Business context and reporting period
Equinix, Inc. filed this Form 10-K for the fiscal year ended December 31, 2017. The filing reports annual results, with selected fourth-quarter data; it is not a standalone Q4 report. Equinix operates a global, carrier-neutral data-center colocation and interconnection platform and reported 190 IBX data centers in 48 markets across the Americas, EMEA and Asia-Pacific. It operated as a REIT for U.S. federal tax purposes.
Growth included organic expansion and acquisitions, notably the May 2017 purchase of Verizon’s colocation business for approximately $3.6 billion, plus acquisitions in the U.K., Spain, Portugal and Turkey. The Verizon business contributed from May 1, 2017.
Financial performance and liquidity
| Metric | 2017 | 2016 |
|---|---|---|
| Revenue | $4.368 billion | $3.612 billion |
| Operating income | $809 million | $619 million |
| Net income | $233 million | $127 million |
| Diluted EPS | $3.00 | $1.79 |
| Operating cash flow | $1.439 billion | $1.019 billion |
| Capital expenditures | $1.379 billion | $1.113 billion |
| Adjusted EBITDA (non-GAAP) | $2.052 billion | $1.657 billion |
| AFFO (non-GAAP) | $1.437 billion | $1.078 billion |
Revenue increased 21%; recurring revenue was 94% of total revenue. Operating margin was approximately 18.5%, versus 17.1% in 2016; net margin was approximately 5.3%, versus 3.5%. Q4 2017 revenue was $1.200 billion and net income was $65.2 million, compared with $942.6 million and $61.8 million, respectively, in Q4 2016.
Net cash from operations less capital expenditures was approximately $60 million. Net investing cash outflow was $5.401 billion, principally reflecting acquisitions and capital spending. Cash, cash equivalents and investments totaled $1.450 billion at year-end; current assets were $2.249 billion and current liabilities $1.243 billion.
Gross debt and financing obligations were approximately $10.2 billion, including $8.470 billion of debt principal and $1.699 billion of capital lease and other financing obligations. Equinix had approximately $1.937 billion available under its $2.0 billion revolving facility after outstanding letters of credit. Minimum operating lease commitments were $1.914 billion, excluding renewal options. Quarterly dividends were $2.00 per share in 2017, or $8.00 for the year.
Material changes versus the prior comparable period
- Revenue grew 21%, reflecting acquisitions, data-center openings and expansions, and higher orders from existing and new customers. Verizon contributed $359.1 million of revenue from its acquisition date through year-end.
- Operating income rose 31% and adjusted EBITDA rose 24%. Net income increased 84%; diluted EPS also benefited from earnings growth, while weighted-average diluted shares rose to 77.5 million from 70.8 million.
- Operating cash flow increased by $420 million, while capital expenditures increased by $265 million. Investing outflow rose to $5.401 billion, including $3.963 billion for acquisitions, net of cash acquired.
- Interest expense increased to $479 million from $392 million, and 2017 included a $65.8 million loss on debt extinguishment, versus $12.3 million in 2016. The 2017 loss included early debt repayments and changes to certain financing obligations.
- Year-end assets rose to $18.691 billion from $12.608 billion, with goodwill of $4.412 billion and net intangible assets of $2.385 billion, reflecting acquisition activity.
Outlook, management commentary, risks and unusual items
The filing gives no specific numerical revenue or earnings guidance. Management expected continued growth in expansion spending and operating costs, and anticipated higher interest expense from 2017 borrowings. It planned further data-center construction and announced acquisitions, including Metronode for approximately $791 million, expected to close in the first half of 2018, and Infomart Dallas, expected to close in mid-2018. The Infomart transaction was structured to include $31 million cash and $750 million of 5.000% senior unsecured notes. These transactions were subject to closing conditions.
Management cited demand-led global expansion, interconnection growth, and customer adoption of cloud and hybrid-cloud services as business drivers. It also highlighted power availability and rising power density as capacity constraints. Key risks include acquisition integration and execution, high debt and fixed lease obligations, access to financing, power and electricity costs, service interruptions and cybersecurity, foreign-exchange exposure, competition, international regulation, and maintaining REIT qualification. The company reported effective disclosure controls and internal control over financial reporting as of year-end.
Equinix was still evaluating the effects of the December 2017 U.S. Tax Cuts and Jobs Act. It recorded a provisional $6.5 million tax expense from remeasuring U.S. TRS deferred taxes and estimated a $195 million mandatory foreign-earnings repatriation amount, with the final tax-return treatment still to be determined. Adoption of the new revenue standard on January 1, 2018 was expected to increase opening retained earnings by approximately $267 million to $307 million before potential tax effects. The new lease standard was expected to materially increase reported assets and liabilities.
After year-end, CEO Steve Smith resigned on January 19, 2018; Executive Chairman Peter Van Camp became interim CEO. The Board declared a quarterly dividend of $2.28 per share in February 2018. The filing describes both as subsequent developments, not 2017 operating results.
Most important facts an investor should verify
- How much of reported growth and profitability reflects acquired operations versus organic growth, particularly the Verizon acquisition and its integration.
- Whether operating cash generation can sustain planned capital spending, dividends, debt service and announced acquisitions; compare operating cash flow with capex and acquisition outlays.
- Debt maturities, variable-rate exposure, covenant headroom, refinancing needs, and the effect of $1.914 billion of operating lease commitments.
- Progress and final purchase-price allocations for 2017 acquisitions, including any effect on goodwill, intangible assets, depreciation and future earnings.
- Final tax and REIT consequences of the Tax Cuts and Jobs Act, including the repatriation estimate and distribution requirements.
- Leadership transition, acquisition closing conditions, construction schedules, power availability and customer demand supporting new capacity.