Equinix, Inc. — Q1 2011 Form 10-Q
Reporting period: Three months ended March 31, 2011; balance-sheet comparisons are to December 31, 2010. Equinix operates colocation data centers and provides interconnection and related infrastructure services. Q1 2011 includes Switch & Data, acquired in April 2010.
Financial performance
| Metric | Q1 2011 | Q1 2010 / comparison |
|---|---|---|
| Revenue | $363.0 million | $248.6 million; up 46% reported and 44% constant currency |
| Recurring revenue | $343.9 million, 95% of revenue | $237.2 million; up 45% |
| Operating income | $71.3 million; 19.6% margin | $48.0 million; 19.3% margin |
| Net income | $25.1 million | $14.2 million |
| Diluted EPS | $0.53 | $0.35 |
| Adjusted EBITDA | $167.3 million | $117.3 million; non-GAAP measure |
| Operating cash flow | $117.8 million | $99.8 million |
| Capital spending | $175.1 million PP&E purchases; also $15.0 million Paris 4 property purchase | PP&E purchases of $143.4 million |
Gross margin, calculated as revenue less cost of revenues, was approximately 46% in both periods. Net margin was approximately 6.9%, versus 5.7%. Interest expense increased to $37.4 million from $25.7 million, primarily reflecting the 2010 senior-note offering and expansion-related financing.
Balance sheet, debt and liquidity
- At March 31, cash and cash equivalents were $304.5 million; short-term and long-term investments were $152.2 million. Combined cash and investments were $456.7 million, down from $592.8 million at year-end.
- Current assets were $695.0 million and current liabilities $343.3 million. Current assets include $60.2 million of restricted cash; an additional $38.5 million of restricted cash was non-current.
- Debt and financing included $750 million of senior notes, approximately $1.02 billion principal of convertible notes, $146.8 million of loans payable and $305.3 million of capital-lease and other financing obligations. Management described total indebtedness as approximately $2.1 billion; the listed components total approximately $2.2 billion, a reconciliation investors should check.
- Management reported approximately $77.3 million of additional available liquidity: $71.0 million under the Asia-Pacific facility and $6.3 million under a revolving credit line. The company said it expected existing resources and operating cash flow to fund current operations, announced expansion projects and the ALOG acquisition.
- Net investing cash outflow was $286.4 million, including $94.8 million added to restricted cash for Paris 4, expansion spending and the property purchase. Cash declined by $138.4 million during the quarter.
Changes, outlook and risks
- Revenue growth reflected both the Switch & Data acquisition and organic demand. Excluding Switch & Data, Americas revenue grew 16%; EMEA revenue grew 28% reported (27% constant currency) and Asia-Pacific grew 35% reported (24% constant currency). Customer count rose 49% year over year to 4,046, partly due to the acquisition.
- Utilization was 76% including Switch & Data; excluding it, utilization was 79%, or approximately 83% excluding recently opened expansions. Management cautioned that power availability, not just cabinet space, may constrain capacity.
- Management expected revenue growth from customer bookings and recently opened and planned expansions, and anticipated expansion construction spending above 2010 levels. It estimated an additional $150–$200 million of non-contractual expansion capital spending beyond $204.8 million of unaccrued contractual capital commitments. No specific revenue or earnings guidance was provided.
- Management expected electricity and other operating costs to rise with growth; it also expected low interest income and higher interest expense from financing. Additional sales and marketing investment and acquisition-related costs were anticipated.
- On April 25, 2011, after quarter-end, the company completed the ALOG Brazil acquisition through a joint venture, obtaining an approximate 52% indirect interest. The purchase included approximately $95 million paid, a further approximately $22 million payable in 2013 subject to adjustments, and approximately $27.5 million of additional funding to the venture. Equinix expected to consolidate ALOG.
- Key risks include substantial debt and refinancing needs, reliance on customer collections and access to financing, power supply and costs, construction execution and returns on expansion, foreign-exchange movements, competition, and operational outages. The filing noted that Equinix’s Japanese centers were operational after the earthquake and tsunami, but warned of possible power shortages and other disruption.
- Two new securities-related matters were filed in March 2011, alongside older litigation. The company said loss was reasonably possible but could not estimate a range and had accrued no amounts. It also reported $204.8 million of contractual expansion capital commitments and $128.6 million of other purchase commitments.
Most important facts to verify
- Reconcile the filing’s approximately $2.1 billion stated indebtedness with the approximately $2.2 billion implied by its listed debt and financing components; review maturities, especially the $250 million convertible notes due in 2012.
- Assess how much of reported liquidity is restricted and the timing and funding of the Paris 4 collateral, construction payments and remaining expansion commitments.
- Separate organic growth from acquisition and currency effects, and monitor utilization, power capacity, customer churn and expansion-center ramp-up.
- Review ALOG’s final purchase-price allocation, post-closing adjustments, joint-venture terms and potential future buyout or put obligations.
- Track the litigation outcomes and exposure, Japan-related operating developments, and energy-price or regulatory impacts on costs.