EQUINIX INC annual report, FY2016

Business context and reporting period

Equinix, Inc. filed this Form 10-K for the fiscal year ended December 31, 2016. The company operates a global, carrier- and cloud-neutral data center platform, earning primarily recurring colocation and interconnection revenue. At year-end, it reported 150 IBX data centers in 41 markets and more than 8,500 customers. Equinix has operated as a REIT for U.S. federal income tax purposes since January 1, 2015.

Financial performance and liquidity

At December 31, 2016, cash, cash equivalents and investments totaled $761.9 million; total indebtedness was approximately $6.82 billion, and stockholders’ equity was $4.37 billion. The $1.5 billion revolving facility had approximately $1.45 billion of availability after letters of credit. Operating cash flow less reported capital expenditures was negative approximately $96.8 million. Operating lease commitments were $1.61 billion, excluding potential renewals; total contractual obligations shown in the filing were $11.58 billion.

Equinix paid $7.00 per share in quarterly dividends during 2016, totaling approximately $492.4 million in cash. The Board declared a $2.00-per-share quarterly dividend in February 2017.

Material changes versus the prior comparable period

• Revenue rose 33% year over year, with reported growth including TelecityGroup, acquired in January 2016, and the Paris data center acquisition. TelecityGroup contributed approximately $400.0 million of continuing-operations revenue; Bit-isle contributed $148.7 million in Asia-Pacific.
• Revenue grew in each region: Americas 11%, EMEA 68%, and Asia-Pacific 48%. EMEA and Asia-Pacific growth included acquired businesses and expansions; foreign currency movements also affected reported results.
• Net income fell 32% and diluted EPS fell 44%, despite higher revenue and operating income. Higher depreciation and amortization, acquisition and integration costs, interest expense, foreign-exchange-related expense and a larger share count weighed on results. Interest expense increased to $392.2 million from $299.1 million.
• Gross margin declined about 3 percentage points, principally reflecting the acquired and expanding operations and higher cost of revenues. Adjusted EBITDA increased 30%; AFFO increased 30%.
• Operating cash flow increased 14%, while investing cash outflow rose with acquisitions and capital spending. Year-end cash and investments declined to $761.9 million from $2.246 billion.
• 2016 included $64.2 million in acquisition costs, a $7.7 million impairment charge related to assets held for sale, and a $32.8 million gain on asset sales. Discontinued operations contributed $12.4 million of net income, including results from TelecityGroup sites divested to obtain regulatory approval.

Outlook, management commentary, risks and unusual items

Equinix signed an agreement to acquire Verizon’s colocation business at 24 sites comprising 29 data centers in the United States, Brazil and Colombia for $3.6 billion, with closing expected by mid-2017. The transaction remained subject to closing conditions. Funding was expected from cash, debt and equity; a $2.0 billion bridge commitment was available, and Equinix borrowed a €1.0 billion Term B-2 loan in January 2017. A specified antitrust-related termination could trigger a fee of up to $200 million. Integration, customer and landlord consents, transition services, government-contract compliance, financing costs and REIT qualification are key uncertainties.

Management expected 2017 expansion construction activity to be approximately in line with 2016 and anticipated additional financing for growth and acquisitions. It estimated $634.7 million to $734.7 million of further, non-contractual expansion capital expenditures beyond commitments reported at year-end. The filing provides no specific revenue or earnings guidance. Management cited demand from cloud adoption, data growth and interconnection needs, while noting that new capacity requires substantial investment ahead of customer commitments and may take time to generate returns.

Principal risks include high debt and fixed commitments; power availability, costs and capacity constraints; service interruptions, cyberattacks and physical security; acquisition execution and integration; foreign exchange and international political or regulatory developments, including Brexit; competition and pricing pressure; REIT qualification and distribution requirements; tax exposures; and potentially costly data center construction and lease renewals. The filing reports no pending claims expected by management to have a material adverse effect and no significant service-level-credit liabilities at year-end. Management and the auditor concluded that internal control over financial reporting was effective as of December 31, 2016, but TelecityGroup was excluded from the assessment and audit.

Important facts for investors to verify

• Track the Verizon acquisition’s completion, final financing mix, integration costs, expected benefits and any required regulatory or third-party approvals.
• Separate organic growth from acquisition contributions and foreign-exchange effects, particularly in EMEA and Asia-Pacific; assess regional margins and utilization.
• Reconcile GAAP earnings and operating cash flow with adjusted EBITDA, FFO and AFFO, including excluded acquisition costs, stock compensation and recurring capital expenditures.
• Review total debt, variable-rate exposure, the €1.0 billion loan, debt maturities, available revolver capacity, lease commitments and planned capital spending.
• Monitor REIT tests, required distributions, foreign and taxable REIT subsidiary earnings, and the $72.2 million of unrecognized tax benefits disclosed at year-end.
• Assess the effects of new lease and revenue-recognition standards; management expected the lease standard to have a significant financial-statement impact and identified installation revenue and contract-acquisition costs as important revenue-standard changes.