Business context and reporting period
Equinix, Inc. filed this unaudited Form 10-Q for the quarter ended March 31, 2014. The company operates colocation data centers and provides interconnection and managed infrastructure services across the Americas, EMEA, and Asia-Pacific. It reported operations in 32 markets. Customer count was approximately 6,047, up 9% year over year; utilization was about 75%, or approximately 80% excluding expansion capacity opened during the prior 12 months.
Financial performance and liquidity
Amounts below are in U.S. dollars; financial-statement figures are converted from thousands to millions.
- Revenue: $580.1 million, up 12% year over year (13% at constant currency). Recurring revenue was $549.7 million, or 95% of total revenue.
- Profit: Operating income was $121.6 million, up from $104.8 million; operating margin was approximately 21.0%, versus 20.3%. Net income attributable to Equinix was $41.4 million, or $0.83 basic and $0.81 diluted EPS, compared with $32.8 million, or $0.67 basic and $0.65 diluted EPS.
- Costs and margins: Cost of revenue was $287.5 million; gross margin was approximately 50%, broadly unchanged. Sales and marketing was $67.4 million and general and administrative expense was $103.3 million. Adjusted EBITDA, a non-GAAP measure, was $260.4 million, up 8%; its margin was approximately 44.9%, versus 46.7%.
- Cash flow and investment: Operating cash flow was $171.7 million, compared with $84.2 million. Cash flow from investing was positive $98.9 million, largely reflecting investment sales and maturities; cash purchases of property, plant and equipment were $105.9 million, with another $16.8 million used to buy land. Financing used $37.3 million, including $47.1 million of share repurchases. Cash and equivalents ended at $495.2 million.
- Liquidity: Cash, cash equivalents, and short- and long-term investments totaled $1.042 billion. Approximately $515.4 million remained available under the revolving credit line after letters of credit. Management stated it expected available resources and operating cash generation to fund current operations, scheduled debt payments, REIT-related taxes, and announced expansion plans.
- Debt and obligations: Total indebtedness was approximately $4.3 billion, including $769.7 million principal of convertible notes, $2.25 billion of senior notes, $245.9 million of mortgages and loans, and $1.1 billion of capital-lease and other financing obligations. Debt maturities included $439.7 million for the remaining nine months of 2014. Minimum operating lease commitments were approximately $1.014 billion, excluding renewal options.
Material changes versus the prior comparable period
- Revenue growth was broad-based: Americas revenue rose 8%, EMEA 26%, and Asia-Pacific 9%. EMEA benefited from a weaker U.S. dollar; currency reduced reported growth in the Americas and Asia-Pacific.
- Adjusted EBITDA rose 8% overall, led by 30% growth in EMEA; Americas increased 3% and Asia-Pacific was essentially flat. EMEA EBITDA benefited from favorable currency effects.
- Operating cash flow more than doubled, which management attributed to improved operating results and working-capital movements, partly offset by higher income-tax payments.
- Interest expense increased to $68.8 million from $60.3 million, primarily reflecting the 2013 senior-notes offering and financing for expansion. Capital expenditures increased from $75.7 million to $122.7 million on the segment disclosure basis.
- Equinix repurchased 266,585 shares for $47.1 million during the quarter. Senior-note balances were unchanged; financing obligations increased, including newly recorded lease and construction-financing arrangements.
Outlook, management commentary, risks, and unusual items
- Management expected continued revenue and adjusted EBITDA growth, supported by organic customer demand and data-center expansions. Additional expansions in multiple markets were expected to open during the remainder of 2014 and 2015. The filing provides no specific consolidated revenue or EPS guidance.
- Equinix planned to pursue REIT tax status beginning January 1, 2015, subject to IRS rulings, board approval, and other steps. It estimated conversion costs of $75–$85 million, with $47.8 million incurred to date; depreciation and amortization recapture was expected to create $360–$380 million of federal and state tax liability, generally payable over four years. Estimated 2014 cash taxes were $145–$200 million. A special accumulated-earnings distribution of approximately $700 million–$1.1 billion was contemplated, generally at least 80% in stock and up to 20% in cash.
- After quarter-end, Equinix agreed to exchange $170.1 million principal of 4.75% convertible notes for 2,017,806 shares and approximately $17.6 million cash. It expected to record an approximately $38 million debt-extinguishment loss in Q2 2014. It also repurchased 186,503 additional shares through May 1 for $32.8 million.
- Other commitments included $240.1 million of unaccrued capital expenditures and $209.1 million of other purchase commitments. Management also expected an additional $200–$240 million of non-contractual expansion capital expenditures during 2014 and thereafter.
- Principal risks include REIT conversion delays or failure and related tax costs; substantial debt, lease obligations, and refinancing needs; power availability, energy costs, and capacity constraints; construction and customer-demand risk; foreign-exchange volatility; competition; and service outages, security breaches, or system failures. The company reported no legal proceedings in this filing and stated disclosure controls were effective.
Important facts for investors to verify
- Progress and IRS rulings for the planned REIT conversion, including the timing, final tax costs, and amount and form of any shareholder distribution.
- Q2 accounting and dilution effects of the convertible-note exchange, including the expected $38 million extinguishment loss and shares issued.
- Cash generation, working-capital variability, expansion spending, and whether projected returns and utilization support announced data-center builds.
- Debt maturities, interest expense, covenant constraints, available revolving-credit capacity, and lease and purchase commitments.
- Reported versus constant-currency performance, particularly EMEA’s currency contribution and regional operating-cost trends.