Equinix, Inc. — 2012 Form 10-K
Reporting period: Fiscal year ended December 31, 2012. The filing also reports fourth-quarter 2012 results. Equinix operates colocation, interconnection and managed infrastructure services across the Americas, EMEA and Asia-Pacific.
Financial performance and liquidity
| Metric | FY 2012 | FY 2011 | Change |
|---|---|---|---|
| Revenue | $1.896 billion | $1.570 billion | +21% |
| Income from continuing operations, before interest and taxes | $400.8 million | $305.3 million | +31% |
| Net income attributable to Equinix | $144.7 million | $94.0 million | +54% |
| Diluted EPS | $2.92 | $1.72 | +70% |
| Adjusted EBITDA (non-GAAP) | $895.7 million | $720.5 million | +24% |
| Cash from operating activities | $632.0 million | $587.6 million | +8% |
- FY 2012 gross profit was $951.7 million, a gross margin of about 50%; income from continuing operations before interest and taxes was about 21% of revenue, and net income attributable to Equinix was about 8%.
- Recurring revenue was $1.799 billion, or 95% of total revenue. By region, revenue grew 17% in the Americas, 21% in EMEA and 40% in Asia-Pacific; reported EMEA growth was affected by unfavorable currency translation.
- Fourth-quarter revenue was $506.5 million, gross profit $256.4 million, and net income attributable to Equinix $44.9 million. That quarter’s net income included $11.9 million from the after-tax gain on the sale of data centers.
- Cash, cash equivalents and short- and long-term investments totaled $546.5 million at year-end, down from $1.076 billion. Total assets were $6.133 billion and stockholders’ equity was $2.335 billion.
- Debt and financing obligations were approximately $3.0 billion, as described by the company. The balance sheet reported $2.449 billion of loans payable, convertible debt and senior notes, plus $561.1 million of capital lease and other financing obligations. The $750 million revolving credit facility had $528.2 million available at year-end; the company reported compliance with its covenants.
- Cash used in investing activities was $442.9 million and cash used in financing activities was $222.7 million. Capital expenditures reported by segment totaled $1.074 billion, including acquisition spending; these figures should not be treated as interchangeable.
Material changes and significant events
- Revenue growth reflected customer demand, data-center expansions and acquisitions. Acquisitions included Asia Tone in Hong Kong, Shanghai and Singapore; ancotel in Frankfurt; and a Dubai data-center transaction. Equinix also entered a Jakarta market partnership.
- Equinix sold 16 U.S. data centers in November for net proceeds of approximately $76.5 million. The transaction generated an after-tax gain of approximately $11.9 million and the sites’ results were presented as discontinued operations.
- Operating expenses increased: sales and marketing rose 28% and general and administrative expenses rose 24%. Interest expense increased to $200.3 million from $181.3 million, primarily reflecting debt issued in 2011 and financing for expansion, partly offset by repayment of convertible notes.
- Cash and investments declined substantially year over year, while property, plant and equipment increased to $3.919 billion from $3.226 billion. Operating cash flow increased, but ongoing expansion remained capital-intensive.
- The company recorded $9.9 million of impairment charges related to two properties and reported no restructuring charges for 2012. A change in estimated useful lives reduced fourth-quarter depreciation expense by approximately $5.0 million.
Outlook, risks and contingencies
- Management expected revenue to continue growing as recent and planned expansions ramped, including projects expected to open in 2013 and 2014. It did not provide a clear quantified revenue or earnings forecast in the supplied filing text.
- Management aimed to become adjusted-free-cash-flow positive in 2013, excluding REIT-related cash costs and tax liabilities; this was a goal, not a guarantee. It expected 2013 expansion construction activity to be below 2012 levels, while retaining flexibility to increase investment if opportunities and financing allowed.
- Equinix planned to pursue REIT status for the taxable year beginning January 1, 2015, subject to IRS rulings and other conditions. Estimated conversion costs were $50–$80 million; tax liabilities from depreciation recapture were estimated at $340–$420 million and would be payable over four years beginning in 2012 even if the conversion were abandoned. Expected 2013 cash taxes were $175–$250 million.
- The company estimated an accumulated earnings-and-profits distribution of $700 million–$1.1 billion, expected to be paid after a favorable IRS ruling, with at least 80% in common stock and up to 20% in cash. Timing and amount could differ; additional borrowing or equity issuance could be needed. Successful REIT conversion and qualification were not assured.
- Other material risks include substantial debt and lease commitments, power availability and energy costs, data-center outages or security incidents, construction and acquisition execution, customer demand and churn, foreign-exchange movements, competition, and litigation. Minimum operating lease commitments were $926.3 million, excluding renewal options.
- A securities class action and related shareholder derivative actions remained pending. The class action’s amended complaint had been dismissed without prejudice; plaintiffs filed a further amended complaint in January 2013. The company said it could not estimate a potential loss range and had not accrued a liability.
Important facts for investors to verify
- Whether organic growth, utilization and customer bookings support continued expansion after separating acquisition contributions and currency effects.
- Whether the $528.2 million of available revolver capacity and operating cash flow are sufficient for debt service, capital spending and REIT-related cash needs.
- The final REIT ruling, qualification requirements, conversion timetable, tax liabilities and distribution amount, form and timing.
- How reported profitability and cash generation compare with adjusted EBITDA and management’s adjusted-free-cash-flow target, including the effect of capital expenditures and excluded costs.
- The outcome of the securities and derivative litigation, and the realization of expected returns from acquired and newly built data centers.