Business context and reporting period
Equinix, Inc. filed this unaudited Form 10-Q for the quarter and nine months ended September 30, 2019. The company operates colocation data centers and provides interconnection and managed infrastructure services. It reported 204 IBX and xScale data centers in 53 markets; results are organized across Americas, EMEA and Asia-Pacific.
Financial performance
| Metric | Q3 2019 | Q3 2018 | Nine months 2019 | Nine months 2018 |
|---|---|---|---|---|
| Revenue | $1.397B | $1.284B | $4.145B | $3.762B |
| Income from operations | $285M | $266M | $857M | $707M |
| Net income attributable to Equinix | $121M | $125M | $382M | $255M |
| Diluted EPS | $1.41 | $1.55 | $4.54 | $3.19 |
| Adjusted EBITDA (non-GAAP) | $675M | $613M | $2.012B | $1.796B |
| AFFO attributable to common shareholders (non-GAAP) | $473M | $402M | $1.459B | $1.245B |
Q3 revenue increased 9% year over year (11% at constant currency); nine-month revenue rose 10% (13% constant currency). Recurring revenue represented 95% of Q3 revenue and 94% for the nine-month period. Q3 net income attributable to Equinix declined about 3%, while nine-month net income increased about 50%. Operating margin was approximately 20.4% in Q3 versus 20.7% a year earlier, and 20.7% for nine months versus 18.8%.
For the nine months, operating cash flow was $1.463B, up from $1.257B. Investing cash outflow was $1.478B, including $1.365B of capital expenditures; financing cash inflow was $821M. Cash, cash equivalents and short-term investments totaled $1.422B at quarter-end. The company paid $626M in dividends and reported quarterly distributions of $2.46 per share.
At September 30, total indebtedness was approximately $10.9B, including senior notes, mortgage and loan principal, and finance lease liabilities. Separately, operating lease liabilities were $1.471B. The company reported approximately $1.9B of additional availability under its $2.0B revolving facility, after letters of credit. Current assets were $2.853B and current liabilities $1.836B.
Material changes versus prior comparable periods
- Q3 EMEA revenue grew 15% as reported (21% constant currency); Asia-Pacific grew 12%; Americas grew 3%. Expansion openings and stronger orders from existing and new customers were key contributors. A stronger U.S. dollar materially reduced reported EMEA revenue.
- Nine-month operating income and adjusted EBITDA increased, supported by expansion and organic growth. Americas operating income declined 6% as higher general and administrative costs—especially compensation and systems depreciation—outpaced revenue growth.
- Q3 income tax expense increased to $58M from $19M; the nine-month effective tax rate rose to 27.9% from 14.0%. Management attributed the comparison chiefly to a valuation-allowance release in 2018.
- Interest expense fell to $118.7M from $130.6M in Q3 and to $362.1M from $391.5M for nine months, partly due to lease-accounting changes and cross-currency swaps. The 2018 nine-month comparison included a $39.2M debt-extinguishment loss.
- Equinix adopted the new lease standard on January 1, 2019 without restating comparative periods. It recognized operating lease right-of-use assets and liabilities; this affects balance-sheet comparability.
- The company raised $1.213B net in a March common-stock offering and $447.5M net through its 2018 at-the-market program over the first nine months, increasing shares outstanding.
Outlook, risks and unusual items
Management gave no specific revenue, earnings or cash-flow guidance in the supplied filing text. It expects continued business growth and rising operating costs, and anticipates expansion construction activity to exceed 2018 levels. Cabinet utilization was about 81%; excluding data centers acquired or opened during the prior 12 months, management said it would have been about 84%. Capacity, particularly power availability, may constrain growth in some markets.
In October, the company closed its GIC joint venture for European xScale data centers, retaining a 20% interest while GIC owns 80%; the company will operate the facilities. The venture acquired London 10, Paris 8 and specified development assets and leases. In October, Equinix also agreed to acquire three Mexico data centers for $175M, with closing expected in Q1 2020 subject to conditions. The NY12 sale closed in October; the company recorded a $16M impairment in the nine-month period.
Key risks include high capital requirements and leverage, refinancing and funding access, customer collections and churn, construction and permitting delays, power supply and cost, foreign-exchange movements, competition and execution of acquisitions and the GIC venture. Currency movements reduced nine-month reported revenue in all three regions; hedging mitigates but does not eliminate exposure. Contractual commitments included approximately $818M of unaccrued capital expenditures and $954M of other purchase commitments. Uncertain tax-position liabilities were approximately $125M, with payment timing unclear.
A Milan, Italy proceeding alleges copper contamination of groundwater. The company disputes the allegations; a trial was expected around March 2020. Maximum stated exposure was €380,000, potentially reduced to €205,000 after adoption of a compliance program; management did not expect an adverse outcome to materially affect consolidated financial position. Management reported disclosure controls were effective and no material change in internal control over financial reporting.
Most important facts for investors to verify
- Whether recurring revenue growth, bookings and utilization continue to support the expansion program, and whether power constraints or delayed openings limit capacity.
- How much cash expansion and lease commitments require, and whether operating cash flow covers capital spending, debt service and dividends.
- Debt maturities, refinancing terms, revolving-facility availability and the effect of additional equity issuance on dilution.
- The realized economics, governance and future funding obligations of the GIC venture, as well as closing and integration of the Mexico acquisition.
- Effects of foreign exchange, tax-rate changes and REIT compliance on reported earnings and distributable cash.
- Progress and costs in systems implementation, construction commitments, tax examinations and the Italian legal matter.