Equinix, Inc. — Q3 2018 Form 10-Q
Reporting period: Three and nine months ended September 30, 2018. Unaudited consolidated results. Equinix operates global colocation data centers, interconnection services and managed infrastructure; it reported 200 IBX data centers across 52 markets after recent acquisitions.
Financial performance
| Metric | Q3 2018 | Q3 2017 | 9M 2018 | 9M 2017 |
|---|---|---|---|---|
| Revenue | $1.284B | $1.152B | $3.762B | $3.168B |
| Income from operations | $265.8M | $224.9M | $706.7M | $577.0M |
| Net income | $124.8M | $79.9M | $255.3M | $167.8M |
| Diluted EPS | $1.55 | $1.02 | $3.19 | $2.18 |
| Adjusted EBITDA (non-GAAP) | $612.5M | $550.3M | $1.796B | $1.487B |
| Operating cash flow | Not provided separately | Not provided separately | $1.257B | $944.4M |
- Q3 revenue grew 11% reported (13% constant currency); recurring revenue was 94% of the total. Nine-month revenue grew 19% reported (17% constant currency), with recurring revenue at 95%.
- Q3 operating margin was approximately 20.7% versus 19.5%; net margin was approximately 9.7% versus 6.9%. Nine-month operating margin was approximately 18.8% versus 18.2%; net margin was approximately 6.8% versus 5.3%.
- Cost of revenues was 51% of revenue in Q3, unchanged year over year; for nine months it was 51% versus 50%. Q3 adjusted EBITDA margin was approximately 47.7% versus 47.8%.
- Q3 revenue growth was broad-based: Americas +5%, EMEA +17%, and Asia-Pacific +20% reported. Nine-month growth included acquisition contributions and currency effects.
- Cash and cash equivalents were $870.5M and short-term investments $15.4M at quarter-end. Current assets were $1.807B and current liabilities $1.461B.
- Nine-month investing cash outflow was $2.350B, including $1.416B of capital expenditures and $829.2M of acquisition spending. Operating cash flow less capital expenditures was negative approximately $158.7M. Dividends paid were $554.7M.
- Gross debt and financing obligations were approximately $11.4B, including senior notes, mortgage and loans, and capital lease/other financing obligations. Total liabilities were $13.128B. The $2.0B revolver had about $1.9B available after letters of credit.
Material changes and notable items
- Q3 and nine-month revenue and earnings increased, reflecting organic demand, opened expansions, acquisitions, and, for some periods and regions, favorable currency effects. Acquisitions expanded the footprint and contributed incremental revenue.
- Equinix acquired Metronode for approximately $804.1M cash and Infomart Dallas for approximately $804.0M consideration, including $758.2M fair value of senior notes. Purchase-price allocations remained provisional at September 30.
- Interest expense rose to $130.6M in Q3 from $121.8M and to $391.5M for nine months from $352.6M, principally reflecting new debt. Management expected higher interest expense in future periods from additional borrowing and rising rates.
- Nine-month results included $33.9M acquisition costs, a $6.0M gain on asset sales, and a $39.2M net loss on debt extinguishment. Q3 included a $6.0M asset-sale gain, primarily from the Frankfurt 3 data center.
- Adoption of ASC 606 on January 1, 2018 increased opening retained earnings by $269.8M, net of tax. Prior-year comparisons were not restated. Under the new standard, installation revenue is recognized over contract terms and certain contract acquisition costs are capitalized and amortized. For nine months, reported net income was $20.4M higher than it would have been without adoption.
- Equinix issued €750M of 2.875% notes due 2024, issued $750M of 5.000% Infomart notes, and drew a ¥47.5B term loan while repaying its prior yen term loan. It also sold $273.9M net of common stock under its ATM program during the first nine months.
Outlook, risks and contingencies
- No specific revenue or earnings guidance was provided. Management described continued expansion and selective acquisition plans, and said operating expenses and regional costs would generally rise with growth. It noted power costs, customer power demand, market capacity and expansion timing can constrain utilization and growth.
- Management said current cash, expected operating cash generation, the revolver and ATM program were expected to support operating needs, regular dividends and announced expansions. Additional financing may be required for further expansion or acquisitions; availability and terms are uncertain.
- At September 30, contractual commitments included approximately $760.9M of unaccrued capital expenditures and $789.6M of other purchase commitments. Minimum operating lease commitments were approximately $2.0B, excluding renewals; additional lease agreements totaling approximately $230.2M were not included in that schedule.
- Foreign exchange is a material exposure despite hedging. A hypothetical 10% currency movement would change the U.S.-dollar value of foreign-currency debt principal by approximately $455.3M. Variable-rate borrowing also creates interest-rate exposure.
- Key stated risks include high debt and fixed lease obligations, acquisition integration and valuation, power availability and cost, construction delays and demand shortfalls, competition, foreign exchange, cybersecurity and service interruptions, changing regulation and taxes, and maintaining REIT qualification. The filing reports approximately $113.2M of accrued liabilities for uncertain tax positions; timing of payment was unclear.
- The company recorded an approximately $33.0M tax benefit from releasing valuation allowances in certain jurisdictions during the nine-month period. It continued to assess the effects of U.S. tax-law changes. Management concluded disclosure controls were effective; no material internal-control changes were identified during the quarter. No legal proceedings were reported.
Investor facts to verify
- Separate organic growth from acquisitions, currency effects and the non-comparable ASC 606 accounting change.
- Track data-center utilization, power capacity, customer demand and returns on the substantial expansion and acquisition spending.
- Review debt maturities, interest costs, lease commitments, available revolver capacity and whether operating cash flow can fund capital spending and dividends.
- Monitor completion of provisional acquisition valuations and integration of Metronode, Infomart Dallas and other acquired operations.
- Assess foreign-exchange, tax and REIT-compliance exposures, including the uncertain-tax-position accrual and future lease-accounting effects.