01—Abstract
Summary
Summary of the 10-K filed February 26, 2009. Cited figures are marked; the original filing is the authoritative source.
Equinix's FY2008 10-K shows a company at an inflection point: revenue grew 68% to $704.7 milliona, and the company posted its first full year of net income at $131.5 million.
However, most of that profit came from a non-recurring $104.5 millionb income tax benefit from releasing valuation allowances on U.S. and Australian deferred tax assets. Operating income was a more modest $73.4 million, up from $10.1 million in 2007, and the 2007 comparison is distorted by the September 2007 IXEurope acquisition, which added the European segment (25% of 2008 revenue). Recurring revenues were 95% of total, and management expects to keep growing through 2009 as new IBX centers ramp up.
The balance sheet and liquidity profile carry meaningful risk. Total indebtedness was roughly $1.2 billionc, comprising $665 million of convertible debt and $576 million of non-convertible senior debt, against $307.9 million of cash and investments. Interest expense rose to $55.0 million from $27.3 million.
Several of the convertible debentures became current liabilities after a parity provision was triggered, and the company faces a $19.2 milliond put-equivalent obligation in February 2009. The company also flags covenant and lender-call risks in a tight credit market, a Netherlands loan not in covenant compliance pending renegotiation, and exposure to a Reserve Primary Fund money market holding (about $9.2 million remaining). Adoption of FSP APB 14-1 in 2009 will add non-cash interest expense on the 2.50% notes, roughly $10 million in 2009.
Investors should weigh the strong operating momentum and pricing power, driven by a supply-demand imbalance in data center capacity and a network-neutral model with over 300 carriers, against the heavy capital intensity (about $471 million of 2008 capex plus $174.9 million in committed unaccrued spend), reliance on refinancing, and litigation including the Pihana Pacific suit seeking damages referenced at approximately $725 million. Recurring revenue visibility and the expected lower capex pace in 2009 are supportive, but the sustainability of reported earnings excluding the tax benefit is the key question.
02—Key points
Key Highlights
- Revenue rose 68% to $704.7 million in 2008 from $419.4 million, with the Europe segment contributing $177.5 million after the IXEurope acquisition.
- Net income of $131.5 million, the first full year of profitability since inception, but includes a $104.5 million income tax benefit; income from operations was $73.4 million.
- Recurring revenues were 95% of total revenues ($670.1 million), supported by 2,272 customers (2,757 including Virtu) and utilization of 81%, up from 73%.
- Total indebtedness of about $1.2 billion versus $307.9 million of cash and investments; interest expense more than doubled to $55.0 million.
- Operating cash flow improved to $267.6 million from $120.0 million, while capex was $471.1 million; $174.9 million of capital expenditures were contractually committed as of year-end.
- Convertible subordinated debentures of $19.2 million became current after a parity provision was triggered, and the Netherlands financing was out of covenant compliance pending renegotiation by April 2009.
- Pending litigation includes the IPO securities class action (settlement agreed in principle, paid by insurers) and the Pihana Pacific shareholder suit, which the company believes is without merit.
03—One dollar
Follow one dollar
Of each $1.00 of revenue in FY2008, Equinix kept $0.15.
- Revenue$704.7M100.0%
- Cost of revenue−$414.8M58.9%
- Gross profit$289.9M41.1%
- Operating costs−$216.6M30.7%
- Operating income$73.3M10.4%
- Interest, other & tax$34.7M4.9%
- Net income$107.9M15.3%
Where FY2008 revenue went
$704.7M- Cost of revenue: $414.8M, 59% of revenue
- Operating costs: $216.6M, 31% of revenue
- Operating income: $73.3M, 10% of revenue
Kept 10% as operating income
Full revenue history →04—Financials
Financial Highlights
Figures from 10-KFY2008filed February 26, 2009Financial Statements
| Revenue | $704.68M |
| Cost of Revenue | $414.80M |
| Gross Profit | $289.88M |
| Operating Expenses | $631.42M |
| Operating Income | $73.26M |
| Interest Expense | $61.68M |
| Net Income | $107.92M |
| EPS (Basic) | $2.91 |
| EPS (Diluted) | $2.79 |
| Shares Outstanding (Basic) | 37.12M |
| Shares Outstanding (Diluted) | 41.58M |
05—Questions
Frequently Asked Questions
Why did Equinix report net income in 2008 when operating income was relatively modest?
Net income of $131.5 million was driven primarily by a $104.5 million income tax benefit, mainly from releasing valuation allowances against U.S. ($101.9 million) and Australian ($6.1 million) deferred tax assets after management concluded those operations had sustained profitability. Income before taxes was only $27.1 million. This benefit is non-recurring in nature, so future net income will bear normal tax expense, which the company expects to be at blended effective rates.
How leveraged is Equinix, and what debt risks should investors watch?
Total indebtedness was about $1.2 billion at December 31, 2008, including $665.1 million of convertible debt and $576.0 million of non-convertible senior debt, against stockholders' equity of $892.7 million. Key risks include the lenders' ability to hold committed facilities to full term in a tight credit market, refinancing needs as leases and loans mature, and variable-rate exposure partly hedged with swaps (a 100 basis point rate change moves annual interest expense by about $3.3 million). The 2.50% convertible notes can be settled in cash or stock at the company's election, and FSP APB 14-1 will add non-cash interest expense from 2009.
What is the outlook for growth and capital spending?
Management expects revenue growth to continue, citing a supply-demand imbalance in data center capacity, pricing power, and new IBX openings in nine of 18 markets in 2009, including Los Angeles and New York expansions in mid-2009. Capital spending is expected to decline in 2009 as the company manages investment during the turbulent economy, with approximately $100 million to $150 million of additional non-contractual expansion spending anticipated. Investors should note that IBX centers carry losses until they reach sufficient utilization, and that power availability is an increasing constraint on how fully centers can be used.
What is the exposure to the Reserve Primary Fund and other investment risks?
Equinix invested approximately $50.9 million in the Reserve Primary Fund, wrote off $1.5 million, and received about $40.2 million in redemptions through year-end. The remaining balance of about $9.2 million was carried at fair value, and a further $3.4 million distribution was received in February 2009. The fund is in liquidation and faces litigation, so timing and amount of final recovery are uncertain. The company's remaining portfolio of about $308 million consists mostly of U.S. government securities, money market funds, and high-grade corporate and asset-backed securities; management believes the remaining holdings will mature at par.
What legal and regulatory matters could affect Equinix?
Equinix is a defendant in the IPO securities class action from 2001, for which an agreement in principle has been reached under which insurers will fund the settlement on behalf of issuers, subject to court approval. A separate Hawaii lawsuit filed in 2008 by former Pihana Pacific shareholders seeks unspecified punitive and compensatory damages, referencing a Equinix value of approximately $725 million; motions to dismiss were filed in January 2009 and remain pending. Management believes the Pihana claims are without merit but cannot predict outcomes or whether they would be material. The company also has a FIRPTA covenant that restricts certain business opportunities until it expires on September 30, 2009.
06—Continue