01—Abstract
Summary
Summary of the 10-K filed February 22, 2010. Cited figures are marked; the original filing is the authoritative source.
Equinix (EQIX) reported FY2009 results that reflected a company moving from early-stage profitability toward sustained growth.
Revenue rose 25% to $882.5 milliona, from $704.7 million in 2008, with recurring revenues at 95% of the total. Income from operations more than doubled to $181.1 million, and adjusted EBITDA grew 40% to $408.6 million. Net income was $69.4 million, down from $107.9 million in 2008, but the 2008 figure included an $88.0 million one-time tax benefit from releasing valuation allowances.
Operating cash flow rose to $355.5 millionb, and the company ended the year with $604.4 million in cash and investments. The balance sheet grew more leveraged. Total indebtedness was about $1.5 billion, including roughly $1.0 billion of convertible notes and $591.3 million of non-convertible debt.
Equinix issued $373.8 millionc of 4.75% convertible notes in June 2009 and posted an accumulated deficit of $386.0 million. Capital expenditures of $369.5 million to $397.7 million continued to fund IBX data center expansion, and management expects to open new centers in 11 of its 18 markets during 2010. Interest expense rose to $74.2 million, and interest income fell to $2.4 million as yields dropped.
The dominant forward-looking item is the pending $689 milliond acquisition of Switch and Data, which would add 34 data centers in the U.S. and Canada and extend Equinix into 16 new markets. The deal is about 80% stock and 20% cash, and it faces a Department of Justice second request, so closing in Q2 2010 is not assured. Investors should weigh the growth potential against integration risk, rising debt and interest costs, dilution from the stock component, and the concentration of revenue in the U.S. and Europe.
02—Key points
Key Highlights
- Revenue grew 25% to $882.5 million in 2009, with recurring revenue at 95% of total revenue and no customer above 10% of revenue.
- Income from operations rose to $181.1 million from $73.3 million, and adjusted EBITDA rose 40% to $408.6 million.
- Net income fell to $69.4 million ($1.75 diluted EPS) from $107.9 million, which included an $88.0 million one-time tax benefit in 2008.
- Total indebtedness was about $1.5 billion at year-end, including $1.0 billion of convertible notes, and the company issued $373.8 million of 4.75% convertible notes in 2009.
- Pending acquisition of Switch and Data for about $689 million (80% stock, 20% cash) would add 34 data centers and expand into 16 new U.S. and Canadian markets, but it faces DOJ review.
- Equinix operated 49 IBX data centers across 18 markets with 2,612 customers at year-end, up 15% from 2,272, and more than 360 network providers on site.
- Revenue from outside the U.S. rose to 39% in 2009 from 37% in 2008, and management expects 2010 expansion in 11 of its 18 markets.
03—One dollar
Follow one dollar
Of each $1.00 of revenue in FY2009, Equinix kept $0.08.
- Revenue$882.5M100.0%
- Cost of revenue−$483.4M54.8%
- Gross profit$399.1M45.2%
- Operating costs−$218.0M24.7%
- Operating income$181.1M20.5%
- Interest, other & tax−$111.6M12.7%
- Net income$69.4M7.9%
Where FY2009 revenue went
$882.5M- Cost of revenue: $483.4M, 55% of revenue
- Operating costs: $218.0M, 25% of revenue
- Interest, other & tax: $111.6M, 13% of revenue
- Net income: $69.4M, 7.9% of revenue
Kept 7.9% as net income
Full revenue history →04—Financials
Financial Highlights
Figures from 10-KFY2009filed February 22, 2010Financial Statements
FY2009 against FY2008
| Line item | FY2009FY2008 | Change |
|---|---|---|
| Revenue | $882.51M$704.68M | +25.2% |
| Cost of Revenue | $483.42M$414.80M | +16.5% |
| Gross Profit | $399.09M$289.88M | +37.7% |
| Operating Expenses | $701.43M$631.42M | +11.1% |
| Operating Income | $181.08M$73.26M | +147.2% |
| Interest Expense | $74.23M$61.68M | +20.4% |
| Net Income | $69.43M$107.92M | −35.7% |
| EPS (Basic) | $1.80$2.91 | −38.1% |
| EPS (Diluted) | $1.75$2.79 | −37.3% |
| Shares Outstanding (Basic) | 38.49M37.12M | +3.7% |
| Shares Outstanding (Diluted) | 39.68M41.58M | −4.6% |
05—Questions
Frequently Asked Questions
Why did net income decline in 2009 even though operating performance improved?
Net income fell to $69.4 million from $107.9 million mainly because 2008 included an $88.0 million income tax benefit from releasing valuation allowances on U.S. and Australian deferred tax assets. In 2009 the company recorded $39.6 million of tax expense. Operating income rose sharply, so the decline is a tax-line effect rather than a deterioration in the core business.
What are the main risks from the Switch and Data acquisition?
The main risks are regulatory and financial. The Department of Justice issued a second request and could require divestitures or sue to block the deal. The deal is roughly 80% stock, so it would dilute existing shareholders, and about 20% is cash, which increases leverage. Integration of 34 acquired data centers could also disrupt operations or fail to deliver expected synergies.
How leveraged is Equinix and how does that affect investors?
Total indebtedness was about $1.5 billion at December 31, 2009, against stockholders' equity of $1.2 billion and cash and investments of $604.4 million. Interest expense rose to $74.2 million. About $591.3 million of non-convertible debt is subject to lender risk in tight credit markets. The Chicago IBX loan of $110.0 million and the $250.0 million 2.50% convertible notes come due in 2012, so refinancing risk is a factor.
What drives Equinix's revenue growth and how durable is it?
Growth comes from supply-demand imbalance in the data center market, a network-neutral model that attracts networks and customers, and rising demand for power and interconnection. Revenue is largely recurring, billed monthly on contracts generally one to three years long, and the cost base is largely fixed, so incremental revenue tends to lift margins. Risks include customer churn in a weak economy, power constraints, and pricing pressure from better-funded competitors.
Is the company's pending expansion adequately funded?
Management says cash on hand plus operating cash flow should cover operating needs, announced IBX expansions, and the cash portion of Switch and Data for at least the next 12 months. Only $67.2 million of cash sits in certain European subsidiaries with restricted use. Additional expansions beyond announced projects may require debt or equity financing, and that financing could be expensive or unavailable if market conditions worsen.
06—Continue