01—Abstract
Summary
Summary of the 10-K filed February 26, 2013. Cited figures are marked; the original filing is the authoritative source.
Equinix's FY2012 10-K reports revenue of $1.896 billiona, up 21% (22% in constant currency) from $1.570 billion in 2011, with recurring revenues at 95% of the total.
Income from continuing operations rose to $400.8 millionb from $305.3 million, and adjusted EBITDA reached $895.7 million versus $720.5 million, a gain of roughly 24%. Diluted EPS was $2.92 including discontinued operations ($2.67 from continuing operations). Growth was broad-based across the Americas (61% of revenue), EMEA (23%) and Asia-Pacific (16%), helped by the Asia Tone and ancotel acquisitions and the Dubai IBX deal, while the Americas grew organically through new IBX expansions.
The company ended 2012 with $546.5 millionc of cash and investments against roughly $3.0 billion of total indebtedness, and it operates in 31 markets with more than 90 IBX data centers. The most consequential item for investors is the planned REIT conversion, targeted for January 1, 2015. It requires a favorable IRS private letter ruling that may not arrive until late 2013 or never.
The company estimates $340d-420 million of depreciation recapture tax payable over four years regardless of outcome, $50-80 million of conversion costs, and an E&P distribution of $700 million to $1.1 billion, at least 80% in stock. Cash taxes are expected to be $175-250 million in 2013, which will weigh on operating cash flow and could require additional debt or equity financing. Other watch items include a $1.5 billion of senior notes, a 2012 accumulated deficit that has narrowed to $110.4 million, and securities class action litigation filed in 2011 that was dismissed without prejudice and then refiled.
02—Key points
Key Highlights
- Revenue grew 21% to $1.90B in 2012; recurring revenue was 95% of the total, supporting a predictable base.
- Adjusted EBITDA rose about 24% to $895.7M, and income from continuing operations rose 31% to $400.8M.
- Diluted EPS was $2.92 (including a $0.25 gain from discontinued operations), up from $1.72 in 2011.
- Operating cash flow of $632.0M and capital expenditures of $764.5M in property, plant and equipment, with 2013 IBX build-out expected to be lower than in 2012.
- Planned REIT conversion (target effective January 1, 2015) carries $340-420M of tax recapture payable over four years plus $50-80M of costs, and the IRS private letter ruling is still pending.
- Total indebtedness of about $3.0B, cash and investments of $546.5M, and $528.2M of available revolver capacity; $1.5B of senior notes are due 2018 and 2021.
- Strong international mix: about 44% of revenue came from outside the U.S., and the company added Asia Tone (Hong Kong), ancotel (Frankfurt) and a Dubai IBX in 2012.
03—One dollar
Follow one dollar
Of each $1.00 of revenue in FY2012, Equinix kept $0.07.
- Revenue$1.89B100.0%
- Cost of revenue−$944.6M50.0%
- Gross profit$942.8M50.0%
- Operating costs−$549.9M29.1%
- Operating income$392.9M20.8%
- Interest, other & tax−$252.9M13.4%
- Net income$140.0M7.4%
Where FY2012 revenue went
$1.89B- Cost of revenue: $944.6M, 50% of revenue
- Operating costs: $549.9M, 29% of revenue
- Interest, other & tax: $252.9M, 13% of revenue
- Net income: $140.0M, 7.4% of revenue
Kept 7.4% as net income
Full revenue history →04—Financials
Financial Highlights
Figures from 10-KFY2012filed February 26, 2013Financial Statements
FY2012 against FY2011
| Line item | FY2012FY2011 | Change |
|---|---|---|
| Revenue | $1.89B$1.57B | +20.6% |
| Cost of Revenue | $944.62M$829.02M | +13.9% |
| Gross Profit | $942.76M$736.60M | +28.0% |
| Operating Expenses | $1.49B$1.26B | +18.6% |
| Operating Income | $392.90M$305.92M | +28.4% |
| Interest Expense | $200.33M$181.30M | +10.5% |
| Net Income | $140.03M$94.78M | +47.7% |
| EPS (Basic) | $2.92$1.77 | +65.0% |
| EPS (Diluted) | $2.83$1.74 | +62.6% |
| Shares Outstanding (Basic) | 48.00M46.96M | +2.2% |
| Shares Outstanding (Diluted) | 51.82M47.90M | +8.2% |
05—Questions
Frequently Asked Questions
What is the REIT conversion, and what does it mean for investors?
Equinix plans to elect REIT status for the taxable year beginning January 1, 2015, which would let it deduct dividends paid from federal taxable income and pay out regular distributions. It is contingent on a favorable IRS private letter ruling, which may not come until late 2013 or at all. The company also expects a special E&P distribution of $700M to $1.1B, mostly in stock, and the tax costs will be incurred even if the conversion is abandoned.
How much cash will Equinix need to pay for the REIT conversion?
The company estimates $340-420M of federal and state tax on depreciation recapture, payable over four years starting in 2012, plus $50-80M of conversion costs and an incremental $5-10M in annual compliance costs. It expects to pay $175-250M of cash taxes in 2013. The tax is payable regardless of the outcome, so it is a cost investors should weigh now.
Is Equinix's debt load a concern?
Total indebtedness was about $3.0B at year-end 2012, against $546.5M of cash and investments and $528.2M of undrawn revolver capacity. Management cites debt covenants and a goal of becoming adjusted free cash flow positive in 2013, excluding REIT-related costs. Rising interest rates would affect the variable-rate portion of borrowings, though most debt is fixed.
What drove revenue and profitability growth in 2012?
Growth came from acquisitions (Asia Tone, ancotel and the Dubai IBX), full-year contributions from ALOG, new IBX expansions in Dallas, Miami, New York and Washington D.C., and rising utilization and customer counts. Cost of revenues fell to 50% of revenue from 53%, and adjusted EBITDA margin improved, reflecting the fixed cost base of the colocation model.
What are the main risks highlighted in the filing?
Key risks include the REIT conversion's uncertain tax outcome, dependence on power availability and cost, long sales cycles, risks from international expansion and currency swings (about 40-50% of revenue and costs are non-USD), competition from other carrier-neutral and wholesale providers, and securities class action litigation over alleged misleading statements from 2010, which was dismissed without prejudice and refiled in January 2013.
06—Continue