01—Abstract
Summary
Summary of the 10-K filed March 2, 2015. Cited figures are marked; the original filing is the authoritative source.
Equinix's FY2014 10-K shows a company in transition: revenue grew 14% to $2.44 billiona, and adjusted EBITDA rose 11% to $1.11 billion, driven by IBX expansions and steady recurring revenue (over 95% of revenue).
Recurring revenue made up 95% of the total, and the company reported more than 4,800 customers across 33 markets. Operating income reached $509 millionb, but the company posted a net loss attributable to Equinix of $259.5 million, or $(4.96) per share. The loss was driven mainly by a one-time $324.1 million income tax charge from de-recognizing U.S. deferred tax assets and liabilities as it converted to a REIT effective January 1, 2015, along with $157 million of debt extinguishment losses from refinancing and convertible note exchanges.
The REIT conversion is the central story for investors going forward. Equinix plans quarterly dividends beginning in 2015, with the first declared at $1.69c per share, and expects special distributions of roughly $580 to $680 million in 2015 (at least 80% in stock). It also faces an estimated $360 to $370 million in depreciation recapture tax liabilities, of which $281 million had been settled by year-end.
Management expects about $10 milliond in annual REIT compliance costs and a long-term cash tax rate of 10% to 15%, subject to REIT compliance and the 2015 distribution mix. Balance sheet leverage is significant. Total indebtedness was about $4.7 billion against $2.3 billion of stockholders' equity and $1.1 billion of cash and investments, and the company refinanced in late 2014 with $1.25 billion of senior notes and a $1.5 billion senior credit facility.
Operating lease commitments total about $993 million off-balance-sheet. Capacity utilization was 78%, and the company expects continued IBX expansion, with 2015 capital expenditures higher than 2014. Investors should watch the cash-versus-stock mix of distributions, DSO increases tied to billing system changes, and whether the REIT structure constrains flexibility for growth investment.
02—Key points
Key Highlights
- Revenue grew 14% year-over-year to $2.44 billion, with recurring revenue at 95% of the total and 2014 constant-currency growth of 15%.
- Adjusted EBITDA increased 11% to $1.11 billion, with the Americas contributing 57%, EMEA 24%, and Asia-Pacific 19%.
- Net loss attributable to Equinix was $(259.5) million, or $(4.96) per share, primarily due to a $324.1 million one-time deferred tax write-off tied to the REIT conversion.
- Equinix became a REIT effective January 1, 2015, with quarterly dividends starting in 2015 (first declared at $1.69 per share) and 2015 special distributions estimated at $580 to $680 million, at least 80% in stock.
- Total indebtedness of about $4.7 billion, with $1.1 billion of cash and investments and $956.7 million of undrawn revolver capacity as of December 31, 2014.
- Portfolio of 102 IBX data centers with 78% cabinet utilization, and expansion projects expected to open in 2015 that add roughly 10,840 sellable cabinets.
- Customer base of more than 4,800 companies, with the 50 largest customers representing 36% of recurring revenue and no single customer above about 2%.
03—One dollar
Follow one dollar
For each $1.00 of revenue in FY2014, Equinix lost $0.11.
- Revenue$2.44B100.0%
- Cost of revenue−$1.20B49.0%
- Gross profit$1.25B51.0%
- Operating costs−$736.6M30.1%
- Operating income$509.3M20.8%
- Interest, other & tax−$768.8M31.5%
- Net income−$259.5M10.6%
Where FY2014 revenue went
$2.44B- Cost of revenue: $1.20B, 49% of revenue
- Operating costs: $736.6M, 30% of revenue
- Operating income: $509.3M, 21% of revenue
Kept 21% as operating income
Full revenue history →04—Financials
Financial Highlights
Figures from 10-KFY2014filed March 2, 2015Financial Statements
FY2014 against FY2013
| Line item | FY2014FY2013 | Change |
|---|---|---|
| Revenue | $2.44B$2.15B | +13.5% |
| Cost of Revenue | $1.20B$1.06B | +12.5% |
| Gross Profit | $1.25B$1.09B | +14.5% |
| Operating Expenses | $1.93B$1.69B | +14.3% |
| Operating Income | $509.27M$460.93M | +10.5% |
| Interest Expense | $270.55M$248.79M | +8.7% |
| Net Income | -$259.55M$94.69M | −374.1% |
| EPS (Basic) | $-4.96$1.92 | −358.3% |
| EPS (Diluted) | $-4.96$1.89 | −362.4% |
| Shares Outstanding (Basic) | 52.36M49.44M | +5.9% |
| Shares Outstanding (Diluted) | 52.36M50.12M | +4.5% |
05—Questions
Frequently Asked Questions
Why did Equinix report a net loss in 2014 despite growing revenue and EBITDA?
The 2014 net loss of $259.5 million was driven mainly by a $324.1 million income tax expense from writing off U.S. deferred tax assets and liabilities when the company converted to a REIT effective January 1, 2015. The company also recorded $157.0 million in losses on debt extinguishment from redeeming its 7.00% senior notes and exchanging convertible notes. These are largely non-operating or one-time items; operating income was $509.3 million.
What will Equinix's dividend and distribution policy look like after the REIT conversion?
Equinix expects to pay quarterly dividends starting in 2015, with the first at $1.69 per share payable March 25, 2015. It also intends to declare 2015 special distributions, estimated at $580 to $680 million including conversion-rate adjustments, to distribute pre-REIT accumulated earnings and profits. At least 80% of these special distributions are expected in common stock, with up to 20% in cash. The amount and mix depend on cash flow, strategic plans, and IRS rules, and there is risk that the company may need to borrow or raise equity to meet REIT distribution requirements.
What tax liabilities could affect investors as Equinix becomes a REIT?
Equinix expects $360 to $370 million in tax liabilities from changing its depreciation methods for data center assets to match real-property treatment. As of December 31, 2014, it had settled $281.0 million of this, with the remainder payable over the four-year recapture period. The company also faces built-in gains tax at 35% on asset sales within 10 years and must keep foreign and taxable REIT subsidiary income in mind, since TRS income is subject to corporate tax. Annual REIT compliance costs are estimated at about $10 million.
How leveraged is Equinix and how is its debt structured?
Total indebtedness was about $4.7 billion at December 31, 2014, against stockholders' equity of $2.3 billion. This includes $2.75 billion of senior notes, $595.8 million of mortgage and loans payable (including a $500 million term loan), $157.9 million of 4.75% convertible notes due 2016, and about $1.2 billion of capital lease and financing obligations. Operating lease commitments add roughly $993 million off-balance-sheet. The company used a $1.5 billion senior credit facility and $1.25 billion of new senior notes in late 2014 to refinance and fund growth.
What growth drivers and risks does Equinix highlight for 2015?
Growth drivers include expansion of IBX data centers, with about $145 million of construction in progress in the Americas and $79 million in EMEA, and continued demand from network, cloud, and financial ecosystems. Revenue growth is expected to continue in all three regions, and capital expenditures are expected to be higher than in 2014. Key risks include the new billing system and EMEA collections causing rising DSO, power availability and cost constraints in IBX sites, reliance on utilities and third-party carriers, competition from carrier-neutral and cloud providers, and the potential need for external financing if REIT distribution requirements or expansion needs exceed operating cash flow.
06—Continue