01—Abstract
Summary
Summary of the 10-K filed February 26, 2016. Cited figures are marked; the original filing is the authoritative source.
Equinix (EQIX) closed 2015 with revenue of $2.73 billiona, up 12% reported and 19% in constant currency, and income from operations of $567 million, up 11%.
Adjusted EBITDA rose 14% to $1.27 billionb. Recurring revenue was 94% of the total, and the company reported net income attributable to Equinix of $188 million, or $3.21 diluted EPS, compared with a net loss in 2014 that was driven by a $324 million REIT-conversion deferred tax write-off. Operating results were held back by roughly $60 million of other expense, mostly foreign currency losses tied to funding the TelecityGroup purchase, and by a stronger U.S. dollar, which cut reported revenue growth by about seven points versus constant currency.
The filing is dominated by two transactions. Equinix closed the roughly $3.8 billionc TelecityGroup acquisition on January 15, 2016, paying about $1.7 billion in cash and issuing about 6.9 million shares. That deal takes the platform from 112 data centers in 33 metros to 145 in 40 metros, and it adds leverage: total indebtedness was about $6.5 billion at year-end before the January financing, and the company issued $1.1 billion of 5.875% senior notes and a larger term loan to fund the deal.
The company also became a REIT on January 1, 2015, which lowered its effective tax rate to 11% and requires it to distribute at least 90% of REIT taxable income, funded in 2015 by a $627 milliond special distribution and $396 million of regular dividends. The main investor debates are leverage and execution risk. Interest expense rose to $299 million, and management expects it to rise further after the TelecityGroup financing.
Integration of TelecityGroup, Bit-isle and the back-office ERP overhaul creates risks of cost overruns, control deficiencies and DSO deterioration, which rose over the year. Demand also depends on continued cabinet utilization growth (81% at year-end) and on new IBX builds (about $565 million of construction progress and $609 million of contractual commitments) being leased before they open.
02—Key points
Key Highlights
- Revenue grew 12% to $2.73 billion (19% in constant currency); recurring revenue was 94% of total, and interconnection revenue grew 17% to $436 million.
- Adjusted EBITDA rose 14% to $1.27 billion, and AFFO increased 9% to $832 million, helped by operating leverage and a 47% cost of revenues ratio versus 49% in 2014.
- Net income attributable to Equinix was $188 million ($3.21 diluted EPS), a sharp improvement from the 2014 net loss of $260 million that included a $324 million REIT-conversion tax write-off.
- The REIT conversion took effect January 1, 2015, cutting the effective tax rate to 11.0%; the company paid a $627 million special distribution and $1.69 quarterly dividends in 2015, with a $1.75 dividend declared for Q1 2016.
- TelecityGroup was acquired on January 15, 2016 for about $3.8 billion including debt, expanding the footprint to 145 data centers in 40 metros and adding seven new European markets; the company has been required to divest certain assets such as the London 2 data center.
- Total indebtedness was about $6.5 billion at year-end, with cash and investments of $2.2 billion; interest expense rose to $299 million and is expected to increase further after the TelecityGroup financing.
- Operating risks disclosed include cabinet utilization of 81%, rising DSO tied to the billing system transition, a stronger U.S. dollar that reduced reported growth, and ongoing back-office ERP and billing system projects that carry control and disruption risk.
03—One dollar
Follow one dollar
Of each $1.00 of revenue in FY2015, Equinix kept $0.07.
- Revenue$2.73B100.0%
- Cost of revenue−$1.29B47.4%
- Gross profit$1.43B52.6%
- Operating costs−$867.0M31.8%
- Operating income$567.3M20.8%
- Interest, other & tax−$379.6M13.9%
- Net income$187.8M6.9%
Where FY2015 revenue went
$2.73B- Cost of revenue: $1.29B, 47% of revenue
- Operating costs: $867.0M, 32% of revenue
- Interest, other & tax: $379.6M, 14% of revenue
- Net income: $187.8M, 6.9% of revenue
Kept 6.9% as net income
Full revenue history →04—Financials
Financial Highlights
Figures from 10-KFY2015filed February 26, 2016Financial Statements
FY2015 against FY2014
| Line item | FY2015FY2014 | Change |
|---|---|---|
| Revenue | $2.73B$2.44B | +11.5% |
| Cost of Revenue | $1.29B$1.20B | +7.8% |
| Gross Profit | $1.43B$1.25B | +15.1% |
| Operating Expenses | $2.16B$1.93B | +11.6% |
| Operating Income | $567.34M$509.27M | +11.4% |
| Interest Expense | $299.06M$270.55M | +10.5% |
| Net Income | $187.77M-$259.55M | +172.3% |
| EPS (Basic) | $3.25$-4.96 | +165.5% |
| EPS (Diluted) | $3.21$-4.96 | +164.7% |
| Shares Outstanding (Basic) | 57.79M52.36M | +10.4% |
| Shares Outstanding (Diluted) | 58.48M52.36M | +11.7% |
05—Questions
Frequently Asked Questions
How did Equinix perform financially in 2015?
Revenue reached $2.73 billion, up 12% as reported and 19% in constant currency. Income from operations was $567 million, up 11%, and adjusted EBITDA was $1.27 billion, up 14%. Net income attributable to Equinix was $188 million, or $3.21 per diluted share, compared with a net loss of $260 million in 2014 that was driven by the REIT conversion tax charge. Results were reduced by about $60 million of foreign currency-related other expense.
What is the significance of the TelecityGroup acquisition?
The acquisition closed on January 15, 2016 for about $3.8 billion, including $1.7 billion in cash and 6.9 million shares. It expands the platform to 145 data centers in 40 metros and adds seven new European markets. Management expects synergies, but also significant integration and divestiture costs, and a required sale of certain assets to win European Commission approval.
How does the REIT structure affect investors?
Equinix became a REIT effective January 1, 2015, so it generally pays little U.S. federal income tax on distributed earnings and must distribute at least 90% of REIT taxable income. This explains the low 11% effective tax rate and the 2015 special distribution of $627 million. The trade-off is limited flexibility to retain cash, a need to borrow or raise equity to meet distribution requirements, and a risk that qualification could be lost, which would trigger corporate-level taxes.
What are the main balance sheet and financing risks?
Total indebtedness was about $6.5 billion at December 31, 2015, against $2.7 billion of stockholders' equity and $2.2 billion of cash and investments. Equinix also has about $1.2 billion of minimum operating lease commitments off balance sheet. The company issued $1.1 billion of senior notes in December 2015 and borrowed roughly $700 million of Term Loan B funds in January 2016 to finance TelecityGroup, so interest expense is expected to rise further. Some debt carries variable rates, and covenants can limit flexibility.
What operational risks should investors monitor?
Key risks include data center power constraints (power, not space, limits some older IBX facilities), utilization that reached 81% with new capacity still under construction, and the ramp of about $565 million of expansion projects. The billing and ERP system overhaul has raised DSO and increased the risk of control deficiencies, and the company must integrate TelecityGroup and Bit-isle while competing with carriers, cloud providers and new entrants.
06—Continue