01—Abstract
Summary
Summary of the 10-K filed February 27, 2017. Cited figures are marked; the original filing is the authoritative source.
Equinix's FY2016 10-K shows a company in a heavy investment and acquisition phase.
Revenue grew 33% to $3.61 billiona (34% constant currency), driven mainly by the January 2016 TelecityGroup acquisition (about $3.7 billion total) and the Bit-isle acquisition in late 2015. Recurring revenue was 95% of the total, and adjusted EBITDA rose 30% to $1.66 billion. Net income attributable to Equinix was $126.8 million, or $1.79 diluted EPS, versus $187.8 million in 2015.
The decline reflects higher depreciation and amortization, acquisition costs of $64.2 million, and interest expense that rose to $392.2 millionb. Net income is not a clean read on the business because of heavy D&A from acquisitions and expansion. Balance sheet leverage increased materially.
Total indebtedness was about $6.8 billionc against stockholders' equity of $4.4 billion, and cash and investments fell to $761.9 million from $2.25 billion a year earlier. Liquidity remains adequate, with about $1.45 billion available under the $1.5 billion revolver. Operating cash flow of $1.02 billion covered the $1.11 billion of capital expenditures only partly, so the company relied on debt financing and cash reserves for its growth.
The major forward-looking item is the pending $3.6 billiond Verizon colocation asset purchase, expected to close by mid-2017 and funded by cash, a $2.0 billion bridge facility, and additional debt and equity. Equinix also borrowed EUR 1.0 billion of term debt in January 2017, which will raise interest expense further. REIT status, with dividends of $1.75 per quarter in 2016 and $2.00 declared for Q1 2017, is central to the equity story, and the filing flags REIT-compliance and Verizon integration risks.
02—Key points
Key Highlights
- Revenue of $3.61B, up 33% YoY (34% constant currency); recurring revenue was 95% of the total.
- Adjusted EBITDA of $1.66B, up 30%, with margin support from the TelecityGroup and Paris IBX acquisitions.
- Net income attributable to Equinix fell to $126.8M from $187.8M, weighed down by D&A, acquisition costs, and interest expense.
- Interest expense rose to $392.2M from $299.1M; total debt was about $6.8B against $4.4B of equity.
- Cash and investments dropped to $761.9M from $2.25B, reflecting the TelecityGroup purchase and capex of $1.11B.
- Pending $3.6B Verizon data center acquisition (24 sites) is expected to close by mid-2017 with a $2.0B bridge facility.
- Quarterly dividend of $1.75 paid through 2016 and raised to $2.00 for Q1 2017; REIT status requires distributing at least 90% of REIT taxable income.
03—One dollar
Follow one dollar
Of each $1.00 of revenue in FY2016, Equinix kept $0.04.
- Revenue$3.61B100.0%
- Cost of revenue−$1.82B50.4%
- Gross profit$1.79B49.6%
- Operating costs−$1.17B32.5%
- Operating income$618.7M17.1%
- Interest, other & tax−$491.9M13.6%
- Net income$126.8M3.5%
Where FY2016 revenue went
$3.61B- Cost of revenue: $1.82B, 50% of revenue
- Operating costs: $1.17B, 32% of revenue
- Interest, other & tax: $491.9M, 14% of revenue
- Net income: $126.8M, 3.5% of revenue
Kept 3.5% as net incomeNet income $126.8M · 3.5%
Full revenue history →04—Financials
Financial Highlights
Figures from 10-KFY2016filed February 27, 2017Financial Statements
FY2016 against FY2015
| Line item | FY2016FY2015 | Change |
|---|---|---|
| Revenue | $3.61B$2.73B | +32.5% |
| Cost of Revenue | $1.82B$1.29B | +41.0% |
| Gross Profit | $1.79B$1.43B | +24.9% |
| Operating Expenses | $2.99B$2.16B | +38.7% |
| Operating Income | $618.74M$567.34M | +9.1% |
| Interest Expense | $392.16M$299.06M | +31.1% |
| Net Income | $126.80M$187.77M | −32.5% |
| EPS (Basic) | $1.81$3.25 | −44.3% |
| EPS (Diluted) | $1.79$3.21 | −44.2% |
| Shares Outstanding (Basic) | 70.12M57.79M | +21.3% |
| Shares Outstanding (Diluted) | 70.82M58.48M | +21.1% |
05—Questions
Frequently Asked Questions
Why did net income decline even though revenue grew 33%?
Operating income rose to $618.7M, but interest expense increased by about $93M, other expense was $57.9M (mostly FX losses), and income tax expense rose to $45.5M. Depreciation and amortization jumped to $843.5M from $528.9M as acquired assets were marked to fair value, and acquisition costs reached $64.2M.
How is Equinix funding the Verizon acquisition and what does it mean for leverage?
The $3.6B cash purchase will be funded with cash on hand, the EUR 1.0B Term B-2 loan drawn in January 2017, a $2.0B senior unsecured bridge facility, and future debt and equity offerings. Total debt will rise substantially, and the bridge converts to a seven-year term loan if not refinanced within 12 months, so investors should watch the pace of new financing and the resulting leverage.
What are the main REIT-related risks to the dividend?
Equinix must distribute at least 90% of REIT taxable income, and its dividend is set quarterly by the Board. Restrictive loan covenants, the 25% TRS asset limit (20% from 2018), and the need to integrate Verizon and TelecityGroup into the REIT structure could limit distributions or jeopardize REIT status. Failure to qualify would trigger corporate-level tax and reduce cash available for dividends.
How concentrated is the customer base and how sticky is revenue?
Revenue is diversified: the largest customer was about 3% of recurring revenue and the top 50 customers about 36%. Recurring revenue is over 90% of total, contracts typically run one to three years, and more than half of monthly recurring bookings in each quarter came from existing customers.
What is the outlook for capital spending and utilization?
Equinix had 146 IBX data centers with 197,600 total cabinet capacity and about 81% utilization (about 84% excluding recently opened expansions). It has $1.03B of expansion projects under construction and expects 2017 IBX construction spending to be roughly flat with 2016, plus about $635M–$735M of non-contractual expansion capex. Power constraints in older facilities are an identified limit on growth.
06—Continue