01—Abstract
Summary
Summary of the 10-K filed February 22, 2019. Cited figures are marked; the original filing is the authoritative source.
Equinix (EQIX) closed 2018 with revenues of $5.07 billiona, up 16% year over year (15% in constant currency), driven by recurring colocation and interconnection demand and by the April 2018 acquisitions of Metronode (Australia) and Infomart Dallas.
Income from operations rose 21% to $977 millionb, and adjusted EBITDA grew 18% to $2.41 billion, a 47.6% margin. Net income increased to $365 million, or $4.56 diluted EPS, versus $3.00 in 2017. Recurring revenues were 94% of the total, and the company operates 200 IBX data centers across 52 markets.
The balance sheet is heavily levered. Total indebtedness was about $11.4 billionc against $7.2 billion of stockholders' equity and $0.6 billion of cash and investments. Interest expense rose to $521 million, and the company's ongoing capital program is substantial: 2018 capital expenditures were $2.1 billion, and roughly $1.9 billion of expansion projects were under construction with openings scheduled through 2020.
Operating cash flow of $1.82 billiond covered a meaningful share of the investment but not all of it, which explains the reliance on debt and the ATM equity program ($750 million authorized for a new program in December 2018). For investors, the key points are strong organic growth and margin expansion against rising leverage, rising interest costs, and execution risk on new data center builds.
The company also flags several notable risks: a pending adoption of the new lease accounting standard (ASC 842) that will add $1.3-1.6 billion of operating lease liabilities on January 1, 2019; PG&E's January 2019 bankruptcy filing, which could affect power supply costs; and a REIT structure that constrains hedging and distributions. The company declared a $2.46 quarterly dividend for Q1 2019, up from $2.28.
02—Key points
Key Highlights
- Revenue rose 16% to $5.07 billion in 2018 and recurring revenue remained 94% of the total, supporting predictable cash flows.
- Adjusted EBITDA increased 18% to $2.41 billion, with improvement in all three regions (Americas, EMEA, Asia-Pacific).
- Net income grew to $365 million ($4.56 diluted EPS) from $233 million ($3.00) in 2017, aided by a lower effective tax rate of 15.6%.
- Total debt of about $11.4 billion and interest expense of $521 million leave the company significantly leveraged, with some variable-rate exposure through its term loans.
- Capital expenditures of $2.1 billion and about $1.9 billion of projects under construction across 30+ new IBX sites signal continued expansion, with openings scheduled through 2020.
- Acquisitions of Metronode (A$1.03 billion) and Infomart Dallas (~$804 million) expanded the footprint to 200 IBX data centers in 52 markets.
- Adoption of ASC 842 on January 1, 2019 will add an estimated $1.3-1.6 billion of operating lease assets and liabilities to the balance sheet; the PG&E bankruptcy poses an electricity cost and supply risk.
03—One dollar
Follow one dollar
Of each $1.00 of revenue in FY2018, Equinix kept $0.07.
- Revenue$5.07B100.0%
- Cost of revenue−$2.61B51.4%
- Gross profit$2.47B48.6%
- Operating costs−$1.49B29.4%
- Operating income$977.4M19.3%
- Interest, other & tax−$612.0M12.1%
- Net income$365.4M7.2%
Where FY2018 revenue went
$5.07B- Cost of revenue: $2.61B, 51% of revenue
- Operating costs: $1.49B, 29% of revenue
- Interest, other & tax: $612.0M, 12% of revenue
- Net income: $365.4M, 7.2% of revenue
Kept 7.2% as net income
Full revenue history →04—Financials
Financial Highlights
Figures from 10-KFY2018filed February 22, 2019Financial Statements
FY2018 against FY2017
| Line item | FY2018FY2017 | Change |
|---|---|---|
| Revenue | $5.07B$4.37B | +16.1% |
| Cost of Revenue | $2.61B$2.19B | +18.8% |
| Gross Profit | $2.47B$2.18B | +13.4% |
| Operating Expenses | $4.09B$3.56B | +15.0% |
| Operating Income | $977.38M$809.01M | +20.8% |
| Interest Expense | $521.49M$478.70M | +8.9% |
| Net Income | $365.36M$232.98M | +56.8% |
| EPS (Basic) | $4.58$3.03 | +51.2% |
| EPS (Diluted) | $4.56$3.00 | +52.0% |
| Shares Outstanding (Basic) | 79.78M76.85M | +3.8% |
| Shares Outstanding (Diluted) | 80.20M77.53M | +3.4% |
05—Questions
Frequently Asked Questions
How profitable is Equinix's core business, and how is it trending?
Income from operations rose 21% to $977 million in 2018, and the operating margin improved to about 19% from 18.5% in 2017. Adjusted EBITDA, which excludes depreciation, stock-based compensation, and acquisition costs, reached $2.41 billion, a 47.6% margin. The company attributes the improvement to IBX expansion activity, acquisitions, and a cost structure that is largely fixed. Depreciation of $1.0 billion and interest expense of $521 million are the main items separating operating income from net income.
How is Equinix funding its expansion, and what are the risks?
In 2018, Equinix funded its expansion through operating cash flow of $1.82 billion, new debt (including a €750 million 2.875% Euro note due 2024, a $750 million 5.000% Infomart note, and a ¥47.5 billion Japanese yen term loan), and $388 million of net proceeds from its at-the-market equity program. Total indebtedness was about $11.4 billion at year-end. The company must also distribute at least 90% of REIT taxable income, which limits retained cash. The risks include rising interest rates on variable-rate borrowings, refinancing risk on maturities that total about $373 million in 2019 and $373 million in 2020, and the dilution that would result from further equity sales.
What is the impact of the new lease accounting standard?
Beginning January 1, 2019, Equinix adopted ASC 842 using the alternative transition method. It expects to recognize operating lease assets and liabilities of approximately $1.3 to $1.6 billion, and to derecognize certain build-to-suit assets and liabilities. This change will increase reported liabilities but is not expected to change cash flows. Investors should watch whether reported leverage ratios and the company's financial covenants are affected by the new balance sheet presentation.
Does the PG&E bankruptcy create a material risk to Equinix?
PG&E filed for bankruptcy on January 29, 2019. Equinix has some facilities served by PG&E and noted that PG&E could seek to reject high-priced power purchase agreements. If that happened, Equinix could face higher electricity costs or reduced supply reliability. Electricity is a material cost for the company, so this is a notable operating risk, but the 10-K does not quantify the potential impact and the outcome remained uncertain at filing.
What is the dividend and REIT outlook?
Equinix paid $2.28 per share in quarterly dividends in each quarter of 2018, totaling $9.12 for the year, and declared a $2.46 quarterly dividend for March 2019. Equinix has been a REIT since 2015 and expects to distribute its REIT taxable income. Because most international operations sit in taxable REIT subsidiaries, and because the REIT structure restricts hedging and limits income from those subsidiaries, changes in tax law or failure to remain qualified as a REIT could affect distributions. The 2017 Tax Cuts and Jobs Act was analyzed and is not expected to meaningfully increase U.S. tax liabilities.
06—Continue