Equinix Reports Second Quarter 2013 Results

Redwood City, CA - 24 July 2013

  • Reported revenues of $525.7 million, a 1% increase over the previous quarter and a 15% increase over the same quarter last year, and includes the negative impact of a $5.8 million accounting change related to non-recurring installation fees
  • Eclipses 120,000 cross-connects on a strong global interconnection quarter
  • Tempers revenue acceleration in second half of 2013

Equinix, Inc. (Nasdaq: EQIX), a provider of global data center services, today reported quarterly results for the quarter ended June 30, 2013. The Company uses certain non-GAAP financial measures, which are described further below and reconciled to the most comparable GAAP financial measures after the presentation of our GAAP financial statements.

Revenues were $525.7 million for the second quarter, a 1% increase over the previous quarter and a 15% increase over the same quarter last year and includes a $5.8 million reduction in revenue for the second quarter due to a change in accounting estimate related to non-recurring installation fees. Recurring revenues, consisting primarily of colocation, interconnection and managed services were $502.5 million for the second quarter, a 1% increase over the previous quarter and a 16% increase over the same quarter last year. Non-recurring revenues were $23.2 million in the quarter. Churn for the second quarter was 2.4%, down from 3.7% for the previous quarter and in line with prior guidance.

Non-recurring installation fees, although generally paid in a lump sum upon installation, are deferred and recognized ratably over the expected life of the installation. During the second quarter, the Company reassessed the estimated period that revenue related to non-recurring installation fees is recognized due to its determination that its customers were generally benefitting from their installations longer than originally anticipated. For example, in North America new customer contracts have generally been lengthened from one to two years, to three years or more, which the Company believes extends the overall life of both the installation and the overall customer relationship. As a result of the Company’s analysis, the estimated period that revenue related to non-recurring installation fees is recognized has been lengthened to four years, up from two to three years. This change was accounted for as a change in accounting estimate on a prospective basis effective April 1, 2013. The change in the estimated period that revenue related to non-recurring installation fees is recognized, which has resulted in less revenue than would have otherwise been recorded, resulted in a $5.8 million reduction in revenue for the second quarter and a total estimated decrease in non-recurring revenue of $16.0 million for the full year 2013.

“Our strong quarterly results reflect growth in all three regions, with particular strength in the cloud vertical. We are winning smaller, interconnection rich deals that enhance our vertical ecosystems while keeping MRR per cabinet firm through a disciplined approach to pricing and customer mix,” said Steve Smith, president and CEO of Equinix. “We remain confident in our long-term strategy and will execute with discipline while balancing top and bottom line growth.”

Cost of revenues were $267.7 million for the second quarter, a 3% increase over the previous quarter and a 19% increase over the same quarter last year. Cost of revenues, excluding depreciation, amortization, accretion and stock-based compensation of $98.6 million, which we refer to as cash cost of revenues, were $169.1 million for the second quarter, a 4% increase from the previous quarter and a 19% increase over the same quarter last year. Gross margins for the quarter were 49%, down from 50% for the previous quarter and down from 51% for the same quarter last year. Cash gross margins, defined as gross profit before depreciation, amortization, accretion and stock-based compensation, divided by revenues, for the quarter were 68%, down from 69% for the previous quarter and the same quarter last year.

Selling, general and administrative expenses were $148.1 million for the second quarter, a slight increase over the previous quarter and a 16% increase over the same quarter last year. Selling, general and administrative expenses, excluding depreciation, amortization and stock-based compensation of $35.7 million, which we refer to as cash selling, general and administrative expenses, were $112.4 million for the second quarter, a 1% decrease over the previous quarter and a 15% increase over the same quarter last year.

Interest expense was $61.0 million for the second quarter, a 1% increase from the previous quarter and a 30% increase over the same quarter last year, primarily attributed to the $1.5 billion senior notes offering in March 2013, additional financings such as various capital lease and other financing obligations to support the Company’s expansion projects and less capitalized interest expense. The Company recorded an income tax benefit of $10.6 million for the second quarter and income tax expense of $17.1 million in the same quarter last year.

In April 2013, a portion of the proceeds from the $1.5 billion senior notes offering were used to redeem the entire principal amount of the $750.0 million 8.125% senior notes, including $80.9 million paid to settle the “make-whole” payment to the bondholders, which was effectively the interest that would have been earned to the March 1, 2014 call date plus the applicable premium. The Company recorded a loss on debt extinguishment of $93.6 million for the second quarter, which includes the “make-whole” payment, write-off of unamortized debt issuance costs and other transaction-related fees.

Net loss attributable to Equinix for the second quarter was $28.7 million. This represents a basic and diluted net loss per share attributable to Equinix of $0.58 based on a weighted average share count of 49.4 million for the second quarter of 2013. This includes the one-time charge to the income statement of $93.6 million for the loss on debt extinguishment related to the redemption of the $750.0 million 8.125% senior notes.

Income from continuing operations was $112.2 million for the second quarter, a 3% increase from the previous quarter and a 10% increase over the same quarter last year. Adjusted EBITDA, defined as income or loss from operations before depreciation, amortization, accretion, stock-based compensation, restructuring charges and acquisition costs, for the second quarter was $244.2 million, a slight increase over the previous quarter and a 12% increase over the same quarter last year.

“We significantly outperformed our adjusted EBITDA targets this quarter and our operating profits continue to improve, increasing the level of cash generated from operations after adjusting for the REIT-related cash costs and taxes,” said Keith Taylor, CFO of Equinix. “We see a clear path to improving adjusted EBITDA margins to support our long-term model, and are balancing growth and profitability as we scale the business.”

Capital expenditures, defined as gross capital expenditures less the net change in accrued property, plant and equipment in the second quarter, were $122.9 million, of which $82.7 million was attributed to expansion capital expenditures and $40.2 million was attributed to ongoing capital expenditures.

The Company generated cash from operating activities of $147.2 million for the second quarter as compared to $84.2 million in the previous quarter and $194.8 million for the same quarter last year. Cash provided by investing activities was $537.5 million in the second quarter, primarily attributed to the $836.4 million of restricted cash released for the redemption of the $750.0 million 8.125% senior notes, as compared to cash used in investing activities of $1,142.5 million in the previous quarter, primarily attributed to the $836.4 million that was placed into a restricted cash account for the redemption of the $750.0 million 8.125% senior notes, and cash provided by investing activities of $93.9 million for the same quarter last year. Cash used in financing activities was $850.0 million for the second quarter, primarily attributed to the redemption of the $750.0 million 8.125% senior notes, as compared to cash provided by financing activities of $1,496.8 million, primarily attributed to the issuance of the $1.5 billion senior notes, and cash used in financing activities of $264.7 million for the same quarter last year.

As of June 30, 2013, the Company’s cash, cash equivalents and investments were $1,216.9 million, as compared to $1,212.1 million as of March 31, 2013.

Business Outlook

For the third quarter of 2013, the Company expects revenues to be in the range of $538.0 to $542.0 million, which includes an approximate $6.0 million impact from the change in accounting estimate related to non-recurring installation fees and negative foreign currency headwinds of approximately $4.0 million. Cash gross margins are expected to approximate 68%. Cash selling, general and administrative expenses are expected to range between $126.0 and $130.0 million. Adjusted EBITDA is expected to be between $236.0 and $240.0 million, which includes $11.0 million in professional fees primarily related to the REIT conversion. This also includes an approximate $6.0 million impact from the change in accounting estimate related to non-recurring installation fees, and negative foreign currency headwinds of $2.0 million. Capital expenditures are expected to be approximately $180.0 to $200.0 million, comprised of approximately $50.0 million of ongoing capital expenditures and $130.0 to $150.0 million of expansion capital expenditures.

For the full year of 2013, total revenues are expected to range between $2,135.0 million to $2,145.0 million, or an as reported 13% year over year growth rate. This includes an approximate $16.0 million decrease in revenues due to the change in accounting estimate related to our non-recurring installation fees. This is a non-cash change only, the result of a longer estimated life for our customer installations. Full-year guidance is also adjusted for $11.0 million of negative foreign currency headwinds, when compared to the rates used from our prior guidance. On a normalized and constant currency basis, we expect 2013 revenue growth of approximately 15.5% compared to the prior year. Total year cash gross margins are expected to approximate 68%. Cash selling, general and administrative expenses are expected to range between $465.0 and $475.0 million. Adjusted EBITDA for the year is expected to range between $985.0 and $990.0 million, which includes an approximate $16.0 million impact due to the change in accounting estimate related to our non-recurring installation fees, $6.0 million in incremental professional fees primarily related to the REIT conversion, and adjusting for $5.0 million of negative currency headwinds when compared to the rates used from our prior guidance. Capital expenditures for 2013 are expected to be in the range of $575.0 to $625.0 million, comprised of approximately $165.0 million of ongoing capital expenditures and $410.0 to $460.0 million for expansion capital expenditures.

The U.S. dollar exchange rates used for 2013 guidance have been updated to $1.30 to the Euro, $1.52 to the Pound, S$1.27 to the U.S. dollar and R$2.23 to the U.S. dollar. Updated global revenue breakdown by currency for the Euro, Pound, Singapore dollar and Brazilian Real is 14%, 8%, 6% and 4%, respectively.

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