Equinix(EQIX) - 2023 Q2 - Quarterly Report

Part I - Financial Information Item 1. Condensed Consolidated Financial Statements This section presents Equinix's unaudited condensed consolidated financial statements for the period ended June 30, 2023 Condensed Consolidated Balance Sheets As of June 30, 2023, total assets increased to $31.6 billion, total liabilities rose to $19.5 billion, and stockholders' equity grew to $12.0 billion Condensed Consolidated Balance Sheets (in thousands) | Metric | June 30, 2023 | December 31, 2022 | | :--- | :--- | :--- | | Assets | | | | Cash and cash equivalents | $2,342,177 | $1,906,421 | | Property, plant and equipment, net | $17,267,282 | $16,649,534 | | Total assets | $31,566,945 | $30,310,742 | | Liabilities & Equity | | | | Total current liabilities | $1,854,228 | $1,838,298 | | Senior notes, less current portion | $12,672,826 | $12,109,539 | | Total liabilities | $19,517,945 | $18,804,910 | | Total stockholders' equity | $12,024,000 | $11,505,832 | Condensed Consolidated Statements of Operations For H1 2023, revenues grew 13.1% to $4.02 billion, with income from operations and net income also increasing Key Performance Indicators - Six Months Ended June 30 (in thousands, except EPS) | Metric | 2023 | 2022 | | :--- | :--- | :--- | | Revenues | $4,016,617 | $3,551,601 | | Income from operations | $716,507 | $585,169 | | Net income attributable to Equinix | $465,816 | $363,775 | | Diluted EPS | $4.98 | $3.99 | Key Performance Indicators - Three Months Ended June 30 (in thousands, except EPS) | Metric | 2023 | 2022 | | :--- | :--- | :--- | | Revenues | $2,018,408 | $1,817,154 | | Income from operations | $332,386 | $317,853 | | Net income attributable to Equinix | $207,030 | $216,322 | | Diluted EPS | $2.21 | $2.37 | Condensed Consolidated Statements of Cash Flows For H1 2023, net cash from operating activities was $1.43 billion, with net increase in cash of $434.3 million Cash Flow Summary - Six Months Ended June 30 (in thousands) | Activity | 2023 | 2022 | | :--- | :--- | :--- | | Net cash provided by operating activities | $1,432,706 | $1,382,704 | | Net cash used in investing activities | ($1,190,585) | ($1,627,881) | | Net cash provided by financing activities | $215,010 | $693,378 | | Net increase in cash | $434,333 | $351,665 | Notes to Condensed Consolidated Financial Statements The notes provide detailed explanations of accounting policies, acquisitions, debt, and other financial components - As of June 30, 2023, the company has approximately $9.9 billion of total revenues expected to be recognized in future periods as part of its remaining performance obligations, with about 70% expected over the next two years[37] - The company completed the acquisitions of data centers from Entel in Chile and Peru and MainOne in West Africa in 2022, accounted for as business combinations[40][41][42] - As of June 30, 2023, the company was contractually committed for approximately $2.5 billion of unaccrued capital expenditures for IBX data center expansion projects and $1.8 billion for other purchase commitments like power[104] - On August 2, 2023, a quarterly cash dividend of $3.41 per share was declared, payable on September 20, 2023[137] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses performance, revenue growth, non-GAAP measures, liquidity, and capital resources, highlighting global platform investments Overview Equinix operates 250 global data centers with a recurring revenue model, developing xScale data centers and maintaining REIT status - Equinix's global footprint includes 250 IBX data centers across 71 markets, with 12 xScale data centers held in unconsolidated joint ventures[141] - The business model is built on recurring revenue, which has comprised more than 90% of total revenues for the past three years, with over 90% of monthly recurring revenue bookings from existing customers[149] - The company elected to be taxed as a REIT for U.S federal income tax purposes starting in 2015, generally allowing it to deduct dividends paid to stockholders from its taxable income[155] Results of Operations For H1 2023, total revenues increased 13% to $4.02 billion, with strong regional growth and Adjusted EBITDA rising Revenues by Region - Six Months Ended June 30, 2023 (in thousands) | Region | 2023 Revenue | % Change (Actual) | % Change (Constant Currency) | | :--- | :--- | :--- | :--- | | Americas | $1,772,088 | 9% | 9% | | EMEA | $1,377,974 | 20% | 27% | | Asia-Pacific | $866,555 | 12% | 16% | | Total | $4,016,617 | 13% | 16% | Adjusted EBITDA by Region - Six Months Ended June 30, 2023 (in thousands) | Region | 2023 Adjusted EBITDA | % Change (Actual) | % Change (Constant Currency) | | :--- | :--- | :--- | :--- | | Americas | $797,835 | 9% | 9% | | EMEA | $621,327 | 12% | 17% | | Asia-Pacific | $426,291 | 15% | 18% | | Total | $1,845,453 | 11% | 14% | - EMEA cost of revenues for Q2 2023 increased significantly by 28% (34% constant currency), primarily due to $85.7 million in higher utility costs, especially in the UK, Germany, France, and the Netherlands[171] Non-GAAP Financial Measures This section defines and reconciles non-GAAP measures, with Adjusted EBITDA and AFFO showing significant increases for H1 2023 Reconciliation of Net Income to Adjusted EBITDA (in thousands) | | Six Months Ended June 30, 2023 | Six Months Ended June 30, 2022 | | :--- | :--- | :--- | | Net income | $465,743 | $363,935 | | Adjustments (Depreciation, Interest, Taxes, etc.) | $1,379,710 | $1,296,109 | | Adjusted EBITDA | $1,845,453 | $1,660,044 | FFO and AFFO (in thousands) | | Six Months Ended June 30, 2023 | Six Months Ended June 30, 2022 | | :--- | :--- | :--- | | FFO attributable to common shareholders | $1,043,392 | $930,993 | | AFFO attributable to common shareholders | $1,556,055 | $1,344,024 | Liquidity and Capital Resources As of June 30, 2023, Equinix had $2.3 billion in cash and $3.9 billion available credit, with substantial commitments - Principal sources of liquidity as of June 30, 2023, were $2.3 billion of cash and cash equivalents and $3.9 billion available from its $4.0 billion revolving facility[241] - Material cash commitments include approximately $12.8 billion in senior notes principal, $5.6 billion in total lease payments, and $2.5 billion in contractual capital expenditure commitments[247] Item 3. Quantitative and Qualitative Disclosures About Market Risk The company details market risk exposure from foreign currency and interest rates, with hedging programs in place - The company utilizes cash flow hedges, balance sheet hedges, and net investment hedges to manage foreign currency risk[255] - A 100-basis point change in interest rates would impact annual interest expense by approximately $6.4 million due to variable-rate debt[261] - A hypothetical 10% strengthening of the U.S Dollar for H1 2023 would have reduced revenues by approximately $137.5 million and operating expenses by $127.3 million, with existing hedges in place[259] Item 4. Controls and Procedures Management concluded disclosure controls were effective as of June 30, 2023, with no material changes to internal controls - Based on an evaluation as of the end of the reporting period, the Chief Executive Officer and Chief Financial Officer concluded that the company's disclosure controls and procedures were effective[264] - There were no changes in internal control over financial reporting during the six months ended June 30, 2023, that have materially affected, or are reasonably likely to materially affect, internal controls[265] Part II - Other Information Item 1. Legal Proceedings The company reports no material legal proceedings during the reporting period - None[267] Item 1A. Risk Factors This section details significant risks including macroeconomic factors, operational challenges, and those related to expansion and REIT status Risks Related to the Macro Environment The company faces risks from global macroeconomic factors, including inflation, interest rates, and geopolitical events - Inflation, increased interest rates, and adverse global economic conditions could negatively affect business by increasing operating costs, causing a decrease in sales, and impacting liquidity[268] - The military conflict between Russia and Ukraine has led to market disruptions, including volatility in commodity prices, supply chain issues, and increased energy costs, which could adversely affect EMEA operations[270][273] - The business is vulnerable to increased costs to procure power, prolonged power outages, and capacity constraints, which could limit operations and growth[275] Risks Related to our Operations Operational risks include cybersecurity breaches, infrastructure failures, IT system disruptions, and personnel management challenges - The company has experienced a past IT security breach and remains vulnerable to future cyber-attacks, which could disrupt operations and harm its reputation[281] - Failure of physical infrastructure or service interruptions could lead to significant costs, reduced revenue, and harm to the company's reputation, as well as potential liability under service level commitments[284][287] - Significant ongoing investments in back-office IT systems present risks of disruption, cost overruns, and potential deficiencies in internal controls[290][291] Risks Related to Our Expansion Plans Expansion efforts carry significant risks, including construction delays, acquisition integration, and joint venture complexities - Construction of new IBX data centers involves significant risks, including delays, rising costs for labor and materials, supply chain challenges, and permitting issues[327][328] - Acquisitions present numerous risks, including integration difficulties, failure to realize anticipated benefits, potential loss of key customers or employees, and assumption of undisclosed liabilities[332][333] - Joint venture investments expose the company to risks such as lack of sole decision-making authority, reliance on partners who may have inconsistent business interests, and potential disputes[340][341] Risks Related to Our REIT Status in the U.S. Maintaining REIT status is critical, requiring specific income distributions and limiting TRS investments to avoid tax liability - Failure to remain qualified for taxation as a REIT would subject the company to substantial corporate income tax, eliminating the dividends paid deduction[385][388] - To maintain REIT status, the company must distribute at least 90% of its REIT taxable income annually, which may limit its ability to fund future capital needs from operating cash flow[389] - The value of securities in Taxable REIT Subsidiaries (TRSs) cannot exceed 20% of the company's total asset value, which may limit investments in non-REIT qualifying operations[391][394] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds The company reports no unregistered sales of equity securities or use of proceeds during the period - None[418] Item 5. Other Information This section discloses that several executive officers adopted Rule 10b5-1 trading arrangements during Q2 2023 for potential share sales - During Q2 2023, CEO Charles Meyers, Executive Chairman Peter Van Camp, and other officers adopted Rule 10b5-1 trading plans[420][421] Item 6. Exhibits This section lists all exhibits filed with the quarterly report, including corporate governance documents and certifications - The exhibits include various supplemental indentures for senior notes, credit agreements, equity incentive plan documents, and executive severance and compensation agreements[422][423][425] - Certifications by the CEO and CFO pursuant to Sections 302 and 906 of the Sarbanes-Oxley Act of 2002 are filed as exhibits[428]