An investigation that included a review of financial and litigation records and interviews with 37 former Equinix employees, industry experts and competitors led Hindenburg to the conclusion that Equinix manipulates its accounting for adjusted funds from operations (AFFO).
Equinix’s share price dropped by 4.6% on market open as the report was released yesterday.
AFFO is calculated by deducting the recurring expenses required to keep a real estate property running and generating revenues from its funds from operations.
The report alleges that AFFO was manipulated by Equinix’s reporting of maintenance capex as growth capex, giving the appearance that the company’s cost to maintain its revenue base is lower than it actually is and therefore making Equinix appear more profitable.
Equinix’s transition to a Real Estate Investment Trust (REIT) in 2015 saw the company begin to use AFFO as a key metric in determining executive bonuses.
The report says that in the same year maintenance capex dropped by 47%, estimating a 19% boost in AFFO.
“The company also reported a sudden spike in growth capex on its balance sheet, a dynamic that has continued for almost 10 years,” it goes on to say.
Former employees reportedly told Hindenburg that Equinix would classify routine battery replacements or light bulb replacements as growth capex, and the company would seek new serial numbers for refurbished equipment in order to recognise the old, repaired item as new and book it as growth capex.
Hindenburg estimates that Equinix’s manipulation of maintenance capex has resulted in a cumulative $3 billion boost to reported AFFO since 2015.
In turn, the boost to AFFO has “contributed to an estimated $295.8 million in stock award grants to top executives who have personally benefited from these accounting games.”
“As a data centre business increases its revenue, expands and acquires new facilities, it would be plainly obvious that maintenance capex in absolute terms should increase,” the report says.
“You would be amazed at the amount of equipment that goes offline, [and] needs to be repaired,” an engineer who worked at Equinix’s large Secaucus data centre in the US, which was built in 2006, added.
According to company press releases and financial results, Equinix has grown from 51 data centres and quarterly revenue of $249 million in Q1 2010 to 260 data centres in Q1 2024, with Bloomberg estimating it will report $2.14 billion in quarterly revenue.
“But despite operating five times the number of data centres and generating 8.6 times the revenue, management guides a maintenance capex range of $14 million in the quarter, less than its maintenance capex 14 years ago (14.5 million).”
In addition to booking maintenance capex as growth capex, the report alleges that Equinix’s profitability is further exaggerated.
Interviews with former employees conducted by Hindenburg point to purchases that should be classified as operating expenses being bundled together so they could be reported as capex, and project outlines creatively worded to further misrepresent expenses.
Hindenburg claims a data centre manager told them the accounting team at Equinix views opex as “dirty spend”.
Equinix has generated significant negative free cash flow (FCF) from 2017 to 2023, totalling $6.7 billion, per its disclosures.
“Investors have largely been untroubled by this, attributing the negative FCF to Equinix’s substantial reported growth-related capital expenditures,” the report says.
To fund its cash shortfall, Equinix has raised net proceeds of $8.5 billion from public stock offerings since 2017, per SEC filings, but since 2019 insiders have cashed out over $327 million.
CEO Charles Meyers, who announced he was stepping into the role of executive chairman as a new CEO replaced him last week, has personally cashed out $112 million, Hindenburg alleges.
“The only executive or director who bought any shares on the open market in the same period is William Luby, with a sole purchase totalling $3.1 million amid the COVID dip in April 2020, according to FactSet data,” the report says.
In addition to financial engineering of its accounts, Hindenburg alleges that Equinix engages in “a risky approach to growing revenue”.
“As Equinix’s accounting has worked to classify operating expenses and maintenance capex as growth capex, our research shows the company has perennially underinvested in actual growth infrastructure.
“Instead, it has quietly relied on a risky approach to growing revenue: overselling power capacity in the hope that customers won’t increase their usage up to the power they’ve contracted for.”
Former employees told Hindenburg that Equinix doesn’t have enough power at some of its facilities to satisfy its current customer contracts.
“Most Equinix data centres are what they call over-utilised anywhere from 120 to 175% of power,” a former executive is quoted as saying.
“The idea is that Equinix can oversell power in the hope that customers don’t grow into their contracted levels, a balancing act that can work if customer power usage rates don’t increase,” the report summarises.
Equinix reports that it has a 79% utilisation rate across its data centre business, but this metric is based on cabinet utilisation rather than energy.
The company does not disclose power utilisation, with CFO Keith Taylor saying it “doesn’t feel like the right metric to be sharing” on Equinix’s Q4 2023 earnings call.
While the report acknowledges that this unsanitary practice is not unheard of in data centre businesses across the world, the impact of it on Equinix’s ability to grow in light of the anticipated AI boom is significant.
“Investors have rewarded Equinix as though it is a key AI beneficiary. However, the growth of AI is projected to double the power demands of data centres within two years, according to industry research, posing a threat to Equinix’s power-constrained facilities.”
Former employees expressed doubt that Equinix could meaningfully upgrade its older facilities to meet these new power requirements. A former executive told us: “That’s a big problem because every single site in the estate is oversold by 25% and there’s no easy way of fixing that.”
"We are aware of the report and in the process of reviewing claims made therein," Equinix told Capacity in a statement.
“We take these matters seriously, and we will not respond further to the claims during our review. We will report back once that review is complete, as appropriate."
