Hindenburg Research, an investment research firm best known activist short-selling, has now taken a position against Equinix, a major global player in the data center market. In a report published on its website, Hindenburg has alleged that Equinix had engaged in “accounting manipulation” to inflate capital expenditure (Capex) figures. It also accused Equinix of “core business decay and selling an AI pipe dream” claiming that some of the top people in the firm knew about this and cashed out.
Equinix has over 250 data centers across the world in locations such as Europe, the Americas, Africa, the Middle East, South Asia and South East Asia. Founded in Silicon Valley in 1998 as a vendor-neutral multitenant data center provider, Equinix employs over 12,000 people across the world. It serves clients from diverse industries such as finance, manufacturing, retail, transportation, government, healthcare and education. Some of its big ticket clients include hyperscalers like Amazon, Google and Microsoft.
The report sent Equinix stock prices plummeting sharply on Wednesday.
Hindenburg’s allegations
Hindenburg Research has accused Equinix of using a technique involving Adjusted Funds From Operations (AFFO) to manipulate its accounts and fudge Capex figures. It claimed, “Our investigation, which included a review of financial and litigation records and interviews with 37 former Equinix employees, industry experts and competitors, revealed that Equinix manipulates its accounting for AFFO, the key profitability metric for REITs. We estimate this metric was overstated by at least 22% in 2023 alone.”
It explained, “A key accounting trick to boost AFFO is to misclassify ‘maintenance CapEx’ as ‘growth CapEx’, giving the appearance that the company’s cost to maintain its revenue base is lower than it actually is, making the company appear more profitable,” adding, “When Equinix transitioned to become a REIT in 2015, it began using AFFO as a key metric in determining executive bonuses. That same year, Equinix reported a sudden 47% drop in maintenance CapEx, leading to an estimated 19% boost to reported AFFO.”
Hindenburg explained some of the ways in which the alleged fraud took place. “Batteries represent one of the largest data center replacement costs. A former operations director explained how Equinix would classify routine battery replacements as growth CapEx by characterizing it as “replacing a battery system”.” It gave another example, saying, “Equinix’s accounting even went as far as classifying light bulb replacements as growth CapEx, per former employees. “Say you changed out fluorescents to LED light bulbs, that’s a capital improvement. You’re not replacing lightbulbs, you’re enhancing”.”
Hindenburg estimates that Equinix’s manipulation of maintenance CapEx has resulted in a cumulative US$3 Billion boost to reported AFFO since 2015.
Equinix’s response
While Equinix is yet to formally refute Hindenburg’s claims, it told Investopedia, a financial news website, that it was reviewing Hindenburg’s claims. It said, “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.”
We will update this story once Equinix issues a formal statement or press release.
Recent changes in the top brass
Equinix was in the news recently for a sudden reshuffle in its leadership. On March 12, 2024, the company announced that Charles Meyers, who currently serves as President and Chief Executive Officer (CEO), will transition to the role of Executive Chairman. Google Cloud Go-to-Market President Adaire Fox-Martin will take over from him effective late Q2. Moreover, Peter Van Camp, who is currently serving as Executive Chairman, will step away from his formal responsibilities as a Board member to take the role of Special Advisor to the Board. Equinix calls this a planned leadership transition, and did not elaborate further as to why the reshuffle was necessitated.