Equinix (EQIX) Beats On Q2 AFFO & Revenues, Raises View (revised)

Equinix Inc (NASDAQ:EQIX). (EQIX) posted strong second-quarter 2016 results, wherein both the top and bottom line not only came ahead of the Zacks Consensus Estimates but also witnessed significant improvement from the year-ago quarter.

The company’s adjusted funds from operations (AFFO) increased 7.3% year over year to $4.13 per share and surpassed the Zacks Consensus Estimate $3.16. The increase is mainly attributable to strong top-line growth, partially offset by higher operating expenses and share count.

AFFO is a non-GAAP financial measure generally used in the Real Estate Investment Trust (REIT) industry. Equinix converted itself into a REIT company effective Jan 1, 2015.

Quarter in Detail

Total revenue was $900.5 million, up 35.3% from the year-ago quarter, which beat the Zacks Consensus Estimate of $894.2 million. The year-over-year improvement was mainly driven by strong booking activity, net positive pricing actions, and the acquisitions of Telecity and Bit-isle.

In the first quarter, total revenue included contributions from the newly acquired businesses, Telecity and Bit-isle, which accounted for a respective $107.2 million and $37.3 million.

Equinix continues to witness strong demand for its cloud services from corporations interested in enhancing their networks. The company witnessed revenue growth across all three geographic regions and verticals. Robust growth in the global Colocation and Interconnection platforms boosted the top line.

Moreover, solid performance in MRR (monthly recurring revenues) per cabinet, MRR churn rate (1.8%) and cross connect additions drove the top line. Recurring revenues came in at $851.8 million (95% of the total revenue), up about 36% from the year-ago quarter. Non-recurring revenues surged 25.3% to $48.7 million (5% of the total revenue).

Revenues from the three geographic regions increased on a year-over-year basis too. Revenues from the Americas, EMEA and Asia-Pacific surged 11.3%, 72.8% and 55.1% to $413.5 million, $300.6 million and $186.4 million, respectively.

Gross margin was 50.5% compared with 52.6% last year, primarily due to increased cost of revenues as a percentage of sales. Total operating expenses increased 38.5% to $291.9 million. Moreover, as a percentage of revenues, operating expenses went up 70 basis points (bps) to 32.4%.

Adjusted earnings before interest, taxes, depreciation and amortization (EBITDA) came in at $420.3 million, up 35%. AFFO increased 31.2% to $290.5 million. On a per-share basis, AFFO was $4.13, compared with $3.85 in the year-ago quarter.

Balance Sheet & Cash Flow

Equinix exited the quarter with cash, cash equivalents and short-term investments of $486.5 million. The company’s total debt principal outstanding was $7.06 billion as on Jun 30, 2016. It generated cash of $278.8 million from operating activities in the second quarter and $383.1 million in the first half of 2016.

Guidance

Buoyed by the strong top-line performance in the second quarter, Equinix raised its full-year revenue and AFFO expectations. Anticipating contributions from the acquisitions of Telecity and Bit-isle, the company now projects revenues to come between $3.598 billion and $3.608 billion (mid-point $3.603 billion), which exceeds its previous guidance of $3.595 billion. The Zacks Consensus Estimate is pegged at $3.590 billion.

Cash selling, general and administrative (SG&A) expenses are now projected in the range of $782 million to $792 million (mid-point $787 million), up from its earlier guidance of $775–$795 million (mid-point $785 million).

The company predicts adjusted EBITDA to be in the range of $1.658 billion to $1.668 billion (mid-point $1.663 billion), higher than the earlier expectation of $1.65 billion. Capital expenditure is expected to be between $950 million and $1 billion (mid-point $975 million), up from the previous guidance of $900–$1 billion ($950 million).

AFFO is anticipated to be $1.04–$1.05 billion (mid-point $1.045 billion), higher than the previous projection of $1.015 billion.

For the third quarter, Equinix expects revenues in the range of $915 million to $921 million (mid-point $918 million), lower than the Zacks Consensus Estimate of $920.93 million. Cash gross margin is expected to be approximately 68%, while SG&A expenses are expected in the $199–$205 million band.

Adjusted EBITDA is likely to be $419 million to $425 million. Capital expenditure is projected in the band of $270 million to $290 million.

Our Take

Equinix reported better-than-expected second-quarter results. The company’s top and bottom line results also improved on a year-over-year basis. Revenues were mainly driven by strong demand for cloud services by corporations and benefits of the recently acquired Telecity and Bit-isle businesses. Equinix witnessed revenue growth across all three geographic regions and verticals.

Moreover, the upbeat guidance for full-year 2016 was encouraging. Equinix is presently focusing on improving customer experience through the Equinix Customer One program. We are also optimistic on the company’s recurring revenue model and expansion plans announced in March this year.

Equinix operates across various geographical regions and is becoming increasingly popular among major players in the tech industry for data management, which should drive its revenues going ahead.

However, intensifying competition from established Internet data center operators such as AT&T (NYSE:T) (T) and CenturyLink Inc (NYSE:CTL). (CTL) may affect product pricing, thereby denting Equinix’s margins.

A highly leveraged balance sheet and industry consolidation add to its woes.

Equinix has a Zacks Rank #3 (Hold). A better-ranked stock in the broader technology sector is Amkor Technology Inc. (AMKR), sporting a Zacks Rank #1 (Strong Buy).

(We are reissuing this article to correct a mistake. The original article, issued yesterday, August 4, 2016, should no longer be relied upon.)

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