Equinix (EQIX) Surpasses AFFO And Revenue Estimates In Q1

Equinix Inc. (NASDAQ:EQIX) posted better-than-expected first-quarter 2018 results, wherein the top and bottom lines surpassed the Zacks Consensus Estimate and increased from the year-ago quarter.

The company’s adjusted funds from operations (AFFO) advanced from $4.15 per share reported in the year-ago quarter to $5.21 per share. The Zacks Consensus Estimate was pegged at $4.94. The uptick primarily stemmed from robust top-line growth and strong operating performance, partially offset by an elevated cost of revenues.

AFFO is a non-GAAP financial measure, generally used in the Real Estate Investment Trust (REIT) industry.

Quarter in Detail

Total revenues came in at $1.22 billion, up 28% from the year-ago quarter, beating the Zacks Consensus Estimate of $1.21 billion. This marked the 61st quarter of consecutive revenue growth.

Equinix continues to witness solid demand for cloud services from corporations interested in enhancing firms’ networks. The company observed revenue growth across all three geographic regions and verticals. Robust growth in the global Colocation and Interconnection platforms provided a boost to the top line.

Moreover, solid performance in MRR (monthly recurring revenues) per cabinet, MRR churn rate (2.4%) and cross-connect additions drove the top line. Recurring revenues came in at $1.15 billion (95% of total revenues), up approximately 28% from the year-ago quarter. Non-recurring revenues climbed 27.7% to $65.2 million (5% of total revenues).

Revenues from the three geographic regions increased on a year-over-year basis as well. Revenues from the Americas, EMEA and the Asia Pacific were up 38.1%, 20.6% and 17.9% to $602.6 million, $379.6 million and $233.6 million, respectively.

Gross margin was 48.8%, down from 50.6% reported in the year-ago quarter, primarily due to elevated cost of revenues as a percentage of sales. Total operating expenses flared up 17.3% to $367.6 million. Further, operating expenses contracted 280 basis points (bps) as a percentage of revenues to 30.2%.

Adjusted earnings before interest, taxes, depreciation and amortization (EBITDA) came in at $579.5 million, up 35.5%. Adjusted EBITDA margins came in at 48% as compared with 45% reported in the year-ago quarter. AFFO increased 36.3% to $414.6 million during the reported quarter.

Balance Sheet & Cash Flow

Equinix exited the first quarter with cash, cash equivalents and short-term investments of $2.1 billion. The company’s total debt principal outstanding was $11.2 billion as of Mar 31, 2018. It generated cash of $300.9 million from operating activities in the first quarter of 2018.

Guidance

Equinix provided an outlook for the second quarter and raised a few full-year 2018 projections. For 2018, the company now anticipates revenues to be in the range of $5.082-$5.122 billion (prior guidance was over $5.010 billion), reflecting an increase of 17% year over year.

The Zacks Consensus Estimate is pegged at $5.04 billion. The company now predicts adjusted EBITDA to be in the range of $2.395-$2.435 billion (prior guidance was over $2.385 billion).

Equinix now anticipates full-year 2018 AFFO to be in the range of $1.595- $1.635 billion, reflecting growth of 12% year over year. Earlier, Equinix expected AFFO to exceed $1.635 billion.

The company reiterated its expectation of the cash gross margin for the full year. The company expects it to be approximately 67%. Cash selling, general and administrative (SG&A) expenses are projected to be 19-20% of revenues.

Coming to the second quarter, Equinix expects revenues in the range of $1.257-$1.267 billion. The Zacks Consensus Estimate is pegged at $1.24 billion. Adjusted EBITDA is likely to lie between $579 million and $589 million.

Cash gross margin for the second quarter is anticipated to be 66-67%. Cash selling, general and administrative (SG&A) expenses are projected be in the range of 19-20% of revenues.

Our Take

Equinix reported stellar first-quarter results. Revenues were mainly driven by strong demand for cloud services from corporations and benefits from Equinix's global platform. The company witnessed revenue growth across all three geographic regions and verticals.

Additionally, the company’s recurring revenue model and current expansion plans are encouraging. In April 2017, it announced a billion-dollar aggressive expansion plan, which includes unveiling data centers, acquisitions and expansion of existing facilities. Further, the company provided encouraging revenue guidance for the second quarter and full-year 2018.

Nevertheless, we are concerned about the company’s growing debt burden, which would adversely affect the operating results as interest expenses would go up. Further, intensifying competition from established Internet data-center operators such as AT&T (NYSE:T) and CenturyLink Inc. (NYSE:T) might impact product pricing while consequently denting margins. A highly leveraged balance sheet and industry consolidation add to its woes.

Equinix carries a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Equinix, Inc. Price, Consensus and EPS Surprise

We are now looking forward to the earnings release of EPR Properties (NYSE:EPR) , which is scheduled to report its numbers on May 8.

Note: Anything related to earnings presented in this write-up represent funds from operations (FFO) — a widely used metric to gauge the performance of REITs.

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