Iron Mountain (IRM) Q1 FFO Misses Estimates, Revenues Top

Iron Mountain Inc. (NYSE:IRM) reported first-quarter 2017 normalized funds from operations (FFO) of 48 cents per share that missed the Zacks Consensus Estimate of 51 cents and decreased 7.4% year over year.

Revenues of almost $939 million however beat the Zacks Consensus Estimate of $929 million and improved more than 25% year over year. At constant currency (cc), storage revenues were up 24.4% to $572.3 million while service revenues grew 26.6% to $366.6 million. The company achieved internal storage rental growth of 3%.

Iron Mountain reported adjusted EBITDA of $292.6 million compared with $235.1 million in the year-ago quarter. However, adjusted EBITDA margin contracted 10 basis points (bps) from the year-ago quarter to 31.2%

Iron Mountain shares have been declining following the results. We note that on a year-to-date basis, the stock has outperformed the Zacks categorized REIT- Equity Trusts – Other industry. While the stock gained 11.2%, the industry returned 4%.

We believe that lower EBITDA margin and declining profitability will drag down stock price in the near term.

Quarter Details

Operating expenses increased 27.5% year over year to $791.1 million. Selling, general & administrative (SG&A) expense increased 15.6% from the year-ago quarter to $240.2 million. Depreciation & Amortization surged 43% year over year to $124.7 million.

Operating income increased 13.6% from the year-ago quarter to $147.8 million. However, operating margin declined 160 basis points (bps) to 15.7%.

Iron Mountain exited the quarter with cash and cash equivalents of $295.6 million compared with $236.5 million as of Dec 31, 2016. Long-term debt was $5.92 billion compared with $6.08 billion as of Dec 31, 2016.

Outlook

For 2017, Iron Mountain expects revenues to be in the range of $3.750 billion - $3.840 billion, reflecting 8% to 10% growth year over year.

Adjusted EBITDA to be in the range of $1.250 - $1.280 billion, representing growth of 16% to 19%. Adjusted FFO is expected to be in the range of $715 million to $760 million.

Internal storage rental growth rate is expected to be 2% to 2.5% in 2017. Capital expenditure along with non-real estate investments are projected to be in a bracket of $150 million - $170 million.

Our Take

Iron Mountain’s diversified revenue base is a positive. It is noteworthy that 95% of the Fortune 1000 companies are on Iron Mountain’s client list. In addition, its strong product portfolio, increasing market share, and promising international business are the primary growth catalysts. Moreover, the company’s entry into the data center market is likely to be a growth driver.

Furthermore, the company has an aggressive acquisition strategy to supplement organic growth in storage revenues. The acquisition of Recall Holdings has been positive for the company.Apart from generating synergies worth $105 million, the acquisition also expanded the company’s footprint in international markets.

But the costs of such initiatives are expected to weigh on financials, especially as the company already has a highly leveraged balance sheet. Also, volatile currency environment and intensifying competition remain overhangs.

Currently, Iron Mountain has a Zacks Rank #3 (Hold).

Stocks to Consider

Better-ranked stocks in the tech sector include Monmouth Real Estate Investment (NYSE:MNR) , CorEnergy Infrastructure (NYSE:COR) and CoreSite Realty (NYSE:COR) . Monmouth Real Estate sports a Zacks Rank #1 (Strong Buy) while CorEnergy and CoreSite carry a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Long-term growth of Monmouth Real Estate, CorEnergy and CoreSite is projected to be 8%, 3% and 19.15%, respectively.

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