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Equinix (EQIX) Lags Q1 AFFO but Tops Revenues, Ups View

Equinix Inc. EQIX posted mixed first-quarter 2016 results, wherein the top line beat estimates but the bottom line missed the same.

The company’s adjusted funds from operations (AFFO) declined approximately 21% year over year to $2.98 per share and missed the Zacks Consensus Estimate $3.09. The weak bottom line resulted mainly from increased operating expenses and a higher share count, which more than offset the benefit from strong top-line growth.

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 $844.2 million, up 31.2% from the year-ago quarter, which beat the Zacks Consensus Estimate of $841.5 million. The year-over-year improvement was mainly driven by strong bookings activity, net positive pricing actions, and the acquisitions of Telecity and Bit-isle.

In the first quarter, total revenue included revenues from the newly acquired businesses – Telecity and Bit-isle – which contributed $84.4 million and $34.2 million, respectively. Moreover, with these acquisitions, Equinix’s total number of IBX data centers has now touched 145, with operations across 21 countries and 40 metros.

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 revenues from global Colocation and Interconnection platforms boosted the top line.

Moreover, solid performance in MRR (monthly recurring revenues) per cabinet, MRR churn rate (2.2%) and cross connect additions drove revenues. Recurring revenues came in at $797.1 million (94% of the total revenue), up 30.7% from the year-ago quarter. Non-recurring revenues surged 40.4% to $47.1 million (6% of the total revenue).

Revenues from the three geographic regions increased year over year too. Revenues from the Americas, EMEA and Asia-Pacific surged 11.1%, 62.7% and 50% to $404.4 million, $267.9 million and $171.9 million, respectively.

Gross margin was 49% compared with 54% last year, primarily due to increased cost of revenues as a percentage of sales. Total operating expenses increased 57.1% to $303.8 million. Moreover, as a percentage of revenues, operating expenses went up 590 basis points (bps) to 36%.

Adjusted earnings before interest, taxes, depreciation and amortization (EBITDA) came in at $380.7 million, up 24.5%. AFFO decreased 5.4% to $209.8 million. Moreover, on a per-share basis, AFFO was $2.98, compared with $3.77 in the year-ago quarter.

Balance Sheet & Cash Flow

Equinix exited the quarter with cash, cash equivalents and short-term investments of $633.8 billion. The company’s total debt principal outstanding was $7.24 billion as on Mar 31, 2016. It generated cash from operating activities of $104.3 million in the first quarter.

Guidance

Buoyed by the strong top-line performance in the first quarter, Equinix raised its full-year revenue and AFFO expectations. Anticipating revenue additions from the acquisitions of Telecity and Bit-isle, the company now projects revenues to exceed $3.595 billion, representing year-over-year growth of over 32%. Earlier, the company was expecting revenues of $3.55 billion. The Zacks Consensus Estimate is pegged at $3.568 billion.

Cash selling, general and administrative (SG&A) expenses are projected in the range of $775 million to $795 million. AFFO is anticipated to be higher than $1.015 billion, up from previous projection of $970 million.

The company predicts adjusted EBITDA to exceed $1.65 billion, higher than the earlier guidance of $1.62 billion. Capital expenditure is expected between $900 million and $1 billion.

For the second quarter, Equinix expects revenues in the range of $893 million to $899 million (mid-point: $896 million), higher than the Zacks Consensus Estimate of $879 million. Cash gross margin is expected between 67% and 68%, while SG&A expenses are expected in the $195–$201 million range.

Adjusted EBITDA is likely to be within $403 million to $409 million. Capital expenditure is expected in the band of $222 million to $242 million.

Our Take

Equinix’s first-quarter results were mixed with the top line surpassing the Zacks Consensus Estimate but the bottom line missing the same. Notably, the company witnessed robust year-over-year revenue growth.

Revenues were mainly driven by strong demand for the company’s cloud services by corporations. Growth across geographies and business segments also had a positive impact on top line.

Moreover, the company issued encouraging second-quarter guidance and raised the full-year revenue outlook. 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 increasingly becoming popular among major players in the tech industry for data management, which should drive its revenues.

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

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

Equinix has a Zacks Rank #2 (Hold). Another technology stock worth looking at is Silicon Motion Technology Corp. SIMO, sporting a Zacks Rank #1 (Strong Buy).

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