Equinix (EQIX) Q1 AFFO & Revenues Beat Estimates, Up Y/Y

Equinix Inc. EQIX posted better-than-expected first-quarter 2017 results, wherein both the top and the bottom line surpassed the Zacks Consensus Estimate and increased from the year-ago quarter.

The company’s adjusted funds from operations (AFFO) increased year over year to $4.14 per share, surpassing the Zacks Consensus Estimate of $3.54. The increase is mainly attributable to strong top-line growth and lower tax rate, partially offset by higher cost of revenues and share count.

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

Quarter in Detail

Total revenue was $949.5 million, up 12.5% from the year-ago quarter, beating the Zacks Consensus Estimate of $945 million. This marked the 57th quarter of consecutive revenue growth. The year-over-year improvement was primarily driven by strong booking activity, Equinix's global platform, continued enterprise momentum and the acquisitions of Telecity and Bit-isle.

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 gave a boost to the top line.

Moreover, solid performance in MRR (monthly recurring revenues) per cabinet, MRR churn rate (2.8%) and cross connect additions drove the top line. Recurring revenues came in at $898.4 million (95% of total revenue), up approximately 12.8% from the year-ago quarter. Non-recurring revenues surged 7.5% to $51.1 million (5% of total revenue).

Revenues from the three geographic regions increased on a year-over-year basis too. Revenues from the Americas, EMEA and Asia-Pacific were up 7.9%, 15.3% and 15.3% to $436.4 million, $314.8 million and $198.2 million, respectively.

Gross margin was 68% flat on a year-over-year basis, primarily due to increased cost of revenues as a percentage of sales. Total operating expenses increased 13.5% to $218.4 million. Also, as a percentage of revenues, operating expenses increased 20 basis points (bps) to 23%.

Adjusted earnings before interest, taxes, depreciation and amortization (EBITDA) came in at $427.6 million, up 12.3%. AFFO increased 44.9% to $304.1 million. On a per-share basis, AFFO was $4.14 during the quarter.

Balance Sheet & Cash Flow

Equinix exited the quarter with cash, cash equivalents and short-term investments of $4.938 billion. The company’s total debt principal outstanding was $9.27 billion as on Mar 31, 2017. It generated cash of $247.4 million from operating activities in the first quarter.

Guidance

Equinix provided second-quarter guidance and raised its full-year 2017 projections. For 2017, Equinix expects revenues to be more than $3.976 million, reflecting an increase of 10.1% year over year (previous guidance was more than $3.993 billion, pointing at an increase of 9% year over year). The Zacks Consensus Estimate is pegged at $4.031 billion. The company now predicts adjusted EBITDA of more than $1.860 billion (prior guidance was more than $1.842 billion).

However, the company lowered its AFFO guidance for full-year 2017. Equinix now anticipates AFFO to be more than $1.214, reflecting an increase of 13% year over year (previous guidance was more than $1.249, pointing at an increase of 16% year over year).

The company continues to expect cash gross margin for full-year 2017 to be approximately between 67% and 68%. Cash selling, general and administrative (SG&A) expenses are now projected in the range of $810–$830 million (previous guidance was $805–$825 million).

For the second quarter, Equinix expects revenues in the range of $976–$982 million (mid-point $979 million). The Zacks Consensus Estimate of $974 million. Adjusted EBITDA is likely to be $447 million to $453 million.

Cash gross margin for second quarter is anticipated to be approximately between 67% and 68%. Cash selling, general and administrative (SG&A) expenses are projected in the range of $206–$212 million.

Share Price

Equinix’s share price movement has been quite favorable. In the last one year, its shares gained 20.3% compared with a loss of 8.4% recorded by the Zacks categorized Reit-Equity Trust- Retail industry.

Our Take

Equinix reported encouraging first-quarter results and issued an upbeat guidance.

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.

Notably, acquisitions have been a major growth driver for Equinix. We expect the company’s buyouts of Telecity Group, Bit-isle and Nimbo, to remain catalysts.

Expansion in important markets and consolidation of facilities in existing ones are important parts of Equinix's core strategy. We believe that the company’s focus on offering upgraded technology to attract clients will bolster its revenues and profitability, going forward.

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 add to its woes.

Equinix has a Zacks Rank #4 (Sell). A better-ranked stock in the technology sector is Western Digital Corporation WDC, carrying a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Western Digital has a long-term expected EPS growth rate of 12.11%.

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