Equinix Reports Mixed 4Q

Zacks

Equinix Inc.(EQIX) reported fourth quarter 2011 earnings per share of 38 cents, well below the Zacks Consensus Estimate of 44 cents.

Revenues

Revenues in the reported quarter were $431.3 million, up 24.9% from the year-ago quarter. Revenue in the quarter included a contribution of $17.3 million from ALOG (ALOG acquisition was completed in April 2011). The company is experiencing improvement in business activity across all its segments, largely driven by the strong demand for Equinix Platform across all industrial verticals. Market conditions are also improving on the back of better supply-demand dynamics and firm pricing environment.

Within segments, Recurring revenues (consisting primarily of colocation, interconnection and managed services) were $410.7 million in the fourth quarter, a 25.9% increase over the year-ago quarter. Non-recurring revenues were $20.6 million in the quarter, up 8.8% from $18.9 million in the year-ago quarter.

Operating Results

Cash gross margin for the quarter was 66.7% versus 63.7% in the year-ago quarter. The higher-than-expected results were driven by higher revenues and a lower-than-planned utility cost.

Total cash operating expenses increased 26.6% from the year-ago quarter. The year-over-year increase in cash operating expenses was primarily attributed to higher selling and marketing expenses (up 45.3%) and general and administrative expenses (up 16.0%).

Adjusted EBITDA, defined as income or loss from operations before depreciation, amortization and accretion, stock-based compensation, restructuring charges and acquisition costs, was $198.1 million in the quarter, up 33.0% year over year. The adjusted EBITDA has grown consistently over the past few quarters and reflects the underlying strength of the business

Adjusted net income attributable to Equinix stood at $18.2 million or 38 cents per diluted share versus $13.7 million or 29 cents per share in the year-ago quarter.

Balance Sheet, Cash Flow & Capital Expenditure

The company generated cash from operating activities of $187.3 million in the fourth quarter compared with $122.9 million in the previous quarter. As of December 31, 2011, cash, cash equivalents and investments were $0.91 billion versus $1.2 billion in the earlier quarter. Moreover, the company repurchased 0.9 million shares of its common stock in the reported quarter for an average price of $99.57 per share, totaling $86.7 million.

Guidance

For the first quarter of 2012, Equinix expects revenues to be in the range of $443.0 to $446.0 million. Cash gross margin is expected to be in the range of 66.0% to 67.0%. Adjusted EBITDA is expected to be between $200.0 and $205.0 million.

For the full year of 2012, total revenue is expected to exceed $1,870.0 million. Total year cash gross margin is expected to approximate 66%, while adjusted EBITDA for the year is expected to be greater than $850.0 million.

 Our Take

The company has delivered modest fourth quarter results with EPS missing our expectation. However, revenue improved on a year-over-year basis. The company is experiencing improvement in business fundamentals across all the segments, along with better supply chain process and firm pricing environment.  

Although the company is cash rich, the company should reduce its high level of debts. We are also positive about its recurring revenue model. Despite all the positives, competitive treats from the likes of AT&T Inc. (T) and Verizon Inc. (VZ) raise our apprehension. European exposure and industry consolidation are also concerning. 

Equinix holds a Zacks #3 Rank, implying a short-term Hold rating.

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