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Will Lower Cross-Connects Hurt Equinix's (EQIX) Q4 Earnings?

Zacks Equity Research

Equinix, Inc. EQIX is set to report fourth-quarter 2018 earnings results on Feb 13, after the market closes. The company’s results will likely reflect year-over-year growth in revenues and funds from operations (FFO) per share.

In the last reported quarter, this global connectivity leader delivered a positive surprise of 1.21% in terms of adjusted FFO per share. Results reflected robust top-line growth and strong operating performance, partially muted by elevated cost of revenues.

The company witnessed a remarkable streak of beating earnings estimates, especially when looking at the previous four reports. In fact, Equinix surpassed the Zacks Consensus Estimate in each of the trailing four quarters, with average positive beat of 3.3%.

Equinix, Inc. Price and EPS Surprise

Equinix, Inc. Price and EPS Surprise | Equinix, Inc. Quote

 

Let’s see how things are shaping up prior to this announcement.

Factors at Play

Banking on strong customer demand and encouraging trend in inventory utilization, Equinix announced a number of new expansions in the fourth quarter. This likely helped the company strengthen its global platform in quarter and attract customers with businesses across different geographies.

These efforts included expansions in London, Helsinki and Singapore. While these portfolio-fortification moves are a strategic fit, Equinix is expected to bear higher integration costs stemming from these acquisitions. In fact, management anticipates integration costs of $15 million in the Dec-end quarter. This will likely hurt the company’s bottom-line performance. 

While Equinix enjoys a solid global presence, the negative impact of unfavorable foreign-currency movements cannot be bypassed. Hence, widespread volatility in the global markets during the Oct-Dec quarter is anticipated to affect the company’s liquidity and top-line performance. 

Amid these, the fourth-quarter EBITDA (Non-GAAP) from its Asia- Pacific operations are expected to be down 7.3% sequentially to $127 million.

Additionally, sequential revenue growth from the United States will likely be limited to 0.7%, amounting to $631 million. Similarly, revenues from the company’s operations in Europe are anticipated to witness moderate sequential growth of 2% to $405 million.

Further, an uptick in interest rates during the quarter under review is expected to have curbed the company’s bottom-line results. In fact, to expand its global footprint and initiate new projects, the company is dependent on external borrowings as well. In addition, significant debt outstanding is expected to flare up its interest expense.

Furthermore, fierce competition from established Internet data-center operators, such as AT&T T and Verizon is expected to depress the company’s margins and revenues. Additionally, with the emergence of software-defined network-enabled fabrics, demand for Equinix’s physical fiber cross-connects   appears to witness a decline. In fact, the Zacks Consensus Estimate for cross-connects across United States is expected to be down 18.3% to 117,199. 

The company’s activities during the quarter to be reported were inadequate to gain analyst confidence. In fact, the Zacks Consensus Estimate for FFO per share of $4.92 for the quarter remained unchanged, over the past month. Nonetheless, the figure denotes year-over-year growth of 2.07% from the prior-year quarter. Equinix anticipates full-year 2018 AFFO to be in the $1.619-$1.639 billion band.

Earnings Whispers

Our proven model does not conclusively show that Equinix is likely to beat estimates this quarter. This is because a stock needs to have both a positive Earnings ESP and a favorable Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 (Hold) for this to happen. But that is not the case here, as you will see below.

You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.

Earnings ESP: Equinix has an Earnings ESP of 0.00%

Zacks Rank: Equinix carries a Zacks Rank of 4 (Sell), currently.

It should be noted that we caution against stocks with a Zacks Rank #4 or 5 (Sell rated) going into the earnings announcement, especially when the company is seeing negative estimate revisions.

Stocks That Warrant a Look

While other players in the REIT space are lined up to report their financial results, below are two stocks, poised to beat on earnings per the proven Zacks model. You can see the complete list of today’s Zacks #1 Rank stocks here.

Hersha Hospitality Trust HT, slated to report fourth-quarter results on Feb 25, has an Earnings ESP of +3.81% and holds a Zacks Rank of 2.

American Tower Corporation AMT, set to release earnings on Feb 27, has an Earnings ESP of +0.29% and carries a Zacks Rank of 3.

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

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