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Equinix (EQIX) Tops on Q4 AFFO, Misses Revenues; View Weak

Zacks

Equinix Inc. EQIX posted mixed fourth-quarter 2016 results, wherein the top line missed the Zacks Consensus Estimate but the bottom line surpassed the same. Both the top and the bottom line increased significantly from the year-ago quarter.

The company’s adjusted funds from operations (AFFO) increased 39.7% year over year to $4.08 per share and surpassed the Zacks Consensus Estimate $3.41. The increase is mainly attributable to strong top-line growth, 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 of $942.6 million was up 29% from the year-ago quarter but missed the Zacks Consensus Estimate of $944 million. The year-over-year improvement was mainly driven by strong booking activity, net positive pricing actions, and the acquisitions of Telecity and Bit-isle.

Fourth-quarter revenues included contributions from newly acquired businesses, Telecity and Bit-isle, which accounted for $100.9 million and $37.5 million, respectively.

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 boosted the top line.

Moreover, solid performance in MRR (monthly recurring revenues) per cabinet, MRR churn rate (2%) and cross connect additions drove the top line. Recurring revenues came in at $877.5 million (95% of total revenue), up about 30.1% from the year-ago quarter. Non-recurring revenues increased 13.1% to $50.2 million (5% of the 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 11.5%, 65.2% and 33.4% to $436.5 million, $301.6 million and $204.5 million, respectively.

Gross margin was 68% compared with 69% last year, primarily due to increased cost of revenues as a percentage of sales. Total operating expenses increased 20.8% to $204.6 million. However, as a percentage of revenues, operating expenses went down 150 basis points (bps) to 21.7%.

Adjusted earnings before interest, taxes, depreciation and amortization (EBITDA) came in at $436.5 million, up 31%. AFFO increased 64.8% to $293.9 million. On a per share basis, AFFO was $4.08, compared with $2.92 in the year-ago quarter.

Balance Sheet & Cash Flow

Equinix exited the quarter with cash, cash equivalents and short-term investments of $751.9 million. The company’s total debt principal outstanding was $6.82 billion as on Dec 31, 2016. It generated cash of $299.3 million from operating activities in the fourth quarter and $1.016 billion in the first twelve months of 2016.

Guidance

Equinix provided first quarter and full-year 2017 guidance. For fiscal 2017, anticipating contributions from the acquisitions of Telecity and Bit-isle, Equinix expects revenues to be more than $3.993 billion, an increase of 9% year over year. The Zacks Consensus Estimate is pegged at $4.069 billion. The company predicts adjusted EBITDA to be more than $1.842 billion.

Full year AFFO is anticipated to be more than $1,249, an increase of 16% year over year.

Cash gross margin for full-year 2017 is anticipated be approximately 67% to 68%. Cash selling, general and administrative (SG&A) expenses are projected in a range of $805 million to $825 million.

For the first quarter, Equinix expects revenues in a range of $940 million to $946 million (mid-point $943 million). The Zacks Consensus Estimate is pegged at 963 million. Adjusted EBITDA is likely to be in a range of $421 million to $427 million.

Cash gross margin for the first quarter is anticipated be approximately 67% to 68%. Cash selling, general and administrative (SG&A) expenses are projected in a range of $208 million to $214 million.

Share Price

Equinix’s share price movement has been quite favorable. Over the past one year, its shares have gained 31.1% compared with just 3.4% increase recorded by the Zacks categorized Reit-Equity Trust- Retail industry.

Our Take

Equinix reported mixed fourth-quarter results. Also, the company provided a tepid revenue guidance for first quarter and full-year 2017. The company’s top and bottom line results however improved on a year-over-year basis. The year-over-year increase in revenues was mainly driven by strong demand for cloud services from corporations and benefits of the recently acquired Telecity and Bit-isle businesses. Equinix witnessed revenue growth across all three geographic regions and verticals.

Equinix is presently focusing on improving customer experience through the Equinix Customer One program. We are optimistic on the company’s recurring revenue model and expansion plans announced in Mar 2016.

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.

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 #3 (Hold). A better-ranked stock in the technology sector is Seagate Technology plc STX, carrying a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Seagate has a long-term expected EPS growth rate of 8.17%.

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