Iron Mountain Inc. (IRM) reported earnings per share (EPS) of 26 cents for its first quarter, missing the Zacks Consensus Estimate by a penny.
Operating Performance
EPS on a non-GAAP basis increased 23.8% year over year from 21 cents, driven by lower interest costs and fewer shares outstanding. Net income attributed to Iron Mountain soared 187.3% year over year to $73.5 million.
Gross profit increased 3.5% year over year to $467.0 million in the first quarter, while gross margin inched up to 58.5% from 58.1% in the year-ago quarter. The gross margin improvement was due to higher storage gross margins, particularly in the International and Worldwide Digital segments.
Adjusted operating income, before depreciation and amortization (OIBDA), grew 2.0% year over year to $222.0 million. However, adjusted OIBDA margin dipped 30 basis points (bps) to 27.7%, due to higher advisory fees and other costs related to Iron Mountain’s recent proxy contest.
Operating income was flat year over year and stood at $132.4 million in the quarter. Operating margin declined 30 bps to 16.6%, primarily due to higher selling, general and administrative costs (SG&A) (up 5.0%). Higher costs were primarily driven by planned increases in sales expense, productivity investments in International business and costs related to the recent proxy contest.
Revenues
Revenues increased 3.0% year over year to $799.0 million, surpassing the Zacks Consensus Estimate of $794.0 million. Revenues were primarily aided by an internal growth rate of 1.0%. Both acquisitions and foreign currency fluctuations contributed 1.0% to revenue growth in the quarter.
Storage revenues (56.3% of revenue) increased 5.1% year over year to $450.1 million. Storage revenue internal growth increased to 3% in the quarter, driven by continued strong performance in the International Physical segment and higher growth in the North America business.
Global records management net volumes inched up 2% year over year, buoyed by higher new sales and lower destruction rates compared with the prior-year quarter.
Service revenues (43.7% of revenue) were flat compared to the year-ago quarter at $348.8 million. Core service revenue internal growth was negative 1% as a result of continued softness in core service activity levels.
Complementary service revenue internal growth was negative 5.0% in the quarter as strong hybrid revenue growth was more than offset by lower special project sales and eDiscovery revenues.
Balance Sheet
As of March 31, 2011, cash and cash equivalents were $225.0 million, compared with $293.8 million at the end of December 31, 2010. Long-term debt was $2.96 billion, compared with $2.91 billion.
In the first quarter of 2011, Iron Mountain generated free cash flow of $58.0 million, compared with $54.0 million in the year-ago period.
Iron Mountain repurchased 0.4 million shares worth $11.0 million in the reported quarter. As of March 31, 2011, Iron Mountain repurchased 5.1 million shares for approximately $122.0 million.
On April 19, 2011, Iron Mountain announced that its Board of Directors authorized a share buyback program worth $2.2 billion through 2013. The company intends to return capital totaling $1.2 billion to stockholders through a combination of share buybacks, ongoing quarterly dividends and potential one-time dividends within the next 12 months.
Outlook
Iron Mountain projects revenue growth in the range of 3.0% to 5.0% (previous guidance 2.0% to 4.0%) for full-year 2011, primarily based on internal revenue growth of 0.0% to 2.0%.
The company forecasts adjusted OIBDA guidance in the range of negative 1.0% to positive 2.0% for fiscal 2011. Iron Mountain expects earnings per share in the range of $1.16 to $1.24, reflecting year-over-year growth of 1.0% to 8.0% (previous guidance $1.21 to $1.30).
The company expects capital expenditure of $235.0 million (previous guidance $245.0 million) and free cash flow in the range of $375 million to $410 million for fiscal 2011.
Recommendation
Although Iron Mountain raised its revenue guidance for fiscal 2011, we believe higher expense growth related to revenue will hurt profitability going forward.
We maintain our Neutral recommendation on a long-term basis (6-12 months) due to weak internal growth and volatile foreign exchange rates, partially offset by Iron Mountain’s promising product portfolio and strong market share.
Iron Mountain faces stiff competition from Anacomp Inc., Cintas Corporation (CTAS) and privately held SOURCECORP, Inc.
Iron Mountain is a Zacks #3 Rank, which implies a short-term 'Hold' rating (for the next 1-3 months).
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