Equinix Inc. (EQIX) reported third-quarter 2014 GAAP earnings of 79 cents, which was down from 83 cents reported in the year-ago period. The Zacks Consensus Estimate was pegged at 88 cents. Nevertheless, revenues for the quarter increased 14.2% from the year-ago quarter to $620.4 million and also beat the Zacks Consensus Estimate of $615 million.
The company witnessed revenue growth across all the three geographic regions and verticals. Robust growth in revenues from Equinix’s product categories (Colocation, Interconnection, Managed infrastructure and Rental) also aided revenues.
Moreover, recurring revenues came in at $588.4 million (95% of total revenue), up 14.1% from the year-ago quarter. Non-recurring revenues increased 16.3% from the year-ago quarter to $32 million (5% of total revenue). Customer deployment across various regions accounted for 67% of recurring revenues, up from 60% in the year-ago quarter. As much as 81% of the recurring revenues came from customer deployment across various metros, up from 78% in the year-ago period.
Moreover, solid performance in MRR (monthly recurring revenues) per cabinet, MRR churn and cross connect addition (1,100 net cross connect) drove the quarter’s revenues. Equinix’s MRR churn was 1.9% compared with 2.7% on a sequential basis. The rate was in line with Equinix’s expectations.
Revenues across all three geographic regions increased on a year-over-year basis. Revenues from the Americas, EMEA and Asia-Pacific increased 8.8%, 21.3% and 23.6% to $347.4 million, $161.6 million and $111.4 million, respectively.
Operating Results
Gross margin for the quarter was 50.9% compared with 50.5% in the year-ago quarter, primarily due to a higher revenue base. Total operating expenses increased 14.1% from the year-ago quarter and came in at $181.3 million. Moreover, as a percentage of revenues, operating expenses contracted 10 basis points (bps). This, in turn, impacted the quarter’s operating margins.
Operating income on a GAAP basis came in at $135.1 million, up 17.3% from the year-ago quarter. Operating margin expanded 20 bps to 21.8%. Net income came in at $43.7 million or 79 cents compared with $44.3 million or 83 cents in the year-ago quarter.
Balance Sheet & Cash Flow
Equinix exited the quarter with cash, cash equivalents and short-term investments of $485 million, compared with $704.3 million in the previous quarter. Equinix generated cash from operating activities of $216.4 million compared with $98.9 million in the previous quarter. The company’s total debt outstanding (including capital lease obligations, total loans payable, senior notes and total convertible debt principal) stood at $3.98 billion. During the quarter, the company repurchased shares worth $42.6 million.
Guidance
Equinix expects fourth-quarter 2014 revenues in the range of $627 to $631 million, higher than the Zacks Consensus Estimate of $631 million. Gross margin is expected to range between 68% and 69%, while selling, general and administrative (SG&A) expenses are expected to be roughly $139 million. Adjusted EBITDA is expected in the range of $291 to $295 million. Capital expenditures are expected in the $210 to $230 million range.
The company updated its fiscal 2014 guidance. For fiscal 2014, Equinix now expects total revenue in the range of $2.433 to $2.437 billion (earlier forecast $2.425–$2.435 billion). The Zacks Consensus Estimate is pegged at $2.431 billion. Gross margins are expected to range between 68% and 69% and SG&A expenses are expected to be approximately $553 million (previous forecast $550 million).
Adjusted EBITDA is now expected in the range of $1.110 to $1.114 billion (previous forecast $1.105 to $1.115 billion). Capital expenditures for 2014 are expected in the range of $630 to $650 million (earlier guidance $600.0 to $650.0 million).
Outlook
Although Equinix’s third-quarter 2014 earnings were down year over year, higher demand for data centers boosted revenues. Moreover, the company provided an encouraging guidance. The data center business is thriving across geographies and Equinix is uniquely positioned to capitalize on this opportunity. Consequently, it is planning to further expand its Solution Validation Center in multiple locations in 2014.
Moreover, Equinix’s recurring revenue model will support its revenues. Also, the company’s proposed REIT conversion is on track and is scheduled to be completed on Jan 1, 2015. Additionally, the company’s association with Verizon (VZ) and AT&T (T) remain the growth catalysts, going forward.
On the other hand, European exposure and industry consolidation remain headwinds. Additionally, the company’s highly leveraged balance sheet is a concern.
Equinix carries a Zacks Rank #3 (Hold). Investors can also consider SunEdison (SUNE) which sports a Zacks Rank #1 (Strong Buy) and is worth buying.
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