Equinix Misses Estimates (EQIX) (T) (VZ)

Zacks

Equinix Inc. (EQIX) reported third quarter 2011 earnings per share of 20 cents, way below the Zacks Consensus Estimate of 44 cents.

Revenues

Revenues in the reported quarter were $417.6 million, up 26.4% from the year-ago quarter. Quarterly result included a contribution of $17.9 million from the newly acquired ALOG data centers.

Recurring revenues, consisting primarily of co-location, interconnection and managed services, stood at $397.4 million in the third quarter, up 26.2% year over year. Non-recurring revenues were $20.2 million in the quarter, up 29.6% from the prior-year quarter.

Revenue growth for the quarter was driven by strong bookings activities. Pricing for the company’s cabinet equipment remained stable across all geographies while bookings backlog remained healthy. Global MRR churn, including switch and data, but excluding ALOG was approximately 2.0% within the company’s targeted range.

Operating Results

Cash gross margin for the quarter was 65.0%, which remained flat compared with the year-ago quarter. Total operating expenses increased 19.9% from the year-ago quarter.

The year-over-year increase in operating expenses was primarily attributed to higher selling and marketing expenses (up 38.0%) and general and administrative expenses (up 12.5%). Adjusted EBITDA, defined as income or loss from operations before depreciation, amortization and accretion, stock-based compensation, restructuring charges and acquisition costs, was $191.6 million in the third quarter, up 30.8% year over year.

Reported net income stood at $20.3 million or 20 cents per diluted share versus a net income of $11.2 million or 24 cents per share in the year-ago quarter. One-time items in the quarter were negligible.

Balance Sheet, Cash Flow & Capital Expenditure

The company generated cash from operating activities of $141.9 million in the third quarter compared with $140.3 million in the previous quarter. As of September 30, 2011, cash, cash equivalents and investments were $1.2 billion versus $423.1 million in the earlier quarter.

Capital expenditures in the third quarter were $131.5 million, of which $104.9 million was attributed to expansion capital expenditures and $26.6 million to ongoing capital expenditures.

Guidance

For fiscal 2011, the company expects total revenue to surpass $1,600.0 million. Cash gross margin is expected to range between 65.0% and 66.0%. Cash selling, general and administrative expenses are expected to be approximately $320.0 million.Adjusted EBITDA is expected to be more than $730.0 million. Capital expenditures are expected in the range of $645.0 to $665.0 million.

For full-year 2012, total revenue is expected to exceed $1,870.0 million. Adjusted EBITDA for the year is expected to be more than $850.0 million. Capital expenditures are projected in the range of $700.0 to $800.0 million.

Our Take

The company has delivered mixed third quarter results with EPS coming below our expectation. However, revenue improved on a year-over-year basis. We believe further growth in client base and strategic acquisitions will enhance the company’s revenue potential and expand its geographic reach.

Moreover, we are encouraged by Equinix’s effort to expand the current facilities and maintain its fiscal discipline. 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 causes for concern.

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

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