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Iron Mountain Inc. (IRM - Analyst Report) reported second-quarter 2013 adjusted earnings per share of 29 cents from continuing operations, which lagged the Zacks Consensus Estimate by 2 cents. Earnings also slumped 21.6% from the year-ago quarter due to higher shares outstanding.

Quarter Details

Although revenues improved marginally (up 0.3%) from the year-ago quarter to $754.7 million, it failed to beat the Zacks Consensus Estimate of $764.0 million. Revenues for the quarter were helped by higher Storage Rental revenues (up 1.9% year over year) which more than offset the 1.8% year-over-year decline in Service revenues.

Iron Mountain’s Global storage rental revenue growth was primarily attributed to 5.6% and 1.2% internal growth in the International business and North America, respectively. Acquisitions also benefited the segment. Services revenues were impacted by decrease in activity-based services. Decrease in recycled paper prices also played a part in the segment’s decline.

Adjusted OIBDA (operating income before depreciation and amortization) decreased 2.6% year over year to $233.0 million. Adjusted OIBDA margin contracted 100 basis points (bps) on a year-over-year basis to 30.8% due to legal accruals and decline in revenues in the Service segment.

Operating income in the quarter decreased 16.9% from the year-ago quarter to $131.9 million, primarily due to higher operating expenses (up 7.6% year over year). Net income from continuing operations was $27.5 million versus $41.4 million earned in the previous-year quarter.

Iron Mountain exited the quarter with cash and cash equivalents of $258.9 million compared with $229.9 million at the end of the previous quarter. Long-term debt (including the current portion) was $3.94 billion.

Guidance

Iron Mountain revised its fiscal 2013 revenue guidance range from $3.02 billion-3.10 billion to $3.0 billion-$3.01 billion. The company also lowered its adjusted OIBDA guidance range from $905.0 million-$935.0 million to $900 million-$925 million. Iron Mountain now expects earnings per share in the range of $1.05-$1.14, down from the earlier forecasted range of $1.13 to $1.24.

The company expects to spend approximately $290 million on capital assets. Free cash flow is expected in the range of $320 million to $360 million for fiscal 2013 consistent with the previous forecast.

Our Take

We believe that Iron Mountain’s strong product portfolio, increasing market share and promising international business are the primary growth catalysts for the company. The company’s decision to convert to REIT to reduce tax burden and increase shareholder value are the other positives. Moreover, the company’s entry into the data center market could act as a positive factor.

However, costs related to the conversion and fluctuations in recycled paper prices are the near-term headwinds for the company. Moreover, volatile foreign exchange rates and competition from Guidance Software Inc. (GUID - Snapshot Report), Pitney Bowes Inc (PBI - Analyst Report) and Cintas Corp. (CTAS - Analyst Report) are the other headwinds. Moreover, the lowered guidance for the fiscal 2013 is an overhang on the stock.

Currently, Iron Mountain has a Zacks Rank #5 (Strong Sell).

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