Equinix Beats on Higher Revenues

Equinix Inc. (EQIX - Analyst Report) reported second quarter 2011 earnings per share of 64 cents, comprehensively beating the Zacks Consensus Estimate of 57 cents.

Revenues

Revenues in the reported quarter were $394.9 million, up 33.0% from the year-ago quarter and 9.0% from the previous quarter. Quarterly result included $11.7 million in revenues from the newly acquired ALOG data centers. Recurring revenues, consisting primarily of colocation, interconnection and managed services, were $376.5 million in the second quarter, a 9% increase over the previous quarter and a 33% increase over the prior-year quarter. Non-recurring revenues were $18.4 million in the quarter.

Solid market fundamentals such as the growth of IP, mobile, video, cloud and electronic trading combined with the company’s global leadership position will likely drive profitability over the long term.

Operating Results

Cash gross margin (excluding depreciation, amortization and including stock-based compensation) in the quarter was 65.0% versus 66.0% in the sequentially preceding quarter and remained unchanged from the year-ago quarter. Total operating expenses increased 11.9% from the year-ago quarter and 7.52% from the previous quarter.

The year-over-year increase in operating expenses was primarily attributed to higher selling and marketing expenses (up 28.2%) and general and administrative expenses (up 21.2%). Adjusted EBITDA, defined as income or loss from operations before depreciation, amortization and accretion, stock-based compensation, restructuring charges and acquisition costs, in the second quarter was $181.3 million, up 8.0% from the previous quarter and 37.0% from the earlier-year quarter.

Reported net income in the quarter was $30.7 million or 64 cents per diluted share versus a net loss of $2.3 million or 5 cents per share in the year-ago quarter. One-time items in the quarter were negligible.

Balance Sheet & Cash Flow

The company generated cash from operating activities of $140.3 million in the second quarter compared with $117.8 million in the previous quarter. As of June 30, 2011, cash, cash equivalents and investments were $423.1 million versus $456.7 million in the earlier quarter. In July 2011, the company received net proceeds of approximately $735.6 million from the 7.00% senior notes offering.

Guidance

For the third quarter of 2011, the company expects revenues in the range of $412.0 to $417.0 million. Cash gross margin is expected to be approximately 65.0%. Cash selling, general and administrative expenses are projected at approximately $86.0 million. Adjusted EBITDA is expected between $180.0 and $185.0 million. Capital expenditures are estimated between $160.0 and $180.0 million, comprising approximately $30.0 million in ongoing capital expenditures and $130.0 to $150.0 million in expansion capital expenditures.

For fiscal 2011, revenues are expected to be roughly $1,590.0 million. Cash gross margin is expected to range between 65.0% and 66.0%. Cash selling, general and administrative expenses are expected to approximate $320.0 million. Adjusted EBITDA is projected at $720.0 million. Capital expenditures are expected in the range of $645.0 to $665.0 million, comprising approximately $115.0 million in ongoing capital expenditures and $530.0 to $550.0 million in expansion capital expenditures.

Our Take

Equinix is one of the leading providers of co-location services and is well positioned to drive significant growth going forward. The company has delivered strong second quarter results and provided a decent guidance for the fiscal year. 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’ 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 - Analyst Report) and Verizon Inc. (VZ - Analyst Report) 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.