Equinix Delivers Decent 2Q

Equinix Inc. ( EQIX - Analyst Report ) reported second quarter 2012 earnings per share of 73 cents, ahead of the Zacks Consensus Estimate of 60 cents.

Revenues

Revenues in the reported quarter were $466.3 million, up 18.1% from the year-ago quarter. The company’s strong second quarter results reflect growth across all geographical regions. The company also witnessed strong growth in the colocation, interconnection and managed infrastructure services.

Within segments, Recurring revenues (consisting primarily of colocation, interconnection and managed services) were $442.6 million in the second quarter, up 18.0% year over year. Non-recurring revenues were $23.7 million in the quarter, up 28.9% from $19.1 million in the year-ago quarter.

Operating Results

Gross margin for the quarter was 68.6% versus 65.2% in the year-ago quarter. The improvement in gross margin took place as revenue increased at a higher rate than cash gross profit.

Total operating expenses increased 24.8% from the year-ago quarter. The year-over-year increase in cash operating expenses was primarily attributed to higher selling and marketing expenses (up 28.9%) and general and administrative expenses (up 22.9%).

Adjusted EBITDA, defined as income or loss from operations before depreciation, amortization and accretion, stock-based compensation, restructuring charges and acquisition costs, was up 22.5% year over year to $222.1 million. Adjusted EBITDA has grown consistently over the past few quarters and reflects the underlying strength in the company’s business.

Adjusted net income attributable to Equinix stood at $38.1 million or 73 cents per diluted share versus $32.5 million or 64 cents per share in the year-ago quarter.

Balance Sheet, Cash Flow & Capital Expenditure

The company generated cash from operating activities of $194.8 million in the second quarter compared with $140.4 million in the previous quarter. The cash, cash equivalents and short-term investments were $769.6 million versus $916.9 million in the earlier quarter.

Guidance

For the third quarter of 2012, Equinix expects revenue to remain in the range of $492.0 to $498.0 million, including $13.0 to $15.0 million of revenue from the Asia Tone and Ancotel acquisitions in the month of July. This apart, cash gross margin is expected to be between 67% and 68%.

Cash selling, general and administrative expenses are expected in the range between $110.0 and $115.0 million. Adjusted EBITDA is expected in the range of $220.0 and $222.0 million, including $4.0 to $6.0 million of adjusted EBITDA from Asia Tone and ancotel acquisitions. Capital expenditure is expected to be in the range of $240.0 to $260.0 million.

For the full year of 2012, total revenue is expected to be more than $1,920.0 million, whereas total year cash gross margins are expected in the range of 68%. Whereas, selling, general and administrative expenses are expected to range between $420.0 and $430.0 million.

Adjusted EBITDA for the year is expected to be more than $880.0 million. Moreover, the capital expenditure for 2012 is expected to be in the range of $740.0 to $800.0 million.

Our Take

The company has delivered modest second quarter results with EPS exceeding the company’s expectation. Moreover, revenue improved substantially on a year-over-year basis as the company is witnessing improvement in mobility, cloud computing and data management.

This apart, the company has a decent cash balance and strong cash generation ability. The company is also experiencing improvement in business fundamentals across most of its business segments, along with a better supply chain process and a decent pricing environment.This apart, the company’s recurring revenue model also offers good support to its revenue stream.

On the other hand, the company should make necessary arrangements to reduce its debt level. Despite all the positives, competitive threats 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 concerning.

Equinix carries a Zacks #2 Rank, implying a short-term Buy rating.