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Iron Mountain Inc. (IRM - Analyst Report) reported third quarter 2012 adjusted earnings per share of 34 cents, a penny shy of the Zacks Consensus Estimate of 35 cents. Earnings decreased 15% from the year-ago quarter, primarily due to lower-than-expected recycled paper prices and currency headwinds.

Quarter Details

Revenues were down 2.6% from the year-ago quarter to $748.1 million, and fell short of the Zacks Consensus Estimate of $764 million. Increase in the Storage revenue was fully offset by lower Service revenue.

On a segment basis, Storage revenue (58% of revenues) increased 1.7% year over year to $434.7 million, driven by strong organic growth. Service revenue (42% of revenues) dropped 8% year over year to $313.5 million. Service revenue was negatively impacted by lower-than-expected organic growth in the core services coupled with decline in activity-based service revenue and decline in recycled paper prices.

Gross profit (excluding depreciation and amortization) was down 5.2% year over year to $437.8 million in the reported quarter. Gross margin for the quarter decreased to 58.5% from 60.1% in the year-ago quarter, due to lower revenue base.

Adjusted OIBDA was down 3.9% year over year to $244 million due to the negative impact of lower recycled paper revenues. Adjusted OIBDA margin for the quarter decreased 40 basis points on a year-over-year basis to 32.6%.

Selling, general and administrative (SG&A) expenses were down nearly 2.2% from the prior-year period to $204.5 million. Operating income in the quarter increased 13.9% year over year to $154 million. Operating margin was 20.5% compared with 17.5% in the previous-year quarter due to lower operating expenses.

Net income from continuing operations was $54 million, which increased from $50 million reported in the previous-year quarter.

Iron Mountain exited the quarter with cash and cash equivalents of $334.6 million compared with $170.2 million at the end of the previous quarter. Long-term debt (including the current portion) was $3.74 billion compared with $3.49 billion in the previous quarter.

Guidance

For fiscal 2012, Iron Mountain expects revenues in the range of $2.99 billion to $3.02 billion. The company forecasts adjusted OIBDA between $900.0 million and $920.0 million. Iron Mountain expects earnings per share in the range of $1.20 to $1.28. The Zacks Consensus Estimate projects earnings of $1.30 per share for fiscal 2012.

The company expects to spend approximately $245 million on capital assets.  Free cash flow is expected in the range of $320 million to $360 million for fiscal 2012. Moreover, management expects a decline in paper prices to negatively impact the top line throughout the year.

Recommendation

Iron Mountain recorded strong performance in the International business segment and persistent growth in the North America business, which positively impacted Storage revenue.

Strong product portfolio, increasing market share and promising international business are the key positives for the company. However, headwinds including tepid internal growth coupled with volatile foreign exchange rates and a decline in paper prices may negate the positives.

Iron Mountain faces stiff competition from Anacomp Inc. and Cintas Corporation (CTAS - Analyst Report).

We maintain our Neutral recommendation on a long-term basis (6-12 months). Iron Mountain carries a Zacks #3 Rank, which implies a short-term 'Hold' rating (for the next 1-3 months).

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