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Equinix Inc. (EQIX - Analyst Report) reported third quarter 2012 earnings per share of 57 cents, in line with the Zacks Consensus Estimate.

Revenues

Revenues in the reported quarter were $488.7 million, up 19.2% from the year-ago quarter. Revenues were in line with the management guidance before excluding $8.8 million from the announced sale of 16 International Business Exchange (IBX) data centers.

Third quarter results were strongly influenced by the company’s growth in the global interconnection platform. The company has been instrumental in connecting its customers and partners inside the world's most networked data centers.

Within segments, Recurring revenues (consisting primarily of colocation, interconnection and managed services) were $462.8 million in the third quarter, up 19.2% year over year. Non-recurring revenues were $25.9 million in the quarter, up 30.2% from $19.9 million in the year-ago quarter.

Operating Results

Gross margin for the quarter was 48.5% versus 46.2% in the year-ago quarter. The improvement in gross margin took place as revenue increased at a higher rate than cost of sales.

Total operating expenses increased 27.3% from the year-ago quarter. The year-over-year increase in cash operating expenses was primarily attributed to higher selling and marketing expenses (up 24.1%) and general and administrative expenses (up 26.9%).

Operating income of $95.9 million increased 23.8% from $77.4 million reported in the year-ago quarter.

Net income attributable to Equinix stood at $28.8 million or 58 cents per diluted share versus $20.3 million or 20 cents per share in the year-ago quarter.

Balance Sheet, Cash Flow & Capital Expenditure

The company generated cash from operating activities of $102.2 million in the third quarter compared with $194.8 million in the previous quarter. The cash, cash equivalents and short-term investments were $404.5 million versus $769.6 million in the earlier quarter.

Capital expenditures in the quarter were $212.1 million, of which $174.5 million was attributed to expansion capital expenditures and $37.6 million has been utilized to finance the ongoing projects.

Guidance

For fiscal 2012, the company expects total revenue in the range of $1,890.0 to $1,895.0 million; a decline of $36.0 million from its previous guidance. The company will sell 16 of its IBX data centers. This apart, the company expects capital expenditures to between $770.0 and $790.0 million, which includes ongoing capital expenditures of $145.0 million and $625.0 to $645.0 million for expansion capital expenditures.

For fiscal 2013, the company expects revenues to be more than $2,200.0 million.  Adjusted EBITDA is estimated over $1,010.0 million, which includes around $20.0 million in REIT-related costs. Capital expenditures are projected to be $550.0 to $650.0 million.

 Our Take

The company’s third quarter results were modest with the bottom line matching our expectation. Revenue improved on a year-over-year basis as a result of improvement in the company‘s global interconnection platform. 

This apart, the company has a decent cash balance although it reduced sequentially. The company is also experiencing improvement in business fundamentals across most of its business segments, and making capital expenditure in expectation of future growth.

On the other hand, high debt level is a cause for concern. Despite all the positives, competitive threats from the likes of AT&T Inc. (T - Analyst Report) and Verizon Communications Inc. (VZ - Analyst Report) raise our apprehension. European exposure and industry consolidation are the other headwinds. 

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

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