Equinix Reaffirmed at Neutral

We maintain our long-term Neutral recommendation on Equinix Inc. ( EQIX - Analyst Report ) based on the company’s decent third quarter 2012 results and weak fiscal 2012 guidance.

In the third quarter of 2012, Equinix’s revenue increased 19.2% year over year on the back of solid growth in its global interconnection platform across each of its geographic regions and good contributions from Asia Tone and ancotel GmbH acquisitions.

Higher revenues led to margin expansion, resulting in a 200.0% year-over-year growth in earnings per share of 57 cents.

For fiscal 2012, Equinix expects total revenue in the range of $1.890–$1.895 billion after including a revenue loss of roughly $36.0 million following the sale of 16 data centers. But for fiscal 2013, the company expects total revenue of more than $2.2 billion.

We remain encouraged by Equinix’ growing footprint across the globe. To meet the need for big data exchanges, Equinix is opening its International Business Exchange (IBX) data centers globally and is becoming popular among tech majors looking for secure and scalable data management. Last month, Equinix acquired a data center in Dubai to expand its reach in the Middle East region. Apart from this, Equinix remains prudent in expanding its existing capabilities in Europe and Asia-Pacific regions.

We believe Equinix has the potential to boost its revenue base as well as profitability. Its recurring revenue model will help to reduce cost of sales and operating expenses as a percentage of total revenue.

But Equinix faces problem with its longer sales cycle. A customer’s decision to license cabinet space at one of its IBX centers and to purchase additional services typically involves a significant amount of time. The current macroeconomic scenario is further stretching the sales cycle as customers are unable to accurately forecast their future business plans and are, therefore, delaying their purchase decisions.

Also, stiff competition from the likes of COLT, Qwest, SAVVIS, Verizon Inc. ( VZ - Analyst Report ) , NTT and AT&T Inc. ( T - Analyst Report ) as well as consolidations in the telecom industry pose some threats.

Estimate Revision Trend

Over the last 60 days, out of the 11 estimates for fiscal 2012, 4 estimates were raised while 4 were revised downward. The magnitude of estimate was decreased by 2 cents to $2.60 for fiscal 2012 in the last 60 days.

Currently, Equinix has a Zacks #3 Rank (Hold).