Iron Mountain Inc. (IRM - Analyst Report) reported second-quarter 2014 adjusted earnings from continuing operations of 41 cents per share, which comfortably beat the Zacks Consensus Estimate of 29 cents. Earnings per share improved 4.1% from the year-ago quarter due to modest revenue growth.
Revenues increased 4.3% from the year-ago quarter to $786.9 million and managed to beat the Zacks Consensus Estimate of $774.0 million. Revenues increased due to higher storage rental revenues of $466.9 million (up 5.7% year over year) and higher service revenues of $320.0 million (up 2.3% year over year) in the reported quarter.
Growth in the North American Records and Information Management (RIM) and Data Management (DM) segments of 3.3% and 0.4%, respectively, also drove results
Of late, with the increasing usage of Internet, Iron Mountain’s service revenue growth rate has been on a decline due to lower activity rates as stored records are becoming less active. Second quarter internal service revenue declined 1.9% on a year-over-year basis due to lower project fees and revenue associated with customer terminations in North America.
Gross profit was $449.9 million compared with $433.3 million in the prior-year quarter. Gross margin declined 20 bps to 57.2% in the reported quarter.
Adjusted OIBDA (operating income before depreciation and amortization) decreased 10 basis points (bps) from the year-ago quarter to 30.7% in the reported quarter. Year-to- date, adjusted OIBDA includes $3.6 million of restructuring costs incurred in 2013 and $3.9 million of Real Estate Investment Trust (REIT) compliance costs.
Operating expenses decreased 130 bps on a year-over-year basis to $639.6 million, driven by lower selling, general & administrative expenses (down 260 bps on a year over year basis).
Operating income in the quarter increased 12% from the year-ago quarter to $147.3 million primarily due to lower operating expense. Net income from continuing operations was $78.9 million or 41 cents per share versus $75.4 million or 39 cents per share reported in the previous-year quarter.
Iron Mountain exited the quarter with cash and cash equivalents of $145.3 million compared with $169.9 million at the end of the previous quarter. Long-term debt was $4.29 billion.
Since the beginning of 2014, the company has acquired five international storage related businesses and the records inventory of nine other document storage companies for a total sum of $72 million. During the second quarter, the company extended its presence in the emerging market of Brazil and solidified its position in the United States by acquiring customers in New Orleans, Philadelphia and Buffalo.
Iron Mountain believes that these acquisitions will help it to establish itself as a market leader and trusted partner for customers who seek to protect and manage their information efficiently.
Conversion to REIT
During the quarter, Iron Mountain acquired unanimous approval from its Board of Directors relating to its conversion to a REIT with effect from the taxable year commencing Jan 1, 2014.
However, in light of the new development, Iron Mountain is likely to distribute between $1.3 billion and $1.4 billion to shareholders from its accumulated earnings and profits as per the REIT regulations. Moreover, the company will publicly announce a record date and payment date for the 2014 Special Distribution as determined by the board of directors.
We believe that this conversion, in turn will definitely enhance shareholders’ value as well as reduce the tax burden of the company.
On account of its conversion to a REIT, the company has provided a revised guidance for 2014. Management expects revenues to range between $3.09 billion and $3.17 billion while the Zacks Consensus Estimate for the same is pegged at $3.12 billion.
Adjusted EPS is expected to be between $1.37 and $1.52 while the Zacks Consensus Estimate of $1.43 happens to be lower than the mid point of the guided range.
Annual dividend is expected to be between $400 million and $420 million while free cash flow is expected to range from $350 million to $390 million.
We believe that Iron Mountain’s strong product portfolio, increasing market share and promising international business are the primary growth catalysts. Moreover, the company’s entry into the data center market could act as a positive factor.
However, costs related to conversion and fluctuations in recycled paper prices are the near-term headwinds for the company. Moreover, volatile foreign exchange rates and competition from Guidance Software Inc. (GUID - Snapshot Report) , Pitney Bowes Inc (PBI - Analyst Report) and Cintas Corp. (CTAS - Analyst Report) are the other headwinds.
Currently, IRM has a Zacks Rank #2 (Buy).