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Equinix Inc. (EQIX - Free Report) posted better-than-expected second-quarter 2017 results, wherein both the top line and bottom line surpassed the Zacks Consensus Estimate and increased from the year-ago quarter.

The company’s adjusted funds from operations (AFFO) increased from $4.13 per share reported in the year-ago quarter to $4.59 per share, surpassing the Zacks Consensus Estimate of $3.41. The increase can mainly be attributable to robust top-line growth, strong operating performance and lower tax rate, partially offset by higher cost of revenues and share count.

AFFO is a non-GAAP financial measure generally used in the Real Estate Investment Trust (REIT) industry.

Quarter in Detail

Total revenue was $1.066 million, up 18% from the year-ago quarter, beating the Zacks Consensus Estimate of $1.025 billion. This marked the 58th quarter of consecutive revenue growth. The year-over-year improvement was primarily driven by strong booking activity, Equinix's global platform, continued enterprise momentum and the acquisition of 29 Verizon data centers.

Equinix continues to witness strong demand for cloud services from corporations interested in enhancing their networks. The company witnessed revenue growth across all three geographic regions and verticals. Robust growth in the global Colocation and Interconnection platforms gave a boost to the top line.

Moreover, solid performance in MRR (monthly recurring revenues) per cabinet, MRR churn rate (2.4%) and cross connect additions drove the top line. Recurring revenues came in at $1.010 billion (95% of total revenue), up approximately 18.6% from the year-ago quarter. Non-recurring revenues climbed 14.6% to $56.4 million (5% of total revenue).

Revenues from the three geographic regions increased on a year-over-year basis too. Revenues from the Americas, EMEA and Asia-Pacific were up 29.1%, 7.4% and 12.6% to $533.6 million, $322.9 million and $209.9 million, respectively.

Gross margin was 68% flat on a year-over-year basis, primarily due to increased cost of revenues as a percentage of sales. Total operating expenses increased 12.9% to $212.6 million. Also, operating expenses decreased 100 basis points as a percentage of revenues (bps) to 19.9%.

Adjusted earnings before interest, taxes, depreciation and amortization (EBITDA) came in at $509.3 million, up 21.2%. Adjusted EBITDA margins came in at 48% as compared with 47% reported in the year-ago quarter. AFFO increased 23.9% to $360.1 million, during the quarter.

Balance Sheet & Cash Flow

Equinix exited the quarter with cash, cash equivalents and short-term investments of $1.068 billion. The company’s total debt principal outstanding was $9.37 billion as on Jun 30, 2017. It generated cash of $306.5 million from operating activities in the second quarter.

Guidance

Equinix provided third-quarter guidance and raised full-year 2017 projections. For 2017, the company now expects revenues to be in the range of $4.317–$4.327 billion, reflecting an increase of 20% year over year (previous guidance was more than $3.976 million, pointing at an increase of 10.1% year over year). The Zacks Consensus Estimate is pegged at $4.24 billion. The company now predicts adjusted EBITDA to be in the range of $2.038–$2.048 billion (prior guidance was more than $1.860 billion).

Equinix now anticipates full-year 2017 AFFO to be in the range of $1.382–$1.392 billion, reflecting an increase of 29% year over year (previous guidance was more than $1.214, pointing at an increase of 13% year over year).

The company continues to expect cash gross margin for full-year 2017 to be approximately between 67% and 68%. Cash selling, general and administrative (SG&A) expenses are now projected in the range of $868–$878 million (previous guidance was $810–$830 million).

For the third quarter, Equinix expects revenues in the range of $1.133–$1.141 billion (mid-point $1.137 billion). The Zacks Consensus Estimate of $1.11 billion. Adjusted EBITDA is likely to be between $535 million and $543 million.

Cash gross margin for second quarter is anticipated to be approximately 67%. Cash selling, general and administrative (SG&A) expenses are projected in the range of $218–$226 million.

Share Price

Equinix’s share price movement has been quite favorable. In the last one year, its shares gained 22.6% against a loss of 17.7% recorded by the industry.

Recent Activities

Equinix recently completed acquisition of Verizon's 29 data centers. The deal will expand its global reach by boosting operations in the U.S. and Latin America.

The company also recently announced its plan to build a new International Business Exchange (IBX) in Amsterdam. The new IBX infrastructure, which will be known as AM4, will be developed at the company’s existing Amsterdam Science Park campus.

Going forward, Equinix also announced that it has opened the sixth International Business Exchange (IBX) data center – FR6 – in Frankfurt, Germany. The new center will enable the company to meet growing demand for data center services in the region.

Notably, Amazon (AMZN - Free Report) , Microsoft (MSFT - Free Report) , Alphabet Inc. (GOOGL - Free Report) , Alibaba and Salesforce are major clients of Equinix.

Our Take

Equinix reported stellar second-quarter results and issued an upbeat guidance. Further, the company provided strong revenue guidance for the third quarter and raised full-year 2017 projection. The company’s top-line and bottom-line results also improved on a year-over-year basis. Revenues were mainly driven by strong demand for cloud services from corporations and benefits of Equinix's global platform. Equinix witnessed revenue growth across all three geographic regions and verticals.

The company is presently focusing on improving customer experience through the Equinix Customer One program. We are also optimistic on its recurring revenue model and expansion plans announced in March this year.

Further, it operates across various geographical regions and is becoming increasingly popular among major players in the tech industry for data management, which should drive revenues going ahead.

Notably, acquisitions have been a major growth driver for Equinix. We expect the company’s buyouts of Telecity Group, Bit-isle and Nimbo, to remain catalysts.

Expansion in important markets and consolidation of facilities in existing ones are important components of Equinix's core strategy. We believe that the company’s focus on offering upgraded technology to attract clients will bolster revenues and profitability, going forward.

However, intensifying competition from established Internet data center operators such as AT&T and CenturyLink Inc. may affect product pricing, consequently denting the margins.

A highly leveraged balance sheet and industry consolidation add to its woes.

Equinix carries a Zacks Rank #3 (Hold).  You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

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