Equinix Inc.’s (EQIX) second-quarter 2010 earnings per share of 18 cents missed the Zacks Consensus Estimate of 24 cents. The adjusted earnings exclude the impact of restructuring charges and acquisition costs, but include stock-based compensation.
Revenues in the second quarter were $296.1 million, up 39% from the comparable period last year and 19% from the previous quarter, exceeding the Zacks Consensus Estimate of $289.0 million. The quarter’s revenues also surpassed the company’s guidance range of $258–$260 million. This reflects the continued benefit from strong demand across international operations and business segments. Additionally, the quarter’s revenues include a $37.6 million contribution from the recently acquired Switch & Data Facilities Company Inc.
Recurring revenue, which comes from colocation, interconnection and managed services, was $282.1 million (95.3% of total revenue), a 39% increase over the year-ago quarter and a 19% increase over the previous quarter. However, non-recurring revenues were $14.0 million (4.7% of total revenues), which increased 45.8% from the comparable quarter last year and 22.8% sequentially.
Operating Results
Cash gross margin (excluding depreciation, amortization, accretion, but including stock-based compensation) in the quarter was 64.3%, compared to 64% in the year-ago period and 65.1% in the prior quarter.
Total operating expenses were comparatively high in the quarter, increasing 74.1% from the year-ago quarter and 38.0% from the previous quarter. The increase could be attributable to a whopping 76.2% year-over-year increase in selling and marketing expenses, and 44.5% year-over-year increase in general and administrative expenses. Adjusted EBITDA margin in the quarter was 38.5%, compared to 40.3% in the comparable quarter last year and 41.1% in the previous quarter.
Reported net loss in the quarter came in at $2.3 million or 5 cents per diluted share, versus net income of $17.4 million or 44 cents in the year-ago quarter. However, excluding restructuring charges and acquisition costs and including stock-based compensation, adjusted net income came in at $12.2 million or 28 cents.
Cash Position
During the quarter, Equinix generated $56.9 million from operating activities versus $99.8 million in the previous quarter. Capital expenditures in the second quarter were $148.7 million, of which $121.8 million was spent on expansion and $26.9 million on ongoing expenditures.
Equinix exited the quarter with $717.4 million in total cash and cash equivalents as well as investments versus $1.18 billion in the previous quarter. The uneven sequential comparison could be attributed to cash expended for acquiring Switch and Data and the repayment of certain mortgage and loans payable.
Guidance
For the third quarter of 2010, Equinix expects total revenue to range between $335.0 million and $338.0 million. Cash gross margin is expected to be in the range of 63%–64%. Cash selling, general and administrative expenses are expected to be approximately $75.0 million. Adjusted EBITDA is expected to range between $136.0 million and $139.0 million.
Capital expenditures are expected in the range of $185.0 to $210.0 million, comprising approximately $30.0 million of ongoing expenditures and $140.0 to $165.0 million of expansion activity.
For fiscal 2010, Equinix expects total revenue of $1.23–$1.24 billion. The cash gross margin for the year is expected to be approximately 64%. Cash selling, general and administrative expenses are expected to be roughly $250.0 million. Adjusted EBITDA is expected to be in the range of $535.0–$540.0 million.
Capital expenditures are expected to be in the range of $530.0–$580.0 million, with approximately $110.0 million slated for ongoing capital expenditures related to customer installation, new product innovation, ERP system solutions and increased investment in IBX reliability. Capital expenditures supplementing the expansion activity are expected to range between $420.0 million and $470.0 million.
Conclusion
We are encouraged by Equinix’s efforts to expand the current facilities, while at the same time exercising fiscal discipline. We are positive about its recurring revenue model. However, increased competition, European exposure, industry consolidation, and a long sales cycle are causes for concern.
We currently have a short-term Hold rating (Zacks #3 Rank) on Equinix shares.
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