A leading information management company, Iron Mountain Inc. (IRM) reported strong second quarter 2010 results. Earnings excluding one-time items increased 12.0% year over year to 28 cents, beating the Zacks Consensus Estimate by three cents. The surprise was primarily attributable to the much stronger gross margins reported.
Earnings on a GAAP basis plunged 53.5% year over year to 20 cents per share. This includes other expenses of 2 cents and a negative tax impact of 6 cents.
Revenue
Revenues increased 4.5% year over year to $779.8 million. However, this was lower than the Zacks Consensus Estimate of $785.0 million and management’s guidance range of $785.0 million to $805.0 million. On a constant currency basis, revenues inched up 3.0% year over year.
Revenues were primarily driven by an internal growth rate of 2.0%. Acquisitions contributed 1.0% of revenue growth, while foreign currency fluctuations contributed 2.0%.
Storage revenues (55.9% of second quarter revenue) increased 4.8% year over year to $435.6 million. Service revenues (44.1% of second quarter revenue) climbed 4.2% year over year to $344.1 million.
Margins
Gross profit rose 9.0% year over year to $471.0 million in the second quarter and margin increased significantly to 60.4% as compared to 58.1% in the year-ago quarter The gross margin improvement was across both storage and service segments, as IRM saw both production efficiencies and pricing gains in the quarter.
Total expenses rose 3.7% year over year to $150.4 million in the quarter, but decreased 2.4% on a sequential basis. However, adjusted operating income before depreciation and amortization (OIBDA) grew 8.0% year over year to $236.0 million. Adjusted OIBDA margin improved 100 basis points to 30.2%. Operating income was up 9.0% year over year to $150.0 million in the quarter. Operating margin expanded 79 basis points to 19.3%.
Balance Sheet
As of June 30, 2010, cash and cash equivalents were $340.5 million as compared with $325.4 million at the end of March 31, 2010. Long-term debt was $3.13 billion compared to $3.18 billion at the end of March 31, 2010.
In the second quarter of 2010, Iron Mountain generated free cash flow of $87.0 million, compared to $64.0 million in the year-ago period, primarily driven by a higher operating income.
During the reported quarter, Iron Mountain acquired its minority owned business in Greece as the company aims to expand its footprint in Europe.
Iron Mountain repurchased 1.8 million shares worth $44.0 million under its $150.0 million share repurchase program in the quarter.
Outlook
Iron Mountain projects revenue growth in the range of 4.0% to 5.0% for full year 2010, primarily based on internal revenue growth of 3.0% (down from previous guidance of 4.0% to 6.0%), with acquisitions and favorable foreign exchange expected to contribute 1.0% and 2.0% of revenue growth, respectively.
The company reiterated adjusted OIBDA guidance in the range of 7.0% to 11.0% for full year 2010. Iron Mountain also maintained earnings growth rate expectations of 10.0% to 22.0% and expects earnings per share projections to remain in the range of $1.07 to $1.16.
The company reduced its capital expenditure guidance to $280.0 million versus previous guidance of $290.0 million.
For the third quarter of 2010, Iron Mountain expects revenues in the range of $780.0 million to $800.0 million and operating income in the range of $149.0 million to $159.0 million.
We maintain a Neutral rating on a long-term basis (6-12 months) due to weak internal growth, volatile foreign exchange and sluggish macro-economic condition, especially in Europe, the impact of which is moderated by Iron Mountain’s promising product portfolio and strong market share. We believe these positives will drive the company’s profitability in the long term.
Iron Mountain faces competition from Anacomp Inc., Cintas Corporation (CTAS) and privately held SOURCECORP, Inc.
The Zacks Rank on Iron Mountain is #3, which implies a short-term Neutral rating (for the next 1-3 months).
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