Equinix Delivers A Solid Q3 And Fixes Ambitious But Achievable Targets

| About: Equinix, Inc. (EQIX)

Last week Equinix reported solid Q3 results, slightly increased full year revenue guidance and hinted at ambitious long term targets, with revenues expected to be greater than $3 billion by 2015.

Let's go through some of the highlights:

  • Revenues were $417.6 million, a 6% increase over the previous quarter, and a 5% Q/Q increase on an organic basis, excluding revenues attributed to ALOG. The increase over the same quarter of last year is 26%. Revenues came ahead of consensus and company's guidance, in spite of negative currency headwinds;
  • Adjusted EBITDA reached $191.6 million, including about $4.6 million attributed to ALOG, for a 31% increase over the same quarter last year and a 6% increase Q/Q;
  • Net income for Q3 was $20.3 million, or $0.21 per share ($0.20 diluted), which includes an approximate $11 million adjustment due to the mark-to-market movement of the redeemable interest in ALOG that Equinix does not own - absent this adjustment, diluted EPS would have been $0.42.

As usual, it is interesting to monitor some of the most important non financial metrics that shed additional light on the company's performance:

  • Strong cabinet additions in all markets, with over 1,600 cabinet equivalents sold in the quarter in the Americas (excluding ALOG), about 1,300 cabinet equivalents added in Europe and approximately 260 cabinets in Asia Pacific, in spite of some post earthquake softness in Japan;
  • Churn was about 2% in the quarter, in line with management's guidance;
  • The company ended the quarter with a 84% occupancy in North America, 76% in Europe and about 70% in Asia Pacific;
  • 43 10Gig ports were added globally on Equinix's peering fabric, and interconnection revenues increased 8% Q/Q in Europe and 10% Q/Q in Asia. Interconnection revenues now represent about 19% of revenues in North America, 4% in Europe and 12% in Asia Pacific;
  • Cross-connects increased by well over 1,700 in the Americas, by about 1,050 in Europe and by about 900 in Asia Pacific;
  • Monthly recurring revenue per cabinet equivalent increased both in North America and Asia, with a slight decrease in Europe attributed by Equinix's management to currency fluctuations and some proactive churn of large but low margin customer. On a global basis, MRR per cabinet increased 1% on a Q/Q basis, and is up 11% Y/Y.

During the conference call Equinix's management fixed some long term revenue objectives ($2 billion in 2013 and greater than $3 billion in 2015) which might sound very ambitious, but are actually achievable targets, given the ongoing positive trends in the sector and the company's historical execution record, even in a touch economic environment.

Here is a quick look at Equinix's recent performance:

(Click on enlarge)

Since 2008, the company has been growing at a very high Y/Y rate, both organically and non organically (through several key acquisitions like IX Europe, Virtu, Switch and Data and ALOG, recently), so becoming the only global network-neutral data center player.

The target set for 2015 by Equinix's management incorporates expectations for a roughly 15% to 20% Y/Y growth in the next 4 years, which sounds achievable especially since the company confirmed it will also be active on the M&A front.

In line with this positive expectation for future colocation demand, Equinix announced an ambitious expansion CapEx target for 2012, in the range of $580 million to $680 million (expansion CapEx is expected to range between $530 million to $550 million in 2011).

About $500 million of expansion CapEx are already allocated to existing projects within locations where the company has already facilities, so being capable to monitor its own customers' needs, and with good knowledge of what competitors might be planning in the meantime.

Here is an interesting part of the Q&A session at the recent conference call related to future expansion projects:

Michael Rollins - Citigroup Inc, Research Division

Just curious if you could focus a little bit more on the 2012 CapEx guidance, specifically the -- for the new centers and new facilities. In terms of the confidence that you have with the economic backdrop, particularly in some of the international markets, can you talk about some of the conviction, maybe some of the tools you've used to gauge the appropriate amount of investments to make? Is there some sort of backlog, early commitments that you have? A little bit more insight maybe into some of the projects that you've got flagged now for next year.

Stephen M. Smith

I guess the first thing I would tell everybody on the call is that of the $500 million that we've announced, roughly 65% of that is aimed at Phase 2 projects in current campuses. So the campuses that we're already in, we have very good intelligence, we know the pipeline, we know the bookings, we know the fill rates, we know the competitive builds. So we have very good intelligence. There's another roughly 30% that I would call new sites in very established markets. So call it roughly 95%, we have very good intelligence, same level of discipline we've been doing for years. And that leaves about 5% of this capital inside that $500 million that's aimed at what we would call new market development. There is no change, Mike, in how we're making these decisions. We look at the same amount of data, same return profiles for every decision that we make. Keith, would you add?

Keith D. Taylor

Yes, so Mike, let me just take you just one step further, and when Steve was referring to the 65%, 30% and 5%, that is actually -- that's over the entire CapEx base of $700 million to $800 million. But probably the most important here is Steve alluded to the fact that we go after the same economic returns. So I can take you back to 21 projects, specifically North America that drive 32% cash-on-cash return, and have effectively 75% cash gross profit. Now that's the type of investment we want to continue to make.

With a quick back of the envelope calculation, Equinix will most probably be able to generate well in excess of $500 million of discretionary cash flow in 2012, which will be used to fund ongoing and expansion CapEx. With a sound balance sheet, a relatively low net debt-to-EBITDA ratio and most debt due after 2018, Equinix sounds nicely positioned to achieve these new ambitious targets, in spite of any concern about the economy.

Disclosure: I am long EQIX.