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Equinix (EQIX) delivered another solid quarter last Wednesday night, and guided above consensus for Q3 and full year 2012.

Let's have a quick look at some of the highlights of the quarter:

  • Revenues of $466.3M (+18.1% Y/Y, +3% Q/Q) slightly missed consensus of $ $467.1 million. On an FX-neutral basis, Q2 revenues increased 4% Q/Q and were up 22% over the same quarter of last year. Negative currency trends impacted the quarter for about $3 million, compared to FX guidance rates;
  • Q2 EPS of $0.76 beat consensus by $ 0.15 per share;
  • The company guided for revenues of $492 million to $498 million in Q3, above consensus of $485.2 million (including $13 million to $15 million of revenue attributed to the Asia Tone and ancotel acquisitions), and increased 2012 guidance to greater than $1,920.0 million;
  • The new annual guidance includes approximately $30.0 million of revenue attributed to the recent Asia Tone and ancotel acquisitions, but also approximately $18.0 million of negative foreign currency headwinds compared to the previous annual guidance rates;
  • Cash gross margins in Q2 2012 were 69%, unchanged from the previous quarter and up from 65% in the same quarter of last year;
  • Adjusted EBITDA in Q2 2012 was $222.1 million (48% margin), a 3% increase Q/Q and a 22% increase over the same quarter of last year;
  • Global MRR churn came at a higher than expected 3.2% rate in the quarter, mainly due to proactive actions to maximize IBX profitability; the company expects it to range between 2.4% and 2.8% in the following quarters;
  • In July 2012 Equinix closed the acquisitions of ancotel GmbH, a data center provider headquartered in Frankfurt, Germany, (at a cost of $85.7 million) and Asia Tone Limited, a data center provider headquartered in Hong Kong with operation in China (at a cost of approximately $230.5 million);
  • Equinix also announced plans to build a new data center in Rio de Janeiro, with opening targeted in Q1 2013. The first phase is expected to cost the company about $20 million in CapEx, and will have space for 320 cabinets. Total capacity of the facility will be 1,170 cabinets. The company also announced ALOG will begin construction on phase II of its SP2 data center in São Paulo, expected to be available in early 2013. SP2 phase two will add 350 cabinets and is expected to cost $14 million.

Strong metrics in Europe and Asia, on a FX-neutral basis

The Americas region grew 3% Q/Q to $297.1 million, with cash gross margin reaching 71%. Adjusted EBITDA reached $145.5 million (49% margin), an increase of 6% Q/Q and up 19% over the same quarter of last year. As a reminder, the region absorbs all corporate costs.

EMEA, in spite of the negative economic landscape in Europe, had a strong quarter, delivering revenues of $102.7 million, up 1% sequentially, but, more important, 5% on a normalized and constant currency basis. We believe that, to properly track execution in Europe and Asia, constant currency basis data are a better reflection of the underneath performances of the regions.

Adjusted EBITDA improved 4% Q/Q and is up 41% compared to the same quarter of last year, on a FX-neutral basis.

Asia Pacific revenues improved 7% on a constant currency basis, and adjusted EBITDA was $31.4 million, up 5% Q/Q and up 34% over the same quarter of last year, on a same currency basis.

New openings and proactive churn bode well for future growth and profitability

As we noticed, Equinix delivered a higher churn than expected in the quarter. During the conference call, management quantified the matter and explained that it WAS mainly related to proactive efforts to maximize return for the company:

Stephen M. Smith

As an example around renewals this quarter, we negotiated with a top digital media customer to embark in a multitiered plan to further optimize their multitiered architecture. This deal will allow us to retain the high-value elements of their deployment and preserve the majority of their high-margin interconnection revenue while transitioning out of the larger-footprint applications that are not well aligned with the Equinix value proposition.

This proactive effort will allow us to dramatically improve profitability with this customer and, importantly, will free up inventory in critical sites such as 111 8th in New York, enabling us to satisfy demand for other high-value applications.

In this specific instance, once the capacity is resold, we expect operating profit to improve by more than $1 million per month, nearly a full point increase in gross margin for the Americas business.

In the same prepared remarks, Equinix's CEO quantified even better the potential advantages, for the company, of managing its large inventory to improve its profitability:

On the supply side, we have broadly implemented our IBX optimization program in the Americas and are actively incorporating elements into both EMEA and Asia Pacific. Through this program, we rigorously evaluate our facilities with a focus on balancing space and power utilization, increasing energy efficiency and identifying ways to add sellable capacity with limited incremental investment. Over the past year, we have generated substantial energy savings, significantly improved our customer mix and increased our sellable inventory by over 2,000 cabinets, including 700 this quarter, giving us more than $50 million of incremental revenue potential with very little additional capital expenditure.

While managing at best existing facilities is important for its impact on the balance sheet, Equinix is still facing strong demand for new space by its current and potential customers. Having reached utilization rates of 84% in the Americas and about 76%-77% in both Asia Pacific and Europe, the company is quantified new inventory in several markets to cope with demand:

Stephen M. Smith

In the second half of this year, we will open several flagship data centers, providing additional inventory in key markets to satisfy our growing deal funnel and support the growth of our ecosystem. In Europe, we will open Amsterdam 3 located in the Amsterdam Science Park, one of the most carrier-dense locations in Europe, as well as Paris 4, which will be tailored to our highly networked Paris campus. In the U.S., we have 2 important new builds: NY5, which is located next to NY4, will provide critical inventory for the financial ecosystem; and Miami 3, located in Boca Raton, near several major fiber-optic cable landing stations in the lowest latency route to Brazil. These new data centers are in addition to the phased builds we will be opening in existing sites across all 3 regions.

Conclusion

As usual, Equinix delivered strong quarterly results. The company remains very well positioned to capture further market share and improve on its already strong, financial metrics. We believe that Equinix can reach its target of $5 B in sales in 2015, as market demand remains strong and its great execution gives the company and edge over competition.

The colocation sector remains a sweet spot in this economy with other players, like REITs Dupont Fabros Technology (DFT) and Digital Realty (DLR) also recently delivering strong revenue growth (+16.8% Y/Y and +13.4% Y/Y, respectively).

Source: Equinix Delivers Another Solid Quarter, Expands In Brazil