Could Higher Interest, Competition Hurt Equinix’s Q3 AFFO?



AFFO to decline

Wall Street appears to be expecting mixed results from Equinix’s (EQIX) third-quarter results, which are scheduled to be released on November 1. Analysts’ revenue estimates indicate a YoY (year-over-year ) increase in the low double-digit range. Its earnings projections indicate a decline in the low single-digit range.

Analysts expect Equinix’s third-quarter revenues to increase ~11.0% YoY to $1.28 billion. However, its adjusted funds from operations (or AFFO) are expected to decline ~2.0% to $4.87 per share. Analysts believe that rising interest expenses and competitive pricing could fully offset the benefit of higher revenues.

Article continues below advertisement

At the end of the second quarter, Equinix (EQIX) had total principal debt outstanding of $11.5 billion. This translated into a debt-to-equity ratio of 1.9x. The company had incurred $134.7 million in interest expenses, which was 13.2% higher than in the second quarter of 2017. The company expects to incur non-recurring capital expenditures of $1.8 billion–$1.9 billion in 2018.

Wall Street analysts believe that intensified competition from established Internet data center operators such as Verizon (VZ), AT&T (T), and QTS Realty Trust (QTS) could dent Equinix’s product pricing in the third quarter, subduing its margins. Equinix comprises ~6.8% of the iShares Cohen & Steers REIT ETF (ICF).

Revenue drivers

Analysts seem to be backing their revenue estimates on strong demand for data center spaces and Equinix’s (EQIX) global expansion initiatives. According to MarketsandMarkets, the worldwide data center colocation market is expected to reach $62.3 billion by 2022 from $31.52 billion in 2017, representing a CAGR (compound annual growth rate) of 14.6%.

IoT, artificial intelligence, cloud services, the smartphone revolution, social networking, and online gaming are driving the need for accessible cloud storage. The robust data center demand may have positively benefited Equinix’s third-quarter results. Expansion in important markets through acquisitions has been an integral part of Equinix’s growth strategies, which has helped it expand its footprint in key markets.

Apart from last year’s Itconic and Verizon Communications’ data center asset buyouts, Equinix’s acquisitions of Metronode and Infomart Dallas in April are expected to drive its third-quarter revenues. During its second-quarter earnings release, Equinix noted that the buyouts of Metronode and Infomart Dallas could contribute ~$95.0 million to its fiscal 2018 revenues.

In this series, we’ll look at the drivers of Equinix’s revenues and profitability, strategic investments, Wall Street’s expectations, and valuations.


More From Market Realist