Equinix (NASDAQ:EQIX), a provider of data center and colocation services, announced its Q4 2013 results yesterday after market close. The stock price gained marginally post the Q4 2013 earnings call after-market close yesterday, trading 1.2% higher than the Feb 19 closing price, in pre-market trade at the time of writing. The company is on track to shift to a REIT classification by the start of 2015, a shift which could alter the investor expectations. We take a look at the quarterly performance, future expectations and attractiveness of current valuation considering the impending shift to a REIT model in the coming year.
Equinix Q4 2013 performance
The company delivered topline growth of 11.6% on a Y/Y basis and 4% on a sequential base. The topline growth was in line with the growth rate over the last few quarters, but was significantly lower than the topline growth rate in 2012. The slowing growth is summarized in the chart below.
Equinix reported a 31% Y/Y increase in the adjusted earnings per share and the drivers of earnings increase were essentially topline growth and profit margin expansions across gross, operating and Net Income levels. The profit margin changes are summarized in the table below.
|2012 Q4||2013 Q4||YoY change|
The gross margin changes were mainly due to better leverage in the cost of goods sold (rent, utility and other expenses associated with the IBX data centers), which resulted in a 1.5% improvement in the gross margin. The gross margin improvement could be attributed to increased scale of operations as the company completed 18 IBX data center expansions. Moving on to net Income, The Net income growth of 30% resulting in expansion of Net margin was attributable to the lower effective tax rate for the quarter.
The overall impact of the 11% topline growth, gross margin expansion and a lower effective tax rate was a 30% Y/Y growth in Net Income, after adjusting the Q4 2012 Net Income for a $11 million gain on sale of discontinued operations.
Analyzing the cash flow for the quarter and cash position at the end of Q4, Equinix Inc., ended the quarter with a cash and equivalents balance of $1.03 billion, a huge increase over the $546 million it held in its kitty at the end of Q4 2012. However, the company saw a decline in the cashflow from operations on account of larger interest and tax payments apart from a $14 million loss on early clearance of its debt.
All in all, using a apples to apples comparison, the company delivered a quarter of topline growth, margin expansions and solid growth in earnings. The actual v/s estimates comparison will help us understand the strength of the quarterly performance.
Actual performance v/s analyst estimates
|Actual performance||Analyst estimate||Beat/Surprise|
|Revenue (in millions of USD)||564.70||562.58||0.4%|
The company came well ahead of analyst estimates, a reason which will be sufficient to add fuel to the already high stock price. The earnings surprise of 14% is something in particular, which could push the valuations to even higher levels from the current levels. Talking of current valuations we take a look at the company’s current valuations vis-à-vis competitors.
Equinix Current Valuation
The table below gives the price-to-sales comparison of Equinix vis-à-vis its nearest competitors.
|Market Cap as of Feb 19, 2014 close (in millions of USD)||LTM Sales||LTM Price/Sales ratio|
|Digital Realty Trust (NYSE:DLR)||6,760||1,451.07||4.66|
|Coresite Realty (NYSE:COR)||662.79||234.83||2.82|
|QTS Realty (NYSE:QTS)||688.97||177.89||3.87|
Equinix clearly enjoys a premium valuation, primarily due to its immense market size. However, considering the current growth and operating efficiencies, we think core realty corp and digital realty trust present better investment opportunities for an investor looking at exposure to the sector.
In conclusion, while we feel that Equinix does represent an opportunity for stable growth with a clear scope for profit margin expansion; it would be worthwhile for an investor to take a deeper look at the other two options in the sector which we believe present better long term opportunities. Keep reading to see our latest updates on technology stocks.
To see latest stock price movement of Equinix, check EQIX stock chart.