Equinix Earnings: Demand Remains Strong While Power and Personnel Costs Hit Margins

Equinix EQIX had a good second quarter that was in line with management’s guidance. Revenue growth remains strong, while margins are facing pressures. We think short-term margin and churn challenges are largely inconsequential, as Equinix continues to see robust demand, which we think will remain for many years. In our view, the bigger question is whether Equinix has an optimal data center portfolio to meet future demand. We expect Equinix to perform well, but we think Digital Realty is better to see its business accelerate. We’re raising our fair value estimate for Equinix to $630 from $620 due to the time value of money, but we still think shares are rich.

Revenue continues to get a boost from price hikes implemented last year to offset higher power costs. Monthly recurring revenue was up 12% year over year, despite a 3-percentage-point currency headwind. We estimate growth would have been in the high-single digits excluding the price hikes associated with power costs. Interconnection revenue was up 10% year over year, though the firm added only 4,100 net new cross connects, which is on the low end of the firm’s range in recent years. Management said gross additions were good, but churn was higher as more customers upgraded to higher-capacity ports.

As expected, margins remain challenged. Adjusted EBITDA grew only 5%, resulting in a 3-percentage-point margin contraction, due mostly to personnel costs, a one-time software charge, and the rolling into a new energy contract.

Overall, recurring revenue churn ticked up to 2.3% in the quarter, but that would not concern us unless it continued at higher levels. With customers of varying sizes, a single customer leaving can move the metric. From what we see, the demand for data centers and interconnections is strong enough that vacating customers can easily be replaced, often at better prices.