Will Rising Rates Depress Equinix's (EQIX) Q3 Earnings?

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Equinix, Inc.EQIX is set to report third-quarter 2018 earnings results on Nov 1, after the market closes . The company's results will likely reflect year-over-year growth in revenues, while its funds from operations (FFO) per share may witness a decline.

In the last reported quarter, this global connectivity leader delivered a positive surprise of 6.13% in terms of adjusted FFO per share. The company witnessed revenue growth across all three geographic regions and verticals. Stellar growth in the global Colocation and Interconnection platforms drove top-line growth.

The company witnessed a remarkable streak of beating earnings estimates, especially when looking at the previous four reports. In fact, Equinix surpassed the Zacks Consensus Estimate in each of the trailing four quarters, with an average positive beat of 4.5%.

Equinix, Inc. Price and EPS Surprise

Equinix, Inc. Price and EPS Surprise | Equinix, Inc. Quote

Let's see how things are shaping up prior to this announcement.

Factors at Play

In the third quarter, Equinix continued its inorganic strategy of expanding in key markets on the back of acquisitions and joint ventures (JV). During the quarter, the company concluded the integration of Terremark Federal Group. This marked the accomplishment of the final leg in the 29 data-centers buyout, from Verizon VZ , last year, that comprised Terremark Federal and secure data-center facilities catering to the U.S. Federal Government ecosystem's specific requirements.

Also, the company formed a JV with Omantel, to work on a new network-dense data center in Barka, Oman. These initiatives are expected to have contributed to the company's third-quarter revenues. In fact, the Zacks Consensus Estimate for its revenues is pegged at $1.28 billion for the quarter under review, reflecting projected growth of 10.9% from the year-ago period. Equinix expects revenues of $1.27-$1.28 billion for the quarter.

However, rising interest rates may impede the company's bottom-line growth for the to-be-reported quarter. It has significant debt outstanding that exposes it to interest rate hikes. Further, to expand its global footprint and initiate new projects, the company is dependent on external borrowings as well.

Given the rising need for data-center spaces, heightened competition from existing players and entry of new players in the space is unavoidable. Hence, fierce competition from established Internet data-center operators, such as AT&T T , Verizon and COLT, along with data-center REITs, like Digital Realty DLR , is expected to promote aggressive pricing in the space, thereby, depressing the company's margins and revenues.

Amid these, the third-quarter sequential revenue growth from the United States will likely be limited to 1.4%, amounting to $627 million. Similarly, revenues from the company's operations in Europe and Asia-Pacific region are anticipated to witness moderate sequential growth to $385 million and $267 million, respectively.

The company's activities during the quarter to be reported were inadequate to gain analyst confidence. In fact, the Zacks Consensus Estimate for FFO per share of $4.95 for the quarter remained unchanged, over the past month. Furthermore, the figure denotes a year-over-year decline of 0.4% from the prior-year quarter.

Earnings Whispers

Our proven model does not conclusively show that Equinix is likely to beat estimates this quarter. This is because a stock needs to have both a positive Earnings ESP and a favorable Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 (Hold) for this to happen. But that is not the case here, as you will see below.

You can uncover the best stocks to buy or sell before they're reported with our Earnings ESP Filter .

Earnings ESP: Equinix has an Earnings ESP of -1.24%

Zacks Rank: Equinix carries a Zacks Rank of 4 (Sell), currently. It should be noted that we caution against stocks with a Zacks Rank #4 or 5 (Sell rated) going into the earnings announcement, especially when the company is seeing negative estimate revisions.

You can see the complete list of today's Zacks #1 Rank (Strong Buy) stocks here.

Note: Anything related to earnings presented in this write-up represent funds from operations (FFO) - a widely used metric to gauge the performance of REITs.

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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