Equinix has revised its yearly outlook down after posting second quarter (Q2) revenue results below analyst expectations and its CEO saying it was expecting to see a negative impact from currency fluctuation.

Equinix CEO and president Stephen M Smith said the colo provider was changing its yearly forecast from US$2.20bn to around $2.14 to 2.15bn, a further drop on the yearly outlook provided in Q1.

“We continue to operate in a volatile currency environment and are building into our forecast an additional $11m in negative impact from currency fluctuation,” Smith said.

“This is in addition to the $21m in currency headwinds from Q1, which we already absorbed into our full year guidance when we maintained our initial forecast for the year.”

Equinix shares fell 11% in the last three months and earnings per share of $0.58 were recorded, short of the $0.70 originally expected.

The company recorded revenues of US$525.7m, up 1% on the previous quarter and 15% of the same quarter for 2012, and a reduction in churn to Q1 with 2.4%, as opposed to 3.7%, which was in line with Equinix estimates.

Smith said part of the Q2 results would be attributed to Equinix’s effort to shift more customers to longer term contracts, especially in the US.

“In North America, we have generally lengthened our new customer contracts from less than two years to three years or more, which brings even more stability to our business long term,” Smith said.

He said the second half of the year, he expected to see Equinix execute longer sales cycle with a reduction in average deal size, and he continued the German market to continue to perform slowly.

“While these factors create a gap to prior expectations, we remain confident in our long-term strategy, which is resulting in strong yield per cabinet, improving margins and deepening interconnection,” Smith said.

“Rather than chasing deals that we believe would compromise our long-term returns, we are making disciplined decisions to drive profitable growth and continue to win the right deals that deliver superior value to our customers and drive acceleration of our ecosystems.”

He said for Q2, 2013, cloud and IT services have continued to perform well, with Software-as-a-Service becoming a heavily growing segment for the provider.

Customers are also moving into Infrastructure-as-a-Service as they increasingly take on a hybrid approach to computing.

Much of the growth around cloud, however, is coming from the small to medium-sized business segment and larger deals are still taking longer sales cycles.

The financial services industry is also showing signs of growth.

“This quarter, cross connects in the financial ecosystem grew 30% year-over-year, driven by our Chicago, London and New York campuses,” Smith said.

“We now have over 120 exchanges and trading venues inside Equinix, up from 75 just last year.”

Buy and build
Smith said 62% of Equinix’s recurring revenue is now coming from customers deploying data center operations across multiple regions, which is driving Equinix’ build and buy strategy.

Asia Pacific is its fastest growing region. Equinix announced its first data center in Osaka during the quarter, it opned Phase 3 of its data center in Sydney and is building out Phase 2 of its Hong Kong 3 site.

It has also opened its fifth facility in Zurich and is expanding in the Americas at Ashburn, Dallas, Rio de Janeiro, Silicon Valley and Toronto.

It also purchased a new data center in New York – New York-2.

REIT conversion
Equinix CFO Keith Taylor said the colo provider is still moving ahead with its Real Estate Investment Trust conversion, and despite the US Internal Revenue Services saying it was investigating its conversion in June, it still expects to make its conversion starting 1 January 2015.

He said Equinix plans to spend $11m in Q3 in cash costs related to the program, mostly on professional fees.

“On a year-to-date basis, we've paid $57.3 million in REIT-related cash taxes. We continue to make progress towards optimizing our global tax structure. And as part of this initiative, we've implemented a new organizational structure that centralized the management of our EMEA business activity into the Netherlands effective July 1 of this year,” Taylor said.

“As a result of this, we expect our effective tax rate to be lower in subsequent periods as the new structure begins to take full effect. Assuming a successful conversion to a REIT and no material changes to the tax rules and regulations, we expect our effective long-term worldwide tax rate to ultimately decrease to a range of 10% to 15%, consistent with our expectation that approximately 50% of our revenues will be generated outside of the US.”

You can read a transcript of the full earnings call on Seeking Alpha here. FOCUS also interview Equinix founder Jay Adelson, for a piece that tells of the company’s early days. You can read it online here.