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Morningstar | Currency Headwinds Continue, but Overall Iron Mountain Did Just Fine in 2018

Narrow-moat-rated Iron Mountain reported decent fourth-quarter results, and full-year results were largely in line with our expectations. Total revenue came in at $4,226 million, just below our expectations for $4,232 million. Slightly lower depreciation and amortization expenses led to a slight beat for operating income before gains and losses, and adjusted earnings per share came in at $1.10, nearly in line with our estimate of $1.08. Management provided updated guidance that was negatively influenced by moving exchange rates. Overall, largely due to the moving exchange rates, we may be slightly lowering our current forecasts, but we do not anticipate a material overall effect on our fair value estimate. Management expects constant-currency revenue growth of roughly 3% in 2019, EBITDA growth of 4%, and EPS growth of roughly 4%. While these growth rates are a bit below the original compound annual growth rates given at Iron Mountain's last investor day, growth was so strong in 2018 that the firm remains well on track for meeting its overall 2020 goals.

On a high level, Iron Mountain continues to do well. Organic revenue growth was roughly 3% in developed markets, largely due to strength in service revenue, and organic growth was roughly 5% in international markets for a total organic revenue growth rate of 3.6%. EBITDA margins expanded over 100 basis points for the year, and the firm’s higher-growth data center unit continues to grow as expected. Additionally, future pipelines and expansion opportunities look promising. We also appreciate that Iron Mountain is finally winning some federal contracts, an area of the market that has historically not outsourced these types of services. The firm continues to find ways to serve both the digital and physical storage needs of clients, often providing hybrid solutions. All of these confirm our original thesis on Iron Mountain.

Internal volume growth in North America remained negative but recovered a bit from third-quarter lows, while rates in Western Europe and other international largely remained in their previous ranges. Pricing management initiatives kept organic revenue growth positive, even in segments with lagging organic volume growth. Tape-related revenue remained under pressure, although North American data management revenue now makes up less than 10% of total revenue. Leverage remained constant, as the net total lease adjusted leverage ratio stayed at 5.6 for the quarter. We hope to see additional deleveraging here in 2019. Overall, we believe that negative North America volume growth trends will abate somewhat in 2019 and that service revenue gains will more than outweigh any negative volume growth related to physical document storage. The firm’s ability to gain additional revenue related to digital services, the pivot toward emerging markets, and alternative revenue sources such as art storage and data centers should all provide a long runway for growth as paper storage faces a drawn-out secular decline in mature markets.