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Morningstar | Data Center Growth and Margin Expansion Remain Key for Iron Mountain

Iron Mountain built its storage empire by fulfilling the document-management needs of companies in record-intensive industries. Its route-based warehouse network grew by acquisition, scaling into the largest global provider of document storage. The company's main income-producing activity is collecting rent from customers for storage space. This produces a steady flow of high-margin rent income. Iron Mountain has an unmatched infrastructure, allowing it to offer uniquely robust services appealing to larger companies. Iron Mountain also received approval to operate as a real estate investment trust in 2014, which allows greater tax efficiency.EBITDA margins in its core North American segment have been north of 30% since 2008 and are now over 40% consistently, which is quite strong relative to other asset-heavy route-based businesses. We believe Iron Mountain's industry dominance has protected margin expansion despite secular growth headwinds. Although paper needs are shrinking at the enterprise level, many regulated industries still mandate the archiving of original hard-copy documents. The firm has also been expanding its extra service offerings, coordinating physical and digital document storage and processing, and this revenue has been outgrowing the slowing hard copy storage revenue. In addition to protecting current margins, Iron Mountain sees continued net internal volume growth as well as volume growth from acquisitions, suggesting any slack in demand for outsourcing storage needs has been manageable. Finally, Iron Mountain's ability to properly scale operations while charging for document destruction could offset revenue loss from physical storage volume contraction. We think the firm has wisely chosen to pivot its business mix toward emerging markets and its data center businesses, which we expect to be an area ripe for growth. Emerging markets offer higher GDP growth and are at an earlier stage in the compliance cycle, while data center organic growth should be in the double digits. This leads us to believe that revenue will continue to increase modestly and returns on invested capital should remain intact over the next few years.