Ultra-secure data management specialist Iron Mountain (NYSE:IRM) reported third-quarter results this week alongside a strategy shift known as Project Summit.
Let's take a look at both of these important events. Where does Iron Mountain go from here?
First, the results
Fittingly, Iron Mountain's third-quarter sales held absolutely steady year over year at $1.06 billion. Storage rental sales increased by 2.5% while the smaller service department saw a 3.7% decrease.
The company reduced its selling, general, and administrative expenses by 8%, resulting in a 14% boost to operating profits. Various smaller benefits followed further down the income statement, including an $18 million gain on foreign currency transactions. The year-ago period contained an $11 million expense related to discontinued operations, a cost that did not recur in this report. At the end of the line, earnings attributable to Iron Mountain as a whole rose 61% to $0.37 per share.
Adjusted funds from operations (AFFO), a metric commonly used by real estate investment trusts like Iron Mountain to measure the cash flows generated by rental operations, decreased by 0.8% to $225 million. This result was affected by maintenance costs and growth investments in the service side of Iron Mountain, which don't contribute directly to the asset rental
Based on these results, Iron Mountain simply tightened up its full-year guidance targets for most metrics while holding the midpoints of each range fairly stable. The exception to this rule was AFFO, where the full-year projection was lowered by 3% to $860 million.
For what it's worth, your average Wall Street analyst had been looking for third-quarter earnings of roughly $0.30 per share on revenue near $1.07 billion. Iron Mountain's results landed just above the Street's earnings target. The top-line result was essentially a rounding error below the analyst view.
What about the Summit program?
Here's the elevator-pitch core of Project Summit:
"Focusing on the highest potential opportunities while creating a more efficient organization that can embrace and execute change faster to become a stronger customer partner."
In other words, Iron Mountain wants to cut costs and simplify its internal processes in order to double down on the most promising business opportunities available today.
If that sounds like every PowerPoint presentation full of hot business management you've ever seen, let me assure you that Iron Mountain actually has a plan in place. Summit is more than just a collection of empty platitudes.
The company will simplify its management structure, cutting out middle-men whose job functions add little value. This extends to the executive suites, where the number of positions at the vice president level and above will take a 45% cut. Over the next two years, roughly 700 managerial and administrative jobs will be terminated.
The tighter set of human resources that remain will be rebalanced toward those top-shelf growth opportunities and cash-machine profit centers mentioned above, along with similar adjustments to Iron Mountain's budgeting and material assets. Taken together with the workforce reductions, Iron Mountain should be able to deliver on the promises of "a more efficient organization" and the ability "execute changes faster."
The tricky part will be the final clause of Project Summit's core statement -- becoming "a stronger customer partner" with a smaller staff and faster-moving decision processes.
The customer service bit is not an easy trick to perform in the midst of heavy efficiency improvements and plenty of similar strategy shifts have failed on this point. Iron Mountain's investors will need to keep a close eye on this detail, which also is notoriously difficult to measure objectively. Important clues should come from high and rising rates of contract renewals, steady customer growth over the years, and press coverage reflecting positive word-of-mouth reviews. You should also expect an utter lack of data security breaches and scandals.
Project Summit will start in the current quarter and management expect to finish it by the end of 2021. The total cost of implementation should be approximately $240 million across that two-year period, including a pre-tax restructuring expense of around $60 million in the fourth quarter. The payoff should be something like a $200 million boost to annual profits, allowing Project Summit to pay for itself by the middle of 2024.
If it all works out, that is. Fingers crossed, but it's not going to be easy.
Meanwhile, Iron Mountain remains an impressive income stock with a REIT-powered dividend yield of 7.3%. That alone is enough justification to own the stock for many income investors, with or without Project Summit's promised efficiency improvements.