Q3 2019 Earnings Call
Good morning, and welcome to the I know third quarter 2019 results conference call. All participants will be in listen only about should you need assistance. Please take note what conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions to ask a question you made.
Star then one on your telephone keypad.
She withdraw from the question Q. Please press Star then too. Please note. This event is being recorded I would now like to turn the conference over to Richard Ramos Chief Communications Officer.
Please go ahead.
Good morning, and thank you for joining us today I'm joined by Peter Queen, Our Chief Executive Officer, Mike Sicoli, Our President and Chief Financial Officer.
In prepared remarks, well open up the call for your question.
The presentation <unk> earnings release, we reference on the call are available on our Investor Relations page on <unk> website.
Today's call contains forward looking statements as described on page two of the presentation.
These statements are not guarantees of future performance.
Actual results may differ maturity from these forward looking statements do you have to assumptions risks and uncertainties. There are described in more detail in our filing with the FCC.
We undertake no obligation to amend update our clarify these forward looking statements made as of today November 12 2019.
During this call. We've also present non-GAAP financial measures, which were not prepared in accordance with gap.
A reconciliation of non-GAAP measures to the most directly comparable GAAP measures are included in todays earnings press release.
Management believes that our presentation of non-GAAP financial measures provide useful supplemental information to investors regarding our results of operations and our non-GAAP financial measures should only be considered in addition to not as a substitute for or superior to any GAAP measure.
Now, let me turn the call over the Peter a cleanup Pete.
Thank you Richard and good morning, everyone.
Let's turn to slide four for opening remarks.
We had a solid third quarter with clear signs that we have settled in on a consistent run rate in operating performance.
We're now on a good trajectory as we head into the final months of 29 team and then to 2020.
After several quarters of hard work on improving our data center portfolio. We're now set up for the next stage at I know.
On a normalized basis that third quarter was fairly consistent with the second quarter, which gives us confidence the operations around the right track.
During the quarter the sales team inc., new business across multiple markets.
For example, we're pleased to report that we resigned our multi megawatt anchor tenant into a long term deals our Phoenix flagship.
We also added Lionsgate this quarter did that site as part of their multi site strategy.
With our attractive metro footprint on the edge, we are partnering partnering with our customers to offer solutions in both primary and disaster recovery backup sites.
Today, we will also provide some color on our strategic initiatives as we zeroed in on a few actionable items.
There are multiple opportunities and discussion as we speak.
As you can appreciate we cannot go into much detail on these specific transactions and make no guarantees of their outcomes. However, I can assure you that we are aligned with shareholders and engaged on these initiatives, including the sale of Sir and noncore assets.
Our recent amendment to our credit facility is designed to give us flexibility to continue these discussions.
Our original thesis for profitable growth. The I know what is first to take the necessary steps to get into a new baseline of products and services that are in high demand and drive sales traffic to our best tier three facilities.
Hi, I'm happy to say that we're no longer hurdling certain partner sites that were trending down.
And as a result, we're experiencing less churn.
And growing our pipeline for larger deals.
Our backlog is still near 20 million as we substitute new sales for installs.
With lower churn I, not and new enterprise sales in both Colo and cloud services across Phoenix, Atlanta, Los Angeles in Seattle. This quarter were seeing good productivity progress from our direct sales team and channel partners.
Hi, Nap is well positioned for upside and many of the best high absorption power markets in the country and our sales team is having more at bats with deals over 250 kilowatts to multi megawatt deals.
And deals of this size would definitely helped drive organic growth in our Colo business.
Let's turn to slide five to discuss I neps attributes that a glance.
This is our claims chart, reflecting who are and that is today, we have 51 data centers and 21 markets around the world.
Most of our business is driven by our 14th Black ships that we operating control primarily in North America.
As we drilled two specific high absorption power markets I Nap has a lot of location hits with capacity that our marketing team has created it really promoting to gain more exposure.
As we have discussed the history of I know doors featured discussions over the past few quarters with advisors was cleared up many interested parties where dated in their view of the company.
Summary call the company as being a small retail Colo player with a network routing advantage.
But today I nap is transformed into a tier three data center, operator, and high absorption power markets what assets that rival the best in class.
We compete not only in uptime and quality of infrastructure, but we also offer comprehensive private cloud and connectivity solutions powered by a performance IP software as a differentiator.
For enterprises running mission critical workloads. The network is a must have service.
Many of our peers and industry are now looking for ways to improve datacenter conductivity and we are already there with 100 Pops.
Moving to slide six let's review, where I nap has a significant strategic present today.
I know it has a very strong presence in North America.
Using market data from structured research you can see the I know if as either a data center flagship private cloud indoor network presidents and most of the best high absorption power markets in North America.
We are in 13 of the top 19 markets, primarily what a data center flagship.
And more importantly demand for infrastructure and these metro markets is also expected to continue to grow over the next several years.
Our customers depend on this reach for multi site and multi product requirements. It's been a meaningful company attribute that we'd like to promote.
Our objective overtime is to increase our market share of the larger wholesale deals in these markets and given our excess capacity. We are laser focused on this upside.
Turning to slide seven.
For a global view on absorption.
Globally and that has a presence and 17 of the top 25 growth markets in the world.
Expansion potential markets that we are already in that makes sense down the road.
From a growth upside perspective, many datacenter in technology research firms suggest that the majority of enterprises still operate their own infrastructure on Prem today.
With recent trends towards outsourcing to data center providers, who can support a hybrid and multi cloud approach.
Well for conductivity and reliability through tier three data centers I nap is well positioned as a potential partner both domestically and internationally.
We will continue look for ways to gain scale overtime to offer more to our customers either through partnerships or more transforming transactions to be a consolidation.
In the meantime, we're focused on day to day operation.
At this point elect to hand, the call over to Mike Sicoli to go through our financial report.
I'm very excited to reintroduce might you all today as I Naps, new President and CFO as of October 1st.
Like joins me as a partner at the top of the management team along with our Chief operating Officer, Andy Day to craft. The next chapter find out into 2020.
Many of you know that Mike and I have team once before in a successful turned around and exit of RCN back in 2010.
Since then he's been no stranger to the street as a public company CFO and he is jumping right into action I know not missing a beat.
Mike.
Thanks, Pete good morning.
Really excited to join the I know team at such an important time in the company's history and of course, it's great to be working with Pete again.
Please turn to slide eight quarterly financial summary.
Overall, this was a pretty flat quarter compared to last quarter.
Total revenue was 72.9 million in the third quarter, a slight decrease sequentially and a 12% decrease year over year.
Year over year decrease was primarily due to planned datacenter exits and churn from several large customers.
Adjusted EBITDA on a third quarter was 23 million with adjusted EBITDA margin of 31.5%.
Adjusted EBITDA was down 1.4 million sequentially as reported but pretty flat on a normalized basis due to the fact that we converted the Santa Clara facility to an operating lease experienced seasonal cost increases and certain accrual releases from the second quarter did not repeat in third quarter.
The year over year decline was due mainly to lower revenue, partially offset by cost reduction initiatives.
Specifically the impact of the Santa Clara conversion on the third quarter adjusted EBITDA was approximately 700000.
Balance sheet impact was actually shown in the second quarter at the lease Amendment was signed in June .
With respect to our finance leases, there's significant concentration with the top lease representing 30% of the total balance the top five leases representing 70% of the total balance and the top 10 leases representing over 90% of the total balance.
We're currently an amendment discussions regarding the top lease which May result in this lease converting to an operating lease sometime between now and year end.
If this lease where to convert to operating the total finance lease liabilities balance would be reduced by approximately 80 million and reported adjusted EBITDA would be reduced by a run rate of approximately 1.7 million per quarter.
There would be no change to cash flows.
Capital expenditures in the third quarter were 8.6 million compared to 7.4 million last quarter and 11.4 million last year.
Similar to last quarter third quarter Capex was spent mainly on success based projects to fund the customer installations.
You may note that the historical Capex figures are slightly different than what we reported previously.
We determined that certain additions to property and equipment that were outstanding and accounts payable were not included in the supplemental disclosures of cash flow information.
The amounts on the supplemental disclosure have been corrected as well as the related adjustments to accounts payable in net cash provided by operating activities and purchases of property and equipment and net cash used in investing activities.
There was no impact the total cash flow the income statement for the balance sheet.
Net loss attributable to shareholders was 23.9 million in third quarter compared to 18.6 million last quarter and 15.5 million last year.
The sequential increase in net loss was due mainly to the exit restructuring and impairment costs of 3.8 million recorded in a third quarter.
Year over year increase was due primarily to lower revenues and higher interest expense, partially offset by cost reduction initiatives.
Now, let's let's turn to slide nine U.S. business unit results.
You ESS revenue was 56.9 million in the third quarter, a decrease of 1% sequentially and a decrease of 13% year over year.
Sequential decrease is primarily due to lower nonrecurring revenue in co location.
As I noted previously the decrease year over year as primarily due to planned datacenter exits and turned from several large customers in 2018.
U.S. business unit contribution was 24 million in the third quarter, a 6% decrease sequentially and a 21% decrease year over year.
The sequential decrease is primarily due to the conversion of our Santa Clara facility to an operating lease lower nonrecurring revenue and seasonal cost increases.
The decrease year over year is primarily due to lower revenues, partially offset by cost saving initiatives.
Now, let's turn to slide 10 International business unit results.
International revenue was 15.9 million in the third quarter, an increase of 2% sequentially and a decrease of 8% year over year.
The sequential increase is due to higher nonrecurring revenue in cloud and nine up Japan. The decrease year over year is primarily due to churn from large customers in 2018.
International business unit contribution was 5.8 million, a third quarter, a 3% increase compared with last quarter at a 1% decrease from last year.
The sequential increase is primarily due to higher nonrecurring revenue.
The decrease year over year, as primarily due to lower revenues, partially offset by cost savings initiatives.
Moving to slide 11 cash flow and balance sheet.
Net cash provided by operating activities was 5.5 million for the third quarter compared to 11.4 million last quarter and 9.4 million last year.
Sequential and year over year variances were primarily related to changes in working capital timing.
Cash and cash equivalents were 10.9 million at the end of third quarter.
We've added to non-GAAP measures to our cash flow disclosure adjusted free cash flow and adjusted Unlevered free cash flow to better illustrate our performance.
Adjusted free cash flow defined as cash provided by operating activities plus cash paid for nonrecurring costs less capex was negative 2.6 million in the third quarter compared to 6.1 million last quarter and 200000 last year.
Adjusted Unlevered free cash flow, which is adjusted free cash flow plus cash paid for interest was 14.1 million in the third quarter compared to 21.7 million last quarter and 17 billion last year.
At quarter end total debt outstanding under our credit facility was 428.6 million and finance lease obligations were 270.1 billion.
172 million of our finance lease obligations are excluded from debt for bank covenant purposes, as they were operating leases at the time of the refinancing.
Our leverage ratio calculated for the definition in our credit facility was 6.6 times in the third quarter compared to 5.9 times last quarter and 5.5 times last year.
On October 31st we disclosed an amendment to our credit facility to increase the cushion under our leverage in interest coverage covenant and push out the step downs on those covenants until March 31st 2021.
This amendment gives us more time and flexibility to evaluate and execute on the various options available to us in a strategic review process and we appreciate the continued support of our lenders.
In terms of updated guidance for 2019, we expect revenue in the range of 290 to 294 million.
Adjusted EBITDA in the range of 94 to 96 million in Capex between 30, and 32 million demonstrating our expectation of continued stability in the business through year end.
Now I'll turn the call backs Pete.
Thanks, Mike.
Let's turn to slide 12 for closing remarks.
We have accomplished most of the portfolio changes that we set out to complete.
Early on to create enough to it I know that third quarter was a mark of consistency now it's all about execution from the new baseline of revenues and expenses, while continuing corporate development with a focus approach the gain scale in the future.
Regarding near term strategic options, we're always open the selling noncore assets and and redeploying those resources to fuel our growth products.
Looking ahead I believe I NEP has an advantage over datacenter providers, given our flagship locations in high absorption power markets.
Our available capacity close larger enterprise deals greater than 250 kilowatts is very attractive and it's helping us to build a better pipeline.
Lending these larger deals will foster sustainable organic growth and it's a positive culture shift for the company sales team.
Finally, we have kept a sharp eye and market conditions regarding leverage our peer group, mostly private appear to be equally challenge with relatively high leverage I understand the others are can contemplating raising new money to de lever selling noncore assets are completely exiting to gain scale with others all of the.
Sounds very familiar to us.
The company with its advisors most align tree.
Our being very creative in its strategic review in order to drive you drive an outcome that lift signed up to next level of transformation into 2020.
So operator at this point, we're happy to take questions.
We will now begin the question and answer session to ask a question you May Press Star then one on your telephone keypad. If you are using a speakerphone. Please pick up your handset before passing the keys to withdraw from the question Q. Please press Star then Tim.
[noise]. The first question comes from Dan Kurnos, The benchmark company. Please go ahead.
Thanks, Good morning, just a quick housekeeping or Mike actually just on your comments around the top lease possibly shifting the operating is that contemplated already in the forward guide or were you just giving that impact in the event that it occurs.
Sure. Thanks for the question, it's not contemplated in the guide currently because we're not sure when it might happen.
Well, we're just providing information so that.
If and when it happens you understand how to think about it [noise].
Great appreciate kind of the forward heads up and then Pete just two questions first just on the sales front. You know consistency is is good you guys have had some some wins obviously you know you're talking about lower churn I'm just trying to get a handle on when we get back to sort of sequential growth here one we see.
Start to see the manifestation of some of those wins and if we look at kind of your portfolio of assets here. Your your named city key data centers flagships arse growing and occupancy it's that other that kinda had the big downtick. So just kind of help us think about where the focus is it and when we start seeing kind of there.
Resumption of sequential improvement.
Oh, yeah. Thanks, Dan I think a for the most part we've accomplished a lot to get rid of the data centers that were downward trending through those exits. The six says it exits were quite painful, but we're through them and we're seeing positive been off now in a more consistent basis, which means work no teetering on the edge.
Just having a baseline we can grow from.
We wanted to put new charts into our deck today to show, where we have a presence.
And as you know the absorption attraction in some of the up the best markets.
That's provided there by structured research, it's really interesting for for all of US here, because we overlap most of the best markets. So the upside potential of scoring where there's high demand makes a lot of sense. So we have the right products, we have tier three data centers we're in there.
Markets location location. So now we got to execute so I think we're kinda on the on the edge now Tiering lean forward.
And Reno really well positioned to do that the sales teams got momentum channel partners are or more engage with men meeting with them at the exact kill executive level as well.
So my sense is you know, it's it's a were right there.
So we're really push into a.
You know for organic growth at this point.
And then just on you know the strategic without specifics, obviously, a lot of properties have come to market recently I don't know if you view the market is crowded from that perspective, but I just kind of love to hear what you guys are thinking you know sale of noncore assets, there's a ton of money out there. So.
How how easy is it to have conversations how serious or people how difficult is the environment, making it for you guys to do something you know a near term to help shore up a you know financials into into 20.
I would say is it's not difficult as much as opportunistic.
There's a lot of activity as you know when the industry you know both from the rate perspective, when interaction and digital no down to smaller portfolios, making trades I think the the the difference could be those that our so called ready now as opposed to you don't want to get their act.
Together to prepare for a combination down the road discussions are fruitful I mean, we've met a lot of great people, who you know would make really good partners and we continue to those discussions.
But.
I think it's more opportunistic than anything and and I'm pretty positive about it.
Alright, thanks, guys.
The next question is from George Sutton of Craig Hallum. Please go ahead.
Hey, guys. A this is James on for George I'm, just one quick one looks like you had a little bit of a sequential improvement.
International business could you maybe talk about kind of whats driving that what you're seeing.
Outside of the U.S.
Yes, a james or for the most part or international businesses that cloud based business with network connectivity.
Canada is driving a lot of new sales or the leadership of international is out of Canada, Toronto, Montreal. So we have a really good.
Really good traction.
With the Canadian group also inside sales out of Chicago is doing quite well to from a quota perspective, they're very consistent.
And we really like the a the rhythm that they have and they tend to also shop, but internationally as well as you know we have a presence in Amsterdam, and and all through Canada in London, We have a new pod in London for cloud.
So there's a lot of focus on getting the in an international segment to really catch up that you can see from the contribution margin is starting to move into right direction, we're still little bit shore of Colo DNA in international So we're kinda in search of that buffer in most parts a cloud and network.
DNA if you will in the International group, that's got a lot of consistency now.
And in this particular period as I mentioned earlier in the prepared remarks that there was higher nonrecurring revenue as well, which which as you know nonrecurring revenue can fluctuate.
From quarter to quarter, but the business is pretty stable as well as Pete mentioned didn't didn't have as much impact from the higher churn events that impacted the U.S. side last year.
[noise] great.
[noise] then next question is from Erik Rasmussen of Stifel. Please go ahead.
Yeah. Thanks for taking the question, maybe just a clarification I kind of missed the commentary about the <unk>. If you did a the top lease or you if that were to convert to it operating lease the could be a.
Some headwind to EBITDA margins is that an expectation should we be modeling. It at this point and then I've a couple of questions.
Yeah.
What I said is that we are in discussions right now about an amendment to that lease and if it were to be amended we believe it would flip to an operating lease.
[noise], which would result.
When flipped and roughly a 1.7 million dollar.
Expense hitting EBITDA. However, the finance lease balance would go down by approximately 80 million. So the the headline leverage impact to that is like 12 times. So in terms of you know reported leverage it's actually pretty de levering pretty enhancing from that standpoint, it's just the a flip between.
Finance lease an operating lease.
So it does manifests itself in lower EBITDA, but cash flows the same it's just in a different buckets and the reason we brought it up is because we are in active discussions about it hasn't happened yet what I mentioned in the prepared remarks, as we expected to happen at some point between now and the ended the year so unlikely to have a big impact on Q.
For regardless, but wanted to give folks a heads up so that a as you're thinking about 2020, you have the the best ratio.
Okay. Thanks, that's helpful. And then maybe just back on the strategic alternatives [laughter] you know it seems like needs are pretty similar message that we heard last quarter you actively engaged with some some parties that are interested what's been sort of the major hold up better.
I guess at this point now that you have this financing you know the credit facility in place in the amendment that you talked about what's the sense of timing for you know a deal or whatever that Oh, you know new review comes up with.
Well the timing is certainly we're working on a right now a weve hired advisors set in the first quarter.
We're finishing third quarter, that's a lot of time in and Weve scoured the earth on trying to figure out the best the outcomes for US I think we're getting close as I mentioned today I think we're narrowing down to a couple actionable items some could be noncore sales could be something different maybe potential.
Really transforming we just have to keep at it make sure we end up in the right place the time a that we.
Attained what the creditors, we really appreciate that because certainly wouldn't want to be rushed to.
To do a bad deals so we're focused on.
While keeping our heads down hopefully by the end of the year will be close but we're in the mix right now so.
Nothing more to add to that.
Okay, and then maybe just or you know you the midpoint of your guidance for the year that assumes then are you know Q4 would be down a little bit up from Q3. So that's three quarters in a row. Obviously you are you going through the datacenter exits in the models been trying to stay.
Belies, but what how should we be seen thinking about growth next year.
Just to try to help us out because it is clearly a lot of moving parts to the model, but I think it would be helpful to sort of right set expectations or at least get some top level ideas as we head into 2020.
Yeah, I think the right way to think about Q4 as flat I'm not down.
That's.
Pretty straightforward I think.
Heading into next year.
You know as Pete mentioned, there's a lot of positive signs about the potential for organic growth.
Does tend to take longer.
Well to materialize. Then then you know we might think on the front end, so when you're coming off of.
You know a prolonged period of declines some sometimes it can be flat for a little while before it actually does well so.
Yeah in terms of.
My expectation of the business it feels pretty flat today with the potential to get back to growth sometime in 2020.
Great. Thanks, Thank you.
This concludes our question and answer session I would like to turn the conference back over to Pete Queen now for closing remarks.
Thank you operator, and thank you everyone for your attention today.
We look forward to future communication have a nice day.
The conference has now concluded. Thank you for attending today's presentation you may now disconnect.