Q2 2021 Cyxtera Technologies Inc Earnings Call
And in our earnings release filed last Monday.
As noted in our earnings release, we have posted a supplemental earnings presentation on the IR section of our website, which management will refer to during their prepared remarks, and with that I'd like to turn the call over to Nelson.
Thank you Greg.
Good afternoon, and thank you for joining us today.
Know how busy you all are so we appreciate you taking the time to join our earnings call.
Let me start by saying how excited the team in IR about hosting our first earnings update as a public company I want to thank all of our investors both old and new for their support and all of our customers and partners for their trust in.
In addition, I want to thank each and every member of our team for their dedication and commitment to six terra without them. We wouldn't have reached this next stage in our growth.
I'll start today with a quick recap of our second quarter results, let's go to slide four.
Total revenue for the second quarter increased by $2.2 million or one 3% year over year to $175.4 million. While recurring revenue also increased by $2.2 million or one 3% year over year to $167.3 million.
As we announced at our analyst day, we successfully renewed our contract with movement on a long term basis last year.
We're very happy with that renewal, because luminal pace market rates with standard commercial contract terms and the relationship with them is strong.
Core revenue, which excludes revenue from <unk> increased by $10.6 million or seven 1% year over year to $159.4 million.
Transaction adjusted EBITDA increased by $3.2 million or five 4% year over year to $62.3 million driven by topline growth and operating leverage.
Annualized core bookings increased by $10.4 million or 54% year over year to $30.9 million at the same time average monthly core churn improved year over year to <unk>, 9% in Q2 of 2021 from 1% in Q2 of 2020.
Prior to having Carlos to provide more detailed information on our second quarter results I would like to quickly review our strategy for the benefit of the participants that are new to the <unk> story.
Slide five summarizes some of the key attributes of the company.
<unk> was formerly the largest private data center provider and is now the third largest publicly traded global retail colocation provider.
We have an international platform with 61 data centers in 28 markets across North America, Europe and Asia.
We serve over 2300 customers, mostly large enterprise and global service providers across all major industry verticals.
Our focus is on the retail co location segment of the datacenter industry, because we believe it is a sweet spot in the industry.
To be successful in the retail co location segment, you need to have a strong interconnection foundation and we certainly have that with over 40000 cross connects across our platform positioning us in the top three among our publicly traded data center peers.
Innovation is a core part of six service culture, and our development efforts are focused on making the datacenter easier to consume for our customers and partners.
To that end, we have developed our digital exchange and bare metal platforms I'd like to dive into a bit more detail on these attributes.
Moving to slide six we believe that data center is the foundation of the digital economy and the strong tailwind for this industry supports this view.
These tail winds are led by digital transformation initiatives, among enterprises, which have been underway for some time, but was reinforced and accelerated by the COVID-19 pandemic.
Enterprises need to transform digitally to ensure they maintain their competitive advantage and that is best accomplished through the use of hybrid it approaches with multi cloud solutions across multiple data centers.
These hybrid solutions are best delivered from deeply connected data centers, thereby positioning retail co location providers in the sweet spot of this growing trend.
Moving to slide seven <unk> is well positioned to benefit from enterprise digital transformation and hybrid solutions that requires because of its differentiated data center platform.
In an industry, where scale matters <unk> has a global platform with facilities in all of the top 10 data center markets in the world.
This is in contrast to other publicly traded retail co location providers, whose platforms are more regional in nature or.
Our data centers are primarily located in tier one markets. Because this is the focus of our enterprise and service provider customers.
Slide eight summarizes our interconnection strength.
Across our footprint <unk> has more than 240 network service providers and offers customers low latency direct connections to all major public cloud providers, we have a deeply interconnected platform with more than 40000 cross connects supporting over 'twenty 300, enterprise and service provider customers.
Each of those cross connects represents a business relationship among our customers and partners delivering value across our ecosystem and driving over 11% of our total revenue from interconnection.
This strong interconnection foundation and broad ecosystem of enterprises and service providers allows us to drive true innovation across the platform.
To that end, we have developed a series of leading edge products focused on making the datacenter easier to consume for our customers.
Let's turn to slide nine to discuss further.
The core innovation, we have developed is our digital exchange.
The digital exchange platform is a highly scalable multi tenant highly secure platform that allows customers to dynamically create secure networks in real time and directly connect to other enterprises and service providers at the click of a button we call. These east to west connections because they don't require access to external network providers.
We've seen strong adoption of our digital exchange, which enables east east west connections and facilitates a thriving ecosystem among our customers.
The more enterprises grow their interconnection the less likely they are to churn because they have established direct connections to their business partners. Our service provider customers get increased revenue from these business relationships with our enterprise customers and expand their footprints within our global platform as needed.
The automated nature of the digital exchange platform provides the foundation of our bare metal offering.
Bare metal as a rapidly emerging category of digital infrastructure.
The core value proposition is that bare metal provides all of the benefits of retail co location, including lower cost total cost of ownership better security better compliance and better control, but does so at the speed of cloud.
Traditionally a colocation environment it would take customers as long as six months to deploy a timeframe that doesn't meet the requirements for certain projects as.
As a result, many of those applications are deployed in the public cloud because of its faster deployment times.
Even when other features of the public cloud might not be ideal for this particular workload.
With the speed of bare metal provisioning retail co location becomes a viable option for a larger percentage of overall workloads.
<unk> developed the software for the digital exchange and bare metal in house with an API first approach.
That allows our customers and partners to access these capabilities with just a few key strokes.
In addition, these capabilities are now available via the <unk> portal, allowing all of our customers to take advantage of these differentiated services.
This in house software development approach is a structural advantage that allows us to continuously innovate at an accelerated rate.
Our fed ramp and AI as a service offerings are good examples of this.
Fed ramp is a certification that the government requires to house and support their it infrastructure the.
The federal government is no different than any other large enterprise they need to digitally transform and they need to do so in a hybrid fashion.
This certification was critical to <unk> ability to partner with new tactics to jointly announced the launch of the new tanks Federal innovation lab powered by <unk>.
The federal innovation lab, which is enabled by our digital exchange and located in one of our data centers in Northern Virginia is a dedicated space focused on translating technology innovation into proof of concept to simplify and automate U S government agency it environments.
<unk> is AI as a service offering powered by Nvidia <unk>. A 100 offers is simplicity and ease of the cloud with the deterministic performance of dedicated infrastructure. This is a first of its kind offering in the market that provides a flexible infrastructure model leveraging point and click provisioning via our digital exchange.
Customers also have direct access to a rich ecosystem of service providers, including storage as a service interconnection and security to complement their Nvidia <unk> hundred deployment.
Moving to slide 10. The end result of all of this differentiation is the 6% of our marketplace, our global footprint of densely interconnected data centers with highly automated network and bare metal capabilities provides the ideal platform for enterprises and service providers to deploy their critical infrastructure.
This full platform approach is the core of our go to market strategy and has been the driving force to our sales momentum.
As this diagram depicts the platform approach allows our partners to deploy hardware as needed rapidly provision that hardware and associated networking and deliver it to customers and partners within the data center and across the full global platform. This is a true value added approach.
Now that I've highlighted <unk> competitive advantages, let's move to slide 11 to discuss how we are leveraging this differentiation to drive growth.
Taking advantage of our in place capacity and continuing to increase occupancy across the platform is the key driver of our organic growth plan.
Increased occupancy leads to increased revenue and high EBIT flow through because the majority of our costs are fixed.
We have made significant progress in this area and we will share some details on that progress in subsequent slides.
The second lever of our organic growth is expanding in our existing footprint.
As we highlighted at our analyst day, our plan contemplates expansions and four top markets, London, Singapore, Chicago in Silicon Valley.
These are markets, where demand is strong and our occupancy is high so we want to ensure we have inventory for all our customers.
To that end, we announced in late June that we were developing a new data center.
Silicon Valley as well as adding additional capacity in our existing facilities in Silicon Valley and Chicago.
The new Silicon Valley data center located in Santa Clara is a nine megawatt data center currently under construction and is expected to be ready for customers in late 2022.
We are excited about the opportunities. This additional capacity represents for our customers and partners and Carlos will discuss the impact to our 2021 capex guidance in his remarks.
The third lever of our organic growth plan is the cross selling of our platform capabilities.
Customers are utilizing more of our interconnection digital exchange and bare metal platforms, all high flow through services that increase our revenue per square foot, while providing customers additional overall value and decreasing the likelihood of churn.
I will address our inorganic priorities later in my remarks, so let's transition to slide 12 to discuss our sales momentum.
We took several steps to improve our go to market strategy and execution last year, including reorganizing the sales force around our differentiated offering and organic growth focus.
This included changing our sales compensation plan to include not only bookings targets, but a net MLR component as well this introduced better churn management and has stabilized our core churn.
We also regionalize the salesforce to ensure we are increasing the occupancy across the full platform.
Lastly, we rebuilt the channel program from the ground up with partners that understand the true value of <unk> marketplace approach.
In addition to our robust stable of referral agents. The channel program has opened up new routes to market with managed services providers Global systems Integrators network service providers and strategic Alliance partners like new tactics, Nvidia HPE and lumen.
The impact of all of these changes has led to consistent sales growth with an increase in annual LTM total bookings of 78% over the last six quarters.
Sure.
Turning to slide 13, our current occupancy sits at 68% across the platform, which gives us ample existing capacity to support our increased sales performance. This is high quality capacity located in some of the most attractive global data center markets. So we have clear runway to support our increased sales performance.
On Slide 14, you can see that our continued sales momentum is already making an impact on occupancy as our core occupancy normalize for alumina capacity give back increased 3% in 2020 continued.
Continued bookings performance with stable churn should continue to increase our occupancy and drive accelerated EBITDA growth.
I would like to cover two additional topics before I pass it onto Carlos.
Inorganic opportunities and ESG.
Scale is critical in this industry and there are a number of inorganic opportunities that can help broaden our reach and accelerate our growth.
The focus of our geographic expansion will be international markets.
Our international footprint is already a competitive advantage and we want to continue building on that differentiation.
We can expand through greenfield developments.
Partnerships, where we can acquire assets.
I believe we're very well positioned from an acquisition perspective.
One of the benefits of the carve out withstanding a new operational systems, which were built to accommodate inorganic expansion and acquisitions.
We also have a management team that is experienced in realizing the expected revenue and cost synergies of acquisitions.
We are in a privileged position because we don't need inorganic initiatives to achieve our stated growth targets. So we will carefully monitor inorganic opportunities and be selective in pursuing those initiatives that are accretive to our long term plan.
Last but definitely not least is our ESG focus.
Like our peers in the data center sector, we are cognizant of our responsibility to be prudent stakeholders of the environment.
During our analyst day in May we highlighted our 'twenty two energy star certified data centers and announced our long term commitment to 100% carbon neutrality.
We've created an interdisciplinary team under the leadership of our senior executives and the oversight of the board that's working on implementing our long term ESG strategy and will guide our efforts on this front.
In early July we announced that we had selected Nextera energy resources, the world's largest generator of renewable energy from the wind and Sun as our preferred supplier of Green energy.
Nextera energy resources will support our efforts to increase the use of renewable energy throughout our north American footprint and both companies will work together to explore other renewable and clean energy projects.
Additionally, Nextera energy resources through one of its subsidiaries invested in six terra by subscribing for $20 million of the 250 million pipe offering completed by starboard value acquisition Corp simultaneously with the closing of our recent merger.
By partnering with a proven leader in clean energy, we intend to accelerate our shift to renewable energy and help reduce our carbon footprint.
In summary, we're very pleased with our second quarter results as they continue to validate the competitive strength of our platform and our go to market execution now I will turn the call over to Carlos to cover the results in more detail.
Thank you Nelson and good afternoon, everyone and once again, thank you for joining us on our first earnings call as a public company.
And Nelson has already mentioned, we're satisfied with our second quarter results, which we believe reflect strong customer momentum and validate our go to market strategy.
Turning to slide 16, total revenue for the quarter increased by $2.2 million or one 3% year over year to $175.4 million, while recurring revenue increased by $2.2 million or one 3% year over year to $167.3 million.
Topline growth was mainly attributed attributable to continued momentum in net bookings performance during the quarter.
Interconnection revenue represented 11% of thorough revenue for the quarter and grew by 11% year over year.
As a reminder, we successfully renewed our contract with lumen on a long term basis during the second quarter of last year.
The renewed contract rates prices to market rate and implement a renewed channel partnership that is yielding good pipeline momentum.
Therefore, Q2 2021 is the last quarter in which we are comparing the new contract versus old and represents a headwind to our revenue numbers versus the same quarter of 2020.
That being said core revenue, which excludes alumina revenue increased by $10.6 million or seven 1% year over year to $159.4 million.
This growth rate is consistent with our long term target.
Excluding non cash charges related to the closure of our Moses Lake data Center gross margin for the quarter was 45, 9% a year over year increase of 20 basis points.
Transaction, adjusted EBITDA increased by $3.2 million or <unk>.
4% year over year to $62.3 million, principally due to higher revenue lower cost of revenue and lower SG&A costs.
And transaction adjusted EBITDA margin of 35, 5% increased by approximately 100 basis 140 basis points year over year, driven by topline growth and operating leverage.
Transaction adjusted EBITDAR increased by $1.4 million or one 7% year over year to $78 million, which we cater to a margin of $44 five.
As a reminder, we view transaction adjusted EBITDA is the best measure for comparing our performance to our peers because it adjusts for our asset ownership structure.
Moving to slide 19.
Core bookings increased by approximately 54% over the same quarter last year.
Driven by customer momentum and strong channel partner contribution.
We continue to see an increase in both quantity and size of deals as demonstrated by our bookings growth.
Average monthly core churn of 0.9% for the quarter improved by 10 basis points year over year and was in line with our expectations.
As detailed on slide 21 core MLR increased from $47.5 million exiting last year to $48 million, primarily due to zero point $5 million of net installations.
On slide 34, we have provided a breakdown of our capital investments.
Q2, Capex remained broadly in line with last year at $13.6 million.
We think capex growth Capex was higher year on year as we continued to have good momentum around bookings, which translate into installation capex.
Corporate Capex was that year on year as projects completed last year were nonrecurring in nature, and we see a return to steady state in that category.
We have announced several projects to expand capacity and follow our customers' growth trajectory. During this quarter, but we would only start to see the impact of those projects in Q3, and Q4 and well into 2022.
As a result of those initiatives, we have moved our capex guidance up to reflect the expenses related to that initial capacity, which I will cover in more detail in a few minutes.
Turning to our balance sheet and capitalization on slide 25, with the completion of the merger we've raised 493 million before expenses and paid down our second lien facility.
In addition during Q2, we extended the majority of our revolving credit facility until November of 2023.
Our pro forma net leverage is now eight times, while our pro forma lease adjusted leverage is six two times based on a five times capitalization of our real estate payments.
Pro forma for the completion of the merger we have available liquidity of approximately $190 million.
As we have mentioned previously we're very excited to have completed our merger with starboard value acquisition Corp, and embark on this new phase for <unk> as a public company as it brings incremental flexibility and commercial momentum to the execution of our strategy.
Although we have discussed our REIT status before I want to reiterate our position as it is clearly an important topic for investors.
We believe we have the ability to convert to a REIT and have the vision to do so at the right time.
It happens that our tax advantages right now, including $600 million of net operating losses are such that we don't feel any immediate need to move and distraction.
We do believe that REIT status has the potential to create value and we don't see any material impediments at this time to conversion. However, we want to be thoughtful and deliberate about our decision as our shareholders would expect.
We intend to review this position at least yearly and find the right time to make that transition.
And so turning to our 2021 guidance on slide 26, we continue to expect total revenue in the range of 681 to <unk> $702 million and transaction adjusted EBITDA of $217 million to $223 million.
As Nelson highlighted we're expanding our capacity in the Silicon Valley and Chicago markets.
Accordingly, we expect expansion capital expenditures for the full year to be in the range of $65 million to $80 million.
The top end of this range represents a $50 million increase to our previous guidance and I would note that our long term plan assume organic expansion into selected markets, including the ones I just mentioned.
And so with that I would like to thank you for your support and looking forward to an open end loan relationship.
Let me turn the call back to the operator, so that we can start the question and answer session.
Operator.
Thank you we will.
We'll now begin the question and answer session.
To ask a question you May press Star then one on your telephone keypad.
If youre using a speakerphone please pick up your handset before pressing the keys.
<unk>. Your question. Please press Star then tail.
At this time, we will pause momentarily to assemble our roster.
Again, if you'd like to ask a question.
Please press Star then one at this time.
This concludes our question and answer session I would like to turn the conference back over to Nelson.
<unk> for any closing remarks.
Well. Thank you all for joining us today, and we look forward to updating you on our progress next quarter. Thank you.
Thank you operator.
The conference has now concluded. Thank you for attending today's presentation you may now disconnect.