Q3 2021 Cyxtera Technologies Inc Earnings Call
Good morning, and welcome to <unk> fixed tariffs Q3, 2021 earnings conference call. All participants will be in listen only mode should you need assistance. Please signal conference specialist by pressing the star T followed by zero.
After todays presentation, there will be an opportunity to ask questions.
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Thank you grant.
Good morning, and welcome to our third quarter 2021 earnings Conference call.
On today's call, we lost part of materials available on our Investor Relations website at IR that fix their dotcom.
We are joined here today by now Simpson Baker, our president and CEO and Carlos Augusta Our CFO.
After prepared remarks, well open up the lines for Q&A.
Before we begin I would like to remind you that today's earnings materials contain forward looking statements, including statements regarding our future expectations.
All forward looking statements are subject to risks and uncertainties.
Please refer to today's earnings materials, the Safe Harbor language on slide two of our presentation and our SEC filings for a discussion of the major risk factors that could cause our actual results to differ from those in our forward looking statements.
In addition, we use several non-GAAP measures when presenting our financial results. We have included reconciliations to these measures in our supplemental financial information with that I'll turn the call over to Nelson.
Thank you Maria good morning, and thank you all for joining us for our third quarter earnings call.
We have proudly entered the next phase of <unk> evolution, becoming a public company at the end of July marking a major milestone in our company's history.
To celebrate this accomplishment we are honored to have the opportunity to ring. The closing bell at the NASDAQ stock exchange on December six.
None of this would have been possible without the hard work and dedication of the <unk> team, who have continued to deliver solid outcomes for our customers throughout this journey.
Our team is motivated and excited about this next phase of <unk> growth and we have received positive feedback from our customers and partners as well.
As we walk through the results of the quarter and summarize our overall strategy. It is clear we have an incredible opportunity ahead of us and we're excited to realize the full potential of <unk>.
I'll start today with a quick recap of our third quarter results, which you can follow on slide four of our presentation.
First I want to highlight that we are raising the midpoint of revenue guidance by $7 5 million for the year to $699 million and transaction adjusted EBITDA guidance by 5 million to $225 million, reflecting our strong Q3 results and year to date performance.
We continue to see sustained momentum in the business with total revenue increasing by $5 1 million or two 9% year over year to $177 1 million.
Recurring revenue increased by $5 8 million or three 5% year over year to $169 3 million.
Core revenue, which excludes revenue from lumen increased by $12 5 million or eight 4% year over year to $161 million.
Transaction adjusted EBITDA improved by $3 5 million or six 4% year over year to $58 1 million driven by topline growth and operating leverage.
Annualized core bookings increased by zero point $5 million or two 5% year over year to $20 8 million at.
At the same time average monthly core churn improved year over year to <unk>, 7% from <unk>, 9%, resulting in strong core net bookings.
Lastly, interconnection accounted for approximately 11% of total revenue up from nine 6% in the third quarter of last year.
This represents 17% year over year growth.
Because some investors on the call today are newer to our story I would like to spend a few minutes highlighting the foundational elements that are driving <unk> strong momentum and show the key elements of our strategy.
As you can see on slide five we are the third largest retail co location provider with 61 data centers across 28 markets.
Our footprint has a strong international presence with facilities in the top 10, most attractive global markets.
We view this as a significant competitive advantage as our data centers are located in markets, where our customers want to deploy their infrastructure.
At six Terra we view everything from the customer lens, we serve more than 2300 enterprises and service providers across our global platform, representing every major industry vertical which leverage our strong interconnection base of over 40000 cross connects to support their digital transformation initiative.
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This diversified customer base, along with our strong interconnection platform creates a differentiated global ecosystem, where enterprises and service providers established business relationships, both directly and through partners.
This leads me to a very important point.
Innovation is core to our organizational culture, and we are continuously striving to improve the value we provide our customers.
We believe our innovative approach to the datacenter sets us apart from our competitors in a manner that is difficult to replicate.
Our innovation efforts are focused on three main objectives.
First to make our data centers easier to consume.
Second to make it seamless for our enterprise and service provider customers to connect to each other and.
And third to support our customers automation initiatives.
Our digital exchange offering is our core innovation platform <unk>.
Digital exchange builds on our interconnection density and enables seamless software based virtual connections between our customers.
We build digital exchange in house with our own product development team, which allows us to rapidly adapt our platform and further innovate in support of our customers' digital transformation efforts.
Our bare metal offering is an example of this continuous innovation.
Metal Leverages, the digital exchange to deliver on demand infrastructure. So customers can consume the data center and a cloud like fashion.
We'd like to think about this is colo on demand and it helps our customers get to market faster. In addition, it provides our customers the flexibility they need to quickly adjust their infrastructure as their business requirements evolve.
Thereby future proofing their environments.
And most recently, we introduced smart cabs, which also leverages, our digital exchange platform to provide on demand co location cabinets complete with built in power and integrated Configurable core network fabric.
This solution is especially powerful for our channel partners and strategic alliances, who can deploy their infrastructure and a resilient secure colocation environment with the live network fabric already built into the cabinet in an on demand fashion.
This exciting new offering will be available in more than 10 markets in Q1 of 2022.
Strategic partners are a core part of our go to market strategy.
We recently partnered with new tactics for the launch of their federal innovation lab in conjunction with some of our other leading technology partners.
The first new 10 X Federal innovation lab is powered by <unk> is digital exchange and enterprise bare metal platforms. The federal innovation lab available across our data centers in Northern Virginia provides U S federal customers as well as industry partners with an environment to build proof of concept and test.
<unk> critical application using on demand infrastructure that readily supports hybrid multi cloud solutions via a single operating platform.
In addition, we were awarded the global service provider of the year at <unk> Dot next digital experience conference in recognition for providing enterprises with on demand access to <unk> market, leading hyper converged infrastructure enterprise cloud software directly within the data center.
We are proud of the strength of our strategic alliances and continually look for innovative ways to enabled our customers to deliver all applications services and data at any scale directly within the data center with cloud like flexibility.
Moving to slide six our global platform and strong ecosystem, coupled with strong industry tailwind has resulted in significant momentum across our business. Our core bookings continue to grow year over year, while our core churn continues to improve this.
This combination of accelerated bookings and lower churn deliveries net bookings, which is driving increased occupancy across the platform.
Turning to slide seven our current occupancy sits at 68, 9%, which is an increase of approximately 50 basis points versus last quarter.
We are making good progress towards our target of 78% occupancy by 2025, which will continue to be supported by our solid sales performance.
Lastly, let me provide a brief recap of our growth strategy as you can see on slide eight our strategy is primarily driven by organic growth opportunities.
As I mentioned on the previous slide taking advantage of our in place capacity and continuing to increase occupancy across the platform is the main driver of our growth.
Increased occupancy leads to increased revenue and that increased revenue comes with high EBITDA flow through because most of our fixed costs are already covered across the footprint.
The second lever of our organic growth is expanding across our existing footprint with expansion projects focused on four markets.
Indonesia, Singapore, Chicago and Silicon Valley. These are markets, where demand is strong and our occupancy is high so we want to ensure we have available inventory for our customers.
Earlier this year, we announced expansion projects in London, Chicago, and Silicon Valley to meet increased customer demand.
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 offerings, all high flow through services that increase our revenue per square foot decreased the likelihood of churn and provide customers with additional overall value.
These organic growth initiatives can be augmented by inorganic opportunities as well, we intend to focus our geographic expansion efforts in international markets, which we believe adds to our strategic positioning we.
We will also pursue the acquisition of individual data centers or data center platforms. When it makes sense strategically.
That being said, we will be opportunistic in our inorganic pursuits and decisions will be driven by prudent capital allocation and our internal return hurdles.
In summary, we're very pleased with our third quarter results as they continue to validate the competitive strength of our platform and our go to market execution.
Now I'll turn the call over to Carlos to cover the financial results in more detail.
Thank you Nelson and good morning, everyone and thank you for joining us for our third quarter earnings call.
As Nelson mentioned, we are pleased with our third quarter performance, which we believe validates our go to market strategy and clearly reflects continued strong customer momentum and business execution.
Before diving into the results, we wanted to share our excitement at being recognized for our hometown business Journal for our recently completed merger with Starwood last month, we received a financial deal of the year Award, which is an honor we were proud to receive.
Turning to slide 10, total revenue for the quarter increased by $5 1 million or two 9% year over year to $177 $1 million, while recurring revenue increased by $5 8 million or three 5% year over year to $169 3 million.
The solid revenue performance can be attributed to continued momentum in net bookings performance during Q3, which increased nearly 80% year over year.
Interconnection revenue represented 11% of total revenue for the quarter and grew 17% year over year.
Core revenue as shown on slide 11, which excludes lumen revenue increased by $12 5 million or eight four year over year to $161 million.
Gross margin was 46, 3% a year over year increase of 290 basis points, primarily attributable to an approximate $4 million recovery in relation to NH settlement with a vendor.
And $2 million in lower installation cost as a result of efficiency initiatives.
This was somewhat offset by higher utility costs, driven primarily by electricity rate increases and a slight increase in power consumption.
As it relates to power cost specifically, we have the contractual flexibility pass through to pass through increases in power cost, which covers more than 85% of our contracts.
While energy has become a widespread topic, we continue to expect minimal impact from this as reinforced by our increased guidance for 2021.
Transaction adjusted EBITDA increased by $3 5 million or six 4% year over year to $58 1 million.
Principally due to higher revenue and improvements in cost of revenue.
Transaction adjusted EBITDA.
32, 8% increased by approximately 110 basis points year over year, driven by top line growth and operating leverage.
Transaction adjusted EBITDAR increased by $1 3 million or one 8% year over year to $73 8 million, which equates to a margin of 41 seven et.
As a reminder, we view transaction adjusted EBITDA as the best metric for comparing our performance to our peers because it had just four asset ownership structure.
Annualized core bookings increased approximately by approximately two 5% over the same quarter last year, driven by customer momentum and strong channel partner contribution.
Okay.
Average monthly core churn of 0.7% for the third quarter improved 20 basis points year over year and represents the lowest quarterly level in more than seven quarters.
As detailed on slide 14 core MRI increased to $48 6 million from $47 5 million exiting last year, primarily due to $1 3 million of net installations.
On slide 17, we have provided a breakdown of our capital investments.
Between the major buckets of expansion maintenance and corporate.
Q3, Capex was approximately $7 million above the year ago level, primarily driven by growth capital to support the demand and expansion projects with the cost previously discussed previously, including London Silicon Valley and Chicago.
As a reminder, we expect elevated levels of Capex in the second half and into 2022 are some of those projects near completion, which we highlighted when we increased our outlook for capital investments last quarter.
Both maintenance and corporate Capex were down modestly year over year, primarily due to timing of projects.
Supply chain disruptions have been a popular topic and we're in a privileged position to have very limited exposure or exposure to the challenges that may be felt throughout the industry.
Given where we are in the development cycle, we just arent seeing an impact.
As we have discussed previously the capacity we have available requires limited growth capital and as it relates to maintenance spend we build our loan pipeline by ensuring we have the equipment, we need on hand in advance of needing to perform routine maintenance.
In addition, our enterprise bare metal product provides customer with supply chain challenges the flexibility to quickly deploy infrastructure in our data centers.
Now turning to slide 18 for an update on our balance sheet and capital markets activity.
Leverage has improved significantly on a sequential basis with financial net leverage declining to three seven times from $5 six last quarter.
We're trending closer to our long term target of three times net financial leverage and are confident that we can continue to delever as EBITDA growth gross and debt levels remain constant.
We view this metric as the best way to measure the health of this business.
We can better control of the different variables.
You can also see on this slide that lease adjusted leverage improved one two turns to six three times in the third quarter.
Additionally, we recently obtained a financial commitment from professional bank for an equipment credit facility in the amount of $10 million with an interest rate of 4% and fully amortizing over 60 months.
As you would expect the financing commitment is subject to customary conditions.
To date this represents the lowest rate and longest term financing with secured doing has a working capital position as we procure <unk> and critical power and cooling equipment throughout our global portfolio further strengthening our financial position.
As you likely saw from our recent press releases, both S&P and Moody's upgraded our ratings and assigned stable outlooks to our credit.
This is a positive step by both agencies and reflects the strength of our interconnection platform the expectation for solid revenue and EBITDA growth and our increased liquidity following the merger with Starwood.
We appreciate the support of the rating agencies and believe that we can continue to grow the business effectively to meet customer demand, while also creating long term value for our key stakeholders.
Finally, turning to 2021 guidance on slide 19, we are pleased to raise our outlook for both revenue and EBITDA based on our strong year to date performance.
We now expect total revenue in the range of $692 million to $706 million.
An increase of $7 5 million at the midpoint or one 1%.
We also now expect transaction adjusted EBITDA of $223 million to $227 million, an increase of 5 million at the midpoint of two 3%.
For modeling purposes, we continue to expect our share count to be approximately $166 million at the end of the year.
We continued to expand expect expansion capital expenditures for the full year to be in the range of $65 million to $80 million supporting on expansion projects that I mentioned earlier.
And with that thank you all for your continued support and for joining us today to discuss our third quarter results.
We would like to open the floor now for questions operator please.
We will now begin the question answer session. SaaS question you May Press Star then one on your Touchtone phone you're.
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Our first question today comes from James Breen with William Blair. Please go ahead.
Thanks for taking the question just can you talk about.
What are the factors that you see in sort of improving revenue growth, whether it's expanding existing facilities or increasing penetration.
Shifting facilities.
And then also just on the Capex side.
It's moved up a little bit as a percentage of revenue.
How do you feel about that going forward as sort of a mid teens total capex capital intensity, the right area to be in.
Yeah.
Hey, James Let me, let me address the revenue and then I'll pass it on to Carlos for the Capex look because we have the available capacity in the core markets. The the revenue growth is a function of our continued bookings momentum right. So we adjusted our go to market.
Execution strategy, a few quarters back we have seen great results from that both on the booking side and also decreasing churn and so that net bookings is what's driving occupancy which is whats driving revenue. We expect that to continue to drive the revenue growth and that really is the focus of the team at the moment.
Carlos from Us from a Capex perspective, you may want to yes.
It's a difficult one because he is going to be very much driven by.
How much more do we need to add from a capacity perspective going forward. So it is going to be a little bit lumpy from that perspective, I would say.
I would expect next year to be lower than this year simply because we're adding capacity this year and the spend tends to happen a few quarters before you start selling it out.
So.
I would think about it differently, which is the things that are constant tend to be your maintenance, which we've always guided to about 3% and then your installation capex would tends to roughly come out at that same number I think.
That's the baseline capex and from there it's going to depend on when do we added specific capacity around our key markets.
Yes.
So.
Your current occupancies in the slides that 69%.
How do you think about that going forward.
As you move that up is when you get to the mid Seventy's is at the point when you think about it because we have it.
Yes, build some new buildings expand a little bit faster.
Yes, because you are starting to sell out of an existing facility.
Yes, so the 69 call. It is our blended for the entire portfolio. Obviously, that's a decision that is done on a market by market basis. What we've said before is that one of our call. It high growth high demand markets reaches that mid seventies, we start to add capacity and that's exactly what we've done this year.
Around Silicon Valley in London.
And anything just on the obviously bookings improving.
Yes.
Penetration of this sales channel.
Anything that we are going particularly well as the customer is taking.
Multiple sites for you.
Activity et cetera.
James What I would say is we're differentiated right. So we have more global scale than many of the providers that are out there. We couple that with our strong interconnection, which is top three in the industry and then when you think about our innovation and how we can make it easy for customers to consume the data center, it's a differentiated approach and that's truly what's driving.
Whats driving our bookings momentum and we expect to continue with that message continue to innovate and then continue to make it easy for our partners to leverage our data centers and their pursuits as well.
Great. Thank you very much.
Again, if you'd like to ask a question Thats Star then one Star then one task in question.
Our next question comes from Michael Rollins from Citi. Please go ahead.
Hi, Good morning was curious if you could provide more context on where you are capturing the bookings geographically.
And how does that compare against the pipeline progression that you were previously reported.
Hey, Mike So two things on the pipeline progression of the pipeline remains strong. So we take a snapshot at the beginning of every quarter and so that pipeline momentum.
Is still continuing from a bookings perspective, we've always talked about some of the markets, where we have higher occupancy, we keep mentioning London, Chicago Silicon Valley and so those markets are still performing very well, but we actually had significant bookings momentum across a number of markets.
And so that one of the things I'm. Most pleased about is it's not only bookings in a small number of markets, but across across the broad platform, both direct and through channel partners.
And I apologize if I missed this did you provide a backlog exiting the quarter.
We did not.
No Mike we did not provide a backlog.
Is that something thats in the future that youre going to pull back on or is that something maybe in the future. You can provide in that theres just qualitatively any context on the book to Bill and maybe how that compares.
Well think about LTV honest it wasn't in our plans, but but we're happy to go back and think about it.
Thanks.
Thank you.
Ladies and gentlemen, there are no questions at this time. So this will conclude our question and answer session I would like to turn the conference back over to Nelson false circa president and CEO for any closing remarks.
Well. Thank you all for your time. This morning, we look forward to giving you an update next quarter. Thank you.
The conference has now concluded. Thank you for attending today's presentation you may now disconnect.
The conference has now concluded. Thank you for attending today's presentation you may now disconnect.