Q2 2022 Cyxtera Technologies Inc Earnings Call
Cloud co location on a global scale to meet the needs of the modern digital enterprise.
Our results from the second quarter also point to the continued positive momentum from investments in our channel program.
Annualized channel bookings in the quarter increased by $1 4 million or 23% year over year to $7 $5 million.
The channel produced about a quarter of the total bookings and highlights the significant progress we've made in this area.
Our successful sales efforts are delivering strong revenue performance for the company.
Revenue increased by $8 7 million or four 9% year over year in the second quarter.
Core revenue increased by $9 4 million or four or five 9% year over year.
Transaction adjusted EBITDA in the quarter decreased by $2 3 billion.
Were a negative three 8% year over year, but increased by $1 4 million or two 4% quarter over quarter.
As we look at EBITDA performance keep in mind that second quarter 2021 with service last quarter as a private company. So we have successfully absorbed significant public company costs.
While the fundamentals of our business continue to show strength, we do expect to experience some impacts from the macroeconomic trends that are affecting providers across the industry for the remainder of 2022.
The increase in utilities costs, we have experienced during the first half of the year is expected to accelerate during the second half of the year.
Although we have established a cost recovery process that successfully passes through over 90% of the increased cost to our customers. There is an approximate 90 day lag for this process.
Therefore continued increases in utilities costs in the second half of 2022 cannot be completely recovered in this fiscal year.
The completion of our northern California, datacenter has been delayed due to a combination of local regulatory and supply chain challenges.
The data center is still scheduled to be completed in 2022, the delay will impact second half 2022 performance.
FX will negatively impact second half 2022 performance if it remains at current rates.
Although we cannot fully quantify the exact impact of these items at the moment, we believe that our full year EBITDA performance will now be in the low range of our initial 2022 EBITDA guidance.
As a result, we are modifying 2022, EBIT guidance to 232 million to $242 million, representing a lowering of the midpoint by two 9%.
Revenue and Capex guidance remain unchanged due to our continued go to market momentum.
Although the lowering of the EBITDA guidance range is disappointing we are energized by the strong performance of the base business and recognize that these challenges are mostly timing in nature.
Second half 2022 utilities cost increases that are not recovered in this fiscal year are expected to be recovered at a 90 plus percent attainment in 2023.
The Northern California data center is expected to deliver full revenue and EBITDA impact in 2023.
We remain committed to the long term success of <unk> and are confident that our current trajectory positions us well to achieve our long term objectives now let me pass it on to Carlos for some additional detail on the results.
Thank you Nelson good morning, everyone and thank you for joining us for our second quarter 2022 earnings call.
We're pleased to report another quarter of solid financial performance driven by solid strong enterprise demand.
Our second quarter and year to date financial and operating metrics are a testament to the success of our go to market strategy and the trust that our customers have et cetera.
The fundamentals of our business remain as strong as ever.
In a healthy pipeline stable pricing and low churn.
Moreover, we closed the quarter with record net bookings the best in our history.
We're confident this momentum will drive revenue growth and higher occupancy rates for the remainder of this year and into next year.
Before diving into our financials I wanted to take a moment to note that like our peers, we're not immune to the challenging macroeconomic headwinds impacting our sector and the broader economy.
Although we have been able to compensate for these challenges in the first half of the year and we're confident that the underlying health of the business is unaffected.
And prudent with our guidance as energy prices and FX remain extremely volatile and supply chain constraints persists.
I will speak to the impact or the impact of each one of these variables on our outlook shortly.
Going a little deeper into our financials now.
Turning to slide nine total revenue for the quarter increased by $8 7 million or four 9% year over year to $184 1 million.
While recurring revenue increased by $6 9 million or four 1% year over year to $174 2 million.
Driven by strong overall demand.
This strong momentum continues to validate our strategy to provide easy to consume cloud micro location on a global scale to meet the needs of the modern digital enterprise.
And Q2 interconnection revenue increased by one 2% year over year, excluding lumen rapid.
Core revenue as shown on slide 10, which excludes <unk> revenue increased by $9 4 million or five 9% year over year to $168 8 million.
Gross margin was 46, 5% a year over year increase of 99 basis points, primarily attributable to increased revenue more efficient installation cost some lower expense related to timing differences and less rent expense all of which were partly offset by higher utility costs.
And FX.
Energy costs.
Continue to be a key focus for <unk>.
As they are for the other players in our industry.
Slide 13 indicates the year over year percentage increases in power costs for each quarter of this year.
We expect power cost to peak at the end of Q3 and then moderate.
For the full year, we anticipate power cost increased 17% compared to the previous year with the majority of this call coming are being back loaded in the year.
As we have discussed in previous quarters, we have the contractual flexibility to pass through increases in power costs, but we consider this approach very carefully because we understand that this is the.
Impact of our customers.
While we've been thoughtful in how we communicate needs may decreases we intend to exercise this option.
Also note that there is a temporary timing lag between the cost and revenue, Missouri State Materialization, which is roughly 90 days.
We expect to recover approximately 90% of the cost.
Our costs on a run rate basis.
As we expect our cost to keep rising in the second half. However, we will be not be able to recover this incremental cost incurred in Q4 until the first half of next year.
Transaction adjusted EBITDA decreased by $2 3 million or three 8% year over year to $60 million.
Principally due to increases in SG&A costs.
As you are aware 2020 do include public company costs that we did not incur in the second quarter of 2021.
Adjusted for this public company costs and transaction adjusted EBITDA would have been approximately $62 million.
Starting with the third quarter our year over year comparisons will include this public company costs for both periods.
The majority of our SG&A increase in Q2 is related to onetime nonrecurring expenses and equity based compensation.
Transaction adjusted EBITDA margin of 32, 6% declined by approximately 295 basis points year over year adjusted for the public company cost transaction adjusted EBITDA margin would have been 33 seven.
Transaction adjusted EBITDAR.
Transaction adjusted EBITDA decreased by $2 8 million or three 7% year over year to $74 8 million, which equates to a margin of 46.
As a reminder, give your transaction adjusted EBITDA is the best metric for comparing our performance to our peers because you did just for our asset ownership structure.
Average monthly churn of <unk>, 7% for the second quarter improved by approximately 20 basis points compared to the same period last year and was well within our expected range.
Our net bookings represented the best quarter to date in the company's history.
Stabilized occupancy rate increased 580 basis points year over year to 74, 2% driven by strong industry demand and <unk> differentiated offering.
Core MLR, excluding FX increased by $2 2 million to $50 8 million, primarily driven by net installations.
Year to date our MLR.
Our per capita decreased 2% as contact that ramp start to flow through the calculation.
On slide 18, we have provided a breakdown of our capital investments.
Overall capex is up on the back of higher expense activity around key markets and normalized maintenance capex levels versus Q2 in 2021, which was lower due to the timing of project execution.
Now turning to slide 19 for an update on our balance sheet and capital markets.
We continue to make good progress on our deleveraging journey.
In Q2, our financial net leverage was three eight times a decrease from five six times at the end of Q2 2021.
On a lease adjusted basis, our financial net leverage was six three times, which is one two turns lower than the same quarter last year.
As it relates to our capital structure and future financing opportunities. We believe we still have sufficient runway ahead of us with our term loan maturing in 2024.
That said, we continue to evaluate all financial alternatives to support our business model and growth plans.
While we are not under any pressure to address financial needs in the near term. It has always been our philosophy to get ahead of these items in a thoughtful and timely manner, hence we intend to be strategic in how we address our near term liabilities.
I would like to provide an update on our full year guidance for transaction adjusted EBITDA.
Nelson said, we're now expecting the reduction in adjusted EBITDA for the full year to be in the range of $230 million to $242 million.
This revised guidance is primarily due to the macro issues I highlighted earlier, which we view as mostly timing related rather than indicative of the underlying health of the business.
As I mentioned, we intend to pass on the increase in power cost to our customers, albeit there is a timing lag associated with that approach.
For the FX impact, although we not we're naturally hedged by reinvesting our British pound and Canadian dollars in those markets. The translation impact is still there as we reported.
To provide some context approximately 21% of our revenue is non dollar denominated.
The British pound, representing about 10%, Singapore dollars or 5%.
Indian 4% and the remainder being euro denominated.
We estimate the full year impact of the excellent transaction adjusted EBITDA to be approximately $2 million.
Finally, we are experiencing some implementation delays UCT supply chain pressures with our northern California data center being the biggest impact.
Which will also impact our full year transaction adjusted EBITDA.
While these delays did not reduce the total contractual revenue received a duly impact the timing of revenue recognition.
As our revenue on Capex guidance, we're reiterating our previous guidance before year, which you can find on slide 20 in our earnings release.
In summary, our second quarter results were driven by strong underlying demand and crisp execution. Moreover, we expect this momentum to continue as we have seen no slowdown in demand of deterioration in the business fundamentals.
While we are facing some challenging macro headwinds in the near term. We believe we have taken adequate measures to navigate them without impacting our long term trajectory.
With that thank you all for your continued support and for joining us today to discuss our second quarter results.
Operator, please open the line for questions.
Thank you.
If you would like to ask a question. Please press star followed by one on your telephone keypad. If for any reason you would like to it makes that question. Please press star followed by two as a reminder, if you are using a speaker phone. Please remember to pick up your handset before asking your question.
Our first question today comes from the line of Michael Rollins from Citi. Please go ahead. Your line is now.
Thanks, and good morning couple.
Couple of questions first on the guidance itself. If you were to unpack the revenue guidance.
How are you thinking about the organic impact relative to the FX and with guidance be improving if it wasn't for FX.
Or are there some other factors that we should be thinking through.
In the current.
Update and then secondly.
As you consider the the business plan that <unk> Terra originally outlined and the progression of revenue relative to utilization.
How is that trending.
And is there any notable observations where you could get more revenue for the utilization that you are anticipating over time or less or similar.
Yes.
Hey, Michael Thanks for joining and thanks for the question, let me take the second one first and I'll pass it off.
So Carlos for the FX I think from a from a revenue perspective that the occupancy Woodbury piece on where we are that's all driven by net bookings pricing is stable to up cabinet is stable to up and so that's what's driving and will drive the revenue growth.
Along with the occupancy goes where we're pleased with that.
That trajectory from an FX perspective comments you made one yes, so Mike I think there's more than just FX on the revenue impact affecting Nelson mentioned and I also reiterate that this delay in northern California means that a significant piece of the new capacity won't come online this year will come in.
By next year.
Also an impact on revenue now with.
We've over performed up until this point from a revenue perspective, and that's why we're keeping items where it was originally.
But you can't just blame FX for the drag on that number.
And the other thing I'll mention Mike just added color because we may get this question later, we don't we don't do a lot of new builds compared to some of the competitors. So we are somewhat shielded from the supply chain. In this particular instance, with this data center, we are experiencing it.
It's something that again, it's timing.
Thanks very much.
Thank you.
The next question today comes from the line of Sami Badri from Credit Suisse. Please go ahead. Your line is now.
Thank you.
No.
One thing as I look at the way you guys are explaining this power cost type impact to your full year guidance you guys have kind of explained it and show that in a little bit of a different way than we saw compared to your peers.
Just kind of give us an idea as to fix their specific way of impact that's manifesting itself into your numbers or is this industry standard.
The impact for your numbers just so you have a better idea of how to interpret what's going on underlying business.
Yeah.
Look Sami tough to talk about the rest of the industry on how our peers do it from our perspective I will say that.
Retail model isn't all that tower model versus may be metered power models, the majority of our power.
It's all in and so our boutiques as we as our power cost increases we go through the process of passing on that power cost to our customers and so what we're describing and we're giving it.
And I think of it as a good level of detail to give visibility on what we're doing with it and why it's really timing in nature and we're not concerned that it's a fundamental impact to the business.
<unk> power customers as their rates go up just pay those those metered power rates, we are primarily an all in.
Power approach with our customers hopefully that helps.
I wanted to add.
I think the retail what we've presented it the way we presented it is because we wanted to highlight two things that we.
We have been addressing this problem where stadium points for us and for our shareholders. The first one being that we're talking about.
I'm precedented quarterly movements in the cost base.
That's something that I think we all know it and we wanted to reemphasize that.
Contrary to what historical averages of two 3% we're looking at.
12% or more in any given quarter and so that's one difference. The other one is that it's timing related.
We've said it is we can recover 90% plus of those costs, but there is a timeline and so what we wanted to emphasize this.
The fundamentals of the business are not affected it's a timing difference and Thats why we presented it away with it.
And also why we're so pleased with the churn number right because we see that this does not impact that this has an.
Effectively a price increase to customers, but we're still seeing customers value, what we provide them and we're not seeing in the maturing number. So that's why it's purely timing from our perspective.
Got it.
Thank you for that and my other question has to do with your occupancy increase of 500 basis points year on year and the backlog coming in the way that it is is this being driven by one or two or a specific cohort.
Customer type coming into the actual business or are these existing customers expanding footprints can you just give us some characteristics on both backlog and the occupancy increase.
So honestly, we're seeing strong demand across the entire footprint by both new logos and <unk>.
Existing customers can't really point to any specific.
Vertical or customer type.
We think it's healthy for the business.
That's what we that's what we want to see and I think the second half of the question was more about occupancy could you repeat the second question and if you don't mind.
Yes, so if I just think about the occupancy increase right. There one customer that drove say 200 to 300 basis points of that 500 plus or.
Is it very broad based across the portfolio you're seeing.
Several contracts get signed deployed occupancy increases across the whole portfolio Im just trying to understand customer characteristics within your portfolio.
So we're seeing we have multiple customers thats, what drive what's driving bookings, which ultimately drives our revenue in every quarter, we have some some big deals.
We signed there is some big deals this quarter as well, but I wouldn't point to any particular customer or particular market that's driving.
Occupancy and what we've seen in that occupancy trajectory over the last few quarters.
In terms of backlog and I'll talk a lot about we don't give a number.
Bob but obviously when you have the strongest net bookings quarter that <unk> had.
In the company's history here in the second quarter all of that becomes backlog as youre deploying that over the second half of the year, which also points to why why we havent unchanged revenue guidance, we feel really good with where we are from a demand perspective.
Got it thank you.
Thank you.
The next question today comes from the line of Frank Louthan from Raymond James. Please go ahead. Your line is now open.
Great. Thank you just to break that down the guide a little bit more it looks like the midpoint of EBITDA down about 7 million appears maybe half of that is FX can you give us sort of the breakdown between.
Northern California data center, what the extra cost are riding on that.
And then and then ultimately how much the power cost there and exactly how much the power cost you you said you'll be recovering it.
In 23 can you give us a range that you think you can expect to recover in dollars and 23 that will be additive.
There as well that'd be great. Thank you.
Yeah.
Yes, Frank So let me start with the last piece because I think the challenge that we're facing is that if you look at our June year to date performance. We're on track on all the metrics correct.
The challenge that we're seeing is that when we look at our vendors and we look at our advisers and we'll look at the forward curve for energy.
We are seeing is the curve that continues.
<unk> continues to materially move forward sorry.
And that creates this timing gap that we felt before now the problem today is that we're speculating.
With the curve.
That literally changes almost everyday I would tell you that when we talked to some of our advisers on this front they tell us.
Two years ago, we would revise the FERC quarterly.
Six months ago, we would revise the curve weekly today, then revise the curve.
So it's hard to give you a number of what that 90% recovery means because it is going to be predicated on what's the actual cost that we end up in court.
The part that we are comfortable with is that whatever the cost that we're going to recover 90% on a run rate basis and the only challenge is whatever happens in the fourth quarter, that's going to be a gap to the 2022 financial statements will recover them in Q1, but that's why it's hard to pin a number on that part of the question.
And then on the gap the guidance, what I would say roughly speaking I would think about this.
Yeah.
A third for FX, a third for the northern California delayed and about a third for the.
The energy.
Dave or timing gap of Q4.
If the curve performance as we have forecasted it quite as the purpose different that balance will be different as well.
Alright, great and what are you seeing what are you doing as far as any price increases on your base pricing and any changes on escalators.
For new contracts and then on the other side of that for the leasing cost that you have any concern that you could see an increase in your underlying operating cost as.
Maybe some of your landlords, maybe raising pricing or what's the sort of the next the next step or that you may face some increases on that thanks.
So Frank let me cover the pricing and I'll pass it onto too.
Carnival's with leasing from a pricing perspective look the actual hospital power cost is effectively a price increase.
On to the customers. So that's happening in terms of pricing in general we have increased our prices.
Total markets, we've always been consistent that we priced at the market level, obviously as costs increased market.
So that so we have increased our prices.
Across multiple markets in response to that of course automotive companies.
And just remember that our leases are long term leases.
We're always talking about a 15 year lease with five year options in which pricing is pretty much locked in.
And so no we're not seeing and we don't theater.
Every pricing movement.
Thanks.
Alright, great. Thank you.
Thank you.
As a reminder, if you would like to ask a question. Please press star followed by one on your telephone keypad.
The next question today comes from the line of James Breen from William Blair. Please go ahead. Your line is now.
Great. Thanks for taking my question.
You talked a little bit about the California project.
Any.
Update on the timing there in terms of when it can set to open next year and how much it delays revenue and what's the initial sort of revenue projections are.
Given the size of the facility.
Yeah.
Let me address the timing of Carlos can address some of the projections. The timings, we still expect to complete the data center of this year, which.
It's just going to be delayed.
Half of the year, so we won't see the full impact of that data center coming online until 2023.
But we still expect to complete the data.
And from a protection perspective, we do not provide disclosure on a facility by facility basis, but certainly giving you a hint of what the delayed might be on a quarterly basis, it's not a full quarter, but roughly speaking about a third of the change in guidance from an EBITDA perspective is going to be related to that delay I think you are getting.
With that.
Yeah.
Great. Thanks, and then just one more just in terms of supply chain issues around some of your customers has the uptake as customers first getting the facility and then grow over time as.
Has that slowed at all as a result of supply chain issues are you seeing generally.
Historical uptake.
Yes, what I would say is the supply chain constraints.
Our real for Us again.
Most of that because we don't have a lot of new construction I would say there is slight delays in being able to implement contracts.
Significant nothing that we can't manage through what we've been able to manage through that.
For the first half of the year, it's not slowing down demand I want to make that very clear the customers are drilling.
Both new logos and existing customers, but our ability to translate into revenue there is a slower bit of implementation that you see.
Nothing that's not manageable.
And if I may add.
We're seeing the positive impact of that supply chain challenges for our customers and the fact that it's starting to affect our implementation timing in that we're getting either more interest in using bare metal as a stepping stone for those deployments a good point.
Great. Thanks.
Thank you.
There are no further questions registered at this moment.
To pass the conference back over to Nelson from Jacobs for closing remarks.
Alright, Thank you very much for joining us for the call. This quarter, we look forward to updating you guys next quarter as well. Thank you.
Good. Thank you all for your participation.
This concludes today's conference call you may now disconnect your lines.
Okay.
Okay.