Q2 2023 Iron Mountain Incorporated Earnings Call
[music].
Good morning, and welcome to the Iron Mountain second quarter 2023 earnings conference call.
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I would now like to turn the conference over to Jillian Tilton, Senior Vice President and head of Investor Relations. Please go ahead.
Thank you Andrea good morning, and welcome to our second quarter 2023 earnings Conference call on today's call. We will refer to materials available on our Investor Relations website. We're joined here today by Bill Meaney, President and Chief Executive Officer, and Barry Heightening, Our executive Vice President and Chief Financial Officer. After prepared remarks, we'll open the line.
For Q&A today's earnings materials contain forward looking statements, including statements regarding our expectations. All forward looking statements are subject to risks and uncertainties.
Please refer to today's earnings material the Safe Harbor language on slide two in our quarterly report on Form 10-Q for a discussion of the major risk factors that could cause our actual results to differ from those in our forward looking statements.
We use several non-GAAP measures when presenting our financial results. We have included the reconciliation to these measures in our supplemental financial information and with that I'll turn the call over to Phil. Thank.
Thank you Julian and thank you all for taking time to join US today for our discussion of our record second quarter results. Our team has once again exceeded expectations with performance reflective of our strong legacy of customer service, our laser focus on execution and our dedication to finding innovative solutions to serve our customers as they evolve their businesses.
I'm excited to share that in the second quarter, we achieved our highest ever quarterly revenue of $1.36 billion and record EBITDA of $476 million. This performance is ahead of the expectations. We provided last quarter. The enhanced operating model. We created through project Matamoros is continue to prove successful.
As our commercial team is empowered to sell the entire mountain range of products and solutions across our portfolio. We are pleased with the high quality and wide range of our offerings today, which positions us to be a nimble partner to serve our customers' needs.
To highlight some of our results in the second quarter, we delivered organic storage rental revenue growth of 11% and drove high teens organic growth in both our data center and digital services businesses. We are also pleased to announce that our board of directors has increased our quarterly dividend dividend per share to 65 cents or two.
And 60 cents per share annualized commencing with our third quarter dividend to be paid in October as we have said before when our E. S. F O payout ratio reached the mid to low sixty's as a percentage we would increase the dividend our payout ratio at the end of the second quarter was just under 64%.
I would like to begin with a broader discussion of some of the customer wins, which led to our record second quarter results. Let me start with records management, where our success was derived from both new and existing customers.
One significant win we would like to highlight this quarter was with a large not for profit hospital system faced with rising lease costs. Despite a shrinking shrinking storage footprint the customer turned to us for an alternative to storing in their own space.
Our smart source solution will address their needs over the next three years, it will deliver cost efficiency and optimized storage space, where the customer before they transfer their records to an iron mountain facility for secure future management.
This win exemplifies our commitment to solving our customers' problems and providing them with tailored solutions.
The COVID-19 pandemic has led organizations around the world to reassess their current real estate portfolios in order to accommodate remote and high bred work our customers are optimizing their real estate to accommodate changing working practices. We are able to offer solutions that demonstrate the breadth of our portfolio and the value of part.
During with Iron mountain across our products and services. One example is a customer who chose our clean start solution to remove and relocate records office equipment and I T assets for more than 60 offices across North America that are being closed or decommissioned over the next two years.
Thanks to our asset lifecycle management solutions. We are also helping this customer to decommission I T assets from these offices securely and sustainably.
We continue to see growing momentum for our digital business with customers turning to us for solutions in areas such as public sector industry focused solutions in end to end business process management. For example, we are proud to be supporting the digitization of real estate and mortgage record held by the Hellenic land registry of ins.
Grief under a two year contract worth $35 million, we demonstrated our understanding of the public sector in Greece, and the European Commission's recovery and resilience. This resilience facility, which is funding this project through the Greek government to support European economies as they transform the way they support their citizens.
This is a breakthrough deal that will provide further opportunities to support similar digitization projects elsewhere in Europe .
Another example of how our digital business is enabling us to develop and deliver transformational solutions for our largest customers is with one of the biggest financial service companies in the United States.
This customer is outsourcing its noncore services and had selected in iron mountain to manage all of its records.
Our end to end solution ensures that secure chain of custody regardless of media format for this customer leveraging our image on demand service and insight platform to integrate seamlessly with their customer success management system.
This game changing deal demonstrates the power of partnering with Iron mountain to accelerate our customers' digital transformation.
Staying with our digital solutions business, our 25 year relationship with a fortune 500 gas and electric utility company continues to be a powerful example of how our customers turn to iron mountain because of the range of solutions. We can provide to ensure our customer is compliant with all legal and regulatory re.
<unk> weird digitizing around 20 million images from 8000 boxes stored with Iron mountain over the next three years.
Having provided records management and data management services since 1998, our customer was confident in our digital solutions secure chain of custody information governance expertise and ability to scale up quickly to deliver this project.
To conclude with records management on the 29th of June we acquired the controlling interest in clutter a tech enabled on demand consumer storage company. We were previously at minority Investor and clutter and provided storage and operational services through a commercial partnership.
This acquisition makes us the industry leader in Valley self storage services in North America.
Turning to asset lifecycle management, we continue to see muted pricing for the largest part of this business, which relies on reselling used memory hard drives and Cpus, we receive from Hyperscale.
That being said pricing has stabilized and we do expect to see an improvement as we head into next year.
Moreover, you will recall that our a L. M business has three components hyperscale decommissioning, which is highly dependent on component pricing.
Enterprise, iPad or I T asset disposition and original equipment manufacturers or Oems.
And these late latter two categories, we are seeing marked growth in traction for.
For example in the enterprise segment, our focus on cross selling the mountain range of products has driven bookings up 175% versus second quarter last year for.
For the OEM segment, you will recall that we signed our first MSA our Master services agreement in this area last quarter and we have added another MSA with a second OEM this quarter.
Turning to specific wins in the a L. M area. A good example of our cross selling appeal Congress from the health care industry.
A customer which has benefited from iron Mountain's Records management solutions for many years has asked us to manage the recovery decommissioning disposal and recycling of I T assets at over 2000 locations in the United States.
The strength of our relationship and our customers inherent trust in Iron Mountain has resulted in an L M contract and renewal of our existing services for the next five years.
Also in a L M. Our team secured a contract with a leading software and technology company to help them decommission racks of servers and nonessential I T equipment from their data center.
Opportunities like this where we are able to extend the value we provide to customers have been significantly enhanced thanks to the industry knowledge and expertise we have gained through our acquisition and integration of I T renew.
We remain very excited about a L M. Whilst component pricing remains a drag for part of the business. The growth we are achieving in the services side of the business shows how iron mountain's brand strengths around security and reliability are a differentiator in this fast growing area.
Moving to our data center business through the first half of the year, we leased 55 megawatts, which includes $2 seven megawatts. This quarter as we said in May the first quarter was particularly strong as we signed some deals earlier than expected due to our strong pipeline. We now feel confident we will exceed our original projection of 80 megawatt.
In 2023. This confidence is thanks to our teams delivering record new sales in the first half as well as the size of our late stage pipeline from some of our largest customers as they add new capacity with the growth of AI.
For example, we are well positioned with nearly 120 megawatts of unleashed capacity on our Nova campus with power fully secured in this very important market. We are pleased to note that pricing is moving up appreciably.
Staying with our data center business I would like to highlight a win that demonstrates the exciting opportunities to expand our solutions and services for customers with a footprint in India and the value of our joint venture with web works in the country.
As we have discussed before India is a key focus for our company's growth and our progress there is a major win for our business in the second quarter, we closed a deal with a multinational media processing company to provide almost one megawatt of storage capacity at our mum by data center with the potential to add a further five megawatts at this.
<unk> and extra capacity at other locations in India.
Our data centers teams experience of handling high density racks iron mountain's wider understanding of the media industry and our expansion plans in Mumbai helped us to convince our customer that we are their best long term partner as their capacity needs grow.
Finally, I would like to mentioned an example of the success we are enjoying in our Crozier Fine Arts business as we build out one of the few globally integrated logistics storage and top quality services businesses in the art World.
Recently, we partnered with a major art gallery in the United Kingdom to support an exhibition by a well known artist. This involves detailed planning and preparations to pack and transports 61 fragile sculptures from the U S Mexico and Continental Europe . We are proud of the unique expertise that our crozier teams provide.
For our customers and to be associated with important exhibitions like this one.
To conclude we are proud of the record results. We delivered this quarter as this is evidence that our strategy is working.
As we continue to leverage the potential of our entire mountain range expand our footprint of storage and services and deliver tailored innovative solutions for each of our customers I could not be more grateful for the hard work of our Mountaineers are Matterhorn program is showing the way in delivering consistently strong sales growth.
Well, it's fueling <unk> growth and our dividend.
We are more energized than ever to continue reaching new peaks and I'm I am excited for the bright future ahead with that I'll turn the call over to Barry.
Thanks, Bill and thank you all for joining us to discuss our results in the second quarter. Our team achieved solid performance across all metrics exceeding the projections we shared in may.
Revenue grew to a record 1.3 dollars $6 billion up 5% year on year on a reported basis and 6% on an organic and constant currency basis revenue was above the expectations. We provided on our last call driven by outperformance in both our global rim and datacenter businesses.
For me a key highlight in the quarter is our organic storage rental revenue, which grew 11% I'll note. This performance was on top of a stronger year on year comp and represents an acceleration and rate of growth.
This reflects strong contributions from revenue management datacenter conventions and positive volume trends.
Total service revenue was $527 million down 1% on a constant currency basis. This was consistent with our projections, which factored in the previously discussed year on year component price declines importantly component pricing was consistent in the second quarter on a sequential basis.
While this represents a significant headwind year on year. We are pleased that pricing has stabilized as a reminder, that affects our I T renew business most prominently excluding R. A L. M business service revenue was up 8% on a constant currency basis. This would have resulted in total company revenue growth.
Of 9%.
Adjusted EBITDA was $476 million, a new record up 5% year on year with revenue management and strong datacenter commencement as being the key drivers adjusted.
Adjusted EBITDA margin was 35% in line with our expectations driven by revenue management and mix.
<unk> was $277 million or 94 cents on a per share basis up $6 million.01, respectively from the second quarter of last year. This was well ahead of the expectations, we shared on our last call.
Now turning to segment performance in the second quarter, our global rim business achieved revenue of 1.1 dollars $6 billion, an increase of $89 million year on year, reflecting organic revenue growth of 9%.
Revenue management and positive volume trends contribute to strong organic storage rental revenue growth of nine 2%.
We delivered organic service revenue growth of nine 3% driven by digital solutions, which were up 20% year on year and continued strength in core offerings.
Global rim, adjusted EBITDA was $499 million, an increase of $30 million year on year.
Turning to our global data center business the team delivered.
From a total revenue perspective, we achieved 17% growth on an organic basis.
Organic storage rental revenue growth was particularly strong at 22% driven by commencement and improved pricing.
As we projected datacenter services were down year on year, given the fit out work we were performing in the first half of last year. As a reminder, the second quarter of 2022 represented the last quarter of these specific fit out services, we will have a more normalized comp on this line going forward.
Data center, adjusted EBITDA was $54 million, representing 27% growth.
Turning to new and expansion leasing we signed $2 seven megawatts in the quarter, bringing total bookings year to date to 55 megawatts as Bill mentioned, we are well on track to achieve our leasing projections for the full year of 80 megawatts and in fact with the strength of our building pipeline. We have line of sight to exceed this projection.
Turning to asset lifecycle management.
In the second quarter revenue grew 4% on a sequential basis slightly ahead of the projections. We gave on our last call. We are seeing positive momentum across all three verticals of our a L. M business, which include Hyperscale decommissioning enterprise I CAD and Oems.
You will recall that China was mostly free of restrictions in the first half of last year, but it returned to tight lockdowns in the second half as a result, as we anniversary the second quarter comparisons going forward will be much more favorable.
While we are diversifying away from China. It is the largest market into which we sell components today.
At the beginning of this year as Lockdowns are eased while component volumes increased pricing declined to record low levels.
Industry analysts project marked improvement in pricing by the fourth quarter and even more significantly in 2024.
To be prudent we have not factored any pricing improvement into our outlook for 2023.
Turning to capital in the second quarter, we invested $320 million of which $287 million was growth and $33 million was recurring.
In 2023, we now expect total capital expenditures to be approximately $1 $2 billion up $200 million from our prior expectations. This reflects an increase to our datacenter development plans given our strong leasing year to date and building pipeline that I mentioned.
Turning to the balance sheet with strong EBITDA performance, we ended the quarter with net lease adjusted leverage of five one times, reflecting a meaningful improvement from last year. We have remained at this leverage level for the past three quarters and it marks our lowest leverage level since 2017.
Importantly, we expect to exit 2023 at this level, even with our increased investment in data center.
Turning to our dividend on a trailing four quarter basis. Our payout ratio is now 63, 9% an approximate 400 basis point improvement from this time last year as.
As you saw earlier today, we are pleased to announce that our board of directors has authorized an increase to our quarterly dividend of 5%, bringing it to <unk> 65 per share to be paid in early October .
This is consistent with our long term commentary that as our payout ratio settles into the mid to low sixty's as a percentage of F. O. You should expect the dividend to rise we remain dedicated to our disciplined approach to capital allocation as we are funding our growth objectives, while continuing to drive meaningful shareholder returns and now turning to.
Our projections.
For the full year, reflecting our performance in the first half and strong outlook. We are pleased to reiterate our full year guidance.
For the third quarter, we expect revenue in excess of $1 4 billion.
<unk> EBITDA approaching $500 million.
F F O of approximately $290 million and a F O per share of approximately 99 cents.
I would like to provide a bit more context for our guidance in terms of revenue our third quarter projection equates to growth of 9% as compared to the prior year.
To frame that I would recommend investors consider the following points.
First.
The prior year comparable in our a L. M business is much easier in the third and fourth quarters of this year as compared to the first half.
Second we have incremental revenue management actions, which will go into effect in the third and fourth quarters, and we will provide a nice tailwind.
Lastly, if you consider the underlying trends in the rest of the business growth has been accelerating for several quarters now as our Matterhorn efforts are driving performance for example, excluding R. A L. M business. The rest of the businesses growth rate was 8% in the first quarter, 9% in the second quarter and our projection is for 10%.
In the third quarter and just as a reminder, the fourth quarter of 2022 is our easiest growth comparable this year to.
To conclude our team continues to execute well and remained focused on driving our growth agenda, we have a growing and well diversified pipeline and we are positioned to achieve our objectives I would like to take this opportunity to thank our entire team for their efforts and contributions and with that operator would you.
Everything in volumes.
Okay, Hi, George This is Barry Thank you for the question.
Yeah, Let me help you with that from a standpoint of the way the decommissioning and component pricing business has been unfolding. This year as you know early this year late last year and to early this year component pricing was dropping quite appreciably and by about the February timeframe. It had reached.
Or essentially all time record lows and that's really across the gambit of component pricing from memory two Cpus all the various components that were selling and that has obviously been a significant impact for both.
Iron Mountain, but also for many other players in the technology industry I think importantly, what you've seen and I'm sure you would've been following this is many of the oem's have significantly reduced their production of new components, which is now limiting supply in the market place and of course.
<unk> used component pricing tends to directly correlate and follow with new and so what we've seen here since the.
The component pricing hit the lows in the kind of February timeframe. As importantly pricing has been very consistent in fact, some <unk> have been taking up we've seen that in certain elements of memory. Among other opponent pricing. So what we've worked into our outlook, though George.
<unk> is that we are keeping component pricing in our outlook for this year at this record level low levels and our thought processes. That's a prudent way to plan. When you look at industry analysts than theirs. In this is publicly available data. There are many estimates that project for component pricing to begin.
To lift as we move through the remainder of 2023 and in fact have very very sharp increases in most component pricing next year in light of supply and demand expectations.
As I said, we're not baking that into our 20 twenty-three outlook for prudent reasons. We are anticipating that are totally L. M business will be up just a few million dollars on a sequential basis in the third quarter and then we'll be up again in the fourth quarter, but that speaks to the point that bill made in his prepared remarks that for example in our enterprise I.
<unk> business bookings are up a tremendous amount in the second order year on year, we are winning more decommissioning business across that decommissioning vertical and of course R. O. M teams have been winning very important wins for us, which I think set us up very well for the intermediate and longer term in the for a broader asset lifecycle management.
Space volume on a sequential basis was essentially equivalent George which we felt good about and I would say the four pipeline as it relates to volume in light of what I've. Just mentioned is is favorable for us. So we feel that we are now getting through the hardest comps of the year you know as you know last year, we were seven.
<unk> 2 million 70 $172 million of revenue in the first quarter with <unk>, we were $83 million in the second quarter at at at that dropped quite appreciably to 60, and the third in 55, or so and a fourth so that goes to my point about the cons get easier with pricing being black to up we feel well positioned thank George.
The next question comes from Nate Crawford of B M. P. <unk>. Please go ahead.
Thank you. So is it fair to say I guess that the service revenue growth year over year like this is the low quarter into Q and.
And that we should expect maybe.
To trend up from here.
And then maybe just comment on storage mental growth that still remains very strong.
Can you maybe just speak to recent customer conversation.
And you know how your ability to push price.
Okay. Thanks, Nate this is Barry a couple of things there. So on services. Yes, you are thinking about that right because really when you look at the total companies service revenue growth it was.
Completely impacted by the fact that the <unk> business was essentially a half that which it was in the prior year and at that 40 some million dollars of revenue that's a big drag on the on the service in total because as you know all of the <unk> revenue essentially is on the service line and.
Give you a point that if you look at global room. For example, our service revenue there was up over 9% and so the total companies service revenue will be improving it should be positive in the third quarter of course, and Furthermore, in the fourth quarter, because frankly by then a L M no longer.
There is a a drag on our service revenue in fact, I think it made and there's a chance it maybe accretive to grow growth rate in service by the fourth quarter in terms of storage rental revenue growth. We have had as as your question allude to strong performance, there and our revenue manager.
Actions have been very well received we are of course very focused on driving value for our customers and making sure that they understand the significant value that iron Mountain provides both in terms of our core offerings of records and and but also all the other offerings that we can cross-sell earn.
And things such as enterprise I T asset disposition data center services and among other and so in terms of where you should expect storage rental revenue growth volume has been trending very consistent with our expectations. It's been modestly positive and we continue to expect that a positive outlook and.
From a revenue standpoint total revenue standpoint, you should expect it to continue to be coughing quite well and as I mentioned the prepared remarks.
We do have some incremental revenue management actions in the third quarter and the fourth quarter and that helps the growth rate, particularly in the fourth quarter Nate because as you may remember last year more of our revenue at management actions were shifted into the third quarter just from a timing of what we were doing last year and this year, it's a little bit more spread out. So these <unk>.
New revenue management actions that I alluded to today on the call that incremental to our prior plans in and we'll be as I said, a nice tailwind to growth rate. So thank you for the question. They yeah and just one thing I would add for <unk> on the on the storage transferable volume you'd probably picked up from some of the wins. We highlighted is that his company is there.
Shifting their use of of space.
Workforces more remote or hybrid that's yielding both increased volume for our storage facilities, if they cleaned out or decided that they want to have it <unk> would rather than in an office that people don't.
Visit as much or at all anymore as well as as Barry pointed out that's part of behind this hundred and 75% year over year increase in iPad bookings, both because as companies are kind of cleaning out. It's it's a tailwind both on the storage of me and the iPad business.
The next question comes from Andrew Steinman of J P. Morgan. Please go ahead.
Yes, Hi, this is Alex <unk>, maybe just to take it on global room for a second can you remind us what percent of storage revenues are are in some manner C. P. I <unk> you know maybe with the the price for an lease terms look like nowadays and then just quickly on clutter, how does that factor into your.
Your outlook and you know, maybe maybe some thoughts around that business, which we understand had some some cash flow issues as a standalone company on its own thanks guys.
Okay, Hi, Alex it's very thanks for those questions <unk>, you know for proprietary and confidential reasons, we don't generally characterize our contracts to you specifically, but what I'll say is it.
Certainly as you know you follow the company for such a long time, we have a very.
Very large number of customers and a 200 and call. It 200, plus thousand client relationships. The vast majority of those are on our standard. If you will paper that allows us to affect revenue management actions alone you know and and as I said before we are very aligned with driving value at.
Times of essentially are choosing and is not if you will link to any sort of <unk>. There are some what I would describe as more bespoke contracts with some of our largest clients, which may have specific agreements around escalators and the like but that is the that is a small number of total contract with risk.
<unk> I appreciate that question as just to help others, who may not be as familiar with clutter clutter was is a business that we have had a minority stake in for a while now and it was a form of a joint venture we own about 25% of the company prior to the transaction that we.
I mentioned this morning, and that's on the valet self storage. So it is a business that we have been providing if you will back in services to for some time storing a fair bit of the volume that clutter had been bringing in from <unk> and what Clutters focus had been on is is billed.
<unk> brand and aggregating consumer demand principally in as Bill mentioned tech enabled manner on a net basis. When all is said and done will pay a little over 20 some million dollars to to buy the business will also contribute various of our acid. So you'll see that it through our other <unk>.
Expense and income lying on the P&L and from a standpoint of for your modeling purposes, you know revenue on a quarterly basis. This being the incremental revenue that iron Mountain will recognize now because of course, we were recognizing revenue from what we were doing for services to clutter previously will recognize you know maybe.
A bit over 10 million there'll be in excess of $10 million on a quarterly basis likely to be growing as we move into the new year and from an <unk> standpoint, and you would have seen this from our prior filings because of course, we were absorbing are a minority interest in clutter through our P and L. As I said, they they've been building their brand for some time.
So it is the clutter has been absorbing a modest EBITDA loss on a quarterly basis thinks something in the vicinity of a couple of million dollars a quarter overtime and perhaps you know by let's say 2024, we expect to be able to drive that breakeven and ultimately to generating positive EBITDA.
Elements of the clutter enterprise itself. The the last thing I'll note is Alex is of course, we reiterated our guidance and feel very good about it despite absorbing that that low drag their from clutter that will absorb here in the second half. So I appreciate the questions.
The next question comes from Shlomo Rosenbalm Stifel. Please go ahead.
Hi, Thank you very much could you talk a little bit about the gross margin friends. They were looked like they were down particularly in the services that are like 200 basis points here over here is that have to do with something from a O M or something else or so the labor costs are up almost 10% year over year and.
Also I thought maybe you could just comment you know go I always ask you about talking about the underlying trends in the volumes and the wind business. They could just comment on that are you getting more positive trends in the you know the historical mature markets than what we've seen before you mentioned like that hospital contract is that something that you know it was good.
Lead to more positive you know volume trends in an area that historically had been a little bit more of a week or <unk>.
Okay, Let me start with the labor costs and and the trends in terms of the the volume. So I think first starting off on the on the volume Frances cause I as I was saying to <unk>. <unk> question is that you know overall the volume as you can see is is black slightly.
Yep. So it's it's trending in the right direction and I wouldn't say this is a you know it's gonna be a <unk>.
A massive change, but what we see if you know if you think about 730 million cubic feet. So it's a very large base that were operating on is the trends that we see both of some of the new storage areas, but as well as what we see and people going into a high brighter remote working aspect. It really is getting a lot more traction for our <unk>.
Smart sorting and clean start type solutions, which.
Which uncover more storage also the services that we can provide being depot in other words, we can serve their their employees anywhere. They are you know they don't have to come to the office to actually get information back whether we give it back to them physically or image on demand and then it's also on covering as they say is driving a lot of the the inquiries.
Bookings that we see in the enterprise <unk> side of the business.
Feeling that hundred and 75 per cent growth that we see so so overall, we feel really good about where the.
The trends are but you can imagine on 730 million cubic feet around the world is that even when I call quite macro trends that I described are you know don't change the the overall trajectory like massively, but but it is definitely a tailwind for that that business and on labor costs before I headed back to bear.
Harry is you're right labor cost is up some of it is as we go into new areas in terms as we wrap or some of the projects that we wrap on that obviously, we're bringing labor and ahead of time and the other part is is is making sure that our mountaineers around the world are well looked after because we really do see.
If the core to our existence, where business services company and the first impression that our customers have is is our mountain, Arizona wanted to make sure that they and their families are well looked after and the inflation environment globally has been challenging for a number of our colleagues.
Uhm Shlomo this is very maybe I'll just pick up there on Bill's point, you're right. It was up that level year on year, you would have seen a similar increase in the first quarter. When we made the actions as it relates to improved wages that bill is just referring to and then I would point out on a sequential basis <unk>.
Labour was up about two per cent well service revenue was up 5% on a sequential basis, reflecting the the operating leverage that the team is is driving the other thing you mentioned more broadly about service gross margins first up they they were up 110 basis points on a sequential basis, yes, they were down.
You're an ear as your question alluded to that has all to do with our component pricing I T. Renew because when you think about it we are still processing a considerable amount of volume yet we are recognizing a much lower price and so if you're excluded the impact of component pricing actually.
Service gross margins were up quite nicely, which speaks to the ongoing trend in the rest of the core and frankly to the productivity that the team is driving an asset lifecycle management. So when you think about what could happen with our gross margins as pricing recovers. We've got a lot of operating leverage in that business. So I feel good about the four look at the.
<unk> projections are anywhere close to accurate for what our pricing will be next year I think we're gonna see a really nice lived there so thanks level.
The next question comes from John asking of I V. C. Please go ahead.
[noise]. Thank you a couple of questions first so just interested in in how to kind of frame. The exposure in your data center business to six Tara, where where there's a lease in in in Phoenix.
Interested in just the data center development pipeline and kind of the opportunities ahead.
And your thoughts about bringing in third party capital to maybe co invest there was there was obviously a recent transaction in India.
In other countries, where third party capital you know.
Is <unk>.
<unk> projects of of some of the established players in your thoughts on on.
Pursuing that route from from a capital standpoint. Thanks.
Okay. Thanks, John I'll start with the what we see on the data Center Horizon, and then I'll turn it over to to very I think you know first of all you know we're really pleased with our data center business continues to to to grow and and also as you know I know you cover the industry extreme you know extremely closely is that price.
Thing is up markedly like if we looking.
Mark Footmark, if like Northern Virginia on a triple net basis as we see around the Hyperscale segment pricing up some 40 per cent. So we the returns continue to you know to grow and keep pace I think in terms of you know looking at you know you're looking at the size of our pipeline Barry mentioned that we.
Have increased R capital allocation to that another $200 million on top of the 1 billion that we already had for investment capital in 2023 based on the strength of that pipeline and the success that we're having pretty much across the globe is that you you know I mean, you're right that you were always kind of conscious had been in terms of how we found our project that being said.
Is we are actually fortunate that we have the records management business or other service business, which is like a financial Beast I mean, it just generates a tremendous amount of cash that not only fuels the dividend, but it also fuels a lot of the development capital into our data center. So I wouldn't say that we're in a situation where kind of.
A company that is solely in the data center space that you know has only two itself to look for in terms of how it funds itself going forward to drive a lot of the development, we actually have a.
Growing but you know some people would consider mature business in terms of the amount of capital we have to put in to that because it's a very scaled sigh operating leverage business and we're able to use funds and profitability from that to find a big part of our development that being said you know that we've done we have taken third party capital a couple of times already and we typically do that.
Stabilized or near stabilized assets and tap into funds that where people are looking for you know relatively low yielding but long maturity or duration type assets and will continue to do that is some of our portfolio. Stabilises you know I can imagine that we would recycle capital when the opportunity presents itself.
But but overall if you look at the plan that we laid out last September in terms of our Investor day, we're probably a little bit ahead of that data center, just because of the growth that we've been seeing in the first half of this year and what we see in the pipeline.
But we feel pretty good about that where we have a fully funded plan in terms of the way we're doing it now, but you know if there's opportunities as they say to to take third party capital, especially around stabilized assets generally that's that boost returns longterm and and you know we will do that.
Hey, John it's very thanks for the question you know <unk> for natural and perhaps obvious reasons, we don't tend to comment on individual clients, but as you noted there's some things out there in the public domain as well as in their filings that would confirm that there are ah client of ours in Arizona, That's obviously.
<unk>, a very long standing relationship that goes back to prior to our ownership of of one of the data centers that we purchase there I mentioned that intently because of course, it's a long standing contract with pricing that goes back quite a ways and frankly is sort of a almost a bill to suit type of.
Situation for them, where where you know it it would not be well, let me put it this way in Arizona, we are essentially 100 per cent least and everything we have whether it be an R. A Z P. One facility a Z P. Two or 100 per cent leaves where 100 per cent least now in Scottsdale on what we're under construction for in.
And our second facility phase five and six were 100 per cent of five and eight were 100 per cent least as well in terms of prelease. So you know, it's a not a particularly large revenue client John and beyond that I wouldn't want to comment, but you would see in the bilings the relative amount of let's see.
Credit that that we have between the two entities and I feel very confident that in light of the where we see pricing and I'll just maybe I should just add this that and on general on Hyperscale pricing today, we're seeing on a triple net basis pricing up about 40% and so we feel <unk>.
And the thing to think about that is we're not building to spec or anything and were 91% preleased on everything that we have under construction at this time and so when we talk about expanding our development capital for growth, it's nearly to build out the facilities, we've already sold and so that our team is doing a for.
A nominal job and we're working hard.
Hard to figure out, which other facilities to start construction on as the pipeline continues to build quite appreciably. So we feel really good about where our data center businesses training John Thank you.
The next question comes from Kevin Mcvey of Credit Suisse. Please go ahead.
Great. Thanks, so much and they should of disclosures.
<unk> can we impact the guidance a little bit I I, just wanted to make sure I understand because it it seems like your reiterated the full year, but if I think about the puts and takes you know it sounds like the pricing a lot better. The Capex has gone up a lot and again that may not be revenue that comes in it looks like the queue to is a little better it looks like the club.
<unk> is gonna have some incremental revenue modestly.
Is the all set the L M business or is it just a little bit of conservatism and you know just put that altogether, how should we think about cash flow for the full year, not operating which is what the use of cash should be particularly given the step up and and the capex.
Okay. Thanks, Kevin appreciate that you're right that our revenue management program is doing very very well and obviously our storage rental revenue growth has has been growing and as I mentioned some of our growth rates are actually accelerating that being one of those and that's thanks to both our global room teams as well as our data center teams cause commencing.
I've been very strong you reference that Capex is up in that as I mentioned, that's going to build out our data center portfolio. That's already preleased. So we we are endeavoring to need all customer demand, which continues to ramp in terms of you are you're right clutter ads.
Relatively small amount of revenue will probably are a touch more conservative with a L. M. In the back half Kevin than where we were at the beginning of the year because of course at the beginning of the year component pricing was still was still coming down and now it's stabilized and we recognize that those stable levels of.
Pricing I as I said, you know that may prove to be conservative as we move through the year, but.
Don't really halfway through so we tend to try to not get ahead of ourselves Kevin in terms of cash generation and and the compilation of the incremental Capex here, Here's what I'd underscore we have reiterated our leverage expectations that we will be at 5.1 times at year end.
Which is consistent with where we are today and act you know a multiyear level low so we feel really good about the cash generation of the business. We are generating incrementally higher returns and data center on that Capex investment returns on Hyperscale have moved from out of the seven eight level to more like eight nine.
And and retail cash on cash on Liberty returns are also quite firm and so we're blending into that low double digit vicinity on I'm buying basis, we feel really good about where things are trending Kevin. So I appreciate your questions.
The next question comes from <unk> of Wells Fargo. Please go ahead.
Hi, Thanks for the questions to if I could so just wanted to touch again on the data center pipeline any requirements <unk> see that you think are tied to this wave of generative AI demand. We're hearing about the industry and does that change at all how you design your data centers for some of the the higher densities that are required.
For these type of appointments and then secondly on the on the Hyperscale a O N business I know you've talked about trying to COVID-19 shutdowns impacting that business is there then I need to move to kind of diversify your end markets to moving sale beyond China to help reduce the the concentration there. Thank you.
Oh, Thanks, Eric So yeah on the trends that we're seeing I mean, you and you've been following this industry for for <unk>, Yeah, I think you'll see the same thing I <unk>, we have right I mean, maybe a year ago, we saw I feel very high growth and hyperscale, but they're probably a little bit more conservative and now the.
There's another wave of really accelerated growth because they're trying to to keep pace with the amount of compute power is required to really run a lot of these large language model associated with the AI programs and so we have seen a you know it's not just type that we actually see virtually all of our large.
Hyperscale customers coming to us looking for or capacity and that's why we were speaking with such confidence that will <unk> original got full full year guidance in terms of the amount of leasing activity. We expect it's just is very very strong now in terms of the type of deployment, you're also right that the <unk>.
<unk> that they're looking for is much higher and you know I think I think I'm right to say, probably a year year and a half ago, we didn't have any customers coming to us and asking us to water cool the <unk> to to actually support some of these higher densities and now we are seeing in a number of deployments.
That are requiring that kind of design Luckily I mean, we built our bills are are designed to be flexible and then of course with these large to plot deployments were actually.
Doing the design to to be to meet the customer very specific customer requirements. So we're able to accommodate the higher density.
Quite easily, but but you're right I mean with the density that some folks are looking at it in the amount of power. They want to put in Iraq, we are cooling using different methods and specifically some water cooling rack to support the requirements.
And <unk>, it's bearing as it relates to diversifying eight from China as we've talked about before that certainly is a focus of the team. We have added to our organization and a L M and specifically around diversifying the downstream channels.
We are making steady progress, but it is it is slow because of course as we said before China is the main market for us in that regard, but we are looking at in branching into throughout southeast Asia. There are opportunities, we think over the intermediate term in India. We certainly have been selling more components into the U S and Europe .
As well and that's a key focus as well as the mid east. So there is there are opportunities there and we are building that those those those channels. The other thing I'll just build on and link. The two questions is when you think about Hyperscale decommissioning, we generally are decommissioning data centers.
That were put into service, let's say five years prior and so on average and and the thing about AI and this very significant ramp in terms of Hyperscale data Center development right. Now is it will provide even another leg two hour Hyperscale decommissioning road.
Five years on you know historically I've had some questions about level out as the how does the decommissioning business continue to ramp over time and of course, the things that will be decommissioning this year.
Our components that were put in place about five years ago and next year will be David commissioning things that were put in place four years ago and as those data center platforms have grown it provides that much larger of a platform for us to decommission in the future and I think it shouldn't be lost on us that.
I wanted to ask on the storage <unk> excuse me the the retention rate in the global room business. It looks like you had contracted about 100 basis points you are over a year.
I understand that the <unk>.
Okay, Hi, Brenda <unk>. It's thanks for the question when you look at that metric I'll, just remind you that it is on a trailing four quarter basis. So what you've got going on there is what you've got going on there is an element of COVID-19 still because we were naturally C.
He inclined you a little bit less activity of of switching and or destruction. What have you during the COVID-19 period and even in the period. After we all felt like Covid was over if you will and so that's a little bit of catching up but if you look back in on that metric over to like to say the last 15 years and that data is available in.
Historic disclosure you find that we're in a very tight band and not outside our normal levels from a pre COVID-19 standpoint I. Appreciate the question I will I will tell you that we feel we.
<unk>, our our customer relationships are very good we can.
You linked it to revenue management I would say are focused on revenue management is continuing to educate our customers on the very significant value we drive for them day in and day out and the fact that our volume continues to trend positively I think should give you a very good indicator thereof of how we're dealing with <unk> with our customers.
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