Quick Byte #1: NEXT DC
Over the coming days, we’ll be providing our insights on the UBS Emerging Companies conference. Check back tomorrow for the next “Quick Byte”. The UBS conference is a good example of the value-add that full-service brokers provide clients. Amid a steady migration by baby boomers to low-cost, cheap and purely online broking relationships, the UBS conference – and those run by Macquarie and others – serve as a reminder that there is a very real benefit from a relationship with a full-service broker.
Tim Kelley attended last Friday’s session, Russell the Thursday’s. We thought you might like to lean over our shoulder and read the notes Tim and Russ jotted down. Like the handwritten notes on a uni student’s lecture pad, they’re rough and ready and in no way intended to be conclusive. You can’t base an investment process on a few lines of hand-written notes, but they may just add to the dialogue. Be sure to seek and take personal professional advice before engaging in any securities transaction.
Next DC
- Favourable impression of the CEO
- NXT has built some impressive data centre facilities around the country and is now in the process of filling them. Utilisation is:
- BNE (open a few years): 70%
- MEL (open 18 months): 50%
- SYD (open 4 months): 30%
- CAN and PER – just opened
- Large global competitors now in Australia – Equinex which is a giant US-listed company, and privately-owned Globalswitch.
- NXT claims advantages over the likes of TLS, Optus on the basis it is vendor-neutral. When (for example) TLS runs out of capacity and outsources, it won’t buy from Optus.
- There seem to be some scale benefits in DCs.
- CEO sees price stability at the moment, due to rapid growth in demand and the time taken to get centres built.
- Summary: NXT has done a good job, but it is not clear that DCs are anything other than a commodity. Good operators can achieve cost advantages, but if NXT do well, one presumes strong global competitors might add capacity and prices fall.
Roger Montgomery is the Founder and Chairman of Montgomery Investment Management. Roger has over three decades of experience in funds management and related activities, including equities analysis, equity and derivatives strategy, trading and stockbroking. Prior to establishing Montgomery, Roger held positions at Ord Minnett Jardine Fleming, BT (Australia) Limited and Merrill Lynch.
This post was contributed by a representative of Montgomery Investment Management Pty Limited (AFSL No. 354564). The principal purpose of this post is to provide factual information and not provide financial product advice. Additionally, the information provided is not intended to provide any recommendation or opinion about any financial product. Any commentary and statements of opinion however may contain general advice only that is prepared without taking into account your personal objectives, financial circumstances or needs. Because of this, before acting on any of the information provided, you should always consider its appropriateness in light of your personal objectives, financial circumstances and needs and should consider seeking independent advice from a financial advisor if necessary before making any decisions. This post specifically excludes personal advice.
Nick Bignell
:
Another advantage of NXTs DCs is their large sustainable electricity feed. A key consideration in government procurement is the sustainability of offerings, NXT are able to offer DC services fed from sustainable sources.
My overall view… for the SMEs of this world where a one-in-five year failure is acceptable, yes, DCs are a commodity. However NXT is targeting the segment where DCs provide a companies core products (TLS, Microsoft, VMware, etc), they’re the ones willing to hand over big money, and that’s who they’re targeting with these ‘next-level facilities’.
Roger Montgomery
:
Is VM ware that $50 plug-in to make your mac look like a pc?
Craig Brown
:
Don’t suppose you could explain this line item from the Profit Statement: “Data Center Development Revenue”?
Is that legitimate revenue, or an accounting trick?
Without it I extrapolated their half year Services revenue (achieved whilst at 30% of full productive capacity, according to the Half Year presentation) of $11.4M out to $36M, or $76M for a Full Year at full capacity.
They state their EBITDA margins for Brisbane and Melbourne to be 65% and 38% respectively, so assuming the lowest case you get roughly $29M EBITDA for the full year.
They’re going to take a significant hit to their profits due to depreciating the considerable initial Capital Spend, which will leave them earning less than $20M post tax.
On those numbers it will be a return on equity of less than 10% as the build will take the equity close to $300M when its all up and running.
Not fantastic numbers without that development revenue.
Happy to be enlightened if I’m missing something.
Also, as to Tim’s comment on the “commodity” nature of data centers (possibly), note the price drop Google recently brought to their storage offering. Pure storage – with no other value add – is certainly a commodity, and one that’s virtually free now. That’s one aspect of data centers anyone can offer, so where’s the value add Next DC can bring to the market?
Is there enough value in the cross connections, where speed in B2B transactions might be a factor, to give them some advantage?
I’m not convinced.
Roger Montgomery
:
These are back of the envelope hand written notes, not an investment case. Your points however reinforce the initial view.
Chris B
:
Low barriers to entry, quite competitive with potential to be very competitive.
George Tsirigotis
:
Hi Roger
I currently hold Next DC and thought some notes have been missing from this article include:
– No other data center provider in Australia has a national presence. Also NXT provide one national contract, SLA and pricing.
– Data centers built to energy efficient infrastructure with a target PUE of 1.3 to 1.6 (reported industry average is 2.9)
– Building construction risk removed as now completed (capex will drop from 80m plus to 20m)
– Data halls to be completed as customer base grows
– 130+ channel partners with 4000+ sales staff able to sell Next DC facilities (all Telco’s have signed with Next DC with Telstra onboard last December)
It will take some time to translate bids into sales due to the nature of the industry, but as building construction has now been completed, the bottom line will start to grow exponentially. With 4000 plus sales staff (channel partners), it’s only a matter of time.
Global competitors such as Equinix and Globalswitch do not have a national presence (Sydney only with Melbourne data center to be completed at year end), and this is where Next DC will benefit being first to the market.
Roger Montgomery
:
Always delighted to receive additional thoughts and insights. Thanks for contributing constructively to the dialogue.