What’s Next?

Companies, Technology & Telecommunications | Comments (10)

What’s Next?

NextDC (ASX: NXT), the developer and operator of data centres, is at an interesting cross roads. Having secured a national footprint, will the company continue to focus on expansion, or will it turn to demonstrating profitability?

By way of background, NextDC came to market in 2010 to raise funds for the expansion of its data centre network. At the time, the company had one data centre in Brisbane, one data centre in Melbourne and also had a view to lease or acquire an additional centre in Sydney.

Prior to pursuing profitability, the initial goal of the company was to develop a national footprint, as defined in the prospectus: “NextDC intends to build a national footprint of data centres, assisting it in realising significant operational leverage, and providing flexibility for national customers seeking to deal with a single provider.”

NextDC completed S1 Sydney in September 2013, and P1 Perth in November 2013 to achieve this national footprint.

At December 2013, NextDC had net assets of $239m and cash of $54m, and this compares with the current market capitalisation of $351 (at $1.82 per share). Capital expenditure is expected to decline from $85m in the December 2013 half-year to sub-$20m in the June 2014 half-year.

The speed of technological advancement and the continued threat of competition means that any company that operates in this space must continue to be one step ahead. If NextDC dramatically slows down its expansion strategy, this may provide an opening for competitors, which may limit NextDC’s earnings potential.

Despite $200 million having already been invested in the business, NextDC is yet to generate a profit. There will come a time when investors will have a view to realise a reasonable return on their investment. If the company continues to focus on building capacity, rather than demonstrating underlying earnings, this may limit its potential to attract further investment.

For some time we watched NextDC’s share price surge with envy and longing but refrained from purchase because of a lack of demonstrated earning power. The NextDC share price has since declined from $2.80 to $1.80 over the past year.

NextDC’s position is beginning to resemble a “Catch 22” – in order to grow earnings, it must continue to expand, but an expansion-centric strategy will delay the company’s ability to demonstrate reasonable returns. It will be interesting to see which strategy the company pursues.

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.

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10 Comments

  1. Ric Ric
    :

    I have heard rumours of a new entry into this space.

    Execpt is ill have a different business model.
    Instead of ‘build and they will come’.

    It will be lock in your specifications, sign long term contract, and we build to your specifications.

    Tweek of NEXT, but for those that understand the difference it could mean all the differentce

  2. the-claessens
    :

    I hold a small “observation” stake in Next DC – more importantly, my business is an anchor tenant. I have had conversations with their MD and have a firm belief in the future of NXT – i am cautious / curious to see how they go with filling their space. In actual fact in Perth they are one of the most expensive providers in the mark (approx 30%) – however the quality of their offering is unmatched.

  3. the-claessens
    :

    Roger, I think your assertion that the business has to keep expanding due to technical advancements and competition is not correct. Next-DC secure clients on multi year contracts, typically once you settle into a data centre you are not likely to move on account of technological advancements. A data centre’s financial outcomes are driven purely on their ability to fill the centre by selling lots of contracted rack contracts. Once a facility is built and occupied – they will operate very profitably – Next DC has bought a lot of capacity on line – obviously they now need to fill it.

    • Roger Montgomery
      :

      You could be right. The reference is about expansion preventing competitors opening next door and offering lower prices – a reason customers would switch in the absence of superior technology/security etc. The obvious strategy for our money is to be taken out by a bigger rival.

      • George Tsirigotis
        :

        Hi Roger
        Not sure if you have even looked at the prices NextDC are offering compared to their peers, but being in the industry, they are cheaper than their competitors. With NXT’s advantage on national presence, one MSA and a leader in renewable program, they are way ahead of the competitors. These are the cons of being first in the industry but usually takes time to build a customer base due to the nature of the industry.
        Eitherway, they are not in direct competition as the others are looking more at wholesalers, where NextDC would like a mixture of both retailers and wholesalers.

        I have heard along the grapevine that both S1 and M1 would be fully utilized if they were to accept wholesalers, but due to nature of tighter margins that come along with just wholesale customers, they are willing to forgo these advances and create a mixture of customers.

        Also, you would of seen Bevan Slattery become a substantial holder over the past few weeks as well as the demand from institutional investors on the unsecured notes offer from NAB (which was doubled to 60M).

        I think there is more to like about NextDC than you suggest.
        Only time will tell and suspect we are both looking forward to their next announcement on operations/financials.

      • Roger Montgomery
        :

        Thanks George. of course most warehouses could be fully utilised if the offer is a give-away. Important you understand that we are agnostic rather than negative. We are always open to having our assumptions challenged.

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