Cyxtera Technologies, Inc. (CYXT) on Q3 2021 Results - Earnings Call Transcript
Operator: Good morning, and welcome to Cyxtera's Q3 2021 Earnings Conference Call. All participants will be in listen-only mode. After today's presentation there will be an opportunity to ask questions. Please note this event is being recorded. I'd now like to turn the conference over to Greer Aviv. Please go ahead.
Greer Aviv: Thank you, Graham. Good morning, and welcome to our third quarter 2021 earnings conference call. On today's call, we will refer to materials available on our Investor Relations Web site at ir.cyxtera.com. We are joined here today by Nelson Fonseca, our President and CEO; and Carlos Sagasta, our CFO. After prepared remarks, we'll 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 our actual results to differ from those in our forward-looking statement. In addition, we use several non-GAAP measures when presenting our financial results. We have included the reconciliations to these measures in our supplemental financial information. With that, I'll turn the call over to Nelson.
Nelson Fonseca: Thank you, Greer. Good morning, and thank you all for joining us for our third quarter earnings call. We have proudly entered the next phase in Cyxtera's evolution, becoming a public company 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 6. None of this would have been possible without the hard work and dedication of Cyxtera 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 Cyxtera's growth, and we have received the 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 incredible opportunity ahead of us, and we are excited to realize the full potential of Cyxtera. 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 2.9% year-over-year to $177.1 million. Recurring revenue increased by $5.8 million or 3.5% year-over-year, to $169.3 million. Core revenue, which excludes revenue from Lumen, increased by $12.5 million or 8.4% year-over-year, to $161 million. Transaction-adjusted EBITDA improved by $3.5 million or 6.4% year-over-year, to $58.1 million, driven by top line growth and operating leverage. Annualized core bookings increased by $500,000 or 2.5% year-over-year, to $20.8 million. At the same time, average monthly core churn improved year-over-year to 0.7% from 0.9%, resulting in strong core net bookings. Lastly, interconnection accounted for approximately 11% of total revenue, up from 9.6% 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 Cyxtera's strong momentum, and share the key elements of our strategy. As you can see on slide five, we are third largest retail colocation provider, with 61 datacenters 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 datacenters are located in markets where our customers want to deploy their infrastructure. At Cyxtera, we view everything from the customer lens. We serve more than 2,300 enterprises and service providers across our global platform, representing every major industry vertical which leverage our strong interconnection base of over 40,000 cross connects to support their digital transformation initiatives. This diversified customer base along with our strong interconnection platform creates a differentiated global ecosystem for enterprises and service providers establish business relationships both directly and through partners. This leaves 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 replicate. Our innovation efforts are focused on three main objectives, first, to make our datacenters easier to consume; second, to make it seamless for our enterprise and service provider customers to connect to each other; and third, to support our customers' automation initiatives. Our Digital Exchange offering is our core innovation platform. Digital Exchange builds on our interconnection density and enables seamless software-based virtual connections between our customers. We built Digital Exchange in-house with our own product development team, which allows us to rapidly adapt the platform and further innovate in support of our customers' digital transformation efforts. Our Bare Metal offering is an example of this continuous innovation. Bare metal leverages the digital exchange to deliver on demand infrastructure, so customers can consume the datacenter in a cloud like fashion. We like to think about this as 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 SmartCabs, which also leverages our digital exchange platform to provide on demand colocation 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 in 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 Nutanix for the launch of their Federal Innovation Lab, in conjunction with some of our other leading technology partners. The first Nutanix Federal Innovation Lab is powered by Cyxtera's 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 proofs of concept and test mission critical application using on demand infrastructure that readily supports hybrid multicloud solutions via a single operating platform. In addition, we were awarded the Global Service Provider of the Year at Nutanix .NEXT Digital Experience in recognition for providing enterprises with on demand access to Nutanix's market leading hyper converged infrastructure enterprise cloud software directly within the data center. We're proud of the strength of our strategic alliances and continually look for innovative ways to enable our customers to deliver all applications, services and data at any scale directly within the data center with cloudlike flexibility. Moving to slide six, our global platform and strong ecosystem coupled with strong industry tailwinds 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 combination of accelerated bookings and lower churn delivers 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're 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 organic growth is expanding across our existing footprint with expansion projects focused on four markets, London, 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, decrease 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 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.
Carlos Sagasta: Thank you, Nelson. Good morning everyone, and thank you for joining us for our third quarter earnings call. As Nelson mentioned, we're 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 Starboard. Last month we received the 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 2.9% year-over-year, to $177.1 million, while recurring revenue increased by $5.8 million, or 3.5% year over a year, to $169.3 million. The solid revenue performance can be attributed to continue 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 8.4% 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 an edge settlement with the vendor, and $2 million in lower installation costs 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 costs 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 an increased guidance for 2021. Transaction adjusted EBITDA increased by $3.5 million or 6.4% year-over-year to $58.1 million, principally due to higher revenue and improvements in cost of revenue. Transaction adjusted EBITDA of 32.8% increased by approximately 110 basis points year-over-year, driven by top line growth and operating leverage. Transaction adjusted EBITDA increased by $1.3 million or 1.8% year-over-year to $73.8 million, which equates to a margin of $41.7. As a reminder, we view transaction adjusted EBITDA at the best metric for comparing our performance to our peers because it adjust for our asset ownership structure. Annualized core bookings increased by approximately 2.5% over the same quarter last year, driven by customer momentum and strong channel partner contribution. Average monthly core churn of 0.7% for the third quarter improved 20 basis points -- million exiting last year's 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 we discussed previously, including London, Silicon Valley, and Chicago. As a reminder, we expect elevated levels of CapEx in the second half and into 2022, 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 to the challenges that may be felt throughout the industry. Given where we are in the development cycle, we just aren't seeing an impact. As we have discussed previously, the capacity we have available requires limited gross capital, and as it relates to maintenance spend, we've built a long 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 datacenters. 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 3.7 times, from 5.6 last quarter. We're trending closer to our long-term target of 3 times net financial leverage, and are confident that we can continue to delever as EBITDA grows, and debt levels remain constant. We view this metric as the best way to measure the health of this business, as we can better control the different variables. You can also see on the slide that lease-adjusted leverage improved 1.2 turns to 6.3 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. Today, this represents the lowest rate and longest-term financing we secured to enhance the working capital position as we procure IT gear and critical power and cooling equipment throughout our global portfolio, furthering and 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 Starboard. 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 1.1%. We also now expect transaction-adjusted EBITDA of $223 million to $227 million, an increase of $5 million at the midpoint or 2.3%. For modeling purposes, we continue to expect our share count to be approximately $166 million at the end of the year. We continue to expect expansion capital expenditures for the full-year to be in the range of $65 million to $80 million, supporting an expansion project 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.
Operator: We will now begin the question-and-answer session. Our first question today comes from James Breen with William Blair. Please go ahead.
James Breen: 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 in existing facilities? And then also, just on the CapEx side, you moved up a little bit of percentage of revenue. So, how do you feel about that going forward? Is sort of a mid-teens total CapEx capital intensity the right area to be in? Thanks.
Nelson Fonseca: Hey, James, 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 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've seen great results from that, both on the bookings side and also decreasing churn. And so, that net bookings is what's driving occupancy, which is what's 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 a CapEx perspective, you may want to…
Carlos Sagasta: Yes, it's a difficult one because it's going to be very much driven by how much more do we need to add from a capacity perspective going forward. So, it's 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 the happen a few quarters before you start selling it out. So, I would think about it differently, which is that the things that are constant tend to be your maintenance, which we've always got it to about 3%, and then your installation CapEx, which 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 add specific capacity around our key markets.
James Breen: So, if your current occupancy is -- in the slides it's 69%. How do you think about that going forward as you move that up, is it when you get to the mid-70s, is that the point when you think about, okay, we have to build some new buildings, expand a little bit faster because you're starting to sellout in your existing facility?
Carlos Sagasta: Yes, so the 69 are 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-70s, we start to add capacity. And that's exactly what we've done this year around Silicon Valley and London.
James Breen: And anything just on the -- obviously, bookings improving, and just your penetrations of sales channel; anything that is working particularly well, is it customers taking multiple sites for you, connectivity, et cetera?
Nelson Fonseca: 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 innovation and how we can make it easy for customers to consume the datacenter, it's a differentiated approach. And that's truly what's driving our bookings momentum, and then we expect to continue with that message, continue to innovate, and then continue to make it easy for our partners to leverage our datacenters and their pursuits as well.
James Breen: Okay, thank you much.
Operator: Our next question comes from Michael Rollins with Citi. Please go ahead.
Michael Rollins: 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 reporting?
Nelson Fonseca: Hey, Mike. So, two things on the pipeline progression, 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, one of the things where I'm most pleased about is it's not only bookings in a small number of markets, but across the broad platform, both direction and through channel partners.
Michael Rollins: And I apologize if I missed this, did you provide a backlog exiting the quarter?
Carlos Sagasta: We did not.
Nelson Fonseca: No, Mike, we did not provide a backlog.
Michael Rollins: Is that something just in the future that you're going to pull back on or is that something maybe in the future you could provide? And if there is just qualitatively any context on the book-to-bill, and may be how that compares?
Carlos Sagasta: We'll think about it. To be honest, it wasn't in our plans, but we're happy to go back and think about it.
Michael Rollins: Thanks.
Carlos Sagasta: Thank you.
Operator: 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 Fonseca, President and CEO, for any closing remarks.
Nelson Fonseca: Well, thank you all for your time this morning. We look forward to giving you an update next quarter. Thank you.
Operator: 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.
