Company Overview: NEXTDC Limited is a technology company, which is engaged in the development and operation of independent data centers in Australia. The Company is engaged in enabling business transformation through data center outsourcing solutions, connectivity services and infrastructure management software. Its segments include Qld, Vic, NSW, WA, ACT and Other. The Company's services categories include data center solutions, connectivity, professional services and cloud connections. The Company offers solutions, including Custom Colocation, AXONVX and ONEDC. AXONVX enables customers to activate high-speed private connections to various carries and cloud platforms on-demand, and access simplified inter-capital connectivity services. ONEDC is the Company's data center infrastructure management platform. ONEDC is engaged in managing customers' entire data center infrastructure and combining their internal and colocated environments all managed through a single console.
 

NXT Details

Decent Growth in Customer and Interconnection Numbers: NEXTDC Limited (ASX: NXT) is engaged in the development and operation of independent data centres in Australia. The company delivers world-class data centre services and solutions to its customers. The company derives its revenue from multiple product sources, including rack ready services, white space, project fees and add-on services. During the year ended 30 June 2019, the company reported a growth of 15% in revenue as compared to pcp. The period ended with a strong balance sheet with cash and cash equivalents at the end of the period amounting to $399 million. The period was also characterised by rental savings, with the acquisition of land and buildings at various locations. During the year, the company witnessed a decent increase in the number of customers on its platform, backed by the flexibility provided by carrier and vendor neutrality, allowing customers a choice of carriers and system integrators, along with a remarkable growth of 27% in interconnections.

Over the period covering FY15 to FY19, the company witnessed a revenue CAGR of 31.0%, reflecting a decent pace of growth. FY15 and FY19 revenue amounted to $60.88 million and $179.26 million, respectively. Among all the five years, the highest growth was reported in FY16 at 52.5% on the back of increased utilisation of data centre services across the business as well as an increase in establishment fees. This was followed by a growth of 33.1% in FY17, which came in as a result of the same factors mentioned above. Over the period covering FY14 to FY19, the company has reported strong growth in customers, with a CAGR of 31%. Average interconnects per customer increased from 8.9 as at 30 June 2018 to 9.3 as at 30 June 2019, reflecting the increasing use of hybrid cloud as customers expand their ecosystems.

Going forward, the company is eyeing revenue growth to be backed by growth in recurring data centre services revenues, underpinned by long-term customer contracts. In addition, it expects to report continued growth in interconnections with the rising demand for connectivity solutions.
 

Growth in Customers (Source: Company Reports)

Financial Highlights for the Year Ended 30 June 2019: Revenue for the period amounted to $179.3 million, up 15% on prior corresponding year. Underlying EBITDA came in at $85.1 million, up 13% on the previous year. Underlying capital expenditure for the year amounted to $378 million, up on the previous year capital expenditure of $285 million. During the year, the company reported a statutory net loss after tax amounting to $9.8 million as compared to a profit of $6.6 million in the previous year. FY19 operating cash flow stood at $39.4 million as compared to FY18 cash flow of $33.4 million. Cash and cash equivalents at the end of the period amounted to $399 million.


P&L Summary (Source: Company Reports)

During the year, the company completed the acquisition of the land and buildings at P1, M1, S1 and B1, delivering rental savings amounting to $15 million per annum. The company also raised a senior unsecured debt amounting to $500 million and refinanced the syndicated senior secured debt facility of $300 million, which remains undrawn. Contracted utilisation for the period went up by 31% to 52.5 MW. The number of customers went up by 22% to 1,184 as compared to 972 customers as at 30 June 2018. Interconnections represented 7.7% of recurring revenue during the period, with an increase of 27% on the previous year. In FY18, interconnections represented 6.5% of the recurring revenue.

Development Activities: Some of the development initiatives during the year included B2 capacity expansion of the second data hall and M2 capacity expansion of the third data hall. In addition, the company opened for early customer access to S2 in 1H19, with billing commencing in the second half. The company also opened the P2 microsite and connectivity hub, to allow early access to the Indigo subsea cable system and other network and cloud infrastructure providers in the West Australian market. Practical completion of the first tower under P2 stage 1 development is expected in 2H20.

Market Review: In FY19, the company established new offices in Singapore and Tokyo to explore the markets. Work in Singapore has currently been kept on hold, pending the outcome of the Singapore Government’s review of the data centre industry. Meanwhile, the company will focus on evaluating opportunities in Singapore and Japanese markets, with no assurances in relation to the timing and nature of development.
 
As per the management, the company has marked a strong start to FY20 and is on track to deliver decent growth in revenue and EBITDA. The company expects to see a continued increase in demand in the data centre industry and is planning for investment in new infrastructure to bring on the additional capacity to support customers’ growth requirements.
Recent Update on AGM Results: The company recently released an announcement on the results of the AGM held on 30 October 2019. The AGM comprised of resolutions in relation to remuneration report, election of directors and approval of grant of 216,393 performance rights to Craig Scroggie, Managing Director and CEO, for FY20. The company also elected Steve M Smith and Jennifer M Lambert, as directors, and re-elected Gregory J Clark AC.

Top 10 Shareholders: The top 10 shareholders have been highlighted in the table, which together form around 47.52% of the total shareholding. Unisuper Limited is the entity, holding maximum shares in the company at 8.65%. Challenger Managed Investments Limited is the second largest shareholder, with a holding of 7.42%.
 

Top Ten Shareholders (Source: Thomson Reuters)

Key Metrics: During the year ended 30 June 2019, the company had a gross margin of 76.2%, slightly above the gross margin of 76.1% in prior corresponding year and in-line with the industry median of 76.2%. This indicates that the company is making reasonable profit on sales by keeping the costs in control. EBITDA margin for the company stands at 52.4%, up on prior corresponding period margin and the industry median of 43.2% and 28.4%, respectively. EBITDA margin well above the industry and the previous year, provides more confidence in the stability of earnings. Coming to the liquidity of the business, the strength of the company is clearly depicted in the current ratio of 7.04x, which is much higher than the industry median of 2.81x.


 Key Metrics (Source: Thomson Reuters)  

What to Expect: In FY20, the company expects to report revenue between $200 million and $206 million, representing growth in the range of 12% - 15%. Revenue in FY20 will be a reflection of contribution from long-term customers’ contracts, providing decent recurring data centre services revenues and continuous growth in connectivity solutions. Underlying EBITDA for the year is expected to be between $100 million - $105 million, with growth in the range of 17% - 23%. Capital expenditure for the year is expected to be in the range of $280 million - $300 million. Investments during the year will comprise of expansion of S2 with 22MW of capacity under development and investment in fit-out of the data centre capacity that will drive growth in customer demand. In addition, the company has planned for Uptime Institute (UI) Tier IV Certification of Constructed Facility (TCCF) for S2 and P2. For S2, the company has also planned to secure the UI Gold certification of Operational Sustainability.


Key Valuation Metrics (Source: Thomson Reuters)

Stock Recommendation: The stock of the company generated returns of 6.29% and 5.78%, over a period of 1 month and 3 months, respectively. The stock has a market capitalisation of $2.28 billion. The year ended 30 June 2019 was marked by a decent financial performance with simultaneous investment in the next generation of world-class Tier IV data centres. At the end of the period, the company had adequate liquidity of over $700 million, which places it in a safe spot to capitalise on customer driven expansion opportunities in the future. The period was also characterised by remarkable growth in customer and interconnection numbers, underpinned by a strong demand for NXT’s premium data centre services. The company believes S2 to be a ground-breaking project with a demand for the site remaining strong. On a macro perspective, Australia’s Managed Cloud Services industry is expected to grow to US$1.2 billion in the near term, with 53% of the businesses expected to represent all installed data centre servers by 2021. By 2023, the global hybrid cloud market is expected to be valued at $138.63 billion. As per some market analysis, about 80% of the enterprises are expected to shift workloads to cloud-based models by 2025. The above transformation will offer significant business opportunity to the company, that accesses the world’s largest clouds, carriers and networks on its platform. Considering the performance in FY19, decent outlook for FY20 on the back of long-term customer contracts and future growth prospects underpinned by a robust industry outlook, we give a “Buy” recommendation on the stock at the current market price of $6.600, up 0.152% on 08 November 2019.

 
NXT Daily Technical Chart (Source: Thomson Reuters)

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