NextDC: Australia's premium data centre operator

Andrew Mitchell

Ophir Asset Management

In the last two years, the human population has created more information and data than the cumulative amount of data created in the history of the human race. Data centres are critical pieces of infrastructure enabling this. Here we review the results from NextDC, Australia's most successful company in the space. 

The flood of data

The enormous transformational changes experienced in recent years through increases in computing capacity and the growing interconnectivity of devices has created a deluge of data and information creation, all of which needs to be stored somewhere.

At a consumer level, individuals no longer consume content and media – we create it. Online streaming video service YouTube, for example, has over 300 hours of video content uploaded every minute, while over 5 billion individual videos are viewed globally every hour.

Social media giant Facebook recently reported that over 136,000 photos are uploaded by users onto their platform every minute. Since image-sharing app Instagram’s original inception in October 2010, over 40 billion individual photos and videos have been uploaded to the site.

Within our own homes, the so-called “internet of things” continues to see more and more household appliances connected to the internet and one another. From smartphones and smart televisions, to internet-enabled fridges, speakers, bread makers and electric cars. Already, the current Australian household has an average of 14 connected devices under the one roof – this is expected to grow to over 30 devices by the year 2021.

Not only are the number of devices growing, but the computational capacity (and the volume of data created) continues to grow equally fast. The first Apple iPhone released in 2007 was sold for US$499 and offered consumers 4GB of information storage. The iPhone 7, released roughly ten years later, offers 256GB and retails today for a similar amount.

An often cited example of the incredible power of the current smartphone generation is the fact the current iPhone sitting in our pocket today has more computational power than the computer used by NASA to send Apollo 11 to the moon.

Investing in data centres 

All that data ultimately needs to be stored somewhere and it the growth in demand for data storage that has seen the Data Centre (or ‘DC’) industry grow at an incredible pace in recent years. Every piece of data created ultimately needs a home and, increasingly, this home has been in ‘the cloud’.

According to commercial real estate consultancy firm CBRE, the total investment in new data centres in the US last year totaled over US$20bn – more than the previous three years combined.  

Data centres, ultimately, are the four walls in which the cloud lives. Simplistically, they make their money by building out the enormous (and high cost) data centres and then leasing the space and power within their centres for various underlying users to store their data. Like telco infrastructure businesses, they follow a ‘build it and they will come strategy’, where a large amount of capital and cost is invested up-front with revenues (and, eventually, earnings) following thereafter.

Australia’s most successful data centre operator 

ASX-listed NextDc (NXT) has been Australia’s most successful operator in the space, the business reporting a solid result full year result with revenues growing +30% on the prior year and EBITDA +28%.

NXT’s stellar growth from fairly humble beginnings has provided another example of the growing number of Australian-made tech winners in recent years, the business having only begun its corporate life in 2010. After listing on the ASX shortly thereafter (in current CEO Craig Scroggie’s words “as a start-up with no customers – just a business model and a belief”), the business now generates in excess of $161m of revenues, with 972 customers, utilising 8 data centre locations across Australia (with three more currently being built).

 

There were a number of notable aspects of the recent result worth highlighting:

 

  • Data centre businesses, by their very nature, need to invest ahead of the curve. Owners of these assets ultimately require shareholders to provide funds up front to build the centres, with the payoff on this investment coming in later years as centre occupancy fills, costs are recovered and every incremental dollar of revenue becomes pure profit. In this regard, it has been pleasing to see the business maintain high operating margins and strong returns on capital across their more mature centres (namely B1 in Brisbane, M1 in Melbourne and S1 in Sydney). All three centres reached break-even with one year of operation, with contracted utilisation across all three now sitting above 92%.

 

  • With the business continuing to grow and add further data centres, ultimately investors need to be comfortable with the future demand profile for data storage facilities (taking into account the additional capacity being brought online by other domestic competitors) and that current return profiles can be maintained. While announced new capacity wins were slightly below market expectations for the 2H of 2018, management continue to remain supremely positive on the opportunity set ahead of the business, detailing a high degree of confidence that a number of new client acquisitions will be completed through the 2019 financial year. We have little doubt that the demand profile remains firm, albeit the competitive landscape has grown tougher: US data centre giant Equinix (market cap US$34.6bn) now speaks for 15 data centres across the country following their purchase of Australian DC-provider Metronode last year, whilst Singapore start-up AirTrunk recently raised $400m in new capital to grow out a DC network in Sydney and Melbourne. The significant capital investment likely highlights the attractive returns on offer in the space, however investors will need to maintain a close watch on the rate of further client acquisition into this year.

 

  • Finally, while management currently seem hesitant to provide the market with clarity on international expansion, the offshore opportunity available to the business is obvious and we would expect to see further news in this regard over the next 12 months. With the ability to leverage off a now significant infrastructure and capital base, the company would be well positioned to tap into the higher growth markets through the Asia-Pac region and with little in the current valuation for international growth we remain highly interested in futher updates.

 

An attractive long-term proposition

With a result today that sits broadly in-line with where market expectations sat, we’d expect shareholders to be broadly satisfied with the current trajectory of the business and performance of the more mature assets.

The business in our view continues to provide an attractive long-term proposition – an industry with high barriers to entry and long-term structural tailwinds that continues to remain highly fragmented at a time when larger players are trying to consolidate.

While there still remains over 1500 multi-tenant data centre providers globally, the top 10 now account for more than half of the industry’s revenue and we would expect that proportion to continue to grow as further consolidation plays out.

 

Ophir Asset Management is a specialist small and mid-cap equities manager. To find out more about Ophir or join their mailing list, visit (VIEW LINK)

 


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Andrew Mitchell
Director and Portfolio Manager
Ophir Asset Management

Andrew has over 15 years’ experience in portfolio management of listed companies, stockbroking and economic analysis. Prior to co-founding Ophir, Andrew worked from 2007 to 2011 as a portfolio manager at Paradice Investment Management.

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