Spring Valley Acquisition Corp III (SVACU) 2022 Q2 法說會逐字稿

Hello, and welcome to today's Cyxtera Second Quarter 2022 Earnings Call. My name is Bailey, and I will be the operator for today's call. (Operator Instructions)

I will now hand over to our host, Kwang Edeker, Senior Director of Finance. Please go ahead.

Thank you, Bailey. Good morning, and welcome to our second quarter 2022 earnings conference call. On today's call, we will refer to materials available on our Investor Relations website at ir.cyxtera.com. We are joined here today by Nelson Fonseca, 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 2 of our presentation and our SEC filings for a discussion of the major risk factors that could cause our actual results to differ from those in our forward-looking statements. 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.

Thank you, Kwang. Good morning, and thank you for joining us for our second quarter earnings call. We are pleased to report continued momentum for Cyxtera in the second quarter as we delivered solid results and finished the first half of the year with strong demand for our full suite of infrastructure solutions. In addition, less than 2 weeks ago, we celebrated the 1-year anniversary of becoming a public company. As we approach the anniversary, Cyxtera was added to the Russell 2000 Index, which served as yet another proof point that our team's ability to execute our plan is delivering strong growth.

These are significant milestones for Cyxtera, and I want to thank all of our team members across the globe for their hard work and focus during this complex period. The second quarter represented the best net bookings quarter in our company's history, which further validates our strategy focused on developing and delivering leading edge infrastructure solutions from our global data center platform. Core bookings came in at over $28 million, an increase of $2.5 million or 10% quarter-over-quarter, with core churn dropping down to 0.7%. An improvement of 30 basis points over the previous quarter and 20 basis points year-over-year. We are ahead of our sales expectations at the midpoint of the year, and we enter the second half of the year with a strong pipeline of opportunities and a favorable pricing environment as a result of the robust demand from enterprise and service provider customers. This strong go-to-market momentum is also reflected in other key indicators across the business. Our stable occupancy is now over 74% as we continue to drive customer deployments in our existing data center footprint, a key component to our growth strategy.

This increased occupancy is coming with pricing and revenue per cabinet that is stable to up in most markets. All of these metrics reinforce the strength of our differentiated strategy to provide easy-to-consume, cloud-like colocation on a global scale to meet the needs of the modern digital enterprise. Our results from the second quarter also point to the continued positive momentum from investments in our channel program. Annualized channel bookings in the quarter increased by $1.4 million or 23% year-over-year to $7.5 million. The channel produced about 1/4 of the total bookings and highlights the significant progress we've made in this area. Our successful sales efforts are delivering strong revenue performance for the company. Total revenue increased by $8.7 million or 4.9% year-over-year in the second quarter. Core revenue increased by $9.4 million or 5.9% year-over-year. Transaction adjusted EBITDA in the quarter decreased by $2.3 million or a negative 3.8% year-over-year, but increased by $1.4 million or 2.4% quarter-over-quarter. As we look at EBITDA performance, keep in mind that second quarter 2021 was Cyxtera's last quarter as a private company, so we have successfully absorbed significant public company costs. While the fundamentals of our business continue to show strength, we do expect to experience some impacts from the macroeconomic trends that are affecting providers across the industry for the remainder of 2022.

The increase in utilities costs we have experienced during the first half of the year is expected to accelerate during the second half of the year. Although we have established a cost recovery process, that successfully passes through over 90% of the increased cost to our customers, there is an approximate 90-day lag to this process. Therefore, continued increases in utilities costs in the second half of 2022 cannot be completely recovered in this fiscal year. The completion of our Northern California data center has been delayed due to a combination of local regulatory and supply chain challenges. The data center is still scheduled to be completed in 2022, but the delay will impact second half 2022 performance. FX will negatively impact second half 2022 performance if it remains at current rates. Although we can't slowly quantify the exact impact of these items at the moment, we believe that our full year EBITDA performance will now be in the low range of our initial 2022 EBITDA guidance. As a result, we are modifying 2022 EBITDA guidance to $232 million to $242 million, representing a lowering of the midpoint by 2.9%.

Revenue and CapEx guidance remain unchanged due to our continued go-to-market momentum. Although the lowering of the EBITDA guidance range is disappointing, we are energized by the strong performance of the base business and recognize that these challenges are mostly timing in nature. Second half 2022 utilities cost increases that are not recovered in this fiscal year are expected to be recovered at a 90-plus percent attainment in 2023. The Northern California data center is expected to deliver full revenue and EBITDA impact in 2023. We remain committed to the long-term success of Cyxtera and are confident that our current trajectory positions us well to achieve our long-term objectives. Now let me pass it on to Carlos for some additional detail on the results.

Thank you, Nelson. Good morning, everyone, and thank you for joining us for our second quarter 2022 earnings call. We're pleased to report another quarter of solid financial performance, driven by strong enterprise demand. Our second quarter and year-to-date financial and operating metrics are a testament to the success of our go-to-market strategy and the trust that our customers have in Cyxtera.

The fundamentals of our business remain as strong as ever as reflected in a healthy pipeline, stable pricing and low trend. Moreover, we closed the quarter with record net bookings, the best in our history. We're confident this momentum will drive revenue growth and higher occupancy rates for the remainder of this year and into next year. Before diving into our financials, I wanted to take a moment to note that like our peers, we are not immune to the challenging macroeconomic headwinds impacting our sector and the border economy. Although we have been able to compensate for these challenges in the first half of the year, and we're confident that the underlying health of the business is unaffected. We're being prudent with our guidance as energy prices and FX remain extremely volatile and supply chain constraints persist. I will speak to this impact or the impact of each one of these variables on our outlook shortly. Going a little deeper into our financials now. Turning to Slide 9. Total revenue for the quarter increased by $8.7 million or 4.9% year-over-year to $184.1 million. While recurring revenue increased by $6.9 million or 4.1% year-over-year to $174.2 million, driven by strong overall demand.

This strong momentum continues to evaluate our strategy to provide easy-to-consume, cloud-like colocation on a global scale to meet the needs of the modern digital enterprise. To that end, Q2 interconnection revenue increased by 1.2% year-over-year, excluding Lumen revenue. Core revenue, as shown on Slide 10, which excludes Lumen revenue, increased by $9.4 million or 5.9% year-over-year to $168.8 million. Gross margin was 46.5%, a year-over-year increase of 99 basis points, primarily attributable to increased revenue, more efficient installation costs, some lower expense related to timing differences and less rent expense, all of which were partly offset by higher utility costs and FX. Energy costs continue to be a key focus for Cyxtera as they are for the other players in our industry. Slide 13 indicates the year-over-year percentage increases in power costs for each quarter of this year. We expect power costs to peak at the end of Q3 and then moderate. For the full year, we anticipate power costs to increase 17% compared to the previous year, with the majority of this cost coming or being back loaded in the year. As we have discussed in previous quarters, we have the contractual flexibility to pass through increases in the power cost.

But we consider this approach very carefully because we understand that this is a real impact to our customers. While we be thoughtful in how we communicate these rate increases, we intend to exercise this option. As Nelson noted, there's a temporary timing lag between the cost and revenue material materialization, which is roughly 90 days. We expect to recover approximately 90% of the cost of the power cost on a run rate basis. As we expect our cost to keep rising in the second half, however, we will not be able to recover this incremental cost incurred in Q4 until the first half of next year. Transaction adjusted EBITDA decreased by $2.3 million or 3.8% year-over-year to $60 million, principally due to increases in SG&A costs. As you're aware, 2022 includes public company costs that we did not incur in the second quarter of 2021. Adjusted for this public company costs, our transaction adjusted EBITDA would have been approximately $62 million. Starting with the third quarter, our year-over-year comparisons will include this public company cost for both time periods. The majority of our SG&A increase in Q2 is related to onetime nonrecurring expenses and equity-based compensation. Transaction adjusted EBITDA margin of 32.6% declined by approximately 295 basis points year-over-year.

Adjusted for the public company costs, transaction adjusted EBITDA margin would have been [33.7%]. Transaction adjusted EBITDAR -- transaction adjusted EBITDAR decreased by $2.8 million or 3.7% year-over-year to $74.8 million, which equates to a margin of $40.6 million. As a reminder, we view transaction adjusted EBITDA as the best metric for comparing our performance to our peers because it adjusts for our asset ownership structure. Average monthly core churn of 0.7% for the second quarter improved by approximately 20 basis points compared to the same period last year and was well within our expected range. Our net bookings represented the best quarter to date in the company's history. A stabilized occupancy rate increased 580 basis points year-over-year to 74.2%, driven by strong industry demand and Cyxtera's differentiated offering. Core MRR, excluding FX, increased by $2.2 million to $50.8 million, primarily driven by net installations. Year-to-date, our MRR per cabinet increased 2% as contracted ramps start to flow through the calculation. On Slide 18, we have provided a breakdown of our capital investments. Overall CapEx is up on the back of higher expansion activity around key markets and normalized maintenance CapEx levels versus Q2 in 2021, which was lower due to the timing of project execution.

Now turning to Slide 19 for an update on our balance sheet and capital markets activity. We continue to make good progress on our deleveraging journey. During Q2, our financial net leverage was 3.8x, a decrease from 5.6x at the end of Q2 2021. On a lease-adjusted basis, our financial net leverage was 6.3x, which is 1.2 turns lower than the same quarter last year. As it relates to our capital structure and future financing opportunities, we believe we still have sufficient runway ahead of us with our term loan maturing in 2024. That said, we continue to evaluate all financial alternatives to support our business model and growth plans. While we are not under any pressure to address financial needs in the near term, it has always been our philosophy to get ahead of these items in a thoughtful and timely manner. Hence, we intend to be strategic in how we address our near-term liabilities. I would like to provide an update on our full year guidance for transaction adjusted EBITDA. As Nelson said, we're now expecting reduction adjusted EBITDA for the full year to be in the range of $232 million to $242 million. This revised guidance is primarily due to the macro issues I highlighted earlier, which we view as mostly timing related rather than indicative on the underlying health of the business.

As I mentioned, we intend to pass on the increasing power costs to our customers, albeit there's a timing lag associated with that approach. As for the FX impact, although we are naturally hedged by reinvesting our British pound and Canadian dollars into those markets, the translational impact is still there as we reported U.S. dollars. To provide some context, approximately 21% of our revenue is non-dollar dominated. With the British pound representing about 10%, Singapore dollar, 5%; Canadian dollar, 4% and the remaining being euro denominated. We estimate the full year impact of FX on reduction adjusted EBITDA to be approximately $2 million. Finally, we are experiencing some implementation delays due to supply chain pressures with our Northern California data center being the biggest impact, which will also impact our full year transaction adjusted EBITDA. While these delays do not reduce the total contractual revenue received, they do impact the timing of revenue recognition. As for revenue and CapEx guidance, we are reiterating our previous guidance for full year, which you can find on Slide 20 in our earnings release. In summary, our second quarter results were driven by strong underlying demand and crisp execution. Moreover, we expect this momentum to continue as we have seen no slowdown in demand or deterioration in the business fundamentals. While we are facing some challenging macro headwinds in the near term, we believe we have taken adequate measures to navigate them without impacting our long-term trajectory. With that, thank you all for your continued support and for joining us today to discuss our second quarter results. Operator, please open the line for questions.

(Operator Instructions)

Our first question today comes from the line of Michael Rollins from Citi.

Couple of questions. First on the guidance, if you were to unpack the revenue guidance, how are you thinking about the organic impact relative to the FX? And would guidance be improving if it wasn't for FX? Or are there some other factors that we should be thinking through in the current update? And then secondly, as you consider the business plan that Cyxtera originally outlined and the progression of revenue relative to utilization, how is that trending? And is there any notable observations where you could get more revenue for the utilization that you are anticipating over time or less or similar?

Mike, thanks for joining, and thanks for the question. Let me take the second one first and then I'll pass it on to Carlos for the FX. I think from a revenue perspective, that occupancy, we're very pleased on where we are, right? And that's all driven by net bookings, pricing is stable to up, the cabinet is stable to up. And so that's what's driving and will drive the revenue growth along with the occupancy growth. So we're pleased with that trajectory. From an FX perspective, Carlos, you may want to.

Yes. So Mike, I think there's more than just FX on the revenue impact, as I think Nelson mentioned and I also reiterated. This delay in Northern California means that a significant piece of the new capacity won't come online this year, will come online next year. And so that's also an impact on revenue. Now we've overperformed up until this quarter from a revenue perspective, and that's what keeping guidance where it was originally. But you can't just blame FX for the drag on that number.

And the other thing I'll mention, Mike, just to add a color because we may get this question later. We don't do a lot of new builds compared to some of the competitors. So we're so much (inaudible) from the supply chain and particular instance with this data center, we are experiencing it, and it's something that, again, it's timing (inaudible).

The next question today comes from the line of Sami Badri from Credit Suisse.

So one thing, as I look at the way you guys are in this power cost type impact to your full year guidance. You guys have kind of explained it and showed it in a little bit of a different way than we saw compared to your peers. Can you guys kind of give us an idea, is this a Cyxtera-specific way of impact that's manifesting itself into your numbers? Or is this industry standard that's impacting your numbers? Just we have a better idea on how to interpret what's going on in the underlying business?

Look, Sami, tough to talk about the rest of the industry and how our peers do it. From our perspective, I will say the retail model is an all-in tower model versus maybe metered power model. The majority of our power is all in. And so our -- it takes -- as we -- as our power cost increases, we go through the process of passing on that power cost to our customers. And so what we're describing and we're giving it and I think in a good level of detail to give visibility on what we're doing with it and why it's really timing in nature, and we're not concerned that it's a fundamental impact to the business.

Metered power customers as their rates go up, just pay those metered power rates. We are primarily an all-in power approach with our customers. Hopefully, that helps.

If I want to add I think the reason why we presented it the way we presented it is because we wanted to highlight 2 things that -- when we have been addressing this problem, were steady end points for us and for our shareholders. The first one being that we're talking about unprecedented quarterly movements in the cost base. And I think that's something that we -- I think we all know it, but we wanted to reemphasize that contrary to what historical averages of 2%, 3%, we're looking at 12% or more in any given quarter. And so that's one thing difference. The other one is that it's timing related. Because I think we've said it is we can recover 90% plus of those costs, but there's a time lag. And so what we wanted to emphasize is -- the fundamentals of the business are not affected. It's a timing difference. That's why we presented it the way we did.

And also, while we're so pleased with the churn number, right, because we see that this is not impacting. This is effectively a price increase to customers, but we're still seeing customers value what we provide them, and we're not seeing it in the churn over. So that's why it's truly timing from our perspective, Sami.

Got it. And my other question has to do with your occupancy increase of 500 basis points year-on-year and the backlog coming in the way that it is. Is this being driven by 1 or 2 or a specific cohort or customer type coming into the actual business? Or are these existing customers expanding footprint? Can you just give us some characteristics on both backlog and the occupancy increase?

Sami, we look at, honestly, we're seeing strong demand across the entire footprint, right, both new logos and existing customers. So I can't really point to a specific vertical or customer type, which we think is healthy for the business. That's what we want to see. And I think the second half of the question was more about occupancy. Can you repeat the second question, Sami, if you don't mind?

Yes. So if I just think about your occupancy increase, right, was there one customer that drove, say, 200 to 300 basis points of that 500 plus? Or is it very broad-based across the portfolio you're just seeing several contracts get signed, deployed occupancy increases across the whole portfolio? I'm just trying to understand customer characteristics within your portfolio.

Yes. So we're seeing -- we have multiple customers. That's what's driving bookings, which ultimately drives revenue. And every quarter, we have some big deals that we signed. There are some big deals this quarter as well. But I wouldn't point to any particular customer or a particular market that's driving occupancy and what we've seen in that occupancy trajectory over the last few quarters.

In terms of backlog, I will talk a lot about we don't give a number for backlog. But obviously, when you have the strongest net bookings quarter that you've had in the company's history here in the second quarter, all of that becomes backlog as you're deploying that over the second half of the year, which also points to why we have an unchanged revenue guidance, right? We feel really good with where we are from a demand perspective.

The next question today comes from the line of Frank Louthan from Raymond James..

Just to break down the guide a little bit more. It looks like the midpoint of EBITDA is down about $7 million. It appears, maybe half of that is FX. Can you give us sort of the breakdown between the Northern California data center, what the extra costs are riding on that. And then possibly the -- how much the power costs there? And exactly -- and how much of power cost -- you said you'll be recovering it in '23. Can you give us a range that you think you can expect to recover in dollars in '23 that will be additive there as well, that would be great.

Yes, Frank. So let me start with the last piece because I think the challenge that we're facing is that if you look at our June year-to-date performance, we're on track on all the metrics, right? The challenge that we're seeing is that when we look at our vendors and we look at our advisers and we look at the forward curve for energy, what we're seeing is a curve that continues to materially move forward or up, sorry. And that creates this timing gap that we talked before. Now the problem today is that we're speculating with the curve that literally changes almost every day. I would tell you that when we talk to some of our advisers on this front, they tell us 2 years ago, we would revise the curve quarterly, 6 months ago, we would revise the car weekly.

Today, they revise the curve daily, right? So it's hard to give you a number of what that 90% recovery means because it's going to be predicated on what the actual cost that we end up incurring, right? So the part that we are comfortable with is that whatever that cost is, we're going to recover 90% on a run rate basis. And the only challenge is whatever happens in the fourth quarter, that's going to be a gap to the 2022 financial statements. We'll recover them in Q1, but that's why it's hard to pin a number on that part of the question. And then on the GAAP guidance, what I would say is, roughly speaking, I would think about this as 1/3 for FX, 1/3 for the Northern California delays and about 1/3 for the energy debate or timing gap of Q4, if the curve performs as we have forecasted, if the curve is different, that balance will be different as well.

All right. Great. And what are you seeing -- what are you doing as far as any price increases on your base pricing and any changes on escalators for new contracts? And then on the other side of that, for the leasing cost that you have, any concern that you could see an increase in your underlying operating costs as maybe some of your landlords maybe raising pricing? Or what is the sort of the next step [for them] you may face some increases on that.

So Frank, let me cover the pricing, and I'll pass it on to Carlos for the leasing. From a pricing perspective, look, the actual (inaudible) power cost is effectively a price increase to the customers. So that's happening. In terms of pricing in general, we have increased our prices in multiple markets. We've always been consistent that we price at the market level. Obviously, as costs increase, market adapts to that. So we have increased our prices across multiple markets in response to that. Carlos, I don't know if you want to cover the (inaudible).

Yes. And Frank, just remember that our leases are long-term leases. We're always talking about a 15-year lease with 5-year options in which pricing is pretty much locked in. And so no, we're not seeing, and we don't fear every pricing movement of from our landlords.

(Operator Instructions)

The next question today comes from the line of James Breen from William Blair.

Can you talk a little bit about California project. Any update on our timing there in terms of when it can start to open next year and -- and how much it delays revenue and what the initial sort of revenue projections are given the size of the facility?

Let me address the timing and Carlos can address the projections. The timing, we still expect to complete the data center this year, which -- it's just going to be delayed into the second half of the year. So we won't see the full impact of that data center coming online until 2023, but we still expect to complete the data center.

And from a protection perspective, we do not provide disclosure on a facility-by-facility basis. But I'm sort of like giving you a hint of what the delay might be on a quarterly basis. It's not a full quarter. But roughly speaking about 1/3 of the changing guidance from an EBITDA perspective is going to be related to that delay. I think you can extrapolate.

Great. And then just one more, just in terms of supply chain issues around some of your customers as the uptake as customers first get into (inaudible) and then grow over time, has that slowed at all as a result of supply chain issues? Are you seeing generally historical uptakes?

Yes. What I would say is that the supply chain constraints are real for us. Again, we mitigate both of that because we don't have a lot of new construction. I would say there's slight delays in being able to implement contracts, not significant, nothing that we can't manage through. And we've been able to manage through that for the first half of the year. It's not slowing down the demand. I want to make that very clear. The customers are going both new logos and existing customers, but our ability to translate into revenue, there is a slower bit of implementation that you see the supply chain and nothing that's not manageable at this point.

And if I may add, we're seeing a positive impact of that supply chain challenge for customers and the fact that it's starting to affect their implementation timing in that we're getting even more interest in using [Bare-Metal] as a stepping stone for those deployments.

Good point.

There're no further questions registered at this moment. So I'd like to pass the conference back over to Nelson Fonseca for closing remarks.

All right. Thank you very much for joining us for the call this quarter. We look forward to updating you guys on the next quarter as well. Thank you.

Goodbye. Thank you all for your participation. This concludes today's conference call. You may now disconnect your lines.