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spk01: Good day and welcome to the 6TERRA Q2 2021 earnings call. All participants will be in listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star, then one on your telephone keypad. To withdraw your question, please press star, then two. Please note this event is being recorded. I would now like to turn the conference over to Greg McNiff, Investor Relations. Please go ahead.
spk03: Thank you, Operator, and good afternoon, everyone. Sextera release results for the second quarter of 2021 ended June 30, 2021, last Monday, August 9. If you did not receive a copy of our earnings press release, you may obtain it from the Investor Relations section of our website at irsextera.com. With me on today's call are Nelson Fonseca, Chief Executive Officer, and Carlos Sagasta, Chief Financial Officer. This call is being webcast and will be archived on the investor relations section of our website. Before I turn the call over to Nelson, I'd like to note that today's discussion will contain forward-looking statements and, as such, is subject to risks and uncertainties. Actual results may differ materially as a result from various important risk factors, including those discussed in our earnings press release and in our filings with the SEC. Please note that any forward-looking statements that are made on this call are based on assumptions as of today, and we undertake no obligation to update these statements as a result of new information or future events. For more information, please refer to the forward-looking statements, notices, and risk factors in our SEC filing. In addition to U.S. GAAP reporting, XTERRA reports financial measures that do not conform to generally accepted accounting principles. We believe these non-GAAP measures enhance the understanding of our performance, reconciliation between these GAAP and non-GAAP measures are included in the tables found in our earnings release filed last Monday. As noted in our earnings release, we have posted a supplemental earnings presentation on the IR section of our website, which management will refer to during their prepared remarks. And with that, I'd like to turn the call over to Nelson.
spk02: Thank you, Greg. Good afternoon and thank you for joining us today. We know how busy you all are, so we appreciate you taking the time to join our earnings call. Let me start by saying how excited the team and I are about hosting our first earnings update as a public company. I want to thank all of our investors, both old and new, for their support and all of our customers and partners for their trust. In addition, I want to thank each and every member of our team for their dedication and commitment to Sixtera. Without them, we wouldn't have reached this next stage in our growth. I'll start today with a quick recap of our second quarter results. Let's go to slide four. Total revenue for the second quarter increased by $2.2 million or 1.3% year-over-year to $175.4 million, while recurring revenue also increased by $2.2 million or 1.3% year-over-year to $167.3 million. As we announced at our Analyst Day, we successfully renewed our contract with Lumen on a long-term basis last year. We're very happy with that renewal because Lumen now pays market rates with standard commercial contract terms, and the relationship with them is strong. Core revenue, which excludes revenue from Lumen, increased by $10.6 million, or 7.1% year-over-year, to $159.4 million. Transaction-adjusted EBITDA increased by 3.2 million, or 5.4% year-over-year, to 62.3 million, driven by top-line growth and operating leverage. Annualized core bookings increased by 10.4 million, or 54% year-over-year, to 30.9 million. At the same time, average monthly core churn improved year-over-year to 0.9% in Q2 of 2021 from 1% in Q2 of 2020. Prior to having Carlos provide more detailed information on our second quarter results, I would like to quickly review our strategy for the benefit of the participants that are new to the Sextera story. Slide 5 summarizes some of the key attributes of the company. Sixtero was formerly the largest private data center provider and is now the third largest publicly traded global retail co-location provider. We have an international platform with 61 data centers in 28 markets across North America, Europe, and Asia. We serve over 2,300 customers, mostly large enterprise and global service providers across all major industry verticals. Our focus is on the retail co-location segment of the data center industry because we believe it is the sweet spot in the industry. To be successful in the retail co-location segment, you need to have a strong interconnection foundation, and we certainly have that with over 40,000 cross-connects across our platform, positioning us in the top three among our publicly traded data center peers. Innovation is a core part of six service culture, and our development efforts are focused on making the data center easier to consume for our customers and partners. To that end, we have developed our digital exchange and bare metal platforms. I'd like to dive into a bit more detail on these attributes. Moving to slide six, we believe the data center is the foundation of the digital economy, and the strong tailwinds for this industry supports this view. These tailwinds are led by digital transformation initiatives among enterprises, which have been underway for some time, but was reinforced and accelerated by the COVID-19 pandemic. Enterprises need to transform digitally to ensure they maintain their competitive advantage, and that is best accomplished through the use of hybrid IT approaches with multi-cloud solutions across multiple data centers. These hybrid solutions are best delivered from deeply connected data centers, thereby positioning retail co-location providers in the sweet spot of this growing trend. Moving to slide seven, Sixtera is well positioned to benefit from enterprise digital transformation and the hybrid solutions it requires because of its differentiated data center platform. In an industry where scale matters, Sixtera has a global platform with facilities in all of the top ten data center markets in the world. This is in contrast to other publicly traded retail colocation providers whose platforms are more regional in nature. Our data centers are primarily located in Tier 1 markets because this is the focus of our enterprise and service provider customers. Slide 8 summarizes our interconnection strength. Across our footprint, Sixtera has more than 240 network service providers and offers customers low latency, direct connections to all major public cloud providers. We have a deeply interconnected platform with more than 40,000 cross-connects supporting over 2,300 enterprise and service provider customers. Each of those cross-connects represents a business relationship among our customers and partners, delivering value across our ecosystem and driving over 11% of our total revenue from interconnection. This strong interconnection foundation and broad ecosystem of enterprises and service providers allows us to drive true innovation across the platforms. To that end, we have developed a series of leading edge products focused on making the data center easier to consume for our customers. Let's turn to slide nine to discuss further. The core innovation we have developed is our digital exchange. The digital exchange platform is a highly scalable, multi-tenant, highly secure platform that allows customers to dynamically create secure networks in real time and directly connect to other enterprises and service providers at the click of a button. We call these east-west connections because they don't require access to external network providers. We've seen strong adoption of our digital exchange, which enables these east-west connections and facilitates a thriving ecosystem among our customers. The more enterprises grow their interconnection, the less likely they are to churn because they have established direct connections to their business partners. Our service provider customers get increased revenue from these business relationships with our enterprise customers and expand their footprints within our global platform as needed. The automated nature of the digital exchange platform provides the foundation of our bare metal offering. Bare metal is a rapidly emerging category of digital infrastructure. The core value proposition is that bare metal provides all of the benefits of retail co-location, including lower total cost of ownership, better security, better compliance, and better control, but does so at the speed of cloud. Traditionally, a colocation environment would take customers as long as six months to deploy, a timeframe that doesn't meet the requirements for certain projects. As a result, many of those applications are deployed in the public cloud because of its faster deployment times, even when other features of the public cloud might not be ideal for this particular workload. With the speed of bare metal provisioning, retail co-location becomes a viable option for a larger percentage of overall workloads. Sixtera developed the software for the digital exchange and bare metal in-house with an API-first approach that allows our customers and partners to access these capabilities with just a few keystrokes. In addition, these capabilities are now available via the Sixtera portal, allowing all of our customers to take advantage of these differentiated services. This in-house software development approach is a structural advantage that allows us to continuously innovate at an accelerated rate. Our FedRAMP and AI as a Service offerings are good examples of this. FedRAMP is a certification that the government requires to house and support their IT infrastructure. The federal government is no different than any other large enterprise. They need to digitally transform, and they need to do so in a hybrid fashion. This certification was critical to Sextera's ability to partner with Nutanix to jointly announce the launch of the Nutanix Federal Innovation Lab powered by Sextera. The Federal Innovation Lab, which is enabled by our digital exchange and located in one of our data centers in Northern Virginia, is a dedicated space focused on translating technology innovation into proofs of concept to simplify and automate U.S. government agency IT environments. Sixterra's AI as a service offering, powered by NVIDIA DGX A100, offers the simplicity and ease of the cloud with deterministic performance of dedicated infrastructure. This is a first-of-its-kind offering in the market that provides a flexible infrastructure model, leveraging point-and-click provisioning via our digital exchange. Customers also have direct access to our rich ecosystem of service providers, including storage as a service, interconnection, and security to complement their NVIDIA DGX A100 deployment. Moving to slide 10, the end result of all of this differentiation is the 6TERRA marketplace. Our global footprint of densely interconnected data centers with highly automated network and bare metal capabilities provides the ideal platform for enterprises and service providers to deploy their critical IT infrastructure. This full platform approach is the core of our go-to-market strategy and has been the driving force to our sales momentum. As this diagram depicts, the platform approach allows our partners to deploy hardware as needed, rapidly provision that hardware and associated networking, and deliver it to customers and partners within the data center and across the full global platform. This is a true value-added approach. Now that I've highlighted Sixtera's competitive advantages, let's move to slide 11 to discuss how we are leveraging this differentiation to drive growth. Taking advantage of our in-place capacity and continuing to increase occupancy across the platform is the key driver of our organic growth plan. Increased occupancy leads to increased revenue and high EBITDA flow through because the majority of our costs are fixed. We have made significant progress in this area and we will share some details on that progress in subsequent slides. The second lever of our organic growth is expanding in our existing footprint. As we highlighted at our analyst day, our plan contemplates expansions in four top 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 inventory for all our customers. To that end, we announced in late June that we were developing a new data center in Silicon Valley, as well as adding additional capacity in our existing facilities in Silicon Valley and Chicago. The new Silicon Valley data center located in Santa Clara is a nine megawatt data center currently under construction and is expected to be ready for customers in late 2022. We are excited about the opportunities this additional capacity represents for our customers and partners, and Carlos will discuss the impact to our 2021 CapEx guidance in his remarks. 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 platforms, all high flow through services that increase our revenue per square foot while providing customers additional overall value and decreasing the likelihood of churn. I will address our inorganic priorities later in my remarks, so let's transition to slide 12 to discuss our sales momentum. We took several steps to improve our go-to-market strategy and execution last year, including reorganizing the sales force around our differentiated offering and organic growth focus. This included changing our sales compensation plan to include not only bookings targets, but a net MRR component as well. This introduced better churn management and has stabilized our core churn. We also regionalized the sales force to ensure we are increasing occupancy across the full platform. Lastly, we rebuilt the channel program from the ground up with partners that understand the true value of Sextera's marketplace approach. In addition to our robust stable of referral agents, the channel program has opened up new routes to market with managed services providers, global systems integrators, network service providers, and strategic alliance partners like Nutanix, NVIDIA, HPE, and Lumen. The impact of all these changes has led to consistent sales growth with an increase in annual LTM total bookings of 78% over the last six quarters. Turning to slide 13, our current occupancy sits at 68% across the platform, which gives us ample existing capacity to support our increased sales performance. This is high-quality capacity located in some of the most attractive global data center markets, so we have clear runway to support our increased sales performance. On slide 14, you can see that our continued sales momentum is already making an impact on occupancy, as our core occupancy, normalized for Lumens capacity giveback, increased 3% in 2020. Continued bookings performance with stable churn should continue to increase our occupancy and drive accelerated EBITDA growth. I would like to cover two additional topics before I pass it on to Carlos, inorganic opportunities and ESG. Scale is critical in this industry, and there are a number of inorganic opportunities that can help broaden our reach and accelerate our growth. The focus of our geographic expansion will be international markets. Our international footprint is already a competitive advantage, and we want to continue building on that differentiation. We can expand through greenfield developments, partnerships, or we can acquire assets. I believe we're very well positioned from an acquisition perspective. One of the benefits of the carve-out was standing up new operational systems which were built to accommodate inorganic expansion and acquisitions. We also have a management team that is experienced in realizing the expected revenue and cost synergies of acquisitions. We are in a privileged position because we don't need inorganic initiatives to achieve our stated growth targets, so we will carefully monitor inorganic opportunities and be selective in pursuing those initiatives that are accretive to our long-term plan. Last but definitely not least is our ESG focus. Like our peers in the data center sector, we are cognizant of our responsibility to be prudent stakeholders of the environment. During our analyst day in May, we highlighted our 22 ENERGY STAR certified data centers and announced our long-term commitment to 100% carbon neutrality. We've created an interdisciplinary team under the leadership of our senior executives and the oversight of the board that's working on implementing our long-term ESG strategy and will guide our efforts on this front. In early July, we announced that we had selected NextEra Energy Resources, the world's largest generator of renewable energy from the wind and sun, as our preferred supplier of green energy. Nextera Energy Resources will support our efforts to increase the use of renewable energy throughout our North American footprint, and both companies will work together to explore other renewable and clean energy projects. Additionally, Nextera Energy Resources, through one of its subsidiaries, invested in Sextera by subscribing for $20 million of the $250 million pipe offering completed by Starboard Value Acquisition Corp. simultaneously with the closing of our recent merger. By partnering with a proven leader in clean energy, we intend to accelerate our shift to renewable energy and help reduce our carbon footprint. In summary, we're very pleased with our second 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 results in more detail.
spk00: Thank you, Nelson. Good afternoon, everyone. And once again, thank you for joining us on our first earnings call as a public company. As Nelson has already mentioned, we're satisfied with our second quarter results, which we believe reflect strong customer momentum and validate our go-to-market strategy. Turning to slide 16, total revenue for the quarter increased by $2.2 million or 1.3% year-over-year to $175.4 million, while recurring revenue increased by $2.2 million or 1.3% year-over-year to $167.3 million. Top-line growth was mainly attributable to continued momentum in Netbooking's performance during the quarter. Interconnection revenue represented 11% of total revenue for the quarter and grew by 11% year over year. As a reminder, we successfully renewed our contract with Lumen on a long-term basis during the second quarter of last year. The renewed contract raised prices to market rates and implements a renewed channel of partnership that is yielding good pipeline momentum. Therefore, Q2 2021 is the last quarter in which we are comparing the new contract versus old and represents the headwind to our revenue numbers versus the same quarter of 2020. That being said, core revenue, which excludes Lumen revenue, increased by 10.6 million, or 7.1% year-over-year, to 159.4 million. This growth rate is consistent with a long-term target. Excluding non-cash charges related to the closure of our Moses Lake Data Center, gross margin for the quarter was 45.9%, a year-over-year increase of 20 basis points. Transaction-adjusted EBITDA increased by 3.2 million, or 4.4% year-over-year, to 62.3 million, principally due to higher revenue, lower cost of revenue, and lower SG&A costs. And transaction-adjusted EBITDA margin of 35.5% increased by approximately 140 basis points year-over-year, driven by top-line growth and operating leverage. Transaction-adjusted EBITDA increased by 1.4 million or 1.7% year-over-year to 78 million, which weakens to a margin of 44.5%. As a reminder, we view transaction-adjusted EBITDA as the best measure for comparing our performance to our peers because it adjusts for our asset ownership structure. Moving to slide 19, core bookings increased by approximately 54% over the same quarter last year, driven by customer momentum and strong channel partner contribution. We continue to see an increase in both quantity and size of deals as demonstrated by our bookings growth. Average monthly core churn of 0.9% for the quarter improved by 10 basis points year over year and was in line with our expectations. As detailed on slide 21, core MRR increased from $47.5 million exiting last year to $48 million, primarily due to $0.5 million of net installations. On slide 24, we have provided a breakdown of our capital investments. Q2 CAPEX remained broadly in line with last year at $13.6 million. Within CAPEX, growth CAPEX was higher year-on-year as we continue to have good momentum around bookings, which translates into installation CAPEX. Corporate CAPEX was down year-on-year as IT projects completed last year were non-recurring in nature, and we see a return to steady state in that category. We have announced several projects to expand capacity and follow our customers' growth trajectory during this quarter. but we would only start to see the impact of those projects in Q3 and Q4 and well into 2022. As a result of those initiatives, we have moved our CAPEX guidance up to reflect the expenses related to that initial capacity, which I will cover in more detail in a few minutes. Turning to a balance sheet and capitalization on slide 25, with the completion of the merger, we've raised $493 million before expenses and paid down our second lean facility. In addition, during Q2, we extended the majority of revolving credit facility until November of 2023. Our pro forma net leverage is now eight times, while our pro forma lease adjusted leverage is 6.2 times, based on a five times capitalization of our real estate payments. Pro forma for the completion of the merger, we have available liquidity of approximately $190 million. As we have mentioned previously, we're very excited to have completed our merger with Starboard, Value Acquisition Corp., and embark on this new Phase 460 as a public company, as it brings incremental flexibility and commercial momentum to the execution of our strategy. Although we have discussed our REIT status before, I want to reiterate our position, as it is clearly an important topic for investors. We believe we have the ability to convert to a REIT and have the ambition to do so at the right time. It so happens that our tax advantages right now, including $600 million of net operating losses, are such that we don't feel an immediate need to move in this direction. We do believe that REIT status has the potential to create value, and we don't see any material impediments at this time to conversion. However, we want to be thoughtful and deliberate about the decision, as our shareholders would expect. We intend to review this position at least yearly and find the right time to make that transition. And so turning to our 2021 guidance on slide 26, we continue to expect total revenue in the range of 681 to 702 million and transaction adjusted EBITDA of 217 to 223 million. As Nelson highlighted, we're expanding our capacity in the Silicon Valley and Chicago markets. Accordingly, we expect expansion capital expenditures for the full year to be in the range of 65 to 80 million. The top end of this range represents a $50 million increase to our previous guidance. And I would note that our long-term plan assumes organic expansion in the selected markets, including the ones I just mentioned. And so with that, I would like to thank you for your support and looking forward to an open and long relationship. Let me turn the call back to the operator so that we can start the question and answer session. Operator?
spk01: Thank you. We will now begin the question and answer session. To ask a question, you may press star then 1 on your telephone keypad. If you're using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press star then 2. At this time, we will pause momentarily to assemble our roster. Again, if you'd like to ask a question, please press star, then 1 at this time. This concludes our question and answer session. I would like to turn the conference back over to Nelson Fonseca for any closing remarks.
spk02: Well, thank you all for joining us today, and we look forward to updating you on our progress next quarter. Thank you.
spk00: Thank you.
spk01: The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.
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