DXN Limited (DXN.AX) Earnings Call Transcript & Summary

Good morning, everyone, and welcome to the DXN webinar. My name is Tim Powditch. I'm with TMT Partners who acts as DXN's corporate adviser. I'm very excited today to introduce DXN's CEO and Managing Director, Matthew Madden. And at the end of this presentation on the recent acquisition of Darwin data center and continuation of the edge strategy, I can handle any questions participants are likely to send through. [Operator Instructions] If you e-mail those through, they'll come through to me and I'll -- we'll get through as many of those as we possibly can. We've already had some questions come through that we'll prioritize and we'll go from there. Just further bit of housework just onto the disclaimer. Matt, if you can pull that up. Okay. Basically, you can look through the disclaimer any time, but it effectively states that there are no forward statements in this presentation, and where there appears to be, that it does not represent a forecast. So having said all that, now I'll pass you over to Matthew Madden.

Thanks very much, Tim, and thank you, everybody, for joining today's presentation just to give you all a bit of an update on the recent announcement with our acquisition into Darwin. Just in terms of the executive summary, this presentation is a presentation that we've already put up on the ASX platform and available. The purpose of today is just to talk you through that and answer any questions that may have arisen from shareholders or interested parties. So firstly, DXN is progressing our regional edge data center strategy and adding to our data centers now with locations in Sydney and Tasmania. TAS01, our Tasmanian data center, was our first step in our regional edge strategy. And SDC or secure data center in Darwin is our next positive step towards that. Obviously, in terms of doing that, we're seeking to raise $7.1 million with $5.6 million already secured with an early announced placement of $1.6 million and a $4 million debt facility that we're working through with pure asset management. The SPP that we have on offer is for up to $1.5 million for existing shareholders. Just go on to the next slide. Look, this slide is a really important slide and really the crux of the reasoning behind Darwin. Darwin is an extremely strategic and important location for Australia both from a defense perspective, but also, it's the closest city to Asia and the shortest distance to Singapore for fiber optic cables. The data center that we are acquiring in Darwin is -- you can see on the screen, if you can see my cursor, is a yellow line that represents a cable from Darwin to Port Hedland. That's a solid yellow line. And you'll see that is -- from Darwin down through the middle of Australia, there's some green lines that sort of extend over to Sydney, Brisbane and Australia. All of these cables are linked and interconnected in the Darwin data center, and that's extremely important to understand that from that perspective. The data centers had a number of upgrades over its 17 years with the latest hall added 3 years ago and able to provide high-density computing. The data center also houses government customers on long-term contracts and like our Tasmanian data center has government customers. SDC is also a carrier-neutral data center with well over 10 carrier -- telecommunications carriers in the data center. Now I'm just going to reflect back to the solid yellow line. And you'll see a dotted yellow line that interconnects a cable called the ASC cable or the Australia Singapore Cable that extends from Perth to Singapore. That dotted line is a build that Vocus is planning to do and has committed to, to bring the cable and extend the cable into Port Hedland. And subsequently, that will connect Darwin directly to Singapore. This is the first of a number of subsea cables that are planned to come into Darwin. And the importance of this cannot be understated. It is the shortest path from Singapore to the rest of Australia and Asia. And based on the concentration of cloud in Sydney and Melbourne will mean that Darwin will become a key hub point for the rest of Australia when communicating with Asia and the subsea cable systems that extend out of Singapore. The cable that extends down from the green cable that I talked about earlier before is the cable that links the rest of the country from Darwin. And that cable also terminates in our data center. The total price for the data center business is $4.88 million and has a delayed settlement of $850,000, which is predominantly based on customer warranties and equipment warranties within the data center. The current occupation levels of the data center are at 70 racks, and the data center has an ability to expand to a further -- expand to 127 racks in the existing data halls. We can, of course, add additional capacity to the data center, and that will be -- that will significantly increase if we needed to. But it means that we don't have to do a lot at the start of the data center whilst we look to grow that out. The financials that we prepared and shared with anyone was based on a pro forma profit and loss of DXN's unaudited accounts alongside the Darwin unaudited accounts. The addition of $1.7 million in DC operations revenue would have lifted DXN's results to $11.2 million. That's a simple addition there. But more importantly, the importance of the improved gross margin is evidenced by the addition of SDC to DXN. And this really demonstrates why adding quality annuity revenue is important for DXN's goal to get towards self-funding. And that is one of the primary drivers for our data center operations business, is to increase our reach and footprint to customers in Darwin does represent that opportunity for us. We talk about a capital-light edge data center model. And data centers are a capital-intensive business in their early stages of development. Hence, why the attraction towards brownfield data centers within an existing revenue stream and profitability. So DXN is looking towards partnering with REITs, or real estate investment trusts, with an appetite for digital infrastructure. So it will be a focus for DXN to assist in edge DC expansion over time. The REITs, or the real estate investment trusts, have a much larger balance sheet than DXN does and a much longer time horizon on returns. And this is an important part of our strategy as we move towards building out data centers into Southeast Asia and other locations and really something that we will start to focus on in the coming years. Our modular manufacturing business is an important part of our business, and I thought I'd take some time to take people through what the progress is that we've been having here. We have mentioned in the past a strong pipeline that we have in the telco mining, subsea cable and edge data center market. And the next slide really represents those targeted market segments. So the subsea cable market, the first section here, if you can see my cursor, cable landing stations is really that representation that DXN has into the subsea cable market. The subsea cable market is a USD 4 billion market globally, and approximately 6% of that spend is directed towards the cable landing station. Now those cable landing stations are a -- can be either a bricks and mortar type solution or a prefabricated solution that DXN builds in its factories today. DXN has rolled out 10 cable landing stations so far, predominantly in the Asia Pacific region. And we've done a lot of that work predominantly in a pandemic-ravaged world. The market in and around this part of the world, the Asia Pacific area, is the largest growth market for subsea cables currently. And the more subsea cable systems planned for deployment, it means that DXN has a greater opportunity to represent itself there. In a very short period of time, DXN has built a reputation on delivering quality with key players in the market, and that's evidenced by the 10 cable landing stations that we've rolled out so far. Our expectation is this market is a market that will continue to grow, and the sales team's pipeline is very supportive of that view. The next representation that we have or the next market that we target into is the mining sector. Mining is again an industry that we're focused on, and Australia has the largest fleet of autonomous vehicles in the world. All of the mine sites that are either in operation today or in the development stage now encompass a significant investment in on-site compute and communications infrastructure. And these requirements mean that a data center environment or a communications housing environment is required. And DXN sees this market as a market that will continue to grow as automation becomes more and more prevalent. And we are finding ourselves in a good position to support that market. And obviously, last year, we secured a number of mining customers. And probably the most notable was Newcrest Mining, where we built for them a 150-kilowatt data center and deployed that into Cadia, which is just near Orange in New South Wales. We're also starting to see more and more opportunity now and around the telecommunications sector, especially around 5G rolling out and the ongoing need to have compute processing closer to where it's being consumed. And we're certainly going to see the opportunities expand in this sector over the coming years. In Australia, there have been a number of announcements that have been made by infrastructure, telecommunications carriers and new entrants into the market. And some of those new entrants are the likes of HyperOne, which has announced it will be rolling out a long-haul cable infrastructure throughout Australia to support their subsea cable sister companies. And DXN has already been working closely with Sub.co, which is one of those sister companies to deploy a cable landing station in Cocos Keeling Islands and the associated works with that cable landing station. So we're already building a strong reputation towards those customers in Australia. They're going to be rolling out infrastructure. In addition to them, there are a number of other carriers that are looking to roll out or expand their infrastructure of long-haul fiber optic cables. And DXN has developed a product that goes to support those markets. And these are in the form of micro DCs or edge DCs into those locations. And some of them quite similarly look like cable landing stations, to be honest. So the Southeast Asia development, which is more encompassed in the telco and government sector or the edge DC sector, is now starting to see a much faster time to operation. And a prefabricated solution is one of the things they're looking to utilize. We're now starting to see these broader opportunity of projects coming up in locations in Southeast Asia, like Thailand, Philippines, Vietnam, et cetera. And we're also starting to see opportunities starting to develop in Africa and the Middle East. So with our Perth operations, we're well situated on the map to be able to support those particular opportunities in those countries. In terms of this particular slide, this is just talking about the equity capital raising. We're looking to raise $3.14 million, of which we've already had a placement through DC Alliance, which is a strategic partnership since we have an option or a further placement that will come in December 15, and that's subject to FIRB approval. Just wanted to sort of take a little bit of a moment to talk about DC Alliance. DC Alliance are a Singaporean company that has purchased a data center in Perth. And that data center is also a Tier 3 data center. We're working with them to work out how we can work together on our broader data center portfolios and how we can flow into the Southeast Asian market. So with DC Alliance, we see this as a strong strategic partnership. And certainly, their commitment to DXN is evidenced in that initial placement that they've come in with. We also feel that making the offer through our shareholders or part of this equity raising is a really important strategy and one that we've supported with our SPP or share purchase plan to shareholders on the same level as we have offered to the [indiscernible]. In addition to the equity raising, we are looking to bring in a new debt facility with PURE Asset Management to reduce the dilutionary effect of the capital raise. We think this is a great opportunity for DXN to move forward. And PURE Asset Management has worked with a number of small cap companies throughout the ASX. And we think we will have a good partnership with them over time. This slide just represents the source and use of funds. Part of that, you'll note, is the repayment of the existing debt facility. We still have a debt facility with the ANZ Bank. This will replace that. This is a much more user-friendly facility than we had with the ANZ Bank, which was an interest and principal repayment facility. We've now largely taken that away, and this gives us a lot more flexibility. We're also -- obviously, the main purpose of the raise is to purchase SDC. But more importantly, as I've outlined, our modules market is set for a good year ahead. And we need to be able to make sure we have some working capital to support that. Again, this is the timetable. This has been published so people have some idea as to the time frame. The SPP is set to close on Thursday, the 30th of September, and I think that's next week. And we'll announce the results on Monday, the 4th of October. And the shares that will be issued on Wednesday, the 6th of October, under the issue. That concludes the presentation, short and straight to the point. Really, the primary focus is we're really excited about the opportunity with Darwin and what that brings to DXN and obviously, the strategic importance of that data center more broadly. Back to you, Tim.

Yes. Look, great presentation. Thanks, Matt. Just I'll begin with some questions. [Operator Instructions] The first question is related to your manufacturing business. So this question says, you've stated in the past you have lots of contracts in the sales pipeline. Can you elaborate how many contracts and how big the contracts will be in terms of dollar figures? A lot of the contracts signed in the last 6 months seem to be small dollar values.

Yes. Okay. I'm not sure that million-dollar contracts are small for us. So we've announced quite a few of those last year. Look, it's difficult -- I'm pointing to the statement at the beginning. We can't provide anything that presents -- represents some form of forecast or future view. What I can say is that we continue to see growth in those -- in the markets that we mentioned earlier. I did take some time to take people through the opportunity that we're seeing around the subsea cable market, the mining sector and the edge and telco markets. We see those as our primary markets in the short to midterm for DXN, and we certainly see the geographies starting to open up in Southeast Asia and Africa. And one of the things I will sort of state there is about 60% of the world's population is connected to the Internet today. That means that there's another 40% that's not connected to the Internet. And broadly, what a data center does and what the associated infrastructure does in a market like the subsea cables, et cetera, is connects those countries to the Internet. So we expect to see those markets in Southeast Asia and Africa growing over time. I'm sorry I can't answer that question in any more detail that, that person has asked because it will start to look like a forecast.

Yes. And similarly, this question probably falls in the same category. But what is the time line for contractual bids with HyperOne. And has DXN any involvement with that process?

Has DXN got any involve -- what are the -- well, you'll have to reference that question to the HyperOne team, maybe to Bevan Slattery in terms of that. So I can't really comment on another business' bidding process or what they're proposing to do. In terms of would we be participating, absolutely, DXN will participate in any opportunity in Australia for the rollout of infrastructure with HyperOne. At this stage, they're going through an expressions of interest time process. We are obviously -- have been keen to respond into that and look into that. But in terms of what those time lines are and the result and success DXN might have there, that will be up to us putting our best foot forward and seeing if it's -- if we can do something.

Okay. Thanks, Matt. Another question relating to the financials. What is the likely time line towards EBITDA and cash flow positive? The company has been cash flow negative for some time now, and I would like to see when that is possible.

Yes. Okay. So yes, it has. The company is a start-up company, and I'll just take people back to this particular slide here because I think this really signifies what the potential -- what the acquisition of Darwin does towards bringing us to a more EBITDA -- closer to that EBITDA positive scenario. So adding Darwin $1.7 million in revenue also brings with it about $700,000 in EBITDA directly to the business. So as you can see, if we looked at last year towards this year, what does that do? It brings us closer to that point. So I think really, the importance is building and growing that annuity revenue in our data centers is really an important focus. But more importantly, lifting our manufacturing sales and infrastructure will have a direct result that's getting us closer to that point. So I think we're heading in the right direction, Tim.

Okay. Well, another one here is, is it likely that the Darwin data center will grow faster than the Tasmanian data center that you purchased last year?

Yes. That's a really insightful question. The Darwin data center does have a couple of things going for it that are really, really strategic and important. One of those is that there is an influx of subsea cable systems coming into or proposed to come into Darwin and one of them already coming in, which is the Vocus ASC cable, Australia Singapore Cable extension. That's a relatively simple extension for that company to do and relatively -- and can be completed relatively quickly. So we see that as a great opportunity to grow in Darwin. And time will tell whether that will be faster than Tasmania. But we certainly see Darwin as having a lot of positive points about it.

Okay. Thanks, Matt. Another question here. Does -- what are DXN's international ambitions? And does DC Alliance play a part in that?

Yes. So that is a good question. So DC Alliance does play a key part in our Asian opportunity. We see -- really, we see the opportunity in and around our backyard being Southeast Asia. DC Alliance is based in Singapore. Singapore is a key hub location for a number of things. Firstly, it's a very large footprint of data centers in Singapore. But more importantly, it's also a hub point for subsea cable systems into the rest of Asia. So having a platform from there is really a positive for us. The DC Alliance team really want to work with us on how we can expand into Asia. So I definitely see that as a positive step forward.

Okay. Thanks, Matt. Another question regarding Sydney. Sydney has been a drag on the company for some time. Is there a solution apparent?

Yes. We've been working on a number of solutions with Sydney and trying to get that resolved. As we have announced to shareholders, we have largely gone towards solving the problem in Melbourne by working through that issue, and we made an announcement about that. Not wanting to go into a lot of details around that, but it certainly will enable us to free up nearly $1 million worth of cash that was being dragged out of the business. The Sydney data center is a data center in a really good location. It's in a central point. It's -- the issue of that data center was when it was built, it didn't have that anchor tenancy in it that we did in the Darwin or Tasmanian data centers. So for us, we've been working on that solution and how we solve that. Part of that is to build up our telco connectivity into the site. We made some announcements about 5G and -- coming into the site and also fiber connects coming into the site. And fiber connects is a dark fiber only service provider that connects into the key data centers around Sydney. They run a hub from our location that has in excess of 860 pairs of fiber coming in an east direction and west direction, and they are centralized in our data center, connecting to all the other data centers. So we see there is possibly a way that we move that forward. And certainly, the telco infrastructure will add to that. And we're also working on solutions for our joint venture into that site possibly or even getting that anchor tenancy into the site as well. So we're working hard on a solution.

Okay. And the last question I have here is, in fact, [indiscernible] stage. What is the likely timing of any capital-light structure that you've mentioned in the presentation? And how may that assist the company?

Yes. So the capital-light structure, we have been approached by a number of large property development groups across Asia Pacific. And there is a strong appetite to enter the data center market and especially the edge data center market. The edge means things to different people, but it's the -- if we use the term, the closest point to where the information is being consumed is edge. They had a strong appetite for digital infrastructure, and they also have a much bigger balance sheet than we do. So in terms of timing, I -- it's difficult to predict in those sorts of markets, but we're certainly progressing that as we go forward now. So I expect, for us, there will be strong engagement in -- with some large property development groups over the next couple of years.

Okay. Good stuff. All right. Look, that's all the questions we have at the moment, Matt. So I'll hang on just a moment. Just a new one through. Okay. I've got a couple of quick questions here. I'm not sure the context of this one myself. Is the connected farms opportunity still progressing?

We've had no further advice other than the announcement we put out about Connected Farms at this stage. We have a memorandum of understanding with them. And we have an open purchase order at this stage. There's nothing more that we can say about that.

Okay. And another one on -- from the same participant. Has there been much progress with the New South Wales government's $100 million edge infrastructure project?

The New South Wales government is in the midst of dealing with the major pandemic outbreak and has been for a little while. I think they've been heavily distracted would be my guess. We've got no further update on the government edge strategy and where it's progressed at this point.

And following off of this person, is DXN's manufacturing facilities being based in Perth led to greater opportunities for modules supporting the mining companies in WA?

So yes, that's a good question. And I would have to say that WA has probably been the state in Australia that has not been affected by COVID. So operations in WA have been good. The mining industry has been progressing well. We've done a number of deployments into the Pilbara throughout last year. And we've also done some deployments into New South Wales. So I think certainly, having a company and manufacturing facility in WA has assisted with that. But we also see that there's broader opportunity beyond WA and the mining sector not only just in Australia but more globally as well.

Okay. And I think that's all I have at the moment. I guess before I hand over you to wrap up, I'll just remind everyone that the share purchase plan is underway. The documents have been mailed to shareholders or sent to shareholders. And the SPP closing date is the 30th of September. So we'd certainly encourage all investors to participate in the SPP. I think it's a very important funding mechanism for the group and an opportunity for investors to participate in the growing edge strategy of DXN. So Matt, over to you to wrap up.

Yes. Thank you, Tim. Look, the real purpose of this is really about a positive acquisition for DXN, positive in the sense that it's positive cash flow and -- for the company. But more importantly, the strategic opportunity cannot be understated about Darwin. There are a number of planned subsea cables that are coming in to Darwin. If our shareholders want to go and Google that, they can and see the list that's there. The Northern Territory government is intensely supportive of growth and digital growth in the -- into Darwin. And they, in fact, had a coined phrase called the Terabit Territory. So they are a strong supporter of what we're doing up in Darwin, and they're very supportive of the acquisition as well. So we look forward to the opportunity. I'm sure our shareholders will, and I think the pathway to Southeast Asia from Darwin and DXN's purchase is the real reason that we're all here today. So thank you very much, and thank you for the opportunity to speak with you all today. Thanks, Tim.

No worries. Thanks, Matt.