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

And welcome to DXN Limited Q3 FY '25 Investor Presentation. This morning, we have, Shalini Lagrutta; and CFO, Laila Green, presenting. [Operator Instructions] I will now pass to Shalini.

Thanks, Mel. Welcome, everybody. As you dial in. We have commenced a regular webinar as we did in the last 2 quarters. And I'm delighted to be here. Laila and I thank you for attending. Mel, could I skip -- go to the next slide? So just a recap of DXN and what we do. So we design, engineer, manufacture. We maintain and we operate data centers in 3 core markets. As you can see there, there are 2 core markets and the third market I will speak about shortly. We have the modular division, which is we basically design, engineer, manufacture and deploy, and this is about 80%, 85% of our revenue to date historically, and this is deployed around the world, along with Australia. So the modular division is the projects division. We build landing stations, and this includes both satellite and cable landing stations. We have mining operations and as well as the edge data centers. In addition to that, we own and operate 2 data centers, one in Darwin and one in Hobart. The third division that we will talk about a little later is the Data Center as a Service, the DCaaS business, of which we have now established a new entity. Next slide. I'll ask Laila to go through the Q3 financial highlights at this time.

Hi, everyone. Just really quickly with the Q3 results, our revenue performance, we delivered $2.5 million for the quarter. And the majority of that revenue was derived from the modular business, which contributed $1.8 million, while the data center operations accounted for $700,000 worth of revenue. Our cash position for the quarter, we finished off with $3.2 million, and that provides us with a solid liquidity base to support our current operations. Strategically, we reached a milestone of reducing a pure loan -- further reducing the pure loan, which was done through a debt and equity conversion of $1 million, which again further improves and strengthens our balance sheet. Our operating cash flow has improved, although it was negative, it has improved on last quarter of the negative $2.6 million. This quarter, it was negative $1.8 million. The negative result was anticipated due to timing milestones for the projects as well as some delays in the project progression due to weather, particularly the cyclone, which delayed some shipments and so on. That also delayed our milestones from being received. Approximately $500,000 of milestones were expected to be received in March. They were delayed and $350,000 of that $500,000 was received early April. So despite that, the result continues. We can show that we're continuing to watch our capital and project-related cash flows. We're always looking at making sure our projects remain cash flow positive. With our backlog and our revenue guidance, as of the end of March, our backlog was $3.2 million. And of that $3.2 million, we have $2.6 million being derived from the modular division and $600,000 coming through from the data centers. At this stage, we remain confident that we will be able to deliver on our guidance of $16 million in revenue for FY '25. I'll hand it back over to you, Shalini.

Thanks, Laila. Next slide. So just picking up where Laila left off. We -- most of our revenue for the Modular division in this quarter has been from the 3 projects that's highlighted in this slide, East Micronesia Cable Ports and a global Internet company landing station contracts. Further, we've also signed in this quarter, $600,000, a new deal with BNL. This is one of the contracts that we signed in this quarter. Besides that, we have also entered into an agreement to acquire the freehold of Darwin. We've had independent valuation done within the data center industry, amounting in a $10 million valuation for the combined SDC and the freehold option, which enabled DXN's Board to make the decision to acquire the freehold. We're now making significant progress. We're in the 60-day financing time frame to complete the transaction. We're making significant progress with that, and we'll have further updates in due course. Further to that, we have also come to an agreement with the administrators of Tasmanet, whereby DXN will be paid all outstanding debt while under the administration process of FSG. And the outstanding amount from the last quarter of approximately $200,000 will be paid over the next 5 months. So DXN is, as part of this process, maintaining a very close relationship with the Tasmanian government. We've got weekly contingency planning meetings to make sure that in the event of any failure of the administration process, we're there to support and transition existing customers across. Just on the overall, we are well positioned to outperform FY '24 from our guidance as well as from a pipeline and growing pipeline point of view, including activities that's been happening in the last few months. And that specifically on that piece, I'll ask Mel to the next slide, we can talk about that a little bit. We've shared some detailed information in this announcement around the pipeline. And we wanted to sort of highlight the number of projects that we've got. And when I say projects, it means projects that we talk about delivering modules, the Data Center as a Service projects that we've just recently won as well. I'll go into that in a bit more detail, but it includes all of those different projects. We've had significant pipeline growth in 3 segments effectively, and that's more in recent times in the AI module division, which is high-density, high-performance compute customers, a lot of inbound requests come in for GPU-as-a-Service AI module requirements, which is right up our ally. We've also got interesting opportunities for Data Center as a Service, one of which we have recently announced, which in the last week. And we also continue to have growth and commitment from the landing station side of the business with both satellite and cable companies looking at landing station services from DXN. So if you look at that pipeline, the funnel that we've highlighted, the focus for the company is while it's across all projects and that pipeline continues to grow. These are basically everything from identified to contracting. We've got a significant share of our current pipeline now sitting between final negotiations and contracting. Effectively, when a customer has given us a verbal win and we need to finalize contracts, that's the point at which it becomes quite heavy on the contracting and discussions and finalizations. And yes, this sort of gives you a view of what that funnel looks like. Next slide please. We also wanted to take a little bit of an opportunity here to go back to this deck, which we talked about at the end of -- I think it was October, and this is the market segmentation. This is a -- I think it's important to just remind shareholders that DXN's solution and where we win is when we solve customer problems. And typically, it is bespoke customer requirements. And this is how we are able to find niche -- the niche that we operate in against very large competitive landscape that we've got. So when we talk about specific products, this is an ever-evolving market. I think we presented the specifics the last time we presented this in November. And I think it is also important to highlight a lot of work is now going into an additional segment of the product data center market segment, and that's the critical support infrastructure for hyperscalers. So every one of these solutions are bespoke in terms of customization, but they are market segmented and they are specific from DXN's standardization point of view, and we can effectively segment them into these market segments. So we have deployed and won the first 3 market segments. We've -- I would say we've also done portable and defense data centers historically. In more recent times, we're starting to see some growth in that pipeline at the bottom half of this deck -- of this slide. For the new market segments we have, and we presented this last year, our pipeline includes AI inference sites, we're making significant progress in the pipeline around the Telco exchanges and indoor applications. Effectively, this is fitting out a precision solution for customers within exchanges, for instance. That's what you see there is #6. This is a problem that we solve for customers specifically, and this market segment is continuing to grow. But beyond that, I think what we wanted to highlight this time is we've got #7 there, which is around critical support infrastructure rooms. And just to sort of give shareholders a bit of an idea what that's like, hyperscalers would typically build IT rooms themselves. That's all prefabricated in markets around the world. But where DXN plays is in the specialized rooms that are required and that can be prefabricated and doctify, especially as the market continues to grow with hyperscale deployments, a lot of customers are looking for standardization and standardization for the nonstandard sections of the data center is where we play. And these would be things like MMR room, which is the MeetMe room, connectivity room effectively, control room, network operations rooms. These are the type of bespoke solutions that is needed in a data center, which is not standardized, and that's where we are starting to see quite a bit of growth in the pipeline as well. So I wanted to just remind shareholders a little bit here about the market segments that we operate in and why we're seeing growth in the pipeline. Next slide. Yes. So on the Data Center as a Service for recurring revenue. So one of the things we highlighted to shareholders sometime last year is that there is additional focus from the team to look at what we can be doing on this above and beyond just selling projects to customers, handing it over and walking away and even having maintenance services on an ongoing basis. So Data Center as a Service has been spoken about in various occasions. We've won our first contract in the last couple of weeks with a customer, it's an international satellite operator. It plays up to our strengths where we can design, build, deploy and maintain on an ongoing basis for a long period of time for customers who require this capital-light model. And as the network continues to evolve as the global Internet continues to evolve, these sort of smaller edge applications depending on the market segment continues to grow. And that's where we always keep an eye out where we can actually play. It is much harder for larger data center companies to compete in this market segment because it is from a power point of view, not huge. It is between sort of 100 kilowatts to 500 kilowatts. That's sort of power load, which effectively means that DXN's solutions as well as the fact that we can deploy a capital-light model as well as a facility as a service as an ongoing basis would be an advantage for us. Next slide. Just on this -- with the FY '25 outlook, and I'll ask Laila to also chime in if she wants to highlight around the backlog orders. We continue to execute our strategic objectives, and that includes entering new market verticals, Data Center as a Service, AI, the data center modules deploying HVC or AI applications is very much a growth market for us. And we're starting to see parallel verticals in the cable or the landing station opportunities that we've got, not just cable landing stations that we know there is a large opportunity for, but also satellite landing stations as well. These are market segments that we're starting to see interest, and we continue to focus on the strategic objectives that we've got. We -- adding new services from a recurring revenue point of view, this is important to us as we build the company. The DCaaS, Data Center as a Service contract that we've signed will kick off that new division that we've got in this next -- in this quarter of FY '25. We have now signed our first DCaaS contract with our U.S.-based customer, and it's a total contract value of $3.6 million over 5 years. This one customer has multiple sites, not just in Australia that's coming, but all over the world as well. From our point of view, it solves the problem -- from their point of view, it solves a problem they've got for us to help with the design, engineering, deployment, site acquisition, maintenance and then the ability to renew the contract at the end of that term. And that's a niche market that we can continue to grow in. We've got backlog orders for both market segments, and this is the data center segment and module segment totaling $3.2 million now going into the last quarter of FY '25. And looking at the pipeline that we've got, which is quite heavy on the bottom half of the pipeline, we're doing everything we can to ensure that as these deals close, we will convert some of that to revenue as well and ensure that we've got a backlog into FY '26. So I've got the confidence that the pipeline project that we've got will convert in FY '25. And as such, we're still on track to deliver our FY '25 revenue guidance of $16 million. That concludes my -- our presentation today. If there are any questions now, happy to answer them.

[Operator Instructions] It looks like we're not getting any questions this morning, Shalini. So there's one that's just come through from James. Can you provide any more color on the contracts?

James, I'm assuming you mean the pipeline contracts that's coming through modules? Yes.

Just a second part in terms of the pipeline fees, average revenue, any of...

Got it. Yes. Yes, sure. So in terms of the contracts, I think what we've got in the pipeline is very much what I've highlighted is the deals that we're -- and the market segments that we're focused on. We're seeing quite a few of that coming from our new market segments, so both satellite as well as satellite end customers, satellite operators as well as we're looking at the indoor application, which is the core product that we developed several -- about 1.5 years ago and got several design orders already last year. Now we're starting to see the fruits of that. So the contracts that we're looking at, at the bottom half of the pipeline is a combination of our existing market segment plus sort of the new industries that we're starting to see growth in satellite as well as the indoor solutions, both of which 1 or 2 sort of deployments that we actually do will set us up for future growth with existing customers as well. So I think the other part was average. Yes. So it is very much in line with the historical deals that we've signed. So James, it sort of varies in terms of average dollar value and the variance is quite large. So yes, in terms of average, I mean, I can't sort of -- I'm unable to sort of provide an actual average because you've got several contracts that are in contract negotiations and then some of them are -- we win as a contract negotiations. It's hard to sort of say exactly what the average would look like. But if you sort of take historical numbers of some of the larger deals we've won, I would say that's closer to that average. I hope that answers your question.

Shalini. We've got a couple of other questions. The first from William is, are you finding that costs are still rising for the building of these various...

Yes. The answer is absolutely yes. So it does increase, but in different aspects. So things like not necessarily steel, when we're talking about UPS and power systems and cooling systems, that will be -- that is typically built to bespoke. So it's actually built to order. So people don't actually keep stock on standard units and because these designs are actually quite bespoke. Cost is rising across the board. So it's not just particularly our build in Australia. And as you know, as we grow into the next financial year, we will be looking at international ways to reduce costs and as well as ensure that we keep IP. So there are various works in the -- various streams of work within DXN now for us to be able to find alternative ways to build. At the same time, making sure that we keep the key IP within the company. And secondly, I think just on that, it's -- the data center market is growing. So where we win is not necessarily a price game. So very often, the price is a price customers are looking for speed to deployment and a quality of build. And someone who's actually done this before and done it over and over again by the time they need a bespoke solution that is fitting into the market we play in, the price is very rarely the issue, if that helps.

Shalini, and our final question is, do you have an idea of how much more revenue is to come from the EMC side over the next 2 quarters? Are these contracts primarily driving the growth to $16 million?

It's just under $1 million still to come from the EMCS sites themselves coming in over the next 2 quarters. I wouldn't say that they're primarily driving the growth to $16 million. I think it's a combination of them and the other contracts that we've won throughout the end of FY '24 as well as earlier in FY '25. I do apologize for my voice again.

No problem. Thanks for that, Laila. Shalini, that was the last question. So if there's anything you want to add or any final comments, I'll pass back to you.

Yes. Okay, sounds good. Yes. I think there doesn't seem to be any other. I think we've answered a few already. Is there any open questions there, Mel?

Sorry, Nick has just added as part of the EMCS question. So the EMCS was part of the backlog, correct?

Correct.

That's the last question. Thanks, Shalini.

Okay. Yes. All right. Yes. With that, thank you, Mel, for organizing the webinar. Thank you, everybody, for dialing in. We have other sessions, I think, during the course of today with investors. We look forward to meeting those on the call with them later. But yes, Laila and I thank you for joining us. And thank you for -- and have a good day rest of your day.

Thank you, everyone.