MEEZA QSTP LLC (Public) (MEZA.QA) Earnings Call Transcript & Summary

Good morning and good afternoon, everyone. This is Omar Maher, [Technical Difficulty] EFG Hermes. I'd like to welcome everyone to MEEZA's H1 2025 Results Conference Call. I'm pleased to be joined by Mohamed Al-Ghaithani, Chief Executive Officer; and Mr. James, Chief Financial Officer. As usual, we will begin with the discussion of the key highlights of [Technical Difficulty] and this will be followed by Q&A session. I will now hand the call over to Yaman Al Jundi, Investor Relations for the safe harbor. Thank you.

Thank you, Omar.

First of all, check if everybody is listening -- can hear us clearly.

Can everyone hear us clearly?

Yes.

There is an echo. I want to make sure that all participants have a clear voice. If anybody can't hear us, please let us know.

Okay. Thank you, Omar, and thank you all for joining us. A couple of items before we begin. The investor presentation is going to be available on the Investor Relations section of the MEEZA website. And please note that the disclaimer on Slide 2 is an important part of the presentation regarding any information provided and any forward-looking statements made. I'll now hand over to our CEO, Mr. Mohamed Al-Ghaithani.

Good morning or good afternoon for others. I would like to welcome you to the second investor call this year to discuss the quarter -- H1 '25 of our financials and operational overall figures. First, we'll give the highlights in H1 for the growth drivers. As announced, we have 4 megawatts being built. It's an expansion for our existing building. We achieved 75% of the overall project construction plan. And all the modules is already on the site and all other components are arriving on site within this month [Foreign Language]. Construction implementation, commissioning will start from September onwards, and we expect this will take 4 to 6 months and the site will be ready for operation by Q1 next year [Foreign Language]. At the same time, there is a 6-megawatt Phase 1. Actually, this part of -- a much bigger plan. It is a building of 24 megawatts, a new site. We have it in Northern Qatar next to MV-2, but we already secured the 36-megawatt contract with the client, and we are working to have the other 14 megawatts also this year to be contracted and ready before we -- or during our construction. This 6-megawatt is about -- 24 megawatts will be shown in the next slide. But it's already -- we are in stage 3 and 4 design, which is the final design [indiscernible] and we're already getting the approval from the government. We have secured the first phase of approval from government, and we expect to complete all the approvals within 2 to 3 months maximum. At the same time, procurement is being placed to secure long lead items like the [ J6 ] and other equipment. So we are working to the delivery for this building, which will be around 24-megawatt, and we expect this building 24-megawatt fully operational by H1 '27 [Foreign Language]. Financial results, we have a very positive growth, 5% year-on-year, around QAR 9 million. We reached QAR 188 million. And we expect this growth to be more than this in the H2. So our target is to exceed by last year, minimum 5% to 10% [Foreign Language], and we try to do to make it bigger. 4.4% year-on-year EBITDA growth, we reached QAR 75.8 million. And underlying net profit, QAR 22 million, we reached QAR 28.7 million. And as -- that will be shown in the financials. Last year, we have a benefit around QAR 6.4 million because of electricity actualization. That's -- so this is -- the underlying net profit is really positive and moving towards the right direction. Operational highlights, net sales pipeline, we have QAR 1.8 billion. And we have 4 new clients onboarded this year. And we are [indiscernible] financing for the new data center, which will be a couple of hundred million, is already secured, but we are -- we will announce it after we have defined the official sign-offs from all parties and stakeholders. It will be announced very soon for the financing. To have a glimpse about our data centers and the growth so last few years, we maintained 14 megawatts, but beginning of next year, the growth will be 18-megawatt with a plan to add around 38 megawatts by '27 so this is a very aggressive plan [Foreign Language]. And thus we're talking about, it is almost committed, and it will be announced while we go this year [Foreign Language]. Moving forward, just to give you a picture of working graph, we have -- we are progressing very, very efficient and fast to deliver the 4 megawatts, although that we have some limitation during the summer because of the government may have limited working hours. And even it is not easy to get approved, especially in the Phase 1 so we try to mitigate this and to deliver the project as we promised [Foreign Language] in Q1 in '26. Financial results, it will be handed over to the CFO, James?

Yes. Thank you, Mohamed. Good afternoon, and good morning, everyone. Moving to the financial results for H1 FY '25, okay. So here, we can see H1 versus H1 last year. As Mohamed talked about, our revenue has grown by 5.1% to reach QAR 188.6 million, and that's primarily led by higher data center utilization, so higher revenue getting to QAR 77.7 million and higher solutions revenue as well. This was offset partially by lower workplace services. Last year, we had a one-off MV-2 electricity actualization. We resolved our bill with Kahramaa, which resulted in a QAR 6.4 million benefit last year. So on an underlying basis, we'll come on to that in the next slide. But on a reported basis, our EBITDA was slightly lower, our net profit 4.1% lower, reaching QAR 28.7 million. And this was aided by lower depreciation and higher finance income. Here, we can see the underlying performance. So EBITDA is growing by 4.4% when we strip out that QAR 6.4 million benefit to cost of sales last year and net profit is growing by 22% to reach QAR 28.7 million, as I said earlier. Here, we're showing the gross margin as we normally do. On an underlying basis, our gross margin as a percentage, is holding flat at around 29%, but on an absolute level, is increasing to QAR 55 million. Our underlying data center margin is at 41%, up from 36.5%. And Managed Services is holding around 28%, impacted by competition in that sector, Solutions declining slightly to 8.7% for H1 FY '25. EBITDA margin on an underlying basis has increased 2 percentage points to 30.6% and net profit has increased from 9.2% all the way up to 15.2% over the 5-year period. Here, we can see CapEx. We've spent QAR 20.3 million in H1 FY '25. We expect that to increase up to possibly close to QAR 200 million in FY '25 and return on capital employed is at about 8%. Cash from operations has been impacted by advanced payments we've made to vendors for MV-2 -- sorry, MV-4 extension, and our net cash is at QAR 74.3 million, impacted by the dividend that we paid in Q1 of QAR 51.9 million. Q2 performance versus Q1, very good performance, 20% increase in revenue, a 19% -- almost 19% increase in net profit and a 12% increase in EBITDA. Underlying Q2 versus Q2 last year, stripping out that QAR 6.4 million benefit to cost of sales, our net profit has increased to QAR 15.5 million, up 31% and EBITDA 8.6% increase. We'll now take questions.

We can move on to questions, Omar.

All right. Thank you. We're going to move to the Q&A session. [Operator Instructions] So we have our first question from [ Gus Shahid ].

Closing, congratulations on the continued progress and strong underlying results. I have a few questions for you, please. I was going to ask about the one-offs in the first half, but you guys clarified that, so thank you for that. Just kind of at a high level, I guess, the 4 new clients that you brought in, in the first half, are these -- just curious about these types of clients. Are these -- I'm assuming these are not the hyperscalers, the hyperscalers for the large -- I'm assuming probably for the Phase 1 of MV-6, if you can confirm maybe that's the case. And then the 4 new clients, are these local corporates in Qatar? Are these GRE-related clients? Just out of curiosity.

Go ahead, James.

Gus, well, primarily, our onboarding of customers is in relation to managed services and security services. We haven't added a new hyperscaler customer in that period. So most of the increases, which we're seeing is basically market-driven in relation to Managed Services, as we expand our portfolio and obviously, the demand, as we've talked about many times in relation to security as well. So it's primarily in those 2 areas.

James. I noticed that right-of-use assets had a big jump to QAR 160 million from roughly QAR 130 million last year. And it seems this is being driven by the new lease of beside MV-2 facility, for the MV-6 facility. Is that correct, number one? And number two, have you had to start making payments on this new lease for MV-6? Or do those only start when the facility is built up and operational?

Yes, correct. The right-of-use assets has increased, I think, by about QAR 43 million due to the addition of the land lease at MV-6. So that is correct. Payments are, I believe, quarterly. I don't believe we've started paying them. We are looking at basically capitalizing those costs during the construction phase. But no, I don't think we've started paying as of yet. I think the first payment will be due this quarter.

And then on -- just on CapEx. So with the extension for MV-4 reaching 75% completion, which is solid progress, I was surprised to see the PP&E or CapEx only being -- I think it was QAR 20-or-so million for the first half of the year. You mentioned there's going to be a big step up, but how does that work exactly? Because the facility is already mostly complete, are most of your payments back-end loaded? Or are they classified differently than CapEx on the financial statements?

It's a good question, Gus, but most of the CapEx in relation to the extension of MV-4 is in relation to the modular element. And as Mohamed said, the modules have only just started arriving well, on the back end of July, actually. So everything is according to plan. But in terms of that CapEx ramp-up, you'll see a significant increase in Q3 because the modules are on site and being constructed or put together. So yes, essentially, it's a much more larger ramp-up in H2 in terms of CapEx.

Got you. And as a final question, I noticed the financing that you secured from Dukhan Bank for the extension was about 50 bps lower than interbank rate, if I'm correct. Is that normal for corporates to get financing at those levels? Or is that just kind of -- given the business model itself, I just -- it seemed like a pretty preferential rate. And I'm just wondering what's driving that? And also, do you expect kind of similar financing terms for the MV-6 extension as well -- as MV-6 build-out?

Good question, Gus. I think when we went into the market with the RFIs for that financing, the QMRL was at quite a high level. And obviously, we're being as aggressive as we possibly could with all the banks in Qatar. So it went to every single bank, and that was the best rate that we were getting. So yes, it is a very good rate. But as I said, the QMRL was quite high at that time. Going forward, we expect to have financing around that level, maybe not as good a pricing as that, but we are seeing it. It's a very competitive landscape in Doha on the financing side. So it's very good for us in terms of obviously being able to finance the projects at a low cost.

We move to the next question, a written question, from [ Jude ] that says you have mentioned a QAR 1.8 billion pipeline in revenue. What is the average duration of these contracts?

It's varied because the contracts 3 years, contracts 5 years, contract 10 years. So it's varied, but this is -- sorry, the pipeline is...

Thank you. The next question in writing from [ Ahmed Kamil ]. It says how sustainable is the 41% gross profit margin for the data center business?

It's a good question. I think we've talked about our data center portfolio having a gross margin, including depreciation of about 35% to 40%. So in terms of our target, slightly ahead, we do believe -- with the strong CapEx negotiations that are currently ongoing and optimizing the data center facility operational costs that we believe 40% will be achievable going forward.

Thank you, James. There's another question from Julius Bottcher.

I just had a question on the revenue disclosure. I think previously, you were breaking the revenue out into all 6 segments, and you've now changed the disclosure. So you've lumped, I think, the Managed Service, the Workplace Services and the Cloud Services together and the MSI and the solutions. I just wondered is there any reason for that?

Yes. I think -- yes, obviously, a good spot. I think in terms of MSI, is primarily a systems integration solutions type revenue with a very similar margin to solutions. So it didn't really make sense to separate that out. We continue to be the systems integrator in the Msheireb Smart City. But as we talked about, I think that operational element of that contract is kind of -- if you look at last year's number and the year before, that revenue line item has been coming down. And we -- it didn't really make sense to sort of separate it out anymore. In terms of Managed Services, obviously, within that Managed Services element, we have security as well and cloud -- our own cloud as well as now Workplace Services is in there. In terms of those types of revenue streams, it makes more sense for us to look at that altogether given that Workplace Services is essentially Managed Services on site.

Got it. Okay. Fair enough. And I think that makes sense. I think in terms of the Managed Services, we had been looking for a 10% CAGR. And obviously, year-to-date, you're quite -- well, it's been shrinking. So I just wondered what -- why that is maybe performing below expectations and whether that sort of 10% expectation still is reasonable.

Yes, good question. Look, we talked about, I think, in Q1 in relation to one contract that ended because the customer moved to a different type of software support. So that did end, and that has reduced the Managed Services year-on-year, especially on that line item. But as you can see, we are adding customers, and we are seeing a 10% CAGR definitely on the security side of things. But with Managed Services, we are still seeing growth, but excluding that contract that I just talked about, that's having an impact. So model-wise, you could potentially dial down Managed Services a little bit, but we are seeing, as I said, strong traction in that area. We recently had a new CITO come in as well, who really is driving that area forward and making it more efficient and operate much more effectively as well. So I think between 5% and 10% would be where we're modeling it at the moment.

Thank you. Next, we have a written question from Rami that says, do you have a 3- to 5-year EBITDA growth target for data centers?

Do we have a 3- to 5-year EBITDA growth target for data centers? I think, as we've talked about before as well when we've met in person at investor roadshows, we're looking -- and as Mohamed talked about, we're looking to triple our capacity. That will, in effect, triple the EBITDA absolute number and definitely push up our EBITDA margins from 30% into the 40s and potentially beyond that. So we don't have a specific absolute number that we would disclose right now, but you will definitely expect to see a 3x increase in EBITDA on the data center piece, as we triple our capacity.

Who asked this question?

Just a moment. Rami.

Rami.

Rami, [Foreign Language] ask me this question next year, I will have a very clear answer to you because data center business considers more likely into real estate business. So we are building data centers now. We are finalizing contracts. It will be more clear for us by end of this year to have what are the targets that we are looking from 3 to 5 years. So definitely by Q1, maximum H1 next year, we'll have very clear targets. Even [Foreign Language] we will try to put -- from next year [Foreign Language] we try to see if we can put a guidance for every year. So it will be more clearer for the investors. However, now we can announce that what we have in our hands. As we spoke, there is -- 4 megawatts is being built and will be commissioned by end of this year and will be operational by Q1 [Foreign Language] next year, which is around 6 to 7 months maximum from now. And how we work to give you the confidence, if you call, we start building before securing the contracts for the MV-4. We announced the MV-4 just -- the contract was being discussed and it was very tough negotiation with the tenants. So we are in the same process now for MV-6, but this is much bigger. MV-6, we are talking about 24 megawatts. The initial stage is 6, but we are not stopping at 6 megawatts. We're trying to make sure that we -- by commissioning this project, we secure all the contracts. And we are very optimistic about these contracts. So [Foreign Language] we will have more information and more clear guidance for you guys [Foreign Language] by next year.

Next, we have a written question from [ Fatima Al-Dosari ] that says, what led to the increase in data center management costs from QAR 11 million to QAR 19 million? And what drove the strong growth in SS and MSI?

Yes. I'll take that one, Fatima. Yes, so we talked about the one-off in electricity in H1 FY '24 in relation to the resolution of the MV-2 electricity bill, which was long outstanding and that had a benefit in H1 FY '24 of QAR 6.4 million. That as well as the fact that our data centers are more utilized now or nearing full utilization, and we have more capacity. So with more capacity, you'd expect an increase in costs, obviously, especially in electricity. I think there was a second point to that question. Can you just repeat what that second question was there on Fatima's?

Yes. Sorry -- on SS and MSI, just hold on a second? Sorry, James, I lost the question, so we'll ask...

It was what drove the strong growth in solutions and MSI.

Yes, good question again. I think, obviously, we've talked about solutions being very much one-off in nature. Q2 was aided by a couple of larger projects on the solutions side, which has increased our revenue, but nothing really in particular. It's very sort of lumpy in nature solutions.

So solution is, as James said, it is one-off. So it is type of a service and it's fluctuating. It's not constant. So in nature, this contract is one-off. Once you deliver the hardware and software, that's it. And to be honest, this is the highest competition area for the ICT industry here in Qatar. We have big competitors here, companies like [indiscernible] other competitors, listed company, nonlisted companies. And the margins in this type of business are very low. So what we are trying here is to upsell these services to our existing clients to make sure that we utilize the same resources, be able to manage all of this so we can enhance and increase our margins. However, there are a lot of such businesses in the market, but the competition is very high and it's risky sometimes because clients sometimes they delay payments. And we have to pay the vendors. This will also decrease the margin. So we are not very keen into this market because the competition, as I said, is very high. And we focus in much higher gross margin business like Data Center, Managed Services that where we can make much margins. And for -- [ Fatima Al-Dosari ], she asked about the management. It is -- it was not QAR 11 million. It was because of the actualization, as Jim said. So the actual cost was around QAR 18 million and increased by QAR 1 million because we have added more customers. We increased by 1 megawatt. This is why the management cost is slightly higher than an increase reasonably. It's not that big.

Okay. I can see Ahmed's question on the side there in terms of CapEx per megawatt for MV-6. Obviously, I think Mohamed might want to talk to this as well, but MV-6 is initially designed to be a 24-megawatt building. With scale, we are going to then see economies of scale per megawatt. We're going to be targeting, and we talked about this before, around $12 million per megawatt, if not lower.

Thank you, James. And then there's a question from Zohaib Pervez.

So your second quarter margins are about 28% lower than -- your historical margins are about usually more than 30%. Is this the new norm for your -- for the business, I mean, considering this one-off is also not there anymore? Should we see the second quarter being the -- going forward as the run rate for your gross margins?

James, you're muted.

Yes, sorry. I think you've got to consider the solutions element in relation to that impact on gross margin. So if that has a greater contribution to revenue, that's going to impact your gross margin. So you need to factor that into your modeling. If -- sorry, solutions revenue declines, then the margin will expand accordingly. So it just depends how much of a contribution of solutions will have.

Thank you, James. Next question is from Naveed Ahmed and it says from the time the 4-megawatt becomes operational next year in 1Q '26, how long does it take to fully contribute in terms of revenues? And is there a lag or does it immediately start contributing at close to full potential?

No, the plan is [Foreign Language] to be in -- by end of Q1. Maximum in March, April, they will start contributing to the revenue.

Next question is from [ Fatima Al-Dosari ].

I appreciate if you can just give us some insight on how the landscape for data centers have changed over the years? And what do you see going forward, whether it's an acceleration of utilization of your data centers, the demand for certain specification? And I mean -- the much higher growth, especially with the AI-driven demand compared to what it was, let's say, 2 or 3 years ago?

Would you like me to take that one?

If I hear it clearly, there is a demand to be honest, and this is why we are building and doubling and tripling our capacity in short answer. In details, the AI is driving part of this growth, and we expect that the demand will increase because the competition in AI is becoming more aggressive. New competitor comes to the market. And we expect this will encourage the clients' customers to be more willing to acquire more AI services. This will put pressure on the services that we provide. We have -- are now in part of the MV-6. We plan to have AI data house that provide GPU as a services. So all of this -- and we expect this demand will increase. To be honest, for the last 6 months, we are engaged with many clients talking about their demands, their plans to come into the region, especially here in Qatar. So talks is more serious this time, more aggressive. And hopefully, we have more clarity by end of this year or at least the beginning of '26. But demand, there is demand.

[Operator Instructions].

I can have time for only one question. I have to run for another meeting, but the team are here to continue. If you want -- if there is any other investor want to ask, the CFO and the Investor Director are here to answer questions. But for me, I have to run for another meeting, chasing revenue.

Understood. It appears we don't have any more questions in the queue. So I guess back to you in case you would like to make any concluding remarks.

I would like to really thank you guys, and the question for this session was really good questions and really appreciate your support, your consider that will let us think how we can make you happy [Foreign Language] by end of this year and the coming years [Foreign Language]. Hopefully, [Foreign Language], we'll come next quarter with more good news [Foreign Language].

Thank you very much Mohamed, James and Yaman, and thank you, everyone, for your participation today. This concludes the call, and have a nice day.