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

Good morning, and good afternoon, everyone. This is Omar Maher from EFG Hermes. I'd like to welcome you all to MEEZA's Full Year 2024 Results Conference Call. I'm pleased to be joined by Mr. Mohamed Al-Ghaithani, Chief Executive Officer of MEEZA; and Mr. James Corby, Chief Financial Officer. As usual, the call will begin with a discussion of the key highlights of the period, and this will be followed by a Q&A session. And I will now hand the call over to Yaman Al-Jundi, Investor Relations Director for the safe harbor statement. Thank you.

Thank you, Omar, and thanks, everyone, for joining us. A couple of items before we begin. The investor presentation is available on the Investor Relations section of MEEZA's website, meeza.net. And please note the disclaimer on Slide 2, which is an important part of this presentation, regarding any information provided in any forward-looking statements made. I'll now hand over to our CEO, Al-Ghaithani.

[Foreign Language] I would like to thank all of the -- all the stakeholders, shareholders for their continued trust and support of the company and their belief in MEEZA future. Today, [Foreign Language] we'll review the financials and operational indicators. First, I will start with the operational highlights. In the past year, 2024, the company achieved a net profit of QAR 60.4 million, a slight increase from last year. And this is despite the decline in the total revenue by 11%. This reflects the strong growth in the higher margin business sectors. This is our focus, and we try to focus more on the highest -- the higher margin business [ rights ]. Key operational results in the growth drivers, as you can see, until now we announced 4 megawatts expansion at MV4 data center and the QSTP. And hopefully by next year Q1, this will be [ decent ] commissioned and start operation [Foreign Language]. Now, most of the data center capacity that we have is fully utilized and this reflects the trust from our customers and the service that we provide. We have very expert team, very good facilities secured. This is the estimate. This help us to total -- total occupancy [ have ] reached 96%. We are bound to finance this expansion by Murabaha Islamic financing from our -- one of the Islamic Banks here in Qatar. Financial results, I will touch very high level -- some numbers and then the CFO will continue to dig deep for the more [ assets ]. Recurring revenues, excluding solutions where we have the client, increased by 7.3% to reach [ QAR 309 million ]. As you can see in the presentation Data Centers and Managed Services grow by 8% and 12% revenues from the last year. Gross margin to reach 31.6%, additional 4.5 points. This maintained the dividend about QAR 0.08 per share of 2020. Operational indicators, we have future committed contracts value at QAR 1.6 billion, increased from QAR 1.2 billion in December 2023. We have added QAR 400 million to our TCV and contracts -- long-term contracts. Our net pipeline that we are trying to get more business around, QAR 1.7 billion increase from last year. We have managed to gain new clients, onboard important clients. Our collections have been last year around QAR 394 million, bringing the AR down by 19% year-on-year. I'll hand over to the CFO to go through the more financial numbers. James?

Great. Thank you, Mohamed. Good morning, everyone. Okay. Starting with the performance in 2024 versus 2023, as we talked about, Mohamed talked about, revenue has declined 11.5%, but that's due to solutions services product lines. That is offset by growth in the higher-margin recurring revenue streams of managed services and data center services growing at 12% and 8%. Expenses declined 16.2% due to that lower solutions revenue and our continued cost optimization. As a result, EBITDA essentially remained flat and net profit increased QAR 0.2 million to QAR 60.4 million for FY '24. Moving to the next slide. Looking at revenue and gross margin for the past 5 years. MEEZA has double-digit CAGR from 2020 to 2024 in managed services and data center services. Total revenue, excluding solutions has grown 7% year-on-year due to higher data center utilization, reaching 96%, as Mohamed said, and an increase in our managed services customers. Gross margin improved 4.5 percentage points to 31.6%. This is our highest ever, with 2023 impacted by the lower margin solutions revenue. Moving to the gross margin by product line. The absolute gross margin increased 3.1% to QAR 118.3 million, driven by data center utilization, as previously said. And pleasingly, in the managed services, cloud and workplace services product lines, margins remained above 30%. Moving to EBITDA and net profit margin. They continue to expand, as you can see on the graphs, driven by the growth in the higher-margin revenue lines and our data center strategy. Net profit margin reached 16.1%, our highest yet. Moving to the quarterly view. Q4 is a seasonally strong quarter as [ entities ] look to spend any remaining budget before the start of the next financial year, especially in solutions. And the data center revenue was also aided in Q4 by the 1-megawatt contract start from the 1st of December, 2024. CapEx. Moving to the CapEx slide. So as you can see, CapEx in 2024 remained on the low side, focusing on the refresh CapEx in our data centers. With the expansion of MV4 by 4 megawatts this year, CapEx will return to FY '21 levels in 2024. Cash flow. Really good performance on cash generated from operations, reaching QAR 111.9 million. This is the highest it's been in the last 5 years. And this was aided, as Mohamed talked about, we had high collections of QAR 394 million, increasing 6% year-on-year as a result of improved controls and focus. Cash on hand at the end of the year reached QAR 279 million and net cash of QAR 157 million. That's the end of our presentation. We're now going to go into the Q&A.

[Operator Instructions] And we have our first question from -- sorry, from [ Alessandra David ].

I just had 2 questions, mostly to do with the expansions that you're talking about. So with the MV4, the 4-megawatt capacity is coming online now. Did you say in the first quarter of 2026? So maybe if you could just give me a little bit more clarity on maybe the CapEx spend with this as well as the MV6 and MV7 expansions as well? Like what kind of CapEx time line over the next couple of years can we kind of expect given those 2? And what would that take your overall data center capacity to?

Yes, James speaking. So yes, the CapEx per megawatt, so in terms of the 4-megawatt expansion at MV4 is going to be between $13 million and $14 million per megawatt. And as I said, we're expecting CapEx levels to reach 2021 this year. So majority of the CapEx for the MV4 expansion will be this year. MV6, MV7, we expect a 21 to 25-month build phase. And we're expecting announcements in H1 on those facilities. In terms of -- I think you also asked about the CapEx per megawatt for MV6 and MV7. I think we are obviously going through the design phase for those data centers. And with a, obviously, movement now to an AI demand, our designs need to be flexible for air cooled and liquid cooled in the future. We are expecting probably a 10% uplift on CapEx per megawatt because of liquid cooling, but that would be passed through to the customer. Our guidance on CapEx per megawatt still falls around $12 million to $14 million per megawatt for the expansion plans. I hope that answers your question.

Our next question is from [ Ahmed Kamil ]

First, on the gross margin level for data center, is this 40% sustainable? The level that we have seen in 2024? Is it sustainable? Also regarding the 4-megawatt addition, can you please like -- let's know on the contribution of these 4 megawatts into 4Q numbers? Have they like contributed -- Because I heard like 1st of September, I don't know. Can you please confirm this? Also regarding the capacity additions during 2025. So we are talking about MV6, MV7. Should they come like in the second half of this year or it should contribute or start coming in 2026? Also, if you can give us like some color on the capacity additions also made by the other peers in Qatar mainly?

Okay. So I think that's about 4 questions. The DC margin, is it sustainable? I think we talked about the one-off benefit we had on MV2 electricity actualization, I think in Q2. That has some uplift in 2024. We're not expecting that to repeat. So the margins on data centers are going to hover around 35%. That's our expectation. In terms of the 4-megawatt expansion of MV4, we're obviously pushing the construction as fast as we possibly can.

As I mentioned -- this is Mohamed, Mr. Ahmed. As I mentioned earlier, the plan is to have it in Q1 in the next year, [Foreign Language]. But always we are trying our best to push and to bring the construction period down. However, there is some [ bit ] items that need to be manufactured abroad and bring, that will take time. And we're trying -- we are working closely with our contractors to make sure that we can expedite the process to bring it down. But as of today, the plan to have it in mid of Q1 next year, [Foreign Language]. As of MV6, MV7, and to be honest, there is a lot of discussions with many stakeholders. However, there is no concrete news that we can say that this is -- it's going to happen on this time. So still we are pushing towards building new capacities. But the plan is still not finalized. Hopefully, by half of this year -- before end of this year, [Foreign Language], we'll have more clarity about what we are going to bid for the next year -- to [indiscernible] next year [Foreign Language], or end of next year, [Foreign Language]. But I can assure you that there is demand and there is discussion. How big, how and when, it's not clear yet, but the company on the right track and the expansion will happen sooner or later this year.

And on the capacity additions by the peer companies?

There is no news. As I talked to you now, we get inquiries for 10, 20, 40, but there is no concrete demand that we can discuss. As you know, globally, many announcements, big numbers, there is announcement of QAR 500 billion, there is announcement in QAR 1 trillion globally, but the actuals, it happens maybe 10% or 20% of this. So this is the same discussions here, happen here in Qatar. But there is demand and it will happen. I believe this year, there should be announcement other than the 4 megawatts. I believe that we will have other announcements, not only 4, maybe more, 6, 10, [Foreign Language], trying to make that number bigger, [Foreign Language].

And you are increasing the capacity as well?

This is our plan. This is our job to make sure that we grow.

And next question in writing from [ Raja ]. He says, CapEx per megawatt was guided to be in the $12 million to $13 million per megawatt. What will it be for MV4 phase 2? And do you see opportunities for further improvements?

Yes. The -- I think I've touched on this before, the MV4 4-megawatt expansion, the CapEx guideline is between $13 million and $14 million per megawatt. As I said, the guidance that we gave between $12 million and $13 million is still very much relevant on the additional capacity.

And next question comes from [ Gus Shahid ].

Congrats, especially on the fourth quarter numbers and bringing the last megawatt online. I just want to clarify, that last megawatt that you brought online for -- with a hyperscaler customer in Q4, there was a bit of confusion. When did that start hitting P&L exactly? Just so we can look at that on a run rate basis for the rest of the year? Was it December 1st? So meaning 1 month of contribution for last year, which helped provide some big uplift for the fourth quarter? Or was it for the full quarter?

Yes. It was for -- it started on the 1st of December, 2024, so 1 month.

And we have a follow-up question from [ Raja ]. It says, can you share some color on the discussions with hyperscalers who are looking to occupy MV4 phase 2, MV6, et cetera? What will be the utilization ramp-up time post completion of construction?

I think as Mohamed talked about, we're in constant contact with the hyperscalers. The pipeline and demand is there, and it is as we've talked about before. We expect full occupancy of the expansion from what we call ready for service day. So that would be the assumption.

And we have a follow-up question from [ Alessandro David ].

Sorry, just one other question for me. I was just curious if you could maybe share a little bit of color on how you see your funding mix over the next year with the expansion? Is it -- can we expect it to remain broadly in line? I know you've given a sort of 40% debt-to-equity sort of target ratio in the past, but maybe if you could just elaborate on some of that.

Yes. We will be splitting our investment through debt and equity, as we've talked about before. There will be a 70-30 debt-to-equity split on the expansion of MV4. And we expect to continue to look into the debt market as we expand further.

And we have another follow-up question from [ Ahmed Kamil ] as well.

The MV4 addition won't come in 2025. So can you provide like some guidance on the numbers? Should the figures will be flat this year compared to 2024, given that there is no capacity addition?

We're not currently giving guidance. I think as we talked about that 1 megawatt is and has come online from December. So there will be an uplift from that for the entire year versus FY '24. We will continue to grow our Managed Services segment as well what we would hope to be over the double-digit CAGR in the 5-year period. So yes -- and we're looking as well at continued cost optimization as well. So yes, we expect 2025 to be a good year.

So current capacity stands at 15 megawatts?

At this stage, we are -- we're not going to give guidance on megawatt expansion within 2025. Management and discussions are going on at looking to deliver megawatts as fast as we possibly can.

Yes, not -- but the current capacity, the existing one, it is 15 megawatts?

14 megawatts, yes.

14 megawatts?

Correct.

Next question is from the Q&A box from Ahmed. It says, do you expect to maintain 50% market share in the expansion phase? And what gives you that confidence?

MEEZA throughout, I mean, the communication that we've given over the last 2 years has been that we want to remain the market leader in the data center segment. So, yes, I think, obviously, hyperscalers grow in nodes, that they already have in certain countries, obviously, where they exist. And they will expand in the areas of those nodes. They can't go beyond a certain radius from the node. So our expectation is as hyperscalers grow in Qatar, so will MEEZA's data center portfolio.

Next one from the Q&A box from [ Shahrukh Saleem ]. It says, how are your costs determined, particularly electricity costs? Any revisions expected there?

Electricity costs, our electricity costs obviously come from the provider Kahramaa. On the hyperscaler business, electricity costs are passed-through, assuming the desired PUE is met per the contract.

And his second question is, the contracts you have signed with customers, will they be renewed annually? Is this -- is the pricing based on utilization of the contracted capacity with customers?

I think we've answered this before, but our data center contracts are long in length and range between 5 and 15 years. So they're very rarely renewed every year.

And we have a follow-up question from Gus.

Yes. I just had a follow-up question on Ooredoo, who also has a data center presence in Qatar, albeit smaller. Obviously, another question that was asked on the Q&A was, what competition are you seeing from Ooredoo? They've announced large CapEx plans. It seems most of that is geared towards Kuwait and Iraq and Oman. But are you seeing any physical data center builds on the ground from Ooredoo in Qatar? That's the first question.

I couldn't hear the question. I didn't speak on Ooredoo's behalf, to be honest. There is nothing [indiscernible]. This is what I can't -- I can answer.

Okay. Okay. So you're not seeing any evidence of any builds at this point. Okay. And the second question, just on the Solution Services business, it's very lumpy, obviously, and lower margin, but it seems you've deemphasized that a good bit this last year. I mean, how is the outlook for solutions business out of curiosity? Like how -- how are those conversations progressing? Is that something you're still pursuing? Or do you prefer to focus strictly on data service -- Data Centers and Managed Services? Or do you still, at the same time, pursue Solution Services businesses as they come as kind of new business to maybe bring in longer-term data center clients?

Solutions, we [ are ] continue to [ stay ] this type of business. We will not stop chasing this. However, there is very high competition. Various companies not in the stock market, been here for 30, 40 years. Competition is very high and solution is sometimes -- it's not a consistent time of revenue stream. However, what we are trying to do is when we focus on other services like managed services, that we can upsell a new requirement. We're trying to do this business on -- based on the customers' needs, not based on the RFPs or the tenders floated in the market. We're trying to create the need for the customers. Part of this need, they might need solutions like hardware, software to be refreshed or licensed for different solutions. This is what we are trying to do. We are trying to change a little bit how we approach the customers to understand more of their needs, to give them the proper solution instead of reply back to the tenders floated in the market.

Mohamed, for the perspective, I appreciate that. Just a final question on MV6, which you mentioned, I mean, you've already announced the MV4 expansion, which is 4 megawatts. So that's like a good 30% uplift on your capacity for -- that's coming online next year. But on MV6, can you give us -- you mentioned that there's -- in the first half of the year, you'll announce details about the tendering and the size and the build cost and time line. But any indication from now that would be helpful in terms of like what size would you start with MV6? And what are you thinking in terms of what would the initial capacity be that you look to kind of finalize in the first half of this year? Is it another 4? Is it 10? Just curious, if you can give us any more transparency on that?

I would -- I would reply. This is still a tender process. If you go to -- it's in the MCIT website, we are participating in this tender, 6 megawatts. But what we are trying -- intend for us to be more commercial, to be more -- it makes sense for us that -- building small sets of data centers, the cost always will be high. So what we are trying to make is to make much bigger data center, this is a discussion. But still there is nothing that we can announce. What we have 6 megawatts, but we can see that we can build much bigger facility, can reach up to 30 megawatts. And this is a discussion between us and the clients. So the delay is in favor for MEEZA's shareholders. We are trying to make the best for shareholders to make this expansions as big as possible so we can increase the return on the investment for the shareholders. Unfortunately, I don't have much details to be shared. There is no clarity. There is -- There are many options still, but I believe we can finalize this within the coming -- in this half yearly chart.

Mohamed. I really appreciate the transparency. As a final question, this MV6 in terms of location, have you finalized like -- or do you have a preliminary location for it? Will it still be next to the MV2 facility?

It will be the next to MV2 facility. We are utilizing the same plot. And our design -- this is one of the discussion is to make the proper design for the plot. So we can enhance or expand the value for the land to make sure that we monetize all single square meter, if not less.

Next question from the Q&A box from Nitin Garg. It says, is electricity cost also a pass-through for local customers that are non-hyperscalers?

No, it isn't.

And there's a follow-up from Raja that says, what is your current hyperscaler versus non-hyperscaler revenue mix within the DC segment?

At this stage, we can't disclose that information.

And we have a question from [ Ahmed Alani ] that says how much uplift did the additional 1 megawatt leased in MV4 deliver in percentage terms to DC segment revenues?

At this stage, we can't disclose pricing -- so I mean, I think in terms of the results, you'll get a better picture in Q1.

And there's a follow-up from Raja that says, what is the outlook for the cloud segment?

The outlook for the cloud segment is positive. We continue to look to grow that. I think we're seeing from an industry perspective over double-digit CAGR growth. Our competition is strong in that area, obviously, with Azure and Google Cloud services. But we look to continue to grow that segment, especially given -- keeping data classification with inside as well as outside of the public cloud. So we'll look to grow cloud services based on our current run rate.

Next question from Aisha Buhiji. It says, given the competition, is the pricing for the new capacity lower than existing contracts? And if that's the case, to what extent? And then the second question is, can you give us some guidance on margins for the DC segment?

Yes. I think I touched on the fact that we can't give specific pricing, but I think there obviously is pressure on hyperscaler pricing within the region, definitely. In terms of margin, it's then up to the DC providers to try and bring that cost per megawatt down. And that's what we're trying to do to ensure that we maintain the margin around 35% on the DC space and maximize the returns to the shareholders on that segment.

And I think we have a follow-up from [ Ahmed Kamil ].

Regarding the revenue per megawatt, any guidance on this level? Where should we see this level in 2025 onwards? Is it like 11, 12, lower, higher?

We're not giving guidance on revenue per megawatt. I think you'll be able to see from the numbers in Q1 the impact in DC space. So yes, that's not something that we're currently giving in terms of revenue or pricing.

And I think we have a follow-up from Gus as well.

Actually, I've asked all my questions.

Okay. Perfect. So I guess, there are no more questions in the queue. [Operator Instructions]Right. It looks like we don't have any more questions. So I guess back to Mohamed and James in case you would like to make any concluding remarks before we wrap up the call.

Yaman speaking. Thank you, Omar, and thank you, everyone, who joined us today and for your questions. If you have any follow-up questions, please don't hesitate to contact us. And we'd be happy also to schedule a follow-up meeting. And we're also currently planning to be in Dubai for the ESG conference [Foreign Language] coming up. So we hope to see you there as well. Thank you all.

Thank you, Yaman, Mohamed and James, and thank you, everyone, for your participation. This concludes the call and have a lovely week. Thank you.