NEXTDC Limited (NXT.AX) Earnings Call Transcript & Summary

[Audio Gap] [Operator Instructions] I'd now like to hand the conference over to Mr. Craig Scroggie, CEO and Managing Director. Please go ahead.

Thank you, Mel. Good morning, ladies and gentlemen. Welcome to the NEXTDC results presentation for the first half of financial year '22. I'm joined today by our CFO, Oskar Tomaszewski. Beginning on Slide 2, we're very pleased to present another set of record results. Revenue of $144.5 million and underlying EBITDA of $85 million giving us the confidence to upgrade our financial year '22 guidance. Contracted utilization increased by 14% to 81 megawatts. Our ecosystem continues to expand growing to more than 15,800 interconnections, up 14% in the past 12 months, and accounting for 7.3% of recurring revenue. On Slide 3, our results continue to demonstrate the company's strong operating leverage. Underlying EBITDA increased 29% to $85 million. Operating cash flow grew 9% to $69.5 million and building utilization grew at 25% over the last 12 months. We remain well capitalized to support our growth plans. During the half, we refinanced our senior debt facilities. The refinance included an upside of $650 million to a new aggregate limit of $2.5 billion, together with material pricing and flexibility enhancements, demonstrating the strong support from our lending partners. Total liquidity at 31 December was over $2.1 billion, inclusive of undrawn headroom of $1.4 billion in our senior debt facility, which achieved financial close in November '21. Our balance sheet remains underpinned by total assets of over $2.9 billion. Our national data center fleet continues to evolve at a rapid pace. 3 megawatts of expansion capacity was installed at M2 with an additional 4.5 megawatts of capacity brought forward at M3. S3 development is on schedule for practical completion of Phase 1 in the second half of '22 with building construction well progressed. Our national data center footprint continues to expand with new sites secured for Darwin and A1 Adelaide. A1 will be the Northern Territory's first purpose-built Tier 4 commercial data center and both direct private access to Darwin's submarine cable infrastructure. A1 will be located in the heart of Adelaide, both placed to service both enterprise and government customers. Finally, we announced our first edge location Sunshine Coast 1, strategically located to host the Sunshine Coast International Broadband Cable Landing Station (sic) [ Sunshine Coast International Broadband Network Cable Landing Station ]. I'll now hand over to Oskar to discuss our financial results in more detail.

Thank you, Craig. Let's now turn to summary of our profit and loss for the year. The statutory results reflect data center services revenue of $144.5 million, an increase of 19% on the same period last year, and net profit after tax of $10.3 million. Our nonstatutory results EBITDA of $85 million, 29% on the same period last year. Direct costs, which cost [indiscernible]. Our facility costs increased to $13.3 million as we ramped up operations and facilities as well as increased property holding costs on [indiscernible] the corporate costs, which increased to $22.7 million, reflecting the investments NEXTDC is making into the ongoing growth of our business as well as the continuation of the market-wide increase in insurance costs, particularly for P&L cover. On to Slide 7. Revenue generated from racks, suites, cross-connects and sources accounted for 96% of total revenue -- project income, representing a lower proportion of revenue each year. The underlying EBITDA performance [indiscernible] operating leverage as demonstrated by the 29% growth in earnings relative to 19% growth in data center services revenue over the past 12 months [indiscernible] traded by the long-term earnings of 36% and 19%, respectively. Slide 8 sets out our revenue per unit metrics. Annualized revenue metrics continue to perform strongly throughout first half '22, moving in line with lower power costs, which are largely passed through to customers. [indiscernible] revenues from customer deployments tend to increase over time due to higher usage of contract power capacity, increased demand for interconnection, and the use of ancillary services. Slide 9 summarizes our balance sheet position and cash flows. At 31 December, NEXTDC on property with a carrying value of $1.2 billion as well as plant and equipment with carrying value of $0.8 billion. Our net assets stood at $1.7 billion. And finally, we remain well capitalized to continue our growth trajectory, with total liquidity comprising cash and undrawn debt facilities of more than $2.1 billion. I'll now hand you back across to Craig to go through our business performance and outlook for the 2022 financial year.

Thanks, Oskar. On Slide 11, our key nonfinancial metrics. Total number of customers was up 10% year-on-year to 1,569. Total interconnections also rose 14% year-on-year to 15,879. Total cross-connects are 10.1 per customer, up from 9.8 12 months ago. Slide 12 gives further insight into the diversity of our business. Breakdown of customers by industry shows strong representation from enterprise and connectivity as well as system integrators and cloud partners. The increasing skew towards higher density deployments reflects the growth of hyper-converged infrastructure and hyper cloud. On Slide 13. As of 31st of December, 82% of installed capacity was under contract and 88% of that contracted capacity was billing and generating revenue. The past 12 months have seen a 25% increase in billing capacity, which now stands at 71 megawatts. With over 10 megawatts of contracted capacity at 31 December still to commence billing, there is significant scope for continued improvement in operating leverage in the form of strong revenue and earnings growth. On Slide 14, we set out our capacity and utilization. The total planned capacity of over 400 megawatts across facilities that are either open or under construction with more than 300 megawatts of additional capacity earmarked for future development in our land bank portfolio. S3 development continues at a rapid pace, with building construction well progressed. We are setting out 12 megawatts, which remains on target for practical completion in the second half of '22. In Victoria, M2 has had an additional 3-megawatt data hall fitted out to support customer requirements. At M3, building construction is also well progressed, and we remain on target for practical completion in the first half of '23. An additional 4.5 megawatts has been added to the plan to support early customer contracts. And lastly, our first edge location, SC1 on the Sunshine Coast, post the International Broadband Cable Landing Station, which is fully live and operational. Turning to Slide 16, provide a summary on our ESG highlights. As data centers continue to grow as a major feature in our infrastructure landscape, our focus on sustainability is critically important. During the first half of '22, the company made significant progress across numerous ESG areas including energy and water efficiency, carbon neutrality, renewable energy generation, recycling and minimizing waste, giving back to our communities, driving social engagement, and monitoring of our supply chain in line with UN Guiding Principles. Turning to Slide 17, we provide a summary of our safety highlights. As our national fleet of mission-critical infrastructure assets continues to grow in size, so too does the importance of keeping our workforce safe. With more than $0.5 billion of capital works and construction projects concurrently [ in site ] around the country, there is a significant focus on achieving our goal of 0 injuries in the workplace. This includes programs that support operational and construction safety, mental health and ongoing procedures for pandemic management. Turning to Slide 19. We're pleased to upgrade our FY '22 revenue and earnings guidance. The scale and earnings growth continuing to be driven by a generation 2 facilities. We expect revenues of $290 million to $295 million, which are underpinned by long-term customer contracts with substantial contracted capacity yet to commence billing. We expect underlying EBITDA of $163 million to $167 million, representing an increase of 21% to 24% on our record results achieved in FY '21. Notwithstanding our strong first half performance, we do expect our operating costs will increase in the second half. This is in line with the planned opening of S3 and M3 facilities as well as the new site acquisitions we have made in Darwin and Adelaide. Total CapEx for the year is expected to be between $530 million and $580 million, which includes our new site acquisition, the final stages of development of S3 and M3 as well as additional data hall investments to support customers [Audio Gap] and our current investment projects remain on time and on budget. FY '22 is a year of continued acceleration of growth in NEXTDC's national infrastructure platform. The foundations we put in place over recent years will see the company continue to scale rapidly through '22 and beyond [indiscernible]. Now over to you. Please open the line for questions.

[Operator Instructions] The first question comes from Jonathan Atkin from RBC Capital Markets.

So I was interested in any kind of discussion you could provide around the commercial use cases that you see around some of the edge deployments, whether that's Sunshine Coast or customer interest that has materialized for A1 and D1. Can you tell us a little bit about the profile that you expect to put business there versus some of your more established first generation sites?

The data center product portfolio. If you think about the last 10 years, the company has predominantly built world-class metropolitan data centers, strategically located close to a highly [indiscernible]. As the industry has continued to evolve, more recently, it has become clear that hyperscale as a segment is a very large and growing an attractive segment that we will want to play a key role in. So what is happening over time is our hyperscale deployments are getting larger, becoming campus space. We're still very focused on building world-leading quality metropolitan data centers that serve those downtown CBD customer requirements by network latency, those particularly sensitive applications that need to be close to the user. But those 2 new emerging categories that have been closely followed by the industry for some time, it hasn't necessarily seen significant traction on a global scale are starting to emerge as very, very interesting opportunities for the company. On the third category in that data center portfolio and being the first is the emergence of regions. And regions, for us, the investments in Darwin and Adelaide, just like our regions in Brisbane and Perth, will become important for serving our customers who want a national presence, who want to be served in 3 major locations as they go closer to customers. We have, in recent times, taken Google to Brisbane, Microsoft and Amazon to Perth and the same, too, will be true in these further locations as our key customers get closer to their key customers. The next component of that is moving from a region or an edge. And edges are strategic locations where the user needs to have some network presence and in particular for us, edges are customer led. The opportunity to serve the RTI cable for the Sunshine Coast International Broadband Network was very strategic for us. SC1 over the course of the next 12 months is forecast to have 25% of Australia's Internet traffic flow through from the U.S. That asset will be very strategic for us. And that is, in part, the key focus for us as we think about serving edge deployments in key markets. But those 4 key pillars of the data center industry give us a highly diversified business model. The last point I'll make on that, Jon, is that whilst regions and edges are very important strategic for us, and they are customer led, they are relatively small compared to the overall manager investments in hyperscale and key metropolitan markets. So they will be size appropriate, and they will have modest CapEx investments that are also size appropriate, but our strategy remains customer led.

So on that last -- so on that last point that you made, I guess, I wanted to maybe get a sense as to where you see mostly megawatt hyperscale type leasing? Is Australia in any kind of a digestion period where it's a matter of moving in and fulfilling prior commitments and [ signs ] made? Or do you see continued strong demand the rest of this calendar year? And then finally, if there's any kind of update on rest of Asia expansion that you could provide more color on.

Sure. In terms of the hyperscale demand in regions, we'll have more to say, seen in those key emerging markets, as I said earlier. We're supporting our customers, supporting their customers. That continues to be our focus and strategy. As it relates to Asia -- there continues to be a significant focus from the team on that opportunity, the key markets there in Japan, Singapore, Malaysia and Indonesia offer significant opportunity. And again, in time, we will share more on progress in those markets, but we do intend to take advantage of the opportunities and work closely to support our customers' growth in the Asia region.

Your next question comes from Kane Hannan from Goldman.

Just 3 for me. I can go in turn as well if that's helpful. Maybe just M3, I'm probably reading a bit much into it, but just the language around I suppose what you said in January about getting ready for service by end of '22 versus now talking about practical completion first half '23. Just confirming if there's been any change there and if that relates to sort of the 4.5 megawatt expansion?

Thanks. Yes. Essentially, it's the end and the beginning, it straddled the end of the year. So sort of 10 days, one side or the other at the moment is the current forecast. I would expect that it's on track to deliver the current program. Despite the significant challenge, obviously, everyone has had working through COVID, getting workers on-site safely, continuing to support safety as our #1 priority as a company and managing multiple workforces, just like we've managed the data center workforce, as too the construction workforce needs to be split between sites that has obviously been a complicated matter for most who are building and constructing. But that has gone very, very well during a challenging period. So as it stands, it's on target at the end of the beginning. It doesn't really matter what way you look at it in the context of the date, about 10 days in the program, one side or the other. As it relates to the additional capacity, obviously, we have secured significant orders and options for M3. We will have significant customer contracts before M3 opens. And that is an outstanding result and gives us significant confidence to be able to further invest and bring more capacity to the pipeline as it relates to growth in M2 and M3. It's very significant. It's more significant than we have seen at any other point in time in the history of the company.

And just one quick follow-up. Just take your comments around inflation and not seeing anything come through at the moment. So as we look forward, and we do see a lot more inflation coming through and it particularly does start to impact build costs. Talk about, I suppose, your ability to offset that through pricing. How much of that you've contracted in with hyperscalers, and so just how you can offset any build cost inflation?

Yes, that's obviously a key topic for everybody right now. There's no question that inflation is an issue that most businesses were going to have to deal with, supply chain being a tightly coupled topic behind that. I'll answer that in a couple of parts. As it relates to the first priority, which is managing our cost base and the delivery of the programs on time and on budget. There is no change to our current cost forecast for M2, M3, S3, Sunshine Coast 1. Those programs have worked. The key mechanical electrical infrastructure and the fixed price building contracts are locked in. We don't see any immediate inflationary impact to the current program. The long lead time supply items, the significant investments that we have made with key supplier relationships, those orders go 12, 18 or 24 months in advance, we're forecasting, for a significant period. Obviously, the depth of the relationships with those key suppliers means that we have locked in pricing for those key supply chain items. So there are, again, no cost impacts in that regard. I was on site in Sydney with the builder at Multiplex last week. On site with our builder also last week in Melbourne Capital Group meeting with the managing directors of both organizations talking about what the future impact of inflation may mean for [ enterprise marketing agreements ] and how they'll manage salaries and other deliverables. But at this point in time, there's no direct impact to the company. We are very conscious of the issue. We're aware that it exists, and it's something that we'll work closely with our building partners on as we start to embark on any future project commitments. If I turn across to the other side of the balance sheet to talk about the impact to customers. The first component is the majority of our contracts, obviously, have CPI or greater. So any movement in inflation will be something that is passed on to customers as they will naturally pass on inflationary movement to their customers. We do expect that, obviously, for key clients, a large portion of our power, electricity costs, are power pass-through. So in that regard, again, it's something that largely will wash through our numbers. An increase in inflation will drive an increase in revenue, that will drive an increase in revenue per megawatt, because that cost inflation will come through at the top line. But as it relates to gross margin and other matters, that will obviously have little to no impact at all on our financial position. There's a lot of key issues, certainly, a number of things top of mind in relation to inflation and supply chain. But the company is very, very well insulated from inflationary movements given its contracting position. And the contracting position not only with customers but the relationship and the agreements that we have in place with suppliers.

And just lastly, just a comment, [ grade ] CPI or greater in your contracts. I mean could there be a situation where if we had inflation you could see margin expansion? Or do you think your cost base would probably expand maybe a little bit more than CPI and so no change as you're sort of talking to them?

I think they're all important issues. And as you start to look through operating expenses, what line items can or would be impacted by inflation. Wages obviously is a key one. No question that those types of things will need to be managed inside our operating budgets. So a short answer is that whilst we have to pay close attention to all of those line items in the day-to-day management and operation of our budget, we'll certainly have margin expansion as a result of some of these changes, and that, in and of itself, has been a positive for the performance of the business financially.

Your next question comes from Tim Plumbe from UBS.

A couple of questions from me, if possible. Craig, just in terms of the 5.5 megawatts that's been contracted, could you remind us how we should think about the time taken across the different parts or different subsets of the business between contracting the megawatts and then those megawatts being activated in billing, please?

Sure. First, a wonderful question for Oskar to weigh in on Tim because it goes directly to forecasting. They are largely known with a high degree of certainty and are forecast into our model generally and in more recent cases. As we deliver capacity, sometimes it's taken up and activated early. But in the most part, we have a very, very good window. So Oskar, do you want to talk about that topic?

Yes, sure. Thanks, Tim. So across the first half, we had a pretty strong enterprise and government performance. At this stage, we're trending ahead of our circa 2-megawatt per annum typical experience. And as you know, those contracts typically ramp in about 3 to 4 months after signing. In terms of the larger hyperscale deals, I think it's -- given our guidance that we're pulling forward additional capacity at M3. I think it's reasonable to assume that the contract might have landed as a anchor tenant in M3. And given we're in construction, that contract will progressively start to ramp in from the second half of FY '23 onwards. But for any further details on that, I know you've got a session lined up with Craig. So I assume you'll get into a little bit more detail with him.

Great. Just one of the other questions. Wondering if you can give us any color in terms of where we sit in regards to the hyperscale options? How many of those options were kind of activated over the last 12 months and where do they -- where do we sit now in terms of the total?

We haven't given any on that, but obviously a lot more detail on options. I'll answer that in a couple of points. The first 1 being we tend not to try and share for much of this information because it's commercially sensitive. And obviously, there's a whole lot of people in the industry that continue to want to focus on taking share away from us. And the less information we share in that regard, the less detail that we provide in relation to where they are and how they're tracking, the harder it is for competitors to pick off those opportunities. So we intend to keep our cards pretty close to our chest in that regard. What I will say is that we had a very, very significant half in signing new options around the country for hyperscale. It's probably one of the largest net new halves with customer commitment stemming up into contracted options that we've ever seen in the company's history. So a high degree of confidence that our customers are working closely to plan with us. The pressure on supply chain, the pressure on getting people into the country, skilled workers delivering capacity in a number of markets. Obviously, all of that pressure flows back on our clients to do a better job when it comes to longer-range planning and ensuring that we're in a position to help them take advantage of their opportunity. When we appropriately prepare our infrastructure platform, it significantly shortens the time to market for our customer to take advantage of the opportunities that are presented to them as well. So we're certainly getting better at long-range planning, contracting of options, understanding where our capacity is required and then putting the base infrastructure in place to provide those services and have quick time to market. So without giving the game away, it has been a very, very significant half for us in that regard. And we do expect that those options will flow through to orders in due course.

Great. And then just very last question, if I can. Are you able to give us any sense of the sort of magnitude of start-up costs for those new data centers that are likely to be absorbed in the second half of '22, please?

At this time, Tim, we have acquired land for those new sites in Darwin and Adelaide. We are going through detailed cost planning day 1. CapEx, obviously minimized with the anchor customers that we have secured for those. The key goal for us is to be able to get those facilities operational at a cash flow breakeven via the entry to the market. So whilst the CapEx estimates are being made on the long-range planning forecast, what is the appropriate size as an example, in the Darwin market, our partnership with Minister of Gunner and the Northern Territory government, significant amount of activity in that region related to defense and other industries supporting the northern border. So sizing that appropriately and the work that we're doing there is in flight currently. So we will share more on that day 1 detail and our anchor customers that we've secured there in due course. The same is true, obviously, we've been -- have been working closely with the South Australian government and Premier Marshall, Minister Patterson, and the team at the Department of Trade and Investment have done an outstanding job. South Australia has some significant investments from key customers of ours like Microsoft, Amazon, Google, consulting firms like Accenture, there's a lot of activity in that market, particularly related to defense, space. [ Lots of events, ] activities in machine learning, the Institute of Machine Learning is based just there. So it's an exciting, I guess, final piece of the national puzzle in the context of covering every major market and being able to support our customers in growing their reach to support their clients. So we will share more on those, but that work on a detailed costing work in relation to day 1 versus the longer range overall CapEx plan and size is currently in place now that we have secured, contracted the land and have those contracted commitments from key customers.

Right. And sorry, I mean, I was just thinking more along the lines of the start-up costs associated with S3 and M3.

For S3 and M3 , I think, Tim, it's probably a modeling question for Greg. We have front half, 24/7 security delivery. There's a lot of day 1 opening costs to bring the facilities -- both facilities particularly given the size and scale. I think you can answer a couple ahead might be accurate. So I think it's a modeling question.

The next question comes from Paul Mason from E&P.

Three from me. So first one, just wondering if you could make any more specific comments around Perth and Brisbane demand levels. Obviously, been a bit of news about one of your hyperscale customers looking to enter those markets. Is there a sort of much active sort of tendering online in those markets at the moment?

All that would go into the competitive information category. So frankly, the less I talk about those at the moment, the better. We see significant opportunity in supporting the growth of our key clients in Brisbane and Perth. The same, too, obviously, will be true in Darwin and Adelaide. We're very well positioned. We have infrastructure in place. Recently, obviously, we announced that we took Google into Brisbane. We already have network and edge deployments, critically important cloud on-ramp locations for Amazon and for Microsoft in Perth. So I guess my answer to you in that regard is watch this space.

Great. So second one, just in terms of the options in Melbourne, it sounds like maybe you've done a lot more that haven't been formally sized in the announcement for the market. But just in terms of the information that you guys have made public there, should we assume that M2 is fully committed? Or do you actually have space to sign more deals there? Yes, [ related question like ] out there?

Yes. Now look, it's an important question into, obviously, is significantly well committed. We always retain some capacity. Enterprise and government is a critically important element of our business, obviously supporting the diversity of our clients, growing those 1,500 plus customers. And when you look at the volume of services and that diversity in our business, it provides a significant risk-reduced overall operating plan. That will continue to remain a very important priority for us, focusing on net new clients in enterprise and government as a key part of our network strategy. It diversifies our ecosystem, it brings a significant amount of value and network effect to our key hyperscale customers as well. It's not just about the ability to serve and build world quality infrastructure that supports our larger clients. They too want to operate in markets where they can get their customers onto their platform in the lowest latency, most secure way that they possibly can. So that will continue to remain an important part of our strategy. In the not-too-distant future, Paul, there will be some upgrades coming to M2 as an overall target capacity. And we have acquired additional land in Melbourne in relation to the expansion of M2.

Okay. Great. And just the last one for me. Obviously, in FY '21, you guys had a new tenant, OVH, which was sort of pretty big news for, call it, the second-tier cloud market, [ they were pretty big there ]. But in terms of that sort of style of customer like the second-tier cloud below what we refer to as hyperscalers in Australia, like, how is the sort of general outlook going at the moment for that sort of market?

But that's one of the most exciting areas of opportunity for us or what we call the hyper challenger category. Today, you've got 70% of the market and the big 3. So between Microsoft, Amazon and Google, they are a significant force on a global scale. But it's very, very exciting when we think about the hyper challenger category. A number of those organizations will bring significant diversity and optionality for enterprise and government customers. So I think the answer is, again, in the not-too-distant future and many of those new clients that we're working closely with to bring to Australia. It has been a challenging time. Most of those organizations have not been able to travel over the course of the last 2 years. Much of this planning has had to be done remotely. And I think that as the borders start to change, travel becomes a little easier, it will not be easy, but certainly will change, the desire for those organizations to want to grow their platforms in the fastest-growing region in the world today will put us in a very good position. So I would expect that, again, just like we have done to support OVH, there will be others just like them desire to expand their platforms as well.

Your next question comes from Bob Chen from JPMorgan.

Just a couple of questions for me. Just looking at sort of the initial stages from S3 and M3 assets coming online over the next calendar year and trying to marry that up to 81 megawatts of contracted capacity. I mean, is that still the leading indicator of what's coming into that pipeline?

Oskar, do you want to take that one for Bob?

Yes, sure, Bob. If you look at the breakdown of our contracted capacity at the end of FY '21 and then at the end of first half '22, you'll be able to see that in the first half, the bulk of [ ourselves ] landed in Melbourne. And as we alluded to earlier, we have flagged that we are bringing on additional capacity into M3 in response to customer demand. So I think you can probably draw some conclusions around where those incremental orders that have been landing in Victoria may have ended up.

Okay. Great. And then just looking back to customer cohort chart you guys have provided. I mean, if we look 3 years down the track, like what's the sort of the mix that NEXTDC gets to, to the more mature level?

Customer cohort chart? Could you just expand on that?

You're talking about the customer mix chart.

Yes, that's right.

Yes. And Bob, I think the answer to that is it will be what it will be. We are heavily focused on the as-a-service community as it relates to building a valuable ecosystem where our enterprise and government customers are able to seamlessly migrate to the cloud and in some cases, repatriate from the cloud. Providing customers the ability to be able to have a ubiquitous network that allows them to move between platforms securely continues to be a very, very important pillar of our strategy: power, secure and connect. So whilst the key customers we're focused on, obviously, is building -- allowing us in that as-a-service market to build significant value for our clients, more than 730 partners today. Most of those partners are providing something as a service to enterprise customers. So I don't know exactly what that number will be over time. But I do know that our ability to bring more value to our clients is helping them, particularly in the enterprise and government sense, get on and off clouds, simply and securely. And that is what builds the value in our double-sided marketplace, helping our customers access enterprise and government clients and building that diverse ecosystem of service providers. So it will have a strong cloud and as-a-service flavor. But it will also still be significantly skewed towards enterprise and government organizations because that is why many of those networks on ramps, the largest number of network on ramps in Australia today continues to fit with us because those companies that sell something as a service need to sell it to those enterprise and government clients. And they want to be at the place where they can do that securely, safely and frankly, in the lowest latency for many of those services.

All right. Perfect. And then just a final question on the cost side of things going through that second half. Is any of those costs more one-off in nature that you're sort of calling out? Or are they essentially sort of embedded costs for new facilities?

Oskar?

Yes. Thanks, Bob. I'm happy to take this one. So we do have some seasonality by design, but we have experienced some seasonality in our operating expenditure over the last few years, and this year is no different to that. Typically, a pattern that we've seen is our project-related spends are typically budgeted for at the start of the year. Progress was made during the first half of the year. But the biggest spend is booked during the second half, resulting in a second half weighting in terms of our operating expenditure. It's not something that we're driving on purpose. It's just a function of how the business has evolved. So we're tracking well in terms of overall operating spend for the entire year, it just so happens to be second half weighted.

Your next question comes from Wei Sim from Macquarie.

I really just wanted to ask a bit more on cloud edge data centers. It's exciting that we've announced the first one. Are you able to give any details as to what kind of CapEx profile each edge data center has? And then also, I know you mentioned that it's probably still a very small kind of thing in terms of our overall portfolio about how we might think about the addressable market, and how we mentioned that we're kind of customer led. How did we go about getting the first one on the Sunshine Coast? And how we're thinking about potentially doing more of this going forward?

I'll start with Sunshine Coast, because obviously, we need to talk to the success of that and where it's going over time. But that cable landing station investment that we've made was strategically important. Securing cable landing stations and then having those as the core to building the network effect for an eco is critically important. And not only do we have [ RPI ] with the cable landing station. The client where we have a number of enterprise customers that have signed with us as a result of us taking over and operating that as a data center. We will build out that Sunshine Coast facility and support us for a megawatt of capacity working with customers. We've got clients who are gunning -- gaming platforms. So OneCloud is an example there. We're running their gaming platform out of Guam. That low latency network connectivity is critically important for the Sunshine Coast running out of Sydney. So it's pretty strategic in that sense. We have a number of other sites planned. So there are about 10 more edge locations that we are working with customers on. And this is genuinely customer led. Our strategy is not to go and build facilities in locations that they're not required. But we aren't working closely with cloud communication customers or major enterprises. So, again, a lot of this is competitively sensitive, and I don't want to give away all the locations necessarily that we are going to announce in due course. So what I would add, this is the important question is, where does this go over time? What could it represent? And what sort of CapEx -- we do expect that most of these edge locations will be modest in size, so there'll be a target size up to maybe 1 megawatt. Some locations might only require 200 to 500 kilowatts, others may require more than 1 megawatt over time. And that will be driven by their success. So as far as CapEx is concerned, day 1 CapEx for a sub megawatt facility that is customer led would be under $10 million, land and building. And generally, again, by being customer led, our operating cash flow breakeven on day 1 and it improves from there. So if you add 10 of those up and estimated that they might all account for 10 megawatts in capacity over time, it's a key point of difference in regions and edges is that you tend to have fewer competitors. And certainly, whilst we offer a national pricing model, we want to be cost efficient and cost-effective for our customers. There's probably a little less competition in regions and edges than there are in major markets like Melbourne and Sydney. And that should see an outlier performance from a margin perspective. So the size might not be significant overall. Its margin performance should be value-creating and significant and serve our customers in a way that few other operators can serve them holistically on a national scale in every major market in the country.

Your next question comes from Ross Barrows from Wilsons Advisory.

Just a couple of questions. Firstly, on the competitive landscape. Maybe you could provide some color there. So I guess, some place, they're in 1 to 2 markets and looking to move into 1 to 2 more, and there are also some new entrants entering the market for the first time. Can you sort of, I guess, the order of magnitude of growth that you're seeing in the market? And I guess any comments you can make around those moves by existing and new players and maybe some reference to the, I guess, the duration of your relationships as well.

Yes, it's interesting to sort of reflect back on the last decade. When we started, there wasn't a lot of competition but there was a lot of questions as to if I had a dollar for every time someone said to me that this won't work. But I don't think there's too many people wondering around saying this won't work today. You've got every pension fund or large-scale infrastructure player on the planet today wanting to be ours and [ others' best friend ]. The jury is not out on whether data centers will be successful and create value. The question is, most importantly, this is a very, very significant infrastructure platform over time. I mean, the infrastructure-like nature of data centers and the role that they will play over the course of the next 10 or 20 years is fundamental in every community globally. And that means that where we didn't have a significant number of competitors in the past, there is very large pools of capital at low rates of return flowing to the industry on a global scale. So we can't control how many people want to be reproducing our success in the industry. What we can control is the way we run our business. We can take our decade of experience and focus on delivering world-class Tier 4 UI certified facilities, 100% uptime. The customers who take security and data sovereignty very seriously, they want to work with highly credentialed operators like ourselves. So whilst we tend to recognize that there are more competitors, there's apartment builders and how many other people who have had any experience building anything in the construction industry wanting to be in our business. But it is not as simple as -- it's not like running the property business in the context of the operational risk is significantly high. The day-to-day support and the expertise around security, power, environmental management and these are all things that have taken us a decade to refine and continue to invest in. So these are -- for us today, important competitive advantages of being able to offer a national platform, 100% uptime guaranteed, DTA-certified strategic certification. All of those credentials give our customers in the enterprise and government stance and in the hyperscale and as a service market, the high degree of confidence that we are a world-class quality operator. The areas that we invest in to press our advantage: Sustainability, carbon neutrality, energy efficiency, the designs that we work with closely with our key strategic partners to reduce our operating costs, to reduce the cost to build per megawatt, will allow us to continue to provide our customers not only with real quality service and the best product but at an affordable price and ensure that we can meet our return on invested capital benchmark. I think we recognize that there's more competition. There's more capital. Everybody wants to eat our lunch. We've got a decade of experience in running a world-class quality business, and we are going to press our advantage.

Just a second one. It's more about the rate and speed of the deployment of some of the hyperscalers. There's a couple of fixed megawatt orders that into in early '20 that starts to get rolled out in second half '21. How have they gone? And I guess, a high-level question, are you seeing the ability of those larger players to deploy much, much quicker than they have in the past? And if so, kind of what did -- how much greater, how much faster are you seeing that?

Look, I think the answer to this question is, again, it's sort of it will be what it will be. If we look at larger providers, they tend to also be customer led. I mean putting yourself in a position to have a land bank, have services in place, be able to take the order from a client and deliver it within a reasonable time frame. That's the most global data center developers are focused on, serving the customer and being able to move quickly. Time to market is critically important, which is why our land bank is critically important. And we're in a position today to be able to take advantage of that to secure strategic sites in every major market, including our future focus on Asia to allow our customers to move with us. We move with our customers based on the regions and the priorities that they have. Even customers who build and develop capacity themselves can't build it all. They don't have all the resources, they don't have every market. So putting yourself in a position to move quickly and be successful as an important piece of our strategy. As it relates to others, building and providing capacity generally, no one builds ahead. There's the odd specialty build here and there, but it's certainly not the standard in the industry and putting yourself in a position to work closely with the customer is critically important because designs are changing as well. The volume of mechanical, electrical engineering change that I've seen in the last 2 years is more than we probably saw in the 8 years before that. Those are all important factors as well, Ross.

Your next question comes from Todd Voigt from Ranger Global.

Yes. And Craig, you just -- we're speaking about kind of that wallet capital that's out there. And I know at one point, there was discussions about potentially looking at joint venture partners, creating joint ventures for either developed existing data centers and/or development. And just would love your view on kind of the progress made in terms of looking for joint venture partners for either joint ownership of existing or development of data centers.

Thanks, Todd. Yes, look, that's an important topic still on our minds, still part of our planning process, reviewing what we'll do, particularly as it relates to development of the size of S4. Some of the countries and markets that we're looking at entering, obviously, in Asia. I was only having this conversation recently with the CFO of Digital Realty, Andy Power. I'm sure you know Andy, Todd. We're talking about the changes that they had recently made, the investments they've made in Greece and Singapore and how they're managing some of those more mature assets in the portfolio. It's really interesting to sort of hear how someone of their size and scale thinks about maximizing their financial strength, 70-plus billion or whatever they are. So yes, it's very, very much on our mind. We continue to talk with key parties about what that will require in the future. And whilst we haven't made any hard decisions at this point in time, we have fantastic optionality. There's no question that we have a long and deep queue of people wanting to get into the detail with us in regards to how we might think about the best long-term capital structure for the business as some of those assets start to mature and what some of those larger hyperscale campuses might look like and how they would be constructed over time, for the most efficient return on invested capital. So it is very important, but I don't have any definitive answer for you at this time, but we are thinking very much about that topic right now.

Are you seeing at all a shift in pension capital or otherwise, that is maybe now more willing to accept either development risk and/or lease-up risk? Or is the capital still heavily skewed towards kind of stabilized long-let steady assets?

Well, I think the answer is probably both. There's -- depending on the type of fund, some have a desire to have a lower risk profile but have a much lower rate of return. They just want the REIT operating structure. [indiscernible] quite surprisingly, in more recent time that would have only been interested in the underlying building structure are recognizing that important for them to get a ticket to the dance, they have to be prepared to do more than just bring low-cost money. I mean, there's low-cost money everywhere. The market is awash with low-cost funds. And those low-cost funds are hard to distinguish as it relates to value from $1 trillion fund to the next. And I think the most important question that operators will answer in that regard is which of these partners brings the most value. We know what value we bring, but what value will that JV partner bring? That's an important consideration for us as well.

Sure. And if I could, one last quick question. We've seen in European telcos kind of a blurring of lines between towers and data center and backhaul, fiber. Recent transactions in the U.S. have furthered this blurring of the lines. And so I just would love your view on Australia. What does that line look like between kind of the towers and kind of data center owners? And is there opportunity for a similar blurring of lines?

Yes. Look, this is a really interesting question, Todd. You would remember Steve Smith, who is the President and CEO of Equinix, is on our Board. We were just having this conversation yesterday about American Tower, the CoreSite acquisition, chatting with the CoreSite team recently about the strategic rationale behind that investment. There's no question that the volume, the weighted funds looking to secure quality assets in the tower and data center market. There are very, very few assets, particularly in the public market list today. We were only just discussing with some of the other global players that when you consider that CyrusOne, CoreSite and when you go back a little further, Telx, interaction recently, all of our global peer comps in the public listed market has largely been taken out. And today, we are really left with GDS in China and ourselves. And when you look at the market, the universe of public data center assets is very, very small. The volume of activity in the private markets in that regard is significant. The volume of capital attractive to investing in digital infrastructure assets, whether they be towers or data centers, is larger than it's ever been in history today. So we're still public right now, but there is no question that there is a significant shift in the capital markets and the view on the value as it relates to the long-term quality digital infrastructure assets. So we're one of the few left, my friend. Interesting time.

[Operator Instructions] Your next question comes from Siraj Ahmed from Citi.

Just a quick question. There's clearly some M&A cost in the first half results. Just wondering whether this is related to AUCloud? Or should we be thinking about future M&A as well?

Thanks, Siraj. Look, we remain highly disciplined in the context of our M&A reviews. We had some expenses in relation to our strategic investment in the AUCloud claim. It's relatively small, it's a modest investment. That's an important piece for us just to get a little deeper knowledge and insight into both government and what's happening in that private Infrastructure-as-a-Service layer. We think about the role that we play today at the data center as a service, the Network as a Service, that Infrastructure-as-a-Service layer is the next layer in the stack. So just getting a little more insight into how we can be successful supporting customers and then having some strategic partnerships, some modest investments in that category is what you should continue to expect to see us doing there. We looked at a significant number of parties in that regard. It sounds that in the case of AUCloud, we're actually able to help them expand their business into state government by helping them grow their platform with us, they'll deploy in Brisbane, they'll deploy in Adelaide, they'll deploy in Perth eventually, in Melbourne. So it's a good partnership and I'm quite excited about [indiscernible] what they're building there and to watch that segment closely. We did look at a number of other opportunities during the course of the half. There are some expenses in relation to further M&A reviews. The key challenge for us has been, as it was previously, and that is we find it hard to identify quality assets that meet our quality standards as it relates to the data center and how it operates. So it's a challenge. But it will be, I guess, something that we can continue to do. We look at every deal, but we remain highly disciplined. It would have to be a very, very good quality asset in order for us to want to put our brand and reputation and 100% service level guarantee behind. But it doesn't mean that we don't look at everything and make important considerations in relation to particularly expanding in key markets. It is easier, in some extent, to buy an existing operating business. But that ease of buying may become a nightmare in the context of operating if you buy the wrong assets. So we will have and continue to remain highly disciplined as an M&A reviewer.

Just one clarification on that. Regarding the assets at the new quality standards, are we talking about Asia or is that in Australia as well?

We're talking about Australia. We're talking about infrastructure platforms. We're talking about security, we're talking about networks. We're talking about data centers, and we're talking about all of Asia Pacific and Japan.

Your next question is a follow-up question from Tim Plumbe from UBS.

Just one last question for me. Most of them have been asked. But just when we think about the pipeline of megawatts contracted, I mean, it sounds like second half '22 is largely covered. It sounds like second half '23, with those additional wins in M3, looks to be covered. How do we think about the first half of '23? Are deals that are signed in the second half of FY '22 able to be deployed in the first half of '23? Or should we think about FY '23 as probably being a year where more is activated in the back end half?

Tim, I'll share this one with Oskar, but I'll start off by saying we have had a very significant start on the enterprise side. Many of you might have read how much activity is going on in the satellite industry, most recently in Australia. And we've had some very, very significant wins in enterprise supporting national deployments for what's happening in the satellite and space industry. So we're very excited about that particular segment of the market as, obviously, everything in the network space is growing. And yes, the first half is the team has done a wonderful job. We want to win more than our fair share in the enterprise. That's for sure. And they're already off to a cracking start to the second half. As it relates to the timing and activation, that's absolutely a forecasting question. Better Oskar and Greg answer the team tax every day. So Oskar, if you want to just give some thoughts on that.

Thanks, Tim. Very difficult for us to comment on the timing of deals that haven't landed yet might impact our financials. As a general rule of thumb, it's 9 to 12 months [ full of anxiety ] that larger deals tend to go live. So obviously, the timing will be impacted by when those deals get signed. But beyond that, any sort of specific detailed modeling questions, I'd refer you back to Greg.

There are no further questions at this time. I'll now hand back to Mr. Scroggie for closing remarks.

Thanks very much, Mel. Ladies and gentlemen, thanks for joining the call today. As always, the last comment is I'd like to thank our investors for their continued support and our amazing staff for their extraordinary efforts that are reflected in these great results today. So thank you all for joining the call. I'm sure we'll talk again soon. Goodbye for now.

That does conclude our conference for today. Thank you for participating. You may now disconnect.