Telecity Group's (TLCTF) CEO on Q2 2014 Results - Earnings Call Transcript

Aug. 4.14 | About: Telecity Group (TLCTF)

Telecity Group Plc (OTC:TLCTF) Q2 2014 Earnings Conference Call August 4, 2014 3:45 AM ET

Executives

Mike Tobin – CEO

David Crowther – Group Financial Controller

Rob Coupland – Managing Director, UK

Analysts

Maurice Patrick – Barclays Capital

Carl Murdock-Smith – JP Morgan Cazenove

John King – Bank of America Merrill Lynch

David Toms – Numis

Michael Briest – UBS

Milan Radia – Jefferies

Adam Rumley – HSBC

Mike Tobin

Good morning, everyone. Thanks to all of you for coming to our First Half 2014 results, and hello to everyone listening online as well.

Telecity Group has experienced good trading conditions for the first half of 2014. We’ve announced solid financial results, yet again driving significant growth in revenue, operating profit and EPS, while our cash generation has allowed for another strong increase in the dividend payments.

I’m very pleased with the 9.5% organic FX neutral revenue growth that we’ve delivered in the first half, which represents an improvement over 2013 and improved further in Q2 2014 versus Q1. Demand across European data center markets is strong, and our order wins continue to be encouraging. Our Rest of Europe division is delivering very pleasing growth, and whilst our growth levels in the U.K. have been held back by the anticipated churn during the first period, the order intake of that business has improved.

As a consequence, I’m confident in the outlook for the Group, and we maintain our guidance range of 9% to 11% organic FX neutral revenue growth for the full-year.

I’ll hand over to David, our Acting CFO in a moment. Before I do so, I would like to thank him for his excellent work over the last nine months in a row. David and his team have substantially improved Telecity’s management information and indeed our external disclosure.

As such, he has enabled us to advance our decision making processes, so that we can move beyond and focus clearly on top line growth to driving growth in conjunction with value for shareholders. This delivered strong returns on capital over the medium to long term.

As evidenced by these results, we have accelerated growth and maintained margins, while at the same time improving our return on capital employed. While doing this, we’ve also developed our structures and processes in a way that I expect to drive further improvements in the long-term returns.

In addition, we will be changing sales force compensation plans and management bonus structure to further enhance this trajectory. All of this has provided a great base for our new CFO, Eric Hageman to build on when he starts in three weeks time. Eric is here today. Hi Eric. And you’ll have a chance to catch up with him during – after the presentation.

So without further ado, over to you David.

David Crowther

Okay. Thank you, Mike, and good morning everyone. Before I get into the main presentation, a couple of housekeeping points. First of all, the financials I’m about to take you through are the Group’s adjusted results, and they are all quoted in sterling. Reconciliation between these adjusted results and statutory results is contained in an appendix to the presentation.

Secondly, I am going to use a number of terms during this presentation, such as organic currency neural or revenue per solid kilowatt, and full definitions of these can be found in note 20 to our half year report today.

So back to the main presentation. My summary of the first half 2014 is that we’ve delivered good financial results, made significant progress in CapEx efficiency and maintained focus on optimizing returns to investment.

Let’s start with the results. Period-on-period revenue growth was 9.3%. We increased the Group’s EBITDA margin by 60 basis points to 46.9%, which is in line with the guidance given you in February. EBITDA itself increased by 10.7%, growth which was maintained to the bottom line.

The Board had declared an interim dividend of 4.5 pence per share, which represents a growth of just over 28%.

So looking at revenue in more detail. We have just seen total revenue growth was 9.3%, and increased to 9.5% on an organic currency neutral basis, which I’ll abbreviate to OCN from now on. Whilst we’ve experienced an FX headwind from the start of the year, the full-year OCN revenue growth rate range of 9% to 11% is maintained.

As expected, annualized churn rates were elevated in the first half of the year at 11.4%. This churn including the previously announced closure of Prospect House and the expected disposal of non-core businesses in Finland. Excluding these announced, underlying churn was 9.6%. This underlying churn rate was about historical norms, and I expect it to reduce going forward starting in the second half of this year.

As such, we reiterate the previous churn rate range for 2014 of 7.5% to 9.5%. Please remember, this range includes a further GBP 3.3 million of Harbour Exchange sub-leases which expire in H2.

On a segmental basis, Rest of Europe revenues increased by 14.2% to GBP 100.6 million. This growth rate increases slightly on an OCN basis to 14.6%. Rest of Europe annualized churn rates reduced to 7.7% from the 11% in the same period last year. This does include the disposal of Finnish businesses just mentioned, and adjusting for this, underlying churn rate was ever lower at 6.2%.

U.K. revenue increased by 3.3% to GBP 73.5 million, and annualized churn was elevated at 16.4%. We’re now going to take a look at the U.K. performance in a little more detail.

I would characterize the first half performance of the U.K. by a strong order intake performance, offset by the expected higher churn levels and certain exceptional items. The exceptional items relate to the closure of Prospect House and reduction in sub-lease income at the Harbour Exchange site in the London Docklands.

Adjusting for these, underlying revenue growth was 5.5%, up from 4.9% in the same period last year. The elevated annualized churn rate of 16.4% included the effect of Prospect House closure, and the underlying churn rate was 14.3%, which as I said, we expect to significantly reduce in H2.

Looking forward, we expect strong double-digit revenue growth in both the Powergate and Manchester market, whilst the Docklands growth is expected to be moderated by churn in the short-term.

I’d like to now take you through the progress we’ve made in our occupancy levels. Power occupancy or the sold power percentage as we call it, is measured as the number of kilowatts we have under contracted customers and currently revenue generating divided by the total available customer power.

The sold power percentage has increased 130 basis points to 72.4%, with increases seen both in the U.K. and the Rest of Europe. This has been driven by optimizing occupancy levels in existing sites and delivering new capacity at the most efficient time.

So let’s take a look at the kilowatt based metrics which were reported for the first time in February earlier this year. Revenue per sold kilowatt is calculated by taking the total annualized revenues for the period, divided by the average sold kilowatts during the period. At the Group level, revenue per sold kilowatt decreased 8.6% to GBP 4,682. 40% of this reduction relates to FX movement and the non-recurring items just discussed, i.e., the closure of the loss of Harbour Exchange sub-leases and the non-core Finnish business disposals, neither of which had any associated kilowatts. On an FX neutral underlying basis, the reduction was 5.2%.

In respect to this remaining reduction, the success of sales into newer sites made a contribution. Such sites have more efficient cost base, therefore supporting lower average pricing, whilst maintaining strong market margins as we have seen.

Churn also has an effect, as revenue per sold kilowatt of mature customers is typically higher than that of new customers which build over time.

Look at the segmental splits. In the Rest of Europe, revenue per sold kilowatt decreased 11.1% to GBP 4,062, and 5.2% on an underlying FX neutral basis, i.e., adjusting for the non-core Finnish business disposals. In the U.K. division, revenue per sold kilowatt decreased 1.9% to GBP 5,918 with an underlying reduction of 1.5%, once again adjusting for the Harbour Exchange sub-leases.

So let’s take a look at how this flows through to EBITA per sold kilowatt, which is calculated on a similar basis to the revenue per sold kilowatt. The more efficient cost base on our newer sites partly mitigates the reduction in revenue per kilowatt we saw in the previous slide. Furthermore, effective deployment of capital spend and increased occupancy levels result in maintaining attractive project returns despite the lower EBITA per sold kilowatt. These have also contributed to an increase in return on capital employed that we shall see shortly.

At the Group level, EBITA per sold kilowatt decreased 6.3% to GBP 1,545, and on an FX neutral basis, decreased 3.8%. Again 40% of the total reduction relates to FX movements, with the remainder largely result of geographical and seismic changes.

Looking at the segmental splits. In the Rest of Europe, EBITA per sold kilowatt decreased 7.7% to GBP 1,253 and 3.3% on a currency neutral basis. In the U.K. division, revenue per sold kilowatt increased 0.2% to GBP 2,129.

So moving onto our cost base. With the exception of power costs, which are directly linked to customer usage, we have a relatively stable cost base. Total operating costs excluding depreciation, increased 8.1% to GBP 92.5 million, the individual component parts of which we’ll look at now.

Starting with power costs in the top left hand corner. Power costs reduced as a percentage of revenue to 14.1%. This reflects the fact that churned customers typically have higher power usage than new customers, who take time to reach optimal utilization levels. The reason this cost is a slightly different color to the others is to highlight the fact that power is typically a pass-through cost to our customers.

Property and staff costs in the top right and bottom left, increased due to the organic growth of the business, full period impacted M&A partially offset by foreign exchange. Both of these costs grew by less than revenue, reflecting some of the natural leverage in our business model.

Other costs in the bottom left hand corner comprised all other costs in our business, including operational maintenance costs, cost of sales of services and sales and admin costs. They represented 12.7% of revenue, an increase on the previous year. The increase in absolute terms of GBP 3 million was mainly due to cost associated with sales of non-collocation services and the impact of M&A in the previous year.

Let’s take a look at what all that means for EBITDA. As we saw in the overview slide, Group EBITDA increased 10.7% to GBP 81.6 million, while the adjusted EBITDA margins increased to 46.9%, consistent with the guidance given at last year end. On an organic FX neutral basis, EBITDA increased 11.5%.

Reflection in the growth in the revenues; U.K. EBITDA increased 4.2%, GBP 35 million, and Rest of Europe EBITDA increased 16.1% to GBP 46.6 million. The Rest of Europe increase on an OCN basis was 17.5%.

The trends for EBITA are very similar, so I don’t propose to talk through these in detail now, but the figures are in the presentation’s completeness.

Turning to cash. The EBITDA of GBP 81.6 million translated into an operating free cash flow of GBP 47.8 million. The operating free cash flow, which used to fund investments, capital expenditures of GBP 34.5 million, and pay the 2013 final dividend of GBP 14.2 million, all of which results in a modest cash outflow of just under GBP 1 million for the first half.

During the period, there have been a number of cash expenses impacting cash flows and operating activities. These included the closure of Prospect House, GBP 2.1 million, and a part settlement of the historical tax dispute of GBP 1.4 million.

On an FX neutral basis, and taking these items into account, the growth in cash flows from operating activities was 11.9%. On the working capital side, debtor days have remained relatively stable at 34.

Before I look at the financial spend on CapEx, I’d like to take you through our process around making important investment decisions. It’s designed to ensure that we only commit CapEx when necessary, and that the best returns are achieved from this investment. There are five key steps detailed on this slide, which I’ll summarize for you now.

First of all, the need for investment has to be demonstrated. This is a combination of setting internal factors such as existing inventory levels and external factors including competitor activity and customer demand.

Second, we then investigate potential options of delivering further capacity, focusing on leveraging the advantages of our existing capacity, for example high level of connectivity, and at this stage, we assess indicative project financings including IRRs.

Third, if an option is feasible and attractive from a financial perspective, then we conduct a detailed appraisal to determine with greater accuracy, the financial returns we can expect.

Fourth, should a project pass the detailed appraised, we then review it against all such projects in order to establish the strength of the investment case relative to other projects and the potential uses of cash.

Finally, we only initiate projects which not only get through the first four states, but also can be delivered within the CapEx guidance range, which for this year is GBP 110 million to GBP 130 million.

To see the results of this disciplined approach to investment, let’s look at the expenditure in H1, which you will see puts us well in the path to be within the stated guidance range for this year.

Total capital expenditure for H1 was GBP 48.8 million. This included investment CapEx of GBP 34.5 million and GBP 14.3 million of operational CapEx. Operational CapEx included maintenance spend of GBP 6.5 million, with the remainder largely relating to cost of installing new customers, which we classify as sales CapEx.

To reiterate, we expect total annual CapEx to remain between GBP 110 million to GBP 130 million per annum in the medium term. From an inorganic perspective, we do not anticipate any material M&A in the short-term.

I’d like to finish by summarizing the Group’s financial position. We have GBP 400 million senior debt facility, with an average remaining term of just over four years. Period end net debt was GBP 296.2 million. And the leverage ratio was 1.8x, down from 2x, all of which put the Group in a very robust and healthy financial position.

So to wrap-up, a good organic growth of the business, along with our increased focus on capital expenditure and increasing utilization rate has contributed to an increased in return on capital employed of 30 basis points to 15.4%.

I am pleased with the progress we’ve made in the first half of the year, and look forward to Eric joining as CFO, bringing with him a wealth of experience and skills, which is going to help us to build on this progress going forward.

I’ll now hand back to Mike.

Mike Tobin

Thank you, David. I’m going to run through some of the operational highlights of the business. Before I do so though, I just want to underline the sustainable long-term performance. And we’ve had some good years and some great years with both financially and operationally, Telecity continues to deliver sustained long-term profitable growth.

This reporting period represents our 14th consecutive period of half and half growth in revenue and profitability since we created the Group in its current form, and we’re confident in the continuation of this trajectory in the long-term.

Turning to Slide 21. Demand for our services is driven by wide range of requirements from across many sectors. As you see, while the connectivity segment is still core to data center ecosystems and indeed to our customer base, there is also a range of emerging demand drivers, particularly around cloud, enterprise and mobile.

I expect these to become more significant as the years progress, as an increase in proportion of the economy becomes digitized and evermore IT functions are outsourced. We are ideally positioned to take advantage of these trends with our strategically located data centers in the core European location and new product developments such as innovative Cloud-IX platform, which connects customers and cloud service providers in a simple, flexible, scalable and cost effective way.

Moving to Slide 22. We’ve had a busy first half across Europe. We opened the last 5 megawatts expansion of our Amsterdam 5 data center, and brought a further 2.4 megawatts online in Frankfurt and integrated the 2013 acquisitions into the Group. The closed business fit of the Polish and Bulgarian acquisitions has resulted in a swift integration, and we are working on expanding these operations in the second half of this year to facilitate further growth in these markets.

In addition, further high-quality capacity has been added to our Turkish operation to take advantage of the very exciting opportunities in that region.

In terms of market performance, as expected, customer churn levels in the U.K. were higher than experienced than prior years, but were reduced significantly in the second half of 2014. In the rest of Europe, customer churn levels have already decreased from last year and that has helped to underpin the improvement on our organic growth rates.

Overall, like-for-like pricing across Europe has remained largely stable over the year, whilst overall demand levels have improved.

Moving on to look at our customer profile. You can see that our average customer contract size remains quite small reflecting the way that even the largest organizations use our data centers for relatively small high-value deployments. While connectivity and content remains the core of our customer base, we are seeing good demand from a broad range of sectors.

Looking at our H1 order wins, there were couple of notable points to highlight. In terms of sectors, you can see that cloud is performing particularly well, while in terms of markets you can clearly see here how well the U.K. is performing on a gross order win basis, which gives us confidence in the medium-term trajectory of that business once the current higher churn levels recede.

On Slide 25, you can see that we delivered a total of 7.5 megawatts of growth capacity in H1 this year. Notable openings in H2 will include the incremental capacity in Warsaw and Sofia, where we are currently running at full capacity.

On Slide 26, you can see as the Powergate site in London represents our largest single expansion project, I think it’s worth giving you some more detail around this data center. Powergate is a great site. Financially, it’s one of our top performance across all key growth and profitability metrics. This reflects not only a scale and efficiency, but crucially also its value to its customers.

Powergate now has over 180 customers and a range of key connectivity and cloud service provider options, which significantly differentiate it from the wider data center market. The customer ecosystems that make data centers valuable in terms of premium pricing are now accelerating with over 100 new customer cross-connects being added each month.

On Slide 27, you can see that in terms of achieving our targeted cash returns, both the original targets and the expansion, are tracking exactly as expected. As with our other data centers, these returns build over the life of the asset with mature cash returns on the total investment reaching in excess of 35% per annum.

Looking at the shorter term outlook, we remain confident in this year’s organic growth forecasts, and Eric and I, look forward to updating you on our progress as the remainder of the year unfolds.

Before we move to Q&A, you’ll recall that earlier this year we announced we would hold an Analyst Day in London on the September 17. As Eric will only be starting with us on the September 1, we’ll use the September 17 as an opportunity to present our products, markets and technical expertise, with the second Equity Markets Day around the full-year results to focus on the Group’s strategy and shareholder value creation.

Thanks very much for listening. David and I will now take your questions. Maurice?

Question-and-Answer Session

Maurice Patrick – Barclays Capital

Yes. Thank you, sir. Maurice from Barclays. So a couple of questions please. First one on the margins. You talked about the – earlier in the year about sustaining the high margins. Obviously you reported margins are up 60 basis points, you talked about some of the efficiency work there. Do you think that margin improvement trend can continue? It feels like you had got some higher marketing costs in the half year. And the second question relates to the ARPU trend per kilowatt in Europe, which I think fell 5.5%, which was a great decline than previous periods perhaps. Walk us through some of the drivers of that, presumably with new expansions that would be helpful? Thanks.

Mike Tobin

So I think they are partly linked questions actually, and the answers are also linked. The way we look at that business is focusing on the return on capital employed as the key metric to drive returns to shareholders. And if you look at that, we’ve got a number of drivers there. And one of the things that we’ve been really pleased about is how David and his team have been able to articulate greater clarity and depth of clarity on our business drivers.

So one of the drivers obviously is revenue and profitability per kilowatt, which we shouldn’t confuse with pricing, all right. And the other is our fill rate. And as you can see, we’ve accelerated the growth in the Group from 6.7% to 9.5%, and whilst doing so, we’ve been able to maintain largely stable margins. So that’s driven the EBITDA and EBITA margins on a Group level up. So I think we continue to focus on those two metrics together. Again we suggest that stable margins – I continue to suggest stable margins, every improvement we can get obviously we will.

Again coming specifically to your second point there. Again I’ll reiterate that EBITDA and revenue per kilowatt is not a price metric, it’s a total revenue and therefore return. If you have a lower EBITDA per kilowatt, it doesn’t mean to say you’re less profitable, because if your cost base in that market is lower, you can still actually be more profitable. So we drive on a focus of the two metrics combined. We drive the value of the business. That answers your question.

I’ll go to Hugo, and then come back to you there. Sorry.

Carl Murdock-Smith – JP Morgan Cazenove

Thanks. Carl Murdock-Smith from JP Morgan Cazenove. Just one question please. Just in terms of the recent update to legislation on Climate Change Agreement. So just to confirm, that charge is currently passed onto customers, isn’t it? So, will there be a small revenue drag there as a result of that? And also can you just update us on what the legislation is like across the rest of your footprint, not just in the U.K., and is this something where there could be more progress made in other countries? Thanks.

Mike Tobin

So you’re right. In the U.K., it is passed through the customers. So there will be a modest revenue decline associated with that, but also the cost decline is there as well. So it should have zero effects on profitability. There are a number of different measures across Europe. The most noticeable is the green tax in Germany. That’s quite a significant tax. And again that is largely passed through the customers. I don’t see any change in any of the metrics across Europe in the short-term.

Unidentified Analyst

Hi Mike, can you elaborate a bit on what you said at the beginning around the Group being much more focused on return on capital and then aligning that to management compensation? Perhaps kind of where the incremental changes are, and just elaborate on that, and then I have a follow-up.

Mike Tobin

So one of the key drivers of return on capital employed – and by the way, the 15.4% is industry leading. It’s more than double some of our peers. So we are very proud of that, but we want to progress that even further. And one of the drivers of that is the occupancy level. And so we are focusing our sales team on refilling this churn space that we get. And that again allows us to be more frugal on our CapEx deployment, because we’re using the space we’ve already created, and that would drive up the profitability.

So on the sale side, that’s one of the incentive changes that we have coming through. And on the management side and it’s right across the entire management team, we’re moving some of their bonus metrics to EBITDA per kilowatt, which includes depreciation as an critical element, which means they’re thinking even harder about how they sweat the assets. And also return on capital employed is specifically noted in the bonus structure from January 1.

Unidentified Analyst

And then just as we think about, sort of, given this focus more on kind of the return in terms of kind of the more medium to long-term growth dynamics for the business, clearly the business have grown substantially faster in previous years. We have some of these pricing dynamics going on. Should we think of the current revenue growth run rate as more reasonable for the medium-term or does that have scope to potentially accelerate?

Mike Tobin

I think that 9% to 11% range is pretty accurate for the next couple of years.

John King – Bank of America Merrill Lynch

Thanks Mike. It’s John, Merrill Lynch. Just a question, if I go back to the pricing quickly or the revenue per kilowatt, could you first of all give us a sense, obviously the pricing – the revenue per kilowatt was down 5% ex FX, and all the rest of it. What was the decline therefore in the new order wins versus your existing back book, because I guess that must have come down a bit further? And then I am thinking about the economics of the business model. If that comes down, I appreciate that some of that is mix and the OpEx is much lower in your newer sites, but the CapEx is going to be substantially pretty similar versus the Powergate versus Docklands. So, can you just walk us through, I guess the confidence level in getting the same level of returns, if the pricing, is that a bit lower?

Mike Tobin

So first of all, thank you for articulating again the difference between revenue per kilowatt and pricing. What happens is when you get a new customer in, it basically takes his capacity and he doesn’t use it straight away, so he then starts to build up his usage. Now, as we pass through power, that already starts to increase the absolute revenue per kilowatt. And then as you’ve seen, the number of cross-connect increases significantly. So we charge for the cross-connects.

And the more he uses, the more revenue he generates from the same amount of kilowatts he is contracted to on day one. So what you typically see is where you’ve got a strong new order win capacity, so we’ve seen a lot of new order wins, and we’ve also had the elevated churn in H1. So the delta between your installed base, who have already built up that revenue per kilowatt, and your new customers coming in at a lower, that delta is larger, but over time those customers then increase.

But on a like-for-like basis, the pricing hasn’t materially changed for a new customer coming in today, compared to a new customer coming in a year ago, okay. So pricing isn’t sort of a change element here. It’s about the increased new order wins and the slightly elevated churn showing that delta.

Secondly, there is – again it’s a good point where you’re going into new markets especially with the acquisitions into Warsaw and Poland. We see this as an opportunity to further increase profitability, because if you think about the operational leverage of the business, where you have a data center business in Poland, it’s full and it has a management team just as it has in every country. So the moment you open your new capacity in that country, you are diluting the fixed cost base of that across the wider number of larger number of kilowatts.

So actually that will improve the EBITDA for that country, and therefore improve the EBITDA for the Group.

John King – Bank of America Merrill Lynch

Just got two quickly follow-ups, if that’s okay. On the churn side of things, you have some decent visibility I guess, as to which customers are just – well, they’ve closed the business or what have you. Do you see anything out – obviously you’ve given six months guidance. Could you give us an early sense of, if you see anything in 2015, which is as large as you’ve seen in the last couple of years that we should bear in mind in terms of churn as opposed to just, finally as well on the CapEx? You’re coming a bit below on the CapEx. What’s the chances of you coming in below your guided range for the full-year, or is that just purely a timing thing?

Mike Tobin

So these are quite lumpy things. They are big data centers and large generators. You can be slightly ahead or slightly behind in every quarter. We feel very comfortable with our GBP 110 million to GBP 130 million range. I think going back to the first point there, we don’t – we have a pretty good visibility on churn. And this year again, particularly in the U.K., we’ve had a number of exceptionals with the Harbour Exchange leases, the Prospect House closure. We don’t see any significant change in that for 2015. In fact, we’re expecting churn to go down in ‘15 from its fairly high levels in the U.K.

It’s already come down across Europe this year. And that’s a very positive trend as well. So there is nothing outstanding out for us in terms of large customer churns [indiscernible].

David Toms – Numis

Hi, David Toms with Numis. I’ve couple of interlinked ones on the build-out program and utilization. So you’re currently running at about 72% utilization by power. You’ve grown this business by 40% without spending a penny on CapEx. So question one is, why are you spending so much on CapEx? And secondly, in terms of cost to built-out program, you’ve got about 47 megawatt less to build, for 153 megawatt versus 106 megawatt you’ve currently got. What do you think the average cost per megawatt from here will be building that out? So you’ve some costs into already and...

Mike Tobin

Yes.

David Toms – Numis

You’ve talked in the past about the expensive things being done. So, from here costs on that. And then, yes, why you’re building anything at all?

Mike Tobin

So I think the first part of that. On the surface 72% which suggests that you could continue to grow in that space, but you think about – that’s on a Group level, right. So for example, in Warsaw and Sofia, we have nothing. We have acquired assets there that are completely full and operationally sweating fully the assets. So we need expansion programs there.

When you look at places like Powergate, we have the capacity. And as that fills, we open more. Where we’ve got the challenge is, as I said, the focus for the sales people would be to go and utilize the churn space, which again is in pretty good data centers with premium pricing, but of course natural tendency is very often are focused on the bright, shiny new stuff rather than the more traditional sales. So that’s something we’re focused on more.

And you’ll see effectively that occupancy rate continue to rise over time, modestly, but that’s a function of the large number of megawatts we have across the Group as well. And on the second thing – I’ve forgotten your second point.

Right, okay. So you’re absolutely right, the vast majority of the 47 megawatts is post what we term as Phase 1. And Phase 1 has your high upfront investment, because you’re doing the entire, sort of dig up the foundations, you’re putting in all the pipe work and everything else for all the phases. So we’re typically looking at around GBP 6 million per megawatt to build the remaining 47 megawatts.

There is a couple of Phase 1s in there, but that’s typically the new markets. It’s largely post Phase 1.

David Toms – Numis

Thanks. And then just sort of a brief follow-up on that. If I then tie that back to your CapEx guidance, that suggests that you could be opening something like 15 megawatts a year or building up 15 megawatts a year, which seems too toppy. Let’s tie back to the growth rate you’ve talked about 10 megawatts a year. That’s only GBP 60 million of CapEx of growth.

Mike Tobin

Well, but don’t forget, there is maintenance CapEx also included in that range. And secondly, we are working on the announcements that you haven’t seen yet. So that 47 megawatts isn’t the end of our growth. So we are currently working on it and spending money on stuff that – and we haven’t announced, because we are still waiting for final planning or final power availability that sort of things, but over time you will continue to see, I think I alluded to in the preamble there, you’ll continue to see further announcements, so that we expand that 153 megawatt beyond that point.

Michael Briest – UBS

Thanks. Michael Briest at UBS. I think in the Q1 or the full-year results, you actually gave a revenue range alongside the 9% to 11%, and I appreciate currency has moved, but given where currency is today, what would you say that range would be? And then secondly in terms of the revenue per kilowatt for the second half, given where we are on the churn trajectory and what you’ve replaced. Do you think revenue per kilowatt will go down sequentially still in the second half? And then just finally on Powergate. Could you give us a sense on the utilization there or occupancy rates relative to the overall U.K. rates? Thanks.

Mike Tobin

Okay. So for your first two points, David?

David Crowther

Sure. The revenue range, which was GBP 355 million to GBP 361 million earlier this year, translates purely at a FX movement basis to GBP 344 million to GBP 351 million.

And in terms of revenue per kilowatt trends, I expect, as we see an increase in proportion of sales being delivered through our newer lower cost base sites, for example Powergate, there is still some downwards movement to be had on that.

Mike Tobin

I think it probably wouldn’t be as extremely as the first half, because in there you had a lot of businesses that we’ve taken out, for example the Helsinki consultancy that didn’t have any associated kilowatts to it. So there you have a revenue per kilowatt impact, that’s greater than just typically the newer site applications, but it should be more modest I think.

On the third point, Rob would like to?

Rob Coupland

Yes. Thanks. So on Powergate, the occupancy level there would be largely in line with the U.K. as a whole. It’s a site where we’re bringing on relatively larger amounts of capacity, so again you tend to get quite lumpy steps on that. And broadly what you see us doing there is bringing on more when we need it.

Mike Tobin

Next question. Milan. Behind you.

Milan Radia – Jefferies

Milan Radia from Jefferies. Just thinking about the change in behavior. I know you talk about pricing being sort of broadly stable year-on-year, and I think that’s borne up by other people are saying as well. If you think about power densities at the start of a deployment, have you seen any change in that metrics, just help customer learn the over-provisioning too early is a bad thing, some of the churn that we’ve seen?

Mike Tobin

Well, I think if you go back to sort of – if you think about sort of five years cycles on contract, if you go back five years ago, and particularly in the U.K., space was absolutely scarce. So people were provisioning in anticipation of it remaining very, very scarce. And subsequent to that, people have realized that actually us and our peers will be bringing on capacity in each market as if needed.

So they’ve kind of forward purchased perhaps a little bit too much and downgraded subsequently when the contract comes up for renewal, but these are people – and again, it’s not churn of customers in a sense, because they are continuing to be the same as they were before, but they are just giving back space they are not using today, and then continue to grow into that space over the next years.

Milan Radia – Jefferies

On a new deal that you’re signing now, a typical power density would be what, versus say three or four years ago?

Mike Tobin

Well, I think the average power density I think is still sort of 1.5 to 2 kilowatts per square meter and that – we continue to build around that configuration. But this is more about people taking 100 kilowatts, but actually only growing into 80 kilowatts of it, and then saying actually we’ll give you back this 20 megawatts and we’ll take it again over the next three to four years.

Milan Radia – Jefferies

Thank you.

Unidentified Analyst

Hi, thanks for taking the questions. Just two, if I may. On the utilization rates, we had a 100 basis points increase in Europe and 80 basis points in the U.K., we get to 130 basis points on a Group level. Could you just talk us through how that works? And then secondly on the Cloud-IX platform, just thinking about the competitive environment, I mean if we think about players like Equinix and InterXion, they all seem to have something similar, and at least have the main providers like Amazon Web Services and what not on their data centers. Could you just talk us through how you think you are differentiated on that front?

Mike Tobin

Well, David, you want to take the first part of that?

David Crowther

Your question is why the 80 basis points in the U.K. and 100 basis points in the Rest of Europe, blends to 130 basis points at Group? I’d have to go through the details. Can I take you through that after the presentation? Thanks.

Mike Tobin

So in terms of Cloud-IX, you’re right. If you think about sort of five, six years ago, the core of our type of business, our sort of highly connected data centers was being the hub of connectivity. And that hub of connectivity is now a hub of cloud environment or cloud connectivity. And it is true that our peers also have offerings in the same area, but within Europe, for example, we are the only operator to have the AWS platform directly in our building.

So there are different versions of service offering, but there is a core here. And I think the Cloud-IX platform itself is quite unique, and we already have AWS, as you know, the two largest cloud providers in the world connected to it. And last month we signed our first three customers onto the cloud platform. So it’s now getting real traction.

Unidentified Analyst

So sorry, just a follow-up on that. What are the – sort of how hard is it for Amazon to take, okay, I’m in the building with Telecity, but actually I’m going to go and do this same process with Equinix and InterXion? What are the barriers for them to do something like that?

Mike Tobin

So the cloud platform itself is a fairly heavy investment. So they tend to put those in core environments. Then you can have the direct connect platforms that are placed in other data centers to connect in. So you have some form of access to it from another data center, but you won’t have the absolute core within.

I think that, this is a range of customer applications. So some customers can live with a secondary position and some would prefer to be directly accessed.

Unidentified Analyst

Thank you.

David Crowther

Mike, can I come back to the first question. It’s actually a blend effect. What you see is the Rest of Europe has a higher occupancy percentage. How far that’s grown greater than the U.K. in H1, it represented a larger share of the Group going forward.

Mike Tobin

Any other questions? Yes.

Adam Rumley – HSBC

Thanks. It’s Adam Rumley from HSBC. You called out the less mature Helsinki business explicitly when you’re describing the sales mix in the release. So I wondered if you could just talk a little bit about the outlook there, and how it either becomes more – how it matures effective over time. And then secondly just a small point on the other cost increase. Am I right in assuming that’s some to do with the sale of cross-connects. You said that you’re selling non-collocation business there?

Mike Tobin

I’ll hand over to David for the second part of that. So in Helsinki, if you recall, we acquired the number one and number two in that market simultaneously, in order to, sort of, get a really strong market leadership position. And in so doing, we had two sets of capacity. The market isn’t strong enough to maintain two sets of capacity as one company, so we did a deal for a medium term, so a five-year program with a fairly large lower priced client. So we fill up our other business on a more reasonable trajectory with a more typical price.

And so we sweat the asset as much as possible, but if the market was more mature, obviously we wouldn’t need to do that lower price deal in the interim. So we would expect that as the second site there fills, we then have the ability to churn that customer and continue the growth.

Adam Rumley – HSBC

So you’re comfortable with the more standard approach in the non-big deal data centers?

Mike Tobin

Yes, absolutely. And on the second part?

David Crowther

And some of the businesses we acquired last year have a greater relative share of non-collation services, and so the cost associated with those. But perhaps most significantly, we’ve alluded to the fact that, H1 has been a period of strong growth order wins. What comes with gross order wins are installation fees, which typically are spread over the course of the contract, but to the extent we incur P&L cost while installing those customers, a proportion of revenue takes that up time to match those costs.

Mike Tobin

Carl?

Carl Murdock-Smith – JP Morgan Cazenove

Thanks. Carl again. I just wanted to follow-up on your, kind of, thinking in terms of the fact that you have over the last couple of years started charging for cross-connect. If you’re happy with the current mix of your standard per kilowatt pricing and then the cross-connect charge, or whether that’s a kind of mix that would nicely evolve going forward? So just interested in your thoughts. Thanks.

Mike Tobin

So again we’ve kind of alluded to a little bit of an experimental process in charging for cross-connects. It’s a discipline that is very useful for us in terms of housekeeping anyway. If you think about the number of cables that we have running under our raised floors in the building, it’s efficient, that’s where our cold air also runs to cool the infrastructure. So it’s efficient to know and to maintain discipline around those cable structures.

And the best way of doing that is to charge your customers on a regular basis, because they will tell you, as and when they don’t need them, rather than just leaving them under the floor. So there is a real operational value to doing that.

So far, we’ve been quite successful in applying a charge to a customer for a cross-connect, but it’s still not a material amount versus our revenues. And we’ll continue to examine that going forward, but I wouldn’t, kind of, factor any major number in there for the time being.

Carl Murdock-Smith – JP Morgan Cazenove

That’s great. Thanks.

Mike Tobin

All right, that’s seems to be it in terms of questions. Thank you very much all of you for coming, and look forward to seeing you as the year progresses. Thank you.

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