Company Interview / NextDC investing in the "fourth industrial revolution"

Key points:

NEXTDC (ASX: NXT) reports a record $404 million in revenue and $200 million in underlying earnings.Craig Scroggie explains the switch to accelerated computing and increased power needs.NEXTDC aims for $350 million in FY25, bolstered by public market support.

Craig Scroggie from NEXTDC reports $404 million in revenue, up 12% YOY, and $200 million in underlying earnings, marking a 5% increase. NEXTDC invests $1 billion to expand data centers, meeting growing AI and cloud computing demands while addressing higher facility costs.

Craig highlights the significance of the shift to accelerated computing, calling it the onset of the fourth Industrial Revolution. He explains the increasing power needs of data centres and the switch from air to liquid cooling to manage the new era’s computational power demand.

NEXTDC aims for $350 million net revenue in FY25. Craig states the company’s growth, driven by AI and cloud advancements, will require substantial investment. NEXTDC's public market support bolsters its growth strategy towards building an infrastructure for future digital needs.

Full unedited transcript below:

0:11

All eyes are on earnings results. Let's begin with data center service provider. Next week brought in $404 million in revenue. That's a 12% increase from last year. Underlying earnings grew by 5% to more than 200 million. It has invested about $1 billion to expand its data centers as demand for digital space, especially with AI and cloud computing, continues to increase.

0:36

However, the company has flagged higher facility costs and the need for more strategic investments to keep up with industry standards and customer needs as they grow. Looking ahead next week, expecting net revenue for FY 25 to be between 340 and $350 million. All right. Let's get some further detail on those results. Craig Scott is the chief executive. And next week he joins us right now. Craig, welcome. Thanks. Congratulations on the results. Thank you. How would you characterize that? Um, given, as I just mentioned there, that strong demand that we're seeing for data centers at the moment.

1:13

Uh, look, it was a record year for us. Amazing performance. Um, ten years in the making, obviously, more than a decade. When you consider that we've been over the course of the last decade through, uh, the CPU era, general purpose computing is now about to change, and we're seeing the era of accelerated computing. So I'll listen to the Nvidia results this morning. Um, the development of AI factories, which will result in the production of intelligence, is really the beginning of the fourth Industrial Revolution. So we're seeing an entirely new generational change in the future of computing. And we build the underlying infrastructure that supports the growth of those AI factories and cloud I mean, it's interesting you characterized it in those terms of the we're on the cusp of the fourth Industrial Revolution. There have been questions, of course, on Wall Street, and that's obviously related to what we've seen with Nvidia too, that those results, the returns are not going to be

2:13

immediate there much longer term. How does that apply to your business, do you think? In a similar way? I mean, if you if you look at Nvidia's results, I mean, they were outstanding. They beat consensus expectations. But when you're the most valuable company in the world and you finally priced expectations are always very, very high. Welcome to living in the public markets. Uh, but certainly in order to build infrastructure, if you think about over the course of the last decade, cloud computing has become one of the most powerful transformational forces that we've seen. Pay per use computing has really changed the way we live and work. And all of those amazing applications, whether they're in the enterprise or consumers today, TikTok, Facebook, Instagram or the Office 365 services you use. Everything is living in the cloud. Now the next transition will see a 3 to 5 times increase in computing capacity. So as we go into this accelerated computing era, you have to make

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the investments. The investments take time to build the infrastructure. So a data center a decade ago, a big data center might have been ten megawatts and capable of serving thousands of customers. Today, a large scale data center could be hundreds of megawatts and cost billions of dollars. So we've had an order of magnitude should shift in the amount of power that's required to drive computing in this next evolution. Well, and to that point, building and running data centers. It's not cheap, is it? So, um, you see, your capital expenditure there are greater than expected over $1 billion. Um, what are you seeing there just in terms of those those costs and talk about running those centers to just what you're seeing with power prices as well, and perhaps your use of renewables. Your power is a fascinating topic when you think about the development of data centers today at hundreds of megawatts, they

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need substations. They need very, very significant amounts of network capacity. And our energy networks have been underinvested in over the course of the last decade, not just the production, but also the transmission networks. Data centers will become more dense. The data center is not using the power. One of the things that we regularly hear is, is that data centers are using all of the power in the community, but the users

4:37

who are driving all the application usage, it's on TikTok and it's on Instagram and all those other things. We're consuming Netflix, we're watching videos at home. All of that on demand infrastructure is coming from a data center. When we are really focused on building that infrastructure, it can take years to build a data center of this size and scale. You're talking about hundreds of thousands of square meters So for us, we've built data centres all over Australia and all the major cities, including regions. We opened Darwin last week, we're opening Adelaide next week. We're building in Malaysia, in Kuala Lumpur, um, the rate of growth. So our run rate CapEx investment was a billion last year. It'll be about 1.1 billion this year, but there's certainly no end in sight, because we're about to go through the most significant transformation in the history of computing. And I've been doing this for 30 years that we've ever been through. Given that scale you're talking about, what is the data centre of the future look like? That is going to be larger,

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uh, physical structures requiring more and more power, or we're looking at sort of some revolutionary process which is going to ease the power burden, if you like, and also the footprint. It's a great question. We're really it's more of an evolution rather than a revolution. We've had computing that's required cooling network connectivity obviously for for decades, as they've become denser. If you think about, you know, in 1965, Gordon Moore wrote a white paper who was the co-founder of Intel. He said the price performance doubling of integrated circuits will will take place every 18 to 24 months. Now, he was right for 50. It was almost 60 years ago. He was right for a long time. But now we're at the beginning of this accelerated computing revolution. So the amount of power per square meter will go up 2 to 3 times. But the big change will be in the way we have to cool computing systems. So we'll go largely from air cooling designs into liquid cooling. So we cool those chips through a direct chip cooling process.

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How are you going to keep up with that demand then, just in terms of, uh, your funding structure, um, in terms of facilitating that, that build out?

6:45

Well, look, it's a public company. One of the fortunate things is, is that when you continue to to have strong results, shareholders to continue to support your growth, you know, as a publicly listed company, since we started, over the course of the last decade, you know, we've continued to grow with the support of great shareholders. And, you know, we continue to have that support. The growth opportunity in the industry is genuinely unprecedented. We've never seen anything as significant as we're experiencing right now. The underlying rate of growth for traditional cloud is continuing on as it has been previously, and in a mutually exclusive way. We're seeing now this new wave of growth for artificial intelligence, which could be three at a time, 3 to 5 times even greater than everything that we've seen in cloud in the last decade. So we're fortunate to be in the public markets. Obviously, both equity and debt form a key piece of our growth strategy. But, you know, when when we continue to be

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successful, we continue to have the support of our shareholders. So, Craig, more immediately, in this financial year, what are your what's your guidance there just in terms of both revenue and profit. Yeah. So we guide for net revenue. That doesn't include obviously power power as a pass through to 350 million this year. Um which which again will be up on the previous year and our EBITDA number 215 million to 220 million. So again, we continue to see we've actually signed as much business as the entire billing capacity today. So the company will actually double once we've built out. It will take us a few years to build all those physical buildings, install all that compute infrastructure. But right today, where we see it, the company has sold 87MW of capacity and has delivered 86.6. So we will more than double

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in the next 2 to 3 years.

8:42

How is your liquidity sitting and also that gearing ratio then? Yeah, on a run rate we've sort of got 2.5 billion in liquidity in available funds that to are able to be deployed. Today our run rate is about a billion a year. So for the for the short to medium term before we increase the size of our debt facilities. Yeah, I think we're very, very well funded for the future. Uh, how do you think the market. What's your interpretation of how the market is pricing your company at the moment, and particularly those future earnings? I have been a public company CEO for more than a decade. And one thing I know for sure is the share price goes up and it goes down. It's at the end of the day, the fundamentals, building a great business, highly diversified model. Um, you know, long term, you know, we've got to think long term, not just in the reporting cycle. One of the challenges today in the market, obviously, is, is that everyone wants results. They want them immediately. They want to see the net benefit. Now, when you're building an infrastructure

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business, the pillars that we're putting in place to build that foundation for digital infrastructure will last and create returns for decades. So, you know, shareholders always want the benefits immediately. But when you're building an infrastructure asset, you have to be disciplined and patient and focused on doing the right business. That will create the right long term returns.