Thank you for standing by, and welcome to the NextDC Limited First Half twenty nineteen Results Announcement Conference Call. All participants are in a listen only mode. There will be a presentation followed by a question and answer session. I would now like to hand the conference over to Mr. Craig Scoggy, CEO.
Thank you. Please go ahead.
Thanks, Katie. Good morning, ladies and gentlemen. Welcome to the McDermott results presentation for the first half of the 2019 financial year. I'm joined here today in Sydney with our CFO, Oscar Tomajewski. We begin on Slide two.
We're very pleased to present another set of record results with total revenue over $90,000,000 and underlying EBITDA of more than $42,000,000 for the half. Contracted utilization grew strongly on the back of what was our largest ever sales half to finish December with more than 50 megawatts under contract. Our ecosystem continues to expand. We added more than 2,500 interconnections over the past twelve months to finish the first half with almost 10,000, which is up 34% in the same period a year ago. Our channel first go to market platform also continued to evolve.
We're now close to 1,100 customers and more than 500 partners, of which more than 60 are connectivity and network service providers. F2 in Sydney opened for early customer access in the first half, with development ongoing. Our P2MicroSite and connectivity hub also opened to facilitate early access to the Indigo submarine cable. On Slide three, our strong performance in the first half is highlighted by robust key operating metrics. Revenue from operations increased by $13,300,000 Contracted utilization increased by a record 11.1 megawatts or 28%.
And interconnection revenue has grown to 7.7% of recurring revenue, which was up from 6.2% in the same period. Our results continue to demonstrate benefits to the company's inherent operating leverage. Underlying EBITDA increased 26% to $42,200,000 Operating cash flow was $15,000,000 after approximately $20,000,000 of net interest paid and $6,000,000 in one off payments related to the acquisition of ATDC. We remain well capitalized to support the company's growth plans. Total liquidity at thirty one December was six forty four million dollars inclusive of our $300,000,000 senior debt facility, which remains undrawn.
Our balance sheet position has never been stronger, which is now underpinned by over $1,600,000,000 of total assets. At thirty one December, we held property with a carrying value of $581,000,000 and plant equipment with a carrying value of $594,000,000 Our network continues to expand at a rapid pace. Net 2 was obviously opened in the first half for our early customer access and the P2 Micro site was open to facilitate early access to the submarine cable system as well as other important telecommunications and cloud infrastructure providers in the WA market, which is central to our retail co location strategy. Finally, we completed the acquisition of the underlying land and buildings at P1M1 and S1. We also acquired B1 in that time, consistent with Nextvc's long term strategy to now own the underlying properties.
I'll hand over to Oscar to discuss our financial results. Thanks, Oscar. Thank you, Craig. Let's now turn to Slide six, a summary of our full year profit and loss. The statutory results reflect data center services revenue of 84,100,000.0 an increase of 15% on the corresponding period last year net loss after tax of $3,100,000 results, which include the impact of increased depreciation costs for our newer facilities increased finance costs and $8,500,000 in one off costs related to the acquisition of ATDC.
As previously advised, LexiC adopted the new accounting standards, AASB nine, fifteen and sixteen from 07/01/2018. Our non statutory highlights include underlying EBITDA of $42,200,000 an increase of 26% from the corresponding period last year. This underlying result excludes distribution income from our previous holding in APDC, transaction costs, including landholder duties related to the acquisition and wind up of APDC as well as gains on the extinguishment of property leases. Direct costs of $16,900,000 which rose in line with contracted customer capacity and power costs. The net impact of direct costs related to energy prices after net increases in power consumption with approximately 15% of total direct costs.
Facility costs decreased to $8,300,000 from $14,900,000 primarily relating to rental cost savings as a result of both the adoption of newly becoming standard AASB 16 and the acquisition of the underlying Ramy buildings at T1, M1, S1 and B1. Corporate overhead increased to $17,200,000 from $13,600,000 primarily relating to investing in the staffing, support and early operations at M2, S2 and T2, reflecting the new investments and growing of our second generation of assets as well as the associated increase in centralization as we continue with our network and client expansion. On to Slide seven. Revenue generated from RACS, Suites, Cross Connect and other recurring sources accounted for 96% of total data center services revenue, an increase from 90% in first half 'eighteen. Note that a key driver of this increase is the adoption of AASB 15, the new revenue accounting standard, according to which project revenue is now must be deferred and recognized over the term of the underlying customer contract rather than recognized upfront as was the previous policy.
The underlying EBITDA performance highlights NextDC's inherent operating leverage as demonstrated by the continuing strong earnings growth in excess of revenue growth. Slide eight sets out our revenue per unit metrics. Both of our annualized revenue metrics have grown strongly during first half 'nineteen, benefiting from contracted price escalation and increased connectivity, power density as well as power recharge revenues. It's also worth noting that revenues from larger ecosystem enhancing customer deployments increased over time due to higher usage of contracted power capacity, increased demand for interconnection and the use of internal services over time. Slide nine summarizes our balance sheet position and cash flows.
At thirty one December, NexTiC held property with a carrying value of $581,000,000 as well as plant and equipment with a carrying value of $594,000,000 Our net assets stood at $882,000,000 Finally, we remain well capitalized to continue our growth trajectory with total liquidity comprising cash and undrawn debt facilities of $644,000,000 I'll now hand it back across to Craig to go through our business performance and outlook for the 2019 financial year. Thanks, Oscar. So on Slide 11, our nonfinancial metrics are set out. Total number of customers, up 25% year on year to ten ninety. Total interconnections grew 34, and total cross connects per customer grew 7% over the same period to 9.2%.
On Slide 12, further insight into the diversity of our business. Customers by industry showed strong representation from cloud and connectivity with continued solid growth from the enterprise. It was skewed towards high density deployments, and that reflects the growth in the hyper converged infrastructure and what we're seeing in the emerging development of hybrid clouds. On Slide 13, at 31%, 90% of our installed capacity was sold and 73% of the sold capacity was billing. The increase in unbilled contracted capacity further underpins our confidence in the forward revenue and earnings outlook.
Both charts highlight the strong growth experienced by the company in recent periods, reflecting high levels of utilization with further operating leverage still to come. On Slide 14, our capacity and utilization. In Sydney with F2, we already sold close to 15 megawatts of capacity, and the ongoing strength of demand in that market has provided us with the confidence to pull forward total capacity of 22 megawatts of the planned 30 megawatts in S2. In Perth, we completed the land acquisition for P2 and immediately commenced construction. The P2 microsite and connectivity hub was opened, and we now provide early customer access at this site, not only for the Indigo subsidy cable but to continue to develop the diverse retail ecosystem.
And you would note that we recently announced not only Amazon connectivity services in the Perth market, but we've taken Microsoft to Perth as well, which is a great win for the company. In P1, we also opened the fourth and final data hall, so no longer enough to be in Perth. In Brisbane, we opened the second data hall of P2, a facility which recently achieved accreditation for the Tier four Gold Certification of Operational Sustainability And it's a great achievement for the team.
It's the
first in the Southern Hemisphere. In Melbourne, M1 also achieved the first, a first for the Australian data center industry, which was a Native's five star rating accreditation, so a great result for the team from an engineering and efficiency point of view. On Slide 16, revenue guidance of 180,000,000 to $184,000,000 is underpinned by strong growth in recurring revenue and our long term customer contracts. Obviously, our rich ecosystem continues to develop, which is driving very strong demand in our connectivity solutions, and you can see that reflected in our interconnection numbers reaching now 10,000. Note that our revenue guidance no longer includes distributions from APDC for the second half as we've now fully acquired, finally, and consolidated the properties.
We expect underlying EBITDA between 83,000,000 to $87,000,000 with scale and earnings growth now driven by our Generation two facilities, and obviously, you'll see that continue to scale. Total CapEx is expected to be between four thirty million and $470,000,000 but that excludes the acquisition of APDC and the B1 properties. Our guidance for underlying EBITDA and CapEx remains unchanged. The only change that you'll see is changing the revenue number as we no longer see that data to distribution. So in summary, this was certainly a massively exciting half for the company.
It was our biggest half biggest sales half, biggest half, obviously, in interconnection than revenue growth. So from a performance point of view, very, very pleased with where the company is today. We're obviously continuing to prepare ourselves to take advantage of that very large shift, not only to retail co location as customers continue to move out of legacy on premise facilities, but obviously the massive growth that we're seeing in the hyperscale cloud. And that continues to give us great confidence to invest in the future for the business and for our shareholders. So ladies and gentlemen, that is the presentation today.
I'm now going to ask Jodi to open the line for questions. Thanks.
Thank you very much. Much. is from Cain Hannan from Goldman Sachs.
Just three for me, please. Just firstly, in terms of that revenue guidance, can you just confirm all those revisions are purely relating to the transactions and the interest impact? Then secondly, the nine megawatt Sydney contract you announced in November.
Could you just provide us with
a bit more color around the terms and pricing of that contract, if you can? And I suppose the returns expectations for those megawatts? And then finally, just cash conversion during the first half, it looks a bit softer than you are sort of expecting, given that you're going to unwind some of the issues in the second half of last year. Just kind of around the impact on the cash conversion in the first half, please. Thanks, Cain.
It's Oscar. I'll take those two questions. So firstly, on revenue guidance, I can confirm that the change to the guidance is lower expected distribution income. Obviously, we're not getting any more distribution income from ACDC as well as lower expected interest income because of the funds that we paid for acquiring ACDC. The second question related to the contract or contracts that we announced towards the end of the first half.
I can't comment beyond what was in the ANZ announcement. So I can't go into any commercial terms as a commercial company. In terms of operating cash flow conversion, I would note that our operating cash flow is after the expensing of approximately $5.8 or paying approximately $5.8 of transaction costs related to the acquisition of APDC. Was a one off in nature as well as after the increment of approximately $20,000,000 of interest payments related to our debt facilities.
Our next question is from John Arkham from RBC Capital Markets.
So I was interested in maybe hearing you describe your outlook in terms of the sales pipeline and how does that look in kind of the hyperscale segment as well as in your enterprise segment? Is it different in print versus mobile versus Citi, maybe kind of a geographic and segmentation? A couple of comments on that terms of sales pipeline. And then on the strategic front, just interested in kind of an update on whether there's line of sight towards land, power and development projects in places like Hong Kong, Japan, Singapore. Thanks, John.
I'll take that one. Sales pipeline continues to obviously be at a record level. So both in terms of retail, so if I start with quarter, our business strategy continues to be focused on the development of those key ecosystems with customers. So we're not exclusively looking to build a hyperscale wholesale business. That's obviously an important segment of the market, that lower rate of returns if you look at the global benchmarks.
We can favor and look favorably at Equinix's business model as a benchmark to next week's development for our ecosystem. We've certainly built an extremely diversified and massively successful business on a global scale, pursuing that blended business model. And we believe the same is true, continue to focus on retail co location, focus on Internet connectivity and cloud connectivity services and the investments that we continue to make in the Axon cloud on ramps to Microsoft, Amazon. We'll note that, obviously, we continue to take those cloud providers into new regions in Australia. So yes, retail and wholesale pipeline is at record all time highs.
Certainly, we can't build data centers in the Cape relocation. And what we've seen in the markets, particularly in Sydney, is that there are multiple availability zones continue to emerge. So we will do our best to keep up with demand and the availability zones that we offer, units that people could do it everywhere. And obviously, we don't have unlimited capital. So we're focused on our business model and what makes NextDC unique.
In a similar regard, obviously, we continue to look closely at the marketplace, Singapore, Hong Kong and Japan, and there are great opportunities in those markets. The dynamics are very similar, both from a client requirement point of view in hyperscale and in retail colocation and in the type and style of products that customers are looking for. So we see great opportunities there. It's really just a question of time and prioritization of our capital. So as I've said before, I hope at some point in time we are capable of expanding the company internationally when we're ready to do so.
So if I can follow-up on briefly then on the first question. Are you noticing any change in lengthening or contraction in decision cycles on the part of some of the larger customers as they seek to kind of look at additional capacity in Australia? And then on the enterprise side, is there any kind of change in your distribution mix between partners and U. S. Sales?
Yes. So we're obviously just recently in U. S, John, as you would know, working with all of the larger customers in the planning period. So I don't think the cycle necessarily has changed. Certainly, the amount of capital that we're deploying has changed.
It's materially increased. And we're seeing an increase in the total pipeline size as a result of what used to be a one megawatt deal, now being a five megawatt deal or a five megawatt deal, which would have historically been extremely large, now morphing into 10 plus megawatt type transaction opportunities. And for a relatively small market like Australia, they are very, very big numbers. So we remain enormously excited about the potential opportunity to continue to grow with those partners. But we continue to be very disciplined in context of our return expectations, and we don't expect that we'll have 100% of the market, and we'll continue to look to invest with customers where we can bring value, grow our particular business model and benefit from a blended retail and wholesale collocation business.
Now on the partner side, partners is very, very important to our strategy. It was early on, and the partner strategy continued to evolve now with more than 50 partners that are reselling and integrating NextDC services into their go to market strategy. So that productization process that we work through with each individual partner is critically important. Our partner team plays a very, very important role in differentiating how NextDC go to market and why the value that we offer to partners is different to other operators in the data center industry. And frankly, the continued investment and development of that strategy will see the company continue to diversify its product portfolio and offer a deeper range of services to customers as we build out our footprint over the coming twelve, twenty four months.
So yes, the partners are critical to our success, we'll continue to do that. You.
You. Your next question is from Tim Pham from UBS Investment Bank. Go ahead. Thank you.
Hi, guys. Just a couple of questions from me, if that's all right. Craig, firstly, on pricing, revenue per meter squared, revenue per meter was up about 3% half on half, So looking good there. Can you talk a little bit around pricing in the market at the moment? What sort of pricing impact you're seeing when you're rolling over contracts, etcetera?
Yes. Thanks, Tim. On contract growth year on year, obviously, we see standardized CPI cost escalators every year for the installed base. And that's fairly common, obviously, across the data center industry. In terms of retail pricing, obviously, our benchmark is Equinix, and we continue to view Equinix as the global benchmark for excellence in retail data center.
I just met with Equinix, the local managing director, Jeremy, last week. Had a good conversation in their business. By all accounts, seems to be continuing to ship the lights out in retail. They've been very pleased with their acquisition of MetroNode and continued investment in that platform. And on the retail side, that's fantastic because we tend to find that in a lot of enterprise deals, if you look at the Sydney market where Equinix are in the Mascot Campus, we're in Macquarie Park, a lot of transactions will be up in Equinix together on either side of the customer's infrastructure when they're building a diversified IT strategy.
So they're getting both ends from both suppliers. So we tend to see and continue to focus on the value in that segment and see them as a very price disciplined quality operator of data centers. They're also very focused on the value of interconnection as we continue to be because we see the importance of the role that we play in working closely with customers and partners to advise clients on how they will adopt and utilize both the public and private cloud platforms. And the combination of those public and private cloud platforms with their legacy computing infrastructure, and obviously, that's what today drives the fastest growing segment for hyper converged infrastructure, which is really that bling, the ecosystem that we focus on, which is hybrid computing. So yes, Tim, I think pricing, we've been pleased with.
We continue to see a rational discipline in relation to the deployment of capital. And then on the wholesale side, obviously, we don't play exclusively in the ultra cheap wholesale category. We tend to pick and choose when we participate in that segment. But global pricing seems to still be benchmarked. We look at the global pricing that's put out by Bubsidy and RBC, and we tend to see the similar pricing in the Australian market in the last half.
It continues to be reflected in what's going on from the top data center providers in The U. S. Markets, particularly Digital Realty core site and probably one are the key benchmark drivers for pricing in The U. S, and we think the DJ market probably reflects that in the last half. Great.
And just secondly on S2, you give us a sense for how you would expect the major customer to roll out their new capacity into the second half of 'nineteen and into FY 'twenty? Can you kind of give us a sense for what sort of EBITDA contribution you've got incorporated within your current guidance for S2 in the second half? Or how we should be thinking about average building megawatts in the second half for S2? Yes, sure. There's a fair amount of detail in that, Tim.
So without picking the model apart, the high level commentary I'd make is obviously, if you have a look, part of the reason or the key drivers for going with our continuous development methodology and it's quite a challenge, to be honest, as to without doubt the most challenging development we've ever taken on building a multistory high rise data center and opening it while it's still under development. It's certainly one of the most challenging engineering feats that we've ever undertaken. And as a company, I'm incredibly proud of what the engineering team has been able to do to build a multistory high rise hyperscale data center, open a portion of that while the ongoing development is done. And that was critically important to support our customers' needs because they needed the capacity early and as it turns out, they need it often. And we are building as fast as we can possibly build to support those customers' continued growth requirements.
So you'll see the revenue come on during the course of the latter 'nineteen and early 'twenty years. Essentially, it will be in line with as quickly as we can continue to develop. So if the development continues to go to plan as it is currently or we can lead to potentially speed up. But largely, obviously, we've taken all of those factors into account in our guidance for the full year and the second half. In terms of very, very specific line item model related things, there's probably questions that I think Greg would be capable of working through with you in more detail with your model.
Got it. But is it fair looking at first half EBITDA, I mean, 1% at the low end of your guidance range, 49% at the top end of your guidance range? Plus in the second half, you should
be getting some sort of benefit coming through from next two?
Yes, not a lot. And the reason for that, obviously, is that we always give customers time to move in and ramp up in the other side. So as you have with every new data center development and customer time to move in and get up to billing capacity themselves, and that's reflected also not only in the commercial pricing but in the tenor of the contract. So those larger and longer term contracts allow us more flexibility to support the customer to deploy their infrastructure get some time to get their own billing up and running before they hit too high payments from a rental point of view. Got it.
And just last question, any update that you can provide in terms of the Melbourne hyperscaler market? Are we starting to see any signs of life there? Or is it a bit of a slow burn and kind of twelve months away? Yes. Look, Melbourne continues to be, I think, a city that's got massive potential.
Clearly, the Sydney market is five plus years in front of growth in Melbourne. And you're seeing both second and third generation deployments from infrastructure providers right across the board. So everyone's benefiting from those massive scale investments. And the bigger platforms that are in their second or third generation are, as I said earlier, they're not deploying one megawatt, they're deploying five or 10 or even more in a number of cases. So the Sydney market, unquestionably, is of extraordinary size, massive growth.
And we certainly see well in excess of another 100 megawatts capable of being followed into the market in the short to medium term here in Sydney. So compared to Melbourne, which is probably in that the first maybe moving towards the second generation size and scale, we support an appropriate amount of infrastructure in M2. But if you have a look as we opened the first and second data halls, we sold those out largely in line with our just in time continuous development methodology. We've been building the third and fourth data halls. We'll be well sold into those by the time they're open shortly.
And we don't overbuild inventory. So again, remaining capital disciplined is the primary objective for us to ensure that we don't deploy our capital before it's required. So we build for retail capacity, one or two data halls at a time. And you see that when we obviously are building multiple megawatts and investing in a market like Sydney with additional capacity, it means that we've got commitments from customers. So we will continue to be capital disciplined, and we'll deploy relative to the rate of growth after the market.
But I think, yes, it's probably fair to say that Melbourne has great potential, and we are in a position to take advantage of that as soon as the hyperscale platforms will grow to a larger extent in that market. Thanks, Tim.
Thank you. Our next question is from Paul Mason from Evans and Partners. Go ahead. Thank you.
Hey, guys. Just a couple for me. The first one, just wanted to clarify your comments about S2 2 in your guidance about a pull forward of 16 megawatts. Should I be reading that as essentially like pulling forward the completion of the facility? So I think at your last contract announcement, you'd announced a pull forward of eight, which was going to be at two or so.
So is this saying you're going to 30 now? I'll take that one, Paul. We have six megawatts of capacity in phase one. So essentially, we're just reemphasizing that we're pulling forward an additional 16 megawatts on top of that, which is consistent with our most recent capacity update, where we started building towards 20 megawatts. So that's that's how that must go.
Okay. Great. Just on maybe the the contract in New South Wales, it looks like you're up to about 30.4 megawatts contracted now, which implies a bit of extra retail. I just wanted to just get a sense. Is that is that going into s one, or is some of that actually already contracts s two retail as well?
What I would give is detail split by that facility, unfortunately. After for some of reasons in relation to the procedure. Okay. Just on Melbourne, maybe. So I'll just I'm taking your case study and then your accounts, and it looks like you've got about 0.8 in the megawatt contract that it's putting out about just under $2,000,000 of EBITDA already.
So historically, that would kind of indicate that you've got much more than that contracted. So should I just be looking at that as you've got, you know, effectively a lot more floor space contracted, and it's just on really, really, really low power? Or or or what else is going into that, but meaning that the profit's kind of coming in a lot higher than the megawatt contracted reported? Paul, it's Craig. Thanks.
So yes, I guess that sort of reflects the strong performance of the retail allocation business. So yes, what you see largely deployed in two stage, all enterprise. So enterprise obviously reflects that. Generally, lower density to higher rate of return, whereas the hyperscale would be a higher density to lower rate of return. So that's why we love the retail allocation business, continuing to focus as much as it's hard and disciplined in its long sales cycle.
It has enormous value to the ecosystem diversity, customer consulting and support services as they develop their hybrid cloud solutions. And what's reflected in M3 today is pretty much a very dense retail allocation business. That's why I've seen those numbers, so, you know, pretty happy with that. Okay. And just last one, just on sort of M3 and S3 timing.
Just wondering, are you kind of expecting, say, the development approval process and stuff will pick up after the election? Or are you able to give any color on on that sort of activity? Yeah, sure. I'll take that one as well. So F3, the Goreville site that we acquired pre BA, the design for the 80 megawatt data center is largely complete.
We've been working with the council, getting our pre BA approvals and other things, power, lockdown. So we're sort of pretty much ready to go on X-ray. It just comes down to working
with
customers on forecast commitments and other things. As we plan that, obviously, it's a very large data center getting up to 80 to 100 megawatt type footprint sizes or massive scale. And so through the type of customer commitments that we're making when we're building facilities of that size of scale. So yes, we're well down the track there. And I'd expect probably not too far in the future, we'll be ready to get going on S3.
But we continue not only to work with the council on the VA approvals and design, but also work with the customers on commitments. And in Melbourne, you are right. The Victorian election, obviously, the change of government and the development approval process in the Victorian market there was at election time. So now that we're clear of the election, we expect that we'll be able to get the BA approval and site acquisition process complete. We like to know that, obviously, we're going to have approval to develop the site before we acquire it.
So once we get that certainty and know that the election is locked down and ministers have been appointed, we're now moving as quickly as we can to secure and sign the M3 site and hopefully produce something similar to what we're in the process of doing for S3. Okay. And just one last follow on for that, though. Can I just ask you, with your CapEx guidance, does that still have a component for the entry land in it? I think it was flagged as having a undisclosed component when we last spoke, but, yeah, just wanna check if there's any change there at all.
No change in itself.
Your next question is from Mitch Sonnegan from Macquarie Group.
A quick question. I couldn't see anyone. Are you able to give me the actual impact of the accounting changes on the first half of 'nineteen result in terms of revenue, EBITDA and impact, please? No, we're not. Well, looking back at your FY 'eighteen presentation, we had some guidance there, but that was only made the time.
So I just wanna know whether those estimates have changed or is that an expected change that we can flow through and just maybe the, I guess, contribution to the first half versus the second half? Yes. Mitch, we if you turn back to Page 22 of our FY 'eighteen results, we gave guidance on both set of accounting standards. We've been disclosure around a slight adjustment to the revenue guidance for reasons that we've already explained. Other than that, the guidance is unchanged.
Beyond that, but for any more detailed or specific questions, I believe you've got a session with Greg lined up a bit later on today. Okay. And maybe, Craig, just trying to get a feel for the activity in the Melbourne half scale market. I guess over the last twelve to eighteen months, it looks like, as Paul sort of said before, it's probably been about 0.1 megawatt added to M2 over the last six months. Can you give any sort of sense of how many hyperscale tenders that you might have worked on in terms of volume and what you think might have gone to the market over that time to competitors?
I'm not sure that number makes any sense. But in terms of activity in the local market, there's really only two zones. We created a third within two. Obviously, between ourselves having one or two big pieces of the Hyperscale puzzle in Melbourne today and then the other piece of the Hyperscale puzzle being out in Western Sydney. Still see plenty of activity there, but, again, in a similar fashion to what I described earlier, it's probably the generation two style of deployment.
So size and scale is in that one to five megawatt range versus in Sydney, we're in the five to 10 plus megawatt range. So I would expect that Melbourne is an opportunity to continue to grow. And as the next refresh of infrastructure comes around, those larger initial deployments or first generation deployments will grow materially in size. But at this point in time, we build enough capacity to serve the retail market. And once we have a high degree of confidence on the customer commitments in Melbourne, we'll commit to build more.
And that's obviously part of our M3 planning process. Clearly, size and scale footprint for M3 anticipates some larger deployments, and we continue to work closely with customers from a planning point of view. But you're talking about ten plus year planning windows on the size of the M3 and its three deployments. And those customers are when you're getting into ten or fifteen year tender commitments, they're quite large and long and detailed negotiation processes because it's lifetime team getting the best in our industry. And certainly, securing contracts in the order of hundreds of millions of dollars for decades plus long commitments takes some time.
So we continue to be disciplined and patient and work closely with the clients on building something that's unique to support our business growth. Okay. I was just, I guess, looking from FY 'eighteen, there was 14 megawatts contracted in M1 and 0.7 megawatts M2, so 14.7 And at the first half, it was up to 14.8 in Melbourne. So just wondering about how do you think we should expect to see M2 feeling in terms of contracted utilization maybe over the next twelve, twenty four months? Difficult question to answer simply because on a retail point of view, retail tends to be fairly simple to forecast.
We've got a base underlying solid run rate to continue to perform, but hyperscale does what hyperscale will do, and that is it comes in very large lumps and very difficult to forecast. So unfortunately, I can't be sure of one thing, and that is it will grow. I just can't be exactly sure of when and to what extent. So if I said it was five megawatts, it could be 10 or it could be 20. Unfortunately, it's just not something that we're capable of knowing the certainty.
But we are planning, importantly, to be able to take advantage of those size opportunities because those size opportunities do exist in the market. The longer term question will be, do they meet our return expectations? We remain disciplined in how we deploy our capital, and we remain disciplined in our rate of return.
Your next question is from Nick Harris from Morgan.
I'm just interested in Perth.
There's a few interesting things going on there at the moment. You've got one and military submarine cables live there. I'm just wondering, do you have any sort of visibility on what hyperscalers are doing? And is there the potential for Perth to actually pick up as an availability zone like Sydney? And then my second question was just also on Perth.
Obviously, you've turned on a microsite really quickly. I'm just trying to understand, is that really a timing thing to obviously buy you time as you build P2? Or is this a potential for the next DC to, I guess, get ahead of the next wave, which is that sort of five gs edge computing stuff? Is there a little bit more to that micro side? Nick, it's Craig.
I'll take that. And great question. So let me try and work through that. It's a lot of detail on me. So first of all, the cables.
Yeah. Look, we were thrilled, obviously, to be able to to work with Kirk Elton and his team at the Board to secure the Indigo cable and obviously, with the North Arnett and and a bunch of other, you know, key telco players in there and being able to connect Singapore to Perth to Sydney on the lowest latency route, massively exciting for the team. That initially drove us accelerating the program of works with the Micro site. But what you see, if you visit Perth and visit P2, the site is just an absolute cracker. Just a short walk over the bridge from the Perth Mall, it's beautifully positioned, great location.
So I couldn't be more excited about what's actually happening in Perth in the enterprise market. Having just recently announced that we signed a contract with Microsoft to take Microsoft into Perth after having not long earlier than that, announced that we had signed a contract with Amazon to take Amazon into Perth. So building that retail colo business that's very network centric with those big global cloud platforms for their on ramps was a huge win for us. So fantastic results there. The teams have done an incredible job to continue to build out that value.
And that drives our ecosystem that's being reflected in the growth of our connectivity numbers. And for all the guys that work in the engineering team that build the Axon product, that's why we continue to focus on our differentiated business model. We feel passionately to solving that problem to the customers. This is a real critical and complicated thing to resolve and particularly doing a good job there. We should see continued very strong growth both in numbers and in costs reflected in our retail strategy.
But the cable piece is really important. As you know, Nick, you cover the telco industry. Submarine cables in the data center industry are data center fairy dust. And when we get a submarine cable, it's a really great news. So the opportunity that, that opens up with international customers coming into the Perth market and then making their way to Sydney is pretty exciting.
So having that opportunity is critical. But as you alluded to, the work and development that we've done on the microsite strategy, so rapid access connectivity hubs, we call them, The five gs emerging components of five gs, as we work closely with partners to sort of design how we can solve this problem, deploying micro sites into a larger number of locations may very well end up being an important requirement for data centers in a regional context. So we've spent the best part of twelve to eighteen months the research and development team, specifically on the engineering side, in partnership with the company that we selected, a global leader in the development of those called Flex Enclosure in Sweden. And the Flex Enclosure team worked closely with our team for twelve to eighteen months to develop that product. And we're now capable of being able to deploy that product into any region or any location as a full rapid access connectivity microsite.
So we do see that as quite an interesting emerging opportunity. We think that, that will be client led. So some of the investments that we're making in that area will allow us to work more closely with regional areas. You'll see that yesterday, the New South Wales government made an announcement for $100,000,000 allocated to regional data centers. So we've been planning and expected to see not only a larger number of connectivity points to support the growth of the digital economy being made in regional areas around Australia, but regional areas right across Asia.
So we see the microsite strategy and having a product that's differentiated and network centric and obviously Tier three or Tier four resilient to the standard that we've become renowned for building an industry as a really important piece of our strategy. So yes, Nick, you're right. There'll be more that we'll share on the MicroSite strategy coming because we see it as an interesting opportunity to support the edge growth of data centers, the IoT deployment into regional areas, whether it's been supporting autonomous vehicles and other things. Compute continues to need to go closer to user, both not only the downloaded data but the creation and the upload of it. Last point, Nick, on the hyperscale side.
Obviously, the total size and scale of the PC development, it will be a continuous development methodology side. So we'll build the site in stages. We won't deploy capital again. And we do see an opportunity for many of the countries in Asia, whether that be Singapore or Hong Kong. Land prices are very high.
Land center prices are high relative to what you could secure in the Australian market. So therefore, it stands to reason that it would make sense if you had diverse cable routes and that latency wasn't an issue, that you would be in a politically stable, comfortable environment that had reasonable energy prices and had all the connectivity both in and out of Australia to Asia and The U. S. So hyperscale is an opportunity there. We just saw Equinix recently announced further investment in the Perth market as well.
So yes, that's continued to also give us confidence that there may be some hyperscale development in the coming period.
Your next question is from Bob Chen from Deutsche Bank.
Just a question on the enterprise market. Are you seeing any sort of uptick in activity in that part of the market? Just looking at sort of the run rate enterprise deals that you're winning, it's sort of tracking at that two, three megawatts a year. And it's been tracking at that for a little while. Yes.
So the enterprise market, obviously, is a long sales cycle from the time if you imagine that from the time that you first engaged with the customer, what drives the moving the data center largely is just that they're moving office. So a lot of the legacy infrastructure will be located in an office building in their CBD. They'll be moving offices. So that generally is a sort of eighteen to twenty four month planning window. And we start working with the customer design.
The data center in itself is not massively complicated, but where the real value comes is the customer being able to then connect to the public and private cloud infrastructure that we host, which is why the retail colocation data centers that have diverse ecosystems and cloud on that become very compelling from the client's point of view because they're able to get material cost savings, both in a telco context, metro fiber is cheaper in the data center. But connecting to the cloud platform is cheaper in the data center as well because you're not then paying for Metro fiber out to the cloud as well. You're actually buying a direct cross connect, either an elastic cross connect or a physical cross connect in the data center. And when you've got the cloud in the data center, that's going to be not only the lowest latency but the lowest cost path to connect to the cloud. So enterprise takes time.
The run rate and size of the enterprise business have been consistent. And as I mentioned earlier, there's probably cheaper alternatives, but we continue to see the benchmark standard in the retail colocation industry of Equinix. And really, ourselves and Equinix tend to be on both ends of the deal. So it's been consistent. It will continue to grow.
Very few companies wanting to build and operate their own data centers, certainly in buildings when you've an average five and six star ratings and green energy requirements, ESG and other sustainability standards. That's also why we've recently made announcements on our carbon neutral. We're now in cost of credit service carbon neutral as a company for NXT. We'll offer our customers the ability to be able to offset their carbon as well for their base and footprint. And then extending out our investments from our solar arrays into the renewable energy space for more PPA style of partnership agreement, as we've done with the Melbourne Renewable Energy project in partnership with Nav and Australia Post and others.
Expect more of those. And they seem to be very important to the enterprise customer when they're selecting the right long term data center partner because they want to know that not only are they getting a world class product, but they're getting world class sustainability and operational credentials to support them for the long term as well. Sure. And then just in terms of the overall competitive environment, especially in the Sydney and Melbourne markets, I mean, we're seeing quite a lot of investment from some of your competitors, including Equinix just recently. Has that had any sort of impact on sort of your business?
Yes. Look, I thought obviously, recently caught up with the Equinix guys and caught up with Digital Realty just recently. So the key players all continue to invest. Look, I see that investment as a good thing. From a competitive point of view, people tend to sort of see investment and think, Ah, that means that you're going to be up against more price competition or losing an opportunity.
But one thing that's important to continue to remember about data centers is it's not a zero sum game. We're not selling widgets. Where the data center is located is critically important. Customers generally need two or three or more locations. In a lot of cases, when we're working with a client, we are working collaboratively with the client, but they're also selecting one or even two competitors at the same time.
So price does play a role. And obviously, we are not a price led company. We are an operational services excellence led organization. We focus on Tier four data center products, the highest standard in the industry, the highest level of operational excellence and customer service, and we are a premium product. But customers will choose multiple locations, they'll choose multiple providers.
And in the majority of cases, we tend to see good competitors as continuing to keep us focused on building a better quality product and being more disciplined about how we run our company. Sure. And then maybe for you, Oscar. Just looking at sort of guidance for the full year, it seems to imply there was sort of margin compression in the second half. I mean I would have thought acquiring APDC and selling some facility and rental costs there would have sort of flowing through into better margins?
Yes. Thanks, Bob. We're tracking pretty much in line with expectations. There can be some seasonality in some of our operating costs. There's a whole bunch of different factors underpinning that.
There could be software costs, there could be variable cleaning costs, engine maintenance and so on and so forth. So we're pretty much tracking exactly in line with where we thought we would do this time.
Thank you. Your next question is from Wayne Arthur from Monaro Superannuation. Go ahead. Thank you.
Good morning. When will the company finally make some decent profits? And what are you gonna do to get there? Every year, every presentation we see figures on utilization. In the six months, utilization is 90%.
It's always been in the high eighties. And that's pretty good. But even if you got to a 100% utilization, that wouldn't seem to have a completely increased profit. So we've got assets of $1,600,000,000. We've got no profit, and we've got no return on equity.
Now I noticed there's been references to your competitor, Equinix. And I noticed in the last year, they recently reported profit of 7% of revenue. So what's next we see going to do to finally generate some decent profits for shareholders?
Yes. Thanks for the question. The answer is a long one, but in summary form, we're essentially continuing to invest. If you look at Equinix's results of performance at a similar stage of development as NextDC found itself in at the moment, very true, we're investing a of capital for future growth. We are building the platform for future expansion, and there is no other way of taking advantage of market opportunity other than investing upfront.
We could slow down. We could stop growing. We could start generating lost profits, but then we're starting all the growth that's happening out there in the market.
Is the company actually under charging?
No. It's if you if you have a look at what's what's driving a lot of our costs below EBITDA, it's essential costs as we take on more debt to fund the ongoing development of future data centers as well as the appropriate depreciation. Each new incremental data center that we build is larger than the previous one. So case in point, in Sydney, the first generation data center is 16 megawatt facility. The second generation is 13 megawatts.
When we get around to the third generation, it's an 18 megawatt facility. The market is expanding, and we are investing to take advantage of the opportunity. And unfortunately, in the business, have to invest our funds and start incurring the costs before the benefits are coming through. If you look at the case studies that we include in our results every six months, you can see the trend historically through the first generation sites. We've experienced very similar trends in our second generation facilities and third generation facilities.
And is there any plan when the company might actually be paying dividends?
That's ultimately a matter for the Board. But at this stage, there are no specific terms of tackling dividends.
We have a further question from Tim Plum from UBS Investment Bank.
Sorry, just one follow-up from me. Craig cross connects at seven point seven percent of revenues at the moment. Can you give us a sense of how you're thinking about that a little bit longer term, given the mix of the customer base you've gotten? And maybe you can split it out kind of against your old generation data centers compared to your new generation data centers, obviously, going to have a different customer or megawatt mix there? Yes.
Thanks, Tim. So obviously, that growth in cross connects, if you go back a few years when we started, obviously, very low percentage. It has continued to grow. I expect it will continue to grow. Can it be 10% or maybe even 15% over time?
Potentially, yes. We're very focused on that retail colocation strategy. We're also focused strategically on building the most diverse ecosystem of public and private cloud providers and on ramps, also the content delivery networks. So as you attract more network service providers to the ecosystem and they can be traditional telcos like Telstra and Optus and Vocus, all good partners and continue to do great work with our teams today. They can be the new digital age born in the cloud network service providers like Megaport and Packet Fabric and others.
So we continue to see that growth. We look at all of those providers as a great opportunity to continue to diversify and grow the breadth of our services ecosystem. The more of those we have in our data centers, the more choice there are for our enterprise customers on network connectivity services. And that includes everything from just buying your cloud cross connect through to who provides your metro fiber, your intercap services or ride out to your submarine cable capacity. So over time, I can't give you an exact number, Tim, but I hope that it's certainly in the teens.
It continues to grow, and it will reflect our focus on being an enterprise colocation provider that builds a lot of value in public and private cloud on ramp services.
Thank you. There are no further questions at this time. I will hand back to Mr. Scobby for any closing remarks.
Thanks, Jodi. Ladies and gentlemen, thanks for joining the call today. Obviously, I'd like to thank all of our investors for their continued support, but it would be remiss of me not to sincerely thank all of our team members at NextDC who are working very hard to build this amazing extraordinary platform. I'm very proud of what the company has achieved and the efforts that all of them have continued to make, not only with our largest sales half ever in the company's history, but obviously, our largest operational half, biggest number of cross connects largest number of customers serving more than 1,000 enterprises today. So very pleased with where the business is as we continue to grow and scale and see enormous opportunity in front of us to continue to take advantage of.
So thanks to our team. Thanks to all of you for your continued support and interest in the company. Bye for now.
That does conclude our conference for today. Thank you all for participating. You may now disconnect.