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Digital International Colo Club: Attracting Investors

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With more than $18 billion in M&A activity in the first half of last year alone, the colocation industry is riding the bubble of rapid growth. Colocation data center providers are being evaluated by a wide range of investors, with varying experience and perspectives. Understanding the evaluation criteria is a critical competency for attracting the right type of investor and financial commitment for your colocation business and this is why we have invited today’s speaker to present.

Steve Wallage Steve Wallage is Managing Director of BroadGroup Consulting. Steve brings 25 years of industry experience, holding senior roles at Gartner Group, IDC, CGI and IBM before joining BroadGroup 10 years ago. In his responsibilities at BroadGroup Steve has led many due diligence projects for investors evaluating colocation companies.

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Digital International Colo Club: Attracting Investors

  1. 1. Digital ICC: Attracting Investors What Colocation Providers Need to Know Confidential Property of Schneider Electric March 14, 2018 Greg Jones, Schneider Electric Steve Wallage, BroadGroup Consulting
  2. 2. Page 2Confidential Property of Schneider Electric | What is the Digital ICC? • International Colocation Club is our annual live annual event where we bring together colocation providers from around the globe to hear from industry experts, analysts, and peers insights to maximize their business success • Digital ICC brings the International Colocation to the web with quarterly webcasts, content and more. • Hosted by Schneider Electric, Digital ICC brings colocation providers insights from leading industry voices on business and technology topics for colocation providers • Stay tuned to our blog for more announcements and check out recordings of International Colocation Club presentations
  3. 3. Page 3Confidential Property of Schneider Electric | Attracting Investors: What Colocation Providers Need to Know Today’s presentation will cover  How investors are assessing colocation providers  Different types of investor strategy and positioning  Actual case studies Steve Wallage Managing Director Greg Jones Vice President, Strategy, Cloud & Service Providers segment
  4. 4. HOW TO SUCCEED IN DATA CENTERS - AND GET INVESTOR SUPPORT STEVE WALLAGE MANAGING DIRECTOR, BROADGROUP CONSULTING steve.wallage@broad-group.com Information in slides comprises data and opinions from BroadGroup Consulting
  5. 5. Why BroadGroup Consulting • Internal databases and tracking of markets from 2002 • Co-location, hosting, IaaS • Research reports – quarterly tracker, annual analyses • DCE8 – Western European analysis, June 2018 • Strategic consulting - focus across Europe, Africa and Asia • Work for investment agencies, operators/providers, vendors, investors, users • Conducted over 30 commercial due diligence projects in sector
  6. 6. Is there sustainable demand for data centers? Will this specific business/financial model work in the face of increasing competition? Two key investor questions
  7. 7. And this demand is accelerating globally – supported by government initiatives
  8. 8. But will this particular investment work - typical commercial due diligence breadth 1. Broader market issues and opportunities/threats/long-term evolution 2. Specific analysis of local market, supply/demand, addressable market 3. Specific analysis business plan - Market positioning, offerings, execution, pricing, channels etc 4. Financial plans - Overview costs, fill rate, pricing, P&L 5. Technical plans - High-level analysis 6. Management 7. Customer and prospect analysis – typically including 15-30 detailed interviews 8. Strategy and recommendations on future plans 9. Other aspects including possible exit Often alongside: Financial due diligence Legal due diligence Technical due diligence
  9. 9. Looking at some key aspects and our experience with real projects • People • Competitive positioning • Revenue and margin forecasts • Getting cloud right • Future opportunities, growth and potential investor exit
  10. 10. People “If didn’t totally trust the management, wouldn’t invest” - Private equity investor
  11. 11. - A serial entrepreneur who has done it before - An experienced chairperson from outside the business - Specific vertical market expertise that is key to business People – good examples from previous investment projects
  12. 12. - ‘Distracted’ other businesses/ventures - Short-term contracts/unclear commitment - Skills to build business up to today but not the skills needed from 2019 and beyond People – poor examples from previous investment projects
  13. 13. Competitive positioning • Does the current and planned competitive positioning make sense? • Is it backed up by evidence from financials? • Is it backed up by industry trends/evidence other markets? • Is it backed up by user interviews? • Is it defendable and sustainable?
  14. 14. - Can you match the growing competition such as Equinix? - Can you make the expected returns given the pricing, terms and expectations of the hyperscale cloud players? - Can you meet their cost expectations….. Example competitive positioning – focus hyperscale cloud
  15. 15. - (Despite our initial concerns) Product roadmap based on customer requirements as so close to key customers - Strong understanding of the gaming market with excellent relationships and partnerships in the sector - Regional (second city) approach and key relationships local IT players, avoiding direct competition major players Competitive positioning – good examples from previous investment projects
  16. 16. - Claims of relationships and Letters of Intent from Middle Eastern customers, with no proven agreements or track record - Claiming to have unique approach with no evidence of customer acceptance of approach - Looking to cut costs by using unproven suppliers Competitive positioning – poor examples from previous investment projects
  17. 17. Revenue and margin forecasts • Forecasts are often treated sceptically – looking for hard evidence and proven track record • Monthly management accounts and detailed customer pipeline assessment • Often see claimed revenue growth and margins much higher than industry average/competitors – is this justifiable and sustainable? • Often only one forecast with little/no contingency – investors like to see different scenarios
  18. 18. “Our investors only care on four things at every management meeting – deals signed and their terms/length, pricing and covenants” Co-location player Revenue and margin forecasts – investor interest
  19. 19. - Higher margins achieved due to under-developed market/limited competition - Higher margins due to concentration of telcos/cloud players at their data center - Higher revenue growth forecasts supported by user interviews showing planned customer growth Revenue and margin forecasts – good examples from previous investment projects
  20. 20. - Sudden growth in new cloud business line despite no track record or expertise in the area - Revenue growth to come from M&A despite lack of identified targets or track record of execution - High current EBITDA margin due to unsustainable factor – in this case, not paying market rate to property owner Revenue and margin forecasts – poor examples from previous investment projects
  21. 21. Getting cloud right • Many different potential approaches (see success stories) but it is key to data center success – supporting customers in their cloud strategies • Key is that it is providing value to customers, and is sustainable and defendable • Differentiation can come from specialist skills and professional services • Success comes from understanding customers – why they use the data center? How can they be better supported? And this is a key area in customer interviews in the due diligence
  22. 22. - Automated services that were easy to deploy with quick payback - Specific services such as DRaaS and Security As A Service that complement existing services - Specific vertical market offering – example was in insurance where had to overcome industry concerns and incorporate specific regulatory requirements Getting cloud right – good examples from previous investment projects
  23. 23. - Trying to use co-location salespeople to also sell cloud services despite no experience in the sector - Competing directly against public cloud offerings - Offering managed hosting and cloud solutions with limited experience and relationships Getting cloud right – poor examples from previous investment projects
  24. 24. Future opportunities, growth and potential investor exit Now that they have our money, we are going to watch very carefully what they do with it Private equity investor
  25. 25. - Expanding offerings – and number of services that can be sold – to a core and loyal group of customers - Being a first mover in an emerging market that larger players are likely to want to enter in the next 2-3 years - Developing differentiated offering in new sector such as edge Future opportunities, growth and potential investor exit – good examples from previous investment projects
  26. 26. • Microsoft developing ‘hub and spoke’ DC strategy, and Azure IoT Edge • AWS Edge Network Locations in Asia Chennai, India (2); Hong Kong, China (3); Kuala Lumpur, Malaysia; Manila, the Philippines; Melbourne, Australia; Mumbai, India (2); New Delhi, India; Osaka, Japan; Perth, Australia; Seoul, Korea (4); Singapore (2); Sydney, Australia; Taipei, Taiwan; Tokyo, Japan (7) • EdgeConnex estimates that response time improves 50-85% for users who bypass the public Internet, opting for direct cloud access via Megaport from an EdgeConneX Edge Data Center And the hyperscale players also now want to be at the edge….
  27. 27. - The ‘build it and they will come’ approach - Expanding in a new country where the provider has very little experience and limited relationships - Assuming a trade buyer will come in at some point…. Future opportunities, growth and potential investor exit – poor examples from previous investment projects
  28. 28. “The industry will largely consolidate around 3-5 global players” David Ruberg, December 2017 How many trade buyers will there be?
  29. 29. - Many investors ‘struggle’ with data centers – their background is often real estate where there are detailed data points and comparative numbers – the investor often needs educating - Does the investor know the sector? What have they done with previous investments? - What is risk profile and focus of the investment company (fund)? - What is the duration/timeframe of the investor/fund? - What is their approach/involvement with investments? Final thought – the right type of investor
  30. 30. HOW TO SUCCEED IN DATA CENTERS - AND GET INVESTOR SUPPORT STEVE WALLAGE MANAGING DIRECTOR, BROADGROUP CONSULTING steve.wallage@broad-group.com Information in slides comprises data and opinions from BroadGroup Consulting

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