Big customers and big facilities are at the heart of the business strategy for CyrusOne, the data center business of Cincinnati Bell, which plans to go public through an initial public offering (IPO) later this year.
The recent opening of a 700,000 square foot facility in the Dallas market is a reflection of the size of the company’s ambitions, but the value of the company’s customer base is perhaps best seen in another new facility – a new Houston campus optimized for customers in the oil and gas industry that have been some of CyrusOne’s most reliable tenants.
CyrusOne’s strategic blueprint is laid out in an SEC filing related to its planned IPO as a real estate investment trust, which could occur as soon as the fourth quarter of this year. The filing is one of several potential IPOs in the offing for the data center sector.
CyrusOne’s strategy is built atop a base of 493 customers, including 108 members of the Fortune 1000. Those existing blue-chip customers accounted for 63 percent of the company’s new contracts over the past year.
Existing Customers Drive Leasing
“We continue to generate a majority of our revenue growth from existing customers who are either migrating more of their existing legacy data center business to our facilities or are requiring additional data center capacity to power the new technology that they have already outsourced to us,” said Gary Wojtaszek, CEO and President of CyrusOne. Wojtaszek said the top 25 customers who have been leasing space for five years or more have grown their business with CysurOne by a compounded annual growth rate of 40 percent.
With its finished data center space now 85 percent leased, the company is aggressively expanding its footprint with a new fleet of facilities designed for phased deployment of customers and capital. CyrusOne plans to add a new revenue stream by providing interconnection services within its data centers.
CyrusOne had revenue of $52.1 million in the first quarter of 2012, an increase of $9.4 million, or 22 percent, compared to the corresponding quarter in 2011. EBITDA was $29 million, up 12 percent over year-ago period, with a total net loss for the quarter of $700,000. The company added 23 new customers in the quarter, and an operating margin of 19 percent, according to the SEC filing.
Building Big in Dallas
Last week CyrusOne opened its new data center in Carrollton, Texas, which will eventually feature 400,000 square feet of raised-floor data center space and approximately 60,000 square feet of class A office space to accommodate customers’ employees. The facility is approximately one-quarter-mile long, or large enough to house six 747 airplanes, four football fields, a dozen space shuttles, or two Washington Monuments.
“We are able to achieve significant construction and asset utilization efficiencies that are simply not achievable in smaller facilities, and we beat the deployment speed of most of the ‘data center in a box’ solutions that are currently being marketed, getting our Carrollton facility to market in just 14 weeks,” said Kevin Timmons, chief technology officer, CyrusOne. “Aggressive sourcing enables a speedy commissioning of the site, which, in turn, enables us to deliver inventory just in time to best match our customer demand.”
The first phase features 47,000 square feet of space, with about 5,000 square feet occupied by the first tenant.
Houston Data Hub for the Energy Sector
Earlier this month CyrusOne announced plans for a new campus in Houston that will focus on the needs of its clients in the energy sector.
“We are particularly proud of the success we have been able to generate in the oil and gas industry, and count five of the six super-major oil and gas companies and just about all of the other major oil and gas companies in the world, which account for about 36% of our total revenue,” said Wojtaszek. “Given the current and projected global demand for oil we believe that oil and gas companies will continue to explore for alternative sources of energy, which we will expect will result in increased demand for IT compute capacity.”
While exploring for oil, energy companies make extensive use of seismic imaging to locate and evaluate potential resources. CyrusOne has provided the high-density colocation space for leading players in this field, including Petroleum Geo-Services and Repsol YPF, who require power loads of 750 watts per square foot and beyond.
IDC projects that worldwide spending for high-performance computing servers for geoscience applications will grow at a rate of 7.8 percent a year through 2015. In its SEC filing, CyrusOne said the growth in seismic data volumes and processing capacity is expected to increase with newer exploration techniques, including shale and deepwater offshore exploration. It said that the need to guard against oil spills also may drive growth opportunities.
“Once drilling has been completed and wells are put into production, wells are automated in order to maximize production and manage environmental, health and safety risks. This means deploying large numbers of sensors and the use of advanced analytics, which will require high-performance computing capacity and data storage.”
Assorted Notes from the SEC Filing
Here are some additional data points from the CyrusOne IPO filing:
- As of March 31, CyrusOne’s property portfolio included 21 operating data centers in eight markets (Austin, Chicago, Cincinnati, Dallas, Houston, London, Singapore and South Bend) with a total footprint of 1.48 million rentable square feet of space and 105 megawatts of utility power. The company has 395,000 square feet of space under development at four data centers in Dallas, Houston, Phoenix and San Antonio; and another 701,000 square feet of additional powered shell available for development, as well as 140 acres of land.
- On the timing of the IPO, Cincinnati Bell President, CEO Jack Cassidy said the process of applying for REIT status may take six months or more to complete. “Based on the expected timing of the reviews, the S-11, and the PLR we continue to expect that we will be ready to IPO CyrusOne no earlier than the fourth quarter of 2012.”
- The IPO revenues will be focused on Cincinnati Bell’s bottom line. “We have consistently said that we think the way to drive shareholder value back into the telco is to reduce the debt level appropriate to the sector that we live in,” said Cassidy. “So, the answer would be in the immediate term we would use proceeds to be able to pay down debt.”
- In addition to growing revenue by building its interconnection business, Wojtaszek also sees opportunities in international expansion, including Brazil. “That is a market that we are exploring,” said Wojtaszek. “That is a really large energy base there, and that is the reason that we are in discussions about looking to go there, because of demand that we are seeing from our customers.”
- Capital expenditures were $117.5 million in 2011, an increase of $88.2 million, or 301 percent, compared to $29.3 million of capital expenditures in 2010. In 2011 CyrusOne purchased land in Phoenix for $14.8 million and a building in San Antonio for $7.8 million. It also spent $91.2 million expanding data centers in Houston, Dallas and Austin, as well as one of its facilities in the Cincinnati area.
- In conjunction with the IPO, CyrusOne intends to purchase a property located at 229 West Seventh Street in Cincinnati, where it leases space used in their network operations. But CyrusOne will not own 14 buildings in its portfolio that account for approximately 600,000 square feet (approximately 40 percent of its total square footage). The weighted average remaining term for its leases and subleases is approximately nine years, or approximately 20 years after contractual renewal rights.
- Among the many disclaimers of potential investor risk, CyrusOne’s S11 filing includes a note that its future results may be adversely affected by regulations related to climate change. “The costs of electric power comprise a significant component of our operating expenses. Changes in regulations that affect electric power providers, such as regulations related to the control of greenhouse gas emissions or other climate change related matters, could adversely affect the costs of electric power and increase our operating costs.”