Craig Scroggie's energy walking into the studio to discuss NextDC's (ASX: NXT) latest financial result was as electric as the data centre operator's share price, which has soared 50% since the beginning of the year.
It's easy to see why ...
The company has just reported that revenues soared 25% over the past financial year to $362.4 million, while underlying EBITDA lifted 15% to $193.7 million. NEXTDC reported a loss of $25.6 million during the financial year.
While there may be no hope of a dividend on the horizon as NEXTDC ramps up investments in its existing and oncoming data centre projects - or the peak of CapEx spending in FY24 as analysts have predicted - investors can find comfort in Scroggie's determination to win an "unfair share" of the "10 times increase in the total amount of digital infrastructure required to support technology platforms" over the next five years.
In this interview, Scroggie dodges a question on future profitability, discusses the company's growth trajectory, and provides an insider's view on artificial intelligence - on which, Scroggie believes there is more opportunity today than at any point in his three-decade career.
0:27 - An introduction to NextDC
1:18 - Craig Scroggie talks NextDC's FY23 result
2:36 - On profitability
3:57 - Analysts predict CapEx will peak in FY24 - Scroggie says no chance
5:36 - Energy needs of data centres
7:12 - How NEXTDC is investing in an AI-fuelled future (and CapEx implications)
9:33 - A not-so-silly question
10:02 - The Australian tech landscape
11:16 - Of the 20 analysts who cover NextDC, only one rates the stock a sell
12:31 - Likely no dividends in the near future
Note: This interview was recorded on 30 August 2023 and first published for Livewire Markets. You can watch the video or read an edited transcript below:
Ally Selby: Hello and welcome to Livewire's C-Suite Reporting Season coverage. I'm Ally Selby, and today we're in for a ride with Craig Scroggie. He's the managing director and chief executive of NEXTDC. We're going to be talking all about the future of AI and data centres. Thank you so much for joining me today, Craig. I'm quite excited about this chat and no idea where it's going to go, but I'm very excited.
Craig Scroggie: It's great to be here. Thanks, Ally.
Ally Selby: Tell us a little bit about NEXTDC first, what do you guys actually do?
Craig Scroggie: At NEXTDC, we essentially build hotels for computers. Digital infrastructure is at the core of what we do. The company specialises in building very large-scale digital assets that house all of the computers for services that you would use at home or in the enterprise.
So if you are searching Google on the internet, you're watching a movie on Netflix, you're using Facebook for social media, you're tweeting on X or Twitter, those services need to live somewhere. And we build the digital infrastructure assets that host those large-scale platforms.
We also support some of the largest technology companies in the world for their enterprise services like Microsoft, Amazon and Google, which build all of those enterprise productivity tools that we use in the workplace every day.
Ally Selby: You've just released your latest results for FY23. What are the numbers investors need to be aware of?
Craig Scroggie: So FY23 was the biggest year in the company's history. We had record revenue of over $360 million, and record EBITDA of over $190 million. We had a record year of new contract signing. So we measure power as a unit of measure in the data centre business to talk about how much growth we have. The power supports the number of computers that are in the data centre.
We had the largest contract signing in the company's history in more than a decade. We're so big that we almost sold everything in the last six months that we'd sold in the last 10 years.
So that's some indication.
Ally Selby: Who was the client there?
Craig Scroggie: I can't say which particular clients. Many of our customers have very, very significant or stringent security needs to protect who they are and their infrastructure. But we obviously support the largest cloud computing companies in the world, and the services that we are providing obviously are instrumental in helping secure information locally in Australia. It's not hosted in the US. When people talk about cloud computing, the cloud is right here in Australia and it sits in a data centre that we build and operate for those companies.
Ally Selby: Obviously, demand is increasing. When will that translate to profits for NEXTDC?
Craig Scroggie: Well, the overall infrastructure business that we are building is very long-term in nature. The asset life for a data centre is about 40 years. So the data centres that we built over a decade ago are producing significant operating cashflow today. And every time we get to the end of filling a first-generation data centre, we start building the second and then the third, and they're doubling in size every few years. So Moore's Law, in 1967, Gordon Moore wrote a white paper, the founder of Intel, about the price performance doubling of integrated circuits. And every 18 to 24 months, that would be something that would be true.
He was right for 50 years. And the reason we've got so much technology in our iPhones today, amazing computing that's available to us at very, very low cost, is because of that computational compounding effect. So the data centres continue to get larger. The compute access to services that we have is greater than at any other point in time in history, and we have to build a digital infrastructure that supports that. So every year we're investing about a billion dollars worth of CapEx, building new digital infrastructure platforms to support the compute that everybody's using here.
Ally Selby: I was just reading through some of the analyst predictions for the year ahead. There were some analysts who said they believe that CapEx will peak in FY24. What do you have to say to that?
Craig Scroggie: That would only be true if the internet slows down.
We think about all of the services that we have access to today. Consumer services are becoming ubiquitous. They're decentralised and largely they're monetized. A lot of the things that we used to pay for as a device is now an application on our phone. And as those apps continue to grow in scale, we get access to more services and we're able to use more technology. The advances that we're seeing in healthcare and education are all being significantly influenced by technology capability today. So we would believe that what's about to happen with generative artificial intelligence and the rate of growth that we're seeing, it was only in November last year that generative AI was released, OpenAI made that available.
What we're seeing from a growth point of view could be at least the same size as the global cloud computing market, but maybe one, two, or even three times larger.
Ally Selby: And what would that mean for NEXTDC?
Craig Scroggie: Well, today, that billion dollars worth of investment that we're making on an annualised basis, if we continue to have record years, could continue to grow very significantly over the next few years. So I would say that there's no end in sight. What does the future of technology look like? I think that in the next five years, we'll probably see something in the order of a 10x increase in the total amount of digital infrastructure required to support technology platforms. And I hope that we win our unfair share of that.
Ally Selby: And what about the energy needs? Obviously, we're moving slowly towards a greener future. Running all these data centres would take a lot of energy. What does the future look like in that respect?
Craig Scroggie: Look, it's fair to say that we're going to make a disorderly transition to a renewable economy. We don't have enough renewables today available to immediately be able to transition to renewable energy. I don't think there's any lack of desire. We are incredibly passionate about wanting to run a sustainable business. The base load requirements from a power point of view in our network today continue to get a lot of focus in the media and from people from a sustainability point of view for very good reason. We've built solar arrays and done PPAs for wind farms. We focus on energy efficiency.
A really good example is if you think about a computer that you used to run in your office if you shut down your on-premise data centre and move it to a co-location data centre like the one we build, your energy costs will be lower because it'll be significantly more efficient. So it's like taking 30 cars off the road and putting 30 people in one bus. So there's a lot of energy saved as a result of consolidating people's compute requirements.
So when we think about energy and sustainability, it's such a huge area of focus because over the course of the next five to 10 years, we are going to have to find a path to more solar, more renewable cost-effective battery storage for energy, and not all the infrastructure is in the network in Australia today that we're going to need.
Ally Selby: I want to learn a little bit more about how you're investing in AI or what that looks like for NEXTDC.
Craig Scroggie: You will have seen all the hype around AI and people are losing their minds. I mean, the NVIDIA company performance and share price ...
Ally Selby: Yes, it's up 242%. I was looking today.
Craig Scroggie: They're staggering numbers and their free cash flow! Just the size of the business PCP is absolutely staggering. This is not new though. They've been working on this for over a decade, but what we're seeing really is that large number doubling, the ability to be able to have these GPUs playing a very significant role. From our point of view, that technology requires a higher density per square metre, which means our data centres need to have more power and more cooling to be able to support those large-scale NVIDIA chips. But that technology over the course of the next few years is really going to change so many industries - healthcare, education, transport, just even in Microsoft's portfolio, the co-pilot services that are available, that little productivity assistant, it's a far more effective version of Siri that's in your phone. And I think we'll all be able to benefit from having multiple AI assistants, helping us in everything that we do in our lives.
Ally Selby: How will that impact CapEx for NEXTDC though?
Craig Scroggie: We'll have to build more digital infrastructure to support more GPUs. GPUs have to live somewhere, so those computers need to live in a data centre and they need to be managed and cooled. And ultimately for us, that means that we'll be building bigger data centres with more power density per square metre.
We'll be really unleashing new technology around liquid cooling. So we have both direct-to-chip cooling and immersion cooling that helps reduce the amount of heat. And that's a really big issue with those big dense GPUs. They produce a lot of heat and in order for them to operate, they need cooling systems that can operate at low temperatures so they don't overheat in operation.
The AI boom has really only just started. I've been working in technology for 30 years, and I've never seen a moment in my career as significant as the one that we're just starting to go through now.
Ally Selby: Okay, this might be a silly question, but do you guys buy GPU chips?
Craig Scroggie: Not a silly question at all. Probably one of the most regular questions I get asked by investors. It's our customers that buy the GPUs. It's the Microsofts, Amazons and Googles of the world that are building large-scale compute infrastructure. And those companies are helping provide the AI services. We're building the digital infrastructure that hosts those GPUs for those customers.
Ally Selby: Another question about tech. I feel like Australia often lags behind compared to perhaps our US counterparts. What does Australia have to do to get in the race?
Craig Scroggie: I actually think we're doing a great job. You look at some of Australia's greatest success stories - Atlassian, SafetyCulture, Freelancer. I mean, there are so many amazing businesses. Canva, what Melanie and Cliff have done with their business. There are some extraordinary stories. I think the weight of scale has a big influence on when you look at the US market and Silicon Valley, just the density of investment and the VC community there. You had a lot of very, very successful entrepreneurs who came through early and then reinvested their success in the next wave of startups.
We have more of that going on in Australia today than we've ever had at any other point in time in history. And while financial markets have been a little bit choppy recently, and raising capital is more challenging, public markets are difficult, and the cost of debt's going up, when you take a long-term view, all these things will normalise.
I think the environment in Australia today is pretty exciting for startups, and you don't necessarily have to move to the US to get access to capital or expertise to grow a startup successfully.
Ally Selby: Analysts are overwhelmingly positive on the outlook for NEXTDC. Of the 20 analysts who cover it, 18 rate the stock a buy, one has the stock as a hold and one has it as a sell. That's an amazing place to be considering where tech was just a year ago. For the person who has it as a sell, what do you think they're thinking?
Craig Scroggie: Well, someone's got to be the outlier. Look, at the end of the day, the company's very, very focused on what we believe we can achieve in building digital infrastructure for the next decade and more. Our success largely over the last decade has been building this world-class platform right here in Australia.
We're just starting to develop internationally now, so Malaysia, Japan, New Zealand, new regions, new markets. It introduces more risk in the company as you start to scale. But I'm extremely confident that we've got more than a decade's worth of track record, building something very, very successful.
The proof is in the support that we have from the world's largest technology companies that we're doing a good job doing what we're doing. We can always learn more. We've always got more to learn. We've always got more to do as far as putting the customer at the centre of everything that we do. But I've never seen more opportunity at any other point in my career than I do today.
Ally Selby: Last question for today. When can we expect a dividend?
Craig Scroggie: Dividends ... Ultimately, at some point in time in the future, infrastructure assets will get to a point where the market slows and growth is no longer a key feature. And at some point in time in the future, if our annual revenue growth is not at 20% or 25% - we've had a compound revenue growth over a decade of 15% to 20%.
If you're growing at that rate, and we can continue to grow shareholder value, most shareholders tell me today, 'I'd rather you continue to invest my money because I can't think of better things to produce a better return than what it looks like NEXTDC is going to generate for me over time.'
At some point in time, the market may change and then we'll make a decision about whether we should return some capital to shareholders. But as it stands at the moment, we can continue to ask ourselves the question, 'Do investors want us to continue to invest or do they want us to pay a dividend?' And it is universal. They want to see companies continue to grow if they can do that in a disciplined cost-effective way.
Ally Selby: Particularly in this low-growth world. Well, thank you so much for your time today. I really enjoyed this chat.
Craig Scroggie: Thanks, Ally.
Ally Selby: If you enjoy that too, don't forget to subscribe to Livewire's YouTube channel. We're adding so much great content, just like this, every single week.
The Livewire Team is working with our contributors to provide coverage of a selection of stocks this reporting season. You can access all of our reporting season content by clicking here.
Thu 31 Aug 23, 10:30am (AEDT)
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