The Good

• Recurring revenue increased 27% QoQ to $884k.
• Sold full capacity of the 2.4MW MidWest DC. Which is a positive move for the direction, but also puts a cap on a growth channel until the potential Vic biogas DC is commissioned somewhere in H2 this year.

The Not So Good

• Trading halt for capital raise to fund “strategic shift in operations”. The strategic shift is to borrow money to start mining bitcoin from the Bibra Lakes DC. Seems like the sales team are finding it tough to sell space. Some serious red flags here with rising interest rates and a crypto meltdown. I don’t know how the numbers stack up in terms of a floor price of bitcoin where mining is currently sustainable.
• Most of the space hired through the MidWest DC is for mining crypto currency which is also a risk at the moment.
• The Tier III accreditation which may have helped with sales to enterprise and government customers is still out in the great unknown.
• $1m in cash outflow. Only $466k in cash left and $1.75m from the recent capital raise still only gives another two quarters before the cash runs out again. The current quarter doesn’t include the cash flow from a fully sold out MidWest DC but they are going to need much more than that to stop the bleeding. Based on the current product manufacturing and operating costs %, revenue will need to increase to over $2m a quarter to reach breakeven on operating cash flows alone.
• Some musical chairs for the management team, but no one is actually leaving. Not sure what has really been achieved there.

What To Watch

• My sales order on SelfWealth go through for an expensive lesson. That’s for another straw.

Another 4C review that I am late on. The rest of my updates are going to need to become Half Year reviews instead…

The Good

• Annual Recurring Revenue (ARR) increased again to $694,703 for the quarter, and is starting to show a slight trend of ongoing growth. Taking cues from the recent Baby Giants podcast episode, I had a look if they have outlined how this figure is reported, however nothing was listed in this quarterly. It will be one to have a look for in the upcoming H1 Update. 

The Bad

• Still no update on Tier III accreditation. Previously indicated outcome expected during February, which gives them one week to get something across the line. If a company misses an announced target once, it can be accepted with the right reasons, however it is concerning when they miss a deadline for a second time.
• A portion of the update contains a fair bit of fluff about Directors on market purchases and industry tailwinds. This is pretty meaningless and ultimately doesn’t provide any insight into company operations.
• With a cash balance of $1.352m there is only 2 quarters of operating cash left. This should hopefully be offset slightly by previously upfront costs for Joule energy contract, which is due for completion and final payments in Q3, but unless there a some significant changes over Q3 there is a capital issue.
• No update on previously announced Mid-West capacity increase or the progress of the Collie project. 

(EDIT: It was announced on 17 Feb that the Mid-West upgrade has been completed. As these projects are completed it should assist in reducing the amount of investment cash flow that is required.

In this update it was also mentioned that the 1MW Collie DC is nearing commissioning but no timeline was provided. Having a bit of a scan around the internet, it looks as though there is a 12 month construction timeline which kicked off in July 21. I would expect that commissioning of the DC would likely be after that, so sometime in Q1FY23 is likely when this will be completed.

WA Gov Media Statement)

What To Watch

• Critical for Tier III design accreditation to be achieved this coming quarter otherwise confidence in management will be further eroded.
• Mentioned Vic DC will be online in Q4 FY22. (EDIT: This timeline was reinforced in the 17 Feb update.)
• Given the current cash position there is likely another capital raise on the horizon.
• Large portion of previous 2 quarters from modular crypto contracts which are now up and running. Further growth needs to come from sales of Bibra capacity.
• EDIT: 03-02-21  Achieved VMWare Cloud Verified Status. I am currently unsure on the significance of this to operations and position in the industry. Will need to carry out further research in this area.

Impacts to Price Forecast

• Revenue currently inline with previous forecast
• Review other DC provider multiples for comparison rather than IT Service Industry

DC2 released their 4C Wednesday this week and it appears that there is a positive shift in progress after previous delays and capital raising requirements. So what did we get?

Total revenue of $847k which has them on track with my forecast for FY22 Rev of $3.5m. This was made up of recurring revenue of $568k continuing growth each quarter. This number will also improve by about 8% next quarter before any further contracts with the latest Mid-West contract kicking off this month.

Cashflow is still going to be a concern for the DC2 until the final Tier III accreditation is completed, however between the latest capital raise and the improving recurring revenue, outflows should be at manageable levels by the end of Q3.

There were mentions on new customers and contracts, however no indication of time or value.

Announced targets for Q2 to watch that confirm that management are delivering on promises:

-         Completion of Tier III Design Accreditation of Bibra Lakes

-         Capacity increase of the Mid-West Data Centre.

 I am relatively happy with this update, however there is still pressure on the company to deliver the Bibra Lakes data centre which will de-risk the next stages of growth.

DC Two has gone into a trading halt pending an announcement of a capital raise on Monday. Given the timing and steady decline in share price this isn’t a great look, however from my perspective it could play out several ways:

First and likely the most positive outcome would be that the capital raise is to fund one or several contracts that have been signed for the setup of further data centres. Based on previous announcements the company was aiming to finalise agreements this month for the data centre installation with Cannaponics Collie. Using the Joule energy announcement earlier in the month as a guide for build costs, another deal like that one would be pushing the limits of the cash balance.

Second and probably the least preferable outcome is that the raise is for working capital because as of the last 4C there were only 2 quarters of cash runway left. This would mean DC2 has had to spend more than anticipated in completing the Bilbra Lake Facility / Tier III accreditation and or the rate at which customers are being signed up is not as high as anticipated. Knowing that the upcoming quarterly won’t be great, they are getting ahead of a further share price decline. This would be the scenario that @Rocket6 described and was wary of starting to play out.

Third possibility is now that the company has completed most of the works on the Bilbra centre they have now found a further acquisition / potential site to continue the expansion of hosting capacity and need the funding to continue the capital works growth. I think it is too early for the company to be heading in this direction.

I need to just wait and see how this plays out, but so far DC2 has not been a great performer that I have averaged down into and likely entered too early before the significant execution risks had been reduced / removed. Hopefully not a case of watering the weeds but I need to keep a close eye on this one over the near term.

Disclosure: Held

Today DC2 announced that Joule Energy will be purchasing a prefabricated modular data centre for $482,396. From the tone in the announcement I doubt there will be any significant commercial outcomes from this deal other than an uptick in overall FY22 revenue with the delivery and commissioning likely to be completed by the end of Jan 22.

The main positive I have taken from this update is the mention of progressing other agreements for DC2 data centre installations at the renewable energy sites. Continuing growth of the modular business arm will help provide small boosts to overall capacity and ARR which should assist in reducing the cash burn which is a concern at present. This part of the business is also a point of difference from the bigger competitors in the market, so having demand for these services is also a positive sign going forward.

It is early days for DCTwo (DC2), however the company reported positive progress in Q4FY21. Cash receipts for the final quarter were down around 9.5% to $632,000 however recurring revenue for the quarter grew by 9.3% to $472,000. Total cash receipts at the end of FY21 totalled $2.3 million, which is up on FY20.

Significant growth in revenue wasn’t expected for FY21, as the company has been working toward bringing the new Bilbra Lakes Data Centre online which provides a 15-fold increase in hosting capacity (3.0MW compared to existing 0.2MW). This was achieved in May and is now able to start generating sales, with the first co-location customers reported. (Previous DC2 investor presentations have indicated industry average for colocation is ~ $1600 pcm per rack)

The next step in development is Tier III accreditation, which is targeted by end of CY21. Tier III accreditation outlines redundancy requirements and maximum allowable downtimes for the data centre. This will allow the company to market itself to a broader customer base.

Another milestone was achieved in the signing of a 5-year contract for a 160kW ‘behind the meter’ modular data centre. This contract will add approx. $46k of rev per quarter starting in August and demonstrates demand for DCTwo’s Modular Data Centre offering and further potential upside for the business.

All these new potential revenue streams are required, as the cash burn for Q4 totalled $848k and the company only has ~$1.9 million on hand, which will get them to the end of the year, unless further capital raises are undertaken. There should also be a reduction in outgoings once all works on the Bilbra Lakes facility have been completed.

Data centres and cloud hosting are an industry with tailwinds and DC2 now has the capacity, I will be watching next quarters results closely to see if they can deliver the goods.

Disclosure: Held