Overview 

DC Two Limited owns, builds, and manages cloud computing, hosting, and data center services in Australia. It offers data center and cloud hosted services, data center hosting and colocation, data center and cloud automation software, and modular data center and hosting solutions. DC Two Limited was founded in 2012 and is based in Osborne Park, WA. 

What are data centres?  

Data centers, often referred to as a singular thing, are composed of a number of technical elements. These can be broken down into three main categories: 

• Compute: The memory and processing power to run the applications, generally provided by high-end servers 
• Storage: Important enterprise data is generally housed in a data center, on media ranging from tape to solid-state drives, with multiple backups 
• Networking: Interconnections between data center components and to the outside world, including routers, switches, application-delivery controllers and more.  

The short of it is, data centres store and manage critical resources and are fundamental to the continuous operations of an organisation – both large and small.   

DC Two (DC2) – recent activity  

HY FY21 

The last time I checked in on DC Two, revenue hadn’t progressed as hoped. HY reports noted sales revenue of $831,689. It was on track (based on its HY figures) to have FY revenue decrease to numbers observed in 2018 (FY2020 – $1,856,000; FY2019 – $1,961,000; FY2018 – $1,400,000). Even with other ventures progressing in the background (namely Bibra Lake data centre), my main concern was that the market wouldn’t respond well to a newly listed company tracking backwards quarter into quarter. So, I avoided it and told myself I would come back in a few months. 

Q4 FY21 

Q3 and Q4 reports were slightly better news for the company (with 692k and 632k in sales respectively). This should see the company report total revenue over $2 million for the year (an increase of around 15% YoY). Again, this isn’t what I would consider exciting growth – particularly with the tailwinds the data centre industry has.

They did secure a fixed term agreement to provide services to a cryptocurrency miner, estimated to be worth a minimum of 926k over a 5-year term (initial revenues expected to begin in August 2021). A small contract, but positive to see it securing long term deals and provides a small tailwind to revenue figures in FY22. There are some opportunities for DC2 to target cryptocurrency miners, but they definitely shouldn't be their core market. 

The Bibra Lake data centre (stage 1) became operational in Q4 FY21, with Tier 3 accreditation expected in the coming months. The data centre will host DC Two servers, cloud services and offer co-location to customers. This is key for DC Two and will underpin its nationwide expansion. It will provide the company with the infrastructure needed to secure mid-market and enterprise customers (that specifically require Tier 3 accreditation). Design and construction accreditation is expected in H2 CY21. When this is complete, DC Two will be only company in WA with an Uptime Institute accredited Tier 3 data centre. This should provide a competitive edge when tendering for larger companies. It will also allow the company to transition some internal resources from development into commercial activities.  

Recent reporting shows a cash balance of $1.89 million. 4Q saw cashburn of $848,000 – up from $293,000 in 3Q. This increase was mainly due to manufacturing and operating costs, presumably due to the Bibra Lake facility? $202,000 was also spent on R&D. This is a red flag. This sort of spending is unsustainable and will result in dilution many times over.

While it is pleasing to see a little more stability in the revenue numbers, cash burn is concerning. Bibra Lake opened to customers in May 2021 (albeit without Tier 3 accreditation yet). The bad news is revenues didn’t increase significantly with the new capacity. The second red flag for me is: why? This suggests demand potentially isn’t there for facilities that aren’t Tier 3 accreditation. So there is a bit of a ‘wait and see’ with this one – it’s hard to judge DC2 too much without Bibra Lake being Tier 3. 

The risk/reward is a little more attractive for me this time around, in contrast to a few months ago. That said, there are still a few red flags and it wouldn’t surprise me if shareholders are diluted in the near-future. I should probably explain a little about why I continue to check in on DC2 and why the industry interests me:

Thesis

Data centres will play a more important role in the future data economy, with the world increasingly shifting to cloud and digital services. The Australian Government Department of Energy has stated that ‘the average Australian data centre is now over 20 years old and many are inefficiently designed’. Unlike 20 years ago, almost every modern business, government and consumer has data stored in a data centre. They host websites and manage e-mail, power hyper-scale platforms (Google, for instance) and support almost all cloud storage and applications. 

Telsyte, a technology insight company, reported in 2020 that 45 percent of organisations were looking to increase cloud infrastructure spending. A further 59 percent of Australian businesses also had a “cloud first” policy at the time.  

The issue with data centres is their cost – they are expensive and resource intensive to establish, and then subsequently maintain over time. This represents somewhat of an economical moat for the company. It doesn’t mean they are without competition though – there are multiple competitors in Australia but the WA market lacks a Tier 3 site. DC2 has capacity now, and is expected to have a Tier 3 site in the coming months – they now need to convert some of the alleged interest into revenue. To summarise, there are some nice tailwinds for the data centre industry – physical and cloud.  

What else do I like? DC2 tick a lot of boxes: 

• Debt free 
• Founder led (CEO) with 24.5% ownership.  
• Competent and experienced BOD, with 2 of the 3 having purchased shares in 2021.   
  • Justin Thomas (CEO) – Thomas has an impressive background, having successfully built and sold two startups – a software business sold to RP Data in 2007 and a data centre sold to Amcom (now Vocus) in 2012. In short, its not his first rodeo. He recently purchased shares in Jan 2021 at 0.34c (well above current share price).  
  • Cameron McLean (chair) – 20 years’ experience leading and managing businesses, including London based geo-technology company iBase Limited and CFO of multiple resource companies. Cameron McLean recently purchased shares at 40c (also well above current share price).   
  • Blake Burton (director) – brings experience within the IT industry. Founded his own web hosting company, which he took to a successful trade sale to Australia's largest privately owned web host. 
• No insider selling since listing on the ASX. 
• ESG play – the company is progressive: it wants to use wind, solar and other renewable power sources to offer a ‘green powered’ service to Australian customers seeking more eco-credentials across their business. This should also reduce capex for the company through cheaper energy.  

This is long winded, but this one isn’t quite there for me yet. I don’t think the risk/reward balance is favourable, despite it being close. 

What I want to see before purchasing

• Monitor the key metrics closely in Q1 FY22 reporting – make sure DC2 is not burning through cash with little increase to its bottom line/revenue. This is a risk for data centre providers, particularly if they are not run well overtime (ASX: DXN an e.g., of this). If cash burn remains at similar rates as it was in Q4 I will be running for the hills. If this is the case, the company will almost certainly have to raise cash multiple times in a short window and dilute shareholders.
• Bibra Lake is a point of difference in the WA market and is key to the investment thesis. Tier 3 should occur in 2021 - if it doesn't management have overdelivered. With Tier 3, track the ability of the company to both market the facility and increase their revenues. 
• Monitor Collie Data Centre and its progress towards commercialization.  

Happy to hear any thoughts other members might have.

DISC: Not held. Added a tiny portion to Strawman portfolio to assist with monitoring them overtime and let other members know I am interested, just not sold on the stock yet.