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- 1. U.S. Research Published by Raymond James & Associates Please read domestic and foreign disclosure/risk information beginning on page 3 and Analyst Certification on page 3. © 2015 Raymond James & Associates, Inc., member New York Stock Exchange/SIPC. All rights reserved. International Headquarters: The Raymond James Financial Center | 880 Carillon Parkway | St. Petersburg, Florida 33716 | 800-248-8863 CyrusOne Inc. February 18, 2015 (CONE-NASDAQ) Company Comment Frank G. Louthan IV, (404) 442-5867, [email protected] William A. Crow, (727) 567-2594, [email protected] Alexander Sklar, CPA, Sr. Res. Assoc., (404) 442-5804, [email protected] Telecommunications Services: Wireline___________________________________ Low Oil Prices Can't Hold CONE Down; Raising PT Recommendation: We maintain our Strong Buy rating on CyrusOne. CyrusOne continues to deliver growth in the sector as it expands and diversifies its customer base and utilizes its sales skills in large enterprise to capture demand. We believe internal returns are rising as demonstrated by its outsized dividend hike (50%) that was announced. Event: CyrusOne beat 4Q results with revenue and adj. EBITDAS of $86.9 million and $44.6 million vs. our $85.6 million and $43.8 million estimates. FFO/share and AFFO/share for the quarter were $0.48 and $0.46 vs. our $0.43 and $0.40 estimates. 2015 guidance appears conservative, in our view, as management consistently beats expectations. Installed base growth. New MRR signed in the quarter of $950,000, was slightly below the company’s two-year average of $1.1 million (~in line when factoring the y/y shift to metered power), however, new revenue from existing customers was very strong up $768,000 MRR in the quarter vs. its $692,000 MRR previous seven-quarter average. New customer adds are necessary for long-term sustainable growth, but we believe these deals are lumpier quarter to quarter given the sales cycle and the above average installed base growth at favorable rates continues to be a positive sign of demand given the estimated ~40% customer NPV that comes in after the initial deployment. Metered power transition. 78% of new leased sq. ft. was to metered power customers, slightly below the recent ~80-90% run-rate. This is a notable shift since the company’s 2013 IPO when metered power contracts represented only ~40% of total revenue. The company picks up essentially no margin on that piece of revenue, which should push margins closer to 50% over the next two years. The offset here is metered power customers sign longer contracts, have lower churn, and it can help decrease overhead. Weaker oil? Not a problem. Management gave meaningful stats defining why lower oil prices and Texas economic exposure would not be a concern. Of note to us is that revenue from its 10 largest energy customers equals ~0.006% of their combined LTM opex, and the last time oil was below $40, growth didn’t slow. Estimates: We are lowering our 2015 revenue and EBITDA estimates to the upper end of what we believe to be a conservative guidance range. Our 2015E FFO and AFFO/share go to $1.98 and $1.93 from $1.99 and $1.85, and we are introducing 2016 estimates. Valuation: We are raising our price target on CONE to $34 based on 13x our 2016E EBITDAS vs. the REIT data center group at 13.5x, which we believe is appropriate given CONE’s strong revenue and AFFO growth profile. Our PT also represents 15x AFFO, in line with the group at 15x. AFFO Q1 Q2 Q3 Q4 Full Revenues /Share Mar Jun Sep Dec Year (mil.) 2013A $0.27 $0.23 $0.30 $0.32 $1.12 $264 Old2014E 0.42A 0.39A 0.45A 0.40 1.65 330 New2014A 0.42 0.39 0.45 0.46 1.71 331 Old2015E 0.43 0.44 0.46 0.52 1.85 388 New2015E 0.46 0.46 0.48 0.53 1.93 381 Old2016E NA NA NA NA NA NA New2016E UR UR UR UR 2.23 437 Rows may not add due to rounding. UR: Under Review. Rating _________________________________ Strong Buy 1 Current and Target Price __________________ Current Price (Feb-18-15 close) $30.16 Target Price: Old: $30.00 New: $34.00 52-Week Range $29.40 - $19.52 Suitability Aggressive Growth Market Data____________________________ Shares Out. (mil.) 65.3 Market Cap. (mil.) $1,969 Avg. Daily Vol. (10 day) 369,130 Dividend/Yield $1.26/4.2% Book Value (Dec-14) $10.99 ROE % NM LT Debt (mil.)/% Cap. $660/42% Earnings & Valuation Metrics ______________ 2013A 2014A 2015E 2016E P/AFFO 26.9x 17.6x 15.6x 13.5x Adj. EBITDAS (mil.) Old $139 $169 $199 NA New $139 $169 $192 $223 Net Operating Income (mil.) Old $170 $205 $241 NA New $170 $206 $231 $267 Company Description ____________________ CyrusOne Inc., based in Carrollton, Texas, operates carrier neutral data center and colocation services to large enterprises in the U.S., Europe, and Asia. The company is structured as a REIT and operates 25 data centers across ten markets primarily in Texas and the Midwest. CyrusOne currently has over 500 customers including approximately half of the Fortune 20 and over 100 of the Fortune 1000.
- 2. Raymond James U.S. Research © 2015 Raymond James & Associates, Inc., member New York Stock Exchange/SIPC. All rights reserved. International Headquarters: The Raymond James Financial Center | 880 Carillon Parkway | St. Petersburg, Florida 33716 | 800-248-8863 2 CyrusOne, Inc. Income Statement Q1 Q2 Q3 Q4 2013 Q1 Q2 Q3 Q4 2014 Q1E Q2E Q3E Q4E 2015E 2016E Revenue 60.1 63.6 67.5 72.3 263.5 77.5 81.7 84.8 86.9 330.9 89.4 92.7 97.2 101.5 380.9 437.1 y/y growth 15.4% 17.8% 19.0% 24.7% 19.3% 29.0% 28.5% 25.6% 20.2% 25.6% 15.4% 13.5% 14.6% 16.8% 15.1% 14.7% q/q growth 3.6% 5.8% 6.1% 7.1% 7.2% 5.4% 3.8% 2.5% 2.9% 3.6% 4.8% 4.5% Costs and Expenses: Property Operating Expenses 20.1 24.6 24.2 24.3 93.2 27.7 31.8 33.0 32.0 124.5 34.4 37.2 39.2 39.3 150.1 170.0 % of Revenue 33.4% 38.7% 35.9% 33.6% 35.4% 35.7% 38.9% 38.9% 37.5% 37.6% 38.5% 40.1% 40.3% 38.7% 39.4% 38.9% Sales and Marketing 2.8 2.9 2.3 2.6 10.6 3.0 3.5 3.2 3.1 12.8 3.2 3.4 3.5 3.6 13.7 16.0 General and Administrative 6.9 7.1 7.2 6.8 28.0 7.3 8.4 9.0 9.9 34.6 9.4 9.5 9.6 9.7 38.2 41.0 Depreciation and Amortization 21.7 23.0 23.9 26.6 95.2 27.6 29.8 30.0 30.6 118.0 31.5 32.3 33.3 34.2 131.3 144.7 Acquisition Costs 20.1 0.4 0.7 - 21.2 0.1 0.8 - - 0.9 - - - - - - Restructuring Costs 1.4 0.2 1.6 - 0.1 0.1 - - Asset Impairments 2.8 2.8 - - - - Total Costs and Expenses 71.6 58.0 59.0 63.3 251.9 65.7 74.3 75.2 75.7 290.9 78.6 82.3 85.5 86.8 333.3 371.7 Operating Income (11.5) 5.6 8.5 9.0 11.6 11.8 7.4 9.6 11.2 40.0 10.9 10.4 11.7 14.7 47.6 65.3 Interest Expense 10.9 10.8 10.5 11.5 43.7 10.7 10.7 9.0 9.1 39.5 9.6 9.8 10.1 10.4 39.9 44.3 Loss on Extinguishment of Debt - 1.3 (0.1) 1.2 13.6 13.6 - - Income Before Income Taxes (22.4) (6.5) (1.9) (2.5) (33.3) 1.1 (3.3) 0.6 (11.5) (13.1) 1.3 0.6 1.5 4.3 7.7 21.0 Income Tax Expense 0.6 0.3 0.3 1.1 2.3 0.4 0.3 0.4 0.3 1.4 0.4 0.4 0.4 0.4 1.6 1.6 Tax Rate -2.7% -4.6% -15.8% -44.0% -6.9% 36.4% -9.1% 66.7% -2.6% -10.7% 30.8% 72.5% 25.9% 9.3% 20.8% 7.6% Income from Continuing Operations (23.0) (6.8) (2.2) (3.6) (35.6) 0.7 (3.6) 0.2 (11.8) (14.5) 0.9 0.2 1.1 3.9 6.1 19.4 Loss on Sale of Real Estate Improvements 0.2 0.2 - - - Noncontrolling Interests (22.1) (4.5) (1.4) (2.5) (30.5) 0.5 (2.5) 0.1 (4.8) (6.7) - - Net Income (0.9) (2.3) (0.8) (1.3) (5.3) 0.2 (1.1) 0.1 (7.0) (7.8) 0.9 0.2 1.1 3.9 6.1 19.4 EPS (0.01)$ (0.04)$ (0.01)$ (0.02)$ (0.08)$ 0.00$ (0.02)$ 0.00$ (0.11)$ (0.12)$ 0.01$ 0.00$ 0.02$ 0.06$ 0.09$ 0.29$ Add: Stock-based comp. mark-to-market - - - - - - - - - - - - - - - - Adj. EBITDAS 31.5 30.8 36.5 39.9 138.7 41.7 40.8 42.2 44.6 169.3 45.4 46.3 48.3 52.3 192.3 222.7 Margin 52.4% 48.4% 54.1% 55.2% 52.6% 53.8% 49.9% 49.8% 51.3% 51.2% 50.7% 50.0% 49.7% 51.5% 50.5% 51.0% y/y growth 10.1% 8.1% 21.7% 40.5% 20.1% 32.4% 32.5% 15.6% 11.8% 22.1% 8.8% 13.5% 14.5% 17.3% 13.6% 15.8% NOI 40.0 39.0 43.3 48.0 170.3 49.8 49.9 51.8 54.9 206.4 55.0 55.5 58.0 62.2 230.8 267.1 Margin 66.6% 61.3% 64.1% 66.4% 64.6% 64.3% 61.1% 61.1% 63.2% 62.4% 61.5% 59.9% 59.7% 61.3% 60.6% 61.1% y/y growth 14.9% 8.6% 18.0% 28.3% 17.6% 24.5% 27.9% 19.6% 14.4% 21.2% 10.5% 11.3% 12.0% 13.4% 11.8% 15.7% FFO/AFFO Net Income (23.0) (6.8) (2.2) (3.8) (35.8) 0.7 (3.6) 0.2 (11.8) (14.5) 0.9 0.2 1.1 3.9 6.1 19.4 + Loss on Sale of Real Estate Improvements - - - 0.2 0.2 - - - - - - - - - - - + Real Estate Depreciation and Amortization 15.9 16.9 17.8 20.0 70.6 22.2 24.1 24.5 25.1 95.9 25.9 26.7 27.6 28.5 108.6 122.3 + Real estate impairments - 2.8 2.8 - - - FFO (7.1) 10.1 15.6 19.2 37.8 22.9 20.5 24.7 13.3 81.4 26.8 26.8 28.7 32.4 114.7 141.7 + Amort. of Cust. Relationship Intangibles 4.2 4.2 4.2 4.2 16.8 4.2 4.3 4.2 4.2 16.9 4.2 4.2 4.2 4.2 16.8 16.8 + Transaction Costs 20.1 1.7 2.1 0.2 24.1 0.1 0.8 - 13.7 14.6 - - - - - - FFO, as Adjusted 17.2 16.0 21.9 23.6 78.7 27.2 25.6 28.9 31.2 112.9 31.0 31.0 32.9 36.6 131.5 158.5 FFO/sh 0.27$ 0.25$ 0.34$ 0.37$ 1.22$ 0.42$ 0.39$ 0.44$ 0.48$ 1.73$ 0.47$ 0.47$ 0.50$ 0.55$ 1.98$ 2.37$ + Amortization of deferred financing costs 0.6 1.7 0.5 1.3 4.1 0.9 0.9 0.9 0.7 3.4 0.7 0.7 0.7 0.7 2.8 2.8 + Non-cash stock based comp 1.2 1.8 2.0 1.3 6.3 2.2 2.8 2.6 2.7 10.3 3.0 3.6 3.4 3.4 13.4 12.7 + Non-real estate depreciation & amortization 1.6 1.9 1.9 2.4 7.8 1.2 1.4 1.2 1.4 5.2 1.5 1.4 1.5 1.6 5.9 5.6 - Straight line rent adjustment, net (2.3) (3.7) (3.7) (4.2) (13.9) (3.0) (3.7) (1.5) (2.3) (10.5) (2.7) (2.8) (2.9) (3.0) (11.4) (13.1) - Recurring real estate capex (0.3) (0.4) (1.6) (1.7) (4.0) (0.4) (0.3) (2.1) (1.0) (3.8) (1.7) (1.8) (1.9) (2.0) (7.5) (8.8) - Capitalized leasing commissions (0.9) (2.5) (1.7) (1.9) (7.0) (0.6) (1.4) (0.9) (2.9) (5.8) (1.8) (1.9) (1.9) (2.0) (7.6) (8.7) - Corporate Income Tax (Benefit) 0.4 - - - 0.4 - - - - - - - - - - - AFFO 17.5 14.8 19.3 20.8 72.4 27.5 25.3 29.1 29.8 111.7 29.9 30.3 31.7 35.1 127.0 149.0 AFFO/sh 0.27$ 0.23$ 0.30$ 0.32$ 1.12$ 0.42$ 0.39$ 0.45$ 0.46$ 1.71$ 0.46$ 0.46$ 0.48$ 0.53$ 1.93$ 2.23$ y/y growth 48.3% -9.8% 55.8% 54.1% 33.8% 57.1% 70.9% 50.8% 43.3% 54.3% 8.6% 19.8% 9.0% 17.8% 13.7% 17.3% Diluted Shares Outstanding: 64.5 64.7 64.7 64.6 64.6 65.0 65.3 65.3 65.3 65.3 65.6 65.8 66.1 66.4 66.4 66.9 Dividend/share 0.16$ 0.16$ 0.16$ 0.16$ 0.64$ 0.21$ 0.21$ 0.21$ 0.21$ 0.84$ 0.32$ 0.32$ 0.32$ 0.32$ 1.26$ 1.44$ Total Dividend Payment 10.3 10.4 10.4 10.3 41.4 13.7 13.7 13.7 13.7 54.8 20.7 20.7 20.8 20.9 83.1 96.0 Capital Expenditures: Total 52.6 48.7 63.6 83.2 248.1 49.7 67.1 78.1 89.3 295.2 51.7 51.8 66.9 62.0 232.5 208.8 Developmental Yield 18.7% 16.4% 17.4% 18.1% 18.4% 16.9% 17.3% 17.5% 16.9% 16.4% 16.4% 16.9% Source: Company Reports & Raymond James Estimates
- 3. Raymond James U.S. Research © 2015 Raymond James & Associates, Inc., member New York Stock Exchange/SIPC. All rights reserved. International Headquarters: The Raymond James Financial Center | 880 Carillon Parkway | St. Petersburg, Florida 33716 | 800-248-8863 3 Important Investor Disclosures Raymond James & Associates (RJA) is a FINRA member firm and is responsible for the preparation and distribution of research created in the United States. Raymond James & Associates is located at The Raymond James Financial Center, 880 Carillon Parkway, St. Petersburg, FL 33716, (727) 567-1000. 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- 4. Raymond James U.S. Research © 2015 Raymond James & Associates, Inc., member New York Stock Exchange/SIPC. All rights reserved. International Headquarters: The Raymond James Financial Center | 880 Carillon Parkway | St. Petersburg, Florida 33716 | 800-248-8863 4 Market Perform (MP3) Expected to perform generally in line with the S&P 500 over the next 12 months. Underperform (MU4) Expected to underperform the S&P 500 or its sector over the next six to 12 months and should be sold. Suspended (S) The rating and price target have been suspended temporarily. This action may be due to market events that made coverage impracticable, or to comply with applicable regulations or firm policies in certain circumstances, including when Raymond James may be providing investment banking services to the company. The previous rating and price target are no longer in effect for this security and should not be relied upon. Raymond James Ltd. (Canada) definitions Strong Buy (SB1) The stock is expected to appreciate and produce a total return of at least 15% and outperform the S&P/TSX Composite Index over the next six months. Outperform (MO2) The stock is expected to appreciate and outperform the S&P/TSX Composite Index over the next twelve months. Market Perform (MP3) The stock is expected to perform generally in line with the S&P/TSX Composite Index over the next twelve months and is potentially a source of funds for more highly rated securities. Underperform (MU4) The stock is expected to underperform the S&P/TSX Composite Index or its sector over the next six to twelve months and should be sold. Raymond James Latin American rating definitions Strong Buy (SB1) Expected to appreciate and produce a total return of at least 25.0% over the next twelve months. Outperform (MO2) Expected to appreciate and produce a total return of between 15.0% and 25.0% over the next twelve months. Market Perform (MP3) Expected to perform in line with the underlying country index. Underperform (MU4) Expected to underperform the underlying country index. Suspended (S) The rating and price target have been suspended temporarily. This action may be due to market events that made coverage impracticable, or to comply with applicable regulations or firm policies in certain circumstances, including when Raymond James may be providing investment banking services to the company. The previous rating and price target are no longer in effect for this security and should not be relied upon. Raymond James Europe rating definitions Strong Buy (1) Expected to appreciate, produce a total return of at least 15%, and outperform the Stoxx 600 over the next 6 to 12 months. Outperform (2) Expected to appreciate and outperform the Stoxx 600 over the next 12 months. Market Perform (3) Expected to perform generally in line with the Stoxx 600 over the next 12 months. Underperform (4) Expected to underperform the Stoxx 600 or its sector over the next 6 to 12 months. Suspended (S) The rating and target price have been suspended temporarily. This action may be due to market events that made coverage impracticable, or to comply with applicable regulations or firm policies in certain circumstances, including when Raymond James may be providing investment banking services to the company. The previous rating and target price are no longer in effect for this security and should not be relied upon. In transacting in any security, investors should be aware that other securities in the Raymond James research coverage universe might carry a higher or lower rating. Investors should feel free to contact their Financial Advisor to discuss the merits of other available investments. Rating Distributions Coverage Universe Rating Distribution* Investment Banking Distribution RJA RJL RJ LatAm RJ Europe RJA RJL RJ LatAm RJ Europe Strong Buy and Outperform (Buy) 54% 64% 50% 44% 25% 39% 0% 0% Market Perform (Hold) 40% 34% 50% 35% 9% 22% 0% 0% Underperform (Sell) 6% 2% 0% 21% 2% 0% 0% 0% * Columns may not add to 100% due to rounding. Suitability Categories (SR) Total Return (TR) Lower risk equities possessing dividend yields above that of the S&P 500 and greater stability of principal. Growth (G) Low to average risk equities with sound financials, more consistent earnings growth, at least a small dividend, and the potential for long-term price appreciation. Aggressive Growth (AG) Medium or higher risk equities of companies in fast growing and competitive industries, with less predictable earnings and acceptable, but possibly more leveraged balance sheets. High Risk (HR) Companies with less predictable earnings (or losses), rapidly changing market dynamics, financial and competitive issues, higher price volatility (beta), and risk of principal. Venture Risk (VR) Companies with a short or unprofitable operating history, limited or less predictable revenues, very high risk associated with success, and a substantial risk of principal.
- 5. Raymond James U.S. Research © 2015 Raymond James & Associates, Inc., member New York Stock Exchange/SIPC. All rights reserved. International Headquarters: The Raymond James Financial Center | 880 Carillon Parkway | St. Petersburg, Florida 33716 | 800-248-8863 5 Raymond James Relationship Disclosures Raymond James expects to receive or intends to seek compensation for investment banking services from the subject companies in the next three months. Company Name Disclosure CyrusOne Inc. Raymond James & Associates makes a market in shares of CONE. Stock Charts, Target Prices, and Valuation Methodologies Valuation Methodology: The Raymond James methodology for assigning ratings and target prices includes a number of qualitative and quantitative factors including an assessment of industry size, structure, business trends and overall attractiveness; management effectiveness; competition; visibility; financial condition, and expected total return, among other factors. These factors are subject to change depending on overall economic conditions or industry- or company-specific occurrences. Only stocks rated Strong Buy (SB1) or Outperform (MO2) have target prices and thus valuation methodologies. Target Prices: The information below indicates our target price and rating changes for CONE stock over the past three years. Valuation Methodology: We value CONE based on an AFFO and EV/EBITDAS analysis. These are conventional and primary valuation metrics employed by most REIT and technology, media, and telecom investors. Risk Factors General Risk Factors: Following are some general risk factors that pertain to the projected target prices included on Raymond James research: (1) Industry fundamentals with respect to customer demand or product / service pricing could change and adversely impact expected revenues and earnings; (2) Issues relating to major competitors or market shares or new product expectations could change investor attitudes toward the sector or this stock; (3) Unforeseen developments with respect to the management, financial condition or accounting policies or practices could alter the prospective valuation; or (4) External factors that affect the U.S. economy, interest rates, the U.S. dollar or major segments of the economy could alter investor confidence and investment prospects. International investments involve additional risks such as currency fluctuations, differing financial accounting standards, and possible political and economic instability. Specific Investment Risks Related to the Industry or Issuer Wireline Telecom Services Risk Factors Wireline telecom services remain highly regulated, and should regulation become less favorable, promoting more competition or reducing subsidies for these companies, the sector could be negatively impacted. Technological substitution remains a highly credible threat toward most wireline telecom services companies' revenue and earnings. A large amount of debt could leverage the industry to the downside should earnings and cash flows face significant pressure.
- 6. Raymond James U.S. Research © 2015 Raymond James & Associates, Inc., member New York Stock Exchange/SIPC. All rights reserved. International Headquarters: The Raymond James Financial Center | 880 Carillon Parkway | St. Petersburg, Florida 33716 | 800-248-8863 6 Company-Specific Risks for CyrusOne, Inc. Customer/Location Concentration The largest risk to CyrusOne investors is its customer concentration. The company’s top 10 customers represent a significant portion of its annualized rent and tloss of a major customer may negatively affect the company’s results. Additionally, a majority of the company's revenue comes from facilities that are located in Texas and Ohio. While the company has had success in both of these markets, there is no guarantee that new entrants into these markets and/or degrading regional economic conditions will not harm the company’s future results. Failure of Facility Infrastructure Data centers are expected to be operational 99.999% of the time, and any power failures or disruptions could cause customers to switch providers. In addition, power failures would hinder its ability to gain new customers and drive additional products such as managed hosting. Additional Risk and Disclosure information, as well as more information on the Raymond James rating system and suitability categories, is available at rjcapitalmarkets.com/Disclosures/index. Copies of research or Raymond James’ summary policies relating to research analyst independence can be obtained by contacting any Raymond James & Associates or Raymond James Financial Services office (please see raymondjames.com for office locations) or by calling 727-567-1000, toll free 800-237-5643 or sending a written request to the Equity Research Library, Raymond James & Associates, Inc., Tower 3, 6 th Floor, 880 Carillon Parkway, St. Petersburg, FL 33716. 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