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Morningstar | Good News Is Below the Surface of CyrusOne's Disappointing 1Q Headline Results

CyrusOne missed consensus first-quarter revenue and EBITDA estimates, but we don't see those as the most important pieces of information coming from this quarter's report. The firm bounced back with improved bookings after a disappointing fourth quarter, is gaining traction in its nascent European business, and disclosed it won't have to issue any more equity in 2019. Without a network colocation-focused business model like some other data center firms, we still don't think Cyrus has a moat, but it seems to be executing on its strategy. We plan to raise our $50 fair value estimate by a few dollars, mostly resulting from the firm selling two thirds of its GDS investment (Chinese data center firm) for $200 million, as recently disclosed. In retrospect, management's GDS investment was brilliant. In selling $200 million of GDS, CyrusOne has already doubled its investment in a year and a half, still holds a $90 million position, and can now self-fund its 2019 expansion.

Revenue grew 14% in the quarter, which we thought was a little light given the addition of the Frankfurt and London data centers that accompanied last year's Zenium acquisition. Despite lapping the Zenium acquisition in this year's third quarter, we still think Cyrus can post mid- to high-teens revenue growth in 2019. The first quarter was light on lease commencements, but the firm has $24 million of bookings set to begin in the second quarter and another $15 million already signed for second half commencements.

Adjusted EBITDA margin was down to 53% in the quarter, down 200-300 basis points both sequentially and year over year. Though this quarter's margin is a bit lower than our full-year estimate of 53.4%, we were already pricing in more than 150 basis points of contraction in 2019 as the firm takes on additional expenses while it ramps up its data centers in Europe. We project margins to return to a more normalized 55% level in 2020, but we expect further expansion beyond that will be limited.

Cyrus booked 93,000 square feet in the quarter, representing 16 megawatts and $27 million in annualized revenue. It was a sharp bounceback from last quarter's 41,000 square feet bookings amid discussion that competition for large cloud customers was behind the weakness. Though smaller colocation customers are typically more lucrative, large hyperscalers are core to CyrusOne's business model, and they returned to compose 60% of the annualized revenue bookings in the quarter after making up only 20% last quarter.

The firm's European operation, which arises mostly from Zenium, is also beginning to bear fruit. Almost one third of this quarter's bookings were in Europe, mostly attributable to U.S.-based hyperscalers. We think international success is imperative for CyrusOne given our belief that the firm's U.S. data centers are undifferentiated and in markets with plenty of competition and supply. If the firm can offer additional value by meeting global customers' needs in multiple markets, it will give Cyrus an advantage over many competitors.