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Key Industry Trends, M&A Valuation Trends

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We’ve all been hearing about how robust the market for data center space is, but a presentation by an investment banker who has his finger on the pulse on the market day in and day out gave me a new appreciation for how great the opportunity really is.

Herb May is a partner and managing director with DH Capital, an investment bank founded 15 years ago in New York that is focused on the Internet infrastructure space. His company has been involved in close to 100 deals, representing almost $20 billion in value. Most of DH Capital’s work is as a mergers and acquisitions advisor, but raising capital is a growing percentage of its business. The point is, the company understands the financials behind data centers and colocation companies inside and out.

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Key Industry Trends, M&A Valuation Trends

  1. 1. Key Industry Trends, M&A Valuation Trends Herbert May Partner & Managing Director DH Capital, LLC International Colocation Club 5th Annual Meeting November 7-8, 2017 London, England
  2. 2. Agenda Confidential | 2 DH Capital Review and UpdateI. Key Trends We are SeeingII. Review of Public CompsIII. Private Market M&A RecapIV. What We Expect in the Year AheadV.
  3. 3. Review and Update
  4. 4. Overview of DH Capital Highly Specialized Sector Expertise Confidential | 4 www.saas-capital.com Services Mergers and Acquisitions Private Capital Placements Financial Advisory Services Industry Sectors Internet Infrastructure Cable/ Telecom Software As-A-Service DH Capital has Partnered with SaaS Capital to Provide Alternative Growth Capital • $35 million senior debt fund providing capital to growing SaaS operators • $90 million follow-on fund established in February 2015 • Goal is to replace dilutive equity capital with debt capital to fund growth • 41 funded loans to date totaling more than $136 million in commitments
  5. 5. Spanning the Full Spectrum of “Internet Infrastructure” Confidential | 5 COLOCATION HYBRID IaaS COMPLEX CLOUD APPLICATION MANAGEMENT SaaS
  6. 6. Our Senior Banking team is the largest and most experienced covering the sector Confidential | 6 Partners Support Team Total Years DH Years Dean Mann Partner Doug Webster Partner Townsend Devereux Partner 24 30 Joe Duggan Chairman & Co-Founder Herb May Partner 30 Marty Friedman Partner 24 34 Peter Hopper CEO & Co-Founder Mark Thorsheim Partner Adam Lewis Partner 29 26 17 29 29 Howard Loewenberg Partner 16 217 14 1417 16 10 4 4 23 Paul Vasilopoulos Partner 1 Brent Mayo Associate Matt DiFrancesco Associate Noah Hirshman Associate Nick Cipiti Vice President Brian Browne Analyst Chad Berger Analyst Andrew Kaskel Vice President Igor Skochilo Vice President John Barkeley Vice President Remington Yee Associate Briana Thompson Analyst Emily Coutts Analyst The DH supporting team is highly experienced and trained in the data center, managed services, and cloud infrastructure sectors allowing for highly effective and detailed deal execution
  7. 7. Equity or Debt Placements 37TOTAL $2.0BVALUE Confidential | 7 is the Leading Advisor to the DH Capital has advised on 96 internet infrastructure related transactions totaling more than $19.4B in value Internet Infrastructure Sector M&A Transactions 59TOTAL $17.4BVALUE Total Transactions 96TOTAL $19.4BVALUE
  8. 8. IT HAS BEEN A VERY BUSY YEAR! Confidential | 8 > $7.5bn in Transaction Value
  9. 9. Key Industry Trends
  10. 10. Key Industry Trends Confidential | 10 • Cloud adoption is exploding
  11. 11. 40,000 30,000 20,000 10,000 Storage is Increasing Exponentially Confidential | 11 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 (Exabytes) 50 FOLD GROWTH 2010-2020 Source: IDC’s Digital Universe Study, sponsored by EMC, December 2012
  12. 12. Confidential | 12 2020 2.3ZB Global IP Traffic (Data Center to User) 2020 600ZB Data Generated by IoT Devices IoT will Potentially Generate 275x more Data than IP Traffic Source: Cisco Global Cloud Index: Forecast and Methodology, 2015-2020
  13. 13. Key Industry Trends Confidential | 13 • Growth remains strong across the ecosystem • Cloud adoption is exploding
  14. 14. 7000 12000 17000 22000 Q3'15 Q4'15 Q1'16 Q2'16 Q3'16 Q4'16 Q1'17 Q2'17 Q3'17 Confidential | 14 Public Cloud Annualized Revenue Growth ($Billions) MICROSOFT CLOUD REVENUE NEARLY DOUBLED IN 4 QUARTERS AWS ADDS NEARLY $10B IN ANNUALIZED REVENUE IN SIX QUARTERS
  15. 15. Worldwide Hosting & Cloud Market Size, 2010 – 2020 Confidential | 15 $0 $20,000 $40,000 $60,000 $80,000 $100,000 $120,000 $140,000 $160,000 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 Dedicated Hosting $3,050 $3,257 $3,436 $3,690 $4,562 $4,844 $5,123 $5,414 $5,718 $6,033 $6,534 Shared Hosting $7,734 $8,640 $9,727 $11,256 $12,632 $14,045 $15,528 $17,071 $18,666 $20,293 $21,997 Managed Hosting $12,150 $17,270 $20,954 $25,367 $30,434 $36,256 $42,962 $50,756 $59,663 $69,712 $80,998 Infrastructure as a Service $717 $1,633 $2,994 $4,764 $6,995 $9,698 $12,724 $15,840 $19,082 $22,496 $26,092 Platform as a Service $283 $549 $940 $1,516 $2,279 $3,148 $4,144 $5,172 $6,271 $7,294 $8,615 Infrastructure Software as a Service $695 $1,054 $1,539 $2,176 $3,004 $4,111 $5,476 $6,592 $8,564 $10,288 $12,162 $USMillions 15.8%Total (Hosting + Cloud) $24,629 $32,403 $39,590 $48,769 $59,906 $72,102 $85,957 $100,845 $117,964 $136,116 $156,398 CAGR ‘10-’20 7.9% 11.0% 20.9% 43.3% 40.7% 33.1% Private Hosting CAGR 16.9% Cloud Services on the Rise: 7% of Total Market in 2010, 30% in 2020 Source: 451 Research, Voice of the Enterprise: Cloud Transformation, Workloads & Key Projects, 2017
  16. 16. Worldwide Hosting & Cloud Market Size, 2010 – 2020 Confidential | 16 Cloud Services on the Rise: 7% of Total Market in 2010, 30% in 2020 2017 $5,414 $17,071 $50,756 $15,840 $5,172 $6,592  Dedicated Hosting  Shared Hosting  Managed Hosting  Infrastructure as a Service  Platform as a Service  Infrastructure Software as a Service CAGR ’17 & ‘20 6.5% 8.8% 16.9% 18.1% 18.5% 22.6% 2020 $6,534 $21,997 $80,998 $26,092 $8,615 $12,162 Source: 451 Research, Voice of the Enterprise: Cloud Transformation, Workloads & Key Projects, 2017
  17. 17. Confidential | 17 LARGEST MARKETS ABSORPTION BY SIZE H1 2017 U.S. mW Absorption by Size 3.5 3.2 1 2.8 1.1 2.0 16.6 19 192.4 3 15 27 20.5 23.6 8 41 14.3 17.3 Source: JLL Data Center Solutions, National and Regional Data Center Overview, September 2017
  18. 18. 1H 2017 mW Absorption 2017 vs 2016 1.45 2 3.5 2.4 1.2 57.6 2.1 7.2 3.4 10 14.1 22.25 8 10.4 32 18 78 1 1.1 2 2.4 2.8 3 3.2 3.5 8 14.3 15 16.6 17.3 19 20.5 23.6 27 41 Houston New York City New Jersey Los Angeles Boston Northern California Denver Western Canada Atlanta Toronto Phoenix Pacific Northwest Montreal Las Vegas & Reno Austin & San Antonio Chicago Dallas / Fort Worth Northern Virginia First Half 2017 Absorption First Half 2016 Absorption Ashburn continues to dominate Dallas and Chicago markets have really come on No Cal has real supply constraints These major cities continue to be enterprise only Source: JLL Data Center Solutions, National and Regional Data Center Overview, September 2017 Confidential | 23
  19. 19. Key Industry Trends Confidential | 19 • Growth in cloud “not lifting all boats” equally • Cloud adoption is exploding • Growth remains strong across the ecosystem
  20. 20. Rapid Growth of Cloud Adoption Impacting Ecosystem Unevenly Confidential | 20 RETAIL COLOCATION CONNECTIVITY CENTRIC COLOCATION LEGACY IaaS HIGHLY AUTOMATED INFRA- STRUCTURE SIMPLE MANAGED CLOUD MIGRATION SERVICES COMPLEX MANAGED & HYBRID CLOUD APPLICATION MANAGEMENT LEGACY IT OUTSOURCING TRADITIONAL V.A.R. WHOLESALE COLOCATION
  21. 21. Key Industry Trends Confidential | 21 • Cloud adoption is exploding • Growth remains strong across the ecosystem • Growth in cloud “not lifting all boats” equally • Growth & disruption driving unprecedented M&A activity
  22. 22. Unprecedented Amounts of M&A and Investments Both Strategics and Financial Sponsors Participating Heavily Confidential | 22 Data Centers INVESTS INTO
  23. 23. Public Company Review
  24. 24. REIT and Corporate Colocation Players Confidential | 24 Note: Figures are as of November 1, 2017, DFT as of September 13, 2017 Enterprise Value $43,091mm $26,668mm $7,459mm $4,201mm $6,335mm $17,210mm $4,866mm $12,760mm Annual Revenue $4,359mm $2,298mm $668mm $431mm $472mm $3,795mm $565mm $2,557mm YoY Growth % 21% 11% 28% 9% 23% 9% 18% 26% Annual EBITDA $2,053mm $1,315mm $363mm $197mm $259mm $1,265mm $261mm $1,243mm YoY Growth % 37% 11% 30% 8% 27% 18% 16% 21% EV to LQA EBITDA 20.4x 21.5x 20.0x 19.0x 24.2x 13.4x 18.5x 11.8x EV to 2017 EBITDA Est. 21.9x 21.1x 20.4x 21.6x 23.4x 13.6x 18.6x 11.4x Debt-to-LQA Adjusted EBITDA 3.9x 6.8x 5.2x 5.2x 3.5x 5.1x 3.4x 3.8x Company
  25. 25. 24.1% 45.8% 31.0% 42.9% 31.1% 59.6% 51.1% 3.1% REIT Colocation-Centric Players Confidential | 25 2017 Stock Performance 23.7% -10% 0% 10% 20% 30% 40% 50% 60% 70% 80% Jan-17 Mar-17 May-17 Jul-17 Sep-17 Nov-17
  26. 26. Q1 '15 Q2 '15 Q3 '15 Q4 '15 Q1 '16 Q2 '16 Q3 '16 Q4 '16 Q1 '17 Q2 '17 Q3 '17 CONE $18.1 $13.4 $13.3 $43.6 $43.3 $58.4 $27.0 $19.1 $31.6 $29.6 $27.0 COR $8.9 $19.6 $9.3 $9.3 $7.5 $8.7 $7.5 $34.9 $9.1 $6.6 $8.9 DLR $21.0 $37.0 $33.0 $36.0 $39.0 $15.0 $55.0 $33.0 $50.0 $34.0 $36.1 QTS $13.6 $10.6 $5.6 $9.8 $8.6 $13.3 $14.5 $11.6 $4.3 $13.3 $15.3 Qtr Total 61.6 80.6 61.2 98.7 98.5 95.4 104.0 98.6 95.0 83.5 87.3 Trailing 4 Qtr Avg 75.5 84.7 88.4 99.1 99.1 98.2 95.3 91.1 Y/Y Increase 60% 18% 70% 0% (4%) (12%) (16%) Qtr versus Trailing 4 Qtr Avg 16% 8% 5% (1%) (3%) (12%) (4%) Demand for Large Colocation Deployments Solid, Q3-17 Leasing Levels Increased from Q2-17 Confidential | 26 In Q3 2017, leasing velocity among the top wholesale data center providers increased on average from Q2 2017 as CONE, COR, DLR, and QTS reported annualized GAAP leasing in aggregate of $87.3M WHOLESALE DATA CENTER QUARTERLY LEASING
  27. 27. Confidential | 27 REIT Colocation-Centric Players 20.0x 19.0x 20.4x 21.5x 24.2x 18.5x 11.8x Data Center REITs Valuation – EV/LQA EBITDA Multiple Over Time 13.4x 7.0x 9.0x 11.0x 13.0x 15.0x 17.0x 19.0x 21.0x 23.0x 25.0x
  28. 28. 132.2% 5.8% 31.2% 14.6% Corporate Hosting Players Confidential | 28 2017 Stock Performance 11.1% -25.00% 25.00% 75.00% 125.00% 175.00% 225.00%
  29. 29. Corporate Hosting Players Confidential | 29 Valuation – EV/LQA EBITDA Multiple Over Time 16.8x 8.4x 9.5x 9.2x – 2.0x 4.0x 6.0x 8.0x 10.0x 12.0x 14.0x 16.0x 18.0x 20.0x
  30. 30. EQUINIX ACQUISITION OF TELECITY & VERIZON DATA CENTERS Accretive M&A Rewarded by Market Confidential | 30 Investors Continue to Reward M&A Acquisition Announced: Source: Capital IQ. Market data as of 15-Sep-2017 -50% -30% -10% 10% 30% 50% 70% 90% 110% 130% 150% 15-Jan-2016 6-May-2015 6-Dec-2016 1-May-2017 Acquisition Closed: Acquisition Acquisition Data Centers
  31. 31. Accretive M&A Rewarded by Market Confidential | 31 Investors Continue to Reward M&A DIGITAL REALTY ACQUISITION OF TELX, DUPONT FABROS & CARTER VALIDUS Source: Capital IQ. Market data as of 15-Sep-2017 (50%) (30%) (10%) 10% 30% 50% 70% 90% 110% 130% 150% 9-Oct-2015 15-Jul-2015 16-May-2016 5-Jul-2016 9-Jun-2017 14-Sep-2017 9-Jun-2017 Acquisition Acquisition Divestiture Acquisition
  32. 32. Accretive M&A Rewarded by Market Confidential | 32 Investors Continue to Reward M&A CYRUSONE ACQUISITION OF CERVALIS AND SENTINEL Source: Capital IQ. Market data as of 15-Sep-2017 Acquisition Announced: Acquisition Closed: (50%) (30%) (10%) 10% 30% 50% 70% 90% 110% 130% 150% CyrusOne Inc. (NasdaqGS:CONE) - Share Pricing1-Jul-2015 2-Feb-2017 28-Feb-2017 28-Apr-2015 Acquisition Acquisition
  33. 33. M&A Overview
  34. 34. Q3 2016 Q4 2016 Q1 2017 Q2 2017 Q3 2017 Application Management Complex Managed Cloud Hybrid IaaS Retail Colocation Wholesale Colocation The Busiest 12 Months for M&A Ever! Confidential | 34
  35. 35. $3,300 $3,900 $4,000 $10,300 $12,986 $22,402 2012 2013 2014 2015 2016 2017 YTD Internet Infrastructure M&A Volume Trends Confidential | 35 TOP 3: 59% TOP 3: 80% TOP 3: 61% TOP 3: 29% TOP 3: 80% TOP 3: 60% (IN MILLIONS) BOTH SIZE AND VOLUME OF TRANSACTIONS AT UNPRECEDENTED LEVELS TOTAL TRANSACTION VALUE HAS INCREASED 5 FOLD OVER PAST 3 YEARS
  36. 36. 5.0x 7.0x 9.0x 11.0x 13.0x 15.0x 17.0x >19.0x M&A Trends: Internet Infrastructure Confidential | 36 Stated LQA EBITDA Multiples for Scaled North American Platforms Since 2011 (>$100M Deal Value) Application Management Retail Colocation Wholesale Colocation Complex Managed Cloud IaaS Hybrid
  37. 37. IPO Recap Confidential | 37 • IPO Date: 10/6/2017 • IPO Price: $17 • EV/H1 2017 Annualized Adj. EBITDA: 24.0x (IPO Multiple) • Annualized 1H Revenue: ~$363 million (17% growth y/y) • Annualized 1H Adj. EBITDA: ~$189 million (21% growth y/y)  Founded in 2000 with headquarters in Las Vegas, Nevada  Datacenter markets served: Las Vegas, Reno, Grand Rapids and Atlanta (2018 commissioning)  Largest customer, eBay and its affiliates, made up $13M of Switch’s 2016 revenue  Operational highlights: Facilities 4 Prime Campuses 3 operational and 1 under development Up to 12 million Gross Square Feet (GSF) Current U.S. Facilities: 4M GSF Future U.S facilities: 8M GSF Up to 1,185 Megawatts of power (mW) Current U.S. facilities: 415 mW Future U.S facilities: 770 mW Customer Base 800+ Customers 55% Of YTD Q2 2017 revenue from customers with 5+ years of tenure 1.4% Average annual revenue churn 2014-2016 Industry Innovator to Enter Public Market Overview of Switch Inc. (NYSE: SWCH) 0 2 4 6 8 10 12 16.00 17.00 18.00 19.00 20.00 21.00 22.00 Volume Share Price SharePrice VolumeinMillions Note: Volume on Switch’s IPO date was 44.5 million and is not shown on the graph above $20.84 $18.22
  38. 38. What We Expect in the Year Ahead
  39. 39. DH Observations from 2016 Confidential | 39 G M&A activity is expected to stay strong through the middle of 2017 with a large number of properties currently in the market and other sale processes expected to be launched over the next few quarters Continued high demand and strong valuation premiums for colocation assets with fee owned real estate and connectivity stories…there are still a number of strategic platforms Expect demand for assets that automate the management of workloads on public clouds GApplication management comes into focus Scarcity value will continue to play into valuations as fewer and fewer chess pieces are left on the board
  40. 40. The Year Ahead Confidential | 40 M&A activity will remain brisk into middle of 2018 with strong fundamentals and increasing scarcity value supporting strong valuations
  41. 41. The Year Ahead Confidential | 41 M&A activity will remain brisk into middle of 2018 with strong fundamentals and increasing scarcity value supporting strong valuations Highly automated infrastructure providers will continue to flourish alongside giant public clouds
  42. 42. Cloud & IP traffic growth creates an “almost can’t miss” scenario for data center providers building highly networked and/or scaled campuses.... “2018 The Year of the Edge” The Year Ahead Confidential | 42 Highly automated infrastructure providers will continue to flourish alongside giant public clouds M&A activity will remain brisk into middle of 2018 with strong fundamentals and increasing scarcity value supporting strong valuations
  43. 43. Financial sponsors get creative on how to play complex hybrid opportunity The Year Ahead Confidential | 43 Highly automated infrastructure providers will continue to flourish alongside giant public clouds M&A activity will remain brisk into middle of 2018 with strong fundamentals and increasing scarcity value supporting strong valuations Cloud & IP traffic growth creates an “almost can’t miss” scenario for data center providers building highly networked and/or scaled campuses.... “2018 The Year of the Edge”
  44. 44. The Year Ahead Confidential | 44 Financial sponsors get creative on how to play complex hybrid opportunity The public market gets a few more pure plays... universe has been shrinking for several years AS ALWAYS, BE READY Highly automated infrastructure providers will continue to flourish alongside giant public clouds M&A activity will remain brisk into middle of 2018 with strong fundamentals and increasing scarcity value supporting strong valuations Cloud & IP traffic growth creates an “almost can’t miss” scenario for data center providers building highly networked and/or scaled campuses.... “2018 The Year of the Edge”
  45. 45. Thank you! Herbert May, Partner & Managing Director DH Capital LLC www.dhcapital.com

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