2014/04/07 Data centres are one of the most profitable infrastructure investments

In this article, we explain why data centres may offer investors healthy cashflows in comparison with alternative infrastructure-based investments.

Data centres have one of the highest EBITDA margins in the infrastructure sector

Data centre EBITDA margins are significantly higher (at about 43%) than those of alternative infrastructure sectors (typically below 20%) – see Figure 1.1 This is partly because they have adopted a 'pay-as-you-grow' model – that is, they only invest in additional infrastructure when there is sufficient demand and they have secured anchor clients. In addition, the data centre customer base is very 'sticky' because of the business disruption that can be caused by moving mission-critical IT hardware and servers, which results in low levels of churn and a lower cost of sales. High EBITDA margins can be used as a proxy for a healthy cashflow, but investors should also consider other metrics, such as return on capital employed (ROCE) when making investments.

Figure 1: Average weighted EBITDA margins by industry sector, Europe, 2009–2013 [Source: Analysys Mason, 2014]

Operating costs can be reduced by a further 20%, improving profitability

Investors will be pleased to note that there is potential to further improve the profitability of data centres by reducing their energy costs. We estimate that up to 50% of a medium-sized data centre's operating costs can be spent on energy usage (see Figure 2), which equates to about USD5 million per year.2

Figure 2: Typical running costs for a medium-sized data centre [Source: Analysys Mason, 2014]

Most data centres consume energy from the national grid – that is, the national, high-voltage electric power transmission network. However, buying energy 'off-grid' (directly from an alternative power source) allows data centres to negotiate lower energy tariffs and reduce their total energy costs. This approach is common practice among energy-intensive industries (such as chemical plants), in which businesses locate their premises close to power generation facilities and install direct power feeds to benefit from lower off-grid energy costs. It is less common among data centres, which tend to be located in large cities such as London, far from power generation facilities. However, there is a notable trend for data centres – particularly in the UK – to locate outside city centres such as London, so off-grid energy usage may become more common.

We estimate that off-grid energy could reduce a medium-sized data centre's annual energy charges by about 40%, equating to a potential saving of around USD2 million in annual usage charges, or a 20% reduction in its operating costs.3, 4

Data centres are experiencing growth in demand

Enterprise and consumer cloud services have been among the main drivers of demand for data centre capacity in the past few years, and it is expected that such services will continue to fuel this growth.5 Cisco Systems estimates that cloud services accounted for 40% of data centre traffic in 2011, and will form the majority of data centre traffic by 2016.

The growth in demand for data centre capacity, combined with the high profitability and the scope to reduce operating costs, make data centres an attractive opportunity for investors. This is particularly the case for those making investments to support the infrastructure, energy and real estate sectors, given the relationship data centres have with these sectors.


Source: Analysys Mason