DGI9 Digital 9 Infrastructure Plc

28 February 2024

DIGITAL 9 INFRASTRUCTURE PLC

("D9", the "Company" or, together with its subsidiaries, the "Group")

PORTFOLIO TRADING UPDATE

The Board of Directors of Digital 9 Infrastructure plc (the "Board") and the Company's Investment Manager, Triple Point Investment Management LLP ("Triple Point"), today provide an unaudited Portfolio Trading Update on the 6-month period ended 31 December 2023.

This Portfolio Trading Update is to be read in conjunction with the previously disclosed conclusion of the Board's Strategic Review of the Company. On 29 January 2024, the Board determined that it would be in the best interests of shareholders as a whole to put forward a proposal for a managed wind-down of the Company to maximise shareholder value (the "Managed Wind-Down").

Concurrently with the publication of the Portfolio Trading Update today, the Board has published a Company Update (the "Company Update") and a Circular to convene a general meeting of shareholders on 25 March 2024 (the "Circular").

1.    Key Highlights

·    Overall during the period the portfolio companies have continued to perform in line with expectations, with Verne Global Iceland ("Verne Global") accelerating its top line growth to 33% year on year, on the back of continued strong customer demand, while Arqiva Group ("Arqiva") and Aqua Comms DAC ("Aqua Comms") grew by 8% and 9% respectively.

·    In line with business plans, margins have remained under pressure for some of the businesses, particularly Arqiva and Aqua Comms.

·    Available cash resources and operational cash flows enabled portfolio companies to accelerate capex investment to £61m (+31% vs. the same period in 2022) allowing commercial momentum and competitiveness to be maintained.

·    There were limited changes to portfolio management teams during the period. However, in February 2024, Aqua Comms CEO Jim Fagan decided to leave the company to pursue another opportunity. Aqua Comms' Chief Networks Officer Andy Hudson has been appointed acting CEO, and Chairman Alan Harper will provide enhanced commercial and strategic assistance to Andy Hudson through the remainder of 2024.

2.    Portfolio Performance Overview

In the 6 months to 31 December 2023, the aggregate revenues of Verne Global, Verne Global Finland, Verne Global London, Aqua Comms, Arqiva, Elio Networks and SeaEdge UK1 (together, the "Investee Companies", and each an "Investee Company") grew by 9% year on year (which resulted, in aggregate, in full-year 2023 revenue growth of 10%). The revenue growth was driven mainly by the performance of Arqiva, Aqua Comms and Verne Global. EBITDA during the period was negatively affected by Arqiva and Aqua Comms, as was factored into business plans. Further details are provided in the following sections.

Note: Revenue and EBITDA figures included in all financial tables in this document are for the full, actual 6- or 12-month period to 31 December and are not pro-rated for the period of ownership. Cash flow from operations is defined as EBITDA less tax and changes in working capital. Arqiva's figures are pro-rated for the Company's economic ownership of 51.76%. All other Investee Companies are 100% owned. FX rates are as of 31 December 2023.

3.    Investee Company Performance

3.1. Verne Global Iceland

Verne Global is a leading data centre platform based in Iceland. It provides highly scalable data centre capacity to its enterprise customers in a geographically optimal environment, powered by 100% baseload renewable energy. Energy is sourced exclusively from local, stable and predictable hydroelectric and geothermal power generation which is secured with a 10-year fixed-price supply contract, enabling customers to reduce their carbon footprint significantly. Verne Global's year-round, free-air cooling capabilities make it one of the most energy-efficient data centres in the world and reaffirms the Company's ambition to decarbonise digital infrastructure in line with United Nations Sustainable Development Goal 9 ("UN SDG 9").

During the period, Verne Global generated sustained and accelerated demand for its facilities from both new and existing customers. Compared to the same period in 2022, revenue increased by 33% in the second half of 2023 driven by new colocation contracts coming online along with the continued ramp-up of existing colocation contracts. Compared to the same period in 2022, EBITDA increased by 61% in the second half of 2023, while EBITDA margin increased from 35% to 42% year-on-year as the business continued to scale.

As announced on 15 February 2024, Verne Global signed its first increase (the "Accordion Facility") under the terms of its existing green term loan debt facility with additional proceeds of US $17 million available to help fund the growth capital expenditure pipeline while the Company awaits the closing of the sale of the Verne Global group of companies to funds managed or advised by Ardian France SA or any of its affiliates (the "Verne Global Sale"), as previously announced by the Company on 27 November 2023.

3.2. Verne Global Finland

Verne Global Finland is a leading Finnish data centre and cloud services platform. It has ultra-modern infrastructure, spread across three campuses (The Air, The Rock and The Deck) with industry-leading sustainability credentials and surplus heat distribution, offering a full suite of cloud infrastructure, connectivity and cybersecurity services. Verne Global Finland has existing buildings capable of providing up to 23 MW.

Although Capex plans have been delayed pending closing of the Verne Global Sale, Verne Global Finland has continued to grow its client base and is looking to expand its data centre capacity further to meet increasing customer demand, particularly in its Helsinki campus. 

Compared to the 6-month period ended 31 December 2022, the 6-month period ended 31 December 2023 achieved revenue growth of 7% and EBITDA growth of 89% as Verne Global Finland secured new customer contracts, increasing utilisation on its sites. EBITDA growth in the 6-month period ended 31 December 2023 also reflected year-end adjustments for one-off items relating to intergroup recharges and severance payments.

3.3. Verne Global London

Verne Global London wholly owns and operates a hyper-connected data centre in Farringdon, central London, providing up to 6 MW of colocation services. Verne Global London facility is a fully accredited hub for connectivity and content distribution to networks across the UK and worldwide and is in an ideal location for latency-sensitive workloads.

Compared to the 6-month period ended 31 December 2022, the 6-month period ended 31 December 2023 achieved revenue growth of 11% and EBITDA growth of 74% as a result of customer contracts ramping up, upfront installation fees and smaller bespoke projects for customers. This resulted in strong growth overall in 2023, as revenue grew 40% year-on-year and EBITDA margin turned positive, at 22%.

3.4. Aqua Comms

Aqua Comms is a leading carrier-neutral owner and operator of subsea fibre, providing essential connectivity through 20,000 km of transatlantic, North Sea and Atlantic, and Irish sea routes. Aqua Comms serves mainly hyperscalers and global carriers who have an exponential data demand.

Aqua Comms had a successful year in 2023 in its core transatlantic market, achieving approximately double the growth rate of the overall market, demonstrating Aqua Comms' ability to capture market share and testament to the strength of the sales team.

Compared to the same 6-month period in 2022, revenue increased by 9% in the second half of 2023 mainly driven by increased sales in Aqua Comms' lease business. EBITDA decreased by 19% mainly because of the planned addition of headcount to support sales, operations and expansion into new geographies such as Asian markets in line with the business' long-term strategy, along with additional and temporary overlapping costs to internalise its previously outsourced Network Operations Centre. In addition, the launch of Aqua Comms' third transatlantic cable, AEC-3, in August 2023 temporarily hindered profitability as all related costs were incurred upfront (e.g. backhaul leases). Therefore, Aqua Comms expects that revenue ramp-up will occur in future years. Aqua Comms also expects customer demand to remain strong in the foreseeable future whilst capacity demand continues to grow at very high rates.

Aqua Comms' 2023 Cash Flow from Operations of £8m will allow the transatlantic business to be self-funded in 2024.

In February 2024, CEO Jim Fagan decided to leave the business to pursue an external opportunity. He hands over a company which has a strong, growing Atlantic business and a significant pipeline of future opportunities to extend its reach to new markets on the back of strong competences and market positioning. Aqua Comms' Chief Networks Officer Andy Hudson has been appointed acting CEO after leading all aspects of Aqua Comms' global operations and engineering since June 2017. Chairman Alan Harper will provide enhanced commercial and strategic assistance to Andy Hudson through the remainder of 2024 as Aqua Comms continues to execute on its ambitious sale plans for its multiple Atlantic routes and the new EMIC-1 system, which is under construction.

3.5. Arqiva Group

Arqiva is the UK's pre-eminent national provider of television and radio broadcast infrastructure and provides end-to-end connectivity solutions in the media and utility industries. It has been an early and leading participant in the development of smart utility infrastructure in the UK through its smart water and energy metering services. It is also a leading provider of satellite uplink infrastructure and distribution services in the UK.

Note: Figures presented are pro-rated based on D9's 51.76% economic interest in Arqiva. Cash Flow from Operations is defined as EBITDA less tax and changes in working capital.

Arqiva sustained good business momentum in the 6-month period ended 31 December 2023, with revenue up 8% year-on-year, reflecting strong growth in smart water metering, whilst the media business saw upwards indexation of inflation-linked revenue contracts and higher passthrough power charges. Limited offset was driven by some TV channel customers entering administration. EBITDA dropped by 11% year-on-year in the period and by 5% for the full year, as a result of an increased mix of utility device sales, higher power costs and TV channel revenue reductions, as well as some one-offs. Our business plan for Arqiva already anticipated a drop in EBITDA in this period.

The UK government is currently drafting the Media Bill, which includes a range of provisions to modernise broadcasting regulation and support public service broadcasters. At its second reading in the House of Commons in November, MPs spoke about the importance of protecting delivery of Broadcast TV in the long-term to ensure broadcast services remain available to everyone in the UK.

Whilst current macroeconomic factors are impacting some customers, Arqiva continues to see positive commercial momentum in both media and smart utilities. Several major Digital Audio Broadcasting ("DAB") contracts have been extended to 2035, with DAB remaining the UK's dominant listening platform, delivering 42% of all listening hours. Arqiva has signed a multi-year deal with a UK Public Service Broadcaster ("PSB"), representing the first Satellite Direct to Home deal (including satellite capacity) that has been signed with a PSB. Arqiva continues to carefully monitor customer demand and requirements to ensure efficient management of satellite transponder capacity. In November, Arqiva announced the extension of its smart water meter network through a contract to deliver an additional 300,000 meters for its existing customer Anglian Water ("Anglian") by 2025. This should allow Anglian to continue to improve network monitoring, identify and reduce leakages, and engage with customers to modify behaviour and help them reduce consumption. To date, Anglian's smart water metering programme has helped customers find and resolve over 200,000 leaks in their properties, on average saving three million litres of water per day over the past three years.

As disclosed in June 2023, Arqiva implemented a collar on its inflation-linked swaps, which applies a cap and floor to future accretion payments, limiting downside cash flow exposure for the business. For its financial year ending June 2023, Arqiva paid £147 million in accretion (equating to c.£76 million pro-rated for D9's 51.76% economic interest in Arqiva). This was based on a 13.5% Retail Price Index ("RPI") inflation rate in March 2023. As a result of the collar, accretion payments going forwards are effectively limited. For example, net of the collar, the accretion payment for the year to June 2024 is effectively capped at c.£75 million (c.£39m pro-rated for D9's ownership). This maximum payment will only be payable if RPI in March 2024 exceeds the collar's cap of 6.0%. If RPI is lower, the accretion payment will be proportionally lower as well, down to an RPI floor of 2.5%. If the January 2024 RPI levels of 4.9% continue to March 2024, the June 2024 accretion payment will be c.£60 million (c.£31 million pro-rated for D9's ownership). The swaps expire in April 2027, and, for the avoidance of doubt, the accretion payments are made by Arqiva out of its operational cash flows.

3.6. Elio Networks

Elio Networks is a leading enterprise connectivity provider that owns and operates the highest capacity Fixed Wireless Access ("FWA") network in Greater Dublin, connecting c.1,600 enterprise customers with high-quality wireless access across c.50 base stations.

Elio Networks continued growing its high-quality wireless connectivity operations in 2023, with unique customer connections of c.2,700 in December 2023. Elio Networks completed a re-branding exercise and launched under its new name in February 2023. Furthermore, Elio Networks extended its services to Cork City in early 2023, reaffirming its position as the leading wireless fixed connectivity player in Ireland.

Compared to the 6-month period ended 31 December 2022, the 6-month period ended 31 December 2023 achieved revenue growth of 7% as Elio Networks continued to focus on higher quality and capacity enterprise connections. The 6-month period ended 31 December 2023 saw a marginal 3% decrease in EBITDA versus the 6-month period ended 31 December 2022 as the business invested in marketing to support growth through the re-brand.

3.7. SeaEdge UK1

SeaEdge UK1 is a data centre asset and subsea fibre landing station, located on the UK's largest data centre campus in Newcastle. Data centre operator, Stellium Data Centres Ltd, occupies and operates the asset via a 25-year occupational lease.

Revenue growth of 11% and EBITDA growth of 13% were achieved in 2023. Compared to the 6-month period ended 31 December 2022, revenue increased by 3% and EBITDA by 7% for the 6-month period ended 31 December 2023 due to positive revenue indexation and reduced expenses.

3.8. Giggle Broadband

As previously reported, the Company invested £4.3 million seed capital into Giggle, a greenfield opportunity to provide affordable broadband to social housing through a Fibre to the Home network across the city of Glasgow.

As disclosed in the Company's Interim Report for the 6-month period ended 30 June 2023, due to the significant capex requirements of c.£150 million and funding constraints, the Company was unable to continue to fund the development capital expenditure required by Giggle and made a provision against its full value.  The Company sold its 100% stake in Giggle to its senior management in Q4 2023 for £1.

ENDS.

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About Digital 9 Infrastructure plc:

Digital 9 Infrastructure plc (DGI9) is an investment trust listed on the London Stock Exchange and a constituent of the FTSE All-Share, with the ticker DGI9. The Company invests in the infrastructure of the internet that underpins the world's digital economy: digital infrastructure.

The Investment Manager is Triple Point Investment Management LLP, which is authorised and regulated by the Financial Conduct Authority. For more information on the Investment Manager please visit www.triplepoint.co.uk. For more information, please visit www.d9infrastructure.com.