Digital Realty Trust, Inc. (DLR) Earnings Call Transcript & Summary

Hello. Good morning. This is Michael Funk, the data security analyst at Bank of America. Very happy to have Digital Realty joining us today. On the call with us are Bill Stein, CEO; Andy Power, CFO; and CIO, Greg Wright. The call will go for approximately 35 minutes. [Operator Instructions] I wanted to begin by giving Bill an opportunity to just kind of give us a brief overview of the last quarter and maybe just talk about priorities for the remainder of the year and looking into 2021. So Bill, thank you for being on the call today. Hope we could start with that.

Good morning, Michael. Thanks for having us. Hello, everybody, this is Bill Stein. I'm the CEO of Digital. As those of you who follow us know, we had a really strong second quarter. We beat on the bottom line, but I think more impressive was the bookings for the quarter, really a record quarter in just about every respect, I think our bookings in the second quarter were 40%, 50% higher than our best quarter ever. So we're obviously very, very pleased with that. The colo bookings were strong, very strong new logos, lots of multisite deals. The revenue from multisite deals up 13% year-over-year. Average deal size is up over 8%. We attribute this not to a COVID pull forward, but it's -- most of these deals were deals that we were working on pre-COVID. So they've been in our pipeline for a long time. We have a new Head of Global Sales, Corey Dyer, who joined us a couple of years ago now and he's put in some new procedures that have resulted in increasing rep tenure and more reps meeting quota. We've also seen quite a bit of cross-region referral between legacy Digital and legacy InterXion. So all in all, I think it was a very successful quarter. In terms of the outlook, I said on the last quarterly call that we're not going to do $140-some-odd million of bookings every quarter. We actually chewed through most of our inventory in Northern Virginia this past quarter. So we have to rebuild inventory in that market. But we're looking forward to a solid second half. The colo business continues to, I think, tick up. I think, look as, right now, it's looking as though the third quarter's going to be stronger than second quarter. So what we're doing in that world is certainly bearing fruit. And of course, the colocation business is a higher-margin business. Generally resulting in higher interconnection revenues as well. And so I will tell you that I'm feeling very positive about the second half and looking into next year, it's feeling good as well. So I'm pleased with the way the 2 teams are going -- moving together. I have said on several prior calls that our highest priority this year is the successful integration of InterXion into Digital, and that's proceeding at pace. Another priority is to push harder into the enterprise business, and I think that's going well, also. So I'll stop there, Michael, and you can feel free to ask any follow-up questions that you might have.

Sure. And thank you for that, Bill. No, I do want to dig into a few of those different points that you made. Maybe just beginning with the leasing number. I know you get asked about it a lot. It's an area of focus for most investors and myself. And the Q2 numbers were very strong, significantly ahead of my expectation, much better than The Street. So maybe going back to your comment about how a lot of those deals have been in the pipeline for a while, and I would assume the larger deal has probably been in the pipeline for the longest period of time. What have been the key drivers, in your opinion, to the improved leasing that we're seeing in 2020? After 2019, it wasn't particularly weak, but certainly, a step back in 2018. So what's driven that improved pipeline and the strong release in numbers, particularly from the hyperscale side?

Well, I think just looking back, probably over the last 4 or 5 years, I've pushed hard to pivot the company from what were its historic routes. As an asset-based business, having come in -- coming out of private equity, to now as an operating business being more of a customer-focused business. And I think that's really what's generating the success with the CSPs, in part, it's really being highly focused on the customer. It's flexibility in terms of term. I think it's having the ability to grow with the customer. So when a customer comes to a digital data center anywhere in the world, I think it's important for them to see how they -- how we can support their growth. So that's obviously additional space and in perhaps that particular building, but it's also land -- adjacent land where they know that we can build additional capacity and knowing our history, knowing that we will build additional capacity. And I think the interconnection piece of it is really important, too. So the fabric that allows them to exchange data, not just with their other data centers but with customers and partners around the world as well. Andy or Greg, anything else that you'd like to add to that?

Go ahead. I think you hit the nail on the head. I think under your leadership, we've worked hard for now several years, putting all the critical puzzle pieces together. Becoming a truly global organization across 20-plus countries, 40-plus metropolitan areas, having the critical, highly connected destinations both inorganically through things like the Westin Building or InterXion. And organically, by growing our colo connectivity product offering in markets like Seoul and Hong Kong, coming soon in numerous parts of the world. And I'm making sure like you said that we have that runway to customer's growth. And last but not least, I think on the less tangible, but more on the leadership in people front, getting the right team around our table and the next level down to make sure the broader customer base that now totals, call it, north of 4,000 customers at Digital Realty, which we're adding 125 plus every quarter now, really sees our value prop as a trusted global partner of choice for all their needs. So I think that concludes events. And it's not -- last but not least, I don't think it's -- it just didn't show up on our doorstep in the second quarter. I mean it's now 5 or 6 consecutive quarters of quarter-over-quarter increase in signings, numerous record new logos, quarters in there, it's in multi-site, multi-market, multi-geo. So the fruits of our labor are starting to be born. And personally, I think there's more to come in the future.

We're all very excited about the opportunity. Go ahead, Greg.

No, so that was Michael. Greg, did you have a comment? You want to add to that?

No, no, no. I was just going to say that wasn't me, Bill. I think it was Michael.

That was me. I just wanted to dig a little bit deeper into the multisite, multi-region comment. I think it's an important comment to make because -- I am hearing from brokers that I talk to how important it is to have multiple regions in winning new deals. Can you quantify that for us, though, kind of the increase in deals that you're seeing, that are multi-site or multi-region? Or any kind of color behind those deals you can add?

Andy, you have the -- probably the hard data on that.

Sure, sure. I mean, I think that -- and I'll get into the numbers in a second. I think as intuitive as this, Michael, when -- whether it's a global 2,000 enterprise customer seeking a hybrid deployment or a hyperscale customer. When you can come to the table in a more complete global fashion and solve more of their problems. I think we see that, that produces more fruitful outcomes for the customer and for digital across many fronts. And enterprise customers are deploying across numerous continents, numerous markets and providing that consistent experience for those customers for that connectivity, storage, compute needs has translated into a customer base that we're able to win more than our fair share, win larger deals and also win more financially rewarding deals. I think you can see in our top 20 customer base by itself, which is obviously leans towards our larger customers, those customers range from 10 to 40 or maybe even more specific locations with digital. Of our 4,000 customers off the cup, I estimate, we're, call it, south of 1,000 still that are multi-market, multi-geos to date. And so we think -- still think that's a large and growing opportunity that we have yet to fully harvest. But I would remind you, only in the last 12, 24 months did we truly broaden our product offering, maybe some of these parts of the world. Our European footprint was close to almost 65%, 70% London focused. So we've -- now with InterXion combination are sprawling across numerous European countries, the leading connectivity and colo and hyperscale footprints and campuses in those markets, which will continue to grow. Similar story as we've entered into South America, where we've added now Santiago, Chile and Mexico, in really in the last, call it, 6 to 9 months. So we think there's a large opportunity ahead of us from our existing customer base and the customers that we're adding to the Digital Realty family every day.

It's a great overview, Andy. And I wanted to kick it over maybe to Greg, and I'm sure Bill will have a thought here, too. But you announced the Altus deal last week, obviously, relatively small versus other things you've done. But Greg, maybe just comment on the current M&A environment, there has been more private capital raised recently. I think probably more earmarked toward doing deals rather than greenfield. So maybe first, just kind of comment on the competitiveness of the market? And then 1 for you, Bill, seeing the line of question or thought, your thoughts on regions that are of interest. And if there's any kind of scenario where you'd want to get bigger in the U.S. or if the push continues to be, to grow outside of North America? I know there's a lot in there to unpack, but maybe beginning with Greg, if we could.

Sure. Thanks, Michael. Look, I think there's a couple of things. As Bill has said repeatedly, publicly, our M&A focus remains right now or is focused on integrating InterXion. With that said, we've seen, what I would call, some very important strategic tuck-in acquisitions that make sense in smaller platforms. As you mentioned, Michael, we had Altus and our view there is Southeast Europe offers really significant economic potential. And it was really our first step and our first gateway into that market. So we're pretty excited about the asset. It's a highly connected asset. It's been -- and we think it's got a terrific team. So we're very -- we've been very, very encouraged and excited about that. But in addition to that, I mean, we've also -- as you saw, we went out recently, so it's a combination of things. We went out and acquired additional land in Madrid, which was within 1 kilometer of our existing data centers, which can support up to another 34 megs of critical IT capacity. Again, we find that strategic. And again, these are all different types of ways to grow, if you will, that are strategic, smaller and that we think are going to be truly value add. And then finally, if you look at like, for example, what we did with our Frankfurt lands, right? When you look at the Hanauer campus in combination with Neckermann, right, combining both the leasehold interest and the fee interest, again, we think, was significantly value-enhancing day 1, given the higher multiple attributed to now full ownership of the building as well as having expansion potential within the existing campus. There are 3 buildings that we're going to get back in a couple of years that will allow for redevelopment potential. So overall, that's been our strategy, recent strategy, again, with a continued focus on integrating InterXion. I think with respect to the competitiveness in the market, look, I think that remains. I think we're still seeing private capital chase deals. Whether it's the infrastructure funds, other strategics, private equity, I think we have seen a true interest in the sector, continue to gain. I think the sector's performance through this whole COVID environment has really made the investment community take note, I would say, both publicly and -- both public and private investors. And for good reason, when you look at the cash flow stability and the performance of the sector, it really is a great test run, if you will, unfortunately, for a sector that's relatively new, to see how it's going to perform. So we continue to see capital compete across the board.

Mike, well, I'll it up from there.

Could you comment on the last part?

Sure. Well, I mean, just let me say, I think in Europe, the focus right now is to push east and south. And those could be deals like the one we did in Croatia, or they could be land deals. But data sovereignty, coupled with the edge means that we will be making smaller acquisitions in the secondary and tertiary markets outside of the flat markets in Europe. In terms of the U.S. or North America, I think that it's unlikely that we would do anything significant there. And that's -- that market is pretty well -- well, saturated, right, but it might be the right comment, but there's a lot of private capital that's come into the U.S. and it's well supplied. And so I'm not sure that it would make sense for us to allocate capital in the U.S. for a major acquisition. I'd say in terms of, if you look around the world and you look at what our market share is, we're either 1 or 2 in North America, South America and Europe, but we're way down in Asia. And while the focus near-term will be on organic growth in Asia. And by that, I mean, buying land and building. And that could be -- that will be in existing markets as well as new markets to the extent that we could find a platform that would make sense in Asia. I think that's probably the 1 region where we would look to invest in that fashion. However, as I said early on in the call, and I've said repeatedly, integrating InterXion remains our highest priority. So we don't want to be distracted or take our eye off the ball because of doing another major acquisition in another part of the world.