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

Hi. Good afternoon. It's Michael Funk from Bank of America, the U.S. data center analyst. And I'm very happy today to have Andy Power from Digital Realty joining us. The format of the call is going to be a 45-minute fireside chat. If you do have any questions, you can submit them through Veracast system. You should see a dialogue box, just go ahead and type in the question, send it over to me, and I'll make sure it fit it in during the Q&A session. Also as a reminder, if you want to access any of the presentations, either this one or the ones we hosted earlier today, there are replays that you could access, if you want to go back to those later. I'm sure most of you already know Andy. But Andy is the Chief Financial Officer of Digital Realty, responsible for all of the company's financial functions, including the reporting, capital markets, tax, financial planning, analysis as well as the global asset management operations. Prior to joining Digital Realty, Andy was the Managing Director of Real Estate, Gaming and Lodging, Investment Banking at Bank of America, where he managed several relationships, including Digital Realty.

So I wanted to kick it over to Andy here in a second and just ask him just to give us a broader overview, maybe some of the high points from the recent quarter and some of the commentary they gave about the trends in the end of the year.

Thanks, Michael. Really appreciate you hosting me here on the call at Thanksgiving's eve to talk data centers. I'm sure everyone is excited to be doing that before spending some great time with family and friends on the holiday, definitely excited to wrap up 2020. While I'm sure -- while my heart -- our hearts go out to so many impacted given this global pandemic, I can say, we, at Digital, have been quite pleased and the opportunity we've been able to play in this environment, being that trusted infrastructure partner for our customers and really making sure the online world can stay alive and healthy and doing business and communicating. And I think if you look at just the recent quarters they've certainly been some accentuated by a few records, a few strategic wins, a few accolades across the board in terms of great new customer wins and continuation of expanding our platform into new markets, new parts of the world with Digital. Just 3Q in a nutshell, had a very strong $89 million of signings. I think it was our third highest in our company's history, coming off the heels of a record signing number a quarter prior. Within that, the mix was on the stronger side. Almost 50% of the signings were in the less-than-megawatt and interconnection bucket, very granular, enterprise-oriented, connectivity-rich. We had a record 130 new logos, adding to the fold of now 4,000-plus customers that are part of PlatformDIGITAL. In addition to strong revenue metrics and new production, we're also pleased with activity we made on the integration front, continuing to advance those integration efforts from organizational leadership, one down, and have a lot of -- many collective wins or referrals that we executed upon in addition to pipeline in the 100-plus numbers of opportunities. And we've been executing that playbook of continuing to grow the platform. We're bringing the capacity and coverage for our customers where they need it, when they need it. That's been in things like adding to our community in Madrid, that legacy Interxion property with incremental land capacity to support those customers' growth. That's also been in some bolt-on or tuck-in acquisition activity added with Croatia and Greece, highly connected destinations and road maps for where our customers are asking us to support them. As well as other parts of the global portfolio, certainly a robust North America quarter, where most of the wins were outside of Ashburn, which is great in terms of fantastic contribution for parts of the portfolio like the New York Metro or Toronto or other parts of North America. As well as a fantastic Asia Pacific quarter, where we had our largest signing of the quarter into the Singapore market, which has been a rather robust market for us. And we continue to bring on new capacity across many of our Asia Pacific locations, including what we have under construction in Seoul, South Korea, which will be the first carrier-neutral destination for our colo and connectivity enterprise customers in that part of the world. So those are just the tops of the waves, but happy to dive in further on any of those topics.

No. I'd love to dig in to a lot of the topics there, actually. But I wanted to start with the global platform, if I could, Andy. And it is a global conference, and we have all the major operators from around the globe and investor clients as well from different regions. So just curious, if you can give examples of customer wins for Digital Realty. Based on your global footprint, do you think the [ effort ] you can give us, where a customer pick Digital, is because you have an expansive global footprint?

Yes. We've really architected our strategy around a simple premise about being the leading global provider dedicated to full customer spectrum, from the enterprise colocation customer to the dedicated data hall hyperscaler. Global is certainly the first words in that statement and leg of that stool to that strategy. It flows through numerous parts of our business. It's our footprint, like you described, that now stands across 6 continents, 24 countries and 48 metropolitan areas. And we're continuing to expand into new parts of the world and where we see our customers asking for our capabilities and our expertise. It's certainly -- it's pervasive in our customers that now total 4,000. Our combination with Interxion, which was a completely EMEA-domiciled business, added close to 2,000 customers, which was a large portion of those customers being a European customer base. In any given quarter, we are selling the entire global platform and its full multi-product capabilities. We've called out -- in every call, we've called out a few examples, some of which that wow those customers, allow us to name them by name, whether it's financial services customers that are originating out of Europe and landing with us in Hong Kong or North America, or multi sites within -- in Paris, in the gaming vertical. We named a customer on CDN side, G-Core, who we had some notable wins with just a quarter ago. We've also had some great wins from some of our Chinese customers, where we've exported our Asia Pacific customers overall into parts of Europe as well. So we view this business as having been global and getting rapidly more globalized. And we think that full-product spectrum across all those numerous parts of the map are key to our strategy of really bringing a differentiated offering to the table for customers. It's also, last but not least, global in terms of our employees. We have a leadership team that strings across a few continents, whether it's at the executive level or the regional leadership level, with regional headquarters in Europe and also in Singapore and São Paulo for each of the portions of our business. And obviously, an employee base, which brings numerous cultures in line with these in countries. We think delivering that global footprint, that global offering and product solution is importantly tied in with a local approach. Having those skilled boots on the ground with that local market knowledge is something that we need to marry with our global approach and to really differentiate our offering.

And I want to dig into some more there, too, Andy. I think a simplistic view of data centers is that the basic big refrigerators, right, you kind of exchange one for another and competition purely based on price. But Digital recently put out some work on data gravity, your data gravity research. And just curious, how that research and conclusions there factor into your view about how important the platform is, right, and how that platform and the data gravity that it creates, attract more customers and differentiates Digital Realty?

Yes. I mean, I don't think I've heard the data -- the refrigerator analogy before, but that's...

I might have made that one up.

[indiscernible] in G-Core. That's a unique one, and I think there's a lot more complexity to our business and value-add in our product offering. And I think, at the core crux of it, the physical nuts and bolts of our infrastructure are obviously providing a secure, protected, redundant, sourced -- is immune to disasters or downtime-type facility. But then you marry that with locational sensitivities, be it for cost of power, cost of occupancy, data localization at a sovereign or other customer level, and then you have, call it, the cost and performance of transport. So we've got of a few vectors that are intersecting here that we believe are incredibly important to make sure we have a distinguished platform offering, with the right capacity and product offering across the right geographic markets. When it comes to data gravity, I think this is -- goes back to this strategy and that second leg of that stool, I mentioned, first was global and the second was the enterprise colocation opportunity and connectivity opportunity. We've made many physical investments over the last few years, and those included kind of getting the critical puzzle pieces together from the right assets in the right markets and the right breadth of coverage in the right countries. But we've also made investments on a more inorganic or organic basis in bringing on the right leadership for our sales and marketing, our go to market, and investing on our platform demand generation and our approach to the customers and industry influencers are -- the origins of PlatformDIGITAL, the marketing of our capabilities in easy-to-select, easy-to-use formats. And last but not least, becoming a thought leader as to not just where the puck is, but where it is going for the enterprise customer so that we're at the table solving their problems. Data gravity is one example of that. It's our most recent example that we -- some of the brightest minds at Digital, think is incredibly important for the enterprise customer, the CIO, CTO, at enterprises small, medium and large. We think that the legacy workloads, the colo environments of yesterday may not be fit-for-purpose for the colo environments of the future. We just look at things like commercial Internet of Things and artificial intelligence that requires re-architecting of network, new levels of formats of security, various power densities for these different -- new or newer workloads, combining with the fact that we see the data become a snowball effect and wanting to be able to grow where it's originally landed. So we put out some work on that topic. We expanded upon this just Thursday of last week at our virtual marketplace live event, where we had north of 1,000 of industry participants and customers attending. But really, what we're trying to show to the market how we can help them with their global solutions of their hybrid IT architectures and do that for a workload of tomorrow and not just what they may have been using for the last several years.

And I wanted to shift to the re-leasing spread, and I know some of you talked about a lot the last couple of years. But the spreads have been better than our expectation in 2020. To what do you attribute the outperformance of re-leasing spreads?

I think the -- if you look back with a broader lens, I believe 4 of the last 5 years prior to 2020, we had positive re-leasing spreads and only one of them was negative. If you look at the beginning of 2020, we essentially came into the year with some expectations as to where we thought the cash mark-to-markets were going to be. And as you see from our guidance table, we kind of inched those to a more positive territory each and every quarter. Overall, we've been just cycling through some tougher renewal comps, and we expect that improvement to continue. What's working in our favor, of course, is we've had a mix shift in our business, additions of our highest-pricing power network-dense solutions, be it the Interxion companies and/or Westin, or growing our colo footprint organically has certainly helped. Those customers have a broader to shorter-term contracts that we're able to turn with some form of uplift more expeditiously. At the same time, despite the progress in this category, I would remind you our philosophy here really is catered to the customer. We want to make sure that we're providing value to our customer and getting a fair economical return for that value, hence the rate that they're paying us for their connectivity solutions or space and power. And we look at it with a long-term customer relationship. So there's customers from time to time, where we see bringing to the table a renewal and maybe we'd get back a little bit on that renewal conversation, I think we kind of stand to pick up a greater share of that customers' wallet and do that sale agreement rates of returns. So that's where we are in the innings today. That's not going to be forever in terms of growing our footprint, our wallet with these customers. But -- hence, I think that's something that may mute some of these stats from time to time. But I think that it overall adds to the overall economic profile and value of our platform.

And has there been any shift in change in renewals just based on the pandemic this year? Has that pushed out decision-making for any customers?

We've had one-off episodic things where a customer that had informed us that they wanted to leave for XYZ reasons, nothing material. And maybe they got -- had to get out a month or 2 later because of -- especially at the very start of COVID, workforces were much more restrained in lockdown. But I don't think I saw a -- any kind of larger shift or slowness due to COVID in terms of, hey, I'm going to stay for the extra year or 2 because of COVID. That's not -- and I would say, quite honestly, if you look at the success we've had on the signings front, when you look at that less-than or equal-to-1-megawatt category in the enterprise vertical, in particular, within it. I think the enterprise vertical has been fairly active despite the COVID backdrop. I had not -- they've not been a deer in headlight, not been frozen in their decision-making and have taken advantage of this -- of let's continue with our digital transformation. And I don't think they pulled forward any business. But I don't think it also delayed any of our enterprise business. And maybe that's partly due to that, I think we've up-leveled our level of execution and success in that part of our business. But I think that kind of go dovetails it. If someone kind of delay making a decision to leave, I don't think that they would be delaying on the one hand and also moving forward on the other activities. So net-net, I don't -- there's nothing to call out there that I would say has a material impact on the business, positively or negatively, on that front due to COVID.

And I wanted to unpack that a little bit. And maybe you've already answered it in part through what you just said. But we had Nic Barnes on earlier, who -- I think you might know Nic. He's the Head of Data Center and Service Transformation at Bank of America. And he was highlighting some of the stress points the bank experienced this past year with higher peak usage due to PPP and more online banking, obviously, very kind of financial services specific. But I'd imagine other customers may have seen similar things. And then there are other industries we were hearing, where maybe they were delaying decision-making. So can you unpack any, maybe where you saw some industry verticals, whether there's some differences and -- in leasing activity throughout 2020?

Yes. From our vantage point of view, enterprise business that I would call a Bank of America or enterprise is much smaller and across numerous other verticals, we've not seen a delay or slowdown in 2020. We -- there's always the anecdote of the, call it, mission-critical cross-connect that we helped for financial services or other company XYZ. And I think we have had strong connectivity quarters, a couple of quarters now in a row. But nothing -- again, I don't think there's this impulse buying ability in our overall spend and our new signings. And I would say we've not seen a pause in the enterprise kind of move forward with its plans. And I think that's -- if you look at -- I believe it was a record 3Q when it comes to that category, especially as a percent contribution, at 49% of our signings being less than or equal to 1 megawatt. I think if we went to 2Q, I think we didn't talk about it much on the call because our overall volume at 144 signings really was -- took kind of -- took the air out of the room. But I think we had a really strong 2Q as well. I asked our Head of Enterprise Sales on the heels of that 2Q, and I said ,"What do you attribute it to?" And I think he'd said that the pipeline's [ now under ] attack, and we executed well. And that's on the backs of all these things we've been doing to improve our execution in that domain for some time now. Turning to 3Q, I asked him the same question on what we're kind of doing on our quarterly business review. And he wants to remain optimistic on where his pipeline opportunity was going. So the data points that we're seeing do not point to a pause or slowdown or a slippage or time delay when it comes to the enterprise customer.

And during some of my checks recently, Andy, I had heard that maybe that some of the industry colocation activity was -- maybe the mix there shifted towards more nontraditional enterprise customers, so less the kind of traditional brick-and-mortar, old school enterprise and more towards newer technology-focused companies and/or even companies that might traditionally be hyperscale customers leasing more colocation space. Is that a trend of Digital Realty you saw?

I think the -- our enterprise mix has been both old and new. And you could see that in some of the logos that permitted us to use their names in our call. When I'm saying a company like Ahold, I pronounced that -- I think I maybe mispronounced that when I made in my prepared remarks, but in the grocery segment, right, or the retail segment out of Europe, a large multinational organization that's been around for many, many years, a clear leader in their segment or some of the other companies that are certainly newer verticals or newer vintages or much more online-focused type businesses. But if I look -- I'm looking at my list of enterprise signings during the quarter, it is certainly a mix of old and new. And I wouldn't say one is all that much more prevalent than the other. I'm seeing health care companies or hospitals, they've certainly been around for many, many years. I'm seeing government entities. I'm seeing newer verticals, new companies in the gaming vertical, social media verticals, artificial intelligence verticals. So it does not, to me, like see a wholesale shift in the type of enterprise wins that we're seeing more recently.

Okay. I wanted to shift towards some of the recent M&A, and it's my chance to mispronounce company's names. I wondered how the recent acquisitions of Lamda Hellix in Greece and Altus IT in Croatia, how does it fit into your international expansion strategy?

Yes, I mean, these -- both of these opportunities are very much part and parcel to building upon the success of the legacy Interxion playbook. Both of these opportunities, I would say, came to us through those channels. They have worked together, legacy interaction, leadership as well as legacy digital investment team leadership. Michael, you know very well, having been built at Bryant Park for many years, although it'd be on different force. And both of these acquisitions, while obviously not near the size or scope of what Interxion today, very much reminds me of what Interxion was years and years ago, first, largely focused on connectivity in terms of their capabilities, the #1 opportunities in their respective countries of Croatia and Greece. Both of these very much aligned with the next leg of growth for the cloud service providers as they grow their on-ramp or network node expansions and follow that demand by compute. And you've seen some of our largest customers make specific announcements about these parts of the world. Furthermore, these countries grow us further east as launching ports for Eastern Europe and the Balkans. And for numerous customers that are looking to do business in those adjacently neighborhoods to those parts of the world, allows us to kind of expand our footprint and also continue on our connectivity-oriented theme that we've been executing in Southern Europe. You could say the acquisition of Greece has been compared to some of what the work -- or the early days of the tremendous success of David and our team, our French leadership team, and Juliano in Marseille. So -- which obviously has the angles of the subsea cable destinations, looking to bring greater connectivity in resourcing the infrastructure, all the way out to further into the Middle East and all the way down to Africa. So not a lot of new stuff other than it's a continuation of what Interxion's doing now as part of the PlatformDIGITAL.