Digital Realty Takes Foot off Brake Pedal on Expansion

After 18 months of optimizing its portfolio, reshaping its business strategy, and completely transforming its senior leadership team, Digital Realty Trust is back in expansion mode.

The company is planning to expand data center capacity in its current markets and enter new ones after 1.5 years of almost complete construction abstinence. Data center demand is up, and with the addition of Telx to the business and new products Digital is ready to start the next chapter, based on what company executives said on its third-quarter earnings call Thursday.

One place where San Francisco-based Digital is focusing its expansion efforts in particular is Northern Virginia, one of the world’s largest data center markets and a key region in the internet’s geography. On the call, the execs announced that the company has bought a 2-million-square-foot property in Ashburn, Virginia, with access to 150 MW of power.

They did not get into specific construction plans but said the build-out will support growth for the next several years. The property is close to Digital’s existing Ashburn campus and is one of few green-field sites fit for data center development Loudoun County has left, according to them.

Demand Stronger than Digital has Ever Seen

Demand for data center capacity overall is stronger today than it has ever been in Digital’s 11 years as a public company, CEO William Stein said on the call. He used Digital’s backup generator deployment dynamics to illustrate the point.

“Within the past five weeks, we’ve ordered twenty-three generators and have allocated 15 to projects scheduled for delivery over the next six months,” he said. “Throughout the course of 2015, we’ve allocated … three to eight per month, so this represents a dramatic uptick in our level of delivery.”

The number of generators allocated gives Digital “clear visibility into the demand.” It is “perfectly correlated” with the spike in leasing activity the company is seeing in the market, Stein said.

Digital signed leases amounting to $33 million in annualized rent revenue in the third quarter. The quarter’s revenue was $436 million – up 6 percent year over year, and net income was $58 million.

Wholesale no Longer Means 2N Infrastructure

Responding to a recent trend other data center providers have also noted, Digital is expanding the variety of wholesale data center products it offers. In addition to its standard 2N infrastructure redundancy level, the company will now also provide N and N+1 options.

There is a lot of demand for lower-cost and lower-redundancy offerings – something Vantage Data Centers, Digital’s competitor in Silicon Valley and Central Washington markets, has been capitalizing on.

In a recent interview, Vantage CEO Sureel Choksi said Digital realty invented the wholesale data center business model in its early days, and that model was built around 2N redundancy on electrical infrastructure, and N+1 on mechanical infrastructure. “There was really one product in the wholesale data center industry in its early days,” Choksi said.

But Vantage has been successful at closing deals with technology companies in Silicon Valley that in some cases include no redundancy at all. In one multi-megawatt deployment by an enterprise software company, whose name Vantage has not disclosed, there are no generators, uninterruptible power supplies, or batteries. “If the utility goes down, it goes down,” Choksi said.

The customer houses its development and testing environment in the facility, so it’s not as crucial for it to stay up whenever there is a power outage.

Cloud service providers and big web companies also build more and more failover and resiliency capabilities into software nowadays, so they don’t need as much redundancy in the physical infrastructure layer. In one extreme example, Facebook shut down an entire data center to test the resiliency of its web application, which rode through the test without an outage, Jay Parikh, the company’s head of engineering, said during a presentation in 2014.

With less infrastructure, the customer gets a lower-cost lease, and the difference in price matches the difference in Vantage’s cost to deliver the space, so the provider’s profit margin doesn’t suffer, Choksi said.

Interxion Acquisition not in the Works

Not surprisingly, integration of Telx, the colocation company Digital bought earlier this year, is currently front-and-center for Digital’s leadership team. “Our highest priority is to successfully integrate this $1.9 billion investment,” Stein said, responding to an analyst on the call who said Interxion, a major European data center provider, was still without a “dance partner” in the European market following the acquisition of TelecityGroup, another European heavyweight, by Equinix.

Equinix, both a customer of Digital’s and its competitor, bought London-based Telecity for $3.6 billion earlier this year. If European regulators approve the deal, Equinix will become the largest data center provider in Europe.

Telx is a direct competitor to Equinix, and by acquiring it Digital started competing more directly with one of its biggest customers than it used to.

Telx to Drive Connected Campus Strategy

The Telx integration will happen in multiple phases. “It’s far more important to get that right than get it right now,” Stein said.

Telx is initially going to operate as a standalone line of business, and Digital is keeping the Telx brand in the near term, John Stewart, senior vice president of investor relations, said in an interview. “Telx will be our colocation and interconnection platform going forward,” he said.

The integration will consist of leasing vacant space in Telx data centers that are not within Digital’s facilities, transitioning Digital’s non-Telx colocation assets under the control of the new line of business, and then building out colocation and interconnection data centers within Digital’s existing wholesale campuses in the US, primarily in Ashburn, Dallas, and Chicago.

The combination of wholesale space and interconnection is aimed primarily at cloud service providers and enterprises that want to connect to them directly. As enterprise demand for cloud services grows, enterprises need to connect their on-premise infrastructure to cloud providers over private network links. With its connected-campus strategy Digital is going after this demand.

The final phase of integration will be taking the model to international markets, Stein said.