Telx Beefs Up Digital Realty's Interconnection Revenue and Cloud Strategy

Telx, the colocation and interconnection company data center giant Digital Realty Trust acquired last year, contributed $13 million in annual revenue from new leases signed in the fourth quarter of last year – the first quarter completed after the $1.9 billion acquisition closed.

While it made an attempt to go public in 2011, the plan was cancelled and Telx remained a private company. As a result, little has been known about its financial performance. Now that it’s part of one of the world’s largest publicly traded data center REITs, there’s a new degree of transparency.

Notably, since Telx’s robust interconnection business was what made it attractive, $7 million of its revenue contribution will come from interconnection services sold during the quarter. The remaining $6 million will be from data center space and power.

While Telx is contributing new revenue, Digital has had to write off some revenue as a result of the acquisition, going from quarterly income to quarterly loss. The company went from net income of about $58 million in the third quarter to net loss of about $17 million in the fourth quarter of 2015, attributing the loss primarily to “the write-off of straight-line rent receivables related to Telx.”

Digital Realty’s total revenue for the quarter was $500 million – up from $412 million it reported for Q4 2014. Its full-year 2015 revenue was $1.76 billion – up from $1.62 billion in 2014.

Using Interconnection to Draw Cloud Users

Telx’s interconnection capabilities and the interconnection ecosystems it has built in its meet-me rooms over the years are a major part of Digital Realty’s new strategy. Put simply, Digital is offering cloud service providers access to those interconnection hubs along with large chunks of wholesale data center capacity nearby, so they have room to grow.

Digital expects cloud providers to reel in enterprise customers looking for private network connections to their services. The two primary cloud providers who are part of this strategy Digital has named are IBM and AT&T. Another customer that plays a big role is Equinix, which doesn’t provide cloud services itself but has all major cloud providers as its customers, who are attracted to Equinix for similar reasons they are attracted to Telx but at a much larger, global scale.

Read more: Digital Realty Leans on IBM, AT&T to Hook Enterprises on Hybrid Cloud

By relying on these service providers to attract enterprise customers, Digital Realty is leveraging a salesforce that’s larger than its own and also avoids directly competing with AT&T, IBM, and Equinix, who are some of its biggest customers. “It’s almost like outsourcing a salesforce,” John Stewart, senior VP of investor relations at Digital, said. “If they’re successful, we’ll be successful.”

Hard to Keep Up With Demand in N. Virginia

One of the first places where this new strategy will be seen in action is Northern Virginia, the biggest and most active data center market in the US. San Francisco-based Digital Realty has a lot of existing data center capacity there, but, seeing a huge amount of demand in the market, has bought an additional 2 million square feet of land in Ashburn, with access to 150MW of power.

There was less than 20MW of unused data center capacity available in the Northern Virginia market in the fourth quarter, according to Digital Realty’s internal estimates. That includes both finished data center space and space that’s currently under construction. There is more than 20MW of planned new construction in the market – more than in any other US data center market.

Read more: Digital Realty Takes Foot off Brake Pedal on Expansion

The only market that’s somewhat close to those figures is Chicago, where more than 20MW is currently available and just under 20MW of new construction planned.

“We are releasing space like hot cakes in Northern Virginia, and we literally can’t keep inventory on the shelves,” Stewart said.

Northern Virginia, Chicago, and Dallas are three of the markets companies generally go to today if they want a national-scale data center infrastructure in the US, he said.

Oracle, for example, recently leased 4.5MW of data center capacity with Digital in Ashburn and 5.5MW in Franklin Park, a village outside of Chicago, according to the commercial real estate firm North American Data Centers. Oracle has been expanding its data center capacity globally as it ratchets up its enterprise cloud business.

Microsoft also recently took 7.2MW with Digital Realty in Franklin Park.

Another example of a recent national-scale customer win for Digital is Uber. The mobile ride-hailing startup took 6MW at a Digital Realty data center in Dallas and 4MW in Ashburn last year, according to North American Data Centers. Uber also took 4MW in Santa Clara, California, with Digital’s competitor CoreSite Realty Corp.

Read more: Who Leased the Most Data Center Space in 2015?

Expanding Internationally

Digital Realty recently added a whole new market to its portfolio, buying a piece of land in Frankfurt, a market it said it had been eyeing for some time now.

“It’s a market that we have essentially followed customer demand into,” Stewart said. “We’ve heard over and over that Frankfurt was the market where [customers] wanted to be.”

Frankfurt is one of Europe’s most active data center markets. It is a major network interconnection hub and a key internet gateway into Eastern European markets.

Digital Realty, which currently has 22 data centers in Europe, bought a 27-acre parcel in Frankfurt, with access to 27MW of power capacity. The site will accommodate a three-building data center campus, the company said.

Frankfurt was one of the major gaps in Digital’s global coverage, Stewart said. Another gap is Tokyo, he added. So far, its Asia Pacific strategy has been focused on Singapore, Hong Kong, and Australia, but it’s likely that Digital will step into Tokyo in the near future, adding a second location in Japan to its existing Osaka data center.