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Unscathed by coronavirus, datacenter providers see no interruption to their business plans

May 18 2020
by Daniel Bizo


Introduction


A review of earnings releases at the largest US datacenter real estate investment trusts (REITs) suggests limited downside risks for the time being due to the economic shock of the ongoing coronavirus pandemic. In contrast to most other sectors, DC REITs have not withdrawn their annual revenue and profitability guidance. On balance, major datacenter REITs see steady growth ahead and maintained their capital spending plans for the year.

The 451 Take

Against a dire social and economic backdrop, datacenters offer some respite for business and investors. Running the digital services we've come to rely on even more, datacenter providers see an uptick in demand for capacity as some customers accelerate their capacity and connectivity plans in response to the systemic shock. Product vendors and datacenter services firms will benefit ultimately, but it won't come without some pain – it will only speed up the ongoing concentration of demand in the hands of the most powerful buyers. Not all are equally positioned to withstand the pressure. For the moment, however, that's probably an enviable problem to have.

Datacenter REITs trust their investment plans


National emergency lockdowns that took much of Western European economies off-line soon gave rise to the idea that digital services, and, in turn, the datacenter infrastructure that underpins them will benefit even in midst of an unprecedented peacetime crisis. Evidence has been in support of the hypothesis all along: first, it was data traffic at major internet exchanges, then Kagan's consumer surveys about changes about media consumption and shopping habits.

But the first hard evidence came with the earnings season: the world's largest semiconductor vendors reported bumper sales to datacenters. Notably, server processor vendors Intel and AMD both recorded increased demand for web services catalyzed by an already strong investment cycle at major cloud and telecommunication providers. Their outlooks spoke of no slowdown either. TSMC, the world's leading contract chip manufacturer, which counts AMD and NVIDIA as well as hyperscalers among its largest customers, backed up the narrative with record shipments of high-performance processors and graphics chips and a bullish guidance for the segment.

Multi-tenant datacenter (MTDC) services providers are a foundational component to the digital infrastructure and should benefit from an uptick in demand for online services – they offer immediately available power and space as well as rich connectivity options. At the same time, the risk of disruption to the health of their business should be marginal because their customer base is diverse, and their operations relatively easily adjusted to the emergency mode that a pandemic dictates.

A review of earnings at major US datacenter REITs (Equinix, Digital Realty Trust, CyrusOne, QTS Realty Trust, Switch, CoreSite Realty Corporation, Iron Mountain) confirms the robustness of the datacenter business. No operator reported on any disruption to facility operations or material revenue impact – against about 8500 megawatts of total IT capacity across hundreds of sites. While there indeed are some enterprise tenants that asked for deferred or reduced payments as a result of the shock of the pandemic to their respective businesses, the total effect has remained immaterial.

Equinix, the world largest datacenter REIT by revenue, said that customers asking for some concessions generate a relatively minor business. Digital Realty, the world's largest datacenter provider by capacity, estimates that about 5% of its business is exposed to sectors that are hit hard by the pandemic, such as aviation, hospitality, energy and retail – which pales in comparison to sectors with growth potential such as cloud, content and telecommunications. Arguably, the single biggest risk for some wholesale datacenter providers lies not with enterprises suffering badly in a pandemic, but the growing reliance on a handful of powerful buyers that will want to press hard for further price reductions.

The upside, for now at least, appears to outweigh any downside by a wide margin. First-quarter revenues rose across the board by about 6% Y/Y for the reviewed US datacenter REITs, even as Digital Realty's core wholesale business is under price compression. Leasing performance was also encouraging for the group, with most providers exiting the quarter with a growing backlog (signed but yet to commence contracts) exiting, supporting annual revenue growth guidance of typically between mid-single digits and low teens. QTS and CyrusOne had a particularly strong start to the year on the back of additional demand from major technology and cloud companies.

The strongest indicator of business confidence, however, is capital expenditure. The seven US datacenter REITs' capital plan calls for a total investment of $6.1bn for 2020, of which more than 90% will go toward capacity expansion, up 2.5% from 2019. No company has reported on any material changes to previously disclosed development plans as a result of COVID-19 impact, even if there will be some sporadic delays to schedules largely as a result of construction stops, and to a much lesser extent, late deliveries of equipment – the impact of the pandemic on datacenter supply chains remains muted because most large REITs have secured inventory and factory schedules at equipment makers.

Equipment makers get caught up in turbulence, outlook unclear


While datacenter chipmakers and datacenter providers saw their businesses lifted in immediate aftermath of lockdowns, the picture is a more difficult read for makers of datacenter equipment such as critical power, cooling, cabling and control systems. Both Schneider Electric and Vertiv, the world's two largest vendors of datacenter equipment, said sales in the first quarter were down Y/Y, although both vendors noted it was a difficult comparison against a strong start to 2019. Power specialist Eaton, on the other hand, said it recorded marked growth during the first quarter.

Due to changes to its reporting, Schneider, a global conglomerate of energy management and industrial automation products, does not disclose earnings specifically for datacenters, but said its pipeline for the rest of the year was on the way up. Schneider has built a strong position in medium-voltage electrical equipment such as switchgears in datacenter application and should benefit from any acceleration to cloud capacity buildout, be it hyperscale campuses or wholesale datacenters. The company also says that its manufacturing footprint was about 95% online by the end of April at varying levels of capacity, but matching demand.

Vertiv said it lost $80m due to pandemic-related disruptions during March – most of it due to supply chain issues, but also due to some cancellations or postponement of orders. Its supply chain, however, appears to have taken a bigger hit. At 60% of capacity by the start of May, Vertiv withdrew its annual guidance due to the uncertainty around how quickly it will be able to ramp up to meet deliveries. Demand has not suffered so far, and its order backlog climbed to a record $1.6bn exiting the quarter because hyperscale customer and large colocation provides placed more orders than a year ago, offsetting decline in the channel. Connectivity specialist CommScope drew a similar picture; uncertainty and decline in the business in general but doubling sales with hyperscale customers. Once again, robust business at the largest datacenter operators seems to be the clear takeaway, even when everything else remains muddied.