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Leased datacenter majors raise capital plans amid peaking IT deployments

August 19 2020
by Daniel Bizo


Introduction


While some major sectors of the global economy are still in shock in the aftermath of the first set of pandemic lockdowns, datacenter infrastructure continues to do well and not only in relative terms. The IT supercycle that has already been under way since the second half of 2019 extended its run in the second quarter, further boosted by the sudden shift to even more online work, commerce and entertainment. While it's likely that we are seeing the peak of the current IT investment, the sustained high levels of datacenter leasing have triggered widespread guidance upgrades and expansion of capital plans at multi-tenant datacenter majors. Makers of datacenter facility equipment were probably the hardest hit within the datacenter sector due to a combination of supply chain disruption and order deferrals, but a strong backlog of orders make the outlook optimistic.

The 451 Take

First quarter results and commentary by major datacenter operators and their suppliers was encouraging during a pandemic with otherwise dire economic and social costs. The takeaway from the second quarter earnings is that the datacenter sector indeed is not only resilient against a pandemic in full force but will, on balance, benefit from it as all kind of digital services, ranging from enterprise technology services to online shopping and entertainment, prevail amid a new environment of lower mobility of people and shifts in consumer and business spending. This momentum will likely sustain a buoyant datacenter sector through the end of 2020, but beyond that visibility remains limited with COVID-19 keeping the business environment volatile.

Semiconductor shipments to datacenters at all-time high


Taking exception to generally gloomy world events, a continued flow of positive earnings results has built confidence in the datacenter sector. The immediate fallout from the economic shock disproportionately hit some verticals, with the top five being air travel, casinos and gaming, leisure, automotive and oil and gas, according to S&P Global Market Intelligence, yet the total exposure these verticals carry into the leased datacenter sector appear to be limited to the 5-10% range and realized revenue losses have been below noise floor so far. On the other hand, the pandemic acted as catalyst to infrastructure rollouts across a wide cross-section of organizations from cloud infrastructure and web services to communications providers to enterprises adjusting their IT footprint in response to more remote working and e-commerce, as well as the urgency of finding new cost efficiencies via IT transformation projects.

The picture drawn by second quarter earnings is robust, with strong demand signals at various key points of the value chain: chips, multi-tenant datacenters and facility equipment. Bumper semiconductor sales, leading indicators for the subsequent few months, continued in the second quarter. Overshadowed by negative news about yet another delay to its manufacturing technology roadmap, the world's largest maker of processors, Intel, recorded its best second quarter in datacenters with a 43% jump in datacenter product sales on the back of strength in cloud, telecom and enterprises. Intel's main rival AMD, too, shipped a record number of server processors, driven largely by demand from major web and technology companies. Combined 12-month datacenter sales from Intel and AMD, covering virtually all server shipments, are at an all-time high, with a record growth of 28% compared with the previous period, 451 Research estimates. This strength is echoed by the largest makers of memory chips, Samsung Electronics, SK Hynix and Micron, which cite robust demand for server DRAM and flash products, largely offsetting weakness in smartphones, automotive and other end markets. The world's largest contract chipmaker, TSMC, further confirmed the broader trend toward more compute (and computers) as orders for high-performance chips such as server and PC processors, graphics units and accelerators, grew by 12% over an already strong first quarter while all other segments posted declines.

Datacenters are filling up quickly, triggering more developments


A prolonged run of record-high shipments of semiconductors for datacenter applications (and client applications that stimulate demand for more online services capacity) means that IT systems have been filling up datacenters faster than expected. Indeed, earnings at major datacenter real-estate investment trusts (REITs) confirm this picture. Second-quarter revenues at the six publicly traded US datacenter REITs climbed by over 4.3% compared with the second quarter of 2019 even as utility rates (passed on to customers' bills) stayed below forecast levels, and Digital Realty, the largest global datacenter landlord by capacity, fought pricing pressure from major tenants in its leasing renewals.

Even more telling is the high leasing performance during the worst of the first wave of the pandemic. Wholesale-focused Digital Realty booked mostly large deals with a record annualized rent value of $143.8m, bringing its annualized backlog value to $251m. Interconnect-heavy retail operator Equinix, the world's largest leased datacenter services provider by revenue, also reported on strong bookings, third highest in its history, across all geographies and key verticals, and the best-ever in the Americas, even as the epidemic accelerated in the region. US-heavy QTS confirmed strength in demand for digital services with a record backlog at $111m that's largely driven by IT and media companies, triggering previously unplanned expansions for 2020. QTS raised its capital plan $50-150m accordingly, and so did CyrusOne, too, largely on the back of strong bookings by cloud and technology tenants.

Yet it is not all upbeat for everyone in the datacenter sector. Suppliers of datacenter facilities equipment continued to feel some pain through the second quarter of 2020. COVID-19 appears to have caused material disruption both to supply chains and rescheduling of customer orders starting with the first quarter of the year, and while the supply chain seems to be running at near capacity by now, sales suffered again. Vertiv, the world's largest stand-alone datacenter equipment maker, reported organic decline of 8.8% compounded by unfavorable foreign exchange rates, although some of the decline was against some large projects a year before. Main rival Schneider Electric also commented on resilient but still softer datacenter sector, even though attributing that largely to a high base in the first half of 2019, pumped by some large deliveries.

Softness in sales, however, appears to be temporary as new orders kept flowing, offsetting any cancellations. So much so that Vertiv reported to have built up a record backlog to the tune of $1.8bn, which is nearly two quarters' worth of revenue. Schneider, too, expects recovery in the second half of the year as cloud, colocation and networks offsets a weak enterprise datacenter environment, a rebalancing that vendors will find familiar from recent years already, exacerbated only by the current crisis. This sentiment was echoed by other major vendors such as ABB and Eaton citing robust orders from datacenter operators as they expand and add new capacity.

Even if suppliers of power, cooling and other equipment were among the first to receive some blows as the global economy slowed down dramatically, they will ultimately see growth in demand for datacenter capacity flow through their businesses too – only a couple of quarters later.