Headwinds Yet To Hit Data Centers, Q3 Reports Show
Third-quarter earning reports for most of the major data center players are in the books, and industry insiders like what they see.
On a macro level, the third-quarter results paint a picture of continued growth across the board, with hyperscale cloud providers seeing particularly strong revenues as accelerated digital transformation continues to drive demand from hyperscale to regional colocation.
“You have continued expansion from the biggest cloud providers, who all had great results, and the REITs that have released earning so far have been solid,” said Kevin Imboden, director of the Data Center Advisory Group at Cushman & Wakefield. “It’s all positives to me.”
Amazon led the charge in a cloud services market that has grown by more than 30% over the past year. While spending on colocation has increased more modestly, data center REITS and other colocation providers reported a strong quarter that saw hyperscalers increase their share of colocation leases.
While concerns about chip shortages, supply chains, increasing power costs and other inflationary pressures hang threateningly in the future, data center providers have yet to feel the impact, and insist they are well-positioned to withstand these forces going forward.
“A lot of folks have been asking whether hyperscale is going to slow down at any point soon,” Imboden said. “But it doesn’t look like it at all, and I see no indication that it will.”
From the rising tide of cloud spending lifting all ships to signs that a new data center REIT is about to go private, here are three takeaways from data center Q3 earnings.
Cloud Providers Continue Massive Growth, From Top To Bottom
The market for cloud services shows no signs of slowing down.
Industrywide revenues from cloud infrastructure services increased 37% from the third quarter last year, surpassing $45B, according to an analysis by Synergy research group. The three largest cloud providers — AWS, Microsoft and Google — grew faster than the market as a whole, further consolidating their combined market share at around 60%, according to separate analyses by Synergy and Canalys.
The third-quarter numbers from AWS were particularly striking, analysts say. Amazon’s cloud division achieved its highest growth rate in 10 quarters, despite the company more than doubling in size over that period. Amazon now controls around a third of the cloud services market, according to Synergy, well ahead of rivals Microsoft and Google, with market shares around 20% and 10%, respectively.
Yet even as the big three providers snap up a greater share of cloud spending, analysts say there are no signs that smaller operators are being pushed out. The rest of the market — led by companies like Alibaba, IBM and Salesforce — grew 27% from the third quarter of last year, with around $17B in quarterly earnings, according to Synergy.
“By any standards a $17B market growing at such a rate is an attractive proposition for many service providers and their suppliers,” Synergy Research Group Chief Analyst John Dinsdale said. “Clearly there are challenges with the big three companies lurking in the background, so the name of the game is not competing with them head-on. Providing companies are smart about targeting the right applications and customer groups, cloud can provide a broad and exciting range of growth opportunities for them.”
Colocation Continues To Grow, As Hyperscalers Increase Share Of Leased Space
While their revenue figures weren’t as eye-catching as the major cloud services providers, data center REITs and the colocation market continued to exhibit solid growth.
Although a handful of public colocation providers have yet to report quarterly results, the worldwide colocation market grew around 10% year-on-year, with quarterly total revenue coming in around $11.5B, according to estimates provided by Synergy Research Group. And while more than one of the colocation REITs reported lower-than-expected revenue, the quarterly results raised few alarm bells among analysts.
“Maybe some of them missed a little here and there, but overall, it’s not like they’re taking losses,” Cushman & Wakefield's Imboden said. “This is what we expected — that leasing would continue to be strong, we’d have strong expansion and we’re still trending in the right direction.”
REITs Equinix and Digital Realty — the two largest colocation providers that together control around 20% of the global market, by most estimates — both beat expectations for third-quarter earnings. Iron Mountain also reported earnings that exceeded estimates, with revenue from the company’s data center unit growing by 22%. Denver-based CoreSite saw stagnant earnings, with revenue down 2% from the previous quarter. Switch and Cyxtera will report third-quarter earnings in the coming weeks.
While these revenue figures come as little surprise to industry insiders, analysts say the insight into the source of those earnings has helped quantify a fundamental shift in the colocation market: the rapid growth of hyperscale operators as a customer base for colocation companies.
According to Synergy's Dinsdale, while the overall colocation market will grow by 10% this year, revenues generated by hyperscale operators leasing whole data centers or large suites of space will grow by almost 25%.
These numbers reflect the same forces driving the cloud market, as companies increasingly outsource their IT infrastructure to managed service providers instead of hosting their own equipment at a colocation facility.
CyrusOne Sends Signs They May Sell
CyrusOne’s earnings call did little to tamp down speculation that the data center REIT is looking for a buyer to take the company private.
The Dallas-based colocation provider posted earnings that continued a bounce back year for the company, with revenues up 16% year-over-year and net income in the black after a net loss of more than $37M a year ago. But much of the conversation surrounding the company’s investor call last week focused on what some analysts saw as confirmation of reports that the company is close to being sold. Executives on the earnings call would not directly refute these rumors.
“We are open-minded to all avenues and alternatives to maximizing our shareholder value,” interim CEO David Ferman told analysts.
The reports of a potential sale come after a tumultuous two years for CyrusOne. In July, CEO Bruce Duncan stepped down after just one year on the job and was replaced on an interim basis by Ferdman, one of the company’s co-founders. This was just the most recent turnover at the top for CyrusOne, which has seen four different people in the CEO’s office since the start of 2020.
Amid this instability, CyrusOne has struggled to match the investor performance of other data center REITs, posting shareholder returns that fell well behind competitors and the market at large. Under pressure from investors, CyrusOne has begun working with Morgan Stanley to help chart a new strategic direction, Reuterss reported in September. Morgan Stanley advised QTS ahead of the $10B deal that saw the REIT taken private by private equity firm Blackstone.
During last week’s call with analysts, executives further inflamed rumors of a sale by providing few details about the search for a new CEO. This led some analysts to openly speculate that leadership is instead focused solely on securing a deal to take the company private.
According to Cushman & Wakefield’s Imboden, the volume of capital flowing into data centers and digital infrastructure means that this kind of deal should be on the table for any company in the data center space.
“There’s so much capital that’s trying to get in that can’t get in, that doesn’t know where to get in and that doesn’t want to take on development risk,” he told Bisnow. “There’s a lot of companies willing to pay 20 or 30 times revenue, so anyone’s in play now as far as I’m concerned.”
Switch Will Convert To REIT
Switch Inc. announced during its Q3 results that the company will convert to a Real Estate Investment Trust.
The company’s board voted unanimously to convert to a REIT, with the goal of completing the transition by the the beginning of 2023, according to Switch President Thomas Morton. Switch would become one of just five data center-specific REITS, although a number of other similarly structured companies have data centers in their portfolios.
“We believe that converting at this time is something that will drive shareholder value,” Morton told analysts Friday. “The board has met with a variety of external advisors as well as our internal team, and they believe that the change is going to be favorable for shareholder value and will not have any sort of negative impact on our ability to operate and reach our growth initiatives.”
Switch first signaled in August that the company was considering such a transition in the near term future. Friday’s announcement comes amidst a less-than-ideal quarter for the company, which posted a net loss of almost $1M and fell short of revenue targets despite revenue growing by more than 20% year-over-year.
