The rest of the world may be in chaos, but the internet infrastructure world has been steady and strong. And the data center provider QTS has been particularly solid, with Q3 revenues and FFO both exceeding analyst expectations. The company has been on a nearly three year winning streak with the markets, gaining revenue momentum steadily. With us today to update us on QTS’s status and future plans for the sector is Sean Baillie, Chief Marketing Officer.
TR: When I attended the QTS Analyst Day in January you outlined your go to market across Hyperscale, Government and Enterprise. With another strong quarter just announced what can you tell us about the trends in these verticals?
SB: Hyperscale continues to bring to market high scale demand. The nature of these businesses requires constant growth in their digital infrastructure so this is not a surprise. Taken as a group, which we define as companies that buy at scale and repeatedly, the demand is noticeable across nearly all of the QTS portfolio for compute, storage and network deployments of all types.
Government at the state and local level, which in our world also includes education, is digitizing at a fairly rapid pace and we have seen demand pick up as these institutions are charting and executing on their digital strategies. This includes state and local government, universities, hospitals and so on. Government at the federal level is finally acting on its long-held view that digitizing, and getting off premises, needs to happen. The requirements around space, power, security and connectivity are detailed and rigorous – you have to be committed to this part of the market if you have a chance to compete. QTS has years of investment in this area and if you’ve read our earnings announcements in recent years you’ll notice that we have done very well. I think demand will continue here for quite some time.
Enterprise is on the same digitization path no matter what vertical you might look at. What’s noticeable across medium and large enterprise is the size of the deployments that are needed to support it. A few years ago a good size deployment would have been around 500kw. Now we’re seeing 1-2MW on a not infrequent basis. Interestingly, along with this development we are seeing a parallel trend of what I call connectivity sophistication. To support large space/power requirements you must have scale at the data center level and to support this connectivity sophistication you must have density in connectivity options of all types that are available in building.
TR: Can you give me some more detail on enterprise connectivity sophistication?
SB: I’ll do that by way of two examples of conversations I have had with prospects. The first was with a large financial services firm. This call was an introduction between the companies but we quickly got on to the subject of connectivity in various forms. These folks had very clear views on what they needed relative to IP access, cloud access, internet exchanges by market, subsea access by market, content distribution networks by region. They knew where the ingress/egress points to all of these networks resided and how they wanted to connect with them. Enterprises have a good handle on their connectivity needs in general but this level of detailed knowledge and strategy was interesting and not something I’ve seen on a regular basis. It just so happens that their strategy and ours matches up very well and it may be that we end up doing some interesting things together.
The second conversation was with a large retailer looking at a colocation/cloud, or Hybrid Colocation, model. We had a pointed conversation about cloud access options both now and in the future. Their main concerns were specific fiber paths, buildings involved to get to the cloud and latency. We walked through the details of each including a look ahead where one of the clouds they were interested in would be accessible without routing through a carrier hotel and that interested them as it will reduce route complexity, latency and dependence on a building they otherwise had no interest in.
TR: It makes sense that as power and space requirements grow, so too would knowing exactly how the connectivity is structured. Is this ultimately about customer experience?
SB: Customer experience is an important factor but not the only one. There are also elements of taking out complexity, risk and cost. For example, if you understand how internet networks are currently constructed you know that the on/off ramps are in a limited number of locations for most of those networks. With the enterprise demand starting to show large space and power requirements those networks are in the wrong buildings. Meaning there isn’t enough space and power in the on/off ramp locations to handle your core colocation requirements. Which puts you in a position of having to pay for some way to get to them. And with space, power and bandwidth demands rising together this adds a significant amount of complexity and cost to your overall project. QTS is doing a lot of work in this area with the network players to deploy in the same building where the growing enterprise deployment will be. We have had good success and will be staying on this for years to come. Networks need to spread out and the enterprise trend will help push this along.
TR: You mentioned subsea access earlier. Does that subject come up often?
SB: More and more from three different perspectives. The first is from the carrier wholesale community. An example would be a carrier trying to sell access across its network with an extension provided by a subsea carrier to complete the entire route needed by the end user. The second is from the Hyperscale community as they are buying, and now deploying their own, subsea capacity. They are interested in neutral, carrier friendly locations to add, drop and distribute traffic riding on those cables. The third is from the enterprise and government verticals which need to reach their customers and partners around the world. QTS has launched four Network Access Points (Hillsboro, Piscataway, Richmond and Eemshaven, Netherlands) specifically because we have dense domestic network options married to subsea cables close to our facilities. These are natural homes for IP and transport traffic to be exchanged on a global basis and are attractive to colocation customers who need a global presence.
TR: Are the digitization trends you mentioned in this discussion a result of COVID-19?
SB: The trends were there before COVID-19 but I think they have accelerated as a result. Digitization and consumption of digital services has been rising for a while now but with most of us staying home the pace of both has increased. Businesses and governments can see this as well and are ramping to meet the demand. This is unlikely to change once COVID-19 is under control as we will have gotten used to it. We have a unique perspective because the data center is at the center of all of it. We can see this through the lens of space, power and bandwidth consumption. We’re fascinated by the pace and growth of it all and excited about the role we are playing for our large customer base.
TR: Thank you for talking with Telecom Ramblings!
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