Data Gravity Drives Data Center Leasing

Demand for data, not remote access, is driving the ongoing growth of the leading data center service providers, as shown in the latest earnings reports from Equinix (EQIX) and Digital Realty (DLR). Both companies are considered bellwethers in the data center real estate investment trust (REIT) market.

“Work-from-home and collaboration-related use cases remain active, although less than pre-pandemic levels as enterprises shift their focus back to broader digital transformation initiatives,” said Charles J. Meyers, CEO of Equinix, during the company’s Q4/FY 2020 earnings call last week.

Those initiatives have companies looking to lease space for applications and services that can support artificial intelligence (AI) and analytics, Meyers noted during the Q&A with analysts:

“[P]eople think about not only electronic commerce and digital interaction with their customers, but … they think about data and how they're using AI to create competitive advantage…. about using Equinix as a nexus for their data, locating their data there, intersecting it with cloud services across the globe to create insights and egress those insights to the people within the business that need them.”

Data Gravity Hits the Scales

Digital Realty likewise noted the increase in data gravity — the trend toward more and more applications activated as a result of the sheer weight of data gathered by enterprises. “We recently introduced the Data Gravity Index, which measures, quantifies and forecasts the growing intensity of the enterprise data-creation life cycle and its gravitational impact on global IT infrastructure,” said Bill Stein, CEO of Digital Realty, during that company’s end-of-year conference call, also last week.

According to that index, London in the U.K. and Singapore in the Asia-Pacific region enjoy especially heavy gravitational impact when it comes to data, as shown in the image below:

Source: Data Center Realty

Equinix earnings also highlighted the importance of those particular regions in the data center/connectivity market. “APAC and EMEA were our fastest-growing revenue regions on a year-over-year normalized basis, both growing 11%, followed by the Americas region at 4%,” said Keith D. Taylor, CFO of Equinix.

Connectivity Is a Big Draw

As customers look to support more data-rich applications as well as multi-cloud networks, both Equinix and Digital Realty are seeing growth in their “fabrics” — the cross-connections among customers in existing data centers, as well as cross-customer interconnections across data centers worldwide.

“We more than doubled our cross-connect count in 2020, reflecting the growing concentration of network-dense, highly connected assets….” said Digital Realty CEO Stein. And interconnections represented about 8% of Digital Realty’s total revenue for 2020.

For Equinix, interconnection revenues comprised over 18% of recurring revenues, prompting the focus on interconnects to drive the vendor’s choice of where to build out its next facilities.

Growth in connectivity also reflects enterprise interest in secure edge and SASE networking. In the same vein, Equinix notes increased interest in its bare metal service, which CEO Meyers said allows “customers to place their digital infrastructure where they need it, when they need it.”

Key Metrics Are Up for EQIX and DLR

For the full year 2020, Equinix reported $6 billion in revenues, up 8% year-over-year, and the company predicts similar growth for 2021. Further, growth in earnings before interest, taxes, depreciation, and amortization (EBITDA) was $2.853 billion, up 12% year-over-year, and adjusted funds from operations (AFFO — a measure that accounts for spending by REITs) was $2.189 billion, up 13% year-over-year. These measures, along with significant debt restructuring, seemed to balance Equinix’s 27% reduction in net income due to acquisitions and joint ventures. At least, that shortfall remained unquestioned by any analysts on last week’s call.

Digital Realty reported total operating revenues for 2020 of $3.9 billion, up 22% from the previous year. The company is predicting revenue growth of 28% for 2021. Like its rival, Digital Realty reported a substantial (39%) reduction in net income year-over-year for 2020, though that too seemed offset by the acquisition of new business, particularly outside North America.

For both Equinix and Digital Realty, the message is the same: Data gravity is driving digital transformation among service providers and enterprises globally, and near term, that curve will only move up.