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As Data Center REITs Report Q2 Results, Strategy and Relationships Trump One-Off Wins

DCK Investor Edge: In a market driven by a small group of hyperscale clients, it's all about who you know

Data center earnings season for the quarter ended June 30 begins today with reports by Digital Realty, CoreSite, and QTS Realty.

Summer months can be slow on Wall Street, with many traders and investment bankers on holiday with their families. However, Q2 earnings are still both early and late enough in the year to impact full-year 2018 guidance.

In my view, 2018 guidance updates are more important than quarterly results. It’s become clear that about a dozen public cloud and SaaS providers, social media, and content firms are driving the majority of spend when it comes to data centers. This makes relationships with hyperscale data center users crucial for the biggest data center providers in growing market share.

Drawn and Quartered

Wall Street analysts slice and dice quarterly results down to the penny a share (much like the convicted were drawn and quartered in medieval times).

Most quarterly earnings results are a mixed bag of news, ranging from bad to good.

The Holy Grail report for a REIT is a combination of an earnings beat (FFO/AFFO per share), a higher full-year guidance, and a meaningful increase in dividend distribution.

Novice investors will look at Q2 2018 bookings (lease signings) in abstract – good or bad. More experienced investors will pay attention to the sales funnel and deal pipeline, with the knowledge that bookings in any one quarter can be lumpy.

Digital Realty C-Suite Departures

All eyes will be on Digital Realty this quarter due to the surprise announcement in May of the departure of senior VP global sales and marketing Dan Papes and of the long-time executive and co-founder Scott Petersen. Petersen departed after an almost 14-year tenure.

Papes, a seasoned former IBM exec, recently completed a reorganization of Digital’s global salesforce. He’s been with the company for less than two years.

Several other high-profile executives left Digital over the past few years, including Andrew Schaap, now CEO of Aligned Energy; Jarrett Appleby, a former Equinix executive who accepted a position with Blackstone; and Jim Smith, who after a little over a year leading site selection and network acquisition at Microsoft, joined Digital’s biggest rival Equinix.

CEO Bill Stein and CFO Andy Power continue to provide stability at Digital. Stein recently signed on for another three years at the helm.

Musical Chairs

In an industry where relationships matter, Digital Realty is not alone when it comes to the musical chairs of key executives:

  • Steve Smith, former CEO Of Equinix, is now managing director at the private equity firm GI Partners, according to his LinkedIn profile.
  • Former EdgeConneX executive Clint Heiden is now focused on growing colocation revenues for QTS Realty.
  • Vantage Data Centers hired Lee Kestler to spearhead sales and marketing. Kestler had previously been a key sales exec for the former wholesale data center firm DuPont Fabros Technology (now part of Digital Realty after last year's merger).
  • Former Vantage and Digital Realty sales and marketing executive Joe Goldsmith is now leading the team at RagingWire, the Americas wholesale data center portfolio company for NTT Communications.
  • Brian Dorinco, another former DuPont Fabros sales and marketing executive, who also spent almost a decade in that role with Digital Realty is now part of the sales team at CyrusOne.
  • Equinix announced in May that Jim Smith will be a key part of the new hyperscale data center development initiative known as HIT.
  • Former CEO of CoreSite Realty, Tom Ray, is now spearheading EdgeCore, a North America wholesale data center developer.
  • Former co-founder of DuPont Fabros, Hossein Fateh, is leading CloudHQ, a super-wholesale data center developer in Northern Virginia.

While not a complete list, it illustrates how a small group of sales and marketing execs are sought-after because of the customer relationships they have.

Investor Edge

During the Q2 2018 earnings calls investors should listen carefully to determine if management teams are part of the planning process for global hyperscale players versus announcing transactional or one-off deals.  

Additionally, concrete evidence of executing on a defined business model trumps being "drawn and quartered" by Wall Street during any 90-day period.

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