QTS Realty Trust, Inc. (QTS)

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QTS Realty Trust Inc. (QTS)

Goldman Sachs 2017 Communacopia Conference Call

September 13, 2017 2:55 AM ET


Jeff Berson – Chief Financial Officer


Jiorden Sanchez – Goldman Sachs


Jiorden Sanchez

Okay. So hello, everyone. I’m Jiorden Sanchez, lead analyst of data centers here at Goldman Sachs. In this session, we’re excited to have QTS. Jeff Berson, CFO, is here with us. Thanks for joining us.

Jeff Berson

Thanks, Jiorden. Appreciate being here.

Jiorden Sanchez

I thought, maybe, we can just start high-level supply demand. Let’s talk about demand backdrop. We’ve been in a few years here of robust leasing activity. Maybe you could just provide a quick update? And it would be helpful, maybe on terms of two different verticals, broadly, right, like the cloud and enterprise. What are you seeing there in terms of demand?

Jeff Berson

Okay, great. So first, Jiorden, I’m going to thank you for remembering that there are two drivers of growth in the industry, because hyperscale and cloud is exciting, and I’ll talk about that in a second, but it is important to remember that’s only one of the two key aspects that have been driving the data center business overall. And those core enterprise customers, right. If you think about hyperscale users, you’re talking about maybe 15 to 20 companies in aggregate. There’s a lot of other companies in the U.S. that have massive data and compute needs that are working with data centers that has been growing and driving growth in our business from long before when hyperscale became something we’ve been paying attention to for the last couple of years.

So over the last seven, eight years, this business has grown from enterprise users. And over the next seven to eight, we’ll continue to grow from that. And so that is a driver of opportunity and growth in the business that, I think, to some extent recently, because it’s really exciting to talk about a 10 or 15 megawatt hyperscale cloud deal, those other deals that are driving diversification in the business, that are driving high returns in the business and continuing to grow is still a very important aspect of the overall trends in the data center sector, in general, and very specifically at QTS.

What those customers are looking for though, is something very, very different than what your traditional hyperscale or cloud companies are looking for, and I’ll cover that in a second. But on the enterprise side, these enterprise users are going through a massive inflection point today, and their worlds have changed drastically, really, over the last couple of years. And it’s because the advent of cloud as an option in their IT stack that is driving a decision tree in a conversation for these enterprise users that, again, is much more complex.

So two, three years ago, if you were an enterprise user, whether you’re one of the largest accounting firms in the world, which is currently a client of QTS’, whether you’re one of the largest global banks in the world, not Goldman Sachs, although we’d love it if you’ve got some availability with us now, any of these users, and some of the midsize enterprises as well. Historically, their decision was pretty simple. I’ve got my servers and my IT stack. Do I want to do it in-house? Or do I want to outsource?

Over the last couple of years, that conversation has shifted to, hey, there’s this public cloud option. I should be outsourcing more. There are efficiencies, but what applications do I want on a public cloud? And do I have some applications that I want in a cloud-scalable environment, but I want it on a private cloud, either dedicated servers or highly customized for my needs. And I have some other applications that I want to keep in my own servers and keep control over. And how do I integrate all of that? And how do I integrate that with the flexibility that as my IT stack changes over time and my application modes change over time, I can move between colo and public cloud and private cloud, and how do I overlay onto all of that what I think we’re all aware of as increasing sensitivity, which is a focus on security and compliance and managing all this?

That’s an enormously different decision for these enterprise users than just, should I insource or outsource my servers? And that’s what these enterprise users are going through today. QTS has a very unique approach to the way we’ve driven this business, which is an integrated service platform where we can sell large space and power through what we call C1 customize data centers. We can sell smaller, scalable, retail colo space and power. But increasingly, importantly, we also have the C3 cloud and managed service stack, which we can layer on top of space and power to offer customers, in addition to their servers, smart hand, smart eyes, IT support, private cloud capabilities, access to a backdoor directly to the public cloud companies, public cloud application management within AWS and others and a focus on overlaying on to all of that a security and compliance dedication that we think is very different than what most in our industry are doing.

So that’s a long-winded way of saying what the market has very efficiently summed up into one word, which is the new hot word you’re going to hear in data centers, which is hybrid. It’s not cloud because what everyone is recognizing, including the public cloud companies, is the whole world can’t go to public cloud, and it’s not all going to stay in colo, it’s going to need a hybrid solution. That’s what QTS has built. It’s what is differentiating our business. It’s why I love mentioning that this enterprise growth is still out there because we are very much doing, in our opinion, all of the right things to meet that need and drive that business. So that’s one aspect of growth drivers and one area in the market that’s driving that.

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