The OCOLO team is back today with a summary of the Big Picture Takeaways that Michael Elias and his Communications Infrastructure team at TD Securities Equity Research shared following their 10th Annual Communications Infrastructure Summit in Boulder, Colorado last week.
The Big Picture
#1 Hyperscale Data Center demand remains very strong
…And will likely accelerate in 2H24, driving further supply shortages and continued data center price increases
#2 Robust demand is forcing Enterprises to change pre-leasing behavior.
As hyperscalers have aggressively accelerated their pre-leasing schedules to 24-36 months in advance, creating tight overall center demand and crowding enterprises out of the market, they’ve had to push their own pre-leasing data capacity to 6-12 months in advance of facility delivery vs. the prior 3 months.
#3 Regarding Towers, conference presentations and discussions indicated “green shoots” for US carrier activity
…With private tower operators indicating expectations for higher activity levels in 2025 vs. 2024… though there was less clarity re: timing and magnitude of the increase.
#4 On Fiber, Lumen Technologies’s $5B GenAI fiber deals were the talk of the conference.
The research team’s take was that “these deals aren’t for everybody in that they provide high upfront-non-recurring fees (with high upfront capex), but low revenue/EBITDA in the outer years.” The team also pointed out that the remote Training Data Center locations could augur lease-up rate challenges for Lumen Technologies. However, they view the solution to Lumen Technologies’s liquidity challenge and its expansive, untapped rail-road conduit as good reasons for the deals.
#5 In Fiber to the Home (FFTH), the team’s view is that “convergence is a race to the bottom, but if one player is going in with a slight advantage (@AT&T), the others must reluctantly follow.”
So, they’re predicting T-Mobile fiber roll-ups and regional roll-ups in the mid-term and larger carrier roll-ups down the road.
Company-Specific Insights
Some points covering companies made in their presentations to support the team’s Big Picture Takeaways include:
American Tower – Management’s points about an uptick in 2H carrier activity vs. 2H23 and healthy, broad-based activity from customers, reinforced the research team’s already positive outlook. American Tower also has US handset market penetration of “a little over 50,” according to management. With continued amendment activity and growth in 5G handset penetration driving increased network traffic, American Tower is well positioned.
Management reiterated increased application volume in its Services business, which was up ~70% sequentially in 1Q24 and up again in 2Q24 vs. 1Q. Management commentary suggests the company is “tracking toward the low end of its $180-190M range” of 2024 revenue guidance.
One positive update was a 4-6 window to close on its recent India towers sale, ahead of the October 1st target date.
Cogent Communications – The research team’s view remains unchanged at long-term bullish, specifically regarding the company’s Waves business. Despite a slow start, management outlined a detailed road map to a meaningful ramp in Waves beginning in early 2025, with GenAI demand providing an additional boost. The team estimates Waves could reach a $500MM revenue run rate by May 2028 – a high margin opportunity it sees as underappreciated. Cogent Communications is also sitting on 100MW of data center power surplus that it could monetize at $10M/MW or lease at $1M/MW per year as a triple net lease. In addition, Cogent Communications has an opportunity to monetize its IPv4 addresses by leasing them at a higher rate, securitizing incremental leased revenue or selling excess inventory. On September 1, it will raise monthly address price for 25% of the install base to $0.51 from $0.29 on average and assess impact on churn before taking next steps. According to the report, these opportunities “will assuage balance sheet pressure and drive near-term equity value accretion.”
Equinix – Record gross bookings in 2Q24 and record demand pipeline suggest greater confidence on the part of enterprises in terms of outlook. Management is now seeing enterprises pre-lease capacity 6-9 months in advance of facility vs. 3 months prior, which increases both backlog and book-to-bill.
Lumen Technologies – The large Microsoft hyperscale deals with multi-billion dollar contract value solved Lumen Technologies’s challenged liquidity position, but the team does not think the opportunity will move the revenue needle for a $15B company, and worries about the long-term TAM
Uniti Fiber – Here, the team feels “the GenAI fiber frenzy is indeed large enough to move the needle.” Management shared that the hyperscale funnel increased from ~12 projects last June to ~90 today, with “substantially better” new build anchor yields than the historical rates of 5-10%.
Vertiv – The team came away “incrementally positive” after hearing management’s commentary that demand remains strong, in line with commentary they’ve heard from private hyperscale-oriented data center operators. Management pointed to a higher current pipeline than at the beginning of 2024, making the team wonder if 3Q24 order guidance was in fact conservative.
Again, many thanks to the TD Securities Equity Research Communications Infrastructure team – Michael Elias, Gregory Williams, CFA, Anton Rinnert and Cooper Belanger – for hosting OCOLO‘s CEO, Tony Rossabi, at the event, and for sharing such detailed and comprehensive insights with the rest of us!
