HITT – Data Center Market Insights and Opportunities for Partners

Please welcome Chad Muckenfuss, our VP of cloud, and Mike Kowalski, solution architect for data center and cloud. Chad, Mike, thank you so much for being on the call with us today. I’m gonna go ahead and pass it on to you. The floor is yours.

Thanks, Cassandra. I appreciate being on the, hit call again today. And, with me, again, is Mike Kawalski. Appreciate him being a part of this conversation today. This is gonna be more of a a look at where things are at currently in the data center space and rely heavily on Mike’s experience here heading up our data center practice from the technical side of things. So we’re gonna jump in. Mike, any thoughts to kick things off here?

No. This is a well timed conversation. It is very hot in the market right now. I think we’ll give them some insight on the best way to attack this particular vertical. So, yeah, I’m just excited to be here and and have this conversation.

Yeah. So we’ll we’ll jump right in. I wanted to go to the next slide here, and we’ll look at some facts and figures that that I pulled together here. AI driven demand is reshaping the global data center landscape.

And one of the things that I touched on on the last call that we did, offer the hit series was the overall size and scope specifically of data centers on a global scale. One of the key factors is is that the US leads that overall data center growth substantially on the world stage. So the US has over four thousand data centers, and the next closest is China with under a thousand. So there’s a pretty dramatic jump from where we are here in the United States, and I’ll roll in Canada too.

So let’s include it as North America. And these stats really kinda show where AI is pushing the data center space. So a fifty nine percent CapEx growth year over year in data center capital expenditure. That means they’re spending money on building the data centers themselves, outfitting them, power, hardware, all that type of stuff, and that growth is substantial as we can see.

And what we’re trying to do today is help all of our partners regardless of the size and and scope of customers that you deal with, be able to leverage this, to make make some opportunities come to fruition for you. So twenty eight percent of the AI market share, the that data center market is is gonna be twenty twenty seven. So next year, that that is going to take twenty eight percent of the overall data center market share is going to be AI by the end of next year. A hundred gigawatts in new capacity is going to happen on a global scale between this year and twenty thirty.

So the next three and a half years, there’s an additional hundred gigawatts coming in. And then the last thing is sixty nine percent of ERCOT load request. So this is data center specifically in Texas. There’s a huge boom of data centers in Texas, not only because of space, but also Texas operates independent of the national grid.

And ERCOT is is the oversight for that specifically in Texas. So, again, just just looking at the size and scope of where the data center marketplace sits right now on a very large scale.

And a couple of things that that have happened over the past week that I wanted to bring to light as well as we kick off this conversation here. So the next slide, is gonna show us a couple of different things. So the the FERC, which is the Federal Energy Regulatory Commission, FERC, is reshaping how the grid access happens, again, outside of Texas. So this is the other forty nine states that are tied into the electrical grid on a national scale.

So as of last week, the FERC issued a draft that all of the companies that manage the national grid are requiring six regional grid operators to defend and or reform their interconnection frameworks. And what this means, taking it out of a technical side of things, is that the federal government has always pushed this down to the states to manage, the connectivity and the grid access and all that type of thing. But now the federal government is beginning to step in a little bit and requiring these six companies that manage the national grid to give a reason why they can’t provide or why it’s taking so long to provide access to the federal grid or to the national grid for these data centers.

It is something that is important. It’s something that we need to watch. Again, this is something that the federal government is stepping into that they never have before. So the sixty day clock is grid operate operators and transmission owners must respond to the federal government with their five key reform areas.

The federal government can then review those, and then kick back whether they agree or disagree and force those grid operators to adjust that on an as needed basis. They are looking for transparent procedures is what this request is. So they must create clear standardized process for connecting large electricity users. This isn’t just data centers, but this is manufacturing.

Anybody that uses a large chunk of the power generated on the national grid has to be able to, have a process that can be followed and not be delayed for any other reason that’s outlined in these in these overall standards. And then the cost allocation reform. So FERC is pushing for fairer frameworks on how, upgrade costs are assigned to the new large load companies that are looking to tie into the national grid. These are all key things, that are happening, and they’re happening probably outside of the purview of a lot of you, but this has a major effect.

And we’re gonna see here as we jump to the next slide what is happening and what the delays are here.

So most of us are aware. I I’ve mentioned it. I know it’s it gets mentioned a lot on a lot of our trainings and calls and all that kind of stuff. The the compute demand, it has gone completely vertical.

So we we had that what we call a hockey stick that has jumped up. So you’ve got memory, you’ve got hardware, you’ve got storage. All of that has has now been sucked up by AI companies, and the lead time to purchase this hardware has has drawn out the ability for companies within AI and outside of AI to make hardware upgrades. What we don’t see a lot of times mentioned is the real constraint underneath all of this is transformers and step up transformers that are needed to provide energy to all of these data centers.

There’s a two and a half to three year wait for these products that have nothing to do with compute, have nothing to do with AI. This is all on the electrical grid system that’s taking this long to, you know, to to really bring this equipment in, whether it’s from overseas, whether it’s manufactured here. So these are key things that are impacting the data center market on a day by day basis. These are two key things that came out just in the last week, and we wanted to make you, aware of what’s happening here.

So, again, as we as we kinda jump into the conversation now, as Mike and I look at where the marketplace is, I’m gonna kick it over to Mike. I’ve done enough talking. And really kinda get an outline of where this is at, how this is affecting, and what it means for you as the partners to be able to go into the market now and sell and talk about data centers and private cloud. So, Mike, why don’t you talk us through where things are at?

Yeah. Back in the day, I’d even say six or eight months ago, maybe maybe even shorter than that, you could go out and you could almost shop for any capacity out in the marketplace. It really became a not who has the power, it’s where do you wanna be, and who has who has the, the right, facilities to support the requirements. Now with everything that’s gone, all of that is just evaporated from the marketplace.

And everything that you just said is is a lot of high end information that the data center developers are having to work with on a daily basis. So, really, the the easy path forward for this is there’s a a tremendous amount of planning that goes into bringing these powers to market. There’s really long timelines that are required to bring the power online once the building is established, and then presale of that power is starting almost immediately. So these data centers are still looking for those anchor tenants.

They’re looking to presale with a letter of intent from the from the client, and, it really just comes down to the big overarching word of planning. You have to plan in this market. You just can’t go out now and get ten megawatts and expect to move in in ninety days. It’s just not possible.

So this really comes down to working strategically with those data center customers that you have. Maybe they’re thinking about moving into the AI platform, and they’re going to need all of these resources. You need to work with them in a in a manner that allows them to set the expectations appropriately, make sure that they plan accordingly, and then when they finally get their their the requirements together, allow us to shop that out. We do know where big pieces of power are coming online.

Let’s go and start researching those so that we can get them in line appropriately again and be able to take down that power. We had a facility that was coming online q three of twenty twenty six. That’s where we are right now. They were coming online with thirty eight megawatts.

That presold in q one. So they I think they’re down to just their last few hundred kilowatts available on this facility. That’s how fast this capacity is being taken down. So it’s it’s a wonderful market to be in.

Everybody is now familiar with what data center is. You may not be so familiar with what it does or how to sell it. I can certainly help in that aspect. I’ve been giving a lot of courses lately with my TAs on just how to approach the data center market.

But, really, when you start having these conversations and people start talking about megawatts of capacity, we are dedicating resources internally for Telarus right now to consistently get updates of where this capacity resides currently or where it’s coming online.

But as soon as I said that statement, it’s out of date. Yep. I had a I had an opportunity for five megawatts last weekend. Last week, excuse me, I found the capacity, and the supplier said, we have five other letters of intent to purchase this capacity.

But here’s what they’re doing that’s a little bit different. They’re not just selling it. They’re looking at the customer. They’re looking at the use case that the customer is going to be presenting in the data center, whether it’s GPU based, which would be perhaps AI based.

What what does the power density look like of the cabinets?

So they’re looking for the right type of fit so that they don’t overextend themselves just in case there is a bubble. I’m not saying there’s a bubble. This is going to go on for the foreseeable future, but they don’t want an an a mass amount of startups taking down, you know, six figures a month of power and then have them not succeed. So couple other qualifying things that are happening with this power is you you will get perhaps a credit check application.

You will get, very specific requests of what they’re going to be using, how they’re going to be using it, and then they go and they review it. Again, it’s a little bit extra during this time, but we can certainly help walk your client through that, make it feel like we’ve done it before because we have done significant business in this space in the last six months, and make it easy for them to locate what they’re looking for and then to move in successfully.

So I think that’s a great overview, Mike, and I appreciate that for the multi megawatt opportunities and where things are headed with that. But, you know, a couple of the comments here specifically, Sharif, like, well, where do where do we make money as partners? Where do the partners really focus that is available in this space and ready to go right now? And I think what what we miss a lot of times is those big multi megawatt deals are flashy.

They’ve got great names associated with them, whether it’s OpenAI or Anthropic or Llama or whomever is out there scooping all this up. But the the reality is there’s plenty of SMB and mid market customers that are still looking for a half cabinet, a single cabinet. I had an opportunity that I worked about ten days ago specifically for a five cabinet opportunity through Equinix. And, you know, they needed to be in a specific area in and around the DC space, and there’s plenty of space and power to fulfill those needs in the SMB and mid market.

And one of the key things that I see happening time and time again is that people are scared about the data center space because they hear, oh, there’s no space. There’s no power. But on the flip side of that, in having conversations with Digital Realty and Equinix and Flexential and and all all of the providers in our portfolio is there is space and power available for the primary users in that SMB and mid market space. And that, I think, is where we can rely on the Telarus SE team.

You, Mike, specifically, being able to filter through. We get reports on a on a by a a monthly basis, if not twice a month, for space and power availability that drives that forward from almost all of our suppliers. We are we are the only TSD that gathers that and puts that into a usable form that’s used internally to help our partners get that information in their hand quickly, and then we make those calls to to verify that that space and power is available. So one of the key things I think that we need to focus on are looking at what the needs are of the customer, what are they looking to do.

They’re again, that five cabinet opportunity is is coming from a data center to data center move, and I think we’re gonna see more and more of that as the as this whole situation in the data center space continues to grow is certain providers are raising prices. So as contracts come up, the costs go up, not only for the power, but the space, all that type of thing. And so we’re seeing some moves being made in that mid market space that maybe have a couple cabinets in two different data centers, maybe on bicoastal or something in the Midwest and the Northeast where they’re saying, I don’t wanna renew here.

Let’s take a look at what else is available. Maybe, you know, maybe they’ve been bought out once or twice, and the company’s looking to consolidate. All those types of situations are happening on a on a daily, weekly basis in the SMB and mid market space, and it provides a ton of opportunity for our partners to go in and have that conversation.

What do you see in, Mike, as far as that space goes?

Well, I I will tell you how good a business it is.

I have many, many partners that have sold one or two cabinets ten or fifteen years ago that they’re still getting paid on. Yeah. When they move in, they have a tendency to stay. And if they stay, they have a tendency to grow.

So that is that is it’s it’s a really good business from a sticky standpoint. What I’m also seeing is I had an opportunity yesterday and someone mentioned is Digital Realty still the leader in the market. Digital Realty is an enormous company. They’ve got over two hundred locations.

They are a powerhouse in the space. But now in this particular market, we have thirty five different colo suppliers in the portfolio that have anywhere from one data center to over two hundred data centers. So who the best is really kind of a trivial question in saying, where do they need to be? What are the requirements?

Who’s doing the power density? But really going back to the SMB, everybody can really do SMB. Everybody in the portfolio can do one cabinet, two cabinets, three cabinets. Very small portion of the portfolio will want to do a half a cabinet.

Right? That’s typically in this market, they don’t want to play with that business. They want one cabinet, but pricing is usually aggressive, so it doesn’t make a material difference. But moving into one cabinet, two cabinets, three cabinets, the opportunity they had yesterday in mentioning Digital Realty, I’m looking for forty six kilowatts.

And I sent it in, and I did a capacity check, and I found over twenty locations within Digital Realty that will support a forty six kilowatt deployment. It’s it was a slam dunk. It was an easy opportunity. That that’s the sweet spot right now.

Hundred kilowatts and less, you can put almost anywhere.

If you get your hands on one of those deals, we can certainly close it. We can give them options. We can make sure that they’re they’re located where they wanna be located. We can facilitate data center tours either virtually or on premise.

Right? Those are the those are the home runs. And if you look at a hundred kilowatts for an opportunity with maybe an average price of two hundred and seventy five dollars a kilowatt to three hundred and fifty dollars a kilowatt, that’s a that’s a fairly nice opportunity for you to get involved with. And, again, those those tend to to grow.

A couple of years ago, when you sold a data center opportunity, people wanted to sign a three year, five year contract because it gave them price guarantee. Those days are over. They now have accelerators on an annual basis to cover their increased power cost every single year. So that’ll range from three to five percent.

So if you sell one cabinet and you don’t do anything else, that is gonna increase three to five v three to five percent every year during the term of that contract. That’s great for everybody. And since everybody’s doing it in the market, nobody is really kind of shying away from it. Nobody’s saying we are different because we don’t have this accelerator.

It’s just in in the space.

The market also, I wanted to throw in some updated news. The market is so strong. The state of Illinois had this amazing tax abatement program just to lure in big companies that were making massive purchases. And if you look at a b three hundred, which is an NVIDIA server, they cost anywhere from five hundred to six hundred thousand dollars per one.

And we have companies that are buying ten, twenty, thirty, a hundred. This is a significant amount of money, capital that they have to spend.

Illinois, their governor recently retracted that abatement, and so tax abatement for the state of Illinois has gone away. They’re leaving money on the table. They say we no longer have to entice people to come to our state. We’ve already established ourselves as the leader in in central US for the data center services.

I could only imagine that some of the other abatement states like Oregon may may start following suit. So we need to keep that in mind. If your customer is doing a large deployment, is tax abatement a good benefit for them? Those are things that we can help with so that we can find I mean, even a small one.

If someone is filling one cabinet of of equipment, that may be a very large capital purchase for them. So these are some things that we can help them with to find the right home and under the right terms.

So couple of things there, Mike, and I’m I’m gonna need your help here too because you see the the deal flow day in and day out. But a lot of interaction here. So I wanna clarify. A cabinet, as we refer to it, is one seven foot rack that is enclosed by a cabinet that is locking all that kind of stuff.

The the there was a question about a single server. You can do shared colo space. It is out there. It’s not the easiest to find, but there is shared space where they would take a cabinet or a seven foot rack and allow one or two, servers to be placed in there.

But from a small business perspective in in a in a couple of minutes here, Mike, what what are your thoughts on on how our partners can go in and help their customers understand the need for colocation and help them uncover what that need looks like from from an SMB and mid market standpoint?

So there’s there’s two sides to that conversation. One is the traditional business that has been in colocation. They know colocation, or they need to own their own workloads so that they need to put it in a purpose built facility like a data center.

There those those clients are a little bit easier to have the conversation with because they are used to that type of format. The benefit that we have for those folks is the intelligence that we have on the back end to shortcut their search for these different locations.

We had an opportunity just last week where we’re working with a company that has a data center team, and they don’t have the ability to locate a four megawatt patch of power. We ingested that data and information that they needed, and I think within thirty minutes, I sent them six different options in the United States, one in Canada, of where they could install four megawatts. And these guys have their own team, and we’re able to offset that. So with that type of an engagement, I like to get it registered early.

I like to get them in the system. I think our minimum registration for clients is six months. We can go up to a year in some instances. If they have these teams, we can still apply a lot of benefit to their process.

I like to say we do the heavy lifting for them. On the other side, cloud repatriation is a real thing, and this is where folks that have workloads born in AWS or Azure or Google are not seeing the value anymore in spending a recurring, unstable, constantly changing cost, and they’re looking to move some of those core infrastructure pieces out and into data center. So, again, they’re looking to move backwards in the technical curve and go more with a traditional type of solution while still maintaining a small footprint in some of those those areas.

Also a good opportunity for us to talk to them about our pinnacle partners, VMware pinnacle partners that could be in a fixed dedicated cost model, but still have that hyper that that ability to hyperscale when needed if they’re a tax company or if they do retail. Right? They have their busy seasons, so they still need that that flexibility. But the data center covers both both sides of those.

So the best way to get involved with it is and I always ask this. It’s not a technical question. It’s a business question. Are you getting a good value out of the infrastructure you’re currently using?

And if they say yes or they say no, the next question is, what are you doing and how are you doing it? I might be able to make it better. I wouldn’t say I might be able to make it cheaper because cheaper is kind of like a flexible term. People used to go in and say, I’ll save you fifteen percent on your money on your on your spend.

Is it possible? Perhaps. Being a technologist, I say the best way to save fifteen percent is to get rid of fifteen percent of your stack and you save money. But is that possible?

We don’t know, but we might be able to do something like that. We’ll get them the best value for the money so when they sign the contracts, they know that they’ve looked at several different options, and they know that going forward with their selection is the best that they could find and the best that they were were brought to to bear.

Yeah.

So I think one of the key things, and you mentioned it there, is the pinnacle partners with VMware and deciding where where that can be placed, whether they need to house it on their own equipment.

Big changes happening in that space again in the next probably four to six weeks. Broadcom is making it known quietly that they’re gonna reduce the number of Pinnacle partners down to seven or eight from the fourteen that are currently approved. But one of the one of the things that that opens the door here and that you’ve touched on, Mike, a little bit is the cloud repatriation and, really private cloud. So because of the cost of hardware and the long lead times of hardware, private cloud allowing the customers in the SMB and mid market space to transition to fully managed hardware with whatever workloads they need through an expedient, through an eleven eleven, through, tier point.

All those different companies that we have in the portfolio, eliminates some of the need to, have to go and buy colospace and then continue to manage it on their own. So I think to to wrap up in the last few minutes here that we have on this call, the the private cloud aspect of things, do you wanna talk to that and see how that that is growing alongside of the data center market here?

In this space, the private dedicated private cloud model is getting more and more popular because they don’t wanna share resources for these GPU intensive workloads. They just it used to be they worried about a noisy neighbor or data leaking over a multitenant environments. Now they just want to know that they have a dedicated resource and primarily the GPU horsepower that the servers are bringing.

But there’s two factors here. One is they’re extremely expensive, so it takes a lot of capital to purchase them. The other side is, like you said earlier in the presentation, they’re sold out. NVIDIA’s twenty twenty six allotment is gone.

You just can’t get them. They’ve already been earmarked for those that are are buying them on the regular basis, not customers that just wanna buy one or two. Now are they available? Yes.

You can go out. You can shop them maybe eBay. Right? Might be out there.

But we have suppliers that work on this space that they are consistent consumers of the NVIDIA chips, and they have access to them. So if we can take that buying power and they they’re sitting on the shelf and move that into a dedicated private cloud, the time to market for that client is slashed by ninety percent. They don’t have to find the space and the power. They don’t have to find out the resources to run it, the the GPU, the stack behind it with the network.

They don’t have to worry about this the physical security. There’s just a ton of benefit to it. Now what’s the downside? If you have a full team that’s designed to run their own infrastructure, this may be counterintuitive because now they they don’t have any physical hardware to take care of.

But if you think about it in a different way, they are now just responsible for making sure that that infrastructure is producing money for the business. They don’t have to worry about resetting a server or did a power supply go out. Now they can just truly focus those resources that they have in producing revenue for the business. On the other side, if it’s a very small business and they don’t have a a healthy IT team, it replaces all of that.

They buy that as a service. They could keep a lean staff.

By the way, those IT people are expensive. Security people are expensive. So we can run through ROIs, and we can do some cost comparisons, but I wouldn’t shy away from taking any customer in this day and age with workloads out in the cloud and talk to them about about dedicated private cloud.

Awesome. Well, thank you, Mike. I appreciate you joining me today. It’s been insightful. And one of the key questions that popped up here is, oh, I’m working in opportunity.

Should I engage the Telarus SE team? And the answer to that is yes. Mike’s response was early and often. So please reach out to to the Telarus engineering team to help you with any of these questions, myself included, and I can get you aligned with the right people in your territory.