Q3 2019 Earnings Call
Good day and welcome to the switch Inc. third quarter 2019 earnings Conference call.
All participants will be in they listen only mode should you need assistance. Please ignore conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions to ask a question. You May Press Star then one on your telephone keypad to withdraw your question. Please press Star then too.
Please note. This event is being recorded I.
I would now like to turn the conference over to Matthew Heinz VP of Investor Relations. Please go ahead.
Thank you operator, good afternoon, and welcome to switches third quarter 2019 conference call on the call today, our Thomas Morton switches, President and gave not switches CFO . Today's call may include forward looking statements, including references to expectations projections or other characterizations of future events or mark.
Conditions.
Actual results may differ materially from those expressed in our forward looking statements, which are subject to certain risks uncertainties assumptions.
Our statements are made as of today and we assume no obligation to update our disclosures.
We describe some of these risks in our does he see filings specifically our Form 10-K , particularly in the section entitled Risk factors. In addition, todays call includes discussion of Nongaap financial measures, which should not be considered in isolation from or as a substitute for financial information prepared in accordance with gap.
Please refer to todays press release and supplemental package for further information, including a reconciliation of non-GAAP measures. Our third quarter 2019 press release has been furnished to the FCC as part of our form 8-K and is available on our investor website that investors that switch dot com.
I'll now turn the call over to switch as President Thomas Martin.
Switch continued its solid business momentum in the third quarter of 2019, achieving year over year revenue growth of more than 14% our highest growth rate since Q4 2017.
Our strong revenue growth third quarter was driven by favorable conversion of our booked not billed backlog increased co location demand from new and existing customers and improving growth trends in telecom revenue, which grew by 13% compared to the year ago quarter.
Due to the stronger than forecasted third quarter revenue performance and continued strength in our sales pipeline. We are once again, increasing 2019 guidance as detailed in our earnings press release, and our Investor presentation.
Gave will speak to the specific changes in drivers of our guidance increase later in today's call. Moreover, we have been pleased with the ongoing ecosystem development at our Citadel and pyramid campus locations, which now combined represent 12% of consolidated revenue as it.
Q3, 2019 up from 8% and the prior year quarter, but the nine months ending September Thirtyth. These two primes have accounted for nearly half of our incremental revenue growth and almost two thirds of our incremental EBITDA growth.
Paired to the same period in 2018.
Driven by a combination of new logos signings and strong incremental demand from our existing customers.
We are pleased to inform you that we now have over 100 customers participating in our citadel ecosystem.
When speaking to investors were occasionally asked about switches ability to replicate the success of our Las Vegas campus at our newer prime locations.
Given the sheer scale, a big core campus, which now in its 11th year of operations. There can be difficult fully appreciate the progress we've achieved in our citadel and pyramid locations within just three years of their launch.
We have been successful and leveraging the course driving customer eco system, and our industry, leading design and reputation to accelerate adoption of the new prime locations. We are doing so using the same core principles of building at massive scale and locations that offer lower.
Our cost low to zero tax is 100% green energy robust connectivity and low risk of natural disaster.
Based on the success of these new primes, we're confident in switches ability to replicate it success in Las Vegas, as we expand nationally.
Indeed, our customer base has proven to be supportive of our vision as evidenced by the favorable growth trends, we have seen a multi campus customer revenue.
As of Q3 2019, our revenue from multi campus customers represent 28% of total revenue compared to 16% a year ago, reflecting a 98% year over year increase.
We expect this trend will endure over time as customers continue to see compelling value and switches ability to deliver north to south and east to west redundancy, enabling enterprises to replicate or diversify their critical hybrid IP operations.
Within the world's most secure and only tear five designed and operated technology solutions ecosystems.
Overall customer activity levels continue to be a robust in Q3, as we executed more than 620 contracts, representing a total contract value of $115 million with a weighted average term of approximately four years.
We added 19, new logos in the third quarter, including a leading global clothing and accessories retailer, a California based oil and gas producer and a Texas based specialty chemicals manufacturer.
Importantly, switch successfully negotiated several key customer contract renewals in the quarter, signing multiyear extensions with six of our top 30 customers totaling more than $70 million in contract value and resulting in a 5% increase.
To the aggregate recurring revenue run rate for these customers included in these renewals with a four year extension with a leading global semiconductor manufacturer and a top five existing switched customer representing $12 million of annualized recurring revenue in the core cap.
Yes.
In addition to the extension the customer also increased its power commitment in Las Vegas and expanded its footprint to the Citadel campus with a three year co location agreement, representing $2.5 million, an incremental annualized revenue.
We also executed multi year renewals with two of our long time hospitality and gaming customers in the core campus, representing a total of more than $22 million in contract value.
In total our third quarter renewals and associated customer expansion activity resulted in a greater than 8% increase and monthly recurring revenues when compared to the prior run rate for these customers.
We continue our efforts to further accelerate our already strong momentum were the key hyperscale cloud platforms as we continue to build a truly differentiated hybrid cloud offering.
Year to date, we have added seven senior sales professional to the switch team assembling what we view as a world class Enterprise technology sales organization.
At this juncture, our 2019 sales hiring initiative has been a success.
Going forward, we will continue to expand the teams head count and a prudent and strategic manner.
Our recent additions to the switch strategic sales team represent a diverse group of highly accomplished industry veterans with specialties, ranging from Hyperscale and hybrid cloud to telecommunications two commercial real estate.
Most importantly, we believe that each of our newly hired and pre existing sales professionals are technologists at their core.
Which is a critical factor and ensuring that switch carries forward what the entrepreneurial culture set in motion by switches founding principles.
We also continue to work closely with the broker community and managed services providers to augment our internal sales force.
With respect to our construction pipeline, we're on track to open sector three of Las Vegas 11 in Q1 2020 .
20 megawatts of additional power scheduled to come online over the course of the next year.
In the Citadel campus, we expect to open a new sector in Q4 2019.
With two additional sectors and 20 megawatt slated for 2020 .
We also continue to move forward with the expansion in the pyramid campus with sector three scheduled to be available for clients. In Q4, Lastly, we anticipate customer billings to commence in the keep campus. During the first half of 2020 based on signed customer contracts that have occurred during.
In Q3 and subsequent to quarter end.
We also remain active dialogue with additional customers regarding 2020 deployments in Atlanta.
As previously announced we have secured the rights to contiguous parcels comprising approximately 80 acres and total located at our core campus in Las Vegas.
As discussed on last quarter's call the planning phases for our next major expansion of the core campus are well underway.
Upon full buildout, we estimate the expansion will add more than 200 megawatts and 2.6 million square feet to what is already the largest technology ecosystem in the world.
We look forward to providing additional updates as we advance development in 2020 .
I will now turn the call over to gave to discuss our financial results.
Game.
Thanks, Thomas today, I'm going to review our financial results for the third quarter of 2019 and discuss our outlook for the remainder of 2019 in the third quarter of 2019, we achieved quarterly revenue of 117.6 million an increase of 14.8 million.
Or 14.4% compared to the third quarter of 2018.
This is primarily attributable to a 12.6 million dollar increase in Colocation revenue, 48% of the year over year revenue growth in Q3, 2019 resulted from new customers, who initiated service during the past 12 months, while 52% of the revenue growth came from customers who've been with switch long.
Within one year more than 95% of our revenue in the quarter was recurring in nature, consisting primarily of co location and Telecom services, which include cross connects broadband and external point to point connectivity.
Colocation revenue for the third quarter of 2019 was 95.1 million compared to 82.4 million reported in Q3 of 2018, an increase of 15%.
Telecom revenue in Q3 of 2019 was 20.9 million, increasing 13% compared to 18.5 million in the same period in 2018.
Other revenue, including professional services accounted for 1.6 million in Q3 2019 compared to 1.8 million for the same period in 2018.
Which has become a strategic partner to over 950 customers and we added 19, new logos in Q3 of 2019.
As of September Thirtyth, 2019 switch had over 15000 billing cabinet equivalents generating over $2300 per cabinet equivalent in monthly recurring revenue.
We had more than 6000 billing cross connects as of September Thirtyth and cross connects accounted for approximately 3.7% of total revenue in Q3 of 29 team compared to 3.6% in the year ago period.
Now turning to bookings during Q3, we executed 622 contracts comprising more than 16 megawatts with total contract value of 115 million an annualized revenue of 34 million at full deployment inclusive of both renewals and sales of incremental services in the third.
Third quarter, we signed 7 million of incremental annualized recurring revenue inclusive of 6 million, an incremental bookings from existing customers and approximately 1 million from new customers as of September Thirtyth 2019 are booked not billed backlog stood at over 22 million an aggregate annualized revenue.
Including contractual ramps and contracts yet to commence billing.
Approximately 11 million of annualized recurring revenue commenced from backlog during Q3, which combined with contractual ramps and accelerated power commit increases from certain large customers helped drive a $6 million sequential increase in total revenue during the third quarter, we expect approximately 1.5 million of revenue.
Contribution from backlog during the fourth quarter of 29 team with the remainder contributing 2020 and beyond.
Revenue reductions from customer churn remained low in Q3 of 2019 at 0.1% compared to 0.2% in Q2 as a reminder, we define churn is the reduction in recurring revenue attributable to customer terminations or nonrenewal of expired contracts divided by the revenue at the beginning of the peer.
Good.
The metrics discussed on today's call are all available in our Investor presentation posted on the Investor Relations section of our web site.
Cost of revenue increased by 3 million in Q3 of 2019 compared to the year ago quarter, primarily due to increases in depreciation labor and collectivity.
Excluding depreciation amortization and equity based compensation expenses. Our Q3 2019, adjusted gross profit increased 18% year over year to 85.3 million a reconciliation of gross profit to adjusted gross profit is provided in the appendix section of our investor present.
Patient.
SGN a expenses in Q3 of 2019 were 37.3 million compared to 31.1 million in Q3 of 2018, an increase of 20% the increase in SGN, a was primarily attributable to higher professional fees and labor expenses.
Income from operations in Q3 of 2019 increased 45% to 18.1 million compared to 12.5 million in Q3 of 2018.
The growth in operating income was primarily attributable to an 11.8 million dollar increase in gross profit.
Offset by a 6.2 million increase Ines DNA costs interest expense decreased by 0.7 million to 6.7 million in Q3 of 29 team, primarily driven by lower LIBOR rates compared to the same quarter last year, we expect interest costs to increase in Q4, resulting from the 70 million draw them.
Our revolver in September to facilitate land purchases datacenter construction and share repurchases.
Net income for Q3 of 2019 was 7.1 million compared to net income of 4.7 million in Q3 of 2018.
Net income in the third quarter 2019 includes the impact of a 3.9 million noncash adjustment on interest rate swaps. Adjusted EBITDA totaled 56.7 million for Q3 of 2019 compared to 50.9 million in Q3 of 2018, reflecting year over year growth of.
11%, our adjusted EBITDA margin for Q3 of 29 team was 48.2% decreasing from 49.5% in a year ago period due to the aforementioned increases in SGN a related to professional services and labor.
Capital expenditures in the third quarter of 2019 were 121.2 million and included 28.9 million to acquire approximately 36 acres for future development in the core campus in Las Vegas.
Excluding the land acquisitions capital expenditures were 92.3 million compared to 60.4 million in the same quarter of 2018.
Compared to the year ago quarter, and excluding land acquisitions, the 53% increase in Q3 capital expenditures was driven by higher investment in the Citadel pyramid and keep campus locations with slightly lower spending in the core campus.
A year to date basis, excluding land total capital expenditures were 192.4 million compared to 221.1 million for the year ago period.
Switch invested 33.3 million in the core campus for datacenter construction equipment, primarily to support customer demand at our Las Vegas 11 facility as of September Thirtyth 2019, Las Vegas, 11 sectors, one and two were 97% contractually committed with sector three.
Back to open in Q1 of 2020 switch also invested 28.4 million for ongoing construction that the keep campus in Atlanta, where we anticipate customer billings to commence in the first half of 2020.
Switch spent 24.2 million in the Citadel campus for construction on two additional sectors expected to open in Q4, 2019, and Q3 of 2020, respectively.
Finally switch invested 6.4 million for additional expansion in the pyramid campus, where we expect to open a new sector in Q4 of 2019.
Maintenance capital expenditures were 1.8 million for the third quarter, 2019, or 1.6% of revenue compared to 3.3 million and 3.2% of revenue in the same quarter last year growth Capex for datacenter construction and improvements was 90.5 million for.
Third quarter 2019, compared to 57.1 million in the same period last year.
As of September Thirtyth 2019, the switched primes had capacity for 21000 cabinet equivalents within our open sectors of which 90% we're committed under contracts compared to 89% in the prior quarter and 85% in the year ago quarter. The Q3 2019 you.
Solicitation rates at these primes based on committed cabinets and currently available Colocation space were approximately 93%, 72% in 92% at the core campus the Citadel campus and the pyramid campus, respectively compared to 93% 66 per se.
Rent and 91% as of Q2.
Full build out our existing constructed facilities comprise an aggregate of nearly 4.4 million gross square feet of space up to 455 megawatts of power and nearly 25000 cabinet equivalents.
Looking now at the balance sheet as of September Thirtyth 2019, the company's total debt outstanding net of cash and cash equivalents was 619.7 million, resulting in a net debt to last quarter annualized adjusted EBITDA ratio of 2.7 times compared to 2.3 times and.
Prior quarter.
As of September 32019, switch had liquidity of 482.5 million, including cash and cash equivalents and availability under its revolving line of credit.
We believe this is sufficient to fund our growth plans for the foreseeable future.
As disclosed in our 8-K on October 4th switch Inc. issued 2.4 million shares of class a common stock to members of switch limited and concurrently canceled an equivalent number of shares of class B common stock in connection with the exercise of member redemption rights.
In addition to the exchanges that occurred we spent 49.2 million to repurchased 3.2 million common units switch limited at $15.39 per common unit. Subsequent to this transaction, we had approximately 15 million remaining on our $150 million repurchase program.
Now turning to guidance as a result of the third quarter outperformance relative to our prior forecast, we're increasing our 2019 guidance as follows we expect 2019 revenue in the range of 454 million to 456 million from a prior range of 442 million.
To 448 million.
We expect 2019 adjusted EBITDA in the range of 225 million to 229 million from a prior range of 223 million to 229 million in capital expenditures, excluding land acquisitions in the range of 245 million to 260.
5 million from a prior range of 210 million to 260 million.
And now I will turn it back to Thomas for some closing remarks.
In conclusion, we firmly believe that switch is well aligned with industry dynamics and favorably positioned to accelerate enterprise migration into a hybrid cloud environment.
We continue to execute on our pipeline of large enterprise retail co location opportunities, which remain robust.
We look forward to announcing these transactions in due course.
We would once again like to take this opportunity on behalf of our management team to thank our employees customers partners and our shareholders for their continued support of switch.
We would now like to open the line for questions.
Thank you we will now begin the question answer session to ask a question you May Press Star then one on your telephone keypad, if you're using speakerphone. Please pick up your handset before pressing the keys to withdraw your question. Please press Star then too.
At this time, we'll pause momentarily to assemble a roster.
And the first question will come from Ari Klein with BMO capital markets. Please go ahead.
Thank you maybe can you expand a little bit on the net new bookings performance, how broad base was it across your campuses and then maybe with with all the new sales additions should we start to see contribution from new customers step up from here.
Sure. Thanks, sorry, this is gate.
In this third quarter, we actually signed an awful lot of renewals with our existing customers and some of our larger existing customers and as you see the net new bookings number.
Was it was not quite as strong as weve typically seen in the past and as you know our businesses not one that runs on 90 day cycles, so whether that the quarter ends on a specific date relative to a customer signing is not something that we really track or managed to it just so happens that up post quarter end.
We've signed a number of additional customer contracts most of which are incremental revenue since the third quarter ended we've already signed over $74 million of total contract value.
Which which represents nearly 13 million of incremental annualized revenue, so where you see the net new bookings number that's just a factor of timing, we're very comfortable with our sales pipeline in our sales velocity and the direction that the that the campus locations are going and in fact, you asked about the.
The adoption across our campuses.
Part of what drove the.
The number in in revenue in Q3 the growth in revenue in Q3 was an expansion faster than expected on ramps for two of our larger Las Vegas customers and faster than expanded ramps in the Citadel campus and post Q3, we've signed our first two customers in Atlanta.
It is exciting for us and we'll be talking more about that and in the Q4 call.
Our intent here was a great question. The this is Thomas we also wanted to give you an answer to your question regarding the sales pipeline of new sales team and part of the contribution post Q3 came from that sales team, including some of the bookings and Atlanta. So they have hit the ground, they're running and they are closing business.
Great and then just on the renewal activity in the quarter is obviously quite a bit.
Most of those contracts that were scheduled to expire and then maybe can you talk to lease expirations in 2020 compared to 2019.
Some of those contracts were scheduled to expire and more typical renewals others were in the in the later stages of those contracts and we advanced renewed and extended along with an expansion in several of those renewals and as far as are our pipeline for 2020.
It our typical contracts are about four years in length. So one can expect that that a quarter of the contracts will be up for renewal in any given year.
Great Thanks to the color.
The next question comes from Jon Petersen with Jefferies. Please go ahead.
Go ahead, John perhaps your line is muted on your end.
Sorry about that.
The delay in the they keep campus so what they got pushed back I buy a quarter I think you mentioned a little bit about in your prepared remarks. It maybe I guess it construction delays or is it just when the customers want their their their leases to commence how should we think about that.
Yes. This is Thomas Thank you very much John it's a great question. The answer is that the keep campus is continuing on schedule. It takes some time once the building is open for customers to move in and billing to commence so when we talk about the timing of revenue from the keep campus we factor in those reality, but the.
Campus itself is progressing very well and we look forward to an on time opening and letting customers begin their move in.
And they're extension of their facilities over to our campus.
And then you respond more on the EBITDA margins looked a little lower.
This quarter than what we've seen in recent quarters I haven't had enough time to dive into the model here, but I mean, there's some of that related and some of the new salespeople you brought online in the extra Gionee. There are there other factors impacting the margin here in the near term.
Sure. John This is gave some of it is indeed related test DNA because as you know we have added a new sales team this year and yes.
As they're getting their pipelines up up to fruition and we're seeing the closing on some of those sales pipelines post quarter. We are carrying the full the whole gionee expense, but if you go back historically the third quarter is typically our lowest margin quarter and it's primarily due to power costs, while we hedge about.
80% of our power load up 20% does float and power costs do increase in the Summertime. In addition to usage increasing during the summer because we're simply having to cool cool hotter air. So that's the primary factor that.
That drives the EBITDA margin.
Variance in Q3.
But we did have some higher SGN a expense and we also made a contribution.
To a program that switch has been supporting for years that was a half a million dollar contribution that all hit in Q3 of that and your senior back to that.
Yes and.
Yes, so we have been very good and supporting our community and making sure that we support education in children and we plan to continue that occasionally those donations come up at hitting a particular quarter. This one did but we believe it's very important met we do our part to support our communities that we exist in so we made a contribution in that regard.
Alright, great thanks for that background.
The next question comes from James Breen with William Blair. Please go ahead.
Thanks, taking the question just one.
We are a couple of questions in terms of your customer base growth coming from.
She cutlery buying.
Growing in all your facilities actually go coastal cities and then secondly, just on Atlanta any update there in terms of.
Are you feeling about the opening any sort of subsiding around that would be great. Thanks.
Yes, Jim This is gave as far as our multi campus customers were seeing.
Continued expansion across the board, we now have 117 customers that locate with us in more than one campus and if you look across our entire revenue base, 20% of our revenue is coming from customers that come from more than one campus that that how's their geared more than one Kim so were tremendously excited about.
With that and it's proving the model.
The model that we expected to prove out that customers want to deploy in multiple locations because they're either have their primary deployment in Las Vegas, with a redundant deployment in reno or or they want to.
Expand their westward deployment eastward into our Grand Rapids campus, and we're very excited about Atlanta.
You talked about soft signings, what we actually had is hard signings and we've signed customers and it will deploy in the early part of next year and we have an ongoing pipeline of discussions with additional customers for that markets, we're very bullish.
James This is Thomas yet we believe that Atlanta is on schedule to have the building ready for customers to load in and they will start the load in on time will have revenue commencing from that facility in the first quarter and we believe that we will begin continue to sign more customers. We have signed initial customers and we know that facilities.
Going to be a success. So we are signing additional customers currently and we have a strong pipeline for that facility in that market in general.
Great. Thank you.
The next question comes from Erik Rasmussen with Stifel. Please go ahead.
Hi, guys, just maybe coming back to Atlanta, again, sorry for but you mentioned to signing some customer contracts.
And in subsequent to the quarter can you talk about the types of customers or maybe.
Would you consider one of these and anchors sort of tenant.
Or is it.
In any sort of color on the types of customers so far that you've been sorry.
Well that we've talked about signing our first two to enterprise colocation customers and they are enterprise customers and will provide additional color on on Atlanta in in the following call.
There is there Eric there is as you know some restriction from our customers about what we can announce and when we can announce it and so as soon as they authorize us to make announcements of the particular size that their deployment.
We will do sell but we wanted to make sure that you. The market was aware of the signings, even though they were post quarter. So that you knew that they we are gaining momentum and actually locking in signed contracts for customers in that area.
Great.
Maybe just you talked can you talk about that sort of the dynamics driving the accelerated pace revenue growth that you're seeing I guess in citadel and and the permit campus.
Yes. The primary driver has been just additional faster demand from some of our larger enterprise customers. We signed a number of deals earlier in the year that had ramps built into them with expected timelines and we found that some of those customers, including customers like the Bay Fedex and others.
And hitting those ramp numbers faster than they initially expected so that's been driving.
The acceleration of revenue growth, particularly sequential revenue growth and it's also driving our expansion of Capex. If you notice our capex number is higher than expected to be at an all for the right reasons. We always talk about the fact that switch builds just in time and we build based on customer demand and we've got strong customer demand. So we've been building.
A lot of Tees gifts, and we've been adding cooling and an infrastructure to our facilities to accommodate that increased customer demand.
You often hear US talk about the fact that 60, maybe 70% of our revenue growth comes from existing customers and in Q3.
48% of our revenue growth came from a new customers and only 52% came from existing customers. So we're continuing to expand logos and explain expand upon the platform of growth for our campuses.
Thank you.
The next question comes from Frank Louthan.
Raymond James Please go ahead.
Great. Thanks, just I'm sorry, if you mentioned this earlier, but the pipeline from Atlanta is that what it sort of a mix is that from from existing versus new customers and sale of the sales coming primarily from some of the the New Commission salespeople and then.
We'll anything start moving in or being installed in that and that campus in 19 or would all be in 20 search.
So.
The answer all into the third part of that question first this is Thomas grade three part question. The first is that people. The campus will be open at the end of this year beginning of next year. So they will start loading in in 2020 or when the campus is ready for people to start loading into.
Secondly, they are new logos that are going into that campus. We are current talking with existing customers, but the new customers are new logos.
And thirdly, they are generated in part by existing sales team and impart by the new sales team. So the new sales team have clothes people that are going into Atlanta as new logos.
Okay, great. Thank you very much.
The next question comes from Richard Choe with JP Morgan. Please go ahead.
Great just wanted to follow up a little bit I guess, you had mentioned in your prepared remarks the backlogs.
Revenue sequentially.
But as we saw in the third quarter.
Faster moving that you've mentioned what kind of level of variability in terms of upside should receive by people moving into faster.
Maybe you could tell us what the third quarter expectation was versus actual sequential growth.
A quick follow on Atlanta.
So I think.
Quarter expectations were inline with our previous guidance and we've exceeded that quite.
Quite nicely and so we're upping our guidance.
Yes somewhere in the $10 million range, because we expect that growth to continue sequentially.
So does that does that answer your question Richard.
No. That's good and then in terms of Atlanta is there much more capex lift and how should we think about.
As you mentioned the just in time lets people movie and how should we think about capex kind of going forward and is there going to be any ramp in opex also or is that kind of.
Will that be baked in in the fourth quarter or will that ramped and to the first quarter.
Richard There is always going to be Capex expenditures enterprise and that's a good thing because if we're spending capex. It means that we're increasing the amount of infrastructure that's available for our customers and if we're increasing the amount of infrastructure for our customers just because those customers are growing so thats a good thing as to Capex when.
Killer for this campus.
When you first start doing a prime there is a front loaded amount of capex that frontloaded capex is to set the facility to bring in the initial water. The initial power. These telecom fiber et cetera, and once that initial infrastructures put in place the supplemental infrastructure that's required to accommodate.
Customer growth is incrementally smaller and we've seen some tail down on Atlanta, and we will see some tail down in 2020, and I'll turn to gave for specific numbers on that yes. As you can look at our guidance number we've raised the midpoint of Capex guidance by about 20 million and that really is not related to Atlanta.
And it continues on pace and there will be capex in Atlanta in the fourth quarter, but that was expected the increase in capex in the guidance is primarily related to faster expansion of the citadel and the core campus.
That's really what's driving that number as we move into 2020 of course, we haven't provided any guidance for 2020.
Yet, but as we as we put a campus into service a lot of the expenses that are capitalized during the construction phase do shift to operating expenses and we'll talk more about that as we present twentys giving guidance.
Great. Thank you.
Again, if you have a question. Please press Star then one.
The next question will come from Michael Rollins with Citi Investment Research. Please go ahead.
Hi, Thanks.
Good evening.
A couple questions first.
What did the the.
Selling points that you talked about before with your customers.
Community.
Hello.
To some of the cloud and enable that hybrid connectivity.
Can you share some examples that maybe what you're seeing from the customer base as cloud adoption is continuing in the marketplace.
How you see this hybrid cloud architecture evolving within your data centers.
The second question is whether or not you're evaluating new markets to expand into whether it's in the us or internationally, how you're thinking about going from the current four markets around the country and possibly looking to.
Go maybe where there is some customer demand.
Customers that you're currently serving thanks.
Mike Thank you and good to hear your voice as to being close to the cloud as you may recall.
Google is right next to us in Atlanta, Google is also located a facility up in Reno, Nevada, and then they are building a facility near us in Las Vegas, Nevada. So we have proximity with those than we've announced on some relationships with Google with respect to fiber interconnects on those.
Those campuses. So we have a good connection there. We also have Amazon onramp deployments in each of our campuses and then as Amazon starts to launch Amazon outpost, we expect to see those deployments on our campuses as well. So we have good affiliations with the various clouds and we expect that to continue.
As to new markets, we are really focused on building, our digital cities and the gravitas of those digital cities, bringing in an increasing number of customers an increasing number of cloud providers, an increasing number of telecommunications provider says they all work and collaborate with each other in those digital ecosystems. So.
We think that those are becoming self proliferating and we're really focused on building out those four primes and making them successful and a couple things to add to that if you recall last quarter. We did talk about signing a a major cloud customer we didnt announce the name.
Here is our Las Vegas campus and the interesting thing about that signing is it's the first time than one of the major cloud providers is putting an entire availability zones, which means there they're try redundant availability zones with one.
With one provider in one location and the reason that they were able to do that is because they're locating in three different sectors within our campus and they view each one of our sectors as each year five.
Platinum Standalone data center and so they believe the redundancy in the resiliency is sufficient for them to locate an entire availability zones in in one location and that's.
That is tremendously exciting and is really a very different model for any of the clouds with regard to international Mike You know, we do have an international joint venture that does have a facility up and running in Milan, Italy, and Amazon is taken half of that facility and we also have a facility in Thailand at this point, we're not looking too.
To expand internationally, we're focused on the four primes, the one differentiator between switch and some of the other peers in our industry is that if you look at the land that we have at each of our prime campus locations. We have enough runway to last five to 10 years on these for prime campuses without needing to acquire anymore dish.
I will land.
So we are not constrained in any way shape or form and believe that campus ecosystem model is a key differentiator for switch and is the strategy that we want to pursue.
Thanks.
Thank you ladies and gentlemen, this concludes our question and answer session and thus concludes today's call. We thank you for attending switch Inc.'s third quarter 2019 earnings conference call. At this time you may now disconnect your lines take care.