Q2 2020 Switch Inc Earnings Call
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Good day and welcome to the switching second quarter 2020 earnings Conference call all participants will be in listen only mode.
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He doesn't event is being recorded no now like to turn the conference every <unk> Vice President of Investor Relations. Please go ahead.
Thank you operator, good afternoon, and welcome to switch a second quarter Twentytwenty conference call on the call today, our Thomas Martin switches, President and gave docked switches CFO.
Today's call May include forward looking statements, including references to expectations projections or other characterizations of future events or market conditions.
Actual results may differ materially from those expressed in our forward looking statements, which are subject to certain risks uncertainties and 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 SEC filings, specifically, our form 10-K, particularly in the section entitled risk factor.
Yes.
In addition, todays call includes discussion of non-GAAP 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 today's press release and supplemental package for further information, including a reconciliation of non-GAAP measures.
Our second quarter 2020 earnings press release has been furnished to the FCC as part of our form 8-K and is available on our investor website at investors that switch dot com.
We'll now turn the call over to switch as President Thomas Martin.
Thank you Matt Good afternoon, everyone. Thank you for joining us today for our second quarter 2020 earnings call.
Switch teaching you to execute favorably upon our strategic and financial objectives through the first half of Twentytwenty.
Our second quarter financial results reflect sustained momentum and solid demand trends across all of our prime campus locations.
Second quarter revenue increased 13% year over year to 126.9 million and adjusted EBITDA of $69.1 million represents a 17% year over year growth.
We continue to track inline with our Twentytwenty operating plan and our sales pipeline for the second half of Twentytwenty remains robust.
As such we are reaffirming our twentytwenty financial outlook and guidance.
Importantly, switch has maintained 100% continuity of our operations for our clients across all of our data centers on all four of our prime campus locations throughout the Covance 19 pandemic.
We have implemented a comprehensive set of protocols to ensure the health and safety of our datacenter employees and visitors, including entry questionnaires contact tracing hand sanitizing stations in high traffic areas.
No touch temperature checks and mandatory based coverings.
Meanwhile, our non datacenter operations staff has adapted favorably to remote work environment.
All of which the mandate has been extended through the end of Q3 Twentytwenty.
Our return to office timeline remains dynamic as we continue to closely monitor the coded 19 case trends and it here to the state and federal protocols.
We continue to experience favorable customer expansion trends toward our newer primes as evidenced by 54% year over year increase in multi campus revenue during Q2 Twentytwenty.
Campus locations outside of Las Vegas represent 50% of our consolidated revenue as of Q2 Twentytwenty.
An increase from 11% in the prior year quarter.
For the six month period, ending June Thirtyth Twentytwenty revenue at the core campus grew 10% while revenue at the Citadel and pyramid primes grew at a combined rate of 70% year over year.
Thus accounting for 45% of our incremental revenue and 16% of our incremental EBITDA growth compared to the first half of 2019.
Second quarter bookings activity remained steady as we executed nearly 700 contracts representing a total contract value of $79 million and a weighted average term of four years.
We signed over $12 million of incremental annualized revenue in Q2, which is consistent with our trailing 12 month average.
Incremental revenue bookings include $2 million from new logos, and an additional $10 million from existing customer expansions.
New customer additions remains strong with 21, new logos signed in the second quarter.
Notably new customer wins included the largest us grocery store chain at the core campus in Las Vegas, a leading accounting and tax audit firm at the keep campus in Atlanta, a nationwide provider of satellite broadband services at the Citadel campus in Tahoe Reno.
And a Chicago base quantitative trading firm at the pyramid campus in Michigan.
Approximately 20% of our second quarter contract value was attributable to the citadel pyramid or keep campus locations as our newer primes continued to see a disproportionately higher share of bookings relative to their current revenue contribution.
Which also saw strong telecom bookings in the second quarter accounting for 45% of total annualized revenue signings compared to a historical average of 15% to 20%.
This reflects the differentiated value proposition when compared to our peers of our core telecom purchasing cooperative and a period of heightened demand for connectivity services.
One of these telecom wins was a leading grocery store chain operator, signing a five year network services agreement totaling $5 million in annualized revenue at full deployment.
This customer first came to switch for Colocation services in Q2, 2019 and has since continue to increase it spend with US as the company has chosen to leverage the core co-operative to connect its national store footprint of more than 500 stores, while consolidating its.
Service providers to significantly reduce network costs.
Similarly, a leading regional bank signed a three year network services agreement following their recent co location deployment in our pyramid campus.
By working with switch connect our telecom audit services Division and the core co-operative the customer was able to reduce network spend by more than 30%, while expanding and upgrading connectivity to its branch locations.
Both of these transactions highlight this strategic nature of the core co-operative telecom offering, enabling our co location and connectivity sales teams to engage in a collaborative fashion to capture a higher portion of ITC spend and maximize value to our customers. Other notable.
Location wins in Q2 include a 500 kw expansion from a fortune 100, aerospace and defense contractor. In addition to a 250 kilowatt compute node deployment by a top three cloud infrastructure provider at the core campus.
The second major cloud provider to deploy an availability zone directly on switches campus further advancing our unique hybrid multi cloud strategy, which enables sub one millisecond latency between enterprise and cloud workloads.
We're also pleased to report that the first major cloud platform deployed on switches campus has officially launched it seven us region in Las Vegas, which is now open to customers in the western United States.
Due to switch is unique and patent protected try redundant power and HCC configurations as well as the excess scale size of the Vegas campus currently more than 2.4 million square feet.
This provider was able to deploy Foley three separate and fault tolerant availability zones across the numerous buildings on switches core campus.
We continue to work closely with all the major cloud service providers to create a best in class hybrid ecosystem across switches prime footprint.
Strong sales momentum has continued subsequent to quarter end, including expansion orders from two technology customers in the citadel campus totaling $1 million of incremental annualized revenue and a new health services provider in the keep campus that we believe is highly strategic.
Two are rapidly growing health care customer ecosystem.
With regard to our strategic and sustainability initiatives, we continue to advance Rob Roy's forward thinking multiyear gigawatt, Nevada program, which began in 2015.
Switching its partners recently announced a renewable energy project comprised of three solar fields combined with an innovative battery storage solution enabled by Teslas makeup pack technology.
We are extremely pleased to be working alongside thought leaders across the renewable energy landscape, including capital dynamics Tesla Con Edison and first solar.
The current phase of the gigawatt Juan project involves the construction of an additional 375 megawatts of solar energy, bringing total production capacity to over 550 megawatts, plus 800 megawatt hours of battery storage ups.
Upon its completion, the northern Nevada location will constitute the worlds largest behind the meter solar plus battery array deployment.
Placing zero burden on the legacy public utility grid.
The estimated 1.3 billion dollar infrastructure costs for the project will be 100% privately funded by the capital dynamics clean energy infrastructure investment team switches entered into a 25 year power purchase agreement for the electricity produced by the project.
This agreement will enable switch to provide 100% renewable energy to our Nevada colocation customers for the foreseeable future.
At rates that are as low as one fifth of those available just over the border in California.
Securing our leadership position in sustainable and affordable datacenter solutions.
Continuing on the topic of sustainability, we are pleased to announce the recent launch of switches SG web portal at our website switch dot com.
The site provides in depth insights to our various programs and policies surrounding corporate governance, environmental sustainability and human capital.
Switch was upgraded to low risk in a recent report from sustain analytics, a leading independent voice on corporate ESG practices.
The updated 2020 report rank switch in the top 12% of sustain Olympics global universe of over 12000 companies.
We are pleased by this outcome and look forward to our investors reviewing the information now available at our SG web portal.
We remain in close contact with various other SG research platforms and an effort to even further enhance our market leading policies disclosures and risk ratings in order to fully informed both active and passive investment decisions.
Social responsibility community involvement and sound corporate stewardship have long been core elements of switches culture.
Given the rising importance of sustainable business practices and rapid growth in the Majdic SG investing we believe a compelling opportunity exists to attract new investors to switch as we educate the marketplace on our SG related practices.
Now turning to our datacenter construction milestones and project pipeline.
We expect to deliver an additional 2000, plus cabinet equivalents and 20 megawatts of incremental power infrastructure during the second half of Twentytwenty.
This includes the Q3 deployment of a 10 megawatt power system in the core campus to facilitate customer ramps in Las Vegas 11. Moreover, we are targeting a Q4 delivery of two new sectors at the Citadel campus totaling 1000.
Sales and 320 cabinet equivalents and 10 megawatts of power.
Also during Q4, we expect to finalize tenant improvements on sector to of Atlanta, one, adding 780 cabinet equivalents.
Additionally, during the second quarter of Twentytwenty, We continued on site development work at the core campus and preparation for the future construction of five new Datacenters. The first of which is Las Vegas 15, with a target delivery of mid.
2022.
We continue to prepare to capitalize on the market opportunities addressed by our three new divisions switch edge switch century and switched vault.
Together with the other related services that support and expand upon our technology ecosystem. We will provide further details to investors as we move forward with our analysis and client interactions.
I will now turn the call over to gave to discuss our financial results.
Okay.
Thanks, Thomas today, I'm going to review our financial results for the second quarter of 2020 and discuss our outlook for the full year in the second quarter of 2020, we achieved quarterly revenue of 126.9 million, an increase of 14.9 million or 13.3%.
The second quarter of 2019. This is primarily attributable to an 11.7 million dollar increase in Colocation revenue and a 3.2 million dollar increase in connectivity revenue.
19% of the year over year revenue growth in Q2, 2020 resulted from new customers, who initiated service during the past 12 months, while 81% of the revenue growth came from customers who've been with switch longer than one year.
The disproportionate growth contribution from existing customers in the second quarter of 2020 was driven by several large new customer contracts to commence billing in the year ago quarter, which by definition are now count that as existing customer growth contributions.
We expect this ratio to normalize in future quarters to reflect our historical pattern of 60% to 70% existing customer growth more than 95% of our revenue in the quarter was recurring in nature, consisting primarily of co location Telecom services, which include Crossconnects broadband and external.
The point connectivity Colocation revenue for the second quarter 2020 was 102.6 million compared to 91 million in Q2 2019, an increase of 12.8% connectivity revenue in Q2, 2020 was 22.8 million increasing 16.2 per.
Percent compared to 19.6 million in the same period in 2019.
Other revenue, including professional services accounted for 1.5 million in Q2 2020 compared to 1.4 million for the same period in 2019.
As of June Thirtyth, 2020 switch had approximately 17200 billing cabinet equivalents generating approximately $2400 per cabinet equivalent in monthly recurring revenue.
We have more than 8000 total cross connects as of June Thirtyth and cross connects accounted for 4.1% of total revenue in Q2, 2020 compared to 3.4% than a year ago period, reflecting a 37% growth rate.
Now turning to bookings during Q2, we executed 698 contracts comprising approximately six megawatts, representing total contract value 79 million, an annualized revenue 24 million at full deployment inclusive of both renewals and sales of incremental services.
In the second quarter, we signed $12 million incremental annualized recurring revenue inclusive of 10 million in incremental bookings from existing customers and approximately 2 million from new logos as of June Thirtyth 2020 are booked not billed backlog stood at 24 million an aggregate annualized revenue.
Consistent with the prior quarter backlog has new signings essentially offset Q2 revenue commencements.
We expect our backlog to contribute approximately 3.5 million of incremental revenue during the remainder of 2020 with the balance contributing in 2021 and beyond.
Revenue reductions from customer churn remained low in Q2, 2020 had 0.2% down from 0.4% last quarter and unchanged compared with a year ago quarter. As a reminder, we define churn as the reduction in recurring revenue attributable to customer terminations or nonrenewal of expired.
Contracts divided by the revenue at the beginning of the period.
Cost of revenue increased by 10.1 million in Q2, 2020 compared to the year ago quarter, primarily due to increases in depreciation power and collectivity costs.
Excluding depreciation amortization equity based compensation expenses, our Q2 2020, adjusted gross profit increased 13% year over year to 94.1 million, reflecting an adjusted gross margin of 74.2%.
SGN a expense growth moderated in Q2 2020 coming in at 33.4 million compared to 32.9 million in the year ago period and down from 40.1 million in Q1 2020.
The sequential decline in SGN, Hey was primarily attributable to a reduction in professional fees.
In addition, the implementation of remote work protocols reduced second quarter SGN, a by approximately 1 million due to a reduction in travel expense marketing and general administration expenses.
Income from operations in Q2, 2020 increased 21% to 25.3 million compared to 20.9 million Q2, 2019, the year over year growth and operating income was primarily attributable to a $4.9 million increase in gross profit offset by a 0.5 million.
One dollar increase in has changed any costs.
Interest expense decreased by 0.8 million to 6.7 million in Q2, 2020 has lower LIBOR rates offset higher debt balances on our revolver.
As of June Thirtyth 2020, we had 582 million outstanding on our term loan and 260 million drawn on our 500 million dollar revolver.
We reported Q2 net income of 13.3 million compared to net income of 4.7 million in Q2 2019.
Second quarter net income includes a 4.1 million dollar loss on interest rate swaps equating to a one cents impact on our reported net income per diluted share.
Adjusting for the loss on interest rate swaps, our net income per diluted share was six cents.
We provide a full reconciliation of GAAP net income attributable switching to adjusted net income attributable to switch ink in the financial tables of our Q2 2020 earnings release available on our Investor Relations website.
Adjusted EBITDA totaled 69.1 million for Q2, 2020, compared to 58.8 million in Q2, 2019, reflecting year over year growth of 17.5%.
Adjusted EBITDA margin for Q2, 2020 was 54.5% increasing from 52.6% in the year ago period, primarily due to the previously mentioned reduction in has today as a percentage of revenue.
We continue to expect that adjusted EBITDA margins will remain within our traditional low 50% range for the remainder of this year.
Capital expenditures in the second quarter of 2020 were 85.6 million compared to 54.2 million in the same quarter of 2019.
Capital expenditures in all four of our Prime campus locations increased compared to the year ago quarter, particularly in the key and Citadel primes, which accounted for 65% of total Q2 capex.
This was primarily attributable to construction on two new sectors at Taco Reno, one to accommodate strong customer demand as well as construction of the second sector in Atlanta one.
We also invested 23.4 million on the ongoing site development work for Las Vegas, 14, 15, and 16 and 7 million in the pyramid campus for additional power and cooling infrastructure.
Maintenance capital expenditures were 1.9 million for the second quarter of 2020, or just 1.5% of revenue compared to 1.5 million and 1.3% of revenue in the same quarter last year growth Capex for datacenter construction and improvements was $83.7 million for the second.
Quarter of 2020, compared to 52.7 million in the year ago period.
As of June Thirtyth, 2020 switched primes had capacity for 23300 cabinet equivalents within our open sectors.
At quarter end, 89% of our total cabinet inventory was committed under contracts compared to 88% in the prior quarter and 89% in the year ago quarter.
The Q2 2020 utilization rates at these primes based on committed cabinets and currently available Colocation space were approximately 93%, 86%, 72% and 23% at the core campus the Citadel campus pyramid campus and.
The keep campus, respectively, compared to 93%, 84%, 71% and 21% than the prior quarter.
At full build out including Atlanta, one our existing constructed facilities will comprise an aggregate of nearly 4.7 million gross square feet of space up to 490 megawatts of power and over 26000 cabinets equivalents.
Looking now at the balance sheet as of June Thirtyth 2020 companies total debt outstanding net of cash and cash equivalents was 864.6 million, resulting in a net debt to last quarter annualized adjusted EBITDA ratio of 3.1 times down from 3.3 times.
In the prior quarter.
As of June Thirtyth, 2020, we had liquidity of 271.7 million, including cash and cash equivalents and availability under our revolving line of credit.
As disclosed in recent 8-K filings during the second quarter of 2020, our members redeemed 11.5 million common units, resulting in the issuance of an equivalent number of class a common shares switch also spend 20 million to repurchased 1.1 million units, bringing the total quarter and shares outstanding to 200.
240.6 million, including 106.8 million class, a public float representing 44% of total shares outstanding.
July and August redemptions totaled 2.1 million common units and we expect an additional 250000 units to be redeemed on October onest, bringing our total public float to approximately 109 million shares or 45% of total shares outstanding.
Finally, we are reaffirming our guidance for 2020 as follows revenue in the range of 507 million to 521 million, reflecting 11% organic year over year growth at the midpoint.
Adjusted EBITDA in the range of 251 million to 261 million, reflecting an increase of 11% compared to 2019 and adjusted EBITDA margin of 49.8% at the midpoint capital expenditures, excluding land acquisitions in the range of 290 million to 340 million.
And now I will turn it back to Thomas for some closing remarks.
Thank you gave 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.
Thank our employees customers partners and our shareholders for their continued support of switch. Thank you all.
We would now like to open the lines for questions.
We will now begin the question answer session.
Good question, we agree or are there on your search to.
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First question today will come from Frank local.
Raymond James.
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Great. Thank you.
So 12% utilization Atlanta.
Pretty good just starting out where do you think that can get by year end looking at sort of the pipeline and then what would it take to get passed the midpoint.
Guidance.
Where would we have to see to to accelerate their you're running on a run rate to get a little bit below that right. Now do you think that can change and get a little bit higher in the back half.
Yes.
Yes.
Hey, Frank This is gave I'll take that.
As far as Atlanta utilization, we've signed for new customers. This last quarter and the utilization percentage remember is based on our onto our open sector right now the second sector is slated to open.
Prior to year end, so that'll obviously increased the floor space and the capital availability in that in that facility and dropped the utilization rate. So trying to predict where the utilization rate is going to end up. This year is is is really tough for us to do and is not something going on that on.
That I'm able to do with this great all at all I can say as we have a number of contracts that we are working on in Atlanta, we have good activity in that facility. We have a lot of interest in the area for that facility and we're very very confident in the way, it's it's rolling out and.
Thomas anything to add there.
Yes, we continue to deploy new customers every quarter in that facility. We've made some more sales into that facility even this quarter.
So we continue to see a robust pipeline and we have many large projects that we are not whether they close and when it got because they're going to land. It's more determined by the customer funding is by US we have the inventory and the ability to deploy them and we're working with them to coordinate their delivery cycle as to overall.
We're going to hit the midpoint or hit our guidance, we provide guidance of revenue between 570 521 million and Thats. The guidance that we are sticking to through Q2, and we believe that we will hit that guidance range.
Yes, as far as being above the midpoint Frank It really just comes down to the timing of customer deployment.
As customers deploy we're able to build cabinets and recognize revenue.
Obviously cobot does impact the ability for customers to to travel the utilize some of our focuses for smart hand services to help put servers in racks and whatnot, but it for their large deployments. They generally have to bring staff down we have full safety protocols to allow them to do that but nevertheless.
Yes, some customers are impacted by Covance and travel restrictions.
Great and just follow up what walk us through where the current status is with the Ed compute nodes.
The interest level is in that product currently.
Yeah, it's been a short time suits, we announced a last earnings call wasn't that long ago typical of a.
Q1 earnings call into Q2, they tend to be compressed so there hasn't been a material amount.
Advancement to report to you on that those projects, but we continue to worked very diligently on projects and we believe that we will have some.
Some announcements to make prior to the end of this year, but the projects do continue to advance we have seen a number of large customers show interest in multiple deployments.
Sites and when we do make an announcement I expect it to be a multifaceted announcement with more than one site and more than one customer. So it's just going to take a little bit more time to get through there and not in 60 days that we have between two calls.
Great all right. Thank you very much.
Yeah.
In the next question will come from Tim along with Barclays Go ahead.
Hi, Good afternoon. This is Brendan Lynch Entre, Tim maybe just following on the switch.
Edge question there.
Can you just.
Give us some details on the nature of the initial conversations what are what are clients. Most excited about what's giving them pause at this point.
Just some details there thanks.
Yeah, Hey, there's no paused. It's go forward go fast, but the what is causing them to be interested is the same things that we reiterated on the last call. It is a robust platform that is far more resilient and more efficient than other opportunities that are out there and much more secure as well. It is also.
As to your typical of switch it is flexible and the architecture and structure and that allows customers to deploy in city in a flexible and expandable way at a reasonable cost and in a way that is more resilient and secure than they have another alternative. So we have a number of customers that were working with and that helps us to identify.
Locations, which location to deploy and which locations to deploy first and when you have a confluence of customers and needs than you are coordinating all of them to where youre going to go in your first built new second built in the third et cetera. So we are working on those coordination effort as well as securing all the next.
The infrastructure to make the deployment and this is infrastructure and infrastructure takes a certain amount of time.
To get rolling but once it does it builds momentum upon itself and it continues at a very good clip. So we're making sure that we do it right.
And that we don't stumble lot of the gates. So we're taking our time and even in this unique situation that we all have in this world. We are making sure that we deploy continue to advance and that we're doing so in a prudent and efficient fashion.
Great Great. That's helpful. And then it isn't details on the Colo agreement with the top three global cloud provider with the size of the initial deployment in the line of sight to future expansion, maybe any implication as a steep core interconnection growth as a result of this client.
Yes, we believe that there will be interconnection growth as result of this clients clients already reached out through us to a number of our customers to facilitate.
Utilization of their services by these customers and that is something that we would expect to continue as they continue to grow and deploy and expand and as our customers identify the fact, they are there and continue to seek out. This services. So this is.
Part of what we've done in our ecosystem is deploying locally multiple cloud options for our customers and because they are deployed inside the same facility. They are able to connect between the cloud and the customer deployment in Pico second since connectivity latency and they don't have as much or any radio.
Atari implications because it is just simply a fiber connection between one cage to another case. So they are in a facility that has met their regulatory.
They are doing interconnects with the cloud provider within that regulated facility regulatory approval facility and they're able to do so in Pico second for connectivity latency. So it's a very appealing platform for our customers and a very appealing place for service provider to deploying so we believe that having multiple options for our customers will further.
Gender success in this area.
And this is really the hybrid cloud vision that we've been talking about for quite some time, we talked last quarter about.
About one of the first major cloud providers, putting you're putting in place a three.
Part tripe redundant availability node within one campus at switch because of the resiliency of each of our sectors, which they view as a standalone datacenter fully.
Three fault tolerant, so rather than picking three vendors in three different geographies to create what is typically their try redundant availabilities only put it all at switch all at one campus in three different sectors and that was not was a really important strategic.
Decision for them in a strategic win for switch now we have the second customer doing something very very similar in putting a full availability node within switch so that as Thomas said, they can connect directly to our.
Nearly 1000 customers all in a single location so that the advantage to the cloud it's an advantage for our customers and that's the vision for for hybrid cloud that we've been expanding and clearly we do business with all the major clouds, but to have two of the largest cloud directly within our campus not just up.
Links to their cloud node somewhere else in the in the United States is a tremendous advantage for us.
Great. Thanks for the color.
Thank you.
Our next question will come from the Crossfit with Berenberg. Please go ahead.
Hey, just on the back to that question I think you mentioned interconnection kick off net center now that you have the second cloud could you help size.
How much interconnection growth, we could actually see from that.
Yep.
Go ahead, Thomas I'm sorry.
That's a tough one and gave you can eliminate them anymore specificity you want that really depends on the adoption rate of customers through the two cloud providers.
That is difficult for us to forecast in regular times in these times. It is even more difficult for us the forecast, but theres no doubt that that will grow the rate at which it grows is going to be subject to their individual needs on because the customers and their ability to.
Work in these times to make those deployment Kaufman.
Certainly we are here to facilitate that growth and do everything we can to make sure that the two entities are connecting and that they are doing so in a positive manner that facilitates the growth that ecosystem generally.
And now we did talk last quarter about the fact that we were seeing additional demand for connectivity simply given the fact that everybody's working remotely in the world.
Has moved to a connected universe right now because people can meet in person and we saw some of that.
Come forward in the numbers in Q2, we saw connectivity growth of over 16% in the second quarter and our cross connect revenue is now about for 4.1% of total revenue. So we saw good growth in.
Total connectivity growth and in cross connects specifically.
If.
We would expect.
That to continue as covert continues and even beyond over it now that the understands that they can operate DNA expected way in a remote environmental as many companies are announcing that they are planning to shift to a more distributed workforce I think that just bodes well for for us in the long run and as we have.
Additionally, cloud providers within our walls that clearly gives an opportunity for our customers to connect directly an increase that cross connect revenue.
Okay. That's helpful and this one I wanted to ask about the dividend increase as a big large you guys just.
Just curious how you think about deploying capital for new projects and you've got this adds project, you're working on versus paying it that investors versus via dividends.
Yes, yes talked about little bit about theory of why the dividend. It and gave you talk about capital allocation. The overall capital allocation of either way to bite that question, but great question, but we want it to adjust our dividend slightly to a level that would be meaningful as a component of the total return for our investors.
You want to do not also while maintaining flexibility to continue to invest growth, while staying neutral on our leverage.
And those two things for the balance that we want it to do and we believe that getting our dividends at this level made it a meaningful consideration for our investors gave you want to talk a little bit overall capital allocation.
Yes.
I agree with Thomas Wholeheartedly, we do straddle a couple of different worlds in terms of our DNA, we really do operate as a technology company, that's where our heart and soul is that certainly where rob's inventions lead us, but we are compared to a group of companies that are structured as rates while.
We would not expect our yield matchy re yield because we're not required to to distribute our income in the way that they are and we want to redeploy our capital for growth more than.
As our primary objective, we did want to get our dividend at least to a level, where it was meaningful to investors as part of their total return and that was the strategy and boosting the dividend at this point plus we feel we're well capitalized we have liquidity. If you look at our balance sheet. Our leverage is just over three times.
So we feel we can boost that but end and still deployed more capital for growth while meeting all of those shareholder objective.
But in terms of capital allocation.
We'll revisit the dividend probably on an annual basis now that it is at along with it. It we feel is meaningful to investors.
But our primary capital allocation is going to be toward toward growth and we do feel we're well capitalized.
Attack on all of the initiatives that we that we've outlined.
Okay.
A follow up on that quickly. So does that mean your tolerance for leverage has gone up a little bit just because the dividend iron out or.
Yes, we said all along we don't have a a leverage target.
You see our revenue is recurring in nature. So it is very leverageable and we have very little churn. So it is a very leverageable model, we just have never needed leverage.
Because of the way, we deployed capital Modularly and because of all the equipment that goes into our building is essentially just in time based on customer demand, we're able to deploy capital very efficiently and for the 20 years. We've been in operations. We've always had low leverage we're not opposed to leverage we just simply haven't needed it.
So I don't think our tolerance for leverage has changed at all we just.
Well, we have the flexibility to too.
Create additional yield in our dividend, while still meeting all of our long term objectives for growth.
I think gays answer is yes gave the answer is perfect. We often get asked why in fact, we're not levering up further but we agreed that we in our board felt that we had room in our leverage model to increase our dividend and make it even more attractive to our investors and so we took the opportunity to do that.
Okay. Thanks, guys.
Okay.
Your next question will come from Eric read anything with Stifel. Please go ahead.
Yes. Thank you for taking the questions maybe just to circle back on on the guidance.
Yes it.
So when we look at sort of year to date performance.
I appreciate the comments on sort of revenue.
We're looking at sort of the maybe getting to the midpoint of guidance based on where we stand today year to date, but your EBITDA year to date seems to be suggesting a much higher level.
Maybe just comment on sort of the puts and takes for the second half of the year as you sort of arrived at that outlook.
The following yeah.
No. That's that's great Yeah, Eric welcome to the call.
We don't expect Q2 margins to continue throughout the second half in Q3, we have seasonal cost increases due to higher power usage not in rates, because we've stabilized that natural usage.
There are expenses that we continue to avoid because of co Vic.
But we don't want people to expect that coated savings are going to be part of our norm and if there are some returned to normal that happens in Q3 or Q4, we will see those expenses and that we're saving on co bit.
Move back towards a more moderated or more consistent manner that we've seen in the past.
So.
I wouldn't we understand that you are getting towards Q2, EBITDA being higher in that might lead to a year end high but there are particular dynamics in play both our seasonality of our.
Expenses on power and the savings that we are encouraged code that that will moderate that backend gave anything you weren't exactly that.
Yes, I agree with Thomas I mean, we're clearly trending above where we thought we would be because their expenses that were not incurring for travel for marketing for other things all things being equal we would rather be incurring those expenses and being in front of customers but.
But thats the world that we're living in today.
As Thomas mentioned third quarter, usually does bring a bit higher power cost and a bit lower margins. So I wouldn't expect to see those Q2 margins continue into Q3, but we are trending above the midpoint, if we get to Q3 and see that will be trending above the range. Then, we'll we'll look to adjust the range, but our philosophy.
Guidance as to try to set a realistic guidance.
Range at the beginning of the year, unless we're trending significantly above or below either the higher LOE of that range to leave it alone.
And.
Right now we're comfortable with the range on EBITDA.
Okay. That's fair, maybe then just a follow up on.
It Atlanta can you give us an update on that market what does that maybe the pipeline look like is it still maybe oriented towards either smaller or larger type deals and then maybe just sort of the competitive dynamics in that market. Thanks.
No that's great.
As in all of our areas, where we do business. There is a blend of smaller and larger deals and that doesn't necessarily mean smaller and larger companies. We get very large companies that do start with smaller deployments because they need to be next to a couple of customers. So they represent or are they need to be next to.
On a particular piece of infrastructure that they need in terms of their business. So they will start small and then they tend to land and expand which is why 70 or so percent of our growth tends to come from existing customer expansions and renewals. So.
We expect that trend to continue so there is a mix of large and small opportunities in Atlanta, we do continue to see a lot of interest in that facility and we're working with some customers too.
Settle down and do a significant deployment some of those customers are more impacted by the current state the economy and the current state.
Cove it in terms of the timing of their signings, but there is a healthy pipeline of interest and which we've mentioned we continue to add customers to that facility.
Great. Thank you very much.
And our next question will come from our equine with BMO capital markets. Please go ahead.
Thank you.
Moving on that last no you mentioned some customers have.
Actually delayed decision.
Yeah, and Atlanta to what extent that you see that else elsewhere in the portfolio.
Maybe you can you talk to delineate parity in the quarter, particularly.
Regards to deal signings.
Yes, we continue to I mean, some every company has impacted slightly differently.
By this current economy and current state of coded and we are not that impacted collectively by other companies art. So we have some companies where they're accelerating because they are growing faster like telecommunications and outpace companies et cetera, and we have other companies that are.
That are slowing down what they're doing so in the mix. The net impact is that we're able to maintain our growth because some are moving faster than they thought they would and others are slowing down a little more so in the next we're continuing on what we feel is that trajectory to meet the guidance that we put out to the market and we believe that we will hit though is that.
Range.
Towards the end of this year, both in terms of EBITDA and in topline revenue.
Got it Okay and then maybe just following up on the on the cloud node conversation.
What extent or you're adding conversations with other cloud cloud providers, they may or may deploy in your data centers and with the existing cloud customers that have deployed there an opportunity for them to deploy nodes in other markets outside of Vega.
Yeah, we actually in Degas and in Reno and Grand Rapids, we have all the major cloud deployments all the major cloud are available on that with within our facilities Almond Atlanta, they're beginning to work with us to deploy there. The we expect that to continue and we expect as the ecosystem draws more.
Customers at the clouds, they'll want to access those customers and the customers will want to access the cloud. So I fully anticipate that we will continue to enhance and expand upon our cloud deployments within.
Within our facilities, but remember we're not a wholesaler to the cloud.
We have business with declining we always have targeted around 20% of our revenues to be cloud and the rest of it will be.
We'll be large scale retail ecosystem deployments, so that allows us to maintain a certain margin profile as well as a revenue profile that we enjoy so they're up to facilitate earnings aspect of our datacenter, but they will never be 90% or our target is not to make them 90 or 100% of our data center deployment.
But but are you think your point, having to the cloud node within our walls. As we said is a great advantage they see that too and I think there's the opportunity to replicate that model in our other primes, particularly with with an east coast location I think Atlanta is a.
There is a market that would make a lot of sense for the the clouds to to deploy within to have both in east West and.
In east posted a west coast node within switch.
Got it thank you.
Okay.
And once again, if you like a question. Please press Star then one.
Our next question will come from Michael Rowe with Citi.
Thanks, and good afternoon, I was wondering if you could speak a bit about.
Where the the bookings are coming from in terms of the sales channels today I'm. The director of some of the indirect relationships something that you talked about in the past, but also.
What are the opportunity to get sales from these cloud partners or other affirms that located in your facilities that end up being magnetic for other tenants. Thanks.
Yes.
All right well first of all Mike welcome to the call. Thank you for joining.
We have most of our sales right now are coming directly we do work with all the major brokerage houses to facilitate relationships with them and have their customers.
Deploy inside of our facility. So it's a mix of the two but some of them more recent deployments have been direct sales.
The absolutely we worked with the cloud providers, just as we work with our existing customers to collaborate with the cloud providers. The cloud providers are also working with us to bring new customers and to deploying be next to them inside of the facility and that's why it is a very symbiotic relationship between us up.
Wider and them as a customer and because as I mentioned before when already with on the phone.
The having a very robust market. If you will have customer that's available to the cloud makes that facility in the campus more attractive to the cloud to deploy there and having a multiplicity of clouds makes it more attractive to.
The customers, so by having that balance and that that ecosystem in harmony, you actually facilitate the growth of the whole even better than if you didnt have a balancing your too heavily levered, one way or the other so we really strive to have an ecosystem that facilitates growth for everybody and all aspects of the need.
Are there whether it be cloud the telecom be vendors that are providing services to our main customers. Our main customers have access to those vendors. So there is a whole ecosystem concept and we are constantly working with everybody to make sure that their needs are fulfilled by the other citizens. If you will that sit inside of our ecosystem.
Thanks, David Yeah.
And this will conclude our question and answer session concluding the switching second quarter 2020 earnings conference call, we'd like to thank you for attending today's presentation at the time you may now disconnect your lines.