Q3 2020 Switch Inc Earnings Call
Good day and welcome to the switch a third quarter, 20th 20th earnings Conference call.
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Matthew Heights. Please go ahead.
And good afternoon, everyone. Thank you for joining us today for our third quarter Twentytwenty earnings call switch has maintained a high level of execution with respect to our key strategic and financial objectives through the first nine months of 2020.
Our third quarter financial results and bookings performance reflects sustained momentum and solid demand trends across all of our prime campus locations.
While also maintaining an industry low leverage ratio of less than 3.5 times net debt to adjusted EBITDA.
Through the first nine months of 2020 hour revenue trajectory has met expectations set forth in our initial guidance.
Which was provided pre covid while.
While adjusted EBITDA has traded above expectations.
Do do tighter cost controls and improved operating efficiencies.
He was formerly the president and Chairman of Alaska Communications, followed by a long career at sprint involving several executive positions.
For the nine month period, ending September Thirtyth Twentytwenty revenue with the core campus grew 7% while revenue it to keep citadel and pyramid primes grew at a combined rate of 58% year over year.
The health care vertical continues to be a top strategic growth priority for switch as we believed switches tier five platinum data centers are purpose built to support the highly regulated in data intensive requirements of the health I T sector.
In addition to our unmatched resiliency, 100% uptime track record and multi level security protocols switched.
As an annualized revenue at full deployment.
Now turning to our data center construction milestones and project pipeline.
During Q3, we delivered a 10 megawatt power system in the core campus to facilitate ongoing customer ramps in Las Vegas datacenter 11.
Moreover, we expect to finalize construction on an additional 2100 cabinet equivalent and 10 megawatts of incremental power infrastructure during the fourth quarter of Twentytwenty.
Thomas today, I'm going to review our financial results for the third quarter of 2020 and discuss our outlook for the full year.
1.6 million for the same period of 2019.
And utility rates that exceeded normal seasonal patterns in large part due to the California, wildfires, which caused a periodic spike in open market power rates in August.
Lower SG&A spend partially offset the increase in power costs as we remain disciplined and operating expenses during Q3.
Los on interest rate swaps, which had a minimal impact on net income per diluted chair.
We provide a full reconciliation of GAAP net income attributable to switch Inc. Two adjusted net income attributable to switch Inc. In the financial tables of our queue three Twenty-twenty earnings release available on our Investor Relations website.
Adjusted EBITDA totaled 67.2 million for Q3, 2020, compared to 60.8 million in Q3, 2019, reflecting year over year growth of 11%, excluding 3.2 million of adjusted EBITDA from a nonrecurring fiber transaction in the year ago quarter.
Adjusted EBITDA increased 17% year over here.
Third quarter, adjusted EBITDA margin was 52.1% increasing from 49.7% in the year ago period, [noise], primarily due to a reduction in S. G and a as a percentage of revenue, partially offset by higher power costs.
Capital expenditures in the third quarter of 2020, where 82.6 million compared to 121.2 million in the same quarter of 2019, where 92.3 million excluding land purchases.
We invested thirty-three point 3 million at the Citadel campus, primarily attributable to the ongoing build out of two new sectors at Tahoe Reno datacenter, one to accommodate strong customer demand capex. It to keep campus was 24.6 million for tenant improvements at Atlanta data Center. One in addition to sidewalk.
Work in preparation for the construction of Atlanta datacenter too. We also invested 21.6 million an ongoing site development work for Las Vegas, Datacenters, 14, 15, and 16 and 3.1 million in the pyramid campus for additional power and cooling infrastructure.
In in total debt outstanding at a weighted average interest rate of 4.1% inclusive of our interest rate swaps on the remaining term loan balance.
As of September Thirtyth 2020, the Companys total debt outstanding net of cash and cash equivalents was $892.3 million, including finance leases, resulting in a net debt to last quarter annualized adjusted EBITDA ratio of 3.3 times compared to 3.1 times.
Six.
In conclusion, we firmly believe that switches well aligned with industry dynamics and favorably position 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 our customers our partners and our shareholders for their continued support a switch.
We would now like to open the line for questions.
Speakers. Your lines are now open we will now begin the question and answer session ask you. A question you marry Press Star then one on your Touchtone phone, you're using a speaker phone. Please pick up the handset before pressing the keys.
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At this time, we'll pause momentarily to assemble our roster.
Ooh.
Our first question today will come from Eric Rasmussen with people. Please.
Please go ahead.
Yeah. Thanks for taking the questions first maybe on your Atlanta Prime you continue to make progress announcing another new meaningful wait and a quarter, but overall can you just provide some additional color on those leases signed and maybe the progress you've made so far and and you know what are some of the tree.
And the pipeline there would suggest increased activity.
Yeah. Thank you for that and I will tell you that we are very excited and continue you're very excited about our progress in the Atlanta crime, we have over 20 customers. There right now and we recently signed Uhm a tenant very recently that will be an anchor tenant in Atlanta more day.
That will come about that tenant as a finalized and their deployment architecture, uhm and various technical aspects of their deployment, but once they deploy they will generate north of $6 million of annualized MRC and they will they will cause the building to be a little over 66% committed.
We're seeing an increased amount of back pressure from customers I.E. there he needs in the growth of their IP needs did not flow down during.
During this cobot period, but their ability to address them did slowdown in some sectors. So we're seeing the relinquishment of that slowdown and we are seeing an uptick in activity and we're very very positively influenced by what we think is going to be in Q4, and we are very confident in our having good.
Bookings in the next quarter.
Great. Thank you.
Our next question today will come from Sami Abboud tree with.
Credit Suisse. Please go ahead.
Hi, Thank you.
I had a question regarding just the switch pipeline of deals that you had kind of in mind in process, partially with the S. Three sales force you entered 2020 with probably a robust pipeline and then covance hit that obviously paused or pushed things out.
Do the three Q results and your expectations and for Q does that essentially are those catch up deals or are those incremental to what you guys were originally expecting going into 2020 and I.
I can clarify the question of market sounds confusing in case of the X. rays that.
No. Thank you Sammy Energous first first is that our S. Three team continues to hit its stride.
Make tremendous progress we're very excited about the way that team has so quickly come up to speed and been able to represent our product very well even when in person meetings are not as possible through covitz. So their progress is remarkable in normal times and as exceptional during these times so it's hard to.
The second part of your question, it's really hard to segregate out what we saw as would've come anyway versus backed up pipeline from.
The co bit items, because you expect to certain transaction volume on each year based on prior momentum that you've had in pre existing years. So we have seen some deals that got slightly delayed but all in all we've been booking revenue as we anticipated we would despite coded.
And that's why we have reaffirmed the impact tightened our guidance and enhanced our EBITDA. So we are doing what we said we are we would do and we expect Q4 to be even more robust.
Got it thank.
Harvest of my first thing efficiencies from kind of lower T and use the lower head count expansion, but just wondering you know do you think that's going to revert back to kind of a lower 50 per cent range going forward are there any kind of efficiencies you can pull forward you know into your model as we look forward to next year.
[noise] I'll take it out.
[laughter] Eric. Thank you for that question clearly with there are some expenses that we are not expanding this year because of Covid. For example, peony, but we've also found that a lot of what we're doing virtually is working quite well and as we go back to what is hopefully going to be a normal environment at some point next year.
We expect to continue to to utilize the tools that we've been utilizing effectively today and so we would expect some of those savings to continue we're right in the process of our 2021 planning cycle. So obviously, we're not ready to talk about 2021 in terms of providing any guidance, but nevertheless, the challenge to our team is to continue.
New to operate efficiently to use the lessons that we've learned this year and to to enhance our margin wherever possible.
Great and one more to supplement.
No I'll go ahead and supplement.
<unk> is that yes, we have deployed some software to increase sufficient case and we have learned to do virtual tours, we've learned to do a virtual conferences, we maintained a flathead count despite growing significantly in terms of our revenue this year and increasing the size of our footprint and we expect to carry.
Those efficiencies forward. So there will be some return in terms of travel and it's handle things like that but there will also be some material efficiencies that we can carry forward and a postcard.
Great. Thanks, that's helpful and one more if I could I'm I'm wondering if you've had any traction uhm around your edge product over the last quarter and maybe you could provide a little color on what the economics and returns on that could look like I mean can you get a typical 2400 $100 per month type of M. R. R. On installed cabinets and can you achieve that kind of you know 20th.
<unk> per cent stabilize yields you've been able to get in your core campuses with this edge product. Thank you.
Yeah. So we haven't released any additional data yet on the edge product, but we continue to work with our partners on development of that product and there will be some announcements and they're not too distant future uhm with those announcements will come discussions regarding the economic topics, but gave is there anything else you wanted it on the interim and that risk.
<unk>.
Yeah, I think as we've alluded to it earlier calls we expect returns from that product to be very similar to our returns for more larger data centers.
Whether it's $2400 per cabinets or slightly more.
We believe that is going to be very healthy product for us.
Okay, great. Thank you.
Oh next question will come from our reply with BMO capital markets. Please go ahead.
Thanks, just a question on the on the guidance specifically the rat revenue for this year. It seems like the <unk> revenue range. There are quite why particularly compared to last year. At this point. So maybe you can talk about the puts and takes uhm at the high and low end of the range.
Yeah, It's a range uhm.
It is arrange real we're getting to year and so we did tightened it but it's still a range and I think the important takeaway is we're.
We still believe we're going to go to maintain the midpoint that we've been talking about all year and we're we're comfortable with that number.
Yeah, Okay, it's been really nothing nothing.
No nothing to change it no already asked that we put out a guidance range. The beginning of the year and we accommodate that request and as long as we feel like we're going to operate within the range that we put to the market. We'll we'll try to stay within that range certain you know mathematical requirement, especially with respect to it but you know allow us to tighten up.
That range, but for the most part we'd like to put our guidance out and unless system that you wouldn't want he'll change we'd like to say that was six.
Got it and then just on the utility costs being higher in the corner as is any of that carrying over into the into the fourth quarter is that largely at gunpoint.
No it's largely done with.
Alright, thank you.
Our next question today will come from Michael Rollins, but the city. Please go ahead.
Okay.
Michael Your line may be muted on your end.
Sorry about that hey, guys don't be sorry my.
[laughter] just warming up.
Curious, we could talk about the journey a bit on the interconnection side and the journey to monetize that better where you are with that had to think about the incremental opportunity and then just secondly, more broadly just in terms of the if you look at sort of the.
Book to Bill kind of framework you provided in the slides in terms of when the revenue could come through for the bookings how does that influence the potential for growth in 2021.
Thanks.
Okay.
Mike I think your first asking about interconnections or cross connects is that correct. That's correct yep.
So our cross connects continue to grow their up over 4% of our revenue year.
Year over year, they groups Degroup quite nicely and we're continuing to to monetize more cross connects as they come up for renewal.
You know historically, we didn't always monetize all of our cross connects and we've been doing that more aggressively we still think there's quite a bit of a runway on that.
And clearly as we continue to expand our footprint.
That alone creates an opportunity for additional cross connects as customers move into new sectors, and new facilities, there either connecting back to their own footprints in other sectors or some of our other facilities or two two customers or.
For our clients within those facilities. So we think there's still a good runway on the cross connect business.
Interesting are connectivity business in general is still growing quite nicely grew about 7% year over year. When you adjust for the the fiber transaction in Q3 of 2019 that we had to account for in that one quarter because of the accounting rule changes.
So we're still very bullish on our connectivity business and and as you know last quarter, we announced a very large connectivity deal was one of the largest contracts was the quarter last quarter was was purely a telecom deal.
So we're.
We think it's one of our the differentiating factors for switch it really does help us in the states in the sales process and as far as the bookings and timing of that going into into the out years. We did provide some additional disclosure on the timing of the bookings conversion to revenue in the supplemental slide deck.
But of course, we're just going through the planning process now for 2021, and so we're not really ready to talk about guidance other than.
Have grown for 20 years, we certainly expect to continue to grow.
Thanks very much.
HM.
Our next question will come from Frank Wootten with Raymond James. Please go ahead.
Great. Thank you two quick questions what would have to happen to hit the high end of the range, we're pretty far into the year here you got a pretty good visibility on it so for to get the high end of the range for revenue. What are you what goes into that expectation and then on the margin expansion the quarter anything kind of covid related or one time, it might mean or.
Burnt over time or is this a new a new baseline for margins. Thanks.
Yeah as far as our revenue.
Oh go ahead Thomas.
No I was gonna say you are absolutely right that you will have a couple of months left to hit it it depends on the right and which were able to do installs and then do that billing uhm. We're confident that we will come within our range and there is the possibility of coming in towards the higher end of that range, but it does depend a little bit on <unk>.
<unk> and the ability for people to send out uhm team to do the installations. So uhm. There's just that there is an unknown variable, but we are confident about coming within the range that we put out to the market.
Uhm. So gave you Wanna talk to anything further on that point.
Not on that point, but with regard to the margin question Frank is Tom.
Thomas alluded to earlier, we do think we will be carrying forward efficiencies into next year and beyond from some of the things that we've learned during this covid.
Operational.
Time period so.
Hesitant to say, it's the new the current margin is our new baseline because we are hoping that we're going to be able to send teams to travel to customers and to.
To work on sales calls and and to travel to to see you.
At various conferences at some point.
But we certainly believe that we can carry forward some of the efficiencies that we're currently seeing into the future.
And just let me follow up.
Yeah go ahead without the frame.
This is a follow up how how much did how much did covid restrict growth. This year you said some of this it depends on whether the companies can get teams and not due to their not necessary. So that implies it's not necessarily their lack of desire. It's just more of their their ability how much would you say.
<unk> type thing impacts from Covid restricted growth this year.
It's really interesting with some cotton we've talked about this on prior calls with some companies it actually enhanced their growth.
And cause their industry to flourish and so they did more of the retail sector of course, you know in terms of online retail and online sales and people that were doing content distribution networks. Those all did very well in those grow other divisions or other gray areas, where more directly impacted by Covid and.
A smaller portion of our business and they were they were more help back by what they did so it's a mixed bag in any economic times. There are some companies that are damaged and some companies that are disadvantaged by whatever's going on in the marketplace, but we are seeing interest from some of our customers that postponed some of their projects are now coming in and making them.
This project so the ones that did well are helping us meet the numbers that we set out that we would do for the market and the ones that were held back a little bit are now coming in and helping us build up a robust 2021.
Alright, great. That's very helpful. Thank you.
Our next question will come from Richard show with J P. Morgan. Please go ahead.
I just wanted to ask about the contract lengths, both the new and existing contracts with blanks wondering over five years is this and then.
And they've been kind of growing a little bit for awhile. This mainly because of maybe trying to get anchor tenants are more.
Longer deals into the new expansion campuses are are you seeing this is from the customers wanting to sign kind of larger and longer deals.
Yeah, So I'm like Trust you might've been Richard.
The Thomas you can add but it's but it's definitely customer driven we're seeing the customers, particularly in the campus locations like Atlanta in Reno wanting to sign longer contracts.
That's what's pushing that Ah.
I totally agree with that.
And with the healthcare deals is this something that you are you're salesforce is focusing on or is this through channel. How are you targeting the healthcare industry in terms of sales.
Yeah, we have a segment of our sales group that is targeting the healthcare industry and having a tremendous amount of success. We were looking at our customer mix and Oh, we when we did so we realized that we had north of the 80 customers plus that we're in the healthcare industry and so we.
Focused on that and said why are they coming to talk to a few of them and they cited our regulatory abilities, our compliance and our uptime as key factors for their desire to come here and then others really looked at the green initiatives that they had and and then we have and so we started talking to them and we.
Found that there is a large number of healthcare customers that are interested in the product that we're offering and we've been successful in further penetrating that marketing garnering some more of those customers and they're they're great customers. They wanna sign longer deals. There there is much because of their regulatory compliance concerns as they are the technical concerns.
So they are very stable customer base in there one that can grow with you significantly overtime.
Great. Thank you.
Our next question will come from Brendan Lynch with Sparklers.
Please.
Great. Thanks for taking my question.
I think it's understood that you don't have a ton of capacity right now in the pyramid campus in Grand Rapids, but maybe you could talk about how demand is there for you to build out additional sectors.
Yeah, if we get email is we get significant me any more demand. There. We will start building that building you see then our long range plan. There are two more buildings that are slated for the Grand Rapids campus and as we see growth mm Mmm matriculate there we go.
Will be in to break ground and build out in those locations or that located right. Now. So we are building simultaneously on three campuses and building multiple buildings.
In Las Vegas, Uhm. So we are totally totally busy in developing those three campuses, where it is the greatest amount of interest in the greatest amount of uptake.
What would you attribute the difference too between premium the three other campuses, where you're seeing quite a bit of demand relative to Grand Rapids.
Yeah. That's that's a that's an interesting question.
We obviously Vegas is the anchor so itself procuring item and up in Reno, you have the entire bay area and the state is north that are providing.
And flow into Reno, and then in Atlanta, you have the entire south east it's pulling their in Michigan, you have Chicago et cetera. There is some competition there and we believe that Atlanta will take off and we'll get going it's doing very well as a single building right now and it's been very profitable when we start to land additional anchors there.
Or have interest for large megawatt deployments, we will quickly deploy we are we have permits to go deploy we have our necessary <unk>.
Construction abilities to go there and we will build as soon as there is.
Sufficient need to make that a viable item for us economically.
Yeah, I would add you to the exit.
Is it Las Vegas, we have hunter.
100 customers just in Las Vegas, so that does create.
A self fulfilling ecosystem because those customers are constantly expanding there's a cadence to Las Vegas.
Reno.
Seeing strong demand coming out of California for all of the benefits that we've talked about in the past in terms of tax benefits lower cost of power 100 per cent prefab power lower cost of living et cetera in Grand Rapids that in a smaller footprint building that we've that we've purchased and we do still have space available there and we.
Still.
Definitely.
Looking to expand that campus overtime, but right now we're seeing tremendous demand in Atlanta, Thomas just talked about the fact that we just signed an anchor tenant with so with that.
That building is approximately two thirds committed and we need to get going on the next building because it does take a while to build so we're going to be moving as quickly as we can.
Sure, but I'll make sense.
<unk> somewhat of a related question I believe you mentioned that you had a return of cabinets at your request at the core campus. Maybe you just hate it give me some color on how unusual this is and whether you were able to reposition the customers who you took the cabinets from.
Yeah, I'll take that one it's really not that unusual.
We have almost 1000 customers so they're constantly rejiggering their deployments and changing their technology stock and when they do that they sometimes rejigger their their cabinet deployments I think we talked about the fact that we also had a return of 300 Logan to the cabinets because that customer was caught.
And trading on new geared into their high density cabinets and are able to to give back space that makes sense for them that makes sense for us. The the the 120 cabinets that we ask the customer to release was because we had another customer that needed that space and the customers that we asked to release is actually moving in.
Two is expanding into another one of our prime is rather than taking those reserved cabinets. So it's a win win win.
Great. Thanks for the color.
Yes.
Again, if you have a question that has started done one.
At this time I'm showing no further questions.
So this will conclude the question and answer session.
The conference has now concluded. Thank you for attending today's presentation you may now disconnect.
Thank you all.