Q1 2021 Switch Inc Earnings Call
Good day and welcome to the switch Inc. First quarter 2021 of the earnings Conference call. All participants will be in a listen only mode should you need assistance. Please signal of corporate specialists per person in the store key followed by zero. After today's presentation, there will be the opportunity to ask questions to ask a question you May Press Star then one. Please note that this event is being.
A recorded I would now like to turn the conference every Matthew Hines Vice President of Investor Relations. Please go ahead.
Thank you operator, good afternoon, and welcome to switch Inc. First quarter 2021 earnings conference call.
On the call today are Thomas Morton switch, President and Dave not switch CFO.
<unk> 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 a forward looking statements, which are subject to certain risks uncertainties and assumptions are.
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 in the section entitled Risk Factors. In addition, today's call includes discussion of non-GAAP financial measures, which should not be.
In isolation from or as a substitute for financial information prepared in accordance with GAAP.
Please refer to today's press release and supplemental package for further information, including a reconciliation of non-GAAP measures. Our first quarter 2021 earnings press release has been furnished to the SEC as per.
Part of our form 8-K and is available on our Investor Relations website at investors switch Dot Com I will now turn the call over to switch President Thomas Morton.
Thank you, Matt and good afternoon, everyone. Thank you for joining us today for our first quarter 2021 earnings call.
Switch is pleased to report another strong quarter as we continued to execute on key business initiatives driven by strong customer demand.
Our first quarter of 2021 of financial results reflect continued business momentum and improved operating efficiency across all of our prime campus locations first quarter revenues were $139 million, increasing 5.5% year over a year when adjusted for nonrecurring fiber.
Transactions compared to the year ago quarter.
Adjusted EBITDA was $73.4 million, representing 19% year over year of growth with an adjusted EBITDA margin of 56.1% ex.
Excluding the benefit from the $2.8 million of nonrecurring license fee income the first quarter adjusted EBITDA margin was 54% representing.
Representing 600 basis points of a year over a year margin expansion.
We continue to see an elevated level of demand across our business and our sales team. Once again stepped up to deliver a strong bookings quarter coming off of a record quarter 'twenty 'twenty.
In the first quarter switch signed $18 million of incremental recurring revenue and total contract value of a $117 million.
This marks our third consecutive quarter with at least $18 million of incremental annualized revenue bookings and more than $100 million in total contract value.
We believe this consistency in sales execution further highlights the value of the strategic hires that were made to bolster our sales force as these individuals have made a significant contribution to our organization since coming on board. In 2019. We are also pleased to report.
The switch ended the first quarter with a record recurring revenue backlog of more than $57 million eclipsing our previous record of $50 million set last quarter the.
The demand across all primes came primarily from existing customers, who continue to expand their footprint with switch.
As discussed last quarter and elevated volume of multi megawatt transactions over the past several months has resulted in large space and power reservations that have a limited the amount of contiguous and immediately sellable inventory give.
Given these near term inventory constraints, we continue to be strategic about how we allocate capacity and approach our customer technology requirements.
We maintain a proactive dialogue with customers, what's the reserve cabinet space and power to optimize the utilization of that infrastructure.
One such instance, Inc. Q1 resulted in a two megawatt power upgrade by a customer in the core campus, enabling us to monetize power without reducing physical space or a cabinet inventory.
As previously disclosed switch recently executed a definitive agreement to acquire a data foundry for $420 million in an all cash transaction. The first major acquisition in our company's history. The multi phased strategic transaction will provide immediate capacity to <unk>.
Sell in both the Austin and Houston markets, but more importantly provides the foundation to launch our fifth Prime campus.
We believe this expansion of our footprint into the Texas market creates a long runway of growth and strong returns for our shareholders due to the immediate benefit of geographic diversification. The addition of new strategic customer relationships and the positive underlying dynamics of technology.
Enterprise migration to the Central Texas corridor.
I would now like to discuss some of switch is notable first quarter activity and key metrics across the existing prime campus locations.
In the first quarter switch added 24, new logos accounting for approximately $2 million of annualized recurring revenue and $6 million in total contract value with their initial deployments in our ecosystem.
We completed a five megawatt expansion with a fortune 100 semiconductor company at the Citadel campus totaling $7 million in annualized revenue and $38 million in contract value in the core campus, we signed a three year renewal.
Oil and expansion with a fortune 500, biotech firm totaling over $9 million in contract value and also completed a two megawatt expansion with an existing hyperscale cloud customer totaling $6 million of incremental contract value.
In the pyramid campus, a leading regional bank customer executed a multi year expansion with over $4 million in incremental contract value in.
In February of 'twenty, 'twenty, one switch and its joint venture partners closed on the sale of the supernatural Italia to I P. I partners, resulting in a five point for a million dollar gain in Q1.
As part of the same transaction switch increased its equity interest in Super Nap, Thailand.
The old thing than a 30% interest in the Thailand asset while also maintaining control over our international intellectual property license.
Lastly in late April switch issued its annual ESG report, which was prepared in accordance with the G. R. I S. A S b and T C F. The reporting frameworks.
Some of the key highlights from the report include continued environmental leadership with 100% renewable power and zero scope two emissions across all of datacenter operations since 2016.
A 40% ethically diverse workforce.
Nearly one to one parity and our male female employee pay ratio a board with three out of eight female directors and board committees comprised of 100% independent directors now turning to our construction milestones.
And project pipeline.
Following their seat of all necessary a construction permits in late Q4, we have continued to accelerate construction on several projects within our development pipeline. We currently expect to complete construction on three new data centers in the core campus the Citadel campus.
And the keep campus between Q2 of 'twenty 'twenty two in Q2 of 'twenty twenty-three at full build out. These three facilities will total 1.3 million gross square feet and up to 160 megawatts.
As these facilities are constructed we are also completing site preparation work on four additional facilities.
Including two in the core campus.
One each in the citadel and keep campus locations.
These assets have planned completion dates ranging from 2024 through 'twenty 'twenty six and will comprise an additional 1.6 million square feet and up to 200 megawatts. Upon full build out we have provided new disclosures on page seven of our.
A investor presentation that details our pipeline of active and planned data center construction over the next five years. Additionally, realizing of that in the current times site visits are not as feasible. We have added a library of construction photographs to our investor.
Web site, showing the progression of our ongoing development efforts in the core Citadel and keep primes I will now turn the call over to Gabe to discuss our financial results.
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Thanks, Thomas today, I'm going to review our financial results for the first quarter of 2021 and discuss our outlook for the remainder of 2021 switch.
The switch reported first quarter 2021 revenue of $130 9 million, an increase of $2 8 million or two 2% compared to the first quarter of 'twenty 'twenty excluding.
The impact of nonrecurring fiber transactions first quarter revenue growth was 5.5% year over year co.
Colocation revenue for the first quarter of 2021 was $107 3 million up 6% compared to $101 2 million in the year ago quarter connect.
Connectivity revenue was 21.9 million, increasing 2% sequentially and 3% year over year when adjusted for nonrecurring fiber revenue.
Other revenue, including professional services accounted for $1.7 million in Q1 of 2021 essentially unchanged compared to the same quarter last year.
Importantly, the customer revenue reductions initiated in Q4 were fully absorbed in the Q1 run rate and we do not anticipate further material events of this type of in 2020 one.
As of March 31, 2021 switch had approximately 17200 billing cabinet equivalents, reflecting 600 net cabinet additions compared to the prior quarter. Our average monthly recurring revenue per cabinet also increased on a sequential basis exceeding 2500.
In Q1 of 2021.
This metric can be influenced quarter to quarter based on the timing of large installations within the period. However, the underlying trend toward increased power density demanded by our customers continues to support strong unit economics in our business.
We had more than 8900 billing cross connects as of March 31, and cross connects accounted for $4. One per cent of total revenue in Q1 'twenty 'twenty. One this compares to three 7% in the year ago period, reflecting 12% growth in cross connect revenue.
Now turning to bookings during Q1, we executed 534 contracts comprising approximately 11 megawatts, representing total contract value of $117 million in annualized revenue of 37 million at full deployment inclusive of both renewals and sales of incremental services.
Excluding renewals the signings represent 18 million of incremental annualized recurring revenue, including $16 million in incremental bookings from existing customers and approximately 2 million from new logos.
As of March 31, 2021 a recurring revenue backlog stood at just over 57 million up from the prior record of 50 million set last quarter, we expect our backlog to contribute approximately $16 million of incremental revenue during 2021 with the remainder contributing in 'twenty 'twenty two.
And beyond.
Customer churn was 0.1% in Q1, 2021 compared to 0.4% in the year ago quarter. As a reminder, we define churn as the reduction in recurring revenue attributable to customer terminations or non renewal of expired contracts, resulting in a full customer exit from the switch platform.
Divided by the revenue at the beginning of the period.
First quarter cost of revenue increased by 4.7 million compared to the year ago quarter, primarily due to an increase in depreciation excluding depreciation amortization and equity based compensation. Our Q1 2021 adjusted cost of revenue decreased by 5% driving a 190 <unk>.
Basis point improvement in adjusted gross margin and a 5% growth in adjusted gross profit, which increased to $97.3 million.
First quarter SG&A expenses were $35 million down from $40 1 million in the year ago quarter. This 13% year over year decrease in SG&A was primarily attributable to lower professional fees and general and administrative costs I would note the year over year SG&A cost comparisons bigger.
In Q2 of 2021 will be less favorable as we lapped the one year anniversary of COVID-19 protocols.
Q1, 2021 income from operations increased 15% to $24 2 million compared to 21 million in Q1, 'twenty 'twenty growth in operating income was attributable to the 5.1 million dollar reduction in SG&A.
Interest expense increased by 1.3 million to $8 8 million in Q1, 2021 primarily driven by higher debt balances, partially offset by lower LIBOR rates compared to the same quarter last year as of March 31, 'twenty 'twenty. One we had approximately 1 billion in total debt outstanding and a one.
<unk> average interest rate of 4.1% inclusive of interest rate swaps on our 400 million dollar term loan balance.
First quarter net income was $24 4 million compared to a net loss of $3 5 million in Q1, 'twenty 'twenty. The growth in net income was primarily attributable to a $3 2 million dollar gain on interest rate swaps in Q1, 2021 compared to a $17.6 million loss on the swaps in the year ago.
Water.
Other significant items impacting net income include a $5 4 million dollar gain from the sale of our interest in Super Nap Italia and license fee income of 2.8 million related to an agreement to use switches intellectual property for the construction of Datacenters in Saudi Arabia.
Adjusted EBITDA totaled $73 4 million for Q1, 2021 compared to 61.5 million in Q1, 'twenty 'twenty, reflecting year over year growth of 19.4% or.
Our adjusted EBITDA margin for Q1, 2021 was $56 one per cent, increasing 810 basis points from the year ago quarter.
Excluding the $2 8 million in license fee income adjusted EBITDA margin was 54% adjusted funds from operations or a F. F. O was $60 9 million in Q1, 2021 of 26% increase compared to $48 5 million in the year ago quarter.
A F F O per diluted share was 25 cents compared to 20 cents in Q1 'twenty 'twenty. Please refer to the appendix section of our Investor presentation for a reconciliation of net income to a F F O.
Maintenance capital expenditures were $2 1 million for the first quarter of 2021 or 1.6% of revenue compared to $1 3 million and 1% of revenue in the same quarter last year.
Growth Capex for data center construction and improvements was $98 3 million for the first quarter 2021 compared to $78 9 million in the year ago quarter. Please.
Please refer to our press release and Investor presentation for a detailed breakdown of capital expenditures by campus as of March 31, 2021 the switch primes had capacity for 24200 cabinet equivalents within our open sectors of which 91% were committed under contracts compared.
The 88% in both Q4 and in the year ago quarter. Please refer to page seven of our investor presentation for utilization rates across each prime campus looking now at the balance sheet as of March 31, 2021 the company's total debt outstanding net of cash and cash equivalents was 1 billion.
The resulting in a net debt to last quarter annualized adjusted EBITDA ratio of 3.4 times unchanged compared to the prior quarter as of March 31, 2021 switch had liquidity of $538 9 million, including cash and cash equivalents and borrowings available on a.
Walloping line of credit as we mentioned in regards to the date of foundry acquisition. We are currently evaluating financing options to fund the acquisition, we expect to finalize our issuance of new debt securities in the coming weeks prior to closing the acquisition.
As of March 31, 2021 there were 241.5 million total shares outstanding, including 127.5 million class a shares and $113 9 million class B shares as disclosed in recent 8-K filings during the first quarter of 2021 our members.
Redeemed 7.7 million common units, resulting in the issuance of an equivalent number of class a common shares.
An additional $3 3 million class B shares had been redeemed in the second quarter of 2021, bringing our class a public float to 54 per cent of total shares outstanding now.
Now turning to guidance for 2020, one we are increasing revenue and adjusted EBITDA guidance to reflect our stronger than expected first quarter results and continued expectation for a ramp in customer installations toward the second half of 2021 I would note that this guidance represents switch standalone expectations.
And excludes any contribution from our announced acquisition of date of foundry, we intend to update guidance. Accordingly. After closing the acquisition revenue in the range of 543 million to $555 million, reflecting 7.3% organic year over year growth at the midpoint is.
Adjusted EBITDA in the range of 281 million to $290 million, reflecting an increase of $6 four per cent compared to 2020, and an adjusted EBITDA margin of 52% at the midpoint.
Lastly, our guidance range for capital expenditures, excluding land acquisitions remains unchanged in the range of 330 million to $370 million. We continue to have a significant amount of space and power reserve for large customer deployments in the second half of 2021 although installations of pace slightly ahead of their.
Contractually committed time lines year to date.
We remain optimistic the revenue growth will continue to accelerate throughout the year returning to a more normalized level of growth as we exit 2021 and now I will turn it back to Thomas for some closing remarks.
In conclusion, we firmly believe that switch is favorably positioned for the rapid digital transformation among enterprises as they continue their migration to hybrid multi cloud architectures.
We are working hard to accelerate delivery of additional data center capacity to meet the strong level of demand. We are currently experiencing.
And we are confident in our team's ability to execute.
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.
We will now begin the question and answer session to ask a question you May Press Star then one on your Touchtone phone.
If youre using a speakerphone please pick up your handset before pressing the keys to majority of your question. Please press Star then two and at this time of a pause momentarily to assemble the roster.
And a first question today will come from Sami debris with credit Suisse. Please go ahead.
Hi, Thank you.
I've noticed there's been a lot more commentary of messaging around the international opportunity in a kind of just wanted to revisit what the switch strategy really is going to be a at least going forward and I know you just made the date of Andrey.
Intense acquisition I just wanted to double check here are you guys go into a potentially considered a international targets or will the international opportunities look a little bit similar to what you guys already a is doing today.
Tammy good afternoon, and thank you.
You're right. We just did the day to foundry acquisition, which means that we've expanded from one to a now five campuses since we went public.
So that's a pretty pretty aggressive rate of expansion, we did rightsize the international a attributes that we had and we have no problem with looking at.
Other international opportunities should the need of rise.
But the or the opportunity arise, but currently we are focused on making our fifth prime a success and also being a successful in developing the 1.3 million square feet that we have under development at three of it before the end of the crimes.
Got it. Thank you and then the other question of habits regarding productivity and specifically the part that is.
Maybe under more pricing pressure that the part that probably more directly compete against other true.
IP transit providers or a connectivity providers could you just give us an idea on led.
Levels of pricing or pricing pressure that switch may be seeing in the market.
Yeah, the well telecom pricing is always a decreasing pricing model right every time when a customer of a news they renew at a lower price I mean, I can remember when the gigabit.
We're almost a $100 per gigabit and now we're buying them for a less than the dollar. So it is obviously been a decreasing but what happens is people deploy new technologies and those technologies such as Wan.
Result in larger margins and they increase.
The amount of bandwidth they need and the increase in the amount of bandwidth that outpaced the decreases in prices also we continue to increase the number of people participating in the telecom cooperative so as we bring in new revenue and as current customers expand the revenue. This is a.
Growing revenue item of four switch and overall, we've been able to maintain a fairly consistent a profit margin off of those customers.
Sami This is Gabe as Thomas mentioned, you know telecom is a declining price product. It always has been so when.
When you look at our telecom growth over time. It has remained 17% to 18% of our revenue for several years, which means it's keeping pace with our co location growth. Despite the fact the unit economics decline.
In the telecom space, so customers are making up for that unit economic decline by expanding their networks and buying more capacity and buying more circuits. So.
So the fact that it remains.
17, 18 per cent of our overall revenue is a fantastic given the given the dynamics of the telecom industry.
Got it thank you.
And the next question will come from Erik Rasmussen with Stifel. Please go ahead.
Yes. Thank you for taking the questions maybe just as it relates to your guidance and specifically EBITDA you raised the midpoint by about a million and a half but you know given.
Given the meaningful outperformance this quarter the run rate would have probably suggested a higher number is there anything to read into this or where.
What we should expect for the remainder of the year it might be keeping a lid on on your expectations there.
Sure Yeah, two things.
Go ahead Gabe.
Okay.
Yes.
This is one of the things about being remote.
So two things and then I'll, let Gaye and I'll turn to gave the supplement the first day is that as COVID-19 restrictions continue to ease there is the potential for our team to do more travel and if that happens then there will be an uptick slightly and expenses regarding the G. E. M. The second thing is that in Q3.
We tend to see an increase in power costs, and we always want to know that that's out there and be a cautious about increasing too much with that coming out.
As you've seen a last year, we had a the winter storms in Texas.
The year before that we had the Cal ISO issues with the pipelines and the fires in California. So in Q3 Q4. There is some uncertainty with respect of power costs. So we want to just be cautious about how much we raise in the front end of the year knowing that there is an opportunity for power cost changes or dynamics in the back.
And of the year.
Gabe.
You hit a both Thomas we're good.
Thank you Sir.
Great.
And then in your prepared remarks, you talked about the supply constraints and limitations due to a lack of having a contiguous space I guess that suggestive of a there's a lot of larger deals coming through the pipeline, but what what can you do you can the team do in the near term to sort of eat some of that and obviously your date of foundry a acquisition could help.
A alleviate some of that but also the a robust development pipeline. It seems like there's a lot that will be coming online towards the latter part of the year.
That's right we're doing everything we can to accelerate a development as much as we can but everybody has to remember at the end of the day. This day as bricks mortar concrete and steel.
It does take some time to develop them. So we are moving as quickly as we can on all three fronts and.
We have also purchased a fifth prime which will have the ability to bring some more opportunity online as.
As we closed the acquisition of begin to build out the remaining space and data foundry.
So we are working to expand our footprint as fast as we possibly can and we feel the need.
To bring more space power and cooling online as fast as humanly possible.
And Eric just to clarify the you know the next large building will be coming online at the.
At the beginning of 2022.
Slated for Q2 of 2022 and with another two large buildings coming online at the beginning of 2023. So we have about one 2 million square feet coming online between 'twenty to 'twenty three.
But we're building as fast as we can data foundry will add some capacity, but the large expansion.
2022.
We've also you know I think we've mentioned what I mentioned in my comments that.
We have added progress progress of slides a onto our IR website.
So that investors can see what's going on in three campuses that we are currently deploying on and see the expansion as that begins to evolve.
Great. That's helpful. Thank you.
The next question will come from Ari Klein with BMO capital markets. Please go ahead.
Thank you.
Just following up on that.
Is there a little bit of a of risks maybe an air pocket, we don't have it.
The deal will capacity and the weather.
Given that a lot.
Lot of the capacity isn't coming on until next year and the following year.
Yeah, we believe we havent well, we've given our growth rate for this year given the available capacity, we have capacity coming on next year and we've also bought data foundry, which will provide some incremental capacity for us to grow into so we believe that we'll be able to continue our growth trajectory through.
This year and into next year, and then as additional buildings come online we will be into enhance a that growth because we will have the opportunity with the additional inventory.
Okay, and then it's been I guess a week since you announced the date of foundry acquisition.
Can you just talk to the customer response since then what have you.
From then any early read.
The market.
Yeah, we have had some a customer inbound calls a.
Asking us about a our availability in Texas, and if theres a space that we might be able to sell.
Those come from existing customers and a couple of new customers. So that is encouraging we have had as part of the diligence process.
Calls with a number of data foundries a largest customers. Those calls are all well received very proactively very well.
And so we do not expect there to be a significant bounce of client flux in the course of this transition.
Yeah.
Okay, and then just a quick clarification more of a nonrecurring.
Previously included in the outlook.
They were not.
And they are now the guidance correct, yes. They are.
Thanks.
Yeah.
And our next question will come from Richard crew with the J P. Morgan. Please go ahead.
Alright, and the disclosures for the long term plan development.
Yes.
Some of the earlier questions maybe.
Development.
Strength, you're seeing near term.
A little stronger than you expected and the need to build a little bit faster not for just 22.
But also a 'twenty three and beyond that which is kind of far away.
Is this a change.
The way you are addressing.
Or capex should run relatively high for the next few years.
Or was this always kind of a plan.
Yeah, I'll, let Gabe address the capex, but what we had as you know in the end of 'twenty 'twenty of actually the last two quarters. In 2020, we had some very large sales those sales committed space, while the revenue roles in this year as we chew through that backlog.
That space is committed and therefore not available to be sold.
That reduced the amount of available inventory that we have to sell in 'twenty 'twenty. One there was also as we've spoken about a slowdown in the issuance of permits which has been relieved which delayed new buildings coming online slightly we had been working day and night as fast as we can to bring more product online.
As fast as we can so that we can serve the market and the customers that we are being asked to serve and we've also expanded to a fifth prime and will begin construction there too.
To expand those properties as well so you know it's a at the modern respects. It's a good issue to have because we have a temporary bottleneck due to robust customer demand and the fact that people would really like to be located inside of our data centers and mercy of our services as to the Capex trending Gabe do you want a comment on that.
Yeah, and Richard when you say when you ask is it a change.
A change certainly since our last.
Quarterly call when we talked about the need to build as fast as we could because our are a our space was being committed based on the bookings that we were signing so if you look at the last three bookings, we had $18 million of incremental bookings in Q3 of.
2020 of 36, which was.
A huge quarter for us from Q4, and another $18 million.
This quarter. So we've had a lot of large contracts that have ramped so as Thomas alluded to that space is gone it's committed.
The revenue will ramp in over the back half of this year and into 2022 and in some cases beyond but the space committed and so we have to build as quickly as we can so it's not a change from from the last call. When we talked about the fact that we're building as fast as we could in Las Vegas, and Reno and in Atlanta.
Lantus, a 70% committed from a power perspective already which means again, we have to build so we're going as fast as we can capture.
Capex, we've given guidance for this year, we haven't given any guidance for for next year, but we will continue to build as quickly as we can until those.
Those Reno in Atlanta facilities come online and then of course based on customer demand. We'll we'll look at the longer range plan the things that youre seeing on slide seven of our Investor day under the planned development for 2024 and beyond.
We will scale of those based on customer demand.
And a quick follow up with the Kimpton is a highly or almost fully committed.
I guess are you approaching those with just leaving that space.
The bill for existing customers or how do you balance that with the new customers at this point.
Well more than 70% of our incremental demand each year comes from existing customers expanding and so a they assume that they will take a portion of the a space that we have but.
But we added 24, new logos this quarter and we are always looking for new logos to continue to enhance and increase the robustness of the ecosystem. So we're not a reserving any cabinets for anybody in particular its.
It's just the first person to place the service order will receive those cabinets.
That's correct, yeah, we have some customers once they sign an order.
If it includes a ramped in that space, it's committed unlocked.
But unless unless theres a service order for a specific cabinets.
It's it's sellable and we will sell it to both existing customers as they expand a new customers as they move in and we do have customers that have rights of first refusal and spaces filling up we're asking people to either make a decision on that were left that space, though.
Great. Thank you.
And our next question will come from Colby <unk> with Cowen. Please go ahead.
Great. Thank you.
I guess first off at the thought was up I think you said, 26% year over year I was wondering if you could talk about what's driving the magnitude of growth that we're seeing.
A any color on what that might look like for 2021, and I guess as part of that these brand and a that we're talking about you know what what does a typical.
Ramped in a.
It looks like is of such thing as a as a typical ramp in another space debt.
Utilized including debt.
The minutes of space, but not necessarily installed.
How much do you typically get a near a rule of thumb or we get say for every.
The deal there is an extra 10 per cent of incremental inventory that you're holding on behalf of.
Just trying to get a sense of Oh, we should start to think about that.
Yeah, Colby I'll answer on the incremental cash.
Cabinet space as Gabe mentioned, we have customers of have reserved cabinets that are committed because they have signed ramps.
To load into that and we've built that into our backlog in less they have signed and committed to take the space. We do not hold space for people. There are people that have brokers, but what we do is we can give them notice that somebody else would like their space and they can either take it or release it back into inventory, so, but there isn't the orient.
So there's a ramp but its a better do you get paid while you're waiting for the ramp do you you asked do they actually have to install before you get your first dollar for the for that state yet does that ramp and typically six months or is it typically a year just any on the.
That would be helpful.
No that's great day, there's two ways that people can do it some people pay a it's built into the price that they ultimately pay for the space.
The ways that the ways that that is currently architected either it's in the full price per kw and its amortized over the term we figure we want to have a target if a day margin on that deal.
And based on the pricing in the ramp and the waiver holding space, we will know what sort of charge, we want a make to that customer. The other way that people can do it is they can pay a reservation fee.
While they decide whether or not the going to ramp into that space.
They will pay that restaurant reservation fee per pet designate a period of time and at the end of that period, they've either exercised it or choose to exercise. It at the end or it's released back into inventory those of the two a structure that most people have with respect to a reserved space.
Gabe do you of any comments on the a F O question.
Okay.
But first let me chime in on the on the ramp Colby I think as we talked about.
In last quarters call historically customers would ramp in if there was a large deal they would start installing in the same month three in the ramping over a 12 or 18 month period.
Based on their need but what we saw with COVID-19 is that customers were a bit reluctant to.
To sign a firm commitment for a ramp there was that fast. So we were seeing some deals come in with say a ramp in six starting in six months.
And instead of 18 months of ramp they would ask for 36 months of ramp now historically, we've seen customers go faster than their from their minimum rent because remember when they're signing an agreement that's a firm commitment and so we would see customers go faster, but obviously, we don't we base our bookings on signed commitments, we did see the customers win.
A bit faster in this first quarter, which is why were adjusted guidance upward that in conjunction with our bookings, but we have seen customers ask for a longer ramp period, whether they will exceed that.
As of yet to be determined but.
You asked what is typical you know there's no such thing as an exact typical ramp but historically, we've seen shorter ramp periods than what we're seeing today because of of the COVID-19 transaction and what's driving the COVID-19 effect and what's driving <unk> frankly, it's the EBITDA increase EBITDA when it went up 19%. So that's a.
Clearly what's driving the.
The change of net.
Well.
Okay, and any color on a FIFO for for the full year.
Yeah, We don't guide a F F O and at this point, we're not intending to do so.
We do guide to EBITDA and I think you can give a.
A pretty good indication based on our EBITDA guidance as to where we began.
Got it.
Yeah.
Thanks Colby.
And the next question will come from the cross that with Goldberg. Please go ahead.
Hey, good evening Clare.
A question on churn first didn't see a come back down again in the quarter.
I was wondering if you could give us an update on the debt Wednesday of last quarter or has there been any.
There is any of that been back filled.
And then how is I guess churn tracking so far in Q.
Oh, it's a it's a great question on the churn it.
It is good to see a go back down for those of you that a need a refresher we had two customers debt reduced their service levels with us.
So that they could take advantage of some cloud offerings with respect to cold storage and that was about a two megawatts worth of reduction from Q4 I'm pleased to report that we.
We replaced those two megawatts that went to the cloud with a cloud customer that moved into our facility. So if the ecosystem you know, it's kind of ironic that they left for the cloud and replace them with cloud.
But that has happened and it happened in the exact following quarter, so pretty pleased by that.
We have no indication that there are any major churn events that are upcoming this year the customers appears stable and growing with us and you can see this quarter on the <unk>.
Vast majority of our growth came from existing customers actually expanding a.
Which is great to see and we don't expect a any to be exiting a that we know of for the course of this year.
Okay. That's helpful. I guess my question a follow up on that would be what the delta between the relief I guess right.
Sure.
A the churn rate.
Okay well.
Yeah.
I won't speak to the specific rates on specific space, but you can see in our disclosures that our average revenue per cabinet is now over $2500. So it continues to increase so we're seeing additional yield from the cabinets that we're selling.
So we're not seeing a significant rate reduction and we're seeing customers continue to dense up their cabinets, which gives us more revenue.
Okay. That's helpful. And then if I could just ask one about kind of the funding needs of the business longer term.
Lee.
And they go up with the foundry.
Ill.
I guess, how should we think about the puts and takes.
Ex longer term going forward.
The company's tolerance for leverage.
Historically, you've been at the low end of the state.
How should we be kind of thinking about that.
Sure you know historically, we had been at the low end you know we've been in the three times range for for years because of the way we deploy capital a very modular so we'll deploy just enough power and cooling as we open up a sector for those customers that have moved in and there is more of a when we deploy more power and more cooling and that EBITDA.
All of them. So it keeps our leverage profile low, but we've also said we're.
Never needed to be a levered, but we're certainly not afraid of a particularly when you looked at 97% of our revenue is recurring and is very very stable and so this was an opportunity to use our balance sheet, we often get asked why aren't we using our balance sheet.
More strategically to grow where we see an opportunity, but we found one historically, we haven't been able to find an opportunity.
In our profile in terms of the quality of assets the location of the facilities and this really fit the bill. It's a good quality assets located in Texas, where we really want it to be given our strategic relationships that we have with many of the customers that are particularly moving into Austin.
Which is a fantastic market, we think in the future. So this fit the bill and the closing we expect leverage to be about four seven times EBIT.
EBITDA and will continue to fund our capex growth as.
As well and we don't see the need to a to lever beyond a.
A position, where we're comfortable we're certainly comfortable being in the fours and in the upper fours, even going above five temporarily should we need to.
But we're comfortable with our leverage profile, we're still going to be at the low end of the.
Of the peer group even after this acquisition.
Okay. Thank you.
Hello next question will come from Eric <unk> with Wells Fargo. Please go ahead.
Great. Thanks, I was wondering if on the your development.
The pipeline do you have the ability or have you historically seen much activity in terms of pre selling or almost like pre leasing like some of your peers do I'm just wondering if there's any.
<unk> opportunity for instance, at like Las Vegas, 15 to sell some of that capacity in advance of opening the facility or a or typically would would you you don't see as much of that giving you a more of an enterprise customer base and then the other question I had was on the MRC per cabinet equivalent increased to over 2500, maybe if you could talk a little bit just how.
That's trended over time and is that the growth in that metric primarily come from.
The more power density or.
Have you also seen growth and whether it's contract ramps or connectivity services like cross connects.
Yes.
Alright, thank you.
Eric So a couple of things one is a.
Usually it's the wholesaler model, where you see people doing pre leasing or pre selling and in our in our portion of the market and we don't see as much of that just historically and we have people taking larger deals, but we generally people like to tour the facility see the facilities and know that the facilities are coming online so that they can plan.
They are infrastructure, that's going to go into into that facility. So.
That's the quick answer to that one on MRC per cabinet I'll, let Gabe talk to that but quick notes. We do have increases in MRC kept per cabinet that come from density we've seen a pervasive increase in the amount of density that customers are using and then we also see an increase in connectivity a which includes an increase.
In cross connects cross connects of continue to increase as a portion of the connectivity revenue and a portion of our revenue overall.
Of course with day to foundry, we have picked up another 2000, plus cross connects as part of that acquisition.
Gabe.
And as far as the trend on revenue per cabinet.
Over the last several years, we've gone from about $2300 per cabinet. The 24 and now just over 25, so the trend is increasing.
Despite what you see in the industry with repricing risk, we're seeing additional yield from market from a from our cabinets and it really does come primarily from density increases and additional utilization.
The the telecom.
Network is also expanding in net for certain customers.
It expands more rapidly than others, but we see increases from both density and connectivity the densities driving the majority of it.
Great. Thank you.
Our next question will come from Tim long with Barclays. Please go ahead.
Thank you.
Two questions if I could.
One could you talk a little bit about a kind of developments with a switch edge and maybe give us an update on on the Fedex a deal and how that's going and then second.
Can you talk a little bit about.
Thank you mentioned some interest from customers for the Texas for.
The new Prime could you just talk a little bit more broadly about how you're seeing a kind of cross cross selling lately.
Across the the other four primes as well thank you.
You know a perfect. So as to edge you know, we continue to work towards the development of edge facilities.
Remember edge is something that a strategic for us, but not a huge a contributor to revenue. We don't have any revenue in the 2021 forecast for edge and so it's not going to be a financial contributor in this fiscal year as two Texas, Yes, we have seen customers express interest and the.
Megawatts that are available in Texas, and we continue to see people wanting to cross sell and the fact that it is existing customers of switch proper of that are interested in Texas shows us the power of that cross selling a remember that in Atlanta about 50% of the customers in Atlanta, our new logos in the us.
The 50% of our existing customers that have expanded into that location. So cross selling is something that we see as a very valuable attribute.
Of the prime ecosystem.
Gabe.
And Additionally in this last quarter some of the contracts that we signed were actually renewals with incremental increases that involved.
Multi campus expansions moving from Las Vegas to Las Vegas, and Reno. For example, so we continue to see the benefit of having multiple locations.
And a very happy with the way the the customer base of expanding.
Okay. Thank you guys.
Thank you.
And our next question will come from Brett Feldman with Goldman Sachs. Please go ahead.
Yeah. Thanks for taking the question and maybe just a bringing it back to sort of the M&A strategy in the.
The path I think a lot of investors would not anticipate the that you would be pursuing deals mainly because you have it in the past, but also the standard of the facility that you build a proprietary facility really unlike anything else there in the market and so you got me.
You just can't buy assets that looked like the assets. You currently owns a so I guess the question is what do you have to get comfortable with when Youre looking at someone else's portfolio to be to be comfortable that you can fold it into your portfolio and deliver an experience to the customers that aligns with the brand.
The entity built because you obviously have some incredibly unique elements to your brand identities such as having had a 100 per cent uptime. So that's the first question just because it would seem like you might have a much more expansive opportunity over time in the M&A field. If we can get a better handle for what you're willing to do and interested in doing it and then the second one is a different topic just.
From a supply chain standpoint, a lot of angst around a stress on a global supply chains and that showed up in your business at all in terms of.
Any of the infrastructure assets, you need to acquire to build out your campuses or have you heard anything from your customers that need it and need some flexibility to deal with their own the supply chain issues. Thank you.
Alright, so light in there Brett. Thank you first of all of the M&A, you're absolutely right. We have a until now not found an asset that we were interested in acquiring the date of foundry asset was the best in the region and it's a it's a good asset it's a very it's not a switch level asset, but its a very solid well run.
Data Center and we were also a very pleasantly pleased when we had the ice storms in Texas and data foundry managed to stay up uninterrupted in both Austin and in Houston. So that was a wonderful unplanned test that they passed with flying colors. They also have a store.
L a reputation for service, but as large as the date of foundry transaction was at $420 million. It is the catalyst for our fifth prime or prime tend to be at least 1.5 million square feet. The idea is to use as the date of foundry asset as a way to catalysts for the.
Growth and rapid expansion of that prime as good as the facilities are what we were also is equally or more interested in that transaction was the contracts. They have a very robust amount of very high quality customers and also their team.
Their team has been with them for as long as 27 years is a long enduring stable team that has been very successful in that region. So if the team the asset in the contracts together a.
With the location made a very compelling model for us to consider and so we took that on and that was the first time that we've done one is theres a possibility of us doing more in the future, but this was a unique a new.
Unique asset the ticked a lot of different boxes for us.
With respect to your question regarding supply chains.
We have not seen any slowdown from our customers in terms of requesting any sort of deferrals on their deployments as a result of supply chain management.
All of our customers have lived up to their take or pay expectations.
Nobody has requested any reprieve from that as to our own construction, we have very strong a.
Relationships with our suppliers and steel is a little difficult to obtain but we have been able to get ourselves to the front of the line and obtain the steel and concrete that we need to continue our construction unabated.
Okay.
Thank you.
And the next question will come from Frank Louthan with Raymond James. Please go ahead.
Hey, guys. This is rob on for Frank.
So you mentioned during your prepared remarks that the G&A cost savings are going to comp less favorably for the remainder of the year, which makes sense can.
Can you give us a ballpark percentage of some of the COVID-19 related cost savings that you estimate are here to stay more permanently.
And then secondly, and then secondly are the COVID-19 related permitting delays you've referred to in your conversations with US from the last couple of calls are they now mostly behind you guys or should we expect that those could still be a factor going forward. Thank you.
Yeah I'll jump in on a go ahead of.
Of the savings.
First.
Talked about last quarter, our margins in 2020 increased from about just under 50% in 2019 to 52 and a half in 2020 and if you look at our guidance, we're guiding to 52% EBITDA margins for 2021, so that means that the 250 basis point improvement, we expect to make about 200 of those.
<unk> permanent.
We do expect that there will be some additional SG&A costs in the back half of the year and of course in Q1.
Of 2020, we were still operating pre COVID-19 so the SG&A.
Comparison is quite favorable in Q1.
So the comparisons will get a bit less favorable as we move throughout the year, because we shut down in <unk>.
Q2 of 2020 of 2020, and you know we're not traveling we werent doing charitable contributions because of those have been shut down. So there were a number of things that just stopped.
We will see those comparisons play out throughout the year, but we do expect to make the majority of the savings that we experienced last year permanent and that's why we.
We set the guidance that we did.
Making about 200 of the 250 basis point pick up a permanent.
Great and then all of the COVID-19 related permitting delays.
So we have.
Gone through the the of COVID-19 relating permitting delays, we have been issued all of the permits that we need to continue construction and again, that's part of the reason that we put up the pictures of the current development. That's underway in three out of four of the price. So that the investors can see what we've been building and track that progress from a vision.
A visual point of view.
Great. Thank you guys.
Thank you.
And the next question is a follow up from a quote.
Sorry, that's the rent the current please go ahead.
Great. Thanks for fitting me in again.
You mentioned a suite starting Superman Italian I think you said you recognized a $5 million gain.
I'm curious how much you actually ended up selling it for I assume that's different than the 5 million game and then is it.
Correct to understand the I guess, you took that capital and roll that into.
Boosting your stake in in Thailand, and then I guess as it relates to Thailand, how how are you going to be recognizing that as that can end up getting a yeah.
<unk> 30 per cent of the total revenue is going to a shopping your revenue 30 per cent of EBITDA and your EBITDA you can actually Inc.
Net and your aunt that though just trying to get a sense of what's actually happening there. Thank you.
Yeah, Colby we did in a.
With Italy, we had a stake in supernatural international which was our international joint venture and supernatural International held a stake in Super Nap Italia. So a super Nap Italia got sold there was a gain that basically flowed upstream to Super Nap International and the supernatural International also.
Held an interest in a in Thailand. So we essentially exchanged some of that interest in supernatural Italia of force additional interest in Super Nap, Thailand, and recognized a gain but we don't consolidate any of their financials on our books. We use the equity method accounting will continue to use equity method accounting pursue.
Thailand as it exists, but one of the other important aspects to that transaction was a.
When we first set up supernatural international this was.
Years ago before I joined the company right before I joined the company. So it must have been six seven years ago, We gave us the exclusive international license to our partner overseas as part of the sale. We took back our international license for all of our IP all of our technology and that's what allowed US to then license that IP in Saudi Arabia and record.
Ignite that $2 8 million a.
License fee. So we have a bit more flexibility as to what we're going to do internationally now that we have our license back and we will have an increased stake in Thailand, which will continue to use the equity method.
The accounting for that stake.
Thank you.
And this will conclude our question and answer session all from a concluding today's call we'd like to thank you for attending today's presentation and at this time you may disconnect your lines and have a great day.
Thank you all.
Thank you.
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