Q4 2021 Switch Inc Earnings Call
Hello, and welcome to switch, Inc. 's fourth quarter and full year 'twenty turned to one results conference call. My name is Alex and I'll be coordinating Nicole today, if you'd like to ask a question at the end of the presentation. You can press star one on your telephone keypad, if you'd like to withdraw your question you can press star two.
I will now hand over to your highest Matthew Heinz VP of Investor Relations over to you Matthew. Thank you operator, good afternoon, and welcome to switch Inc. Fourth quarter and full year 2021 earnings call on the call today are Thomas Morton switch, President and Gabe Nacht switch 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 in the section entitled Risk Factors. In addition, today's call includes discussion of non-GAAP financial measures, which should not be considered in isolation from or as a substitute for.
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 fourth quarter 2021 earnings press release has been furnished to the SEC as part of our form 8-K and is available on our.
Our investor website at investors that 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 on our fourth quarter and full year 2021 earnings call.
Switch accomplished another solid quarter as we continued to execute on our strategic growth initiatives and sales opportunities driven by strong enterprise demand for our tier five and environmentally sustainable data center infrastructure.
We view 2021 is a transformational year for switch as the company delivered upon its strategic priorities, including the successful acquisition and integration of data foundry.
Coinciding with the launch of our fifth Prime campus in Texas known as the rock switch.
Switch also gained board approval to move forward with its plan for a REIT conversion effective January 2023. In addition to the advancement of construction on new data center capacity totaling one 3 million square feet.
We intend to build upon this momentum in 2022 with another year of solid execution as we progress towards our 2023 REIT conversion and the achievement of our five year growth objectives presented at the Investor Day last November .
Our fourth quarter and full year 2021 financial results detailed on slide four of our Investor deck reflects strong top line momentum across all of our prime campus locations.
<unk> fourth quarter, 2021 revenue growth accelerated to 26% year over year.
<unk> organic revenue growth was 17% year over year, excluding the contribution from data foundry.
Full year 2021 revenue of $592 million was increased 16% year over year.
Which includes a 27 $4 million revenue contribution from data foundry.
Organic revenue growth was 10, 4% for the full year.
Furthering switches strong track record of double digit organic top line growth.
We are especially pleased to achieve this milestone in 2021, despite our relatively constrained inventory position coming into the year end.
And COVID-19 related delays in customer ramps that affected growth in the first half of 2021.
Fourth quarter, adjusted EBITDA increased 22% year over year to 85 $8 million, including a $5 1 million contribution from data foundry.
Full year 2021, adjusted EBITDA increased 17% year over year to $315 1 million exceeding the high end of our guidance range on stronger than expected margins.
Our adjusted EBITDA margin.
53, 2%.
Increased 70 basis points compared to the prior year, despite absorbing the lower margin data foundry assets, which contributed $11 6 million in adjusted EBITDA over seven months of operations.
Gabe will provide additional details on our Q4 financial performance and 2022 guidance later on today's call.
Our sales teams continued to execute favorably upon a strong demand pipeline.
Delivering fourth quarter incremental annualized revenue bookings of nearly $30 million, the second highest quarter since our IPO and exceeding the trailing 12 month average of $22 million per key.
<unk>.
For full year 2021 hour increments until annualized revenue bookings totaled a record of $80 million eclipsing the prior record of $76 million set in 2020.
2021 was also a record year for connectivity revenue bookings.
With $29 million of annualized recurring revenue contracted including $11 million signed during the fourth quarter. These bookings represent large scale network migrations by highly strategic customers, which I will describe in greater detail later in the call.
New logo acquisitions remained solid with 81, new logos added during 2021 inch.
Including 19 first time clients added in Q4.
Switches strategy to develop differentiated excess scale technology ecosystems across the United States continues to drive increased customer engagement as enterprise clients have increasingly exhibited demand for our industry, leading infrastructure across multiple switched <unk>.
Occasions.
As of December 2021, multi campus customers comprised over 40% of total revenue.
<unk> to 35% in the same period last year.
Our sales activity also demonstrates the increasing diversity of our business with just over 40% of our annualized revenue signings coming from primes other than Las Vegas.
Both in the fourth quarter and full year 2021. These primes contributed an impressive 67% of our full year 2021 organic revenue growth.
With particularly strong growth in the citadel and keep campus locations.
For the fourth quarter of 2021, the core campus represented 62% of total revenue.
Followed by the Citadel rock keep and pyramid primes, representing a combined 28% of total revenue.
The remaining 10% of fourth quarter revenue was comprised of the core cooperative and other revenue, which is not allocated to a specific prime campus.
This information can be found on slide 17 of our investor presentation.
I will now discuss some of our notable fourth quarter activity and key metrics across the switch primes.
<unk> signed a two megawatt agreement with an existing cloud software vendor at the Las Vegas 15 facility.
Representing nearly $4 million of annualized revenue.
This represents our initial customers signing at our newest tier five platinum data center at the core campus, which remains on track to open in early Q2 of this year.
Due to an exceptionally strong demand funnel for this new facility.
We have accelerated the build out of the building second sector to enable a back to back opening for the first two sectors of Las Vegas 15.
This will facilitate expedited installations for tenants looking to quickly ramp up deployments and drive accelerated revenue recognition from our newest asset.
We also completed a colocation and network services agreement with an existing fortune 100, global technology customer totaling more than $6 5 million of incremental annualized revenue. This agreement will expand the customers existing footprint at the core campus.
And also migrate significant portions of its telecommunications network to the core cooperative.
Switch executed a multiyear expansion order with an existing global logistics customer for incremental collocation and telecommunications services at the core campus and keep campus.
The contract represents approximately $5 million of incremental annualized revenue and over $40 million in total contract value.
Subsequent to year end the same customer signed an additional network deal that is expected to generate over $6 million of annualized revenue for switch. This transaction will result in the migration of over 800 network locations to the core cooperative.
Driving a greater than 400% increase in the customers' port bandwidth capacity and at the same time, reducing its current network cost by over 30%.
This represents an exciting win for the switch telecom sales team and further validates the power of our unique telecommunications purchasing cooperative during the fourth quarter switch completed multiyear renewals with two of its top 20 customers representing a combined.
$8 million of annualized revenue and $36 million of total contract value.
Subsequent to Q4, we completed a four megawatt expansion order with an existing global cloud service provider at our core campus. We expect this transaction to commence billing in the fourth quarter of 2021 with ramps extending through 2024.
Sure.
Also subsequent to Q4, we finalized another key renewal with a top five customer.
Extending the client's term through 2025, and securing $46 million of total recurring revenue over the new contract term.
And finally in December switch announced that it received the highest environmental rating from S&P Global's, New ESG credit indicator report card.
Which is the only company among more than 180 issuers in S&P's global telecom sector to achieve an E. One rating, including all other public and private peers in the United States data Center industry.
Now turning to our construction milestones and robust project pipeline.
During 2021, we delivered a total of 40 megawatts of new power capacity and approximately 1600 cabinet equivalents across the portfolio.
This includes the delivery of one new sector and 30 megawatts of additional power at Tahoe, Reno, one and the second sector plus a 10 megawatt power system at Atlanta one.
All of the aforementioned infrastructure delivered in 2021 was substantially committed by customer contracts prior to being placed into service.
Turning to our 2022 development priorities.
We continue to make significant headway on active development projects in Las Vegas, Tahoe, Reno, and Atlanta, totaling one 3 million square feet and 150 megawatts of power capacity.
These three facilities represent approximately half of our 2022 capital expenditures budget.
Our most immediate priority is the delivery of Las Vegas, 15, which is expected to be open for customer deployments in the second quarter of 2022 as previously discussed we have secured a two megawatt anchor customer and sector, one and possess strong visibility.
City in the sales funnel to have significant portions of sectors, one and two committed by mid 2022.
We are also engaging in customer discussions regarding presale commitments in Tahoe, Reno too and Atlanta three.
Which are scheduled for completion in the first quarter and second half of 2023, respectively.
As can be seen on slide seven of our investor deck.
Which has a total of approximately 4 million square feet of data center capacity that is on track to be developed through 2026. This represents an 80% increase to the $5 1 million square feet of data center capacity currently.
In service.
For definitional clarity our planned development projects on slide seven includes seven data centers scheduled for completion between 2024 and 2026 in order to maximize cost efficiency and accelerate the delivery of future capacity, we are completing the underground.
Utility work pad completion, and additional site preparation for subsequent facilities spanning all five prime campus locations.
The preliminary work on these seven facilities represent approximately 20% of our 2022 Capex budget and the remainder will be incurred closer to the anticipated in service dates in accordance with our real time evaluation of customer demand.
I will now turn the call over to Gabe to discuss our financial results.
Gabe.
Thanks Thomas.
Today, I am going to review our financial results for the fourth quarter and full year 2021, and discuss our outlook for 2022.
Starting with slide four of our Investor presentation switch reported full year 2021, total revenue of $592 million growing 15, 7% compared to the prior year revenue of $511 5 million.
Excluding a $27 4 million revenue contribution from data foundry switch revenue increased 10, 4% year over year to $564 7 million on an organic basis.
Full year 2021, adjusted EBITDA was $315 1 million, increasing 17, 4% from the prior year adjusted EBITDA margin was 53, 2%, reflecting a year over year increase of 70 basis points.
Now turning to slide five switch reported fourth quarter 2021 revenue of $161 4 million, an increase of $33 6 million or 26, 3% compared to the fourth quarter of 2020, excluding data foundry revenue of $12 1 million switch fourth quarter revenue.
<unk> totaled $149 3 million, representing 16, 8% organic growth compared to the fourth quarter of 2020.
Staying on slide five adjusted EBITDA totaled $85 8 million for Q4, 2021 compared to $70 6 million in Q4, 2020, reflecting a margin of 53, 2% and year over year growth of 21, 6%. We continue to focus on finding operational efficiencies.
<unk> throughout our business and we believe our fourth quarter results reflect this initiative.
Excluding data foundries adjusted EBITDA contribution of $5 1 million switch adjusted EBITDA was $80 8 million, reflecting a margin of 54, 1% compared to a margin of 55, 2% in the year ago quarter compared to the prior year Q4 2021 margin.
<unk> included an increase in power costs, partly offset by efficiencies in labor and SG&A expense in.
In the fourth quarter of 2021 switch reached a $35 million settlement paid in stock related to a lawsuit filed against the company by cobalt Datacenters, which failed and ceased operations in or around 2015. We are pleased to have moved on from this legal matter, which has been pending since 2017.
As a result of this charge switch reported a fourth quarter net loss of $18 5 million compared to net income of $15 3 million in Q4 of 2020.
Excluding charges related to the settlement and a $4 $2 million gain on interest rate swaps net of tax provision in Noncontrolling interest. Our adjusted net income was $4 1 million in the fourth quarter or <unk> <unk> per diluted share.
Lastly on slide five customer churn was 0.5% in Q4 2021 compared to 0.4% in the year ago quarter.
I will now provide a summary of our fourth quarter operating results fourth quarter cost of revenue increased by $23 6 million compared to the year ago quarter of which $8 3 million was attributable to data foundry.
The $15 3 million increase in switch cost of revenue was primarily attributable to higher power costs and depreciation excluding depreciation amortization and equity based compensation switches Q4, adjusted cost of revenue was 42 million, increasing $9 million compared to the year ago quarter.
<unk>.
Excluding the noncash litigation charges fourth quarter, SG&A expenses were $43 7 million compared to $31 6 million in the year ago quarter excluding.
Depreciation amortization and equity based compensation switches Q4, SG&A increased by $8 2 million, primarily attributable to litigation fees incurred prior to the settlement and higher professional fees related to our previously announced REIT conversion.
Switch reported a $10 $8 million loss from operations in Q4 of 2021 compared to income from operations of $26 3 million in Q4 of 2020.
In addition to the legal charges the year over year reduction in operating income was partly attributable to increases in depreciation and amortization and power costs.
Interest expense increased by $4 4 million year over year to $13 5 million in Q4 of 2021, primarily driven by higher debt balances due to the utilization of our revolver and the issuance of $500 million in senior unsecured notes in Q2 of 2021.
Adjusted funds from operations or <unk> was $68 million in Q4, 2021, or 22% increase compared to $55 6 million in the year ago quarter.
<unk> per diluted share was 27.
Compared to <unk> 23 in Q4 2020, looking now at our growing excess scale portfolio on slide eight as of December 31, 2021, the five switch primes had capacity for approximately 28600 cabinet equivalents within our open sectors of which 93% were committed to.
Under contracts compared to 88% in the year ago quarter.
Billing cabinets totaled 22800, a year and equating to 80% of our total in service cabinet inventory.
Now turning to bookings on slide 15.
During Q4, we executed 545 contracts, representing total contract value of $163 3 million in annualized revenue of $47 $6 million at full deployment inclusive of both renewals and sales of incremental services.
Excluding renewals switch signed $29 5 million of incremental annualized recurring revenue in Q4, the second highest quarterly bookings since our IPO.
Now looking at revenue attribution on slide 17, total Colocation revenue for the fourth quarter of 2021 was $128 7 million up 23% compared to $104 8 million in the year ago quarter.
Excluding $7 8 million and co location revenue from data foundry switch co location revenue grew 15% year over year to $128 million.
Total fourth quarter connectivity revenue was $29 7 million, increasing 38% from the year ago quarter.
Excluding data foundry connectivity revenue of $2 9 million switch fourth quarter connectivity revenue increased 2% sequentially and 23% year over year to $26 8 million on an organic basis.
Other revenue, including professional services accounted for $3 million in Q4 of 2021, which includes approximately $1 4 million from data foundry.
Now turning to our key revenue drivers on slide 20 as of December 31, 2021, our recurring revenue backlog stood at $43 million up from $37 million in the prior quarter.
Sequential backlog increase was driven by our nearly $30 million of incremental revenue signings offset by approximately 23 million of annualized revenue commencement.
We expect that $23 million incremental revenue contribution from backlog in 2022, which is factored into our current guidance on.
On a consolidated basis switch had approximately 22800 billing cabinet equivalents across its five prime campus locations are consolidated average monthly recurring revenue per cabinet was $23 58 in Q4 of 2021, excluding the data foundry assets.
Witches MRC per cabinet was $25 80 in Q4, representing a 4% year over year increase.
Switch had more than 10500 billing cross connects as of December 31, and cross connects accounted for 4% of total revenue in Q4 of 2021, reflecting 24% year over year growth and cross connect revenue.
Now looking at capital expenditures on slides 21, and 'twenty two.
Growth Capex, excluding land purchases was $110 7 million for the fourth quarter of 2021 compared to $94 5 million in the year ago quarter. Our Capex spend was slightly above the high end of our full year guidance range due to our efforts to expedite construction and accelerate certain equipment.
Purchases to meet the strong client demand currently reflected in our backlog and our near term sales funnel.
Given the high utilization rates across our existing prime footprint, our investment priorities are particularly focused on meeting or exceeding the target delivery dates on facilities and active construction pipeline, including Las Vegas, 15, Tahoe, Reno too and Atlanta three.
Maintenance capital expenditures were $2 8 million for the fourth quarter of 2021, or one 8% of revenue compared to $3 4 million and two 7% of revenue in the same quarter last year.
Which is low ratio of maintenance Capex to revenue is attributable to our proprietary designs and meticulous approach to data center construction.
Looking now at the balance sheet on slide 24 as of December 31, 2021, the company's total debt outstanding net of cash and cash equivalents was 163 billion.
This resulted in a net debt to last quarter annualized adjusted EBITDA ratio of four seven times down from 5.0 times in the prior quarter.
As of December 31, 2021 switch had liquidity of 411 4 million, including cash and cash equivalents and borrowings available under our revolver.
As of December 31, 2021, there were $243 5 million total shares outstanding, including $145 2 million class a shares and $98 3 million class b shares, including dilutive options and Unvested rsum, our weighted average diluted share.
<unk> was $249 8 million for the fourth quarter.
As disclosed in our recent 8-K filings during the fourth quarter of 2021, our members redeemed $6 2 million common units, resulting in the issuance of an equivalent number of class a common shares including member redemptions totaling $2 6 million in January and February our class a public float.
Now represents approximately 61% of total shares outstanding.
Now turning to 2022 guidance, which can be seen on page 25 of our investor presentation.
We expect revenue in the range of $660 million to $674 million, reflecting 13% growth at the midpoint, we expect.
Adjusted EBITDA of 345 million to $357 million, reflecting an adjusted EBITDA margin of 52, 6% at the midpoint.
Lastly, our guidance range for capital expenditures, excluding land acquisitions is $510 million to $560 million as we continue to accelerate new datacenter expansion across all five of our prime campus locations.
Regarding our 2022 guidance. Please note that our committed cabinet utilization is 93% across the portfolio, including 95% at the core campus and 99% at the Citadel campus our guidance for the year reflects the timing of Las Vegas, 15, opening and the expected.
<unk> of our robust booked but not billed backlog.
As demonstrated by our Q4 bookings performance and strong wins already signed in 2022, we are accelerating our development activities across the primes and remain encouraged by the strength of our pre leasing activity.
At our Investor day in November of last year, we shared our multiyear plan and today, we have even greater conviction in achieving these targets.
And now I will turn it back to Thomas for some closing remarks.
Thank you Gabe 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 our.
Our current sales funnel is the strongest in the company's history and we are working diligently to ensure the timely delivery of additional data center capacity to meet this strong level of demand.
On behalf of our entire management team, we would like to take this opportunity to thank our employees customers partners and our shareholders for their continued support of switch.
We would now like to open the line for questions.
Thank you.
I will begin the Q&A, if you'd like to ask a question you can press star one on your telephone keypad. If you would like to withdraw your question you're compressed start too.
And show you on muted locally when asking your question.
First question for today comes from Erik Rasmussen of Stifel. Erik Your line is now open.
Yeah. Thanks, Thanks for taking the questions maybe.
Maybe just starting with the outlook maybe you can provide some.
Relative puts and takes.
Do you think the revenue.
Shortfall lives compared to consensus obviously, 13% is above the peer group, but.
I think if we look at your <unk> run rate for revenue relative to the midpoint.
It would seem that guidance is conservative.
Just trying to understand sort of what the driving factors there to the outlook.
Yes. Thank you very much Eric a couple of initial thoughts first of all of these are relatively uncertain times in the market and politically uncertain times. So we wanted to put out a number that we had a very high degree of confidence that we would hit and that as we progress through the year, we may gain confidence in different numbers and then we will share those as we go through the.
Year.
As to particular monitor numerical factors I'll, let gabe weigh in on those.
Yes, Eric it's primarily based on our.
On our expectations for filling Las Vegas, 15, as you know and as you see in the numbers, we're essentially sold out on our campus locations, where at 95% utilized in Las Vegas, we're at 99% utilized in the city of Delaware at 99% utilized in Grand Rapids.
And we're building as much space as quickly as we possibly can Las Vegas 15 is about to open Thomas announced that we've already signed our first two megawatt customer in Las Vegas, <unk>, but that will ramp in and we have ongoing discussions with additional customers. In fact that same customer is looking for an additional two megawatts as.
Well as others.
By the time they ramp in revenue impact will be will be more towards the back half of the year, but we do have upside potential on the telecom side. We've signed some very large telecom deals recently that we've discussed publicly and of course that's nuts.
Subject to any space constraints.
We want to as Thomas said, we want to make sure that we're starting out with numbers that we have high degree of confidence in and then we will see how the year progresses.
Great I understand.
Maybe just the EBITDA margins.
They were strong and it looks like the outlook.
Again as for.
I think outperformance here. So maybe just highlight some of the contributing factors to that outperformance versus consensus.
<unk> had made a couple of comments in the prepared remarks, but maybe any additional color would be appreciated.
Sure I mean, we continue to integrate data foundry.
As we integrate that and execute on that integration, we're finding increased operational efficiencies that improve our overall margins and that leads to lower labor and G&A costs.
Percentage of our revenue.
It has it professional fees in 2021 also came under guidance due to the settlement of the cobalt litigation, which I mentioned in our opening remarks.
But we're expecting some increase in the power costs in 2022 that will be offset in large part by increases in power revenue and we continue to gain efficiencies in the way that we operate our campuses and leveraging the fact that we have.
Single Prime six of them that we are able to used at scale and thereby achieve operational efficiencies.
Great. Thanks, Good luck.
Thank you Eric.
Thank you. Our next question comes from Michael Rollins of Citigroup, Michael Your line is now open.
Thanks, Good afternoon.
Was curious good afternoon.
Okay.
Hi.
Two things if I could please.
First question is when you look at.
Yes.
You already have.
In service.
How much power capacity.
The veil of ball that hasn't yet been purchased or deployed.
On behalf of your customers and what.
Incremental revenue opportunity over time.
Hi.
Switch.
Customers start using more of that power capacity.
<unk> space that they are operating within.
And then just a separate question the follow up.
Your comments earlier given.
What you were describing on inventory.
Should the.
Market be mindful that there might be one or two quarters in the future that might not have.
Okay great.
Constrained.
Where are you at least.
Leasing activity is beyond that and you don't have a constraint in terms of.
Okay.
Okay.
Sure.
Mike I appreciate that and the first to the how much power capacity is available we have some information that we've put out on that point, but just to give you. An example in nap seven that building is designed to carry 100 megawatts of power capacity. We currently have deployed 70 megawatts inside of that building.
At least 30 megawatts of power capacity remaining.
To be sold inside of that facility, allowing customers to refresh in place and thereby increase revenue from those customers without having to take incremental space as we move into our newer facilities customers are becoming more efficient and consuming larger portions of that power capacity as they as customers are operating a denser.
These that are greater than the densities that we're seeing at our legacy data centers now that being said, Mike. We don't we don't put in the power capacity until customers actually need it and part of Rob's designs are.
Modular power systems that can actually be put outside of a building and plugged in if we need to so we have almost indefinite capacity to expand power in the existing shells. When we talk about our utilization numbers as you know we're talking about cabinet capacity essentially floor space and we are we are.
Paul with regard to your second question on the bookings and the potential constraints in bookings because of space, but we do have three sectors in Las Vegas <unk>.
There is available.
Our bookings and we are already talking to customers about.
Reno two in Atlanta three.
Customers are looking that far in advance for what they might needed more space.
Thanks.
Thank you Mike.
Thank you. Our next question comes from Colby <unk> of Cowen <unk> Company. Your line is now open.
Hi, This is Michael on for Colby two questions if I may.
First we've seen a theme in this sector of record leasing among the public peers and now youre talking about essentially the strongest pipeline that you've ever seen just wanted to break down the pipeline and get a better sense of whether youre seeing a greater contribution from hyper scaler in that pipeline and then second.
To the extent, our hyperscale more to want to acquire land from switch to develop a data center adjacent to your campus is that something that you'd be open to.
Yes.
Alright, so it sounds like.
Mike you might have a prospective customer sent to us.
The first is the first statement is as to Hyperscale.
What percentage of the mix. They are they tend to be about a consistent percentage of the mix, we target around 20% of our revenue coming from Hyperscale.
And those Hyperscale is due to significant deployments with us in terms of size, but they pay retail rates and they pay those rates because they want access to our customer ecosystem and they see value in that as well as seeing the value in our data centers. So we can continue to attract a variety of hyperscale.
In the proportions that we believe are well balanced for our ecosystem and at rates that are profitable for us to engage with those hyperscale.
As to land if somebody came to us with a request for a built to suit we definitely have some land, particularly in Tahoe, Reno and we would entertain a discussion.
Building, a build to suit for them on that basis.
And as Thomas talked about in his in his remarks earlier post Q4, we signed an additional four and a.
A half megawatts with a cloud provider that would be considered a hyper scaler.
In the general marketplace, but theyre not taking wholesale powered shell from us. They are taking the exact same product that every other customer. It takes we're taking the same technology. The same resiliency and they are paying the equivalent rate that a non hyperscale cloud company would pay for that for that level of utilization.
And because they want access to the customers our customers want access to their cloud the cloud is a necessary component to our to our ecosystems and having a true hybrid cloud low latency highly secure.
Availability zone for all of the cloud companies is super important to our customers and to them.
Perfect. Thanks for the color guys.
Thank you, Mike say Hello to Colby for us.
Will do.
Thank you next question comes from Brendan Lynch of Barclays.
Your line is now open.
Great. Thanks for taking my question.
Thomas You had mentioned one customer kind of relocating 800 network locations you could just give us a little bit more detail on that and.
To what extent, maybe other customers would follow suit.
Yes that is the continuing elevation of the core cooperative we are attracting as we attract more and more enterprise customers relocating their enterprise with us.
Our bringing their telecommunications needs to us as core continues to evolve empower and breadth and scope it is attracting even larger potential deployments.
<unk> was one of the largest deployments we've ever had the opportunity to do we're very pleased to have done it with a large co location tenant or a customer and we look forward to doing future transactions of this size and greater in the coming years and we've had a few a few of them in the past last year, we talked about.
A large network.
Transfer agreement that we did with a with a major logistics company there.
It is also a major Colocation company and then we've also connected a major retailer with 500 plus of their retail locations through the core cooperative and they are also co location customer, but they spend more with us on telecommunications, but with regard to that customer that Thomas just mentioned.
I want people to really understand the power of our cooperative, we're giving them over 400% additional bandwidth capacity, while saving them, 30% on their existing spend if one were to look at what they would otherwise have spent for that for 100% capacity increase the savings would have been more like 80.
Percent. So it is an extremely powerful tool.
Enterprise customers are beginning to understand how to use more effectively.
Great that's very helpful.
Just one other question on power and your ability to increase rates.
In reaction to increased power costs.
Is that only at renewal.
That in real time.
If I understood correctly in the past at some points you've been contractually allowed to raise prices, but have not done so to me.
Remained at the market level, maybe you could just give some color around that.
Power costs become more pertinent.
Our contracts all provide us with the ability to proportionally increase rates commensurate with increases that we've received from utility providers.
So the risk if you will.
Power rate fluctuations is borne by the customer who is the consumer of that electricity.
In the past there are certain fluctuations that have we believe to have been short term in the marketplace and we have chosen to absorb those costs rather than impact customer relationships that was a business strategy decision versus a contractual right decision.
But I think going forward and overall method or.
And overall theme is that we have the ability to fluctuate power cost with our customers commensurate with the cost that we are seeing from our providers.
And in the past if you look historically for the past 15, plus years power costs have actually been going down.
Typically do our annual rate increase for Colocation rates in the March timeframe.
When we saw power rates Spike last year, we did a separate increase of our power rates in the August September timeframe and reported that in our Q3 calls.
Great. Thanks for the color.
Thank you Brian .
Thank you. Our next question comes from Brett Feldman of Goldman Sachs. Bret Your line is now open.
Yes, thanks for taking the question.
The Capex budget that you outlined for this year came in higher than I think we and others had expected and you articulated why youre in your remarks, youre responding to strong demand environment and currently are very highly utilized and so it seems like you are pulling forward. So I guess the question is is that the right way of thinking about it and.
How much runway.
For growth does that create for you in other words. This year is an interesting year, where youre going to have a little bit of a deceleration in revenue a pull forward of Capex do we end up on the other side of that as we go into 2023 or is it still kind of a moving target.
Yes, we actually do end up on the other side, but we presented a.
A 10 year build plan at our Investor day, and we expect to keep building and building an instrument filling facilities as we build them, we're seeing robust demand for our for our product. We believe we can fill our facilities as fast as we can build up.
You're correct that this year. The only building that is opening up is that Las Vegas 15 facility, but next year, we'll have Reno two in Atlanta three opening in between those three facilities. That's one 3 million square feet of space that will be available.
For sale and then we've got another $2 million behind that that will come online between then and 2026. So we are building very very aggressively because we see that demand and if you recall at our Investor day back in November I presented a slide that showed how we are building typically fills.
We'll open up the sector and we will typically get that sector fully committed in terms of sales.
Either as its opening or certainly within six months, but then that sector will spill over an 18 month horizon typically as customers ramp it.
Meanwhile, there'll be selling the second sector, which will then also have that same fill rate in the third sector, which will also have that same fill rate. So we're building reaches its prime growth.
Growth period in months 12 through 24 of its activity. So if you sort of model that out.
Between Las Vegas, 15, renal too and in Atlanta, three Youll see that.
As we fill those facilities to see accelerated growth in 'twenty, three and even greater accelerated growth into 'twenty four.
That's great color and maybe just to follow up on an earlier question I think goes down the EBITDA margins, obviously the guidance implies something I think.
And then we would've guessed you just sort of acknowledged that you're finding more efficiencies is there anything more you can add to that and is it something thats, maybe just an incremental step up in efficiency gains this year and things will start to I don't know grow at a more predictable glide path after that or do you think this is something you can continue to do.
Well, we did say that our that our long term target is a 55% EBITDA margins and so to get there we've got to keep increasing our margins annually. The guide for next year is a bit down from where we are today, because we've got an additional five months of data foundry.
They do operate at a lower margin and as buildings open.
Shift what is capitalized expense to operating expense, but then as those campuses continue to fill out we see the efficiency of our campus model. So as we build the next facilities in Reno and in Atlanta and in <unk>.
Grand Rapids.
Texas will continue to gain efficiencies. That's why we're confident we will reach that 55% milestone.
Yes, Brett the short answer to your question is yes, we will continue to seek and believe that there are additional efficiencies for us to monetize inside of our operations and we do have a long term target of 55% EBITDA margin.
Thanks, guys.
Okay. Thank you.
Thank you. Our next question comes from Nate Crossett of Baron Bug Nate Your line is now open.
Hey, good evening.
And maybe just one on the REIT conversion timeline.
We tend to be watching this year in terms of milestones.
For that end.
Just an update on maybe the E&P potential distribution and your thoughts on the TRA.
It would be helpful.
Yes. So we are on track with our REIT conversion, we plan to effectively operate as a REIT as of January one 2023.
And we are working with our various outside advisors to complete that conversion in the most effective and efficient manner possible. There will be some obviously some outside expenses for professional and consulting fees in connection with that conversion process, but we are on place and on par on track and on target to complete the process Natus.
We talked about in previous calls this is.
This is a product most companies take 12 to 24 months to go through this conversion because theres a lot of work to be done we have to go through each of our income streams and assets and determine which ones are going to be REIT qualifying, which ones arent, which ones will go into a Trs and then what.
Sort of cash flows will come from those and determine how we move forward. So we're in that process right now we are.
Yes. It is.
In February we do did say that we would be taking the year to make this conversion.
So we are deep into the weeds right now of that and.
And we'll keep updating the market as we as we move through the process as far as the E&P distribution I think we've stated publicly in the past that we don't think E&P is going to be material distribution. We continue to believe that will be the case.
And as far as the TRA again that is going to be.
Something that we talk about after we go through the nuts and bolts of breaking apart the assets and income streams, because that's going to determine what benefit if any.
There will be to the TRA holders and guide us in our in our strategy on what we should do with that TRA, but.
But as we also stated publicly in the past we don't have to do anything there is nothing that contractually obligates us to do anything with the TRA. We can continue as is but obviously, we want to do the right thing for all of our constituents.
Okay.
Perfect.
And then the Capex spend guidance for this year.
Is there a need for equity I know you havent done at the IPO, but.
Or maybe you could talk about just elaborate level this year.
Yes.
We're not seeing a need for equity this year that we don't expect to be a cash taxpayer again. This year. So while the TRA is a balance on our balance sheet. It is typically paid out over a 15 to 25 year period. It has a very very long tail and only gets paid out to the extent that we are a cash taxpayer, which we don't expect to be this year.
So that's.
That isn't going to create a funding need or a cash need for us as far as the TRA payment is concerned with regard to how we operate as a REIT. There is still a lot of the decisions. We made about the assets that are going to qualify and not qualify what's going to happen with the Trs what depreciation lives, we're going to use and what that ultimately means for taxes.
<unk> income.
And our required distributions as a REIT, but.
But we have liquidity to fund our build plan. This year, we don't see any need to go to the markets for any additional funding.
Okay. Thank you.
Yeah.
Thank you Nate.
Thank you. Our next question comes from Frank Louthan of Raymond James Frank Your line is now open.
Great. Thank you have you seen any acceleration of any sales cycles over fears you concern to some of your customers finding availability.
Supply chain issues at the meeting and more quickly and then on the Austin market.
Can you.
Maybe just give us an update have you broken ground.
Land on that campus to build some of your own sort of style facilities have you already begun.
Thank you.
Yes perfect.
Frank Thank you and as to acceleration, yes, we are seeing an acceleration in our pipeline. We are also seeing customers because when they launch when they lock with us they do it ramps, where they will deploy inside the facilities over a course of time, we've said before that they tend to sign up for their minimum timeline for.
Loading into the facility and then there is a tendency to accelerate that during COVID-19 , we didn't necessarily see that acceleration that we saw great signings. We are now beginning to see that acceleration come back and people start to be more comfortable and move into our facilities facilities at a greater rate.
Im not sure sure that Thats, a peer based item, but it is certainly something as we gain increased traction with enterprises and they see more and more benefits financially and infrastructure wise to being in our facilities. There is an increased uptake and need for our facilities. So we're hot.
Regardless of motivation of the increased demand for our facilities and the fact that we are pre selling into facilities that haven't yet been built.
As to Austin, we have started building on Austin for on the Dallas campus and we have in our investor deck, we have a timeline of when those facilities will be coming online and I'd refer you to that for all of the facilities that are coming out and the timelines era, Yes, Frank Let me just jump in on one more thing I think Youre quest.
<unk> is actually a really interesting one because historically switch not being a wholesale data center company has not done a lot of pre leasing of our buildings. We tend to open up a building and most of our sales come from existing customer expansion. So we know that theyre going to expand into our buildings.
With Las Vegas, 15, we're already selling into that it's not open yet.
And I think your point about customers thinking about whether it's their own supply chains or just more strategically about planning their thinking longer term and so for customers that are looking for larger deployments three megawatts five megawatts and beyond they are starting to talk to us much earlier as I think I mentioned in my remarks.
Earlier, we're already talking to customers about Reno two in Atlanta, three these buildings won't be open until 2023, and we've already got customers that are very interested in taking space in those facilities, that's not something that we've historically seen so.
We.
We find that very encouraging for the demand for our product.
And with regard to Austin.
We're already in the permitting of the things we're working as fast as we can on non building on that Dell land.
So hopefully that all turns into upside to your guidance alright. Thank you very much.
Thank you appreciate the well wishes.
Thank you. Our next question comes from semi battery of Credit Suisse. Your line is now open.
Thank you very much.
So I have two questions and they're interconnected to each other upon there. So the first one is on the Capex guide that you guys just issued.
A lot of equipment providers and the actual industry are getting a bit pressured on costs and it's because they have contractual agreements with a lot of customers to lock in pricing over long periods of time some of those equipment providers have seen a bit of adverse effects of that is cost of materials and labor have gone up quite.
A bit without pricing being revised for the first part. The first question I have is of your Capex guide that was revised up versus what a lot of analysts are actually modeling how much.
Much of that is just because things just cost more and therefore your capex is therefore, just higher as a function of equipment being more expensive. So this is question number one.
And then tied to question number one going to question number two is when we look at your revenue growth for the year, how much of that growth is volumetric versus actual pricing and renewals.
And we just need to kind of understand the curve here, what's going on because we would look at this environment as being a high demand very conducive for your business as far as limited supply with.
Your product being demand so could you just frame that out for us as well.
Sure well first of all on the Capex guide and increased costs. One thing that is great about Rob Roy's designs is that we have people building air handling units and other equipment for us that is very unique and so we're as people that have just that.
Generic product are seeing Hyperscale is and others come in end demand of that product.
Paid premiums for it and there is a demand for a limited amount of supply.
As our product and <unk> units et cetera are one offs and built just for US there isn't the market competition for our goods and we are able to purchase enough volume to keep customer suppliers busy on a particular supply chain. So we are not seeing the same increasing costs that others might be.
Spirit, because there isn't the market for our goods that there would be for the goods that are sold to others.
No.
There is some some caps in there to make sure that we've covered pricing, but it is not as incremental as others might be seeing which may allow us to increase the profits that we have targeting again the trend towards that 55% that we spoke to earlier.
As to revenue growth I'll, let Gabe talk to how much of that is volumetric MRI.
And on the Capex side Sammy.
Most of that increase in our guide is because we're building more and we're building fast as quickly as we can it really isn't driven by price increases it's driven by just additional construction going on on all of the campus locations.
Because if you look at our utilization.
We've been very fortunate at nice.
It's a nice problem to have but people like what we build and we're full.
As far as our revenue growth.
Most of what we're expecting for next year is going to come from volume. It is going to come from Las Vegas 15, and it's also going to come from our backlog is our backlog builds it into our existing space, which is committed but not yet billing.
Yes.
Got it.
I have one other follow up and it.
It has kind of well actually two.
Rick follow ups, one actually tying to a prior question that was asked regarding REIT conversion costs in the TRA and I guess, we don't need to know.
Maybe you guys have those numbers I guess, you would tell us, but I guess, what we'd really like to know is maybe timing you guys have like a timing roadmap on when youre going to communicate what youre going to do with the TRA and when youre going to absorb the REIT costs for the conversion and then not related to that and if you look at the data foundry.
<unk> per cabinet or MRC per cabinet.
Is there going to be an effort to increase MRC per cabinet and the data foundry asked I know. This question has been asked a couple of times in the past, but I guess as we saw demand come in.
It's looking like you guys are in a little bit of a better position I'm just trying to know a little bit more of what you guys are going to do.
Sure as far as the REIT conversion costs and when we expect to absorb them. The professional fees related to those are being absorbed right now we're working with our legal teams with our tax teams.
Going through the conversion process. So we have signaled a therapy additional professional fees. This year as we go through that conversion process with regard to the timing of the TRA.
As I just finished speaking to there is a lot of pre work that has to be done to get to the cash flows to determine what that value is to TRA holders, if any and that will help determine what we do we expect to be able to communicate that towards the second half of this year.
And are working diligently toward that.
As to data foundry MRC per cabinet, I mean that asset can it's able to supply so much power. It's not one of the switch asset. So it is it has limitations on the amount of power. It can provide to cap per cabinet. We always look to increase the revenue we can per cabinet and there is one way to do that that is not currently in the day.
At a foundry model is it existed before we bought it and that core we have 400, new customers inside of data foundry, who we'd look to bring into the core cooperative and show them the benefits thereof, and increase the monetization from those customers.
As a result of their participation in the telecommunications cooperative.
Yes.
Got it alright, thank you very much.
Thank you Sammy.
Thank you. Our next question comes from Eric <unk> of Wells Fargo. Eric Your line is now open.
Okay.
Hey, Thanks for taking the question.
So I was looking at page 23 of your supplemental it looks like a couple of projects were pushed out a few quarters Las Vegas sector three pushed back to early 2020 for Tahoe Reno pushed out a couple of quarters versus last year Q3 presentation. So.
To call out in terms of delays in permitting or development that are specific to those timeline timeline changes.
Yes, Im not sure Thats the case, we've actually.
The sector two of Las Vegas, 15 is going to be opened earlier, although the power system for that won't be won't be supplied until Q3, but because of our ability to port power from one power room to any other cabinet in a building, we're able to begin selling into Las Vegas sector too.
In advance of that power system, providing being provided and in Q3 as far as Las Vegas sector. Three that's slated for Q1 of 2024 today, if we can bring that earlier we will.
Particularly we're seeing the demand for that yes. The answer the short answer Eric is that we're trying to build everything as fast as we can to meet the demand of our customers.
As we get incremental EBITDA, it will allow us to expand more capital and stay within the constraints of our leverage covenants and we will absolutely be doing everything we can to move demand forward or move product forward into the pipeline as fast as we can.
Great and just one follow up for me.
Can you give us any color at all your expectations for <unk> per share. This year I know, it's not a metric you guide to but you did provide.
I'll tell you a guide on at least <unk>.
Anything you can you can provide some of the moving pieces between EBITDA and <unk> per share is that something that we should see scale. It gray.
Greater than 10% again this year.
Well, we are expecting EBITDA to grow quite nicely next year, and we're not expecting to issue equity at this point. So I think you can you can do the calculation on where you would think <unk> per share will shake out, but we do expect it to continue to increase our Sim.
Similarly to EBITDA.
Okay. Thank you.
Thank you Eric.
Thank you. Our next question comes from Ari Klein of BMO capital markets.
Your line is now open.
Thank you.
Maybe just a follow up on the Capex outlook for this year.
A bit above what you provided at the analyst day back in November I appreciate that demand is quite strong.
Did something change.
From then until now that that has that above the range.
Yes.
We talked at the Investor day that we expect Capex over the long term to average 4% to $500 million per year, we still expect that to be the case next year is going to be a bit higher than that and really what changed is we booked $30 million of incremental revenue and we want to get that revenue.
So we're responding to customer demand and as I've said, we're already talking to customers about renal two in Atlanta three so the demand is out there and we want to make sure that we have much availability as we possibly can to meet that demand.
Got it and then maybe just on churn it looked like you are with it.
Tad higher than normal and also it looks like.
And at the rock campus community and build cabinets.
Down a little bit.
Is there something worth calling out there.
Something happened in the quarter.
No when you say a tad higher than normal I think we went from 0.4 to 0.5.
It's still ridiculously low.
I think it's just a matter of whatever customer happened too to leave in that quarter, which very very rarely happens as you know with regard to the.
The rock cabinets, when we purchase data foundry they had a small outpost in a virginia facility that they were sub leasing from Equinix.
That we are going to be exiting so that's what's causing that.
Thanks.
Thank you.
Next question comes from Richard Choe of Jpmorgan, Richard Your line is now open.
Hi, I just wanted to follow up on the data foundry.
Location revenue fell to $7 8 million in the quarter from a.
Last quarter is this kind of the low point for the data foundry.
Revenue and should we what are the expectations for guidance for 'twenty two.
Is that driving or help drive the margin improvement and then I will follow up.
Yes, we expect revenue from data foundry to increase and grow as customers that we have signed four continue to deploy there and as I said before we expect to monetize some of the data foundry people as they join into the core cooperative and that will increase the revenues from those facilities.
<unk> and we will be building of course, the Austin for a facility, which is located on the Dallas campus, Yeah and.
With regard to data foundry I think we spoke earlier that there was.
A large company that took another three megawatts in that last part of the data foundry facility that was yet to be built out that will be coming online this quarter and the customer will be ramping in throughout the year. So we definitely expect data foundry revenue to grow in 2022.
But.
There are facilities only operate.
At a lower density than typical switch facilities. So their revenue per cabinet is lower but.
But we do expect revenue to grow out of data foundry and as far as margin improvement.
We're ahead of the $2 million of run rate synergies that we had.
Spoken to the street about we're pushing $3 million at this point. So yes that is some of the cost of the margin.
Great and then wanted to talk a little bit more about the committed versus billing because anything you look at your kind of committed at 98% in the citadel.
Very high level Keith.
Last quarter the send it all went up from 54% going to 64, so 10 percentage points gain there.
But keep went up from 53 to 89.
I guess in guidance.
Are you expecting to be in.
99% billing.
If everything was kind of stays static and they moved in.
What kind of uptake are you expecting.
The Senate at all from that 64%.
Over the year.
Yes, the reason that we're at 99% is.
And the difference between committed and our billing is our backlog.
The $43 million of backlog revenue, which we expect about $30 million of that to commence in 2000 $20 million to $22 million of revenue will actually hit but it will be $30 million of annualized commencements and.
And the remainder will come in 2023.
And a bit of trails on beyond that but that's what that backlog represents is that difference between sold which is our committed number and our billing as customers ramp in the reason the citadel ramped 10 points in terms of billing as we had a large commencement we had about $23 million of Commencements in this last quarter.
And that was one of them. The other one was as you pointed out was it keep where a large customer began billing in the second sector of that facility and know that customer will continue to ramp power in they started billing with certain powered cabinets and certain reserved on power cabinets as those.
Cabinets become powered they will ramp in two higher revenue per cabinet growth rates.
But those were two of the larger commencements.
And as we said before customers tend to accelerate faster than their contracted ramp button Covid times, that's a little less predictable than it was previously but it is a trend that we're beginning to see re evolve in 2021 and continuing into 2022.
Got it thank you.
Okay.
Thank you our final question for today comes from James Breen of William Blair. James Your line is now open.
Thanks for taking the question.
Just along those lines in the building versus committed rock showed at 77% on the committed site built side.
Is there anything that has to be done there to get that up into the ninety's structural issue or is it just increasing sales within that group and then.
Secondly on the Capex, you said about 20% of the guide for this year is for future projects and sort of the foundation work.
I am assuming does that apply to sort of the planned development products projects that are that $2 7 million square feet that you've looked at it 2024 and beyond.
Yes, I'll take the second question first that's exactly what it applies to it's doing all of the site work and preparation work for.
The next two buildings on each of the campuses, where we're developing Las Vegas 15 is opening now, but we've done the site work for Las Vegas $14 16 at the same time in Reno, We have got two coming online in 2023, but we're also developing the site and Pat for for renal III and in Atlanta.
We have Atlanta three opening in 2023, but we are developing the site pad for Atlanta for at the same time, that's going to let those second buildings go up that much faster and we'll monetize that savings as those buildings.
As those buildings go up.
With regard to the rocket its utilization rate.
Texas campus that we purchased from data foundry does have some capacity in the Houston datacenter, which we are looking to fill this year and the last pod has not yet come online that is coming online this year, but as I mentioned before a one specific customer took the entire thing.
Took all three megawatts. So as that comes online that will also be committed and youll see that 77% number wise.
Great. Thank you and we're doing everything and to build an increased inventory as fast as possible because the demand pipeline is robust.
I'd like to hear your well that might be our last question I have just I.
You're hearing it from Thomas and myself that we are extremely extremely.
We are pleased with our performance. This year, we're extremely bullish on what switches prospects are we know that the demand is out there for our product. We build buildings, we will fill them. We don't have to buy any more land. We don't have to negotiate any new telecom contracts, we don't have to negotiate any new legislative agreements with tag.
Authorities, we have everything we need in place to build and fill and build in Phil and we think the demand for our for our industry leading product is out there. So we are super Super excited about.
Switches future as Gabe mentioned for the first time and really our history, we are pre selling into not yet built buildings and that is how robust the demand pipeline gas and so our job over this year and <unk> is to just get buildings into service as fast as possible.
Okay.
Thank you we have no further questions for today that concludes today's conference call. Thank you for joining you may now disconnect.
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