Switch Q3 2021 Earnings Call Transcript

Quartr
Provided by Quartr
November 4, 2021

There are 14 speakers on the call.

Operator

Hello, and welcome to the Switch Inc. 3rd Quarter 2021 Earnings Conference Call. My name is Katie, and I'll be coordinating your call today. I'll now hand the call over to your host, Matthew Hymes, to begin. Matthew, please go ahead.

Speaker 1

Thank you, operator. Good afternoon, and welcome to Switch Inc. Q3 2021 earnings conference call. On the call today are Thomas Morton, Switch's President and Gabe Nacht, Switch's CFO. Today's call may include forward looking statements, Actual results may differ materially from those expressed in our forward looking statements, which are subject to certain risks, uncertainties and assumptions.

Speaker 1

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 ks in the section titled Risk Factors. In addition, today's call includes discussion of non GAAP financial measures, Please refer to today's press release and supplemental package for further information, including a reconciliation of non GAAP measures. Our Q3 2021 earnings press release has been furnished to the SEC as part of our Form 8 ks and is available on our Investor website at investors. Question and answer session.

Speaker 1

I will now turn the call over to Switch President, Thomas Morton.

Speaker 2

Thank you, Matt, and good afternoon, everyone. Thank you for joining us today for our Q3 2021 earnings call. Switch accomplished another solid quarter as we continue to question. Thank you, Katie. Our first question

Speaker 3

comes from the line of Katie. Please go ahead. Thank you, Katie.

Speaker 2

Thank you, Katie. Our first question comes from the

Speaker 3

line of Katy Hovde. Please go ahead. Thank you, Katie. Thank you, Katie. Good morning, everyone.

Speaker 3

Good morning, everyone.

Speaker 2

Good morning, everyone. Good morning, everyone. Good morning, everyone. Good morning, everyone. Good morning, everyone.

Speaker 2

Importantly, our strategic sales initiatives continued to gain traction, producing strong mid teens revenue growth in the 3rd quarter a question. As disclosed in our earnings press release, I am pleased to announce that the Switch Board of Directors has voted unanimously to pursue REIT conversion and will be targeting a REIT tax election On January 1, 2023, we look forward to sharing additional details as we continue to move forward with this exciting evolution in Switch's corporate structure. Question, please. Our Q3 2021 financial results detailed on Slide 4 of our investor deck reflect question. Increasing 23% year over year, excluding a $12,000,000 revenue contribution from DataFoundry, question.

Speaker 2

Switch's revenue was $146,100,000 representing a 13.5 percent organic growth rate question. Compared to the year ago quarter, 3rd quarter adjusted EBITDA increased 14.5% year over year question to $76,900,000 including a $4,800,000 contribution from DataFoundry. Question. Our Q3 adjusted EBITDA margin of 48.6% was affected by seasonally driven Increases in power costs, in addition to a full quarter contribution from data foundry's operations, where 3rd quarter SG and A levels question and answer session. Gabe will provide additional details on Q3 financial performance question and answer session.

Speaker 2

In 2021 guidance later on today's call, our sales teams once again delivered solid third quarter bookings, question Signing over $16,000,000 of incremental recurring revenue and a total contract value of more than $94,000,000 As detailed on Slide 13 of our investor deck, for the 1st 9 months of 2021, question. Our incremental annualized revenue bookings increased 25% year over year to $50,000,000 question. And total annualized revenue signings increased 28% to $88,000,000 inclusive question of $38,000,000 in renewals. Switch's strategy to expand its prime footprint equally and strategically across question. The United States has continued to pay dividends as our customers have increasingly exhibited demand question.

Speaker 2

This represents a year over year growth rate of 26% in 3rd quarter multicampus customer revenue. Our revenue bookings mix also demonstrates the increasing diversity of our business, question, would 60% of our Q3 total contract value coming from primes other than Las Vegas question and 44% on a year to date basis. Switch's growth efforts in Texas continued to gain momentum in 3rd quarter question. As Texas customers accounted for approximately $5,000,000 of incremental annualized revenue signings in the period. Question.

Speaker 2

Notably, during Q3, we executed a 3 megawatt expansion with a Fortune question and answer session. Hi, Katie. I'm Katie. I'm Katie. I'm Katie.

Speaker 2

I'm a In the newest sector of our Austin III data center, we believe this significant expansion from 1 of the world's largest technology companies question. Question and send a positive signal to the other large enterprises as Switch continues its build out question Our funnel of sales opportunities remains robust question and answer session. We are pleased to report our first outbound expansion by a Texas customer In October, a healthcare organization that has signed to expand to Switch's Keep Campus in Atlanta. We remain confident question, please go ahead. Thank you.

Speaker 2

Our first question comes from the line of Alex. Please go ahead. Thank you. Thank you. Our first

Speaker 3

question comes from the

Speaker 2

line of question within the legacy data foundry footprint, creating tremendous cross selling opportunities and revenue synergies from this acquisition. I will now discuss some of Switch's notable third quarter activity and key metrics across the existing prime campus locations. In August, Switch announced the appointment of Jonathan King as our Chief Revenue Officer. Question. Jonathan was previously an executive at Google Cloud, where he led partner ecosystem development, including the launch of Google question and answer session.

Speaker 2

Thank you, Katie. Thank you, Katie. Thank you, Katie. Thank you, Katie. As Chief Revenue Officer from Switch, question.

Speaker 2

Jonathan will oversee Switch's go to market strategy and business development efforts to further accelerate revenue growth. Question. Following our land purchase agreement with Dell Technologies and receipt of zoning approval from the City of Round Rock, During Q3, we began underground preparation work on the future sites of our next Tier question. We expect to begin shell construction question. On Austin 4 in Q2 of 2022 with a targeted completion in early 2024 question and the timeline for Austin V will be targeted for 6 to 9 months after completion of Austin IV, question.

Speaker 2

Including the data foundry assets, the Rock Campus ecosystem will be architected to provide more than question, please go ahead. 2,000,000 square feet of data center space and 180 megawatts of power upon completion. Question. As previously mentioned, just 2 months after closing the acquisition of DataFoundry, Switch signed its 1st multi megawatt expansion order question. With a legacy data foundry customer, the transaction involves a 5 year renewal of the client's existing space question.

Speaker 2

And its 3 megawatt expansion will more than double its current footprint in Austin and Houston. Question. We expect the customer to begin ramping into this new deployment in early 2022. Switch We executed another multi year expansion order with an existing global logistics customer for incremental colocation And telecommunication services in the core campus and the Keep Campus. On a combined basis, question.

Speaker 2

The order represents approximately $2,400,000 of incremental annualized revenue and over $12,000,000 question in total contract value. Subsequent to Q3, this same customer also question. For an additional 220 cabinets in Atlanta, we signed a 1 megawatt expansion question. With a leading semiconductor manufacturer who is adding to its multi campus footprint in the Citadel Campus and the Keep Campus locations, The new order represents approximately $2,200,000 in incremental revenue over a 5 year contract term. In October, question.

Speaker 2

Switch announced the commencement of the regional water improvement pipeline project in partnership with the Tahoe Reno Industrial Center question and various state and local government agencies, this is the first public private partnership of its kind in Nevada history. Question. The project further switches industry leading commitment to providing sustainable technology infrastructure for decades into the future. Question. The pipeline will deliver 4,000 acre feet of treated effluent water from a reclamation facility in Sparks, Nevada question.

Speaker 2

To the Tahoe Reno Industrial Center, enabling Switch's Citadel Campus to operate indefinitely question. In November, Switch was recognized for the 3rd year in a row by being placed on the U. S. Environmental Protection Agency's National Top 100 List Of the largest GreenPower users from the GreenPower partnership, Switch ranked in the top 10 on the EPA's top question with a perfect 100% ranking for the use of green power. Now turning to our construction milestones question and robust project pipeline.

Speaker 2

As can be seen on Slide 7 of our investor deck, Switch has a total of more question. We have a question and answer session. We have a question and answer session. Thank you. Thank you.

Speaker 2

Our first question comes from the line of Matthew McElroy from Goldman Sachs. This represents a greater than 60% increase to the 5,100,000 square feet During the quarter, we delivered the final sector of our Tahoe Reno 1 facility question. To an anchor customer, placing 10 Megawatts and 7 80 Cabinets into service. Question. The massive 1,300,000 square foot data center at our Citadel Campus is now effectively fully committed to customers, And we are underway on the shell construction of Tahoe Reno 2 and the pad construction of Tahoe Reno 3.

Speaker 2

Question. We continue to prioritize the acceleration of construction of 3 new data centers at the Core Campus, The Citadel Campus question and the Keep Campus, totaling 1,300,000 gross square feet and up to 160 megawatts a question. As illustrated in our development milestones table on Slide 19 of our investor presentation, question. We expect to complete construction on Las Vegas 15 in Q2 of 2022 Tahoe Reno 2 In Q1 of 2023 and Atlanta 3 in Q2 of 2023. In order to maximize cost efficiency and accelerate the delivery of future capacity, we are also completing the underground utilities a question and data center pad preparation on 5 additional facilities spanning our core campus, Citadel Campus, question.

Speaker 2

Please keep in mind that these facilities currently have planned completion dates ranging from 2024 through 2026 question and thus will incur the majority of their capital spend much closer to the anticipated in service dates In accordance with our real time evaluation of customer demand. Upon completion, we expect these 5 data centers will provide approximately 1,900,000 incremental square feet and more than 200 megawatts of power capacity. Question. We look forward to hosting our investors and analysts at our Las Vegas headquarters for the Switch Investor Day On November 15, 2021, our Founder and CEO, Rob Roy, will present his vision and strategy for the company. Those in attendance will have the opportunity to tour our Las Vegas campus and spend time with a range of Switch executives question, as they present key elements of our strategy and operations.

Speaker 2

In addition, we will provide multiyear financial targets

Speaker 3

Thanks, Thomas. Today, I'm going to review our financial results for the Q3 of 2021 Which reported total Q3 2021 revenue of $158,100,000 an increase of $29,300,000 or 22 8% compared to the Q3 of 2020. Excluding data foundry revenue of 11,900,000, question and answer session. Switch 3rd quarter revenue totaled 146,200,000, an increase of 17,400,000 question or 13.5 percent organic growth compared to the Q3 of 2020. Staying on slide 4, question.

Speaker 3

Adjusted EBITDA totaled $76,900,000 for Q3 2021 compared to $67,200,000 in Q3 2020, question, reflecting a margin of 48.6 percent and year over year growth of 14.5%. 3rd quarter adjusted EBITDA margins were question and answer session. Switch adjusted EBITDA was $72,100,000 reflecting a margin of 49.3% question, please refer to a margin of 52.1 percent in the year ago quarter, again primarily driven by an increase in power costs relative to Q3 2020. In the Q3 Switch reported a net loss of $900,000 compared to net income of $13,200,000 in Q3 2020. Question.

Speaker 3

The reduction in net income was primarily attributable to a $5,100,000 reduction in income from operations question and an 8,600,000 increase in interest expense. Lastly on slide 4, customer churn was 0.2% in Q3, 2021 question and answer session. Looking now at our growing exascale portfolio on Slide 7, as of September 30, 2021 Switch had approximately 21,700 billing cabinet equivalents across its 5 prime campus locations, question, please go ahead. Reflecting 600 net cabinet additions compared to the prior quarter. Included in this total is approximately 3,300 billing cabinet equivalents question data foundry compared to 3,200 in the prior quarter, including a full quarter contribution from data foundry, question, please go ahead.

Speaker 3

The Switch average monthly recurring revenue per cabinet was over $2,375 in Q3 of 2021. Question. Staying on Slide 7, as of September 30, 2021, the 5 switch primes had capacity for approximately 29,100 question within our open sectors of which 91% were committed under contracts compared to 88% in the year ago quarter. Question. Now turning to bookings on Slide 13.

Speaker 3

During Q3, we executed 6.57 contracts Representing total contract value of $94,000,000 and annualized revenue of $27,000,000 at full deployment, inclusive of both renewals question and answer session. We are continuing to see strong customer demand in Texas and for the data foundry assets. Question. Our 3rd quarter bookings in Austin were a great example of the sales traction we are seeing with over $5,000,000 in annualized revenue question and approximately $40,000,000 in total contract value from legacy data foundry customers. Excluding renewals, we signed question $15,200,000 of incremental annualized recurring revenue in Q3, including $15,000,000 in incremental bookings from existing customers and approximately $1,200,000 from 15 new logos.

Speaker 3

Now looking at revenue attribution on slide 15, question. Total colocation revenue for the Q3 of 2021 was 125,900,000 question, up 20% compared to $105,100,000 in the year ago quarter. Excluding $8,300,000 in co location revenue from data foundry, question. Switch colocation revenue grew 12% to $117,700,000 compared to the year ago quarter. Total 3rd quarter connectivity revenue was $29,300,000 increasing 31% from the year ago quarter.

Speaker 3

Question. Excluding data foundry connectivity revenue of $2,900,000 Switch 3rd quarter connectivity revenue increased 9% sequentially question and 18% year over year to $26,400,000 on an organic basis. On a consolidated basis, question. Switch had more than 10,500 billing cross connects as of September 30 and cross connects accounted for 4.2% of Total revenue in Q3 2021, reflecting 26% year over year growth in cross connect revenue. Question.

Speaker 3

Finally, other revenue including professional services accounted for $2,900,000 in Q3 2021, which includes approximately 750,000 from data foundry. Maintenance capital expenditures were 3,700,000 for the 3rd question. Our first question comes from the line of Peter Kligerman with the line of Peter Kligerman with the line of Peter Kligerman with the line of Peter Kligerman with the line of Peter Kligerman with the line of Peter Kligerman with the line of question. Growth CapEx excluding land purchases was $132,200,000 for the Q3 of 2021 question, please refer to Slide 18 for a detailed breakdown of our capital expenditures by campus. Question.

Speaker 3

3rd quarter cost of revenue increased by $23,100,000 compared to the year ago quarter of which $5,800,000 was attributable to DataFoundry. Question. The $15,200,000 increase in switch cost of revenue was primarily attributable to higher seasonal power costs and depreciation. Question. Excluding depreciation, amortization and equity based compensation, Switch's Q3 adjusted cost of revenue increase by $10,200,000 primarily driven by increases in power and connectivity costs compared to the year ago quarter.

Speaker 3

We would note that power rates have normalized in September October following an elevated forward pricing curve in the peak summer months. Question. 3rd quarter SG and A expenses were $42,800,000 up from $31,500,000 in the year ago quarter. Question. Normalizing the year over year comparison for DataFoundry, Switch's SG and A increased by $7,200,000 primarily attributable to higher professional services costs related to litigation and our ongoing REIT evaluation.

Speaker 3

Question. In the Q3 of 2021, Switch accrued $4,700,000 in litigation costs related to a lawsuit filed against the company in 2017 question by Cobalt, a data center operator who ceased operations in or around 2015. Our prior expectation was for the trial to begin in 2022. However, the court set the trial date for mid November 2021. We continue to believe the allegations lack merit question and thus we intend to vigorously defend against the claims.

Speaker 3

It has historically been our practice to exclude litigation costs from our presentation of adjusted EBITDA question that are deemed to be unrelated to our patent portfolio or core business operations. As such, our 3rd quarter adjusted EBITDA question, please press star and press star and press star. Excludes the litigation fees incurred in connection with our defense of the allegations. We expect SG and A costs to remain elevated in the Q4 of 2021 question in connection with these two items. However, any litigation costs related to the case will be excluded from our presentation of adjusted EBITDA.

Speaker 3

Question. Q3, 2021 income from operations was $17,800,000 compared to $22,900,000 in Q3 of 2020. A question. The year over year reduction in operating income was attributable to increases in depreciation and amortization, power costs and SG and A expense. Question.

Speaker 3

Interest expense increased by $8,600,000 year over year to $15,200,000 in Q3 of 2021, primarily driven by higher debt balances related to the issuance of $1,100,000,000 in senior unsecured notes. Adjusted funds from operations or AFFO was 51,100,000 in Q3, 2021, a question, a 9% decrease compared to $56,000,000 in the year ago quarter. AFFO per diluted share was $0.21 compared to $0.23 in Q3 2020 primarily due to increases in interest expense, maintenance capital expenditures question and answer session. Looking now at the balance sheet on page 21, as of September 30, 2021 question. The company's total debt outstanding net of cash and cash equivalents was $1,500,000,000 resulting in a net debt to last question.

Speaker 3

Our annualized adjusted EBITDA ratio of 5.0 times. The increase in our leverage ratio was driven by on our historically lower Q3 EBITDA margin and the increase of $40,000,000 on our revolver. As of September 30, question. In 2021, Switch had liquidity of 488,300,000 including cash and cash equivalents and borrowings available on our revolver. Question.

Speaker 3

As of September 30, 2021, our recurring revenue backlog stood at $37,000,000 compared to $63,000,000 in the prior quarter. Question. The reduction in backlog was a function of our nearly $40,000,000 in annualized revenue commencements during Q3 of 2021. We expect our backlog to contribute approximately $3,000,000 of incremental revenue for the remainder of 2021, representing an estimated $20,000,000 of annualized question. As of September 30, 2021, there were 242,000,000 total shares outstanding, including 137 point for questions.

Speaker 3

5,000,000 Class A shares and 104,500,000 Class B shares. As disclosed in recent 8 ks filings, question, please go ahead. During the Q3 of 2021, our members redeemed 6,100,000 common units, resulting question and answer session. Thank you, Katie. Thank you, Katie.

Speaker 3

Thank you, Katie. Thank you, Katie. Thank you, Katie. Thank you, Katie. Thank you, Katie.

Speaker 3

Thank you, Katie. Thank you, Katie. Thank you, Katie. Thank you, Katie. Thank you, Katie.

Speaker 3

Thank you, Katie. Thank you, Katie. Thank you, Katie. Question, our Class A public float now represents 59.4 percent of total shares outstanding. Now turning to guidance for 2021 on Page question and answer session.

Speaker 3

We expect consolidated revenue in the range of $590,000,000 to $595,000,000 question, please go ahead. Including data foundry revenue of $27,000,000 to $28,000,000 This represents 16% growth in consolidated revenue question and answer session. And over 10% organic growth excluding data foundry. Our implied revenue guidance for Q4 represents 17% organic growth at the midpoint, demonstrating significant acceleration from recent trends question and a result of ongoing growth across our 5 prime campuses. We expect consolidated adjusted EBITDA question of $307,000,000 to $314,000,000 including $11,000,000 to $12,000,000 from DataFoundry, question, reflecting a consolidated adjusted EBITDA margin of 52.4% at the midpoint.

Speaker 3

Lastly, our guidance range for capital expenditures question, please. Excluding land acquisitions has been increased to $410,000,000 to $440,000,000 including $13,000,000 to $17,000,000 question in the Rock Campus for development of the final sector of Austin III and site preparation for the Austin IV and Austin V facilities. A question, please go ahead. The $25,000,000 increase in our CapEx midpoint reflects an acceleration of equipment purchases and construction activity in response to strong customer demand, question, particularly as the sales funnel begins to build for our Las Vegas 15 opening in Q2 of 2022. Relative to our prior guidance range, the 1% reduction in our 2021 revenue guidance midpoint is primarily related to lower than expected contribution from pass through power revenue during the second half of twenty twenty one.

Speaker 3

Question. In addition to a modest timing difference in customer deployments relative to prior expectations, the revenue impact from lower pass through power is largely offset by lower than planned power costs for the second half of twenty twenty one, resulting in no material change to the full year adjusted EBITDA guidance. Question. The portion of 2021 revenue guidance affected by the timing of installations was largely due to the strategic customer signing in Austin that occurred in Q3, but will begin the ramp on its 5 year contract in early Q1 2022. Question.

Speaker 3

And now I will turn it back to Thomas for some closing remarks.

Speaker 2

Thank you, Gabe. We firmly believe that Switch is favorably positioned for the question. Rapid digital transformation among enterprises as they continue their migration to hybrid multi cloud architectures. We are working hard to accelerate the 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. 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.

Speaker 2

Question.

Operator

Our first question comes from Eric a question from Wells Fargo. Please go ahead. Your line is open. Hi.

Speaker 4

Thanks and good morning. I know some of this will question. You'll go over this at the Analyst Day. I was just wondering if you could give us a little bit of color on the decision for REIT conversion, some of the puts and takes and considerations in terms of why you think pursuing a REIT at this point is the right strategy?

Speaker 2

Yes. Good morning, Eric, and thank you very much. We've always wanted to maximize shareholder value and we believe that converting at this time question, please press star. The Board has met With a variety of external advisors as well as the internal team, and they believe that the change is going to be favorable question and answer session. Thank you.

Speaker 2

Thank you. Our next question comes from the line of David. Your line is open. Thank you. Question.

Speaker 2

So we've worked out ways to balance all of those various imperatives and we believe at this time that converting to a REIT is the way to maximize shareholder value.

Speaker 4

Okay, great. And then one follow-up for me. Maybe you could just talk about your supply position today. Obviously, Las Vegas question coming online next year, do you think you'll be a little more limited in terms of your ability to lease up new cabinets the next couple of quarters? Or as you mentioned, question.

Speaker 4

It sounds like the funnel is building for Las Vegas 15. Is that largely available to be pre leased or pre sold the next couple of quarters as we enter the New Year?

Speaker 2

Yes, that's correct. We have existing inventory. That inventory is spread around our 4 or 5 primes now. And we believe that we will sell into that inventory. And then in the first half of twenty twenty two, we have Las Vegas 15 coming online, which will bring additional revenue question and then in the beginning of 2023, we have Tahirino 2 coming online.

Speaker 2

So there will be a lot of inventory question available for people to load into in the future and we believe that we'll be able to meet that demand. Question.

Speaker 3

Eric, we are currently talking to customers today about Las Vegas 15. So yes, it is available question for pre leasing. And to reiterate Thomas' point, we have 1,300,000 square feet coming online between early 'twenty two and early 'twenty three. Question. So we believe we're well positioned to continue growing in the future.

Speaker 3

And for the 1st few months of 2022 until Las Vegas 15 comes online, question. We do have inventory in Las Vegas. We do have inventory in Texas. We do have inventory in Atlanta.

Operator

Our next question comes from Richard Choe from

Speaker 5

question. Can you give us an update, given that guidance seem pretty good about the margin improvement? How should we think about it going forward?

Speaker 3

Sure, Richard. I'll take that. We're very happy with the acquisition. The team on the ground at DataFoundry has been fantastic. Question, as we talked about our strategy for that acquisition, it was really to give us a 2 year head start into the Texas market question, because we knew we were looking to build our facilities on the Dell campus and by acquiring DataFoundry, we got a fantastic staff question that knows how to run high quality data centers, we had a very strategic sale in the quarter that essentially takes the last sector question about the existing data foundry facility.

Speaker 3

So we're really happy with the way things are going there. And as far as the synergies that we expected, we talked to The Street about expecting $2,000,000 in annualized synergies, we are already exceeding that number.

Speaker 2

Yes. Just to echo one of the things that Dave said is our largest sale actually came from DataFoundry. And then that team has done a question, a really good job with the integration and that has resulted in achieving synergies faster than expected. So we're very pleased by the way that that acquisition is rolling out.

Speaker 5

Was that sale already done and in the works before you acquired it? Or can you talk a little bit more about that?

Speaker 2

That sale was not done and not in the works before we acquired it. It was a post acquisition opportunity that the DataFoundry team helped us successfully land. Great. Thank you.

Speaker 5

Question. Great. Thank you.

Operator

We take our next question from Ari Klein from BMO Capital Markets. Please go ahead.

Speaker 6

Question. Thanks. You brought in a Chief Revenue Officer. Can you talk about how you expect your go to market strategy to evolve? And maybe where do you feel like you could be

Speaker 2

a question. Well, yes, all right. Thank you very much. And question. We have pretty good growth in Q3 and then 7 about 17% in Q4 organic growth projected.

Speaker 2

Question. So we feel like we're doing quite well in our sales. But now that we are in 6 different cities in 5 different question. On campuses, there is a need for a growing national footprint. We need a leader for the sales team for that sales footprint.

Speaker 2

And that is why Jonathan King has been brought on board and we think that he is going to be incredibly effective in deploying that question and answer session, both in terms of numbers and strategy and approach. So we are really pleased to have him on board, and it's just a natural evolution of the company in its size and its breadth, question, please. Thank you. Thank you. Our next question comes from the line of question Mr.

Speaker 2

King Yee. So very, very pleased to have him on board and look forward to the results as we move forward into 2022.

Speaker 3

And one of the things Jonathan brings to us Ari, I'm sorry, this is Gabe. He's been around the industry for 20 plus years. Rob has known Jonathan for many, many years and has always wanted to bring him on board, but he's always been a very tough guy to get question because people keep taking him wherever they go. But in addition to his experience at Google, he was previously at Worldwide question, please. Thank you.

Speaker 3

Thank you. Thank you. Thank you. Thank you. Our next question comes from the line of Alex Yao with question, we really do expect him to add a lot of channel expertise to our sales force and help us grow that national footprint.

Speaker 6

And then Gabe, I think you mentioned that there were some commencement timing issues question In the guidance, it doesn't sound like it had a big impact, but could you just talk about that and what you're seeing there?

Speaker 3

Yes, sure. Question, it was a very small impact to our guidance. The primary reason for adjusting our guidance was pass through power revenue. When we talked question. In Q2, we had a forecast for power revenue that involved a forward curve increase and we actually locked in question about the power at lower rates than we were expecting.

Speaker 3

So we pass through those lower rates and therefore get the lower revenue. So the timing issue was really question Quite minimal and it was really related to this large Texas transaction. So instead of selling into that last sector question and answer session. As we typically do with a variety of customers, this one customer took the entire sector and they're not ramping until early 2022. Question.

Speaker 3

So that's really the primary driver behind the timing difference.

Speaker 6

Thank you.

Operator

Question. Our next question comes from Sami Badri from Credit Suisse. Please go ahead.

Speaker 7

Question. Great. Thank you. Couple of questions. Could you just walk through how Switch manages a question about the power costs and you've made several references to how that's managed and power cost savings to the customers, etcetera.

Speaker 7

But question. Maybe we could just revisit how you guys are treating things and also do these treatments apply to both the data foundry customer base a question and switch legacy. So this is question number 1. And then question number 2 is, could you just give us an update on any kind of question, I know that's part of the synergy or the revenue question and I might have a follow-up.

Speaker 3

Sure. Sami, with regard to power, question. Historically, over the last decade or so, power costs have actually been going down for Switch, primarily question. In 2017, when we decoupled from NV Energy from a utility provider in Las Vegas and went to an open market question and answer session. Our power rates were able to drop quite significantly.

Speaker 3

This is really the first time that we've seen an increase question. Our power rates, so we typically have not adjusted our power rates upward, but because of this increase, we've question specifically adjusted about half of our customers that have that provide us with the right to adjust power rates up. Question, please. The average increase was about 4% and we do lock in power wherever possible. Right now, we are question about the future, we are actively working the markets to lock in additional power for longer periods of time.

Speaker 3

We're also building our solar fields in Nevada and we have 25 year power purchase agreements question related to those solar fields.

Speaker 7

Got it. And then maybe the second question on that is

Speaker 3

a question on renewals and pricing.

Speaker 7

And sorry, one other clarification on the prior question is data foundry versus switch like you may have addressed it, but question.

Speaker 3

Yes. No, data foundry in Texas has power rates that are coming through the utility, as opposed to open market question and answer session, we experienced here in Las Vegas. So their power structure is different, and we didn't put any power pass question for any of the data foundry customers. And with regard to renewals in data foundry, the renewals are going quite well in addition question to the large strategic signing that we made for the last sector in data foundry, we also had another large renewal and question, please. I'll now turn the call over to Chris.

Speaker 3

Thank you. Thank you. Thank you. Thank you. Thank you.

Speaker 3

Thank you.

Speaker 2

Question. Great. Sami, one quick sorry. One quick addition just to let you know that question, please. We are building these solar fields in order to continue and proliferate our 100% commitment to green energy.

Speaker 2

And as you may have seen our press release, the question. Just gave us accolades for being 100 percent green and rated us in the top 23 out of 100 companies on their scale of green energy companies. Question. So we continue our commitment to our ESG initiatives, and we're doing that through power as well as the way that we operate our facilities.

Speaker 7

Got it. And then just the renewal pricing question?

Speaker 3

I'm sorry,

Speaker 7

I think we

Speaker 2

addressed that. We're not seeing any address that. Yes, I think we addressed that. Okay.

Speaker 7

A question. The other follow-up question I had was more to do with supply chains and it's a 2 part question. The first one is since question Which actually designs and has the IP for a lot of the actual industrial components that go into your data centers. Question. How are you guys prioritized in the pecking order of manufacturing and shipments with your vendor supply base?

Speaker 7

So question. That's question number 1. And then number 2 is, if you were to give us a percentage magnitude of the number of customers that you're working with question, please. I have seen delays of equipment arrive to your facilities and therefore slowing down commencements. What percentage of the customer base or question.

Speaker 7

Any incoming kind of commencements, would you say have been paused or delayed because of supply chain issues?

Speaker 2

All right. So, Gabe, I'll take the first pass at this and then please weigh in. But as to prioritizations, we have very long standing relationships with our question. Our supply chain manufacturers, we do custom build, so they go in a different supply chain than just the commodity products. Question.

Speaker 2

They're very long lead time items. So we've been able to plan and order those items a long time ago. And because they are custom builds, they question, please go on a different route. So we have not had any significant impacts by supply chains delivering and being able to deliver us in a timely manner. Question.

Speaker 2

As to customers, we haven't experienced any customers doing significant delays or sharing with us. They've had question, please. I have a question and answer session. I have a question and answer session. I have a question and answer session.

Speaker 2

So We haven't seen much in the way of a supply chain impact at least to date in our operations.

Speaker 3

Yes, I'll add to that, Sami. As Thomas said, our equipment suppliers really to build a very different product for Switch based on our patents. And you'll notice that we did increase our CapEx guidance by about $25,000,000 this quarter. A question, please go ahead. A lot of that has to do with ordering power equipment.

Speaker 3

We want to make sure that we are that we have all of the production slots that we need for our power and a question and answer session. So we're not anticipating any slowdowns in our delivery and we're not anticipating any question But we did want to lock in all of those slots and we've ordered all of the equipment.

Speaker 7

Got it. Thank you very much.

Operator

Next, we take our question from James

Speaker 8

Can you talk a little bit

Speaker 9

about question and answer your question. And customer interest across multiple data centers, any color you can give us on which customers are taking space in all the facilities or multiple facilities? Thanks.

Speaker 2

Question. As we mentioned during our initial remarks, the number of customers cross populating has continued to grow and proliferate, which is great. Question. It's not tied to any particular industry, or any particular organization in terms of the way that they are spreading across our a question, but we are very pleased to see customers take space in multiple locations. And it was one of the reasons that we originally expanded back East question.

Speaker 2

And one of the reasons that we also expanded into Texas, but 38% of our customers, question. Well, 38% of our revenue is multi campus, which is continuing to grow and we expect that to continue to increase, which is question, please. Good in terms of elevating overall revenue, but it's also good in stability of customer engagement. So we are pleased by both of those numbers going up question and the fact that it will help stabilize our platform.

Speaker 8

And are you seeing

Speaker 9

a noticeable difference in customer churn between the multi tenant

Speaker 2

question No, churn has remained unchanged. It's 0.2%. So it is unchanged from a question In Q3 in 2020, so no appreciable differences there.

Speaker 9

Great. Thanks.

Operator

Question. We have a question from Michael Rollins from Citi. Please go ahead.

Speaker 3

Thanks and good morning. Question.

Speaker 10

Curious to just delve a little more into the REIT conversion. So first, question. Do you have to purge any of the retained earnings and make a distribution to shareholders prior to conversion? Question. And the second part of this topic I was curious about is what happens to the tax receivable agreement?

Speaker 10

Question, how does REIT conversion impact the existing liability from shares already converted as well as the remaining

Speaker 3

question. Sure, Mike. I'll take those. Question. As far as the E and P purge that's required upon a reconversion, we are still working through those numbers.

Speaker 3

Question, we'll provide additional detail at our Investor Day and really more additional detail next year. We're targeting January 1, question about the 2023 election date, which means that during 2022, this is a complicated process. We need to go through all of our assets and income, to determine which ones are going to be REIT qualifying, which ones are not, set up a taxable REIT subsidiary and divide up the business accordingly. Question. There's a lot of work to be done.

Speaker 3

2 of the items that still need to be finalized are the E and P purge, but we don't believe that's going to be a materially large number for us. And answer session. And as you mentioned, the TRA, the tax receivable agreement is another item that we have a variety of alternatives to deal with the TRA. Structures that we utilize. So all of that is still being analyzed and we'll provide additional information as we have it.

Speaker 3

Question. And then just

Speaker 10

to update on just as you look at the bookings and churn environment in general, question. How should investors think about the possible lumpiness of each, not really customer churn per se, but revenue churn, which at certain moments has had question. But then also on the other side on the bookings, you've had a range of outcomes over the last number question. So what's the right way to think about the lumpiness of each of these going forward?

Speaker 3

Yes. Actually, as far as our bookings number, our a question, please. Our first question comes from the line of Michael Korsman.

Speaker 2

Please go ahead. Thank you. Thank you. Our first question comes from the line of Michael Korsman. Please go ahead.

Speaker 3

Thank you. Thank you. Question. 2020 was quite elevated because at year end we have some large signings that typically come in. But we've been question.

Speaker 3

Running at over $15,000,000 in incremental annualized bookings for the last three quarters. If you go back a year or so ago, we were typically running around $10,000,000 of incremental question So we're really excited and quite happy with the increase in our bookings. But you are correct. I mean, there is lumpiness question Going into the back half of the year because we had bookings that we knew would commence and that's indeed exactly what's happened. If you look at, we obviously had 23% growth question in Q3 and we're looking at 27% growth in Q4 as the midpoint of our guidance, but really the exciting number is the 17% question and answer session.

Speaker 3

Organic growth that we're looking for in Q4 and that's because of the commencements that we've had in the back half of this year as they roll through in comparison to the a question about prior year same quarter revenue. So there is some lumpiness to our business. I think that's just a natural part of what we do. We have a number of retail clients, question. As you know that take 1 cabinet to 5 cabinets to 10 cabinets to 30 cabinets, but then we have some very large customers that take hundreds of cabinets and question.

Speaker 3

As those companies ramp in, that's what creates a bit of the lumpiness.

Speaker 2

Question I would say that Gabe is spot on. And it is true that we have some lumpiness as we do larger deals. They all have phase ins or rollouts question and answer session, and even it takes some time to close a large deal and then to figure out what their deployment schedule is and how that ramps in over time. Question, every deal is different. And even once you've closed the deal, there can be timing of when that revenue starts to flow in.

Speaker 2

Question. But overall, the projection is onwards and upwards and is continuing to grow. And as Gabe said, we are looking at 17% organic growth in Q4. Question and answer session. Our momentum of growth and with Jonathan King coming on board and us firming up question, the way that we do our sales, both direct sales and indirect sales and channel partners, we believe that we have built the platform to have sustained growth going into 2022 and beyond.

Speaker 3

Additionally, Mike, you know our history well question. And we've been a double digit growth company for many, many years. And our compound annual growth rate continues to be double digits. But that doesn't mean it's double digits question and answer session. And our history proves that out.

Speaker 3

But over the long run, we're very excited about our future. We have 1,300,000 square feet of space coming online question in the relatively short future and then another $1,900,000 coming online after that. So we believe from an inventory standpoint, nobody is building the kind of inventory question, nobody is building the kind of inventory that Switch is building right now. And certainly no one is building the quality that Switch is building. So as corporate data centers or corporations are looking to close their data centers and move to a co location and question.

Speaker 10

Question. And just on that churn side, a year ago, I think

Speaker 3

it was in the Q4,

Speaker 10

if I'm remembering this correctly, there was some incremental revenue churn question that didn't come up in the customer churn. There was just some migrations that you had in 2 of them. Are there any of these question about the chunky types of migrations or risks that we should just be mindful of as we're thinking out over the next 1 to 2 years as you kind of see what's question Coming up for renewal and you've had conversations with customers.

Speaker 3

Yes, right now there really isn't question, anything that we see in the horizon that is going to be significant. We have normal customer deployments that are moving workloads from question, please go ahead. One facility to another, customers move workloads to the cloud back from the cloud. They've been doing that for 20 years, question. But there's nothing material that we're looking at over the near term.

Speaker 3

When you say multiple years out, that question. I don't have good data on what customers are going to do multiple years out, but we don't expect anything material.

Speaker 6

Thank

Speaker 3

you.

Operator

The next question comes from Frank Louthan from Raymond James. Please go ahead.

Speaker 11

Question. Great. Thank you. Can you give us an maybe I missed this, but can you give us an idea of what the pass through power has question And then question. I've got another question on the REIT conversion.

Speaker 11

Do you think you're going to need to seek a PLR with the IRS question in conjunction with that and we'd be able to get that done before January 23. Thanks.

Speaker 2

I'll answer the second question, Gabe. And we don't think that we're going to need to seek a PLR. Question, conversion of data centers into REITs is pretty well vetted out, and there probably isn't a need to do that. Question. But we continue to evaluate the various options and paths that we have to do this conversion to being a REIT, and we'll have more to speak about that on our Investment Day question and answer session.

Speaker 2

And throughout the course of the next year as we work towards implementation in January 1, 2023. Gabe, do you want to speak us to pass through power?

Speaker 3

Question. Sure. With regard to power, we sell contracts in a variety of different flavors. We have a number of circuit based question and answer your question, please. Hi, good morning, everyone.

Speaker 3

I'm very pleased with the question and answer session. I'm very pleased with the question and answer session. I'm very pleased with the question about the business, we have customers that commit to an all in power a question and answer session, we sell a variety of different formulas. With regard to the increase that we pass through, question, as I mentioned, it affected about 50% of our customers, of our utilization of power question and the typical increase was on average about 4%, and this is the first time we've ever done that.

Speaker 11

Okay. But so as far as the guidance going forward coming down, I mean, you mentioned it was kind of a No margin or low margin

Speaker 3

pass through.

Speaker 11

Can you give us an idea like on a dollar basis, on a quarterly basis, what does that usually run? So So we can get an idea of the magnitude of how that what's really changed here?

Speaker 3

Yes. The increase the reduction in the power revenue that we were expecting was about $4,000,000 in Q4. Question So that's the largest part of our decrease in guidance.

Speaker 11

Question. Okay. Is there anything else that was low margin in there to do for the delta and the change or is it for that pretty much it?

Speaker 3

No. The other question and answer session. The next piece of the pie as we talked about earlier was really related to the timing of the large sale that we made in Texas.

Operator

Next, we have Colby Synesael from Cowen. Please go ahead.

Speaker 6

Question. Okay. Thank you. So I guess I'm still confused and I apologize maybe everybody else understands it. So question.

Speaker 6

You reduced your guidance for lower pass through, because you said you got lower power question Pricing and you passed it on to your customers and that's the $4,000,000 that you just referenced to Frank. But then you're also saying that for 50% of your question about the revenue base, I think. You're saying that you just implemented a 4% increase to your question, which presumably would have a, I guess, a positive benefit on revenues, even though not necessarily on EBITDA in the Q4 and then into question 2022. So I'm just trying to unpack those two things, but they seem kind of in polar opposites. And then secondly, To the extent that you guys see an opportunity for bigger deals than what you're accustomed to signing, question.

Speaker 6

Particularly in markets where you may have a decent amount of capacity, so for example, Michigan, would you be question. Interested in those types of deals, even though they're what some may perceive as hyperscale when you've historically said you're more focused on enterprise. Thank you.

Speaker 3

Yes, Colby, with regard to the power, when we put forth our guidance in Q2, we were question, we're expecting a certain amount of power pass through revenue to increase. We had built in about $7,000,000 or $8,000,000 a question additional pass through revenue coming in the back half of the year. We actually flocked in lower prices than we anticipated, so that pass through revenue is less than what we anticipated by about $4,000,000 but along with that comes lower power costs. That's why our EBITDA is not impacted. Question.

Speaker 3

So hopefully that helps. I mean that was part of our increase in guidance in Q2 question based on that expectation, and now we have actual numbers and we've adjusted guidance for that. As far as the types of sales that we're interested in, question. The types of sales that we're interested in, yes, Thomas, you want to go ahead.

Speaker 2

So I mean, before we go

Speaker 6

to that, so how does the increasing question, can you give us a question? Yes. Does that separate then? And I guess, isn't that question. If you're raising pricing by 4%, doesn't that mean for all intents and purposes for 50% of your revenue, it's 4% higher and I guess 2% for the total business.

Speaker 6

Is that separate from this pass through component that you just described?

Speaker 3

No, no, no. That is the component a question.

Speaker 2

Yes, some of it's going to be timing too. I mean, Gabe, we didn't have a full quarter of the increases in revenue. A question, I'm sorry, increases in pricing and those increases in pricings will experience a full quarter in Q4. Question. But it was only a partial quarter in Q3 and that's part of the reason you're seeing that it's not the increase in pricing doesn't offset fee revenue.

Speaker 6

Okay. We can take it offline.

Speaker 2

Yes. Okay. As to larger customers, we absolutely are question. We had a customer last year that took 12 megawatts from us, in Reno, which is fairly significant. Question.

Speaker 2

We have talked to a number of enterprises just because they're not just, but because they're enterprises doesn't mean that they're small customers. Question. Hyperscale, large scale, I mean, the cloud customers, it's 2 or 3 customers that you're talking about when we reference those customers. Question. But we have very large scale deployments potentially in the queue and those come from enterprises migrating out of their corporate data centers question and into a co location environment and we're seeing those impacts and potential sales in all of our campuses, question, most notably up in Reno where we have a large building coming online in 2023.

Speaker 2

Question.

Speaker 3

And Colby, just to come back, I want to make sure that you're clear on what we're saying and I don't want there to be any confusion. So running the numbers, question. If you look at our Q4 guidance, we're guiding at the midpoint to about $162,000,000 $161,800,000 About half of that revenue, we're able to adjust for power. So you're roughly at $81,000,000 or so. Question.

Speaker 3

And if you take a 4% increase on that, you're getting to about $3,500,000 or so of additional quarterly revenue and that's what's in our guidance today. Now in Q2, we thought that was going to be about double and we were able to lock in lower rates.

Speaker 2

Got it. Okay.

Speaker 6

Thank you.

Speaker 3

Does that clarify?

Speaker 2

I think so. Thank you.

Speaker 3

Okay. Perfect.

Operator

Next, we have a question from Brendan Lynch from Barclays. Brendan, your line is now open.

Speaker 12

Great. Thanks for taking my questions. Question. Maybe you can give us an update on the Edge data center initiatives. It looks like in the slide deck you had a photo from

Speaker 2

question. Yes. Thank you, Brandon. Appreciate that. And yes, we did put a picture of the Edge data center in Tennessee question.

Speaker 2

That is looking to come online in the near future, and we're excited about that. We have other question. The Edge data center from a colocation point of view is not really a large contributor in terms of revenue. The opportunity with Edge is question and answer session, please press star to work on our Vault platform, do the 4th cloud in conjunction with our partners and expand our telecommunications network. Question, EDGE will take some time to roll out and do so effectively, but we don't expect it to be a large contributor in 2021 or significant probably in question.

Speaker 2

So that is just an update on Edge, if you will. Gabe, anything to add to that?

Speaker 3

No, I think you covered it.

Speaker 2

Awesome.

Speaker 12

Great. And maybe just a follow-up. The question. You're giving multi year growth objectives at the Investor Day. Can you tell us if you're planning on giving question Specific revenue, EBITDA and AFFO targets or are your growth objectives going to be more generalized?

Speaker 3

Question. Well, we're going to give revenue growth targets over the long term. We're going to give an EBITDA margin target over the long range, question and we'll provide some additional information on AFFO as well, but we're certainly looking forward to your tuning in to get that data.

Operator

The next question comes from Nate Crossett from Berenberg. Nate, please go ahead.

Speaker 13

Hey, good morning. Maybe just question. One follow-up on the REIT conversion in terms of the E and P distribution. When would the timing on something like that be? Question.

Speaker 13

And how would you think about funding that? It kind of sounds like it's not going to be a large amount, but question. At the same time, I think your leverage levels are the highest they've ever been. So how should we kind of square that? And then just Overall comments on leverage would be helpful.

Speaker 3

Sure. As far as the E and question Again, we're still determining exactly what that number is going to be, but we really don't believe it's going to be material or create a funding issue of any kind for us. Question, we have to do that before we actually make the election. While the election is question, please. As of the tax year January 1, 2023, we actually have until we file our 20 for the Q3 tax returns, which would be October of 'twenty four to make that election.

Speaker 3

Of course, we wouldn't want to wait that long. We'd want to be operating as a REIT question, please. As of 'twenty three because otherwise you make your election and you're immediately a busted REIT if you haven't question provided the dividends that you're required and separated your assets as you're required. But the E and P purge would likely question and answer session. And as far as leverage in general, question.

Speaker 3

We were operating at very low leverage from since the inception of the company really and because of that we were able to do the data foundry acquisition with no additional equity raise question, which we think increased our enterprise value and benefited shareholders tremendously and used our balance sheet effectively. Question, we're sitting at around 5 times today, but we know if you look back at our history that Q3 is typically our lowest EBITDA margin quarter question Because of summer power rates in Nevada and we expect leverage to come down in Q4.

Speaker 13

Okay. Just in terms of the dividend level upon converting to a REIT, is there any question and answer session. I mean, there is a disparity across the space about payouts. So I'm just question, what's your thinking on that?

Speaker 3

We will provide more information on that as we have it. That's just one of the many a question

Speaker 13

Okay. Then just one quick on this liquidity of the question, I'm just curious what the latest redemption would get you to?

Speaker 3

Yes. If we look at our latest reductions through November, we'll be at just under 60% publicly floated shares. Question. So we're quite happy with the float as it currently sits. We've got good trading volume.

Speaker 3

The concerns about low float have question We're not hearing that anymore and we'll see additional redemptions next year. We have another 8 opportunities for our partners to redeem shares next year.

Speaker 2

Yes, that's correct. We currently trade north of $50,000,000 worth of stock a day. So most people do not consider us an illiquid stock in any question, so we really Gabe is right. We really don't get many questions on that and we will crest over 60% in the near future.

Speaker 6

Okay. Thanks, guys.

Speaker 2

Thank you.

Operator

We take our next question Eric Rasmussen from Stifel. Eric, your line is open.

Speaker 8

Yes. Thanks for taking the questions. Maybe just to a lot's been addressed, question But the EBITDA margins obviously were impacted by the higher power costs, but it sounds like a return to more normalized rates in Q4. Question. But what sort of the limiting factor at this point?

Speaker 8

Is it really just the data foundry business that's creating some of the headwind given their margin structure?

Speaker 3

Question Yes.

Speaker 8

Yes. We'll

Speaker 3

Go ahead, Thomas.

Speaker 2

All right. Thank you. The Q3 power costs question and answer session. So, that's a seasonal item that we see every year. It's summer, it's hot, question, we use more electricity to run the HVAC units and the price of that electricity goes up.

Speaker 2

That's nothing new. And then we have a question. Data foundry that we've brought on board and we have the 1st 3 months on data foundry, which resulted in about a 75 basis point reduction in margins.

Speaker 8

Okay, great. And then maybe just clarifying, you talked about accelerated equipment purchases. Question. Is that really more just demand or is it some of the supply chain issues in the market that's at hand knowing that getting access to a

Speaker 2

question Yes. Some of it is just the fact that we are growing our facilities at question, please go ahead. And the other is to just avoid any supply chain issues, putting our orders in early, making sure that our suppliers know that the orders are there that they have, the money that they need to continue their builds and that we adjust ourselves and our own expectations question, please. So what we have done is place the orders earlier to both help our demand curve and also make sure that our suppliers had adequate time to provide us the equipment that we need without delay.

Speaker 3

Yes. Eric, I'll add to that a bit. If you look at our build plan, not only is Las Vegas 15 coming online, but the other facilities are also question, please go ahead. I'm going to be coming online about a year after that, but we're also adding a lot of equipment to our Reno facilities due to customer demand. Question.

Speaker 3

We're adding equipment to Las Vegas 11 due to customer demand. We're adding equipment to our Atlanta facility due to customer demand. Question. So I think it's primarily demand driven, but as Thomas said, we also want to lock in those production slots from our suppliers.

Operator

Okay. There are no further questions, which now brings this call to an end. Thank you all for joining. You may now disconnect your lines.

Speaker 3

Thank you.

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Switch Q3 2021
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