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Edited Transcript of SWCH.N earnings conference call or presentation 13-Nov-18 10:00pm GMT

Q3 2018 Switch Inc Earnings Call

LAS VEGAS Jan 3, 2019 (Thomson StreetEvents) -- Edited Transcript of Switch Inc earnings conference call or presentation Tuesday, November 13, 2018 at 10:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Erin Thomas Morton

Switch, Inc. - President, General Counsel & Secretary

* Gabriel Nacht

Switch, Inc. - CFO

* Matthew Scott Heinz

Switch, Inc. - VP of IR and Financial Planning & Analysis

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Conference Call Participants

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* Ahmed Sami Badri

Crédit Suisse AG, Research Division - Senior Analyst

* Brett Joseph Feldman

Goldman Sachs Group Inc., Research Division - Equity Analyst

* Erik Peter Rasmussen

Stifel, Nicolaus & Company, Incorporated, Research Division - Analyst

* Frank Garrett Louthan

Raymond James & Associates, Inc., Research Division - MD of Equity Research

* James Dennis Breen

William Blair & Company L.L.C., Research Division - Communication Services Analyst

* Timothy Patrick Long

BMO Capital Markets Equity Research - Senior Equity Analyst

* Yong Choe

JP Morgan Chase & Co, Research Division - VP in Equity Research

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Presentation

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Operator [1]

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Good day, and welcome to the Switch Third Quarter 2018 Earnings Conference Call. (Operator Instructions) Please be advised, today's program may be recorded.

It is now my pleasure to turn the call over to Mr. Matt Heinz. You may begin, sir.

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Matthew Scott Heinz, Switch, Inc. - VP of IR and Financial Planning & Analysis [2]

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Thank you, operator. Good afternoon, and welcome to Switch's Third Quarter 2018 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, 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 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 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 press release has been furnished to the SEC as part of our Form 8-K and is available in our investor website at investors.switch.com.

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

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Erin Thomas Morton, Switch, Inc. - President, General Counsel & Secretary [3]

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Thank you, Matt, and good afternoon, everyone. Thank you for joining us today.

Before I begin, would like to welcome Matt Heinz, who has joined Switch as the Vice President of Investor Relations and Financial Planning & Analysis. Matt has had an extensive background in the data center and communications infrastructure space, having covered the industry in both buy side and sell side roles over the past 5 years. Please join us in welcoming Matt aboard to the Switch team.

This past October, Switch celebrated its first year as a public company. During this time, we made significant progress to establish the Switch PRIMEs' technology infrastructure ecosystems, uniquely positioned to support strategic enterprise deployments. According to industry estimates, 60% to 70% of enterprise data centers are still inside the enterprise. And as we have been discussing since our IPO, we believe that a key factor in enterprises moving gear out of their own data centers is the hybrid cloud strategy. The hybrid cloud strategy is not unique to Switch. However, Switch has unique attributes in key areas that matter to enterprise hybrid cloud deployments.

First, Switch operates the only Tier 4- and Tier 5-rated colocation data centers. We have consistently stated that the Switch PRIMEs are designed, constructed and operated by Switch for enterprise primary deployments, their most regulated data sets, their most proprietary data sets and their highest density compute needs. Over the next decade, Switch is well positioned in this respect because we believe that corporations will prefer to move their existing enterprise deployments into hybrid data centers rated as equal to or better than their own facilities.

Second, Switch offers hybrid cloud environments. This allows customers to leverage Switch's partnerships with hundreds of cloud, information technology and software providers. Through these partnerships, our customers can utilize hybrid cloud technology and access their colocation deployments using either direct nodes inside of Switch or carrier partners located within the Switch ecosystem. Our carrier deployments at each of our PRIMEs provide secure cloud connectivity and transport services of 100 gigabits and beyond.

Third, the size and hyper scale of the Switch PRIMEs means our customers are not and will not be constrained by space, power capacity, bandwidth or connectivity for the decades into the future. Our PRIMEs can scale up to millions of gross square feet and are intentionally located in low-tax environments with low risk of natural disasters, low cost of living and have a planned capacity to provide over 1,000 megawatts of renewable power from solar, wind, geothermal and other sustainable resources, all to be offered to Switch customers at highly competitive rates.

Switch also manages a dynamic telecom auditing and purchasing cooperative known as the Switch CORE. On the customer side, the Switch CORE has hundreds of clients, representing over $6 trillion of combined marketing capitalization. On the provider side, the Switch CORE includes over 60 carrier partners who actively participate in the ecosystem. As a result, Switch offers CORE members an efficient and effective telecommunications marketplace, providing rates that save customers 30% to 50% on their national telecommunications expenditures. In addition, Switch offers low-latency deployments of less than 10 milliseconds to major metropolitan hubs from each of its PRIMEs and less than 5 milliseconds from our Citadel and Core Campus ecosystems to major technology markets like San Francisco and Los Angeles, latency of approximately 2 milliseconds from the Pyramid to Chicago and we will be on net in the Atlanta metropolitan market when The Keep Campus opens in Q4 of next year. These factors provide the incentives necessary to jump-start enterprise migration out of the enterprise-owned data centers into a hybrid cloud environment. The scale and complexity of such deployments to colocation facilities is unprecedented, and we are ramping our operations to support the engagement and deployment process.

We are continuing the process of enhancing our sales and marketing organizations, and we will provide additional information regarding that effort in Q1 of 2019. On the customer front, Switch has added 30 new logos in this quarter, bringing our total to 112 new logos year-to-date. Some of the new customers include several financial institutions, a leader in automotive parts, a major supplier to the chip manufacturing industry and a leader in the radio broadcasting industry.

In addition, eBay signed a new $56 million expansion of its commitment in both our Core Campus and our Citadel Campus locations. Since our IPO, Switch has continued to license our intellectual property to data center equipment manufacturers. In addition to the licenses we have executed with Schneider and Munters, Switch anticipates signing license agreements with other leading manufacturers who design, build and service critical infrastructure for the vital application of data centers and commercial and industrial facilities. As of the end of Q3, we stand at over 550 issued and pending patent claims in our intellectual property portfolio.

I will now turn the call over to Gabe to discuss our financial results. Gabe?

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Gabriel Nacht, Switch, Inc. - CFO [4]

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Thanks, Thomas. In the third quarter of 2018, we achieved quarterly revenue of $102.8 million, an increase of $5.1 million from the third quarter of 2017. This is primarily attributable to a $3 million increase in colocation revenue and a $1.4 million increase in connectivity revenue. 57% of the revenue increase in the quarter resulted from new customers initiating service during the past year, while 43% of the revenue growth came from customers who have been with Switch longer than 1 year.

In the third quarter of 2018, we derived more than 95% of our revenue from recurring revenue streams consisting primarily of colocation, which includes the licensing of cabinet space and power; and connectivity services, which includes cross-connects, broadband services and external connectivity. The increase in revenue in Q3 of 2018 was primarily related to increased volume sales to existing and new customers.

Colocation revenue for the third quarter of 2018 was $82.4 million compared to $79.4 million reported in Q3 of 2017. Connectivity revenue in Q3 of 2018 was $18.5 million compared to $17.1 million in the same period in 2017, primarily due to a 23% increase in our cross-connect revenue. Other revenue, including professional services, accounted for $1.8 million in Q3 of 2018, up from $1.1 million in the same period in 2017.

We had another strong bookings quarter in Q3 of 2018, signing over 450 contracts equating to over 18 megawatts with total contract value of approximately $135 million and annualized revenue of over $39 million.

eBay signed a new $56 million expansion of its commitment in both our CORE and Citadel Campus locations through August of 2023. Switch has become a strategic partner to approximately 900 customers, and we continue adding new customers and partners as we ramp The Citadel PRIME and The Pyramid PRIME and continued construction of our Keep PRIME in Atlanta, which will open in the fourth quarter of 2019.

As of September 30, 2018, Switch had over 14,000 billable cabinet equivalents generating over $2,300 per cabinet equivalent in total revenue. We included these metrics in our investor presentation posted on the Investor Relations section of our website.

Cost of revenue increased in Q3 2018 compared to the same period in 2017, primarily due to a $5.8 million increase in depreciation and amortization expense due to additional property and equipment being placed into service since September 30, 2017.

SG&A expense in the third quarter of 2018 was $31.1 million compared to $21.5 million in the third quarter of 2017. The increase was largely attributable to a $6.6 million increase in salaries and related expenses, $6 million of which is related to noncash compensation expense primarily due to the continued vesting of common unit awards of Switch, Ltd. granted in connection with Switch's initial public offering. Marketing expenses and professional service fees for consulting, legal and accounting services, which are associated with operating as a publicly traded company, were up $2.6 million in Q3 of 2018 compared to the same time last year.

Income from operations in the third quarter of 2018 was $12.5 million compared to $25.5 million in the third quarter of 2017, due in part to $7.6 million in equity-based compensation expense and the other expenses already discussed. Interest expense decreased by $1.4 million to $7.4 million in the third quarter of 2018, primarily driven by a decrease in our outstanding debt from $824.1 million at the end of Q3 2017 to $587.9 million at the end of Q3 2018.

Net income for the third quarter of 2018 was $4.7 million compared to $16.5 million in the third quarter of 2017. Net income in Q3 of 2018 includes the impact of $7.6 million in equity-based compensation as well as the $6.1 million increase in depreciation and amortization.

Adjusted EBITDA totaled $50.9 million for the third quarter of 2018 compared to adjusted EBITDA of $49.7 million in the third quarter of 2017. Adjusted EBITDA margin for the third quarter of 2018 was 49.5% compared to 50.9% for the same quarter in 2017. Capital expenditures in the third quarter of 2018 were $60.4 million compared to $64.1 million in the same period in 2017.

During the third quarter of 2018, Switch invested $35.8 million in The Core Campus, primarily on its Las Vegas 11 facility, which is planned to open in late 2018 or early 2019, adding another 340,000 gross square feet.

Switch also invested $12.7 million in The Citadel Campus to support additional customer deployments in its open sectors, and Switch invested $4.5 million for additional expansion in The Pyramid Campus. Finally, Switch invested $7.3 million on site development at The Keep Campus in Atlanta, which is scheduled to open in Q4 of 2019.

Maintenance capital expenditure was $3.3 million for the third quarter of 2018 compared to $0.4 million in the same period last year. This increase is due to power infrastructure upgrades on our East campus in Las Vegas. Growth capital expenditure was $57.1 million for the third quarter of 2018 compared to $63.7 million in the same period last year.

Our existing facilities at our PRIME campus locations currently encompass 10 data centers with an aggregate of over 4 million gross square feet of space and up to 450 megawatts of power. As of the end of the third quarter of 2018, the utilization rates of these PRIMEs, based on currently available colocation space, were approximately 90%, 57% and 86% at The Core Campus, The Citadel Campus and The Pyramid Campus, respectively, versus 87%, 38% and 96% in the prior quarter. The utilization rate at The Pyramid Campus declined from the prior quarter as a result of continued sector expansion.

Looking now at the balance sheet. As of September 30, 2018, the company's total debt outstanding, net of cash and cash equivalents, was $503.2 million, resulting in a net debt to last quarter annualized adjusted EBITDA ratio of 2.5x. As of September 30, 2018, Switch had liquidity of $604.5 million, including cash and cash equivalents and availability under its revolving line of credit. We believe this is sufficient to fund our growth plans for the foreseeable future.

In August, the Switch Board of Directors authorized a program to repurchase up to $150 million of outstanding common units. In August, Switch completed the repurchase of approximately 6 million, common units from Intel Capital for approximately $61 million, retiring the units and the corresponding B shares. We have approximately $89 million remaining under the approved repurchase program.

Now turning to 2018 guidance, which remains unchanged. Revenue is expected to be in the range of $405 million to $408 million. Adjusted EBITDA is expected to be in the range of $197 million to $200 million and our capital expenditures are expected to be in the range of $260 million to $310 million.

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

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Erin Thomas Morton, Switch, Inc. - President, General Counsel & Secretary [5]

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In conclusion, we firmly believe that Switch is well aligned with industry dynamics and competitively positioned to jump-start enterprise migration into a hypercloud environment. We continue to execute on our large enterprise, retail, colocation opportunities, which remain the strongest we have ever seen. We look forward to announcing these transactions in due course.

We would once again like to take this opportunity, on behalf of our management team, to thank our employees, customers and our partners for their continued support of Switch.

We would now like to open the line for questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) And we will take our first question from Erik Rasmussen with Stifel.

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Erik Peter Rasmussen, Stifel, Nicolaus & Company, Incorporated, Research Division - Analyst [2]

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Maybe first, and it goes back to what you announced last quarter, the enterprise hybrid cloud program. You talked about delays in signings, but do you see any opportunity to improve on that time line to close some of those deals and maybe ramp those deals a little bit faster?

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Erin Thomas Morton, Switch, Inc. - President, General Counsel & Secretary [3]

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Yes. Well, as -- good to talk to you, Erik, thank you for the question. As we roll through this process and as people figure out how to do these deployments, there is an opportunity as the market matures for these deployments to go faster. And as we have said, the first 1/3 of the deployments started going to the cloud. We think for the next 3 to 5 years, the hybrid cloud will be the story for the second 1/3 or the second 1/3 of the wave to move out of enterprise data centers. And then the last part will be the final portion, the most secure portion, moving out of data centers or enterprise data centers into a colocation offering as people learn that the first 2/3, having moved out of their enterprise data centers, it mathematically does not make sense for them anymore to keep and maintain their existing data center infrastructures. So they'll begin to shut those down, decommission them and sell them off. So that's the role that we have been seeing, and that's the progression we've seen in the market. As with many progressions and evolutions to the market, they tend to accelerate over time as people figure out the migration path and how to optimize those paths for their company.

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Erik Peter Rasmussen, Stifel, Nicolaus & Company, Incorporated, Research Division - Analyst [4]

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And maybe just as my follow-up, it's kind of related to this as well, but with regards to your -- the 15-megawatt deal with the streaming company, media company, this too was impacted by that cloud -- hybrid cloud program. But is that deal now back on track in terms of deployments? And any changes in revenue contribution or the timing?

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Erin Thomas Morton, Switch, Inc. - President, General Counsel & Secretary [5]

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So that deal had 2 issues or 2 concerns with it. One is they have some technological items that they were considering. But secondly, they were looking for a certain quotient of financing for their company to make that deployment viable for them. With the items that have occurred in the stock market of late, there has been a slowdown in their ability to procure that funding, so there's been some delay in the timing, in their deployment as a result of that. And that is just something that we don't have control over. They very much want to do a transaction with Switch. They very much wanted to deploy with us. But they have to make sure that they have the funding secured and in place prior to doing that larger scale of deployment. So we're all waiting for that deal to close. Their financing deal, to be clear.

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Operator [6]

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And we will take our next question from Sami Badri with Crédit Suisse.

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Ahmed Sami Badri, Crédit Suisse AG, Research Division - Senior Analyst [7]

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I kind of just want to understand the relationship between the colocation revenue growth and the connectivity revenue growth. The colocation revenue growth clearly decelerated a little bit more or disproportionate relative to the connectivity revenue. Could you just give us a little bit more color on how should we be thinking about this, just for future instances? And I have a follow-up kind of related to connectivity, but I would love to hear maybe some color on this deceleration and this relationship.

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Gabriel Nacht, Switch, Inc. - CFO [8]

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Sure. As we've talked about historically, connectivity and the way we sell connectivity is one of the advantages that Switch has in the marketplace through our CORE cooperative and our ability to buy as a block for all of our customers. I think one of the things that customers are now realizing that we've been talking to them about for quite some time but now they're able to take advantage of is the fact we can buy connectivity from any point to any point. It doesn't need to touch our data center. So as customers have learned how much we can save them on connectivity that does touch one of our data centers, either as a beginning point or endpoint, they're now starting to look at their enterprise deployments that don't have any connection to our data center but can still take advantage of the CORE cooperative from a purchasing standpoint and save them money. And that's why we're seeing connectivity growth that has been faster than our colocation growth. And in 2018, the colocation number was impacted by the contract that we have that did have a contractual step back in the first half of the year. And so that's impacted the overall colocation revenue growth for the year while connectivity was not impacted by that.

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Ahmed Sami Badri, Crédit Suisse AG, Research Division - Senior Analyst [9]

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Got it. And then on -- my follow-up has to do with the new signings, the new customers coming in. Did those customers sign connectivity-related contracts as well on top of their colocation contracts? But what I'm really trying to get at is future contracts, are they going to have a higher attach rate from a connectivity revenues to a colocation perspective in future revenue streams? Or would you say it's very in line to the historical portfolio?

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Gabriel Nacht, Switch, Inc. - CFO [10]

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Yes. So it's hard for us to tell what is going to be -- what the future contracts are going to be structured as. But one thing to keep in mind is that anybody that does take colocation space with us typically takes connectivity as well. Now in what flavor they take connectivity and to what degree really depends on the customer. But a cabinet that is not connected is not particularly useful in the data center environment. So everybody does have some level of connectivity, whether that's our bandwidth that we sell, whether that's connectivity through one of the carriers that does business with Switch, but they're typically connected. And over 80% of our customers in buying that connectivity take advantage of our CORE purchasing cooperative.

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Erin Thomas Morton, Switch, Inc. - President, General Counsel & Secretary [11]

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Yes. And Sami, this is Thomas. Gabe is absolutely right. About 81% of our customer base takes advantage of CORE at some level. And just like they tend to land and expand with their data center deployment, they also tend to land and expand with their telecom purchasing. So we are actively mining our telecom -- our clients for additional telecom purchases, which is part of the reasons that you see an increasing rate of growth in that area, in that division of our company.

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Operator [12]

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And we will take our next question from Richard Choe with JPMorgan.

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Yong Choe, JP Morgan Chase & Co, Research Division - VP in Equity Research [13]

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I wanted to ask, it seems like there's a lot of development and there's a lot of signings, but we're not seeing the revenue ramp quite yet. How should we think about when the revenue ramp will kind of accelerate in the next few quarters? And then I have one follow-up.

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Gabriel Nacht, Switch, Inc. - CFO [14]

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Well, sure. We did have a good bookings quarter. This quarter, we signed a number of new customer contracts. They were relatively on the smaller side from what we've experienced historically. But that's okay because we know that, historically, customers land and expand with us. But we did have a $135 million worth of bookings. And when that revenue is going to hit really depends on the deployment schedule. The largest contract that we did sign this past quarter was the expansion with eBay. They signed a $56 million expansion of their existing colocation agreement with us here in Las Vegas and in our Citadel Campus in Reno. And we've been getting questions in past quarters about whether we think they're going to exceed their contractual floor. And the answer is, yes, they have actually increased their floor commitment over the remaining period of their contract, which goes out through August 2023. And so we'll see some of that revenue begin hitting in '19 and continuing on for the remainder of that contract.

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Yong Choe, JP Morgan Chase & Co, Research Division - VP in Equity Research [15]

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And then in terms of the margin, how should we think about the margin percentage kind of going forward or the absolute level of adjusted EBITDA as things kind of come through?

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Gabriel Nacht, Switch, Inc. - CFO [16]

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Yes. We've talked about our long-range targets in the past being 51% for an EBITDA margin. We're still comfortable with that figure. We're below that right now because of a number of onetime costs of becoming a publicly traded company and the additional SG&A that comes with that. As we move into next year, we haven't talked about guidance yet for next year. We're in the process of finalizing our budget and planning cycle for 2019, but we're still comfortable with that long-range target of 51%.

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Yong Choe, JP Morgan Chase & Co, Research Division - VP in Equity Research [17]

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Is that going to be a step function next year? Or is this going to be kind of a gradual move up to that 51%?

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Gabriel Nacht, Switch, Inc. - CFO [18]

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As I said, we're not quite ready to talk about '19 yet because we're still in the middle of our planning cycle.

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Erin Thomas Morton, Switch, Inc. - President, General Counsel & Secretary [19]

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So there will be some -- this is Thomas. There will be some expenses that fall away because they were onetime IPO-related. We also have some expansion items that we are considering doing as a company, so we will provide guidance in the normal time frame that a company provides guidance for a company. And then we will provide some detail around that when we're actually able to provide that guidance and the board has approved it.

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Operator [20]

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And we will take our next question from Frank Louthan with Raymond James.

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Frank Garrett Louthan, Raymond James & Associates, Inc., Research Division - MD of Equity Research [21]

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Yes, I just wanted to get a little bit of color on how you're thinking about the buyback. Given where the stock price is, any thoughts on accelerating that a little bit? And then what will -- when can we expect the Atlanta property to begin billing? And what would it take to kind of to get -- gross up to double digits revenue growth next year?

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Erin Thomas Morton, Switch, Inc. - President, General Counsel & Secretary [22]

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So the first question is what do we think about our buyback program and could we utilize it. The answer is, yes, we could utilize it more. We have about 3.2 million shares coming out in the November redemption. That is not enough of a market that we thought that the buyback was necessary, that there was enough float there. We'll see what happens in Q1 of next year and whether or not we decide to activate the buyback program. As you remember, the buyback program was put in place in order to have a monitored and effective flow of our stock from Class B to Class A to publicly traded. So with 3 -- a little over 3 million shares going in November, we're comfortable with that level, and we won't need to exercise the buyback. As to when Atlanta is going to open, we've projected Atlanta opening in Q4 of next year. It has been impacted by some of the rains that have gone on in Atlanta, and that has been the cause of shifting that time line slightly to accommodate Mother Nature in that regard.

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Operator [23]

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(Operator Instructions) We will take our next question from Tim Long with BMO Capital Markets.

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Timothy Patrick Long, BMO Capital Markets Equity Research - Senior Equity Analyst [24]

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Two questions if I could. First, thanks for sharing the cabinet equivalent number in the quarter. It's probably a little bit lower than we had expected but, obviously, there's been some changes. So could you just talk a little bit about how that's a grown over the last year and kind of how much the impact is from those pushouts that we talked about last quarter, how much is from the little bit of uptick in churn this quarter or any other factors with that? And then second, if you could just talk about the business with existing customers, the contract signings in the quarter, could you give us some flavor as to how much of that would be just pure renewals of existing footprint? And how much of that would be kind of expansion footprint with those customers?

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Gabriel Nacht, Switch, Inc. - CFO [25]

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Sure. With regard to the cabinet equivalent, as we've talked about in the past calls, we very much want to expand the disclosures. People have been asking us for different metrics, and cabinet is one of them, so this quarter we're able to provide some cabinet numbers. We do state that they're cabinet equivalents because we do have some folks that are not billed on a cabinet basis. They either have a power floor or a space utilization component, but I'm not quite sure what you were expecting, but we have over 14,000 billable cabinets today, generating over $2,300 in average monthly revenue per cabinet equivalent. That -- the monthly revenue per cabinet equivalent has remained very steady over the past year while we have been expanding our cabinets. I don't have the exact number of cabinet equivalents from a year ago and so, therefore, we did not provide that number.

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Timothy Patrick Long, BMO Capital Markets Equity Research - Senior Equity Analyst [26]

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Okay. And then on the existing customers' renewals versus expansions.

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Gabriel Nacht, Switch, Inc. - CFO [27]

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Yes. We do break out our contracts and the total contract value by new versus existing customers. It's very difficult for us to break out renewal versus expansion because it's rare for a customer to simply do a plain vanilla renewal. In fact, we were talking about that earlier today. When customer contracts come up for renewal, in most cases, there's some sort of change that takes place, either the customer is taking additional space, additional circuits, they're adjusting their loads, they're doing other things other than just a plain vanilla. We've got a 3-year 10-cabinet deal, and we're going to renew it 3 years and 10 cabinets. So it's hard for us to break that out, that leasing model, which is specifically leasing and renewal-based.

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Erin Thomas Morton, Switch, Inc. - President, General Counsel & Secretary [28]

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So let me give you a quick example. A customer may keep the same number of cabinets but just jump the density from 14.4 to 18.8, and that would be an incremental increase in MRC, but it wouldn't be a change in the size of their deployment, or they may buy some more connectivity and lower a few of the cabinets. So it is usually a blend of services that they do when they true-up their need, so it's hard to identify what's new and what's not new in terms of the customer. What we can share is the overall spend of that customer has increased.

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Gabriel Nacht, Switch, Inc. - CFO [29]

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And if you look at the total annualized revenue from those bookings, I think that provides a good indication for the pace of business activity and for what will ultimately translate into revenue over the life of those contracts.

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Operator [30]

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And we will take our next question from Brett Feldman with Goldman Sachs.

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Brett Joseph Feldman, Goldman Sachs Group Inc., Research Division - Equity Analyst [31]

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As we look at the revenue reported this quarter and last and what's implied by your guidance, it's a fairly stable number. And I realize that's totally in line with what you guided to last quarter, so that's not new. What I find a hard time helping investors sort of dig into is understanding the dynamics that create that. And the questions we get are, you've talked about a lengthening sales cycle in some of these bigger deals. And so has there been a meaningful pause, I guess, in the bookings that are converting into billings? And that's a big factor here because the churn from customers who are leaving you entirely hasn't really changed. So the other end of the question we get, is there something going on whereby your existing customers may not be leaving you, but they have identified some degree of spending efficiency? And so I was hoping you can maybe just help us understand like qualitatively sort of what the puts and takes have been. And then just to kind of get back to a previous question, you've had a few quarters here where you've been signing $40 million of annual recurring revenue. That's a 10% uplift in your existing revenue base. It would seem like at some point in the not-too-distant future, you'd be poised to start seeing something like 10% revenue growth unless there was a pricing or a churn element we didn't completely understand. I know there's a lot in that question, but I think you kind of get the gist of what we're trying to get our arms around.

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Erin Thomas Morton, Switch, Inc. - President, General Counsel & Secretary [32]

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So the answer is some of the -- there is a lot in that question. Some of the deployment, the larger deployments, have slipped. And we've talked about one at the very top of this call. All you need is a couple of those, and they have an impact on the revenue growth cycle for the year, so that's something that has definitely occurred. We have also seen customers shift from buying incremental amounts of colo to also buying incremental amounts of telco. So while their colo growth may not have been growing as fast as in the past, they have procured different services with different margin profiles from us. But overall, customers continue to expand their footprint and their service purchases from us, from Switch. So we were bullish about that. We also believe that there is a robust pipeline for the company, and we are looking forward to a very productive 2019.

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Brett Joseph Feldman, Goldman Sachs Group Inc., Research Division - Equity Analyst [33]

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I mean, is it fair to say that at some point, the timing, which has been somewhat unfavorable, suddenly starts aligning and becomes much more favorable? Because it feels like, just based on these bookings you've had, there should be, in the next couple of quarters, something that begins to resemble an inflection. I know you're not giving guidance yet, but I mean is there any reason why we wouldn't hit that point?

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Gabriel Nacht, Switch, Inc. - CFO [34]

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Well, clearly, the contractual revenue that we've signed is going to turn into actual revenue over the life of those contracts. So one can do the math and infer what revenue we should be hitting. And we've talked about the fact that those contract lengths, while they have ramps, typically are 4 years in average length, at least the ones that we've signed over the last few quarters. So I think one can do that math and figure out where that -- what that long-range growth profile could look like. But we don't necessarily disagree with you, Brett, that we've had a couple of good bookings quarters, and it doesn't turn into revenue until the deployments happen. We've talked about some of the deployment time lines that we're experiencing, but we're confident that they will deploy, and that will turn into revenue.

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Operator [35]

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And we will take our next question from James Breen with William Blair.

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James Dennis Breen, William Blair & Company L.L.C., Research Division - Communication Services Analyst [36]

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Just from a customer standpoint, can you talk about some of the verticals you're seeing customers coming from? And then is there any concentration that you're seeing within some of the new customers you're getting on?

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Erin Thomas Morton, Switch, Inc. - President, General Counsel & Secretary [37]

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No. I mean, Gabe kind of pointed to a page of our deck that we put out there, but the short answer to your question is our customer base continues to be very diversified. There has always been -- and we've put out a wheel before that shows where our concentration areas were, and it's always been a concentration in the technology compute space, and that continues. We have picked up some governmental clients, and we have also picked up some manufacturing customers as well. But Gabe, what's the page on that?

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Gabriel Nacht, Switch, Inc. - CFO [38]

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Yes. If you go to the deck that we put on the website, Slides 14 and 15 highlight the contracts that we booked this quarter. Slide 14 with some of the new customer highlights and Slide 15 with some of the contracts and contract value from our existing customers. But you'll see that there's a wide variety of industries. One of the things that we did experience this last quarter was a few new financial services industry clients. And regulated industries tend to like being at Switch because of the security that we offer. We've also got a number of cloud and IT software companies that we signed in the quarter as well as some retail and manufacturing customers. So we really don't have a significant industry concentration or a significant customer concentration.

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James Dennis Breen, William Blair & Company L.L.C., Research Division - Communication Services Analyst [39]

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Great. And then just in terms of some of the new contracts you signed, is there any certain length of time, is there an average contract length that you're seeing guys come on up?

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Gabriel Nacht, Switch, Inc. - CFO [40]

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Yes. We are a retail colocation company, so most of our contracts are 3 to 5 years in length. And if you look at the disclosures that we provided this quarter, you'll see that the average contract length was 3.9 years, so exactly what one would expect.

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Erin Thomas Morton, Switch, Inc. - President, General Counsel & Secretary [41]

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That's right. Two observations. First of all, even though the initial contract is about 3.9 years, our retention rate for a number of years is far higher than that. So they tend to renew and not exit after that 3.9 years, which is part of the reason we have such a low churn. And to emphasize Gabe's other point, we have customers who tend to come to us seeking one of or more of 3 things. They have high density needs for their compute, they have high needs for telecommunications and/or they have really high needs for security and making sure that they have optimal uptime. And so we provide all 3 of those things. And customers need them in varying degrees, but they all are, generally speaking, in those particularly regulated entities.

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James Dennis Breen, William Blair & Company L.L.C., Research Division - Communication Services Analyst [42]

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And then, I guess, just one last one with respect to Atlanta. You talked about opening at the end of next year. Any indications there early on in terms of how you're filling it or how it's going to be filled by the time you open it?

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Erin Thomas Morton, Switch, Inc. - President, General Counsel & Secretary [43]

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Yes, we're in contracts with -- not contracts, we're in discussions with a variety of potential customers there. As we've said before, customers tend to sign on with us when we pour the pad, the concrete pad on which the data center will be built. They don't tend to close the deal until that's done. We expect to pour the pad very shortly and, in that case, we will expect to start seeing some closing of some contracts shortly after that.

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Operator [44]

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And there are no additional questions at this time. We would like to thank you for your participation. This does conclude today's program, you may disconnect at any time.