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Edited Transcript of SWCH.N earnings conference call or presentation 5-Nov-20 10:00pm GMT

·40 min read

Q3 2020 Switch Inc Earnings Call LAS VEGAS Nov 6, 2020 (Thomson StreetEvents) -- Edited Transcript of Switch Inc earnings conference call or presentation Thursday, November 5, 2020 at 10:00:00pm GMT TEXT version of Transcript ================================================================================ Corporate Participants ================================================================================ * 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 ================================================================================ Conference Call Participants ================================================================================ * Ahmed Sami Badri Crédit Suisse AG, Research Division - Senior Analyst * Aryeh Klein BMO Capital Markets Equity Research - Analyst * Brendan James Lynch Barclays Bank PLC, Research Division - Research Analyst * Eric Thomas Luebchow Wells Fargo Securities, LLC, Research Division - Associate Analyst * Erik Peter Rasmussen Stifel, Nicolaus & Company, Incorporated, Research Division - Analyst * Frank Garrett Louthan Raymond James & Associates, Inc., Research Division - MD of Equity Research * Michael Ian Rollins Citigroup Inc., Research Division - MD & U.S. Telecoms Analyst * Yong Choe JPMorgan Chase & Co, Research Division - VP in Equity Research ================================================================================ Presentation -------------------------------------------------------------------------------- Operator [1] -------------------------------------------------------------------------------- Good day, and welcome to the Switch, Inc. Third Quarter 2020 Earnings Conference Call. (Operator Instructions) Please note this event is being recorded. I would now like to turn the conference over to Matthew Heinz. Please go ahead. -------------------------------------------------------------------------------- Matthew Scott Heinz, Switch, Inc. - VP of IR and Financial Planning & Analysis [2] -------------------------------------------------------------------------------- Thank you, operator. Good afternoon, and welcome to Switch's Third Quarter 2020 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 described some of these risks in our SEC filings, specifically our Form 10-K, particularly 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 third quarter 2020 earnings press release has been furnished to the SEC as part of our Form 8-K and is available on our Investor Relations website at investors.switch.com. I will now turn the call over to Switch's President, Thomas Morton. -------------------------------------------------------------------------------- Erin Thomas Morton, Switch, Inc. - President, General Counsel & Secretary [3] -------------------------------------------------------------------------------- Thank you, Matt, and good afternoon, everyone. Thank you for joining us today for our third quarter 2020 earnings call. Switch has maintained a high level of execution with respect to our key strategic and financial objectives through the first 9 months of 2020. Our third quarter financial results and bookings performance reflects sustained momentum and solid demand trends across all of our prime campus locations. Third quarter revenue of $128.8 million reflects a 5% year-over-year growth or 9% as adjusted, excluding a nonrecurring fiber transaction in Q3 of 2019. Adjusted EBITDA of $67.2 million represents 11% year-over-year growth or 17% when adjusted for the nonrecurring fiber transaction in the year ago quarter. Our Q3 adjusted EBITDA margin increased 250 basis points to 52.1%, representing our highest third quarter margin as a public company. On a year-to-date basis, Switch's reported revenue growth of 12% and adjusted EBITDA growth of 14% compares favorably to industry peer average growth rates of approximately 9% for revenue and 9% for adjusted EBITDA. Importantly, our growth has been entirely organic and generated in a highly capital-efficient manner with no dilutive incremental share issuance since our IPO while also maintaining an industry low leverage ratio of less than 3.5x net debt to adjusted EBITDA. Through the first 9 months of 2020, our revenue trajectory has met expectations set forth in our initial guidance, which was provided pre-COVID, while adjusted EBITDA has trended above expectations due to tighter cost controls and improved operating efficiencies. As such, we are narrowing our revenue guidance range for 2020 while maintaining the midpoint at $514 million and raising our guidance for adjusted EBITDA by $8 million or 3% at the midpoint. Gabe will discuss our guidance changes in further detail later on this call. Our operations have remained robust throughout the COVID-19 pandemic, maintaining 100% continuity of services for our clients within all of our data centers across the 4 primes. In addition, our protocols have remained stringent in protecting the health and safety of our data center employees, customers and vendors. On the corporate governance front, Switch appointed 2 new members to its Board of Directors in the third quarter, expanding the Board to 6 independent directors and 8 members in total. We are extremely excited to welcome Angela Archon and Liane Pelletier to the Switch Board, who bring a combined 50-plus years of leadership experience in the technology and telecom industries. Ms. Archon joined Switch following a successful career at IBM including the leadership positions involving strategy, operations, business development and most recently served as the Chief Operating Officer in the company's Watson Health division. Ms. Pelletier was formerly the President and Chairman of Alaska Communications, followed by a long career at Sprint, involving several executive positions. We believe these key additions to our Board will add unique and valuable insights to help and form strategic decision-making. In mid-September, Switch issued $600 million of 8-year senior unsecured notes at an interest rate of 3.75%. Our inaugural bond offering was met with strong demand from institutional investors, leading to a $100 million upsizing from our initial target of $500 million and pricing that came in 50 basis points below the expected range. We are pleased with the strong execution and outcome of our initial public debt offering and credit facility refinancing, providing additional flexibility to our already strong balance sheet while locking in low-cost capital to fund future growth initiatives. Customer expansion trends towards our newer primes have remained favorable as evidenced by a 32% year-over-year increase in multicampus revenue during Q3 2020. Campus locations outside of Las Vegas representing 16% of our consolidated revenue as of Q3 2020 compared to 11% in the year ago period. For the 9-month period ending September 30, 2020, revenue at the Core Campus grew 7%, while revenue at the keep, Citadel and Pyramid Primes grew at a combined rate of 58% year-over-year. Thus accounting for 51% of our incremental revenue and 60% of incremental EBITDA growth compared to the first 9 months of 2019. Customer bookings activity accelerated in Q3 compared to the 2 prior quarters, as we executed nearly 600 contracts, representing a total contract value of $109 million with a weighted average term of 5 years. We signed $18 million of incremental annualized revenue in Q3, above our trailing 12-month average of approximately $12 million. Incremental revenue bookings include $4 million from new logos and an additional $14 million from existing customer expansions. New customer additions remain strong with 21 new logos signed in the third quarter. Notable new customer wins included one of the largest U.S. private health insurers at the Keep Campus in Atlanta, a global leader in medical device technologies in the Core Campus in Las Vegas, a leading producer of electric vehicles and innovative battery solutions at the Citadel Campus in Tahoe Reno and a top-ranked university medical center-based in Northern California also at the Citadel Campus. The health care vertical continues to be a top strategic growth priority for Switch. As we believe Switch's Tier 5 platinum data centers are purpose-built to support the highly regulated and data-intensive requirements of the health IT sector. In addition to our unmatched resiliency, 100% uptime track record and multilevel security protocols, Switch data centers offer a full suite of compliance certifications, including HIPAA, FedRAMP, FISMA, SOC 1, 2 and 3, among many others. We believe this combination of factors, combined with the industry's only Class V resiliency, makes Switch the premier destination for health care industry colocation deployments. Including the logos we signed in Q3, we now have 100 customers in the health care sector. In addition, health care customer revenue increased 18% in Q3 2020 compared to the year ago quarter, representing one of our fastest-growing enterprise verticals during this period. Approximately 2/3 of our third quarter contract value was attributable to the Citadel, Pyramid and Keep Campus locations, as our newer primes continued to see a disproportionately higher share of bookings relative to their current revenue contribution. Notably, our Q3 colocation wins included a 5-megawatt expansion at the Citadel Campus from a Fortune 100 semiconductor firm specializing in AI autonomous vehicles and other high-density computing architectures. This 7-year contract is expected to generate approximately $7 million of annualized revenue at full deployment. Now turning to our data center construction milestones and project pipeline. During Q3, we delivered a 10-megawatt power system in the Core Campus to facilitate ongoing customer ramps in Las Vegas data center 11. Moreover, we expect to finalized construction on an additional 2,100 cabinet equivalents and 10 megawatts of incremental power infrastructure during the fourth quarter of 2020. This includes 2 new sectors at the Citadel Campus, totaling 1,320 cabinet equivalents and 10 megawatts of power. Also during Q4, we expect to finalize tenant improvements on Sector 2 of Atlanta Data Center 1, adding 780 cabinet equivalents. Additionally, during the third quarter of 2020, we continued site development work at the Core Campus in preparation for the future construction of 3 new data centers. The first of which is Las Vegas Data Center 15 with a target delivery in 2022. In closing, we are pleased to deliver strong third quarter in 2020 year-to-date performance and remain focused on the exciting opportunities that lie ahead for Switch. We continue to prepare to capitalize on the market opportunities addressed by our 3 new divisions: Switch Edge, Switch Century and Switch Vault, together with the other related services that support and expand upon our technology ecosystem. We look forward to providing further details to investors as we move forward with these strategic growth initiatives. I will now turn the call over to Gabe to discuss our financial results. Gabe? -------------------------------------------------------------------------------- Gabriel Nacht, Switch, Inc. - CFO [4] -------------------------------------------------------------------------------- Thanks, Thomas. Today, I'm going to review our financial results for the third quarter of 2020 and discuss our outlook for the full year. In the third quarter of 2020, we achieved quarterly revenue of $128.8 million, an increase of $6.4 million or 5% compared to the third quarter of 2019. Normalizing for nonrecurring fiber revenue recognized in the year ago quarter, our third quarter revenue growth was 9%. 45% of the year-over-year revenue growth in Q3 2020 resulted from new customers who initiated service during the past 12 months, while 55% of the revenue growth came from customers who have been with Switch longer than 1 year. More than 95% of our revenue in the quarter was recurring in nature, consisting primarily of colocation and telecom services, which include cross-connects, broadband and external point-to-point connectivity. Colocation revenue for the third quarter of 2020 was $105.1 million compared to $95.4 million in Q3 of 2019, an increase of 10%. Connectivity revenue in Q3 of 2020 was $22.5 million an increase of 7% when adjusted for $4.3 million of nonrecurring fiber revenue from the year ago quarter. Other revenue, including professional services, accounted for $1.2 million in Q3 of 2020 compared to $1.6 million for the same period of 2019. As of September 30, 2020, Switch had approximately 16,900 billing cabinet equivalents, generating approximately $2,400 per cabinet equivalent in monthly recurring revenue. We had more than 8,500 total cross-connects as of September 30, and cross-connects accounted for 4.1% of total revenue in Q3 2020 compared to 3.6% in the year ago period, reflecting a 19% growth rate. Now turning to bookings. During Q3, we executed 590 contracts comprising approximately 12 megawatts representing total contract value of $109 million and annualized revenue of $27 million at full deployment, inclusive of both renewals and sales of incremental services. In the third quarter, we signed $18 million of incremental annualized recurring revenue comprised of $14 million in incremental bookings from existing customers and approximately $4 million from new logos. As of September 30, 2020, our booked not billed backlog stood at $27 million in aggregate annualized revenue, an increase from the prior quarter backlog as new signings exceeded Q3 revenue commencements. We expect our backlog to contribute approximately $1 million of incremental recurring revenue during the fourth quarter of 2020, with the balance contributing in 2021 and beyond. Please reference our third quarter investor presentation for new disclosures regarding backlog contribution by year. Revenue reductions from customer churn remained low in Q3 2020 at 0.2% compared to 0.1% in the year ago quarter and unchanged from last quarter. As a reminder, we define churn as the reduction in recurring revenue attributable to customer terminations or nonrenewal of expired contracts divided by the revenue at the beginning of the period. Cost of revenue increased by $10.8 million in Q3 2020 compared to the year ago quarter, primarily due to increases in depreciation and power costs. Excluding depreciation, amortization and equity-based compensation expenses, our Q3 2020 adjusted gross profit increased 2% year-over-year to $90.7 million, reflecting an adjusted gross margin of 70.4%. Adjusted gross profit and adjusted gross margin were negatively impacted by an increase in utility rates that exceeded normal seasonal patterns. In large part due to the California wildfires, which caused a periodic spike in open market power rates in August. Lower SG&A spend partially offset the increase in power costs as we remained disciplined in operating expenses during Q3. Total SG&A expenses were $31.5 million compared to $36.9 million in the year ago period, and down from $33.4 million last quarter. The sequential decline in SG&A was primarily attributable to a reduction in stock-based compensation and general and administrative costs. Excluding depreciation, amortization and stock-based compensation, third quarter SG&A expenses equaled 18.4% of total revenue compared to 19.9% in Q2 of 2020 and 23.6% in the year ago quarter. Income from operations in Q3 2020 increased 4% to $22.9 million compared to $22 million in Q3 of 2019. The year-over-year growth in operating income was primarily attributable to a $4.4 million decrease in gross profit, offset by a $5.4 million reduction in SG&A costs. Interest expense decreased by $0.8 million to $6.6 million in Q3 2020 as lower LIBOR rates offset higher average revolver balances compared to the year ago quarter. We reported Q3 2020 net income of $13.2 million or $0.05 per diluted share compared to net income of $10.1 million in Q3 of 2019 or $0.03 per diluted share. Third quarter net income includes a $1.6 million loss on interest rate swaps, which had a minimal impact on net income per diluted share. We provide a full reconciliation of GAAP net income attributable to Switch, Inc. to adjusted net income attributable to Switch, Inc. in the financial tables of our Q3 2020 earnings release available on our Investor Relations website. Adjusted EBITDA totaled $67.2 million for Q3 2020 compared to $60.8 million in Q3 2019, reflecting year-over-year growth of 11%. Excluding $3.2 million of adjusted EBITDA from a nonrecurring fiber transaction in the year ago quarter, adjusted EBITDA increased 17% year-over-year. Third quarter adjusted EBITDA margin was 52.1%, increasing from 49.7% in the year ago period, primarily due to a reduction in SG&A as a percentage of revenue partially offset by higher power costs. Capital expenditures in the third quarter of 2020 were $82.6 million compared to $121.2 million in the same quarter of 2019 or $92.3 million, excluding land purchases. We invested $33.3 million at the Citadel Campus, primarily attributable to the ongoing build-out of 2 new sectors at Tahoe Reno Data Center 1 to accommodate strong customer demand. CapEx at the Keep Campus was $24.6 million for tenant improvements at Atlanta Data Center 1 in addition to site work in preparation for the construction of Atlanta Data Center 2. We also invested $21.6 million in ongoing site development work for Las Vegas Data Centers, 14, 15 and 16 and $3.1 million in the Pyramid Campus for additional power and cooling infrastructure. Maintenance capital expenditures were $2.0 million for the third quarter of 2020 or just 1.6% of revenue compared to $1.8 million and 1.5% of revenue in the same quarter last year. Growth CapEx for data center construction and improvements was $80.6 million for the third quarter of 2020 compared to $90.4 million in the year ago period. As of September 30, 2020, the Switch primes had capacity for 23,300 cabinet equivalents within our open sectors. At quarter end, 88% of our total cabinet inventory was committed under contracts compared to 89% in the prior quarter and 90% in the year-ago quarter. The Q3 2020 utilization rates at these primes, based on committed cabinets in currently available colocation space, were approximately 91%, 90%, 72% and 36% at the Core Campus, the Citadel Campus, the Pyramid Campus and the Keep Campus, respectively, compared to 93%, 86%, 72% and 23% in the prior quarter. Two primary factors contributed to the sequential decrease in utilization rate during Q3, the first being a customer return of 300 low-density cabinets in the Core Campus. The second factor impacting Q3 utilization was the release of 120 non-billing reserve cabinets made at our request by a separate customer at the Core Campus in order to accommodate the growth plans of another customer. We anticipate that these cabinets will be occupied by the customer and included in our build cabinet counts in Q1 of 2021. Now turning to the balance sheet. In mid-September, we completed our first unsecured bond offering raising $600 million of 8-year notes at 3.75%. The proceeds were used to repay revolver balances totaling $280 million and $182 million on our term loan B, with the remaining proceeds designated for future growth CapEx and general corporate purposes. As of September 30, 2020, we had approximately $1 billion in total debt outstanding at a weighted average interest rate of 4.1%, inclusive of our interest rate swaps on the remaining term loan balance. As of September 30, 2020, the company's total debt outstanding net of cash and cash equivalents, was $892.3 million, including finance leases, resulting in a net debt to last quarter annualized adjusted EBITDA ratio of 3.3x, compared to 3.1x in the prior quarter. As of September 30, 2020, we had liquidity of $656.1 million, including cash and cash equivalents and availability under our revolving line of credit. As disclosed in recent 8-K filings, during the third quarter of 2020, our members redeemed 2.1 million common units resulting in the issuance of an equivalent number of Class A common shares. Total shares outstanding at quarter end were 241 million, including 109 million in Class A public float representing 45% of total shares outstanding. October and November redemptions totaled 10.1 million common units, bringing our public float to approximately 119 million shares or 49% of total shares outstanding. Finally, we are updating our guidance ranges for 2020 as follows: revenue in the range of $510 million to $518 million, reflecting 11% organic year-over-year growth at the midpoint; adjusted EBITDA in the range of $261 million to $267 million, reflecting an increase of 14% compared to 2019 and; an adjusted EBITDA margin of 51.4% at the midpoint; capital expenditures in the range of $295 million to $325 million. And now I will turn it back to Thomas for some closing remarks. -------------------------------------------------------------------------------- Erin Thomas Morton, Switch, Inc. - President, General Counsel & Secretary [5] -------------------------------------------------------------------------------- In conclusion, we firmly believe that Switch is well aligned with industry dynamics and favorably positioned to accelerate enterprise migration into a hybrid cloud environment. We continue to execute on our pipeline of large enterprise retail colocation opportunities, which remain robust. We look forward to announcing these transactions in due course. We would once again like to take this opportunity on behalf of our management team to thank our employees, our customers, our partners and our shareholders for their continued support of Switch. We would now like to open the line for questions. ================================================================================ Questions and Answers -------------------------------------------------------------------------------- Operator [1] -------------------------------------------------------------------------------- (Operator Instructions) Our first question today will come from Erik Rasmussen with Stifel. -------------------------------------------------------------------------------- Erik Peter Rasmussen, Stifel, Nicolaus & Company, Incorporated, Research Division - Analyst [2] -------------------------------------------------------------------------------- First, maybe on your Atlanta prime. You continue to make progress announcing another new meaningful win in the quarter. But overall, can you just provide some additional color on those leases signed and maybe the progress you've made so far? And then what are some of the trends in the pipeline that would suggest increased activity? -------------------------------------------------------------------------------- Erin Thomas Morton, Switch, Inc. - President, General Counsel & Secretary [3] -------------------------------------------------------------------------------- Yes. Thank you for that. And I will tell you that we are very excited -- continue to be very excited about our progress in the Atlanta Prime. We have over 20 customers there right now. And we recently signed a tenant very recently that will be an anchor tenant in Atlanta. More data will come about that tenant as they finalize their deployment architecture and various technical aspects of their deployment. But once they deploy, they will generate north of $6 million of annualized MRC, and they will cause the building to be a little over 66% committed. So we are very pleased with the progress of the Atlanta estate and very, very pleased to have this anchor tenant in place. -------------------------------------------------------------------------------- Gabriel Nacht, Switch, Inc. - CFO [4] -------------------------------------------------------------------------------- And Thomas, I'll just add to that. Erik, the contract that we announced this last quarter is not the one Thomas is talking about since that was literally just signed, and we're super excited about that. But the one that we announced in this quarter is a health care company that signed a 10-year commitment for Atlanta. If you look at the new deals that we signed, we had a number of health care companies on the list. And we've been making a very concerted effort to target health care companies because of our resiliency, our security, all of the regulatory compliance that we have. We think we're a fantastic home for health care companies, as Thomas mentioned in his remarks, and that's clearly showing up in our sales report. -------------------------------------------------------------------------------- Erik Peter Rasmussen, Stifel, Nicolaus & Company, Incorporated, Research Division - Analyst [5] -------------------------------------------------------------------------------- Great. Progress sounds good. And then my second question is a follow-up, my follow-up question. Maybe you can just discuss the broader demand environment going into the year-end. Are you seeing any changes in customer behavior? Or things picking up that could even give confidence in sustained momentum for next year? -------------------------------------------------------------------------------- Erin Thomas Morton, Switch, Inc. - President, General Counsel & Secretary [6] -------------------------------------------------------------------------------- Yes. We are seeing an increase in activity as supply lines begin to bolster themselves back up and customer activity continues to go forward. We're also seeing an increased amount of back pressure from customers, i.e., their IT needs and the growth of their IT needs did not slow down during this COVID period, but their ability to address them did slow down in some sectors. So we're seeing the relinquishment of that slowdown, and we are seeing an uptick in activity. And we're very, very positively influenced by what we think is going to be in Q4, and we are very confident in our -- having good bookings in the next quarter. -------------------------------------------------------------------------------- Operator [7] -------------------------------------------------------------------------------- Our next question today will come from Sami Badri with Credit Suisse. -------------------------------------------------------------------------------- Ahmed Sami Badri, Crédit Suisse AG, Research Division - Senior Analyst [8] -------------------------------------------------------------------------------- I had a question regarding just the Switch pipeline of deals that you had kind of in mind in process, partially with the S3 sales force. You entered 2020 with probably a robust pipeline and then COVID hit that obviously paused or pushed things out. Due to the 3Q results and your expectations in 4Q, is that essentially -- are those catch-up deals? Or are those incremental to what you guys are originally expecting going into 2020? And I can clarify the question a little bit more if it sounds confusing in case of the way I created it. -------------------------------------------------------------------------------- Erin Thomas Morton, Switch, Inc. - President, General Counsel & Secretary [9] -------------------------------------------------------------------------------- No. Thank you, Sami. I guess first is that our S3 team continues to hit strides and make tremendous progress. We're very excited about the way that team has so quickly come up to speed and been able to represent our product very well, even when in-person meetings are not as possible through COVID. So their progress is remarkable in normal times and is exceptional during these times. So it's hard -- to the second part of your question, it's really hard to segregate out what we saw as would have come anyway versus backed up pipeline from the COVID items because you expect a certain transaction volume each year based on prior momentum that you've had in pre-existing years. So we have seen some deals that got slightly delayed. But all in all, we've been booking revenue as we anticipated we would despite COVID, and that's why we have reaffirmed and, in fact, tightened our guidance and enhanced our EBITDA. So we are doing what we said we are -- we would do, and we expect Q4 to be even more robust. -------------------------------------------------------------------------------- Ahmed Sami Badri, Crédit Suisse AG, Research Division - Senior Analyst [10] -------------------------------------------------------------------------------- Got it. And then one question on the health care accounts that you guys are winning. Are these health care customers deploying net new colocation footprints? Or are these health care customers already existing customers of other data center facilities that have colocation footprints? As in, is moving to the Switch facility, their first step moving into co-location type data center infrastructure? -------------------------------------------------------------------------------- Erin Thomas Morton, Switch, Inc. - President, General Counsel & Secretary [11] -------------------------------------------------------------------------------- So good -- that's an interesting question. The answer, the one that we announced in Atlanta, they moved from another data center into our data center. Gabe, are there any others that you want to illuminate on... -------------------------------------------------------------------------------- Gabriel Nacht, Switch, Inc. - CFO [12] -------------------------------------------------------------------------------- Yes, it's a bit of both, Sami. The deal that we announced in Atlanta was a move from another data center. The #4 transaction this last quarter was a health care company that basically moved from their own data center to ours, from a California data center to ours in Tahoe Reno for all of the advantages that, that data center provides. So it's a bit of a mixed bag. -------------------------------------------------------------------------------- Ahmed Sami Badri, Crédit Suisse AG, Research Division - Senior Analyst [13] -------------------------------------------------------------------------------- Got it. Got it. And then one last question. When will Nevada be completed the vote count for the presidential election. I'm kidding. Don't answer that question. -------------------------------------------------------------------------------- Erin Thomas Morton, Switch, Inc. - President, General Counsel & Secretary [14] -------------------------------------------------------------------------------- That's a great question, Sami. The answer is who knows? -------------------------------------------------------------------------------- Operator [15] -------------------------------------------------------------------------------- Our next question is from Eric Luebchow with Wells Fargo. -------------------------------------------------------------------------------- Eric Thomas Luebchow, Wells Fargo Securities, LLC, Research Division - Associate Analyst [16] -------------------------------------------------------------------------------- One for Gabe. So obviously, you've been operating at kind of a higher EBITDA margin this year. I think that you've been able to harvest some efficiencies from kind of lower T&Es, lower headcount expansion. But just wondering, do you think that's going to revert back to kind of a lower 50% range going forward? Or are there any kind of efficiencies you can pull forward into your model as we look forward to next year? -------------------------------------------------------------------------------- Erin Thomas Morton, Switch, Inc. - President, General Counsel & Secretary [17] -------------------------------------------------------------------------------- I'll take that one, yes. Eric, thank you for that question. Clearly, there are some expenses that we are not expending this year because of COVID. For example, T&E. But we've also found that a lot of what we're doing virtually is working quite well. And as we go back to what is hopefully going to be a normal environment at some point next year, we expect to continue to utilize the tools that we've been utilizing effectively today. And so we would expect some of those savings to continue. We're right in the process of our 2021 planning cycle. So obviously, we're not ready to talk about 2021 in terms of providing any guidance. But nevertheless, the challenge to our team is to continue to operate efficiently, to use the lessons that we've learned this year and to enhance our margin wherever possible. -------------------------------------------------------------------------------- Gabriel Nacht, Switch, Inc. - CFO [18] -------------------------------------------------------------------------------- Just to supplement what Thomas has said, is that, yes, we have deployed some software to increase efficiencies, and we have learned to do virtual tours. We've learned to do virtual conferences. We maintained a flat headcount despite growing significantly in terms of our revenue this year and increasing the size of our footprint, and we expect to carry those efficiencies forward. So there will be some return in terms of travel and incentive things like that, but there will also be some material efficiencies that we can carry forward in a post-COVID environment. -------------------------------------------------------------------------------- Eric Thomas Luebchow, Wells Fargo Securities, LLC, Research Division - Associate Analyst [19] -------------------------------------------------------------------------------- Great. That's helpful. And one more, if I could. I'm wondering if you've had any traction around your edge product over the last quarter. And maybe you could provide a little color on what the economics and returns on that could look like. I mean, can you get a typical $2,400 per month type of MRR on the installed cabinets? And can you achieve the kind of 20-plus percent stabilized yields you've been able to get in your core campuses with this edge product? -------------------------------------------------------------------------------- Erin Thomas Morton, Switch, Inc. - President, General Counsel & Secretary [20] -------------------------------------------------------------------------------- Yes. So we haven't released any additional data yet on the edge product, but we continue to work with our partners on development of that product, and there will be some announcements in the not-too-distant future. With those announcements will come discussions regarding the economics. But Gabe, is there anything else you wanted to add on the interim in that respect? -------------------------------------------------------------------------------- Gabriel Nacht, Switch, Inc. - CFO [21] -------------------------------------------------------------------------------- Yes. I think as we've alluded to in earlier calls, we expect returns from that product to be very similar to our returns from our larger data centers, whether that's $2,400 per cabinet or slightly more. We believe that's going to be a very healthy product for us. -------------------------------------------------------------------------------- Operator [22] -------------------------------------------------------------------------------- Our next question will come from Aryeh Klein with BMO Capital Markets. -------------------------------------------------------------------------------- Aryeh Klein, BMO Capital Markets Equity Research - Analyst [23] -------------------------------------------------------------------------------- Just a question on the guidance, specifically the revenue for this year. It seems like the revenue ranges are quite wide, particularly compared to last year at this point. So maybe you can talk about the puts and takes at the high and low ends of the range? -------------------------------------------------------------------------------- Gabriel Nacht, Switch, Inc. - CFO [24] -------------------------------------------------------------------------------- Yes, Aryeh. It is a range. We're getting to year-end, so we did tighten it, but it's still a range. And I think the important takeaway is where -- we still believe we're going to kind of maintain the midpoint that we've been talking about all year, and we're comfortable with that number. -------------------------------------------------------------------------------- Erin Thomas Morton, Switch, Inc. - President, General Counsel & Secretary [25] -------------------------------------------------------------------------------- No, nothing to change it, Aryeh, except we put out a guidance range at the beginning of the year, and we accommodate that request. And as long as we feel like we're going to operate within the range that we put to the market, we'll try to stay within that range. Certain mathematical requirements, especially with respect to EBITDA, allow us to tighten up that range. But for the most part, we'd like to put our guidance out. And unless there's a material change, we'd like to say that we're fixed. -------------------------------------------------------------------------------- Aryeh Klein, BMO Capital Markets Equity Research - Analyst [26] -------------------------------------------------------------------------------- Got it. And then just on the utility costs being higher in the quarter. Is any of that carrying over into the fourth quarter? Or is that largely done with? -------------------------------------------------------------------------------- Gabriel Nacht, Switch, Inc. - CFO [27] -------------------------------------------------------------------------------- No, it's largely done with. -------------------------------------------------------------------------------- Operator [28] -------------------------------------------------------------------------------- Our next question today will come from Michael Rollins with Citi. -------------------------------------------------------------------------------- Michael Ian Rollins, Citigroup Inc., Research Division - MD & U.S. Telecoms Analyst [29] -------------------------------------------------------------------------------- Curious if you could talk about the journey a bit on the interconnection side. And the journey to monetize that better, where you are with that? How to think about the incremental opportunity? And then just secondly, more broadly, just in terms of the -- if you look at sort of the book-to-bill kind of framework you provided in the slides in terms of when the revenue could come through for the bookings, how does that influence the potential for growth in 2021? -------------------------------------------------------------------------------- Erin Thomas Morton, Switch, Inc. - President, General Counsel & Secretary [30] -------------------------------------------------------------------------------- Mike, I think you were first asking about interconnections or cross-connects, is that correct? -------------------------------------------------------------------------------- Michael Ian Rollins, Citigroup Inc., Research Division - MD & U.S. Telecoms Analyst [31] -------------------------------------------------------------------------------- That's correct. Yes. -------------------------------------------------------------------------------- Erin Thomas Morton, Switch, Inc. - President, General Counsel & Secretary [32] -------------------------------------------------------------------------------- So our cross-connects continue to grow. They're up over 4% of our revenue. Year-over-year, they grew quite nicely, and we're continuing to monetize more cross-connects as they come up for renewal. You know historically, we didn't always monetize all of our cross-connects, and we've been doing that more aggressively. We still think there's quite a bit of runway on that. And clearly, as we continue to expand our footprint, that alone creates an opportunity for additional cross connects. As customers move into new sectors and new facilities, they're either connecting back to their own footprints in other sectors or some of our other facilities or to customers or clients within those facilities. So we think there's still a good runway on the cross-connect business. . Our connectivity business in general is still growing quite nicely. It grew about 7% year-over-year when you adjust for the fiber transaction in Q3 of 2019 that we had to account for in that one quarter because of the accounting rule changes. So we're still very bullish on our connectivity business. And as you know, last quarter, we announced a very large connectivity deal. It was one of the largest contracts of the quarter. Last quarter was purely a telecom deal. So we're -- we think it's one of the differentiating factors for Switch and really does help us in the sales process. And as far as the bookings, and timing of that going into the out years, we did provide some additional disclosure on the timing of the bookings conversion to revenue in the supplemental slide deck. But of course, we're just going through the planning process now for 2021. And so we're not really ready to talk about guidance other than we've grown for 20 years. We certainly expect to continue to grow. -------------------------------------------------------------------------------- Operator [33] -------------------------------------------------------------------------------- Our next question will come from Frank Louthan with Raymond James. -------------------------------------------------------------------------------- Frank Garrett Louthan, Raymond James & Associates, Inc., Research Division - MD of Equity Research [34] -------------------------------------------------------------------------------- Two quick questions. What would have to happen to hit the high end of the range. We're pretty far into the year here. You got a pretty good visibility on it. So to get the high end of the range for revenue, what do you -- what goes into that expectation? And then on the margin expansion in the quarter, anything kind of COVID-related or onetime that might mean revert over time? Or is this a new baseline for margins? -------------------------------------------------------------------------------- Gabriel Nacht, Switch, Inc. - CFO [35] -------------------------------------------------------------------------------- Yes. As far as our revenue guidance -- go ahead, Thomas. -------------------------------------------------------------------------------- Erin Thomas Morton, Switch, Inc. - President, General Counsel & Secretary [36] -------------------------------------------------------------------------------- No, I was going to say, you're absolutely right that you only have a couple of months left to hit it. It depends on the rate in which we're able to do installs and then do that billing. We're confident that we will come within our range, and there is the possibility of coming in towards the higher end of that range. But it does depend a little bit on COVID and the ability for people to send out teams to do the installations. So there's just -- there is an unknown variable, but we are confident about coming within the range that we put out to the market. So Gabe, do you want to talk anything further on that point? -------------------------------------------------------------------------------- Gabriel Nacht, Switch, Inc. - CFO [37] -------------------------------------------------------------------------------- Not on that point. But with regard to the margin question, Frank, as Thomas alluded to earlier, we do think we will be carrying forward efficiencies into next year and beyond from some of the things that we've learned during this COVID operational time period. So I'm hesitant to say it's the new -- that our current margin is our new baseline because we are hoping that we're going to be able to send teams to travel to customers and to work on sales calls and to travel to see you at various conferences at some point. But we certainly believe that we can carry forward some of the efficiencies that we're currently seeing into the future. -------------------------------------------------------------------------------- Frank Garrett Louthan, Raymond James & Associates, Inc., Research Division - MD of Equity Research [38] -------------------------------------------------------------------------------- And just a follow-up, how much did COVID restrict growth this year? You said some of this depends on whether the companies can get teams in, not due to their -- so that implies it's not necessarily their lack of desire. It's just more their ability. How much would you say the similar type thing impacts from COVID restricted growth this year? -------------------------------------------------------------------------------- Erin Thomas Morton, Switch, Inc. - President, General Counsel & Secretary [39] -------------------------------------------------------------------------------- It's really interesting with some -- we've talked about this on prior calls. With some companies, it actually enhanced their growth and caused their industry to flourish. And so they did more of the retail sector, of course, in terms of online retail and online sales and people that were doing content distribution networks. Those all did very well, and those grew. Other divisions or other gray areas were more directly impacted by COVID, and that's a smaller portion of our business, and they were more held back by what they did. So it's a mixed bag. In any economic times, there are some companies that are advantaged and some companies that are disadvantaged by whatever is going on in the marketplace. But we are seeing interest from some of our customers that postponed some of their projects are now coming in and making those projects. So the ones that did well are helping us meet the numbers that we set out that we would do for the market. And the ones that were held back a little bit are now coming in and helping us build up a robust 2021. -------------------------------------------------------------------------------- Operator [40] -------------------------------------------------------------------------------- Our next question will come from Richard Choe with JPMorgan. -------------------------------------------------------------------------------- Yong Choe, JPMorgan Chase & Co, Research Division - VP in Equity Research [41] -------------------------------------------------------------------------------- I just wanted to ask about the contract lengths, both the new and existing contract lengths won in over 5 years. Is this -- and they've been kind of growing a little bit for a while. Is this mainly because of maybe trying to get anchor tenants or more longer deals into the new expansion campuses? Or are you seeing this from the customers wanting to sign kind of larger and longer deals? -------------------------------------------------------------------------------- Gabriel Nacht, Switch, Inc. - CFO [42] -------------------------------------------------------------------------------- It's definitely customer driven, Richard. Thomas, you can add, but it's definitely customer-driven. We're seeing the customers particularly in the campus locations like Atlanta and Reno wanting to sign longer contracts, and that's what's pushing that up. -------------------------------------------------------------------------------- Erin Thomas Morton, Switch, Inc. - President, General Counsel & Secretary [43] -------------------------------------------------------------------------------- I totally agree with Gabe. -------------------------------------------------------------------------------- Yong Choe, JPMorgan Chase & Co, Research Division - VP in Equity Research [44] -------------------------------------------------------------------------------- And with the health care deals, is this something that you are -- your sales force is focusing on? Or is this through a channel? How are you targeting the health care industry in terms of sales? -------------------------------------------------------------------------------- Erin Thomas Morton, Switch, Inc. - President, General Counsel & Secretary [45] -------------------------------------------------------------------------------- Yes. We have a segment of our sales group that is targeting the health care industry and having a tremendous amount of success. We were looking at our customer mix. And we -- when we did so, we realized that we had north of 80 customers plus that were in the health care industry. And so we focused on that and said, why are they coming? We talked to a few of them, and they cited our regulatory abilities, our compliance and our uptime as key factors for their desire to come here, and then others really looked at the green initiative that they had -- that we have. And so we started talking to them, and we found that there is a large number of health care customers that are interested in the product that we're offering, and we've been successful in further penetrating that market and garnering some more of those customers. And they're great customers. They want to sign longer deals. They're there as much because of their regulatory compliance concerns as they are -- the technical concerns. So they are a very stable customer base, and they are one that can grow with you significantly over time. -------------------------------------------------------------------------------- Operator [46] -------------------------------------------------------------------------------- Our next question will come from Brendan Lynch with Barclays. -------------------------------------------------------------------------------- Brendan James Lynch, Barclays Bank PLC, Research Division - Research Analyst [47] -------------------------------------------------------------------------------- I think it's understood that you don't have a ton of capacity right now in the Pyramid Campus in Grand Rapids. But maybe you could talk about how demand is there for you to build out additional sectors? -------------------------------------------------------------------------------- Erin Thomas Morton, Switch, Inc. - President, General Counsel & Secretary [48] -------------------------------------------------------------------------------- Yes. If we get -- as we get significantly more demand there, we will start helping that building. You see that in our long-range plan, there are 2 more buildings that are slated for the Grand Rapids Campus. And as we see growth matriculate there, we will be into break ground and build-out in those locations -- or that location. Right now, though, we are building simultaneously on 3 campuses and building multiple buildings in Las Vegas. So we are fully busy in developing those 3 campuses, where there's the greatest amount of interest and the greatest amount of uptake. -------------------------------------------------------------------------------- Brendan James Lynch, Barclays Bank PLC, Research Division - Research Analyst [49] -------------------------------------------------------------------------------- What would you attribute the difference to between the 3 other campuses where you're seeing quite a bit of demand relative to Grand Rapids? -------------------------------------------------------------------------------- Erin Thomas Morton, Switch, Inc. - President, General Counsel & Secretary [50] -------------------------------------------------------------------------------- Yes. That's an interesting question. We -- obviously, Vegas is the anchor, so it's a self-procuring item. And up in Reno, you have the entire Bay Area and the states north that are providing inflow into Reno. And then in Atlanta, you have the entire southeast that's pulling there. In Michigan, you have Chicago, et cetera. There is some competition there. And we believe that Atlanta will take off and will get going. It's doing very well as a single building right now, and it is very profitable. When we start to land additional anchors there or have interest for large megawatt deployments, we will quickly deploy. We are -- we have permits to go deploy. We have our necessary construction abilities to go there, and we will build as soon as there is a sufficient need to make that a viable item for us economically? -------------------------------------------------------------------------------- Gabriel Nacht, Switch, Inc. - CFO [51] -------------------------------------------------------------------------------- Yes, I would add to that that Las Vegas, we have 100 customers just in Las Vegas. So that does create a self-fulfilling ecosystem because those customers are constantly expanding. There's a cadence to Las Vegas. Reno is seeing strong demand coming out of California. For all of the benefits that we've talked about in the past in terms of tax benefits, lower cost of power, 100% free power, lower cost of living, et cetera. In Grand Rapids, that is a smaller footprint building that we've purchased. And we do still have space available there. And we are still definitely looking to expand that campus over time. But right now, we're seeing tremendous demand in Atlanta. Thomas just talked about the fact that we just signed an anchor tenant with that, that building is approximately 2/3 committed, and we need to get going on the next building because it does take a while to build. So we're going to be moving as quickly as we can. -------------------------------------------------------------------------------- Brendan James Lynch, Barclays Bank PLC, Research Division - Research Analyst [52] -------------------------------------------------------------------------------- Sure. That all makes sense. Somewhat of a related question, I believe you mentioned that you had a return of cabinets at your request at the Core Campus. Maybe just give us some color on how unusual this is and whether you were able to reposition the customers who you took the cabinets from? -------------------------------------------------------------------------------- Erin Thomas Morton, Switch, Inc. - President, General Counsel & Secretary [53] -------------------------------------------------------------------------------- Yes, I'll take that one. It's really not that unusual. We have almost 1,000 customers. So they're constantly rejiggering their deployments and changing their technology stack. And when they do that, they sometimes rejigger their cabinet deployments. I think we talked about the fact that we also had a return of 300 low-density cabinets because that customer was concentrating on new gear into their high-density cabinets and are able to give back space. That makes sense for them. That makes sense for us. The 120 cabinets that we asked the customer to release was because we had another customer that needed that space, and the customer that we asked to release is actually moving into -- is expanding into another one of our primes rather than taking those reserved cabinets. So it's a win-win-win. -------------------------------------------------------------------------------- Operator [54] -------------------------------------------------------------------------------- (Operator Instructions) At this time, I'm showing no further questions. So this will conclude the question-and-answer session. The conference has now concluded. Thank you for attending today's presentation. You may now disconnect. -------------------------------------------------------------------------------- Erin Thomas Morton, Switch, Inc. - President, General Counsel & Secretary [55] -------------------------------------------------------------------------------- Thank you all.