DigitalBridge Group, Inc. (DBRG) Q4 2020 Earnings Report, Transcript and Summary

Good afternoon, and welcome to the Switch Inc. Fourth Quarter and Full Year 2020 Earnings Conference Call. All participants will be in listen-only mode. [Operator Instructions] After today’s presentation, there will be an opportunity to ask questions. [Operator Instructions] Please note this event is being recorded. I would now like to turn the conference over to Matthew Heinz, Vice President of Investor Relations. Please go ahead.

Thank you. Good afternoon, and welcome to Switch’s fourth quarter and full year 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 fourth 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 President, Thomas Morton.

Thank you, Matt, and good afternoon, everyone. Thank you for joining us today. The Switch team demonstrated tremendous resilience and strong execution in 2020, achieving several key strategic priorities despite the challenges presented by the COVID-19 pandemic. Our sales team stepped up to the challenge by delivering record bookings in the fourth quarter, signing a total contract value of $240 million and a record incremental annualized revenue of $36 million, reflecting the strength of market demand by enterprise customers for our Tier 5 multi-tenant facilities. We are excited to report that Switch ended the year with a record recurring revenue backlog of more than $50 million. Our highest ever as a public company. Full year 2020 revenue increased 11% year-over-year to $511.5 million or half of 1% below the mid-point of our forecasted range. Fourth quarter revenues were affected by two customers opting to migrate a portion of their application stack to a public cloud environment. They determined that a portion of their workloads with relatively low power density and low security requirements were better suited for a public cloud, while choosing to maintain their more mission critical applications at Switch. Reductions from both customers were factored into our prior guidance ranges. However, the timing of these adjustments was uncertain contributing to the variability of reported revenue compared to our guidance midpoint. This revenue reduction was more than offset by an improvement in operating efficiency, as we achieved our highest ever adjusted EBITDA margins as a public company in both the fourth quarter and full year 2020. As a result, our full year 2020 adjusted EBITDA of $268.3 million came in above the high end of our previously increased guidance range, representing 16% year-over-year growth and a margin of 52.5%. While a portion of our 250 basis point margin improvement in 2020 was attributable to COVID-related cost savings. We believe that a material amount of this margin expansion will be sustained moving forward due to the more permanent enhancements in our operating efficiency. Our current growth outlook for 2021 reflects a dynamic of robust enterprise demand offset by near-term inventory constraints that we expect will be alleviated as we approach the second half of the year, due to our elevated volume of multi-megawatt transactions closed during the second half of 2020 and early 2021. We have a number of pending installations that will ramp in over the course of this year and extending into 2022. As a result, the space in power being reserved for these larger transactions in our backlog will limit the amount of immediately available space that may have otherwise been sold and monetized earlier in 2021. In addition, we expect a longer than average initial deployment timeline for customer installations this year, due to COVID-related travel restrictions, affecting the timing and magnitude of our backlog contribution for 2021. Against this backdrop of continued strong demand for Switch’s best-in-class data center infrastructure, we are keenly focused on ramping up construction now that permitting bottlenecks have ease in recent months. I will provide additional details around our near-term and long-term development plans later in the call. I would now like to cover some of Switch’s notable achievements during 2020, before turning to our key strategic objectives in 2021. In the fourth quarter, we completed a 10-year colocation agreement with an anchor customer at our ATLANTA 1 facility bringing committed utilization to over 70% in less than eight months after opening in response to strong signings and ongoing robust demand in the Southeastern Prime region, we began construction and site development on our next two data centers at The Keep Campus in the fourth quarter. With the next facility expected to open in early 2023, adding 450,000 square feet and up to 50 megawatts of additional capacity. We also broke ground on the second and third ultra scale data centers in The Citadel Campus in response to customer signings representing nearly 15 megawatts at full ramp and bringing committed utilization to over 80% of capacity at TAHOE RENO 1. Our next two data centers planned at The Citadel Campus represent an additional 1.2 million gross square feet and up to 130 megawatts of incremental power available by the end of 2025. 2020 also saw Switch’s continued development of three massive data centers at the Las Vegas Prime. The first of these facilities is expected to come online in Q2 of 2022, adding over 330,000 gross square feet and up to 40 megawatts of available power and aggregate the three data centers under development at The Core Campus represent an additional 950,000 gross square feet and up to 120 megawatts of available power to be delivered by the end of 2026. In November 2020, Switch finalized an agreement with FedEx and Dell Technologies to collaborate on the development of multi-cloud edge infrastructure services that will leverage Switch’s proprietary Tier 4 edge colocation designs alongside Dell’s hyperconverged cloud infrastructure solutions. The initial deployment is expected to launch in late 2021 near FedEx’s headquarters in Memphis, Tennessee with additional sites likely to be announced in coming months. Switch was recently awarded the ENERGY STAR certification by the environmental protection agency for its Los Vegas eight data center at The Core Campus with additional facilities expected to be certified later this year. This certification represents an independent third-party assessment signifying that Switch data centers perform in the top tier of facilities nationwide for energy efficiency and meet these strict energy performance level set by the EPA. In October 2020, Switch was again named in the top 10 among all U.S. companies for its investments in utilizing solar energy in the Solar Energy Industry Association’s annual Solar Means Business report alongside Apple, Walmart, and Google among other Fortune 50 enterprises. Switch is the only colocation data center technology company to be named in the top 10. This acknowledgment affirms and further cements Switch’s position as a leader in sustainability, which tremendously benefits our customers, the communities where we operate and our planet. Switch saw continued positive momentum in ESG performance with recent rating upgrades from third-party scoring agencies, including MSCI, Sustainalytics, and ISS. Notably, our upgrade to a BB rating by MSCI makes Switch eligible for the MSCI ESG leaders index, one of the largest equity benchmarks tracked by sustainability focused investors and passive index funds with over $170 billion in assets under management. Switch launched the upgrade of the SwitchDoc client portal in December 2020, providing expanded administrative capabilities and several self serve options for customers. These advancements open additional avenues for sales and enhance customer interactions. Our data center operations and security staff responded favorably to a rapidly changing and highly uncertain business environment brought forth by the COVID-19 pandemic, helping Switch to maintain its perfect record of zero downtime for our clients. Throughout 2020, Switch partnered with local community organizations in Nevada, Michigan, and Georgia to provide assistance to healthcare workers, individuals, and small businesses grappling with the COVID-19 pandemic. These programs include the COVID kindness program in Northern Nevada to provide meals to frontline healthcare and public safety workers, a partnership with the Grand Rapids Chamber of Commerce to support local restaurants and we also partnered with Google and the Douglas County Department of Economic Development to provide funding and support to local businesses and healthcare workers in the Greater Atlanta area. I will now summarize Switch’s top strategic priorities for 2021. One, may continued progress on our development pipeline with a total 75 megawatts of power and nearly 4,000 cabinet equivalents expected to come online between Q2 of 2021 and the first half of 2023, which we expect to become meaningful contributors to revenue growth in 2022 and beyond. Two, complete the installation of several large customer deployments across our prime campus locations to expedite the realization of our record revenue backlog. Three, maintain our recent sales momentum by closing on opportunities in our sales pipeline that maximize the currently available space and power in our portfolio. Four, achieve greater revenue diversification through continued growth of customer ecosystems outside of The Core Campus. For the full year 2020, our Citadel, Pyramid and Keep primes accounted for nearly 60% of Switch’s total incremental revenue growth as the total aggregate revenue growth for these three primes was 53% last year. Importantly, our Citadel, Pyramid and Keep locations now represent 18% of consolidated revenue as of Q4 2020, up from 13% in the year ago quarter. Now to recap our sales activity for the fourth quarter and full year 2020, Switch signed over $500 million in total contract value for the second consecutive year. Our sales velocity continued to gain momentum in the second half of 2020 as Switch executed transactions totaling over $54 million in incremental annualized revenue in the final two quarters of the year, including a record $36 million in the fourth quarter. For the full year 2020, incremental annualized bookings totaled $76 million, an increase of 27% from the $60 million signed during 2019. We also added 26 new logos in the fourth quarter representing our best quarter in 2020 for new customer acquisitions. Fourth quarter new logo wins included a leading developer of application software for the automotive industry in The Core Campus, a supply chain management software vendor in The Pyramid Campus, a nationwide provider of streaming video and wireless communication services in The Core Campus and a leading engineering and construction firm in The Keep Campus. The majority of our Q4 signings came from existing Switch customers, including key wins across multiple campus locations totaling more than 25 megawatts and $34 million of incremental annualized recurring revenue. Among the largest just existing customer signings during Q4 included a 10-year contract with a global transportation and logistics customer to anchor our ATLANTA 1 facility, a 5 megawatt expansion with a global e-commerce platform spanning both of our Nevada Prime locations and a 4 megawatt expansion order from a Fortune 100 semiconductor manufacturer in The Citadel Campus. This customer has signed for an additional 5 megawatts in The Citadel Campus in early 2021. Now turning to our construction milestones and project pipeline, during 2020, we delivered a total of 50 megawatts of new power capacity and approximately 2,900 cabinet equivalents across the four primes, including 780 cabinet equivalents and two 10 megawatt power systems supporting customer deployments in the LAS VEGAS 11 facility of which 94% is now committed under customer contracts. In The Citadel Campus, we opened two additional sectors totaling 1,320 cabinets and 20 megawatts, both of which are fully committed to customers and expected to ramp in over the course of 2021, including the anchor tenant signing for ATLANTA 1, which is expected to commence in the second half of 2021. Our ATLANTA facility is approximately 70% committed as of yearend 2020. Following the anchor tenant deployment at The Pyramid Campus in 2020, the GRAND RAPIDS 1 facility is currently 96% committed based on available space and power capacity. More than 90% of the cabinet capacity is scheduled to come online over the next 12 months is already committed under customer contracts. These projects include an additional 30 megawatts and 780 cabinets in The Citadel Campus, primarily supporting customer expansions that were signed during Q4 2020 and early 2021. Also included in our 2021 construction plan is the aforementioned second sector of ATLANTA 1, which we expect to complete in Q2 2021 with anchor tenant revenue commencing in Q3 of 2021. Other projects included in our 2021 CapEx plans with deliveries beyond this year, include the LAS VEGAS 15 data center, which is scheduled for delivery in Q2 of 2022. The TAHOE RENO 2 data center scheduled for Q1 2023 and the next Atlanta data center in Q2 of 2023. Looking out beyond 2021, we are excited about our long-term growth prospects, as we lay out the roadmap for expansion within the four primes. In aggregate, Switch currently has more than 2.8 million square feet and up to 300 megawatts of new data center capacity currently under development and schedule for delivery over the next five years, representing a greater than 60% expansion of our current footprint. Subsequent to year end, SUPERNAP International closed on the sale of SUPERNAP Italia to IPI Partners. As part of this transaction, Switch has agreed to exchange its equity interest in SUPERNAP Italia for additional equity in SUPERNAP Thailand and retain full control over its international intellectual property license. This created an opportunity for a successful liquidity event for our JV partner. I will now turn the call over to Gabe to discuss our financial results. Gabe?

Thanks, Thomas. Today, I’m going to review our financial results for the fourth quarter and full year 2020 and discuss our outlook for 2021. Switch reported fourth quarter 2020 revenue of $127.7 million, an increase of $7.2 million or 6% compared to the fourth quarter of 2019. 47% of year-over-year revenue growth in Q4 2020 resulted from new customers who initiated service during the past 12 months, while 53% of revenue growth came from customers who have been with Switch longer than one year. For the full year 2020, 88% of total revenue growth was attributable to existing customers with 12% from customers initiating service after December 31, 2019. Colocation revenue for the fourth quarter of 2020 was $104.8 million compared to $97.8 million reported in Q4 2019, an increase of 7.2%. Connectivity revenue in Q4 of 2020 was $21.5 million, increasing by 1.9% compared to $21.1 million in the same period in 2019. Other revenue including professional services accounted for $1.4 million in Q4 2020 compared to $1.6 million for the same period in 2019. Fourth quarter 2020 revenue was affected by two customers opting to migrate a portion of their application stack to a public cloud environment. This resulted in an approximate $3 million reduction in fourth quarter revenue and an approximate $18 million reduction to 2021 projected revenue. The full effect of these customer reductions will be realized in the first quarter of 2021. Importantly, both customers have signed renewal contracts to maintain the balance of their hybrid workloads at Switch and we do not anticipate further significant customer migrations at this time. As of December 31, 2020, Switch had approximately 16,600 billing cabinet equivalents generating over $2,400 per cabinet equivalent in monthly recurring revenue. We had more than 8,700 billing cross-connects as of December 31 And cross-connects accounted for approximately 4% of total revenue in Q4 2020, up from 3.8% in the year ago period. For the full year 2020, revenue from cross-connects increased 20% compared to the prior year. Now turning to bookings. As mentioned by Thomas, Switch delivered a record sales quarter in Q4 2020. During Q4, we executed 580 contracts comprising approximately 26 megawatts, representing total contract value of $240 million and annualized revenue of $55 million at full deployment, inclusive of both renewals and sales of incremental services. In the fourth quarter, we signed a post IPO record $36 million of incremental annualized recurring revenue, including $34 million in incremental bookings from existing customers and approximately $2 million from new customers. As of December 31, 2020, our recurring revenue backlog stood at just over $50 million, also a new record for Switch as a public company. We expect our backlog to contribute approximately $27 million of incremental revenue during 2021 with the remainder contributing in 2022 and beyond. Our backlog currently includes multiple large strategic enterprise transactions with initial contract terms, ranging from three to 10 years. These installations are large and complex in nature and are affected by inherent uncertainty regarding COVID-19 travel restrictions. As a result, we anticipate the majority of our 2021 backlog revenue contribution to occur in the second half of the year. Customer churn was 0.4% in Q4 2020 compared to 0.2% in the year ago quarter. As a reminder, we define churn as the reduction in recurring revenue attributable to customer terminations or non-renewal of expired contracts resulting in a full customer exit from the Switch platform divided by the revenue at the beginning of the period. For this definition, the previously mentioned customer revenue reductions in Q4 were not included in churn as both customers have maintained a presence at Switch. Cost of revenue increased by $6.4 million in Q4 2020 compared to the year ago quarter, primarily due to increases in depreciation and power costs. Excluding depreciation, amortization and equity-based compensation, our Q4 2020 adjusted cost of revenue increased by just 1% and adjusted gross profit increased 8% year-over-year to $94.7 million. A reconciliation of gross profit to adjusted gross profit is provided in the appendix section of our investor presentation. SG&A expenses in Q4 2020 were $31.6 million compared to $38.7 million in Q4 2019. This 18% decrease in SG&A compared to the year ago quarter was primarily attributable to lower professional fees and labor expenses related to ongoing work from home protocols and COVID travel restrictions. Income from operations in Q4 2020 increased 43% to $26.3 million compared to $18.3 million in Q4 2019. The growth in operating income was attributable to the $7.1 million reduction in SG&A and $0.9 million increase in gross profit. Interest expense increased by approximately $1.9 million to $9.1 million in Q4 2020, primarily driven by Switch’s higher debt balance following its first unsecured bond offering in September, 2020. This increase in debt was offset by lower LIBOR rates compared to the same quarter last year. As of December 31, 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. Net income for Q4 2020 was $15.3 million compared to net income of $12.9 million in Q4 of 2019. Net income in the fourth quarter of 2020, includes $0.2 million non-cash loss on interest rate swaps, resulting in $0.01 reduction to reported net income per diluted share. Adjusted EBITDA totaled $70.6 million for Q4 2020 compared to $57.6 million in Q4 2019, reflecting year-over-year growth of 22.4%. Our adjusted EBITDA margin for Q4 2020 was 55.2%, increasing 740 basis points from the year ago quarter, primarily due to the reduction in professional services and labor. For the full year 2020, adjusted EBITDA increased 16.1% to $268.3 million, reflecting a 52.5% margin and coming in slightly above the high end of our previous guidance range. The 250 basis point year-over-year increase in adjusted EBITDA margin during 2020 was due to a combination of certain COVID related cost savings and operating efficiencies that we expect to be more permanent in nature. I will discuss our 2021 margin expectations in greater detail during the guidance portion of the call. Full year 2020 capital expenditures, excluding land purchases were $343.8 million compared to $278.8 million in 2019, an increase of 23%. Capital expenditures in the fourth quarter of 2020 were $97.9 million compared to $86.4 million in the same quarter of 2019. Fourth quarter and full year capital expenditures were approximately $19 million above the high end of our prior guidance range. This was primarily because of our decision to pull forward certain projects and equipment purchases that were previously expected in 2021, due to mid-year COVID related permitting delays. However, based on the receipt of all necessary permits and the large capacity requirements to fulfill our record Q4 backlog, we opted to accelerate purchasing and construction in the final months of 2020. Maintenance capital expenditures were $3.4 million for the fourth quarter of 2020 or 2.7% of revenue compared to $1.5 million and 1.2% of revenue in the same quarter last year. Growth CapEx for data center construction and improvements was $94.5 million for the fourth quarter of 2020 compared to $84.9 million in the same period last year. Please refer to our press release and investor presentation for a detailed breakdown of capital expenditures by campus during the fourth quarter and full year 2020. As of December 31, 2020, the Switch PRIMEs had capacity for 24,200 cabinet equivalents within our open sectors of which 88% were committed under contracts compared to 89% in the prior quarter and 91% in the year ago quarter. Q4 2020 utilization rates at these primes, based on committed cabinets in currently available colocation space were approximately 89%, 93%, 96% and 38% at The Core Campus, The Citadel Campus, The Pyramid Campus and The Keep Campus respectively compared to 91%, 90%, 72% and 36% in the prior quarter. Looking now at the balance sheet, as of December 31, 2020, the company’s total debt outstanding net of cash and cash equivalents was $958 million, resulting in a net debt to last quarter annualized adjusted EBITDA ratio of 3.4 times compared to 3.3 times in the prior quarter. As of December 31, 2020, Switch had liquidity of $590.7 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. As of December 31, 2020, there were 240.6 million total shares outstanding, including 119 million Class A shares and 121.6 million Class B shares. As disclosed in recent 8-K filings, during the fourth quarter of 2020, our members redeem 10 million common units, resulting in the issuance of an equivalent number of Class A common shares. At year end, Class A public float represented 49.5% of total shares outstanding. Based on member redemptions completed as a February 4, 2021 an additional 7.7 million Class B shares have been exchanged for Class A common stock in the first quarter of 2021, bringing the Class A public float up to 52.7% of total shares outstanding. Now turning the guidance for 2021. We expect 2021 revenue in the range of $540 million to $555 million, reflecting 7% organic year-over-year growth at the midpoint. We expect 2021 adjusted EBITDA in the range of $278 million to $290 million, reflecting an increase of 6% compared to 2020 and an adjusted EBITDA margin of 52% at the midpoint. Lastly, we expect capital expenditures, excluding land acquisitions in the range of $330 million to $370 million. I would like to add a few important points of clarification regarding 2021 guidance. Due to the timing of our backlog revenue contribution and customer revenue reductions, in addition to the realization of $4.8 million in non-recurring fiber revenue in the first half of 2020, Switch expects its 2021 revenue growth to be weighted toward the second half of the year. Growth comparisons to the prior year will be most affected in our first quarter growth rate. Excluding the $4.8 million in non-recurring 2020 fiber revenue, our 2021 revenue guidance reflects 8% growth at the midpoint. From an inventory standpoint, a significant amount of space and power is being reserved for our record backlog of large customer installations, which reduces the remaining quantity of sellable capacity in 2021. We fully anticipate that these capacity constraints will be alleviated over the course of this year and into 2022, driving a normalization of our growth rate in future periods. In addition, we continue to make great strides in margin expansion and the efficiency gains we achieved in 2020 will enable us to operate the business above our historical margin levels. And now, I’ll turn it back to Thomas for some closing remarks.

In conclusion, we firmly believe that switches favorably positioned for the rapid digital transformation among enterprises, as they continue their migration to hybrid multi-cloud architectures. We are working hard to accelerate delivery of additional data center capacity to meet the record level of demand we are currently experiencing. And we are confident in our team’s ability to execute. We would once again, like to take this opportunity on behalf of our management team to thank our employees, customers, partners and our shareholders for their continued support of Switch. Thank you. We would now like to open the line for questions.

We will now begin the question-and-answer session. [Operator Instructions] And our first question comes from Jon Petersen of Jefferies. Please go ahead.

Thank you. Congrats on the strong leasing quarter. I was just curious, on leasing volume, if you could give us, maybe any update on any changes in urgency you’re seeing from your customer base assigned deals, maybe enterprise versus cloud or any of the different properties or different customer types now that we’re getting back to normal and closer to a reopening and I have a follow-up.

Well, it appears Thomas may be on mute. So I’ll take that question.

Okay.

We’re seeing – continuing to see a good strong pipeline. The deals that we signed have been enterprise deals. As you know, Switch really does target the enterprise market. We have a number of clouds in our facilities and within our campus walls, both in terms of uplinks to the cloud and cloud nodes within our facilities. But our bread and butter is the enterprise market. And we’ve signed a number of large deals, I think in the last year and a half, we have 19 deals that are over 1 megawatt, all of which have been enterprise transactions. So we are definitely seeing an uptick in that activity and they’re very happy with the sales pipeline there.

Okay, great. And then on the customer downgrade, I appreciate the clarification on the definition of churn. So the customer is still with you, so that didn’t fall into the churn category. But maybe if you could help us, maybe frame a number that we should be thinking about on an annualized basis, I’m sure it’s lumpy. But how much revenue do you guys have got the door from downgrades each year that we should be thinking about as we model over the next few years.

You’re absolutely right. It is lumpy. This is an unusual amount for us. And it’s unusual and that it happened in the fourth quarter, we were aware that these customers were looking to migrate portions of their workload to the cloud, which is why we had a relatively wide revenue range for Q4. But the applications that these companies are running are low density consumer-based applications. One is cold storage of images. And that is exactly what the cloud should be doing. They can do it cheaper than us, that’s where that workload should go. And this is a customer that’s been with us for nine years. And over that nine year period, technology has changed. And we’ve been very consistent in saying, the cloud is not going away. The cloud is going to continue to expand and get a large amount of compute, but not everything is going to go to the cloud and Switch is very well positioned for the workloads that really aren’t best enabled in the cloud, but this happens to be one that is. The other is a consumer focused software application that also is better run and more cheaply run in the cloud. And these are low density applications. They’re continuing to maintain their high density, most critical workloads with us. But we do have – we don’t have a specific number that we guide to as far as migrations, it happens from time to time. We’ve talked publicly that there was a large file storage company that went to a cloud heavy strategy several years ago, and then came back to Switch. Because the in and out charges were too expensive for them. So there’s not a specific number I can give you. It is lumpy. This is an unusual number for us. We have our customers adjusting their deployments all the time with us and yet 88% of our growth is coming from existing customer expansion.

Okay. I appreciate that color. Thank you.

No, and guys, real quick one note is that we don’t ever have any issue with advancements in technology over the years. We’ve seen people go from tape drives to disc drives to static drives, and cloud is just another evolution of technology. Every time, there’s an evolution in technology, it enhances the amount of digital architecture that people have and that overall is good for the colocation industry. So we welcomed the cloud and we welcomed continued advancements in technology.

The next question comes from James Breen of William Blair. Please go ahead.

Thanks for taking the question. Can you just give us a little more information the revenue impact? So you said $18 million that said in the first quarter, so assuming that comes out on day one, and then what’s sort of the EBITDA impact associated with that revenue.

Yes. Gabe, do you want to respond to that one?

Both of these customers made their migration in Q4 of this year. And one of them migrated in the beginning of October, the other one in December. So the full impact is already in our 2021 guidance. So the recurring revenue piece starts in January and carries throughout the year. The EBITDA, we generally are running it around 52% margin. These workloads are no different than any other. So that’s the number that I would use for our EBITDA impact.

And so we’ll see a step down from your normal sort of sequential growth on a quarterly basis minus $18 million, then grow from there with…

Well, $18 million for the year. $18 million is the annualized number. So it’s basically a $1.5 million a month over the 12 months.

That’s what I was asking. Okay, perfect. Thank you very much.

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

Great. So back to the churn, I’m just curious if you knew that this was coming out and it was having this impact. I can appreciate that you didn’t have 2021 guidance out there yet, but something that’s impacting you to the tune of 25% to 30% of your growth. Why didn’t you call that out ahead of the call? Or if you did, maybe I missed it. And then was there anything one time in the quarter, any cancellation fees or anything that helped with EBITDA from either of these guys?

Sure. Frank, I’ll take that. With regard to the timing, both of these customers were on contracts that had moved to month to month, and they’ve been on month to month for quite some time discussing what their strategy was going to be. So we really didn’t have a specific timing information from these customers. It was really up to them when they were going to pull the trigger and make their migration. They just both happened to do it in the fourth quarter. That’s why we didn’t call it out. But we did know that it was a possibility, which is why we created the guidance range that we did. And Frank, the second part of your question was?

Well, I mean, so even with the little bit of lost revenue you kind of came in at least ahead of our EBITDA. And I would just curious, was there any one-time cancellation fees or anything that associated with these guys leaving that maybe helped help the quarter?

No, absolutely not. The EBITDA performance in Q4 was primarily driven by professional services fees. In the year ago Q4 quarter, we incurred additional professional services fees that we were able to normalize this year. You saw in – you probably haven’t seen yet in the 10-K that we just released, previously we were carrying a material weakness in our financial statements that has been remediated, so that helped us reduce our audit costs and other professional service fees. But Frank, specifically your question, there weren’t any termination fees or anything associated with their departure.

Okay, great. And then can you quantify, I can appreciate why things evolve. Can you quantify any more exposure to workloads that you see in your data centers currently that you think are should be in the cloud and have a likelihood of turning off. So that we can have an idea of what percentage of your revenue might be at risk for customers making these feature decisions?

We currently don’t have any major customers that we’re expecting a migration in 2021 away from our data centers. We continue, as we said, we have a more of a migration in than we can currently deploy inside of our data centers. So we have no issues with current customer stability and the inflow of customers is as strong as we would ever hope it would be.

Thank you very much.

The next question comes from Michael Rollins of Citi. Please go ahead.

Thanks and good afternoon. And thanks for the additional disclosures in the presentation deck. Was curious to go back to the comment I believe you made about the inventory potentially being constrained until you get the development done over the next 12 to 18, 24 months you can remind me of the timeframe. But I’m just curious, how investors should think about that in terms of the context of the quantum of bookings as you had a ramp during 2020, and how they – how we all should think about, what you could do if the inventory is in that constrained position. Thanks.

Yes. I’ll let Gabe talk to the numbers, but what you’re absolutely right. What we have here, Mike, and it’s a great question. It’s the confluence of two factors. On one hand, we have record setting number of sales that are large and that ramp up, which allocates the space, even though, it won’t be revenue generating in 2021. On the other hand, we have COVID caused delays in zoning approvals and the issuance of permits, which in turns delays the construction of the new facilities by six or seven months. This creates a short term supply demand, which we know will be alleviated as we roll through 2022 and open more facilities. So while COVID is having a one-time effect due to pushing out our new data center completion dates, we’ve never been really more bullish on the outlook of the true enterprise class technology space as a whole. But Gabe, do you want to talk about any particular numbers?

Yes, as I think I mentioned on the last question, I think in the last year and a half, we’ve had 19 1-megawatt transactions or higher and you see the numbers for the fourth quarter. So these large deployments in some cases aren’t starting until Q3 of 2021 and then ramp over 36 months. And one case, it ramps over nine years with the biggest part of the ramp coming in the first three years, but the space is sold. And unlike the REITs, we don’t straight line the rent over the period of the contract, because we’re not a REIT, we recognize the revenue as the cabinets come online and are built. So that revenue isn’t straight line over the contract, it will come online as those cabinets ramp. But nevertheless, the space is committed and we can’t sell it otherwise. If we were able to sell out all of that space, if you look at our backlog, in the backlog slide that we provide to the investor deck, essentially, all of that revenue could be pulled forward today, that is sitting in backlog. That $15 million of annualized incremental revenue is space that we are now setting aside.

So is that $15 million inclusive of all of the commitments or is it over just a certain period that you’re measuring those commitments?

No, that’s inclusive of – that’s our full backlog.

Thank you.

Thank you.

The next question comes from Colby Synesael of Cowen. Please go ahead.

Great. Thank you. Two, if I may. First, on pricing, as you sign more of these bigger deals, I’m just curious what impact that that’s had on pricing. So for example, maybe if you were to compare, for example, maybe a 500 KW type deal versus these bigger deals, just trying to get a sense of what the impact of just a discount is simply based on selling these bigger deals. And then secondly, I know there’s a lot of focus on enterprise customers versus hyperscalers. And I know you talked about how 19 of those deals were with enterprises. But if we were to think of hyperscalers is not just the large cloud companies, like the Google and Microsoft of this world, but also large internet companies that Apple and Facebook of this world. Would you still define on 19 of those as enterprise customers? Thank you.

Sure. And as to pricing, when we have these larger scale deals, of course, there is some pricing adjustment in terms of size, but what we also have is efficiencies when we deliver a large amount of space and power. We to a single customer, we achieve efficiencies and we share some of those efficiencies with the customer. And as a result, even though the pricing may be slightly adjusted in order to accommodate the size of the customer, the EBITDA margins are not compromised. So we’re able to keep our EBITDA margins the same. The other thing that we’re able to do to augment the sale is to sell telecommunications and we will make additional margin on telecommunication sales to those customers as a way to further augment the EBITDA margins and the revenues that we generate from that customer. So that’s pricing on large deals. As to your second question and enterprise and hyperscalers, if you – I believe that if you included your broader category of hyperscalers, that would not change the way we would label or configure those 19 customers that we spoke. And Gabe, do you want to check me on that?

Yes. And just for clarity Colby, those 19 large transactions that we’ve signed. I said the vast majority of them were enterprise. We did announce strategic transactions with two major cloud companies that are built zones within our facilities and nodes within our facilities. So we do business with the hyperscalers. And when you talk about Facebook and some of those others, I don’t think that would change the equation at all. They’re not current customers of ours and they tend to deploy in a way that is different than what Switch builds. Even when we’re doing business with the large cloud companies, they’re still taking our full Tier 5 Platinum facilities. They’re taking all of the infrastructure that we install for every other customer, and we’re not building powered shell, we’re not doing – what digital and some of the others do as far as wholesale space. So we treat all the customers the same, but obviously larger transactions aren’t going to be negotiated from a price standpoint. But nevertheless, they’re still priced for the full availability of what Switch offers.

Do you change your design for those bigger customers? Or is it effectively the same design for those customers as you would, if it was a smaller deployment?

It’s exactly the same design.

That’s great. Thank you.

The next question comes from Richard Choe of JPMorgan. Please go ahead.

Given the comments that you’ve said, it seems like the churn is upfront and given the backlog run rate that’s coming on near the end. So given that the guidance is around 7%. I assume we should be looking for a pretty higher exit run rate in the third and fourth quarter. Can you give us a little color on how should we think about revenue through the year?

Yes, I think that’s exactly right for two reasons. Number one, we have the two churn events that we’ve talked about. But we also have $4.8 million of non-recurring fiber revenue that hit in the first half of last year. And that was in conjunction with building a fiber link that links one of the clouds and one of the big three cloud campuses to our campus facility. And so that’s almost a percentage of our revenues. So those two items are going to impact the first half of the year. And we’ve talked about the fiber revenue, not recurring for quite some time. So there should be full visibility on that. But as we exit the year, all of – the ramps that are starting in January and the ramps that are starting in Q3 for some of these other deals that we started. We’ll be picking up steam and as we exit the year, we should exit at the highest growth rate in the fourth quarter.

Great. And is it fair to say that could be a double-digit growth rate? I haven’t done all the math, but just given the put something.

Yes. We’re guiding to 7% at the midpoint for the year, and I think, you guys can do the math on that, but it will be in the high single digits, low double digits as we exit the year.

Great, thank you.

The next question comes from Aryeh Klein of BMO Capital Markets. Please go ahead.

Thank you. And just on the lack of capacity, are you losing those deals as customers maybe look elsewhere? Are they waiting around to some extent, if you can just provide a little bit more context as to what’s happening there?

That’s a great question, Aryeh. And the larger deals – we’re actually not losing any of those deals we feel, because we have new data centers coming on in 2022 in each year, as we’ve talked about on the earnings script. But the idea is that there are a bunch of deployments that are getting pushed out due to COVID. Customers are slowing down their deployments either because of health concerns or their inability to obtain equipment or chipsets. And the fact that it’s very hard to do installations, in a T-SCIF or in a cabinet environment, where you try to maintain six-foot distance. It’s just not physically possible. They’re closer than that. So there are a number of customers that are pushing out their deployments for all these reasons into 2022 and beyond. And we are actually getting RFPs and RFIs that asked for deployments right about the time that our data centers are coming online. So we feel like there’s a great backlog that we’ll be able to tap into, as our data centers open up. So we’re pretty bullish on the future. You wouldn’t necessarily expect bookings to be weaker in 2021 because of this.

No, I don’t expect bookings to be weaker. And then just on the churn, what is your ability to back filled that space?

We think the space will be backfilled – Aryeh, we think of the space, we’ll be back filled without a doubt. But these customers exited in one case in December. And so it’s not back filled immediately and it is lower density space. So it needs to be back filled with the right customers, because ultimately, there’s only so much power that is available in that specific segment of the sector.

All right. Thank you.

Thank you, Aryeh.

The next question comes from Eric Luebchow of Wells Fargo. Please go ahead.

Thanks for taking the question. So I know you mentioned that obviously there were some costs efficiencies that you think will continue on post-COVID. So it was kind of 52%, you think the right longer-term range for margins. And maybe you can just help remind us some of the operational efficiencies you’ve mentioned that had been enabled you to take margins a little higher going forward, and they haven’t been historically. And just wondering if there’s any kind of expansion drag, as you bring a lot of few deployments online with a heavy CapEx year, that is impacting margins this year at all. Thanks.

No just operational – well, Gabe will talk to the numbers, but it’s operational efficiency, I mean one great example is the fact that we actually started 2020 with a higher head count than we ended 2020 with and that’s just because we had a tremendous amount of efficiencies that we gained in the way that we did our operation. So it was basically flat for the year, even though we expanded our deployments and even though we expanded our revenue, we found ways to operate more efficiently, and sometimes the greatest advancements are made in times of disruption. And there are nobody would doubt that the COVID pandemic was a moment of disruption. So why – that’s why we believe that our efficiencies that we obtained during COVID will be sustaining, because they’re integral to the way that we operate as a business versus being entirely incidental savings, such as lower food costs, et cetera. Gabe?

And some of it is just – is just our maturation as a public company. This is now our third year, third annual close as a public company, and you just get better at it. And as we get better at it, we’re able to lower our professional fees. And as Thomas said, we’ve been keeping our head count in check doing more with fewer people. Our plan for 2021 is to continue those efficiencies. In the past, we had signaled that a long-term target for our EBITDA margin was 51%. We’re clearly above that now. We ended up at 52.5 for the year, and while we expect some normalization of things like travel and marketing costs, we expect to maintain the vast majority of that margin expansion going forward.

Okay. Thanks.

The next question comes from Erik Rasmussen of Stifel. Please go ahead.

Great. Thanks for taking the questions. So maybe just on the enterprise, maybe comment on the enterprise demand environment. Are you seeing a meaningful pickup, especially with new logo activity, maybe comment on the sales funnel, how larger enterprises are looking to address some of their IT decisions in the coming year?

It’s an acceleration – thank you, Erik. It’s a great question. It’s an acceleration of the trends that we have been seeing, which is that as people look at their legacy data centers, enterprises look at their legacy data centers, they’re never been terribly efficient as they may have had that data center be 80% occupied and leaving some room for future growth. But what has really happened is they have shrunk the deployment inside their legacy data center to maybe 40%, because they’ve uploaded some of that data center space to the cloud. When you have that data center only being 40% occupied, it is far more efficient to move it to a colocation environment or a multi-tenant environment and take advantage of the one-to-many deployment. The thing is you’re not going to move and deploy into a Tier 2 environment what you really want to do is deploy into a data center that’s as good or better than your current deployment or your current infrastructure. And that is what Switch provides. It provides a Tier 5 deployment that is better or – actually is much better than anything that they’re deploying inside their own data centers. So we see that migration continuing. With COVID coming on, we have seen a number of customers looking for ways to save money at a more rapid rate. We’ve also seen people leverage the cloud more robustly. Those two things are driving people at an accelerated rate out of their legacy data centers and into our facility. So we believe the demand for enterprise shifting into a colocation environment will increase in 2021 and beyond.

And just to give you a little color, as Thomas mentioned in his remarks, every company has done – has been impacted by COVID differently. Some of them have had delays if you’re a casino company, others have seen an increase in their business. And one of the companies that, that is a large customer of ours has been expanding quite rapidly as a large semiconductor manufacturer. And they not only expanded with us in 2020. As Thomas mentioned, they’ve already signed another 5 megawatt contract in Q1 to further expand with us and another $6 million of incremental annualized revenue. But again, that doesn’t start until Q3 of 2021 and they’ve signed that in Q1.

Great. That’s helpful. And maybe just circling back on your guidance being impacted by the delays related to COVID, how does this compare to maybe what you were previously thinking in terms of the length of that delay? And then you envisioned sort of in a scenario where you can actually pull in this timeline and actually you get better performance and maybe pull in some of those construction projects or we sort of fixed at the moment.

No. As Gabe mentioned, we have spent additional capital dollars and we’re doing everything we can to pull those timelines in. I mean, at the end of the day, it is steel and concrete. It takes a certain amount of time and process for it to cure and move and get things signed off. But we are doing everything we can to move those timelines as aggressively as possible while maintaining the quality and integrity of the type of facility that we can construct.

Erik, I think you’re actually asking to two questions there. One is in the ramps that we’ve talked about and the contracts that we’ve signed and everything that’s showing up in our backlog, those are from commitments from our customers. So as one would expect, they’re willing to sign the minimum that they think they’re going to need in the timeline that they think they’re going to need it. We don’t necessarily control all of their installation timelines. But historically in the past, we’ve seen customers accelerate their deployments above their minimum total contract commit. And if vaccines are out there, if the customers feel more comfortable sending their teams to install, we’re hopeful that we can pull forward some of that revenue that is already committed and the space is already set aside and we’re ready for them. It’s now up to them. The second question is on construction and we did have some permitting delays, but you see from our CapEx both in Q4 and our guide for next year, we are building and we are building fast because the demand is there. We’re building as fast as we can in Las Vegas. We’re building as fast as we can in Reno. We’re building as fast as we can in Atlanta. Nevertheless, even with that our capital intensity is still in the 60s. So we think it’s a very achievable CapEx plan. It’s not going to strain our financials at all. We think we’re very well positioned for it, but I think those are the two aspects of the question that I think you’re asking and we’re hopeful the customers will pull forward some of their deployments, but we don’t control what they do. We know what their minimum commit is.

Great. Thanks for the clarification. Good luck.

Thank you.

The next question comes from Sami Badri of Credit Suisse. Please go ahead.

Thank you for fitting me in. Can you give us more color on the COVID-related delays and which specific facilities those are going to in which markets? I’m just trying to pin where in the entire supply chain, this is happening and that where the customers are trying to get to that is – that might be a bit restrictive just to get more color on what’s going on on the supply chain?

Yes, it’s not as much. There is some delays. There were some delays in supply chain. But mostly the delays came from permitting and zoning. And that was in both in Reno and in Vegas and Nevada, as well as in our ATLANTA facility. I mean, in Nevada, they laid off a substantial portion of the – or furloughed a substantial portion of the employees in Nevada County and Clark County where we built. And that resulted in a significantly reduced amount of production of permits and zoning and zoning variances were much slower to be approved because there just weren’t as many committee meetings and those meetings were online, which limited the ability for them to pass resolutions, et cetera. So that resulted in a significant delay for us, but we are doing everything in our power now that that delay has been ameliorated to, or been removed to ameliorate the impact of that delay and roll ourselves forward. But it really was a government impact, was the largest thing that caused our delays.

And Sami, the first building that’s coming online is our Las Vegas facility. And Las Vegas is still 80% plus of our revenue. And so when we look at customers that are always looking to expand within our facilities, Las Vegas is still the key driver of that. So having that facility come online first, and we’re pushing as fast as we can in Las Vegas, I think is going to serve as well. It’s scheduled to come online in early 2022. The ramps that we have set aside in Reno are larger and longer, but that facility is also larger. So I think we’re okay there. And in Atlanta, while the facility is almost 80% committed at this point, the first sector still has availability and customers will still be able to sell the rampant into there. So we have availability, it’s just a little bit of a Tetris board for us to make sure that we can fit the customers into the right slots and in the way that they want and in the time that they want.

Got it, got it. Thank you for that color. My next question, I think this is a good segue actually, and Gabe, you mentioned that the capacity or the majority of your capacity is reserved for the backlog. At some point, your customers will come online and absorb that capacity, but during this – during the period of time from now, until those customers deploy that that capacity is essentially just untapped and unmonetized. Is there any point where you guys might actually change your mandate, where you’re more aggressive about bringing on more capacity and make binding agreements with your customers, that postponing installations come at a fee or come at a specific type of requirement, changing the way you guys do things into your favor a little bit more, just so that whenever customer decides to push out installations or whenever a new customer comes to you for capacity, you guys can be there ready to go. Is there a potential mandate shift that could exist at some point as you guys get bigger and more flexible, or is this kind of the dynamic that you’re going to deal with for now just where we are in your growth curve?

Hi, that’s a great question, Sami. And I think that dynamic has already happened, because rather than building one building in one sector in advance of where we thought we needed to be, we’re building two buildings ahead. We’ve already broken doing all of the underground work for the next three facilities in Vegas, the next two facilities in Atlanta and the next two facilities in Reno. So we want to make sure that we have expansion space, because we’re actually thinks many more of these 2 megawatt, 5 megawatt, 7 megawatt transactions than we ever have in the past. And so historically, we’ve grown up as a retail colocation company, even somebody deploying a 100 cabinets or, 500 kW, that was our bread and butter. We’re seeing many more large transactions now. And so we need to have that space available. So we’re actually building at a faster clip and at a larger clip, and we do charge reservation fees in many cases for customers that they want to reserve cabinets. So we are able to monetize them in some of these larger transactions that are negotiated. Now we know that a customer can come in and deploy a 1,000 cabinets overnight, it’s just not feasible. So we allow them to ramp over time and that’s just part of the negotiation.

And the ramp has got to fit into the – I think so there is consideration of the idle space, if you will, over the course of the deployment. So that’s consideration and Gabe makes another good point, which is that we talk about the large transactions on this call, but we have like, we talk about the number of logos we brought in this quarter. We have a large number of smaller transactions that are really bread and butter, or that actually generate a significant amount of revenue for us as a company. And those are great margins and great customers for us to have, and they provide a nice diversity of revenue for us.

Got it, got it. Thank you. And then my final question, I don’t think has come up on this call yet, is, are you guys going to consider a fifth location or fifth campus within North America at some point, just because you guys have now surpassed that point of proving Grand Rapids and Atlanta now works, right. I don’t think that’s no one can, I think formidably come up with a bare thesis around, well, you guys have been able to do. This opens up the question on your ability to open up to a fifth site at least in North America. Have you guys given any thought to that?

Well, first of all, may I really appreciate your acknowledgement that we have moved to other locations and been very successful in deploying those locations. We got a lot of questions about, could we replicate in other markets, could we extend telecom to other markets? And we have time and time again shown that we can at our new Atlanta campus, we mentioned that we sold out 70% of the massive data center after only being open for less than eight months. And we’ve now immediately moved to build the second and third data centers on The Keep Campus. So there is obviously a need for our enterprise class hybrid and multi-tenant facilities. And so you’re absolutely right. We are always looking for ways to expand as a company. You’ve seen us expand in a ways of announcing an edge deployment that we’ve started and the partnership that we have there. We talked about that again, early on the call. And we are always looking for ways to continue to expand as a company. We haven’t announced anything about other primes at this time, but we want to keep our growth cycle rolling. And when customers demand that we are put up enough demand that we look at a new prime location, we will consider that as an option.

Great. Thank you.

The next question comes from Nate Crossett of Berenberg. Please go ahead.

Hi, good evening. A question on back-filling the $18 million, does your 2021 guidance assume that that space is back-filled this year, and I think you mentioned that those companies were on month-to-month contracts. And so I was just curious how many of your contracts are month-to-month like that?

Yes, thanks, Nate. Our guidance does indeed include the fact that we are selling new captains into that space or other available space just as we do in each of our years, we looked at our run rate. We look at our backlog, add that in, we factor in our some churn. And that guides us to a starting point, including our annual rate lift that we do in the March timeframe. And then we add new sales to that. So we are expecting new sales. That’s part of what gets us to the 7% growth number. And whether that space will be allocated is in those specific T-SCIFs where these customers are exiting or others is yet to be determined, but it’s available space and we’re going to be selling new cabinets in order to achieve our growth. And the second part of your question Nate?

It’s on month-to-month. How many of in the existing basis?

Yes, the vast majority of our customers are locked in on average three-year contracts. They’re three to five-year contracts, so average of four years. And if you look at our all of the bookings that we’ve done throughout 2020, I think the average has been about four years. So we don’t have other large month-to-month contracts. And as we’ve stated, we’ve not expecting any other material migrations to the cloud or there otherwise.

Okay. I also was wondering if you could give a quick update on just the edge product, where do things stand, when can we expect maybe some more concrete I guess numbers to that initiative?

Yes. So we have announced that we had started the first deployment there with CAC. And we expect that we’ll look to open sometime in the latter half of this year. And we do not have any revenue forecasts for the edge in this year’s forecast, but we would look to have some forecasting in 2022.

Okay. Have other tenants started asking you about this product outside of FedEx or what’s kind of the dialogue you’ve had with existing tenants?

Yes. We have had discussions with other prospective tenants outside of FedEx in connection with this deployment. And the number of them have indicated a strong interest and those include telecommunications carriers, as well as enterprise customers who want to have proximate locations to their facilities. And third-party infrastructure providers that are servicing the Internet of Things and things that involve very low latency. So we’ve had a number of requests about how we’re going to roll out and how they can take space inside of those facilities. And we’re working with those customers. So that we have the highest take rate as possible once we get the facilities online.

Okay. Lastly, I guess the floats improved quite a bit over the last couple of years, is there any kind of indication where you think that might shake out at the end of this year? I know it’s can be difficult, but…

Yes, that’s…

Thomas cutout, so if you can hear me, this is Gabe. We’ll give our partners the opportunity to exchange their partnership units for public shares, 8 times this year. And so where it shakes out is entirely up to them and when they choose to exchange, but we would expect the float to continue to increase throughout this year. And if you look at how it’s increased over the past three years, we went out at just under 15% of the company floated. We’re now over 50%. I think if you extrapolate that you could – you can get to an expectation, but it really is entirely up to the partners themselves.

Okay. Thank you.

The next question comes from Brendan Lynch of Barclays. Please go ahead.

Great. Thanks for taking my question. Just one quick one, you’ve recently had some strong momentum in the healthcare vertical. Just wondering if there’s any booking activities in the fourth quarter that stood out.

In the – we didn’t have any specific healthcare bookings that were large, that stood out in the fourth quarter. We had other large bookings, as you can see from a logistics company to semiconductor companies to a software – automotive software companies. It just we didn’t have notable healthcare bookings in the fourth quarter.

Great, still a lot of breathe. Thank you very much. That’s only my question.

Perfect, thank you.

This concludes our question-and-answer session. The conference has now also concluded. Thank you for attending today’s presentation and you may now disconnect.