Good afternoon, ladies and gentleman, thank you for attending the Switch Inc.s' Second Quarter 2021 Earnings Conference Call. [Operator Instructions] I will now pass the call over to your host, Matthew Heinz with Switch. You may proceed.

Thank you, operator. Good afternoon and welcome to Switch Inc.'s second quarter 2021 earnings conference call. On the call today are Thomas Morton, Switch's President and Gabe Nacht, Switch's CFO. Today's call may include forward-looking statements 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 second quarter 2021 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.

Thank you, Matt, and good afternoon, everyone. Thank you for joining us today for our second quarter 2021 earnings call. Switch is pleased to report yet another exceptional quarter, as we continue to execute on our strategic growth initiatives and sales opportunities, driven by strong customer demand. We are also excited to announce several shareholder value initiatives that I will describe after reviewing the details of the quarter. Our Q2 2021 financial results detailed on Slide 4 of our investor deck reflect continued business momentum and improved operating efficiency across all of our Prime campus locations. Second quarter revenue was $141.7 million, increasing 12% year-over-year. Excluding a $3.3 million revenue contribution from Data Foundry, Switch revenue was $138.4 million, representing a 9% increase, compared to the year-ago quarter. Profitability also remained strong with our second quarter adjusted EBITDA of $79 million, representing a 14% year-over-year growth, including a $1.7 million contribution from Data Foundry. Excluding Data Foundry, Switch's second quarter adjusted EBITDA of $77.2 million reflects a 12% year-over-year growth and a margin of 55.8%, representing 140 basis points of year-over-year margin expansion. As a result of our outperformance in revenue and adjusted EBITDA compared to our internal forecast and also incorporating the expected contribution from Data Foundry, we are increasing our 2021 financial outlook. Gabe will discuss the changes to our guidance in greater detail later on today's call. Our sales teams once again delivered solid second quarter bookings, signing $16 million of incremental recurring revenue and total contract value of $81 million, as detailed in Slide 13 of our investor deck. For the first half of 2021, our incremental annualized revenue bookings increased 54% year-over-year to $34 million and total contract value increased 30% to $198 million. In addition, Switch's recurring revenue backlog rose to a new record…

Thanks Thomas. Today, I'm going to review our financial results for the second quarter of 2021 and discuss our outlook for the remainder of 2021. Starting with Slide 4 of our investor presentation, Switch reported total second quarter 2021 revenue of $141.7 million, an increase of $14.8 million or 11.6% compared to the second quarter of 2020. Excluding Data Foundry revenue of $3.3 million for the 24-day period post deal closing, Switch second quarter revenue totaled $138.4 million, an increase of $11.5 million or 9% compared to the second quarter of 2020. Staying on Slide 4, adjusted EBITDA totaled $79 million for Q2 2021 compared to $69.1 million in Q2 of 2020, reflecting a margin of 55.7% and year-over-year growth of 14.3%. Excluding Data Foundry's adjusted EBITDA contribution of $1.7 million, Switch adjusted EBITDA was $77.2 million, reflecting a margin of 55.8% and year-over-year growth of 11.7%. Second quarter net income was $9.7 million compared to net income of $13.3 million in Q2 2020. The reduction in net income was primarily attributable to a $3.5 million increase in interest expense and $4.3 million of acquisition related expenses. Lastly on Slide 4, customer churn was 0.2% in Q2 2021, unchanged compared to the year-ago quarter. Looking now at our growing exascale portfolio on Slide 7, as of June 30, 2021, excluding Data Foundry assets, Switch had approximately 17,900 billing cabinet equivalents, reflecting 700 net organic cabinet additions compared to the prior quarter. Data Foundry had approximately 3,200 billing cabinet equivalents, bringing total billed cabinets to over 21,000 for the entire company. Excluding Data Foundry, the Switch average monthly recurring revenue per cabinet was over $2,500 in Q2 of 2021, consistent with prior quarter. Staying on Slide 7, as of June 30, 2021, the four legacy Switch primes had capacity for over…

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

[Operator Instructions] The first question is from the line of Sami Badri with Credit Suisse. You may proceed.

This is actually George Engroff on for Sami. Yes over the last couple of quarters, you guys noted that customers generally weren't taking up space over and above their contractual commitments. And then there was a quote in the press release today that referenced customer installation pace. So I guess, if you could - like if you could provide some color on that point that would be very beneficial?

Sure, George thanks very much for joining the call. In the previous calls, usually what happens is customers sign up for their minimum commitment that they are willing to state that they will take at our space and then they have a ramp for how they will deploy that into that space. What we have seen traditionally is that they accelerate that deployment and then inevitably sign service orders for additional services as they go. During COVID times, we saw people maintain their minimum deployments, but not necessarily accelerate. What we've seen in the back half of this year is customers have requested accelerations of their ramps and that is helping revenue pull forward into the second half of 2021, and that's part of the reason for the increase in our guidance, Gabe anything to add to that?

Yes, George, this is Gabe. In our first quarter call, we actually did mention that we saw some acceleration of customer ramps, which is why we raised our guidance. We're seeing more of that in the second quarter. And of course, because we're a monthly recurring revenue model, we get the benefit of that compounding throughout the year, and that's why you're seeing - us increase guidance again this quarter.

Great. And I guess, just a quick follow-up. So that - you say that's continuing or even getting better into 3Q?

Well, I say - I would say it's continuing and it's incorporated into our guidance. Of course, the world is subject to change as we all know. The world opened up in Q2 and is now shutting back down a little bit, but we are optimistic that our customers will be able to continue to deploy, send their staffs here to do deploy their equipment and get their contracts up and running.

Great. And then, can you speak to the cross-selling demand you've seen to-date with The Rock Campus and with the rest of the campuses?

Sure, we actually provide some numbers it’s all as Gabe talked to in terms of cross-selling and there is some numbers in my script regarding the fact that more and more customers multi-homing. We have been selling into The Rock Campus and the sales people in The Rock have actually brought up prospects for Las Vegas and Atlanta. So there is cross-selling by the teams, as well as customer’s multi-homing. Gabe, do you have the percentage of people that cross deployed?

Actually, given that we took possession of Data Foundry on June 7. We are actively cross selling those locations, but we're not ready to report closed contracts yet.

The next question is from the line of Ari Klein with BMO Capital Markets. You may proceed.

Can you talk a little bit more about the decision to kind of look at REIT status now? It's obviously probably you've been asked that many times before, so just curious about what's the input hit today. And then, will you - do you think you'll have an update for us by the Analyst Day in November?

Well, thank you, Ari and the - you're right. This has been an ongoing discussion regarding REIT and the Board has asked us to take a formal look at it. There have been some changes in the tax codes and on we foresee the potential of other changes in the tax codes. We continue to grow, and if signed, we will become a tax-paying entity. And we've always said that if it becomes advantageous to our stakeholders, to [indiscernible] as a REIT company or having made a REIT election. Then we would be able to do so, and we preserve that ability at our IPO. As to the November 8, Investor Day, we will have an update on the status of our REIT reevaluation during that meeting. I don't know we’ll have a definitive decision, as this is an incredibly involved and accounting-driven metric and decision for the company to make. And so, we will have an update on the November 8 meeting, but cannot promise a decision at that time.

And then on the leasing, it seems like another pretty healthy quarter, but can you talk to your capacity to lease in the near term? I think you said you are 90% committed in the - excluding Data Foundry. How much of the development is going to come online, I guess within the next year has already spoken for, and kind of in the near term, do you feel restricted in any way from a leasing standpoint?

No, we want to sell into Las Vegas 15, which will open in the first half of 2022. And we have cabinets that we still are able to sell and then we have ramps that are going to be deploying from larger customers in the first half of 2022 and into the back end of 2022.

Yes, I would jump in and say that we're continuing to see good customer demand. We clearly have a lot of committed space and utilized space, but we're building. And I would encourage everybody to go to our investor deck and look at the construction photos. If you look at the construction photos, you'll see that Las Vegas 15 is up. The building is standing, the roof is on, TI work is continuing inside. And we have 1.3 million square feet that is coming online between the early part of 2022 and the early part of 2023, which is a 25% expansion to our existing space. So we're already beginning to engage customers into pre-leasing that space, and particularly, once the building is up. When the customers see that the walls and the roof are up. They really feel much more confident in knowing when that building is going to open and when they can begin planning on deploying space. So that's an excellent advantage for us. And so, we're selling and we're selling aggressively, and we're finding ways to fit customers into the existing space that we do have.

Okay, thanks for the color.

We also - just quick final note. Yes, one other quick item here, Ari, is that we also about 80% of our revenue is telecommunications, and telecommunications obviously does not have an inventory constraint on it. So that division is continuing to go and grow, and it is selling into the market base that has opened up with the Data Foundry acquisition where we picked up about 400 new customers.

Thank you, Mr. Klein. The next question is from the line of Erik Rasmussen with Stifel. You may proceed.

Yes, thanks, and congrats on the strong results and returning a low double-digit growth for this year. Maybe my question - so in regards to the strategic review announcement and then thinking about the financial targets longer term, what kind of framework would you be targeting that sort of above where you are currently tracking today?

Gabe, you want to…

Well, Erik, this is Gabe. I'll jump in on that. I'm not sure that we're ready to discuss the specific metrics, but we'll be talking about on the Analyst Day. But I think you can expect to hear normal - the normal types of metrics that are discussed in these types of events. We'll talk about what we believe our long-term leverage profile ought to be. Of course, that will be influenced by the strategic review that we're undergoing. We'll talk about where we see our development pipeline and potential growth targets over the next several years and our margin targets.

Great, okay maybe then we'll wait for that. But as my follow-up question then, as it relates to Data Foundry business and the numbers you gave in the 2021 outlook for the contribution there, it seems like the business is tracking in line with what they did last year. As you look at sort of the second half of this year, is there any opportunity to sort of accelerate growth from those assets on a year-over-year basis, and what would sort of drive that?

Yes, it's a great question. There are - there is some incremental space that is available inside the existing data center facilities, with a little over three megawatts and we are actively working to sell that space. If we can sell that space and get the installation in this year, then that will - increase the incremental revenue for the second half of 2021 with respect to the Data Foundry assets. We are actively working on closing deals to accomplish that goal.

Thank you, Mr. Rasmussen. The next question is from the line of Colby Synesael with Cowen. You may proceed.

I guess, first just starting with Elliott, are they the impetus behind the focus on potentially transitioning to - I mean, they're known as an activist type investor. I can't imagine they're just there without looking to make some changes. I'm just curious what it is they're are potentially looking for you guys to do. Is potentially selling the company on the table as well? Are there other things being debated, perhaps expanding internationally? Just any color you can provide there in terms of why they're there now in the stock? And then secondly, deal sizes. It seems like the deal sizes that you're seeing are getting bigger really over the last year or so. I'm wondering if you have anything that you could point to explain that. Is that just a function of where you guys are focusing, and therefore it's really a Switch thing, or is it more a reflection of just what the market is offering up and maybe there is something to talk a bit more on that too? Thank you.

No, it's great. First, on Elliott tone and tenor, they have been very, very productive to work with. We have enjoyed the relationship with them. They've already added value to the way that we look at the stock market and we approach that market and the customers we have there. And so, we have had a very positive and productive relationship with Elliott. As REIT analysis and Elliott, I believe, is supportive of that, consideration at the very least, and we have talked about a - and the potential of a REIT conversion for a very long time, actually since the IPO. So they are supportive of that analysis. But we had already been engaged in that review and have been asked by the Board to conduct a thorough analysis of when and whether that conversion would be appropriate for the benefit of all stakeholders. Your question regarding deal sizes is a great one. As we grow as a larger and increasingly sized company, we attract larger customers and larger deployments from those customers. For a long time, also focused on helping enterprise customers migrate out of their ageing legacy data centers and into our corporate ARC data centers rather and take advantage of the one to many metrics that is available in a colocation environment. And they have received that message very well and we have started to garner more and more enterprise customers that are decommissioning their legacy corporate data centers and move into a data center that is at least as resilient, if not more resilient than their existing structure, taking advantage of those economies of scale, taking advantage of the telecom cooperative and taking advantage of the green energy that we're able to offer them. So the deals that we are seeing are indicative of that initiative. It was started by Rob Roy and we are pleased that we're - it is bearing fruit and we're beginning to see these larger deployments roll in as it holding

So I just one last one. As it relates to Elliott component, is the sale of the company being considered?

Not at this time.

Colby, this is Gabe. A couple of things on Elliott's involvement, why are they in the stock. I think they believe our stock is undervalued, and frankly, we agree with that. We've been trading at a discount for quite some time despite showing numbers that are at the top end of the industry. We have more space coming out of the ground and being put into service than we believe any other data center company, with 1.3 million square feet coming online in less than - between now and the early part of 2023, and then another 1.9 million behind that. I think that's also driving deal size, the fact that we have space available has driven deal size. The industry is needing more and more colocation space and having the buildings that we have come online, we're filling them up faster than we expected. So that's a great thing. Your initial question on where they the impetus behind the REIT analysis, the answer is no. Our Board really was the impetus behind that. But they are clearly supportive of us doing that analysis, particularly if that is part of the reason why we trade at a discount. I will remind everybody that we're not a cash taxpayer at the moment. So there is no tax advantage to becoming a REIT right now, and by not being a REIT, we are able to deploy our capital and put it back into growth, and we have very aggressive CapEx plans over the next couple of years, as you guys know. But we are very happy to be working with them. They do have a certain reputation on the street. But I also think that Elliott's been working hard to adjust that reputation. There are a number of engagements that they get involved with, they work very productively with management. We believe we are one of those and we are very happy to have their involvement.

Thank you, Mr. Synesael. The next question is from the line of Brendan Lynch with Barclays. You may proceed.

Great, thanks for taking my question. Maybe just a follow-up on the REIT status. If you're not a cash taxpayer now and don't anticipate to be one in the near future, what do you see as the benefits of converting to a REIT at this point?

Well, first of all, when you say at this point, timing is something that we are looking at and evaluating whether or not it will make sense at some point. And ultimately, our goal is to maximize stakeholder value and if the REIT status is holding us back, that's something we want to look at, because even though we're not a cash taxpayer, we do know that there are a number of REIT funds that invest in our peers and we are boxed into a peer group that is all REIT, with the exception of Switch. So if that's creating a drag on our valuation, that's something that we obviously want to look at. We also are cognizant of where the tax rules are. Right now, we're able to take advantage of bonus depreciation, because we're not a REIT, but those bonus depreciation rules begin to diminish after 2023 and then drop off by 2025. So we're looking at where we think our future tax position will be and what we think is going to be most beneficial for our stakeholders.

Okay, that's helpful. And somewhat related to that, it's difficult to say, changing to a REIT status might change a number of things. But all else equal, what impact would that have on your ability to invest in your R&D platform that's been fairly robust over the past 20 years?

That's one of the thing…

It's a great question.

We're looking at - we are running the numbers as a REIT, we would be required to make distributions of our pre-tax income and we're running all of those numbers now to see what it will do to our long-range strategy. Our goal is to make sure that we are structured the most appropriate way to enhance shareholder value, while executing our long-range strategy and CapEx plan.

Thank you, Mr. Lynch. The next question is from the line of Frank Louthan with Raymond James. You may proceed.

Great, thank you. So on the REIT status, I know you're not announcing what you might do, but is it - since REITs have to be on a December fiscal year so the conversions always happen on January 1, is it safe to say that this is sort of a January 1 conversion at the earliest?

Frank, it's a great question and that goes with the timing. There is a very detailed analysis that needs to be done. There is also a depreciation recapture and other considerations that have to go on. And it would be generally a January 1 announcement. Doing a January 1 at this year may be a bit stiff for us, but - and the real important thing is to make sure that it's going to drive shareholder value and find the optimal time to do it. If it's going to drive shareholder value, we'll find the time, place, and location that we should make the conversion.

All right, great. Just a follow-up with the business in Texas. What's been the status of the customers? You got any new traction there as far as adding customers in some other locations, are you getting some incremental new business out of the customers from the Texas acquisition? Thanks.

Yes, we have had traction from customers that have started to deploy in our other facilities, and we've had from our existing customer base about taking up a deployment in the Texas asset. So we are actively cross-selling and integrating this into this new Data Foundry facility into our network. We are also cross-selling our telecommunications and introducing those customers to our Core cooperative and the opportunity to purchase on our telecommunication services through that cooperative.

Thank you, Mr. Louthan. The next question is from the line of Jon Petersen with Jefferies. You may proceed.

Can you tell us how much revenue came off this quarter from customers down in the space, but not captured in the churn bucket?

I'm sorry you broke up a little bit there. Can you repeat?

How much revenue came off from - like I have to answer any better, how much revenue came off from customers that - okay sorry, you move on?

Go ahead, Gabe.

I think the - the question was how much revenue reduction that we had. And again, that's a number that is difficult for us to measure and report, because we constantly have customers adjusting their deployments, and we've talked about that in the past. Customers are constantly adding circuits, adjusting circuits, adding power, adjusting cabinets. This has been an ongoing moving part of our business for the last 20 years and continues to do so. So we look at our net incremental increases and that's what we've reported in the financials.

Next question?

Thank you, Mr. Peterson.

We may have lost Jon.

The next question is from the line of Eric Luebchow with Wells Fargo. You may proceed.

Great, thanks for taking the question. Sorry to keep beating the reconversion question, but Thomas, you mentioned that you foresaw maybe some other changes in the tax code in the future that could impact that decision. So maybe you could walk us through what you foresee outside of the bonus depreciation step-down that might impact the decision?

Well, I was actually speaking to the bonus depreciation step-down, which is one, and then we obviously have a Democratic Congress and then that - and there, there is an opportunity for us to see other changes in tax code, and we just want to be prepared and be ahead of those.

Okay, got you. And then just one more from me as it relates to kind of some of the inventory supply constraints that you talked about, with some of the larger deals you are seeing, like how early do you see the pre-leasing window start to open? In other words, like how soon before you actually bring capacity online, can you start to materially pre-lease? And what type of customers, are typically more likely to engage in those pre-leases versus others that would wait till the capacity is delivered?

Good question, well 70% of our growth each year, 60% to 70% comes from existing customers simply expanding. So when you say up 15 is in the middle of our Core Campus in Las Vegas. The most likely customers to expand into that facility are existing customers. And then with all in new customers into that space, we are actively marketing that space, and not 15, in the first sector and to close some sales on that in the near future. And then by the time that opens, we hope to have sold considerable portion of the data center space.

Got you. But you don't necessarily have like pre-leasing targets for when you open up a new sector necessarily, just wondering if that pre-leasing equation has changed at all? So I think historically, you didn't do as much pre-leasing, but it seems like you're highlighting it a bit more than maybe sometimes in the past?

Gabe take that one.

Yes Eric, yes we've never had specific pre-leasing targets, and we still don't. But obviously, we build buildings because we want to fill them, and our building in Las Vegas, Las Vegas 15 is up standing, the roof is on, the work is being done. So our customers that are currently on the Las Vegas campus, where we have 800 customers, know that they can expand into that building and know the timeframe in which it will be delivered with very good certainty. So that helps us in those discussions. Additionally, we are still seeing activity from new customers that want space and we know that's going to be the next large block of space that we're bringing online. So we don't have a specific target, we really never have, we're able to see the cadence of our business go as it has for many, many years where we build a sector and bring it online and we fill that sector and bring the next sector as customers expand. So there is a cadence to Las Vegas because of that 800 customers that are here. We're seeing that same cadence in our Tahoe Reno location, we're obviously Atlanta is a newer location. So we have fewer customers there, but we already have 90% of that building committed and we need to build as fast as we can there. So, we're excited about our prospects.

Thank you, Mr. Luebchow. The next question is from the line of Richard Choe with JPMorgan. You may proceed.

I just wanted to go back to guidance a little bit for standalone Switch, you raised guidance can we get a little more color on how much of that is customers moving in faster, how much is kind of incremental wins and business on it yet it's now in the backlog. And then what’s coming from power and then what might drive you since there is only half year left to the higher end or the lower end of that guidance?

Hi, Richard, this is Gabe I'll take that. It's sort of all of the above and I'll give you a little bit of a breakdown, around $7 million or $8 million of that expansion on Switch standalone guidance is due to the fact that we now have customers that have moved in faster. You're seeing us run ahead of revenue both in Q1 and Q2 and we'll get the compounding effect of that over the next six months as those customers continue to generate monthly recurring revenue. Additionally, we've signed some large deals. We talked about those in the call and Thomas highlighted some of those. Many of those will be moving in the second half of the year. So we're going to see revenue coming from there and then you mentioned the power increase I'll talk. I think that's an important thing to highlight because that has a little bit of a different dynamic. We have seen power rates go up, particularly here in the Western states and - some of our customers do have power pass-throughs and that will add about $7 million in the back half of the year, but of course that will not come at a, typical margin that is really a pass-through.

Great. And then with the MRC of the combined company it's lower, so assuming that the Data Foundry is lower. Is there something that can be done to or in additional services that can increase that MRC or is it just the lower - the campus is just going to be a lower MRC market.

Well we are building at The Rock, go head.

I think in terms of their MRC they are running a bit lower than Switch today and that's something that we are looking to enhance because in this last sector that we're building in Austin. It is going to be a hybrid between Data Foundry’s existing design and what Switch typically puts into its Tier 5 data centers. We are going to be incorporating our T-Skip design all of our efficiencies our air handlers, so we're looking to increase that MRC per cabinet. I also think it's super important to understand that our telecom network and our telecom cooperative is an extremely strong tool to increase overall revenue per cabinet because we know that here at Switch over 80% of our customers participate in the cooperative. But we've been actively engaging the 400 customers at Data Foundry about that cooperative and that can enhance revenue per cabinet. And then we're going to be building. We're going to be building a Tier-5 facility on The Rock Campus and we expect to get the same level of revenue per cabinet that we get in all of our other markets, because we do offer the same, the same solution.

Great to hear, seems like a real incremental revenue opportunity for that campus along with the extension. Thank you.

Thank you, Mr. Choe. That concludes the conference call. Thank you and have a great day.

Thank you, all.

Thank you.