CyrusOne Inc.
Q2 2015 Earnings Call Transcript

Published: 5 Aug 2015

[Operator:]

Good day, and welcome to the CyrusOne Second Quarter 2015 Results Conference Call. All participants will be in a listen-only mode. After today's presentation, there will be an opportunity to ask questions. Please note this event is being recorded. I would now like to turn the conference over to Michael Schafer. Please go ahead, Mr. Schafer.

[Michael Schafer:]

Thank you, operator. Good afternoon, everyone, and welcome to CyrusOne's second quarter 2015 earnings call. Today I'm joined by Gary Wojtaszek, President and CEO, and Kim Sheehy, CFO. Before we begin, I would like to remind you that our second quarter earnings release, along with the second quarter financial tables are available on the Investor Relations section of our website at cyrusone.com. I would also like to remind you that comments made on today's call and some of the responses to your questions deal with forward-looking statements related to CyrusOne and are subject to risks and uncertainties. Factors that may cause our actual results to differ from expectations are detailed in the company's filings with the SEC, which you may access on the SEC's website or on cyrusone.com. We undertake no obligation to revise these statements following the date of this conference call, except as required by law. In addition, some of the company's remarks this afternoon contain non-GAAP financial measures. You can find reconciliations of those measures to the most comparable GAAP measures in the earnings release, which is posted on the Investors section of the company's website. I would now like to turn the call over to our President and CEO, Gary Wojtaszek.

[Gary Wojtaszek:]

Thanks, Michael. Good morning, everyone, and welcome to CyrusOne's second quarter 2015 earnings call. We had another strong quarter, continuing the trend of solid operational and financial performance since becoming a public company, and I am excited about the opportunities in front of us. The Cervalis acquisition begins a new chapter for our company and I'm pleased to welcome 100 new team members to CyrusOne. Beginning with slide four, the strategic decision we made last year to focus on FFO growth by reducing our capital investment and increasing our asset utilization is proceeding well. Second quarter normalized FFO and AFFO were up 30% and 44% respectively over the second quarter of 2014. Adjusted EBITDA was up 15% for the quarter compared to the same period last year and revenue was up 9%. We leased 48,000 colocation square feet with signings generating $13 million in new annualized GAAP revenue, which brings our first half bookings to $32 million in annualized GAAP revenue. I'm particularly pleased with the success we've had in Northern Virginia. We commissioned this facility in the first quarter and it was essentially sold out by the end of the second quarter. We've started our next phase, which is already nearly 10% pre-leased, making this one of our strongest markets. Moving to slide five, we were successful in signing new customers in the quarter as we added a total of 18 new logos, including five Fortune 1000 customers, bringing our total customer count to 697 and Fortune 1000 count to 151, not including the impact of the Cervalis acquisition. Since going public, we have grown both our total and Fortune 1000 customer base at a compound annual rate of 12%, which is the most important leading indicator as we know that more than 50% of all of our future growth is derived from existing customers. And now with our Cervalis acquisition, we bring in an additional 220 customers for more than 900 overall, providing us an expanded base of customers for future growth. The bottom of the slide shows the contribution to revenue by industry vertical as of the end of the second quarter on both a standalone basis as well as pro forma on a combined basis with Cervalis. We have a much more diversified portfolio today than when we went public as on a combined basis, three segments each contribute more than 20% of our total revenue. The acquisition more than doubles our presence in the key financial services vertical. Slide six highlights the continued success we have in maintaining strong investment returns as we deploy capital to grow the company. Our development yield for the quarter was 17% and over the last two years have been consistently delivering unlevered development yields of between 16% and 18%, despite a more than 40% increase in the investment over this period. This past year, we brought on 160,000 square feet of raised floor and our utilization increased by 400 basis points to a high of 90%. We are able to generate the yields we do because we sell many different types of colocation products, which are all being delivered on a shared platform. This allows us to run at higher asset utilization levels and also charge a blended price that is higher than if it were being delivered on a dedicated data center platform. Turning to slide seven, I wanted to point out some of the key operating trends for the quarter. Since the IPO, we have been focusing on increasing the duration of our leases and inserting escalators into our leases. Over the past four quarters, the average duration has been over six-and-a-half years, which increased the overall remaining duration of our portfolio by 25% from 28 months at the time of the IPO to 35 months. We expect that over time, the duration will continue to increase. Over the last four quarters, approximately 76% of new MRRs signed included escalators at a weighted average of 2.6%. Nearly 40% of our portfolio now includes escalators up from less than 10% when we went public and we expect that this trend will also continue. Churn in the quarter was 0.6%, representing the second lowest rate since our IPO. As I mentioned earlier, the increase in our customer count also provides a greater base for future growth, especially in light of the Cervalis acquisition. Utilization has also been increasing due to the strong leasing trends, especially in recent developments in Northern Virginia and Phoenix, where we are essentially out of inventory. Lastly, our new interconnection products have continued to gain traction, with revenue growth of 31% year-over-year, accounting for approximately 5% of our total revenue. We expect that as the enterprises become more familiar with an outsourced network model, similar to their acceptance of the outsourced data center model that they look to take advantage of the lower cost afforded by an Internet-based network topology. This product should continue to grow faster than our base business. On slide eight and slide nine, we have shared additional information related to the different products we offer. We have discussed in the past that we have diversified our product set in response to customer demand with the goal of maximizing asset returns. This additional detail highlights the many different products customers are purchasing from us and classify those products according to their size, power resiliency and service requirements, which provide more granularity than the historical definition of retail versus wholesale. As I have said in the past, no customers come to us and ask to purchase our retail or wholesale product. Rather, customers' infrastructure purchasing decisions are based around the applications they are managing, which have very specific requirements. In order to meet our customers' requirements, we have developed a broad product offering of different resiliencies, densities and other environmental conditions necessary to support their applications. Full-service deals are typically smaller deployments where customers contract for a fixed amount of power at a fixed rate. These deals carry the highest pricing. Over the past eight quarters, the majority of our new leases are from full-service customers based on the volume of leases. It fluctuates from quarter-to-quarter, but has ranged from 63% to 78% during this period. On an MRR basis, since these are smaller contracts, full-service deals have contributed between 16% to 47% of new MRRs signed during this period. By comparison, low resiliency products have less than 4% of total lease volume in each quarter, but have contributed over 25% of new MRRs signed in five of the past eight quarters. There are several different products in this category, all of which provide a resiliency solution with less than 99.999% reliability, meaning that they can expect more than five minutes of downtime a year. This is a product that we started offering a few years ago to customers who really understood the criticality of their applications and the associated cost of downtime. As shown, more and more customers are using this product as the architect and optimize their data center infrastructure. In total, about 20% of our overall revenue is now generated from low-resiliency, infrastructure solutions, which is up from almost nothing a few years ago. We expect as the market matures and customers become more sophisticated in understanding the criticality of their applications and try to minimize their cost, more customers will adopt multi-tiered resiliency solutions. These low resiliency solutions come at the lowest price point, but they require significantly less capital to supply and often carry the highest IRRs and development yields. As we are otherwise using idle assets that are necessary to provide redundancy for our metered power and full service contracts. Of the $1 million in new MRR this quarter, 45% was associated with full service contracts, which compares to 53% of the MRR in a quarter being driven by metered power contracts. Metered power contracts are similar to full service contracts, except that the power utilization by the customer is separately identified and charged to the customer as opposed to the full service contract in which the monthly invoices include all charges. Although metered power contracts come at a lower price point than full service contracts, they are critical to increasing leasing velocity to justify the construction of our larger facilities which have a lower cost-to-build and also much greater operating leverage. We prefer to have a mix of metered power, full service and low resiliency deals, because it allows us to accelerate growth and achieve higher asset utilization and over time allows us to drive increased same-store sale growth. For instance, this quarter, you can see that we closed a large number of deals at a low power density. These are basically for new customers who were then originally installed with us, going for lower power requirements. As their IT power needs grow, we begin to charge incrementally more for power, which increases revenue without a corresponding increase in square footage. On slide nine, we have detailed out the percentage of MRR associated with deals that are less than or greater than 1 megawatt, which is traditionally considered the split between retail and wholesale customers. Over the last eight quarters, 54% of new MRR were for deployments greater than 1 megawatt. This quarter, we had a higher amount of full service deployments and a few low resiliency deployments, resulting in 75% of our MRR being leased to customers who purchase less than 1 megawatt of power, which is higher than the 46% average over the last eight quarters. Almost all low resiliency leases are greater than 1 megawatt, while almost all full service leases are below 1 megawatt. However, within the metered power product, we see a nice mix of leasing, both above and below 1 megawatt. I wanted to emphasize this as one may equate our metered power product to what others categorize as wholesale or super wholesale. However, in reality, many of our metered power leases are for deployments less than 1 megawatt. Over the past eight quarters, on an MRR-weighted basis, 37% of our metered power leases were for deployments less than 1 megawatt. This will fluctuate from quarter-to-quarter. For example, in Q2, 58% of our metered power MRR was for deployments less than 1 megawatt. Over time, we expect that more of our contracts will trend toward deals greater than 1 megawatt, driven by increased adoption by enterprise companies of the outsourced data center model and by the unbridled increase in data generated and managed by enterprise companies. However, as we noted on slide five, we have consistently been adding large Fortune 1000 customers at roughly the same rate that we've been adding the smaller, non-Fortune 1000 customers. The mix of products, both by resiliency and size, is what enables us to continue to achieve the mid-to-upper-teen development yields that we've discussed on slide six. In summary, I think you can see a theme in our results in terms of consistently having double-digit customer growth, a trend towards larger and metered power contracts as customers become more comfortable outsourcing their needs to us, and I would also expect more customers to allocate applications to lower resiliency solutions. However, while we offer different products and charge different prices, they're all being delivered on a shared infrastructure platform, which allows us to achieve relatively high returns on the assets we deploy and gives us the flexibility to redirect assets towards customer needs that a typical dedicated platform doesn't allow for. Turning to slide 10. As I mentioned earlier, we closed the acquisition of Cervalis on July 1, and I'm excited about the opportunities as a result of the adding of financial services data center platform in the New York metro area. This acquisition provides us with a number of key benefits. First, it allows us to immediately scale our platform in a meaningful way, increasing our revenue and adjusted EBITDA to make us one of the leading colocation providers in the U.S. Based on our combined revenue, we would now be the third largest data center operator in the country. The acquisition also enhances and diversifies our geographic and customer footprint, establishing a presence in the Northeast and expanding our financial services customer portfolio. Lastly, the deal is immediately 5% accretive and we expect to generate additional accretion through expense synergies and lease-up of in-place inventory. In closing, I'm happy to see that the shift we made last year to focus on FFO growth is playing out well. I'm even more excited about the broader trends playing out in the data center industry. Demand for our product remains robust as we have basically sold out the inventory available in Northern Virginia and Phoenix. I'm excited about our company and the opportunities we have in front of us and the expected shareholder benefit evidenced by the increased FFO and EBITDA guidance. And I believe that at our current share price, we offer a very compelling investment opportunity. Lastly, I believe we are the last data center company to report earnings, and every one of my competitors put up really good numbers this quarter, which reinforces our rising-tide thesis that the market, while large and is still growing nicely, driven by increased data demand and secular outsourcing trends, which we still believe it's in its early stages. I will now turn the call over to Kim, who will provide more color on our financial performance.

[Kimberly H. Sheehy:]

Thank you, Gary. Good afternoon, everyone. Thank you for joining us today. I will provide additional color on our second quarter financial results and give an update on the outlook for the full year, including the impact of the Cervalis acquisition. Beginning with slide 12, normalized FFO and AFFO were up 30% and 44%, respectively, compared to the second quarter of 2014. This is primarily due to the increase in adjusted EBITDA over the same period, driven by strong growth in leasing and additional IX services. Revenue for the second quarter was $89.1 million, an increase of $7.4 million or 9% from the second quarter of 2014. The year-over-year increase was driven by a 12% increase in leased colocation square feet and additional IX services, with interconnection revenue up 31% compared to the prior year and approximately 5% of total revenue for the current quarter. Both new and existing customers are contributing to our growth. Churn for the quarter was 0.6%, down significantly from the elevated level we saw in the first quarter and our second lowest level since becoming a public company. We expect quarterly churn for the remainder of the year to be between 1% and 2%, more in line with our quarterly historical levels. Turning to slide 13, we leased 48,000 colocation square feet in the quarter. The leases signed were for 4.8 megawatts of power, with bookings particularly strong in our Dallas and Northern Virginia markets. Based on square footage, 79% of the colocation square feet leased was to metered power customers, with executed leases having a weighted-average term of 90 months. 76% of the new leases on a monthly reoccurring revenue-weighted basis have escalators at an average annual rate of approximately 2.9%. The new leases signed this quarter represent approximately $13.4 million in annualized GAAP revenue, excluding estimates for pass-through power. Year-to-date, we have signed new leases representing approximately $31.6 million in annualized GAAP revenue. By the end of the second quarter, we had commenced approximately 27% of contracted revenue for leases that were signed during the quarter and we estimate that by the end of the third quarter, approximately 85% of contracted revenue for leases signed during the second quarter will have commenced. As of the end of the quarter, our total backlog of annualized GAAP revenues stood at $16.7 million. We estimate that by the end of the fourth quarter, we will have commenced all leases currently in the backlog. Moving to slide 14. Net operating income was $56.3 million for the second quarter, an increase of $6.4 million or 13% from the second quarter of 2014. The NOI margin of 63% was up 2 percentage points versus the second quarter of last year. Adjusted EBITDA increased by $6.3 million to $47.1 million, up 15% from last year, primarily driven by the increase in NOI. The adjusted EBITDA margin was up 3 percentage points, driven by the increase in the NOI margin as well as SG&A expenses, excluding non-cash compensation, remaining flat and decreasing as a percent of total revenues. Normalized FFO over the second quarter was $33.4 million, an increase of 30% from the second quarter of 2014, driven primarily by growth in adjusted EBITDA and a decrease in interest expense, partially offset by an increase in non-cash compensation. The reduction in interest expense was primarily a result of the impact of our open market bond repurchase program in the fourth quarter of 2014 and higher capitalized interest, partially offset by the impact of borrowings on our credit facility. The increase in capitalized interest was primarily driven by an increase in construction in progress and related cash outflows, which resulted in more interest being capitalized in the quarter. AFFO for the second quarter was $36.5 million, an increase of 44% over the second quarter of 2014, driven primarily by the increase in normalized FFO and lower deferred revenue and straight-line rent adjustments as a result of fewer contracts and free rent and rent periods. Slide 15 compares our performance on a sequential basis. Revenue increased $3.4 million or 4% from the previous quarter, driven primarily by incremental revenue from recent signings with a corresponding 4% increase in NOI. The adjusted EBITDA margin of 53% was flat compared to the prior quarter. The increase in normalized FFO was driven primarily by the increase in adjusted EBITDA, partially offset by higher interest expense related to the impact of borrowings on our credit facility. The increase in AFFO was primarily driven by the increase in normalized FFO and lower deferred revenue and straight-line rent adjustments, partially offset by higher leasing commissions. Deferred revenue and straight-line rent adjustments were lower as a result of fewer contracts in free rent and rent periods. Leasing commissions were higher as a result of the higher volume of lease commencements in the second quarter. We expect that in the second half of the year, deferred revenue and straight-line adjustments will be up from the levels seen in the second quarter. Slide 16 shows a market-level snapshot of our portfolio as of the end of the second quarter in 2015 and 2014. Without Cervalis, the utilization is at 90%, an increase of four percentage points compared to last year despite a 13% capacity increase, reflecting particularly strong demand in Texas, Northern Virginia and Phoenix markets. Utilization at the Cervalis facilities as of the end of the second quarter was 79%. The combined total footprint including Cervalis is approximately 1.5 million colocation square feet and includes 31 facilities across 12 markets. Including the Cervalis locations, we have approximately 169,000 square feet of raised floor available to lease, primarily in Dallas, Cincinnati, Houston and the New York metro area. Our Northern Virginia facility came on line in January and utilization as of the end of the second quarter was at 98%. The strong leasing in this market has triggered the construction of a second data hall. We also commissioned new data halls at our Carrollton facility in Dallas and our Phoenix II facility, adding approximately 92,000 colocation square feet and 6 megawatts of power capacity. The data hall at the Phoenix II facility is fully leased, triggering construction of our Phoenix III facility. Slide 17 shows our total debt as of June 30 and provides details on the transactions that occurred on July 1 related to the Cervalis acquisition and the redemption of approximately 6 million operating partnership units of a subsidiary of Cincinnati Bell, reducing their ownership stake to approximately 11%. In late June, we executed an amendment to the credit agreement to increase the size of the facility by $350 million to a total of $950 million, comprised of $650 million in revolver commitments and $300 million in term loan commitments. Also in late June, we completed a common stock offering raising approximately $373 million. On July 1, we completed a series of transactions. We borrowed $150 million under our term loan commitment and issued $100 million of senior unsecured notes. We used approximately $400 million of the debt and equity proceeds to fund the purchase of Cervalis. We used $170.3 million of those proceeds from the equity offering to redeem approximately 6 million operating partnership units from a subsidiary of Cincinnati Bell. As a result of the timing differences, our cash balances as of the end of the second quarter are temporarily inflated. Taking into account the impact of the transactions that occurred on July 1, our adjusted cash balance was approximately $90 million. Net leverage based on combined CyrusOne and Cervalis annualized adjusted EBITDA was approximately four times on an adjusted basis. Taking into account the increase in commitments under the credit facility and after giving effect to the July 1 term loan draw down, we have $445 million in remaining borrowing capacity, with liquidity sufficient to fund our growth for the next 18 months to 24 months. Turning to guidance, slide 18 shows our revised outlook for the full year 2015, including the impact of the Cervalis acquisition. We are providing revised full-year standalone CyrusOne guidance and introducing Cervalis guidance for the second half of 2015 and combined guidance for the full year 2015. On a standalone basis, we expect revenue to be between $361 million and $365 million based on signed leases through the second quarter and expectations for the remainder of the year. We are tightening the base revenue range to between $322 million and $325 million. Bookings have been strong through the first half this year, with new signings generating approximately $32 million in annualized revenue, and the pipeline remains strong. Signings in the second quarter were down slightly from the first quarter, but relatively in line with the prior fourth quarter average. Similar to last quarter's comments, the timing of the signings and related recognition of revenue in the first half of the year compared to our original expectations is impacting the full year revenue. We are reducing and tightening the range for metered power reimbursements to be between $39 million and $40 million. This is primarily driven by metered power reimbursements trending below expectations as a result of lower than expected electricity rates and usage. Approximately one-third of the decrease is attributable to lower electricity rates. Another one-third is due to the delayed commencement of new leases and associated power utilization. The remaining one-third is due to a variety of reasons, including a reduction in usage of a couple of legacy customers and the impact of efficiency initiatives. As I've noted before, given that our metered power billings have no associated margins, there is no impact to adjusted EBITDA, we are tightening the standalone adjusted EBITDA guidance range to between $191 million and $193 million, with the midpoint increasing by $2 million compared to the original guidance. We expect standalone normalized FFO per share to be above the upper end of our original guidance range. This is based on a full-year share count assumption of approximately 65.8 million shares, which excludes the impact of the June common stock offering to partially fund Cervalis acquisition. Turning into or taking into account the expected accretion from Cervalis, including the impact of dilution from June's common stock offering, our combined full year and normalized FFO per share guidance is between $2.07 and $2.13, with the midpoint reflecting an 8% increase compared to the midpoint of our original guidance. I will provide further details on the normalized FFO per share accretion on the next slide. Combined full year revenue is expected to be between $398 million and $404 million and combined full year adjusted EBITDA is expected to be between $209 million and $213 million. We anticipate capital expenditures on a combined basis to be between $260 million and $275 million. We have tightened our original standalone guidance range. And for Cervalis, we have assumed expenditures relating to the potential development of a property adjacent to one of their existing facilities, which is fully leased up. And there is an active pipeline for existing customers looking to expand. We are currently undergoing diligence on this expansion site, but anticipate stabilized development yields in the mid-teens to upper-teens, consistent with other developments in our portfolio. We will provide additional details as our development plans progress. Moving to slide 19, we've included a chart that walks forward our original 2015 normalized FFO per share guidance to our revised combined guidance and also shows the expected additional accretion associated with Cervalis expense synergies as well as the lease-up opportunities Gary mentioned. Our original normalized FFO per share guidance range was $1.90 to $2. We expect that on a standalone basis prior to the impact of the June equity offering, we will exceed the midpoint of the range by $0.08 to $0.12 per share, resulting in pre-Cervalis normalized FFO per share of between $2.03 and $2.07. The next two bars show the impact of the acquisition, including the dilution from the equity offering in June to fund a portion of the purchase price. Cervalis is expected to add $0.04 to $0.06 to normalized FFO per share in the second half of the year, including the impact of dilution, translating into approximately 5% accretion to second half 2015 normalized FFO per share assuming the midpoint. This is consistent with and unchanged from our original estimates at the time of the announcement of the acquisition. So, the revised guidance midpoint is $2.10 per share, an increase of approximately 8% compared to our original guidance midpoint of $1.95 per share. The last two bars show the additional potential accretion to annual normalized FFO per share attributable to Cervalis. Assuming expense synergies as well as lease-up of existing inventory, we anticipate that Cervalis may add another $0.11 to $0.16 of annualized normalized FFO per share accretion on a steady-state basis. Slide 20 shows current and planned development activity by market. As I mentioned earlier, we delivered approximately 92,000 square feet of raised floor and 6 megawatts of power capacity in the second quarter with data halls at our Carrollton facility in Dallas and our Phoenix 2 facility coming online. As I mentioned earlier, strong demand in Northern Virginia has triggered construction on the second data hall. We have begun the project and expect to add approximately 37,000 colocation square feet. Development continues in Austin, Houston and San Antonio and we expect to add a total of 145,000 colocation square feet and 12 megawatts of power capacity in these markets. We have also begun construction on our Phoenix 3 facility. As I mentioned before, we are currently undergoing diligence related to the potential development of a property adjacent to one of the existing Cervalis Facilities that is completely leased up and there is demand from existing customers. We will provide additional details as our development plans progress. By the end of the year, including Cervalis locations, we expect to have a total of approximately 1.7 million square feet of raised floor online, up from approximately 1.2 million square feet at the beginning of the year with another 1 million square feet of powered shell available for future development across seven markets. In closing, we're very pleased with the results in the second quarter, and believe we're well-positioned to capitalize on opportunities for growth in our markets. Thank you for your time today. This concludes our prepared remarks. Operator, please open the line for questions.

[Operator:]

We will now begin the question-and-answer session. Our first question comes from Emmanuel Korchman of Citi. Please go ahead.

[Emmanuel Korchman:]

Hey, guys. Good morning and afternoon. My first question for you is, Kim, if you look at your guidance increase, the EBITDA guidance increase was about $2 million to the midpoint it's about $0.03. Can you address where the rest of that $0.08 to $0.12 increase on CyrusOne standalone is coming from?

[Kimberly H. Sheehy:]

On the FFO, is that what you're...

[Emmanuel Korchman:]

Yeah, on the FFO.

[Kimberly H. Sheehy:]

Yeah. I'm sorry. Yeah. It's – was the EBITDA and then lower interest expense.

[Emmanuel Korchman:]

And that's all due to the increased capitalization on development?

[Kimberly H. Sheehy:]

That's primarily, yes.

[Emmanuel Korchman:]

Great. And then the other $0.08 to $0.12 on the same FFO walk page, the lease up of the existing Cervalis space, how much incremental capital spend would it take to get that space leased up to get the $0.08 to $0.12?

[Gary Wojtaszek:]

On that, Manny, none. That's basically just taking the existing inventory that they have available and selling that out. That doesn't include the additional capital that Kim was talking about in terms of looking at developing another site next to the existing facility.

[Emmanuel Korchman:]

So that shows boots on the ground leasing of space that just needs to get people in there?

[Gary Wojtaszek:]

Yeah. That's right. Yeah.

[Emmanuel Korchman:]

And Gary, my last question for you is, you mentioned your peers' calls on results this quarter. One thing that surprised me between Digital results and yours was the timing of commencements. And I think your commentary was that it's taking longer than you expected, theirs was shorter than expected. Any idea of what sort of the difference could be between the two portfolios?

[Gary Wojtaszek:]

Yeah. I mean just to kind of put a final point on it, I mean what we're saying in terms of timing of commencements, that's really kind of talking to our first quarter where we had bookings that were kind of later in the quarter. If you look at like the chart that we had in there in Kim's piece where we kind of rolled through what the backlog looks like in terms of when it's going to get deployed. The timing of when they're going to commence is pretty much unchanged for us from what we've done historically. I don't know specifically what Digital saw in their numbers, maybe they had an improvement, but we've seen kind of consistent difference between when we sign versus when they're commenced.

[Emmanuel Korchman:]

Great. Thanks very much.

[Gary Wojtaszek:]

Yep.

[Operator:]

Our next question comes from Jordan Sadler of KeyBanc Capital Markets. Please go ahead.

[Jordan Sadler:]

Thanks guys. I wanted to just follow up on Manny's guidance question, if you could. So I guess two separate pieces. First on the standalone revised guidance, revenue is declining and I think you attributed that to the timing being later, and I understand that I think. It's the adjusted EBITDA going up that I guess I'm not 100% clear on. So, one, could you clarify that? And then separately I want to come back to the capitalized interest.

[Kimberly H. Sheehy:]

Sure. This is Kim. The base revenue change, we've brought this – we tightened the range, the low end stayed the same and that's what we were guiding everyone to last quarter. So we still have the same forecast that we talked about then. The metered power is the piece that changed overall. And those are for all the various reasons we talked about, we're seeing lower rates, lower usage than we forecasted. And so, we aren't seeing the increase in metered power pass-through that we had forecasted for the year. Does that answer your question?

[Jordan Sadler:]

Not really. Because I guess, I'm looking at base revenue declining from $327 million at the midpoint of $323.5 million at the midpoint, I get range. I am looking at the midpoint and that's effectively a decline, no?

[Gary Wojtaszek:]

Yes.

[Kimberly H. Sheehy:]

Yeah.

[Gary Wojtaszek:]

I think what you're not seeing in there, I mean versus our initial expectations Jordan is that our expense numbers are coming in more favorable than we had originally expected for the year. So that 1% drop in base revenue has been offset by a bigger improvement in expense management as we head towards the second half of the year. The rest of it down below is in interest on the FFO piece, as Kim talked about higher proportion of capitalized interest, but also the fact that we assumed that rates were going to go up faster. Hence, we've got a delta there in terms of interest forecast assumptions.

[Jordan Sadler:]

Okay. So that's the other piece on capitalized interest. So that delta which is – so I guess, if we're looking for a normalized FFO to normalized FFO, the original versus the new and $0.05 is Cervalis, so you've got $0.10 related to capitalized interest, is that the way you to think about it?

[Kimberly H. Sheehy:]

It's primarily the lift in EBITDA that's driving the higher FFO. There is additional capitalized interest, but it's mostly the EBITDA.

[Jordan Sadler:]

Right. Okay. It's mostly the change in EBITDA. Okay. Okay. Separately, I just had some curiosity regarding shared infrastructure, I know that you guys have talked about this from time-to-time, and I'm curious if you find that there is an increasing willingness of folks or if the pushback is decreased in terms of – I know you guys have never really talked about seeing much pushback. But are people just – and tenants just generally receptive to the shared infrastructure and do you – and then maybe any commentary you can offer in terms of difference in cost between your estimate of it for shared infrastructure versus dedicated?

[Gary Wojtaszek:]

Sure. Yeah. So I mean the only product that we have ever sold has been a shared infrastructure product. And so I mean just given the growth over the last decade or so, I mean it kind of points to the fact that all customers are very comfortable with the shared infrastructure solution. What's attractive about that is two things, both for us and for the customers. And that the way we look at it is, if you're making an investment in a single asset, your ability to kind of carve up that asset in many different ways and sell that asset to customers in different products, enables you to basically ensure that you get a much higher utilization of the assets. And by that, what I mean, so whether you want a high resiliency solution or a low resiliency solution or a high density solution or low density, when you have a shared platform, you can carve up that asset in many, many different ways and basically give the customer exactly what they're looking for. The biggest change that we've seen in our product portfolio over the last several years has been in the lower resiliency solution. And this is basically solutions that are less than 99.999% reliability. So to give you some sense, I mean, you're looking at, say, like a 99.9% reliability, so upwards of potentially nine hours of downtime a year on a set. It's not that we ever kind of run that types of outages for customers, but that is the expectation that they have going into it. Those type of customers that are willing to deploy their critical applications on that understand that there is some expected downtime in those applications per year, but they understand what their IT applications are and the criticality of those applications to their business and are comfortable making the differential there – the cost differentials to go to the lower tiered solution. And so what that enables us to do is basically take some of the redundancy that we have inherently built into the system in order to provide the 99.999% or 99.9999% of reliability that we would traditionally do on a high-end product, and reallocate that and basically sell that extra capacity, if you will, towards a lower capacity, a lower resiliency solution. So when you blend that all together on the same asset, we're getting slightly better yields. That is something that we expect is going to increase more over time as more and more customers become more sophisticated about their IT needs. And also as the IT applications have stronger and better self-healing capabilities at the operating level, where they can take a particular downtime in one application knowing that their operating system can redirect to another compute source out of a different data center or different data hall.

[Jordan Sadler:]

Any estimate of the differential there, shared versus dedicated cost to deliver the different products?

[Gary Wojtaszek:]

Yeah. I mean the way we underwrite these things is we fully burden all of our full service and metered power deals with all of the operating costs when we underwrite those deals to achieve the returns we do. So if you look at it from that basis, you're getting a much higher yield on these assets from an operating cost. From a capital perspective, it's very similar like when we underwrite our difficult deals, we're looking at getting – we're underwriting to mid-teen type returns in the traditional 99.999% of environment. So again, if you have some additional assets there that you can sell, and typically the pricing is 50% less or so, it's another kind of yield enhancer. So whether it's selling that additional capacity, whether it's selling cross connects, whether it's selling service, those are all things that we look at just driving up ARPU off of a denominator which is an asset investment that we've made that we're trying to sell to everyone.

[Jordan Sadler:]

All right, thank you.

[Gary Wojtaszek:]

Yep.

[Operator:]

Our next question comes from Jonathan Atkin of RBC Capital Markets. Please go ahead.

[Jonathan Atkin:]

Yes. Thank you. So just a quick clarification, when you say better expense management, is that power or there are other elements that fold into that?

[Gary Wojtaszek:]

Hey, Jonathan. What was that when you said better...

[Kimberly H. Sheehy:]

He is asking about the expense. Jonathan, it is power. We are seeing a benefit in the EBITDA because of the lower rates, the same as we were talking about on the top line. And we also are seeing cost management in other areas, but it's also – some of our larger facilities are just being leveraged from the operating expense side because of the fixed cost nature of them.

[Jonathan Atkin:]

Okay. And then I was interested in the reduced usage of power, first of all, just to clarify, is your low resiliency product, is there a power reimbursement? Does that hit the revenues or not with the powers pass through for the low resiliency power?

[Gary Wojtaszek:]

Yeah. The powers pass through, almost 100% of all those contracts in the low resiliency powers pass through.

[Kimberly H. Sheehy:]

Yes. So they'll have a rent charge, obviously, as well and then their usage would come through that power line.

[Jonathan Atkin:]

Okay. So it is revenues pass through. So then the question I have then is

[Gary Wojtaszek:]

It was basically in Houston and Phoenix predominantly.

[Jonathan Atkin:]

Okay.

[Gary Wojtaszek:]

And just another point on the rate. So the rate reduction and the efficiency component of that, it also provides us an EBITDA margin benefit in terms of the fixed service – the fixed price contracts, since they are priced at a – with a power rate that was typically higher; to the extent rates are lower, you are getting a slight benefit there and to the extent that you become more efficient in terms of managing your facilities to a lower PUE, you also get a pickup in contribution margin there as well.

[Jonathan Atkin:]

And does that affect the MRR churn number or not when there is reduced usage? Is that baked into the metric or does that metric exclude that?

[Kimberly H. Sheehy:]

No, we do not include pass-through cost in the churn calculation.

[Gary Wojtaszek:]

Yeah. Our churn calculation, Jonathan, is any customer that leaves, any customer that pays less for the existing product or purchased less products. So anything that reduces revenue is included in that churn metric, except the power.

[Jonathan Atkin:]

Okay. And then, I was interested finally in the factors driving Virginia demand, and is that existing customers from elsewhere that are then taking that location or is it new logos that you're bringing in there? And then also the product mix in Virginia, is that more or less indexed towards the all-inclusive versus the metered power products?

[Gary Wojtaszek:]

Yeah. So, I mean. the way we underwrote that deal originally when we went into that market was based on the assumption that our existing customers were going to be the primary drivers and that's turned out to be true. About 80% of the customers that we have in there were existing customers and we've been attracting new ones into that mix. We are seeing a lot of demand in that market and we expect that we're going to do really well there. We're also involved with different cloud operators in various discussions in that market. So I think what you saw broadly, I think from pretty much everyone reported so far, that Northern Virginia continues to be a really strong market for us and we're going to be the beneficiaries of that. Similar story in Phoenix. It's another really strong market for us. We basically sold out there. We're bringing on new capacity; we'll have a new building completed by the end of the year in Phoenix. We're also started to work on the next data hall in Northern Virginia and are looking at – we're scoping out building the next facility on that site as well.

[Jonathan Atkin:]

And then just on the Virginia question then, does the requirements that you're needing there, are they indexed more towards metered power versus power inclusive contracts?

[Gary Wojtaszek:]

It's probable. I mean I think like in the chart that we provided, and this is for the first time, Jon, I don't know if you had a chance to go through. But we provided a lot of detail concerning the different types of products that we're selling as well as the mix between full service, metered, low resiliency, and then kind of sliced it differently taking the metered power products and sliced that between deals greater than 1 megawatt and lower than 1 megawatt to give a lot more color. I would suspect that what we will ultimately have in Northern Virginia is going to mirror pretty much what we have across the portfolio currently.

[Jonathan Atkin:]

Great. Thank you very much.

[Gary Wojtaszek:]

Yep.

[Operator:]

Our next question comes from Amir Rozwadowski of Barclays. Please go ahead.

[Amir Rozwadowski:]

Thank you very much and good morning, folks.

[Kimberly H. Sheehy:]

Good morning.

[Gary Wojtaszek:]

Hey, Roz.

[Amir Rozwadowski:]

I wanted to ask a question in terms of the lease up synergies at Cervalis. How long should we think about sort of the time it takes to realize sort of those lease up synergies?

[Gary Wojtaszek:]

Yeah. Look, I mean, we're assuming that we're going to be selling out roughly $8 million or $9 million of annualized revenue there. So that's what we're expecting that we're going to generate for synergies.

[Amir Rozwadowski:]

Excellent.

[Gary Wojtaszek:]

And just from the combination of the two now, so, no one asked that, just to give you some color. I mean, so from an integration perspective things are moving along really, really well. We expect that the majority of business is going to be integrated into our company by December 31. So, everything will be running on one platform on January 1 of this year. We're actually trying to pull this ahead and do this earlier this year, but things are running along. As part of that, we've integrated their sales and marketing efforts into ours. We're working with their customers and ours to basically do cross-pollination work. We're driving more additional leads into their business than they have historically had. Just given that, we have I think a bigger presence particularly in SEO. So, I mean to-date so far in the first six months or so, they probably had about a $2 million to $3 million of annualized bookings. We think we can accelerate that beyond that once we fully integrate them.

[Amir Rozwadowski:]

And that's sort of where I wanted to continue the questioning. I was really thinking about sort of the incremental opportunities aside from some of the just general synergy opportunities. I mean, obviously, if we look at Virginia and sort of the traction that you folks have had in building new capacity and then leasing up that capacity at a pretty healthy clip rate. How should we take the lessons from being able to do that in Virginia with an established business in another market and already having the feet on the street in terms of the ability to sort of drive additional traction there?

[Gary Wojtaszek:]

Yeah. Look, I think, it's easier, right. I mean, they have a base of 200 customers already, and we know I mean historically for the last decade that 50% of our growth every quarter comes from an existing base of customers. So, to the extent that they have 200 customers, we can – we expect that we're going to be able to sell more of their customers in existing space there, as well as in our facilities and vice versa, we've got about 700 customers that we'd expect are going to take some space in some of their facilities. The challenge in this though is that there is that we have limited capacity, this is why we're talking about bringing on additional facility in there. So, we can have additional inventory to sell. So, they basically have a majority of their inventory in Connecticut with lesser amount available in the Garden State.

[Amir Rozwadowski:]

And then you had mentioned sort of cross-pollination, I know we discussed this a bit on your prior conference call, but any update in terms of selling some of your existing facilities to some of their customers and sort of how you're seeing the opportunities from that perspective?

[Gary Wojtaszek:]

Yeah. So the cross-pollination is on two-fronts, right, so there is the straight data center cross-pollination stuff, where their customers will take space in ours and vice versa, and that's underway now, and we talked about before that having real opportunities in London with some of their customers and some of our customers here looking at space that's underway. The other thing is on the product side. They have a managed service product. It's very small relative – it's about 3% of our combined revenue, but that's something that Mike and Bob are absolutely focused on driving through. We are going to be putting in deployments and I think, as a start in Dallas and in Phoenix to really start driving that through, and I think that we're going to get a lot of additional uptick on that. It's still fairly small dollars on that, but I think there is absolutely a product there that customers would want to pay and for the convenience of us offering it to them be able to do it with a nice return.

[Amir Rozwadowski:]

Excellent. Thank you very much for the incremental color.

[Gary Wojtaszek:]

Sure.

[Operator:]

Our next question comes from Simon Flannery of Morgan Stanley. Please go ahead.

[Simon Flannery:]

Great. Thank you very much. I wonder if you could just touch on the interconnection side of things. Revenue is up about 31 percentage, which is showing good momentum, but perhaps you can just talk about given the strong results we saw out of AWS. How are your clients thinking about combining your product with some of the public cloud operators and using you to get connectivity to them and how you see that ramping over time? And then, obviously your results continue to look good here, but perhaps you could just touch on what you're seeing in Houston, I think Digital Realty had touched on maybe some supply, excess supply there. Are you seeing any changes in pricing or any impact from the energy correction? Thanks.

[Gary Wojtaszek:]

Sure. Yeah, so the IX business is something that we started two years ago, thinking that the underlying premise there was that, as customers become more and more comfortable with the outsourced data center model, driven by the clear economic benefits associated with a shared asset that over time, they will also be attracted to the shared network model as well, also attracted to the same economic benefits. So once they give up the control issues and the concern that they had historically, we think more and more customers are going to go down that route as they take advantage of some of the IP networking topology. And we've seen that in our results, it's growing – that piece of our business is growing three times as fast as our base business and we're above 5% in revenue now. So, we expect that that's a trend that's going to continue along. It's still a really long selling process, it's very much like the data center business was eight years or nine years ago, where you're trying to get the CIO to make a decision to trust you with the data center that takes a long time. The networking conversations and the networking sell is taking an equally long time. So we expect that that's going to happen over time as more and more people become comfortable with the outsourced model. With regards to how they are interacting with the clouds, I mean, some of our biggest growth over the last 18 months has been with all of the large cloud players. We've had announcements go out about the different cloud providers that are in our facilities, that customers are now able to take advantage of, and they're working through that. Right. We expect that, they are going to continue to be successful, the cloud guys. And we also think that equally there's going to be a continuation of dedicated type applications that are going to continue to be housed by and managed by the customers. We are involved in lots of conversations with customers trying to link up to the different various cloud operators and we expect that, that's going to increase over time. With regards to your last point, on Houston, we had roughly 10% of our bookings this quarter. We're just kind of consistent with what we've seen over the last five quarters or six quarters in terms of the oil and gas. We had a really strong Q1 in terms of – actually our strongest booking quarter in oil and gas for the last five, and this quarter was pretty consistent with what we've seen over the last couple quarters.

[Simon Flannery:]

Great. Thank you very much.

[Operator:]

Our next question comes from Ross Nussbaum of UBS. Please go ahead.

[Ross T. Nussbaum:]

Hey, guys. Good afternoon, here. Most of my questions have been answered. I had one on Cervalis. You gave recurring CapEx disclosure for the second half of this year of $1 million to $2 million, which I think works out to be about 8% of EBITDA. I guess two questions, one is does that include capitalized leasing commissions or is that pure kind of maintenance CapEx?

[Kimberly H. Sheehy:]

Yeah. No, that would be just pure – that would be pure maintenance CapEx and that number is pretty lumpy. It's not constant, that means that's our best forecast as to what happen – what's going to be spent in the second half of the year, but that's just pure maintenance capital.

[Ross T. Nussbaum:]

Do you have a guesstimate as to what the capitalized leasing commissions going to work out to be annually?

[Kimberly H. Sheehy:]

On just the Cervalis activity, it would – I mean, it wouldn't be very large. I don't have the number, but – I mean, Michael, can certainly get that for you. But it would be...

[Michael Schafer:]

$700,000? I don't know; we're just – we'll get back to you, because don't – we're just taking a guess.

[Kimberly H. Sheehy:]

Yeah.

[Ross T. Nussbaum:]

Okay. Yeah. I mean, the reason I ask is Digital with their Telx acquisition gave a number for next year that EBITDA or that the maintenance CapEx and capitalized leasing commissions are going to be 20% of EBITDA. So I am just trying get my arms around the differences between kind of your what I will call below the line FFO adjustments and theirs because there is a notable difference between those two companies?

[Kimberly H. Sheehy:]

Okay. Yeah. Let us get back to you. But I don't think the Cervalis piece is going to be that material.

[Ross T. Nussbaum:]

I appreciate it. Thank you.

[Kimberly H. Sheehy:]

Okay.

[Operator:]

Our next question comes from Colby Synesael of Cowen & Company. Please go ahead.

[Colby A. Synesael:]

Great, thank you. First, just thanks for all the information on today's call, very helpful. Two questions, so as you continue to see a mix shift in terms of how your facilities are actually being used, I am curious if there's been a change in the average CapEx dollar having to be spent, so maybe on a per megawatt type basis. So we could think about that – is that changing as a result of how you see your facilities being used going forward, and thus how you're designing them. And then the second question is, I certainly appreciate that the majority of the reduction in revenue came from the pass-through power, but we have seen it looks like the base revenue growth moderating over the last few quarters as well, at least in the first half of this year relative to last year. I'm curious, is that just a consequence of your increased focus on EBITDA, and therefore the deals you are willing to do, or is there something else there that might be able to explain that and essentially are we going to be able to get back to seeing that reacceleration in growth to the levels we saw perhaps more similarly in 2014?

[Gary Wojtaszek:]

Sure. Yeah. Yeah, Colby. Yeah. So, on the cost to build, I mean we're always looking at kind of designing out expense in each of our iteration. So we're working on stuff now, we're – we are trying to get – pull out another 10% out of the $7 million a meg of cost that we've been at for about a year now or so. So we're trying to get that down another 10%, but the way to think about though is – and this is what I'm talking about the shared platform is that what we're trying to do is take that same $7 million and that same megawatt of cost and capacity and try to carve up a bunch of different products on it. So we can be really kind of price discriminatory, and kind of serve up exactly what a customer wants and charge on a blended price, that's higher than if we were to sell that same megawatt on a dedicated basis. So that's the way we are trying to do. So none of these things kind of really change our cost model in terms of how we're designing and delivering that megawatt. With regard to the focus on revenue and EBITDA and FFO. So last year, we absolutely felt that in spite of having like just tremendous EBITDA growth. Last year, if you recall, we were trading at the highest FFO multiple in the industry and also at the time, somewhat bipolar at the lowest EBITDA multiple in the industry. And so, at that point, once we started looking at what's some of the drivers were between us and our peer set, we realized there were some things that we were doing as a telecom and technology company that real estate investors typically don't do. A lot of those things are focused on capital structure, in that we had a100% fixed bond, long maturity, and most in the industry had majority of floating and that environment when you're looking at a 400 point delta, it was very detrimental to us on an FFO basis. Also, we were really aggressive in terms of our capital investment and that just further stressed the differential between our EBITDA and our FFO. So last year, what we wanted to do was focus on driving up that FFO faster, and what we talked about last year is exactly what we see here, was that we were talking about FFO growth that was going to be two times or three times faster than our revenue growth. And I think that's exactly what we've seen here. So what we're trying to highlight is, what the underlying opportunity is in terms of kind of harvesting the investments we've made historically in our business and then to show people really the type of yields and cash that these things generate, if you're not putting capital back into business. We feel pretty comfortable on that. However, on this quarter, I mean, just to be perfectly honest, I mean, we had two deals in the quarter that we were – we've looked at, but we actually walked away from. These were very – in one, there was a credit issue, we were concerned about the customer; and another one, it was a build-to-suit and the pricing on that was very low. We thought we can – we can direct our capital elsewhere to better means. To give you some sense, these are probably around $15 million in annualized revenue. So this would have been our strongest bookings quarter ever, if we had closed those deals. And we intentionally didn't do that, because that wasn't in line with the strategy that we wanted to pursue. So, I think, in general, as we sit here right now, we are looking at – even excluding those two deals, we are looking at a funnel that is 28% higher than where we sat at the same point last year. So, we feel really good about where the future is going to go over the next couple quarters. But, all these deals have just the natural ebb and flow, and in spite of how good we are in trying to like coordinate deals and steering to close in a quarter, they are just going to close when the customer ultimately wants. So, we feel really good about where we sit now, heading into the next four quarters, and we're looking at a pretty big funnel that we expect is going to bring some additional upside.

[Colby A. Synesael:]

There's certainly no permanent reduction in top line base revenue growth in terms of your own expectations, nothing to read into there?

[Gary Wojtaszek:]

No. I mean, no, I mean – I think, the revised guidance that we put out, we tried to be as accurate and kind of colorful as possible to give you as much detail behind those numbers. When you cut through our revised guidance, just on our core business, right, I mean, where we took our base revenue down 1%, and we took the power pass-through down about 12%; and at the same time, the EBITDA up about 2%. So net-net, we feel pretty good about being able to deliver that. Have some on these other deals, if we were willing to go down and take that type of return on the capital, we would have had a revenue number that would have been right in line, actually probably in the higher end of where we would have delivered the year at.

[Colby A. Synesael:]

Great. Thank you for the color.

[Gary Wojtaszek:]

Yep.

[Operator:]

Our next question comes from Matthew Heinz of Stifel. Please go ahead.

[Matthew S. Heinz:]

Thanks, guys. Good afternoon, thanks for fitting me in. With the ongoing convergence of wholesale and retail you highlighted in the presentation, I'm curious if you're seeing more opportunities in your funnel to service customers that maybe your larger peers might miss, just given that their needs don't necessarily fit neatly into a style box?

[Gary Wojtaszek:]

So is your question

[Matthew S. Heinz:]

Maybe just that they might slip past the radar of other people just given the flexibility of your platform and kind of what you are willing to do in terms of the customer?

[Gary Wojtaszek:]

Yeah, I think, that's definitely true. I mean for the most part – still the majority of our deals are all done on a direct basis, and most of those are not in competitive situations. About 80% of our deals this quarter were on a direct basis. And so, it's only in some of those other deals that are shot more broadly, that are kind of the broker-led ones where they go out to a wider audience, do you get into a more competitive situation, but for the most part those aren't deals that we generally do. I think, we've been selling the lower resiliency solutions for several years now, and I think that's something that we have kind of cut out a really niche play in innovation there. I think some of the other companies are now starting to talk about it more, but it's hard to tell from a market share perspective, in general, what type of deals you're losing to your competitors. But it seems broadly, right, everyone did really well this quarter, right. So the market and the sandbox still continues to be big and doing well in general.

[Matthew S. Heinz:]

Okay. Thanks. Then as a follow-up I think you already may have alluded to this. But we've seen several data points this earning season that suggest an acceleration of enterprise, cloud deployments, and I guess we've seen a fairly meaningful decline in the enterprise share of server sales, some of the big chip makers reporting those trends. And I'm just wondering if you have noticed any change, given the big enterprise mix in your portfolio, any change in behavior or things that customers are saying that might corroborate that, and how it impacts your business?

[Gary Wojtaszek:]

No. I mean, what I could say is we've had one of our strongest Fortune 1000 bookings quarters in a while. We closed five Fortune 1000 companies this quarter. That's up from our typical average. So all I can say is

[Matthew S. Heinz:]

Okay. You talked about some new cloud customers coming in and traction there. Are you seeing any enterprise customers accessing cloud services, third party cloud services from – or active cloud environments from your data centers?

[Gary Wojtaszek:]

Yes. Yeah, that was Simon's question earlier. So we announced a couple of months ago about all the different cloud partners that we've been putting in here and all customers are, if not connected to them, are in active dialogue talking to them about

[Matthew S. Heinz:]

Okay. Thanks a lot, Gary.

[Gary Wojtaszek:]

Yep.

[Operator:]

Our next question comes from Vincent Chao of Deutsche Bank. Please go ahead.

[Vincent Chao:]

Hey, Gary. Good afternoon, everyone. Just a question going back to the Cervalis, the lease up upside that this has sort of down the road. I think I heard you mention that the utilization is about 79%. Just curious, what is the $0.08 to $0.12 you highlight. What does that take utilization or what does that presume utilization goes to to get that $0.08 to $0.12?

[Kimberly H. Sheehy:]

What it relates to is the assets that are already built out in place and the assumption there is that they're leased up to 95%.

[Vincent Chao:]

To 95%. Okay. And then I guess just on the $0.05 that's baked in from Cervalis in the back half of this year, I thought when we talked about this originally last quarter that that was really not assuming any level of synergies, including any sort of lease-up potential. So, I mean, I guess is that still the case and I guess presumably you'd be looking to increase utilization immediately. So, I guess, does that offer some upside versus the $0.05 that's currently embedded?

[Kimberly H. Sheehy:]

Yes. That's correct. We're still modeling the numbers that the synergies would not be in 2015. We see them in 2016, but you're right, there is upside opportunity if we're able to do that quicker.

[Vincent Chao:]

Okay. So the $0.05 would assume utilization stays about the same?

[Kimberly H. Sheehy:]

That's right.

[Vincent Chao:]

Right. Okay. Thanks for that. And then just on the lower resiliency tenants that you talked about, I mean being a bigger part and being able to slice and dice the market much more cleanly given the shared infrastructure, I think that makes a lot of sense. But just curious, you gave a lot of characteristics about those types of tenants. They're generally over 1 megawatt; they're generally a metered power type of tenant. Just curious, are they typically pretty long-term as typical wholesale guys? I mean, are they taking five-year leases with you? And also, just curious if there's any notable difference in the creditworthiness of those types of tenants.

[Gary Wojtaszek:]

Yeah. They are all generally longer-term leases. I'd say on average, probably around six-year type terms. They are generally the most sophisticated buyers out there in terms of understanding the applications that they're running and their comfort with accepting some level of downtime in exchange for a lower cost. So there is a big difference in terms of that buyer set than your traditional kind of to-lend (1

[Vincent Chao:]

Okay. So more sophisticated, I guess, more advanced in terms of how they're thinking about their data center usage, but I guess from – just from a type of tenant in terms of their overall credit qualities, is it better than, if they're more sophisticated or maybe you could be more specific...

[Gary Wojtaszek:]

Oh yeah. No, these are all really good, these are really good tenants.

[Vincent Chao:]

Okay. Okay. Thanks. And then, just one last question to clean up, just a lot of questions on the base revenue being cut a little bit, Satellite One (1

[Gary Wojtaszek:]

Yeah. It's really timing, right. I mean, the first quarter, what we're talking about, we had a really strong bookings quarter. And it was really skewed to the last month and actually the last two weeks of that quarter, which was really, really kind of bizarre. This quarter, it was much more level-loaded, like a typical quarter for us, where we had a steady stream of bookings throughout the month. And what we talked about our last quarter's call was, we're guiding to the lower end there because what we saw with it being back-end-loaded in the quarter and then pushed out, you're losing a couple million bucks there in terms of revenue that you would expect to have metalized this year. We were still holding out, hoped that if we would have closed one of these other deals and got them in, we would have been back on our plan, if we were to close both, we would have probably been at the high end. And that didn't work out, so we just took down our guidance. But we feel pretty good about being able to deliver this at the end of the year and coming out at an MRR that we were targeting.

[Kimberly H. Sheehy:]

Then the other thing too, you might recall that we had the accelerated churn in the first quarter from a timing perspective as well, which gave us – gives us a total revenue impact for the year, while it was really timing again.

[Vincent Chao:]

Right. Okay. It sounds like though the end-of-year MRR expectations are not significantly different?

[Kimberly H. Sheehy:]

That's right.

[Vincent Chao:]

Okay. Thank you.

[Operator:]

Our next question comes from Barry McCarver of Stephens Incorporated. Please go ahead.

[Barry L. McCarver:]

Hey, good morning guys, and thanks for taking my questions. I guess first off on, a little bit more on the revenue guidance, just to be clear, metered power can be – has been seasonally a little higher in 3Q, like it normally is in 2Q. Do you expect that to be a little higher in 3Q just because of the timing of some of these new leases or do you expect revenue and margins to look a little bit more like 2Q?

[Gary Wojtaszek:]

We expect it to go up, right. I mean it's been 100 degrees here in Texas for the last couple of days. So, you're just going to get the natural increase in terms of the raw utilization, so your PUEs suffers during these hot months, right, and then typically, you'll get some spikes in power rates as well during this period as well.

[Barry L. McCarver:]

Okay. And then on the churn, when your churn was high in the first quarter, very low in 2Q, and you're guiding for it to go back to more of a normalized run rate in the second half of the year. I mean is there any specific churn event that you can point to or you're just assuming kind of normal business operations?

[Kimberly H. Sheehy:]

It's really just normal business operations. So, there's not a significant contract we're concerned about or anything like that.

[Barry L. McCarver:]

Okay. Great. Great. And then just lastly, Kim, you mentioned, to get to the Cervalis, you kind of upside 95% utilization in leasing. As a standalone, CyrusOne capacity utilization has been moving up steadily for several quarters and into the 90% to 91% rate. Are you comfortable that the company can continue to grow at these levels and keep utilization high? I know it's highly correlated to margins and it'd be great, but just kind of your thought on where your utilization should be once we get past kind of the Cervalis work through?

[Kimberly H. Sheehy:]

Yeah. I mean I think we are comfortable because of the way we manage bringing the new inventory on. That's what allows us to keep the inventory or the utilization rate so high.

[Gary Wojtaszek:]

Yeah, you know, Barry, I mean we came out with that phrase "Massively Modular" a couple of years ago when we were talking about kind of like our Data Center 2.0 initiative. And this is what you see, right, in that we could bring capacity on really quickly and when you have these massively scaled facilities, you get that efficiency benefit. So, we're running at really high rates. And we're also at the same time bringing on a boatload of new capacity and it's because we've got the supply chain down to the point that we can bring the stuff on rather quick, I expect that it's going to kind of continue to float around that same level.

[Barry L. McCarver:]

Great. That's very helpful. Thanks guys.

[Operator:]

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

[Frank G. Louthan:]

Great. Thank you. So going back again to just a little bit nuance on the metered power shift. So, you're seeing better escalators and better booking and so forth. I understand about the price of the power coming down, I guess, that's a good thing, you can't control. But why would that see such a shift in that guidance if overall the business is doing better? Or why wouldn't it translate a little bit to more metered power or is just there a mix shift? And then, can you be more specific on how much the lower power cost is benefiting your OpEx and how long do you think that'll last? Is this some temporary fluctuations in pricing or was there a new source for power or change in a particular state in rates that we can kind of point to? What's really behind the decline in the power cost?

[Kimberly H. Sheehy:]

Well, as I said before, I mean there are several things that are changing the amount that we're expensing and recognizing as revenue. And on the rates, what we saw was about a 6% across the board, it was different in each market, but about 6% decrease in rates when you just compare it from where we are today versus where we were a year ago. And to kind of quantify what that means on the bottom line, we saw, from a net EBITDA impact, I think it was about $250,000 benefit to us because most of it being pass-through. We're not seeing obviously the substantial amount of it, but we do see a small pickup in EBITDA. The other decreases, we just had a significant amount of quick ramping last year that we really sort of kept our trends being similar that just didn't materialize this year. And so, I think the increase that we see incrementally on the power usage is probably a more normal trend now than what we saw last year. Does that help?

[Frank G. Louthan:]

Okay. Yes. All right. Thank you very much.

[Kimberly H. Sheehy:]

Okay.

[Operator:]

And this concludes our question-and-answer session. I would like to turn the conference back over to Gary Wojtaszek for any closing remarks.

[Gary Wojtaszek:]

Thanks, operator, thanks, everyone for joining. If you have any other questions, don't hesitate to reach out to Michael, Raj, Kim or myself. Have a great week. Bye.

[Operator:]

Thank you. The conference has now concluded. Thank you for attending today's presentation. You may now disconnect. Have a great day.