Switch, Inc.
Q2 2019 Earnings Call Transcript

Published: 8 Aug 2019

[Operator:]

Good day, and welcome to the Switch’s Second Quarter 2019 Conference Call. Today's conference is being recorded.At this time, I would like to turn the conference over to our presenters. Please go ahead.

[Matt Heinz:]

Thank you, operator. Good afternoon, and welcome to Switch's second quarter 2019 conference call.On the call today are Thomas Morton, Switch's President and Gabe Nacht, Switch's CFO. Today's call may include forward-looking statements, including references to expectations, projections or other characterizations of future events or market conditions. Actual results may differ materially from those expressed in our forward-looking statements, which are subject to certain risks, uncertainties and assumptions.Our statements are made as of today, and we assume no obligation to update our disclosures. We describe some of these risks in our SEC filings, specifically on our Form 10-K, in the section entitled Risk Factors. In addition, today's call includes discussion of non-GAAP financial measures, which should not be considered in isolation from or as a substitute for financial information prepared in accordance with GAAP. Please refer to today's press release and supplemental package for further information, including a reconciliation of non-GAAP measures. Our second quarter 2019 press release has been furnished to the SEC as part of our Form 8-K and is available on our Investor website at investors.switch.com.I will now turn the call over to Thomas Morton, Switch's President.

[Thomas Morton:]

Thank you, Matt, and good afternoon, everyone. Thank you for joining us today.Switch continued its solid business momentum in the second quarter of 2019, again delivering strong revenue and profitability while achieving our highest quarterly EBITDA margin as a public company. We signed healthy bookings in Q2 with over $13 million of incremental annualized recurring revenue, and continued to make key additions to our internal and external sales teams.We continued our strategic focus on solving for the enterprise's most significant critical infrastructure needs. This effort continues to entrench Switch’s position as a trusted service provider and advisor to some of the world's largest corporations. We believe the unique capabilities and scale and unmatched ecosystem environments of our Prime campus locations have and will continue to attract an increased share of enterprise, mission critical computing requirements.Moreover, we continue to deepen our strategic relationships with hyperscale cloud vendors, as we execute toward our vision of building the largest, most sustainable, most resilient and highly connected multi-cloud availability zones in the world.We believe Switch is uniquely positioned for growth as enterprises increasingly look to deploy low latency, hybrid and multi-cloud architectures in our industry-leading hyperscale campus environments. Our robust and expanding cloud partner ecosystem, and wide range of connectivity solutions through our one of a kind telecommunications purchasing cooperative, further, advanced these initiatives.Our quest to build a truly differentiated hybrid cloud ecosystem has been a top strategic priority for Switch, dating back to prior to the time of our IPO. To achieve optimal performance, we believe hybrid workloads require close physical proximity between the enterprise gear and the cloud compute node, such that the data transfers occur in a frictionless manner without crossing the public internet.During the second quarter, Switch completed a 5 megawatt agreement with a cloud provider in The Core Campus. This transaction will generate more than $38 million in revenue over the initial contract term of five years. This figure excludes usage based power, usage based telecommunication services, and built-in expansion options for up to an additional 6 megawatts. We are excited to expand upon our existing relationship with this cloud partner.Also during the second quarter, Switch successfully closed a $5 million expansion order from an existing payment solutions customer and also completed a three-year colocation agreement with a major aerospace and defense contractor, totaling approximately $5 million of incremental value.In total, Switch executed nearly 600 customer contracts in the quarter, generating $81 million of total contract value with a weighted average term of just over four years. We added 34 new logos in the quarter, which in addition to the aforementioned aerospace defense contractor, also includes a leading West Coast financial institution, a nationwide grocery store chain, and a rapidly emerging cloud security solutions provider.Overall, we are extremely pleased with the breadth and diversity of our second quarter bookings, and continue to see a strong pipeline of sales activity across our Prime Campus locations.Importantly, our year-to-date bookings and financial results have outpaced our initial internal expectations, resulting in an increase in our 2019 guidance, as detailed in our earnings press release and our investor presentation. Gabe will speak to the specific changes and drivers of our guidance increase later on in this call.We are pleased to announce further new additions to our senior sales team during the second quarter. Shawn Novak joins us as Executive Vice President of Strategic Solutions. Shawn was previously with CBRE, as Vice President of Data Center Solutions. While at CBRE, Shawn worked with many of the world's largest enterprises as a data center strategist, providing value insights around complex ecosystem design, including colocation, cloud, and enterprise owned data center infrastructure. We look forward to leveraging Shawn's deep industry knowledge and enterprise relationships to further enhance the sales capabilities of Switch.Year-to-date, we have added six senior sales professionals to the Switch team, in line with our expectation to add between 5 and 10 new members during 2019. Our new hires thus far represent a diverse group of highly accomplished industry veterans with specialties ranging from hybrid cloud and telecommunications to commercial real estate.In June, we secured the rights to continue with parcels comprising approximately 80 acres in total, located at our Core Campus in LAS VEGAS. This additional acreage will support the next several years of growth at Switch's Core Campus. We have already begun the permitting process on the new site and expect to commence construction on our next data center in early 2020. We will provide additional updates as we move forward with planning and construction phases of our Core Campus expansion, which is currently 2.4 million square feet and is the largest hyperscale data center ecosystem in the world.In July, we took steps to further our leadership in the realm of renewable energy, securing our commitment to provide 100% green power on favorable economic term for multiple decades. Switch has entered into two power purchase and sale agreements, providing more than 150 megawatts of additional solar capacity and a battery energy storage system agreement for 50 megawatts of capacity for a term of 20 years.I will now turn this call over to Gabe to discuss our financial results. Gabe?

[Gabe Nacht:]

Thanks, Thomas.Today, I'm going to review our financial results for the second quarter of 2019 and discuss our outlook for the remainder of 2019.In the second quarter of 2019, we achieved quarterly revenue of $111.6 million, an increase of $9.4 million or 9.2% compared to the second quarter of 2018. This is primarily attributable to a $9.6 million increase in colocation revenue. 57% of the year-over-year revenue growth in Q2 2019 resulted from new customers who initiated service during the past 12 months, while 43% of the revenue growth came from customers who have been with Switch longer than one year. More than 95% of our revenue in the quarter was recurring in nature, consisting primarily of colocation and telecom services, which include cross connect colocation revenue for the second quarter of 2019 was $90.7 million, compared to $81.2 million reported in Q2 2018, an increase of 12%.Telecom revenue for Q2 of 2019 was $19.5 million, compared to $18.9 million in the same period of 2018. Other revenue including professional services accounted for $1.4 million in Q2 2019, compared to $2.1 million for the same period in 2018.Switch has become a strategic partner to over 950 customers, and we added 34 new logos in Q2 of 2019.As of June 30, 2019, Switch had over 15,000 billing cabinet equivalents, generating over $2,300 per cabinet equivalent in monthly recurring revenue. We had more than 5,000 billing cross connects as of June 30th, and cross connects accounted for approximately 3.4% of total revenue in Q2 2019.During Q2, we signed nearly 600 contracts, comprising more than 10 megawatts with total contract value of $81 million and annualized revenue of $24 million at full deployment, inclusive of both renewals, and sales of incremental services.Bookings from new customers in Q2 of 2019 were $13 million in total contract value with over $4 million in annualized revenue. We also signed over $9 million of incremental revenue from existing customers, yielding more than $13 million of total incremental annualized revenue signed during the second quarter.As of June 30, 2019, our booked not billed backlog currently stands at over $26 million in aggregate annualized revenue, including contractual ramps and contracts yet to commence billing. We had several large customer contracts commence during Q2, totaling approximately $24 million of annualized recurring revenue. This is reflected both in our sequential quarterly revenue increase and also the decline in backlog from the prior quarter, partially offset by our incremental bookings during Q2. We expect approximately $5 million of revenue contribution from backlog during the second half of 2019, with the remainder contributing in 2020 and beyond.Revenue reductions from customer churn remained low in Q2 2019 at 0.2% compared to 0.1% in Q1. As a reminder, we define churn as the reduction in recurring revenue attributable to customer terminations or nonrenewal of expired contracts divided by revenue at the beginning of the period.The metrics discussed on today's call are in our investor presentation, posted on the Investor Relations section of our website.Cost of revenue increased by $2.7 million in Q2 of 2019 compared to the year-ago quarter, primarily due to a $4 million increase in depreciation and amortization expense, as a result of additional property and equipment being placed into service, offset by declines in labor, facilities and connectivity costs.Excluding depreciation, amortization and equity-based compensation expenses, our Q2 2019 adjusted gross profit increased 14% year-over-year to $83.2 million. A reconciliation of gross profit to adjusted gross profit is provided in the appendix section of our investor presentation.SG&A expenses in Q2 of 2019 were $33 million, compared to $31.1 million in Q2 of 2018, an increase of 6%. The increase in SG&A was primarily attributable to higher professional fees and headcount growth.Income from operations in Q2 of 2019 increased 30% to $20.7 million compared to $15.8 million in Q2 of 2018. The growth in operating income was primarily attributable to a $6.7 million increase in gross profit, offset by a $1.9 million increase in SG&A cost.Interest expense increased by $1.2 million to $7.3 million in Q2 2019, primarily driven by an increase in LIBOR rates, compared to the same quarter last year. As a reminder, during Q1, we entered into interest rate swaps, which effectively fixed $400 million of floating rate debt to a fixed rate of 4.73% through June of 2024.Net income for Q2 of 2019 was $4.6 million, compared to net income of $9.5 million in Q2 of 2018. Net income in the second quarter of 2019 includes the impact of an $8.8 million recorded loss on interest rate swaps.Adjusted EBITDA totaled $58.5 million for Q2 of 2019, compared to $50.3 million in Q2 of 2018, reflecting year-over-year growth of 16%. Our adjusted EBITDA margin for Q2 of 2019 was 52.4% compared to 49.2% in Q2 of 2018, an increase of 320 basis points.Capital expenditures in the second quarter of 2019 were $54.2 million, compared to $99.4 million in the same quarter of 2018, down 45%, primarily due to lower spending in The Core Campus and The Citadel Campus, partially offset by increased investment in The Keep Campus.Maintenance capital expenditures were $1.5 million for the second quarter of 2019 or 1.3% of revenue compared to $1 million and 1% of revenue in the same quarter last year. This increase was primarily due to power infrastructure upgrades and additional core network equipment purchased at our LAS VEGAS 7 and LAS VEGAS 9 facilities.Growth CapEx was $52.7 million for the second quarter of 2019 compared to $98.3 million in the same period last year. During the second quarter of 2019, Switch spent $16.5 million in The Core Campus to open LAS VEGAS 11 Sectors 1 and 2, both of which were placed into service in April.As of June 30, 2019, LAS VEGAS 11 Sector 1 was 97% committed based on executed contracts and Sector 2 customer installs are expected to ramp over the second half of 2019. As such, we’ve begun work on Sector 3 of LAS VEGAS 11, which is expected to open in late 2019 or early 2020.Switch also invested $23.7 million for continuing construction of The Keep Campus in Atlanta where the first building remains on track to open towards the end of Q4 2019. Switch spent $9.5 million in The Citadel Campus for construction costs related to the next sector build out, which will be open for clients in Q4 of 2019. Finally, Switch invested $4.4 million for additional expansion in The Pyramid Campus.As of June 30, 2019, the four Switch PRIMES had capacity for 21,000 cabinet equivalents within our open sectors, of which 89% were committed under contracts. The Q2 2019 utilization rates of these PRIMES, based on committed cabinets and currently available colocation space were approximately 93%, 66% and 91% at The Core Campus, The Citadel Campus and The Pyramid Campus respectively.At full build out, our existing facilities comprise an aggregate of nearly 4.4 million gross square feet of space, up to 455 megawatts of power and nearly 25,000 cabinet equivalents.Looking now at the balance sheet. As of June 30, 2019, the Company's total debt outstanding net of cash and cash equivalents was $543.3 million, resulting in the net debt to last quarter annualized adjusted EBITDA ratio of 2.3 times, compared to 2.4 times in the prior quarter.As of June 30, 2019, Switch had liquidity of $560.2 million, including cash and cash equivalents and availability under its revolving line of credit. We believe this is sufficient to fund our growth plans for the foreseeable future.As disclosed in our 8-K, on July 5th, Switch, Inc. issued 6.3 million shares of Class A common stock to members of Switch Limited and concurrently cancelled an equivalent number of shares of class B common stock in connection with the exercise of member redemption rights. In addition to the exchanges that occurred, we spent $11.1 million to repurchase 834,000 common units of Switch Limited at $13.32 per common unit. Subsequent to this transaction, we had approximately $65 million remaining on our repurchase program.Now turning to guidance. As a result of the year-to-date outperformance relative to our initial forecast regarding bookings, the timing of contract commencements and margins, we are increasing our 2019 guidance as follows We expect 2019 revenue in the range of $442 million to $448 million from a prior range of $436 million to $445 million. We expect 2019 adjusted EBITDA in the range [Technical Difficulty] from a prior range of $217 million to $223 million. And capital expenditure guidance remains unchanged in the range of $210 million to $260 million.Now, I will turn it back to Thomas for some closing remarks.

[Thomas Morton:]

In conclusion, we firmly believe that Switch is well aligned with industry dynamics and favorably positioned to accelerate enterprise migration into a hybrid cloud environment. We continue to execute on our pipeline of large enterprise retail colocation opportunities, which remain robust. We look forward to announcing these transactions in due course. We would once again like to take this opportunity on behalf of our management team to thank our employees, our customers, our partners, and our shareholders for their continued support of Switch.We would now like to open the line for questions.

[Operator:]

Thank you. [Operator instructions] The first question will come from Michael Rollins with Citi. Please go ahead with your question.

[Michael Rollins:]

Hi. Thanks and good afternoon. Can you discuss where you're seeing the mix of bookings in terms of your different campuses? And, as you look at the pipeline, how you see that evolving?

[Gabe Nacht:]

We're seeing bookings across all three campus locations that are currently open. Obviously, Las Vegas has been the major driver because you have an embedded base of 800 plus customers here, and they will continue to grow and expand with us. We're very happy with the way we Reno is filling, and we're really happy with way Michigan is filling. So, we're seeing bookings across all three, and I would expect that to continue. Atlanta opens up at the end of this year. And we're quite happy with the discussions that we're having for the Atlanta market right now and we will announce a transaction as soon as we're able, but we are quite confident in bookings there as well.

[Michael Rollins:]

And could you also give us an update in terms of where the bookings are coming from with respect to your direct sales force and indirect channels?

[Thomas Morton:]

So, this is Thomas. Great question. Most of our sales -- the sales really come from three areas. They come, about 70% from existing customers that desire to expand and grow, they land and expand with us. The remaining 30%, 35% come from direct sales force -- and mixture of direct sales force and of channel, mostly it is direct sales force. We are expanding our channel offerings, but currently they are a smaller portion than our direct sales in terms of incremental sales volume.

[Gabe Nacht:]

And additionally, the channel partners tend to work with smaller companies. And so, those bookings tend to be a bit more bite sized, rather than the larger transactions, the direct sales forces is working on.

[Thomas Morton:]

Gabe is absolutely correct. So, in terms of volume of transactions versus volume of impact, I mean, we have a robust channel and it does really well. But, they tend to be the 1 to 5, and occasionally 10 cabinet increments. Most of the sales in the channel are back side and in the larger bookings come from our direct sales force.

[Operator:]

Thank you for the question. The next question will come from Richard Choe with JP Morgan. Please go ahead with your question.

[Richard Choe:]

Great, thank you. In terms of your bookings and the customer wins this quarter, kind of wanted to get a sense of how we should think about the smaller scale wins versus the longer term wins, and kind of maybe an overall level? I mean, it sounds driving a lot from call it mid-teens to $30 million in terms of annualized MRC? Should we expect a kind of call it $10 million to $15 million in terms of the smaller deals, and then the larger deals that are longer term, kind of bouncing up to the higher end? How do you think about managing the difference between the two? Thank you.

[Thomas Morton:]

Yes. So, our average -- our average contract term is four years. And that's been playing out for a very long period of with our Company. And that's way -- that has continued and we expect it will continue to do. We've had -- added about 34 new logos. There are few customers that move that needle significantly, and then there's a smattering of smaller customers that move the needle, but not as much. And in addition to that, there's, as we just talked about, the internal sales, which tend to be numerous in that part of what you get to your 600 contracts, but they are not large dollar volume in themselves. But as customers continue to buy another cabinet, another -- with another -- grow more power, that is an indication that they're going to stay and continue to build out and make their infrastructure with us more robust. And that's what leads to the churn that is below 1% with us on a traditional basis.

[Gabe Nacht:]

Yes. Richard, this is Gabe. As far as our bookings, they do bounce around a bit because you don't always know when a larger contract is going to drop. In the first quarter, we had a number of large contracts drop this quarter. We're very happy with what we did, particularly with the incremental MRC that we’re seeing from those bookings. But they are going to bounce around a bit. And as far as the size of the bookings, if you -- as we talk about, we have 950 customers, our top 10 are about 36% of our revenue. So, that means we've got 940 customers to make up the rest. So, we are a retail colocation shop, seeing larger contracts in the pipeline, we're closing larger contracts, but we still have our normal run rate business of the smaller deals that feed growth. Very happy with that. Thanks.

[Operator:]

Thank you for the question. The next question will come from Frank Louthan with Raymond James. Please go ahead with your question.

[Frank Louthan:]

Great. Thank you. How much capacity will you be able to get in the 80 acres in Las Vegas? Is that contiguous? And then, what is it -- what will it take to see a little bit more space taken up in Michigan? And Reno dipped a little bit. What how should we think about that for the rest of the year?

[Thomas Morton:]

The answer is that the majority of the 80 acres is all contiguous, and it's part of the deck. There is 27 acres that is right across the street. So, there's just a street dividing the two acreage pieces. And so, the number of actual sectors that we’ll be able to get on there is dependent a little bit on how we end up designing the buildings, and where we decide to put substations and switching stations and parking lots and things like that. So, there is some opportunity to flex a little bit on that space and how we want to build it out. But we are planning on building our first building out there, as we start commencing in the beginning -- the end of this year, beginning of next year, and we look forward to having that facility available within about 18 months after that.In the interim, we have, as Gabe announced during the primary call, that we have about 5,000 to 6,000 cabinets still available in our inventory. And so, we have plenty of inventory to grow into during that period. And then, we -- as to GRR, we have -- we are really quite pleased with the uptake in that facility, and the welcomeness of the environment there has been more than we even anticipated. That data centers is still very well. We have, as Gabe mentioned, very good and robust discussions going on in Atlanta. And as soon as we're able to make an announcement there, we will. But we anticipate good things to becoming an Atlanta when that facility comes on line at the very end of this year.

[Gabe Nacht:]

If you’ve been to our corporate offices, not the data center, but where Thomas and I sit, if you recall, there's a big patch of land right next to the building where we sit, that's the land that Thomas is talking about. So, while we're still doing all of the design and permitting for that additional acreage, which will ultimately lead to the final square footage, it'll be well over 1 million square feet of data center space.

[Operator:]

Thank you for the question. The next question will come from Erik Rasmussen with Stifel. Please go ahead.

[Erik Rasmussen:]

Yes. Thanks for taking the questions, and great execution. I just wanted to go back to your guidance. Obviously, you are raising the midpoints and raising the overall guidance. But if we’d look at where we are for the first half of the year and then kind of factor in sort of a run rate for Q3 and Q4, and then take into account your backlog conversion, are we really tracking towards the high end of your guidance here?

[Gabe Nacht:]

We're happy with the guidance that we’re setting forth. We're comfortable with the range. We've not only raised the range, but we've tightened it as we get further into the year. So, whether we're tracking towards the bitter towards the high end, we'll let the year play out. But, we're comfortable with the guidance that we're setting for.

[Thomas Morton:]

Erik, we appreciate your ambition, and we hope to beat it.

[Erik Rasmussen:]

Good. Well, so do I. And then, maybe just on [Technical Difficulty] this earnings season, we heard a lot about the enterprise vertical. Based on your discussions with customers, is there a fundamental shift that's happening that would suggest that things are maybe accelerating there?

[Thomas Morton:]

Yes, absolutely. If we -- we’ve talked about the fact that we have learned how to work with and provide concierge services to some of these enterprises as they migrate out of their legacy data centers and into a colocation environment. As customers start to do that, with us, they tell other customers or prospective customers that they were successful in doing that with Switch, and word gets around, we also get better at it, we learn how to work in the concierge service for those customers. And we learn what their issues are and how that we can best address them and become a better and better partner for them as they make these transitions.So, yes, we are seeing an acceleration in that curve. And we're also learning that as those customers come in and do an initial deployment, they tend to continue to do larger and larger deployments with us, which can be multi-megawatt, witnessed the expansion we had from Box earlier this year that goes to that very point.

[Gabe Nacht:]

And with regard to the enterprise deals, we're definitely seeing more activity. We've talked about that in past quarters. We did talk about the fact that those are more complex and they have longer sales cycles. But we're quite happy with the deals that we're signing. In fact, as far as the new contracts that we signed this quarter, the defense contractors that we talked about, that's a Fortune 100 company, an enterprise deal, it's a new customer for us. They've got a lot of runway for growth in the future, signed another transaction with a new bank, financial institution, and again, has a lot of runway for growth. So, we're very happy with the transactions that we're closing, including an enterprise grocery chain. We're definitely seeing activity.

[Operator:]

Thank you for your question. The next question will come from Sami Badri with Credit Suisse. Please go ahead.

[Sami Badri:]

Hi. Thank you. So, my first question has to do with the major cloud deal that you signed in the quarter. And I just want to get more color here, and what this cloud provider is trying to do in their deployment. Are they trying to build out a core node, almost like a backbone to their broader network, or was the motivation behind the deployment with Switch predominantly an on-ramp to connect enterprises together using the interconnection or physical cross connects, or it could be both? But maybe you could just tell us a little bit about this.

[Thomas Morton:]

Sami, thank you very much. We're under a very tight NDA with respect to this customer. So, forgive me if I can't give you too much illumination. But, we did give you the total value of that contract. So, that would give you some idea of whether or not it is just an on-ramp facility or is something more substantial than that. There will be announcements coming forth when they are ready to make those announcements. But, as of right now, they have asked us to make our required disclosures and say no more. And we really want to respect that new relationship we have with them.

[Sami Badri:]

Got it. Thank you. So, it sounds like it's one of the more aggressive cloud providers now. Do you see similar or other cloud providers follow suit to do something very similar that these guys are doing? So, could we be expecting maybe two or three more of these big major deals to be announced over the next 18 months, at least when these big build-outs are taking place?

[Thomas Morton:]

Well, let me answer -- there's two implied questions there, let me answer both of them. The first is that yes, we are having discussions with the other major cloud providers and we are in active discussions with several of them. When they close, whether they close and what scale they close, that is not yet determined, and unknown. And I'll know when they sign what they're going to do. But, we already have secured one, and one tends to get more, and we are working on the more part.

[Gabe Nacht:]

And just to add a little bit more to that. When this really does go back to everything that Rob's been talking about since pre IPO about the hybrid cloud environment, about Switch having the right resiliency, the right design, the right power, every -- and the customers, customer density to really attract a hybrid cloud environment, either next to us, in the case of some of the clouds that have purchased land and are building next to us or clouds being on our campus in order to get access to our clients. But, we have on-ramps with all the clouds, as you already know. I think, you can see by the size of this transaction, this is more than an on-ramp. This is a presence within our facilities. There's some unique things that Switch does that attracted this particular customer. But, as Thomas said, we're under a pretty tight NDA there.

[Sami Badri:]

Got it. And then, I have one last question. So, this is more of a long-term of sources of finance kind of question. And you're currently at 2.3 times net-debt-to-EBITDA. But, if we think about your story, and then the way you manage your Company, maybe one or two years now, are you projecting that you're going to be getting closer to the 4 times net-debt-to-EBITDA range? Is that a comfortable area for you to run the business, or is the comfortable level here at 2.5 times?

[Gabe Nacht:]

Yes. I think, there's a difference between comfort and where we see the business. We're certainly comfortable at 4 or even 4.5 times leverage because we have such a repeatable revenue and EBITDA base. So, it's a leverageable model as others in the industry obviously do. We just haven't needed it. Because of the way we build, we build modularly, we build just in time. You've seen in the last two years with a higher level of CapEx, deployment, because we were building out our new campus locations in Reno and in Michigan, those are now fully functional and we're into our normal just-in-time growth in each of those campus locations as we are here in Las Vegas. The only new build that's going on is Atlanta, as far as a new campus build. And then once that opens by 2020, will be into our just-in-time growth CapEx across all 4 campus locations. So, are we comfortable? Yes. Do we need it? No. We've been leveraged at no more than 3 times leverage in the history -- in the 18-year history of the Company because we simply haven't needed it, with the one exception of pre-IPO where we did a special distribution pre-IPO and leveraged up and then delivered right after the IPO.

[Sami Badri:]

Go it. And then, I just have one last question, has to do with your scaling of your sales force. So, first half of the year, sales and marketing definitely ticked up. Should we expect this to tick up or remain at this elevated level for the back half of the year as well, as you guys continue to scale your sales force?

[Thomas Morton:]

I don't know if it's an elevated level, but it would -- we would expect to continue with the current run rate. We have been fortunate in having one campus to not have to spend very much on sales and marketing. And now, we need to proportionally ramp our sales and marketing expenses to accommodate the fact that we have 4 campuses. And so, we will be continuing that as the new norm. And we will be working on continuing to build out and support our sales force, so that they can be very successful in the years to come.

[Operator:]

Thank you for the question. The next question will come from Ari Klein with BMO Capital Markets. Please go ahead with your question.

[Ari Klein:]

Thanks. Maybe just following up on that last question. You've announced some senior sales hires in this quarter, which follows the hires from last quarter. Can you maybe talk a little bit about some of the changes that you are implementing with those hires, or is this just more about building out the kind of the quota-bearing headcount?

[Thomas Morton:]

It is both. It is building up the quota-bearing headcount and the thing that we don't announce is that there are administrative staff and others that we are hiring that come along with that, because in order to make the sales people successful, you need to have an infrastructure underneath them. That helps them succeed, grow and run at the pace that they need to run at, to make their quotas and make their KPIs. So, we will continue to expand that sales force. And we will also continue to expand the infrastructure below them to make sure that they are well-supported and make investments in the growth of that community, so that that will in turn grow our top line and our EBITDA margin.

[Ari Klein:]

Okay. And then, it looks like there's an $8 million nonrecurring component to the cloud deal. Can you talk about what that is specifically, and maybe the timing of that impact? Will it hit the model at once? Any color you could provide there?

[Gabe Nacht:]

Yes. That's a connectivity component related to a fiber transaction, tied that customer to our facilities in addition to what they're putting in our facility.

[Ari Klein:]

Okay. And will that hit at once, or that's going to come in over the length of the contract?

[Gabe Nacht:]

Yes. That will get amortized over the length of the contract.

[Thomas Morton:]

Yes. It's an IRU, indefeasible right to use, that will fade in over time -- income is amortized over the length of the contract.

[Operator:]

Thank you for the question. [Operator Instructions] The next question will come from Nate Crossett with Berenberg. Please go ahead with your question.

[Nate Crossett:]

Thanks. Yes. I just wanted to touch on Atlanta. I think, you mentioned you would announce something when you can. But, I just wanted to be clear. Has there been any pre releasing yet? And then, on just the indication so far, are they mostly current Switch customers or are they new people you're going after?

[Thomas Morton:]

So we are in -- thank you, Nate, good to hear your voice. We are in discussion with a variety of customers, some of which are incremental and new, and some of which are existing customers that decided to have an East Coast and a West Coast deployment with Switch. In fact, we have a team out in Atlanta today that is meeting with two prospective new customers who would do significant deployments at the facility. So, the sales volume and the sales interest has been robust. And we look forward to doing announcements in the near term. But, it will be a mix of new blood or new customers and existing logo that desire to have an East and the West Coast presence with us.

[Nate Crossett:]

Okay. That's helpful. And then, maybe just one on the flow, it continues to go up? Is there any kind of guidance you can give us or your thoughts on where that shakes out by the end of the year and into next year?

[Gabe Nacht:]

There really isn't a lot of guidance that we can do on that because it really is dependent on what our limited partners in the partnership do as far as exchange. We do announce the exchanges that we make on a quarterly basis and we announced how many were exchanged in this last period and next exchange date is in October. And we are just getting those numbers now. So, there's nothing that we can announce, we will as soon as in the next quarters call. But it really is entirely dependent on what partners decide to exchange.

[Operator:]

Thank you. [Operator Instructions] The next question will come from James Breen with William Blair. Please go ahead.

[James Breen:]

Thanks for taking question. Just a couple, one, just on the margins, saw good uptick year-over-year both the gross and EBITDA margin side. Could you just give us some color around what's happening there? And are the margin levels we’re at now sort of the ones that you'll be at as a room for expansion or one way or the other? And then, secondly, you added 34 new logos on a base of just over 900. That's a pretty good percentage gain for single quarter. Just wondering, if there is something specific that led to that, and kind of what you're hearing from your sales force as to why those new customers are coming on line?

[Gabe Nacht:]

So, a couple of things. On the margins, we are managing our expenses quite carefully and seeing that developing into expanded EBITDA margins and gross margins. As far as that continuing, I think you can see from the guidance that we put forth, we are not expecting the same level of EBITDA margin in Qs 3 and 4, as we experienced in Q2, and that's for a couple of reasons. Q3 typically is a quarter where our energy costs increase, even though most of our energy is tied in with three-year contracts, there is a portion of energy that does float, because usage does float. And in Q3, we do see higher energy costs because of the summer quarter. And we've also, as we announced earlier, we locked in a bunch of land next to our facilities, and a portion of that is under a land lease. And we'll see those lease payments begin to hit the in July. So, those will impact margins a bit. But nevertheless, we're still comfortable with the forecast for our overall margins for the year. And it's relatively in line with our long-term forecast of 51% EBITDA margins.

[Thomas Morton:]

Yes. James, this is Thomas. One of the things I like about this is that we are exceeding our expectations in terms of top line revenue, and at the same time, we are increasing our EBITDA margins, which is indicative that we're not buying business. We're able to maintain our margins, scale at an accelerated rate while maintaining and even shrinking our expense ratio.

[James Breen:]

And just on the customer side?

[Gabe Nacht:]

And as far as the second part of your question about the logos, they're really -- I'm not sure what to read into that other than if you look at our past quarterly releases, we’re between 20 and 40 new logos typically in a quarter. This happened to be a quarter with a significant number of new logos. A few of those were larger transactions. The majority were part of our other 940 customers that we talk about that make up the run rate of the business. We love seeing those guys come in because they typically expand with us over time and we know that our churn is low, so they typically don't leave. I don't think there's anything to read into that number this quarter.

[Operator:]

[Operator instructions] We currently have no further questions in the queue.

[Gabe Nacht:]

Wonderful, guys. Thank you all for your time this afternoon. And we look forward to speaking with you soon. Thank you.

[Thomas Morton:]

Thank you, everybody. We appreciate your support of Switch and we look forward to giving our next quarterly report. In the meantime, we look forward to talking to the various analysts and others, and seeing you at the next investor conference.

[Operator:]

Thank you. Ladies and gentlemen, this concludes today's event. You may now disconnect your lines.