Switch, Inc.
Q1 2018 Earnings Call Transcript

Published: 15 May 2018

[Operator:]

Good day, ladies and gentlemen, and welcome to today's Switch First Quarter 2018 Earnings Call. As a reminder, today's conference is being recorded. And at this time, I'd like to turn the floor over to Irmina Blaszczyk. Please go ahead.

[Irmina Blaszczyk:]

Thank you. Good afternoon and welcome to Switch's first quarter 2018 conference call. Joining me today are Thomas Morton, Switch's President; and Gabe Nacht, Switch's Chief Financial Officer. Before we start, I would like to remind everyone that certain statements made on this call may include forward-looking statements. Any statement that refers to expectations, projections, or other characterization of future events, including financial projections or future market conditions, is a forward-looking statement. Actual results may differ materially from those expressed in these forward-looking statements, and we make no obligation to update our disclosures. These statements are based on currently available information, and they are subject to a number of significant risks and uncertainties that could cause our actual results to differ materially from those projected in the forward-looking statements. We describe some of these risks in our SEC filings, specifically our Form 10-K, particularly in the section entitled Risk Factors. Statements today include non-GAAP financial measures. These measures should not be considered in isolation from, or as a substitute for financial information prepared in accordance with GAAP. For information regarding these non-GAAP financial measures from the most directly comparable GAAP measures, and a reconciliation of these measures, please refer to today's press release regarding our first quarter 2018 results. This press release has been furnished to the SEC as part of Form 8-K and is available on our investor website at investors.switch.com. Let me now turn the call over to Thomas Morton, Switch's President. Thomas?

[Thomas Morton:]

Thank you, Irmina, and good afternoon, everyone. Thank you for joining us today. These are exciting times for Switch, with strong momentum and the largest multi-megawatt pipeline we have ever had as a Company. I will start today with a summary of our operating results in the first quarter of 2018, followed by a review of our recent business developments. I will then turn the call over to Gabe Nacht, our CFO, for a discussion of our Q1 financial metrics and an updated outlook for 2018. After going public in October of 2017, the 2018 business vision for Switch has been focused on strategic enterprise deals to enhance the capabilities of the PRIME data centers and thereby create a more valuable technology infrastructure ecosystem to sustainably grow our Company for the future. We are enthusiastic to report that Switch currently has more multi-megawatt deals in its sales pipeline than in any other time in our Company's history. We expect that over the next 12 months, several of these relationships will come to fruition, and Switch will continue on its path of being a differentiated technology data center infrastructure company. Due to large and power-dense nature of these deals and a substantial logistical undertaking for the customers and migrating their environments to our data center ecosystem, it can take nine to 12 months to close one of these transactions. For the last seven years, we have experienced organic growth averaging approximately 20% annually, which is among the highest organic annual growth rates in the industry. Due to the scale and complexity of these deployments, this growth is not linear. It also does not adhere to particular calendaring preferences. This incremental growth aspect of our business is not unique to our Company. However, it can be more pronounced at Switch due to the size and nature of our enterprise customer deployments. Switch will continue to add many meaningful deployments to our PRIME campuses, creating what we believe to be an unrivaled technology infrastructure platform for decades to come. Switch builds and operates our multi-user hyperscale company very differently than any other technology ecosystem in the world in fulfillment of our plans to provide stable, excellent returns for decades to come. For the first quarter of 2018, we've reported a revenue of $97.7 million, which represents a 10% year-over-year organic growth. Adjusted EBITDA was $46.9 million in the first quarter of 2018, compared to adjusted EBITDA of $47.1 million for the same quarter in 2017. Our first quarter results were somewhat impacted by several clients taking additional time to close while they consider their long-term deployments of newly engineered designs. We have closed significant deals. And as I mentioned, we expect to close additional multi-megawatt transactions this year. Our long-term sales funnel remains the strongest we have ever seen, and our long-term outlook and expansion strategy are unaffected. After 17 years of consistent and organic revenue growth, Switch is one of the leading technology ecosystems in the world. Our dedication to innovation and sustainability and our reputation contribute to 100% organic growth and the industry's lowest average annual customer churn rate of just 0.9% over the last three years. For example, we recently announced a 15-megawatt colocation deal with International Streaming Media Corporation, which plans to use The Citadel Campus as a worldwide distribution hub, leveraging Switch CONNECT, the world's only hyperscale telecom auditing and purchasing cooperative and leveraging the Switch CORE Interexchange for access to international cable landing stations. At our Core Campus in Las Vegas, we added several new clients, including a high-security government project. In our Pyramid Campus in Michigan, we added Consumers Energy Corporation, a global consumer goods manufacturer and a major credit card processor, selling out 90% of the currently available space in our Pyramid Campus. We are now in the process of preparing new sectors at the Pyramid to accommodate additional demand. We also continue to innovate and strengthen our intellectual property portfolio. Thus far in 2018, we have been awarded three additional patents. One, providing additional protections for Switch's data center hot aisle and cold aisle segregation and cooling designs, one pertaining to organizing cabinet power and communications wiring and the third regarding the infrastructure matrix supporting the hot and cold air containment systems. We have also filed four patents related to, one, drone technology; two, UPS battery arrays; three, external HVAC technology; and four, our heat containment chimney pod deployments. To date, we stand at over 500 issued and pending patent claims. In addition, we signed a patent license with Munters Corporation for Switch's cooling technology pertaining to our TSC air conditioning systems. Munters is one of the largest and most established HVAC manufacturers in the world. This license agreement acknowledges the uniqueness and industry-leading nature of our patented exterior wall-penetrating HVAC units. With respect to Switch CORE, the connectivity side of our business, we advanced our capabilities to host hyperscale clouds with enhanced availability of AWS Direct Connect, Microsoft Express Route and Google Cloud Interconnect, initiatives that offer customers access to their deployments using direct notes, inside Switch or career partners located within the Switch ecosystem. We also deploy carrier expansions at each of our PRIME campuses, including executing an agreement with packet fabric to provide secure cloud connectivity and transport services of 100 gigabits and behind. Lastly, we concluded several transport and Internet deals. This includes transactions with a major consumer goods provider, a multinational minerals mining company, an Internet security company, two content distribution company’s, two leading healthcare company’s and Fortune 100 software company. Historically, once companies enter our ecosystem, they expand and grow with us over many years, and we look forward to these new participants following that same pattern. As we continue to innovate, we continue to evolve. We are pleased with our progress in growing our ecosystem and positioning Switch as a partner of choice for global enterprises. Our highly differentiated and strategically located campus ecosystems continue to attract primary deployment for enterprise customers while our unmatched telecom capabilities enable hybrid cloud environments and hyperscale cloud deployments. We are excited about our growth prospects as we continue to execute on our market expansion strategy. Let me now turn the call over to Gabe, to discuss our financial results in more details. Gabe?

[Gabriel Nacht:]

Thanks, Thomas. Today I’m going to review our financial results for the first quarter of 2018. I will then provide our updated outlook for 2018. In the first quarter of 2018, we achieved quarterly revenue of $97.7 million, an increase of $8.6 million from the first quarter of 2017. This represents 10% year-over-year organic growth, primarily attributable to a $5.7 million increase in colocation revenue and a $2.4 million increase in connectivity revenue. 41% of the revenue increase in the quarter resulted from new customers initiating service during the past year, while 59% of the revenue growth came from customers who have been with Switch longer than one-year. In the first quarter of 2018, we derived more than 97% of our revenue from recurring revenue streams consisting primarily of colocation, which includes the licensing of cabinet space and power and connectivity services, which includes cross-connects, broadband services and external connectivity. The increase in revenue in Q1 2018 was primarily related to increased volume rather than an increase in the prices we charge our customers. Colocation revenue for the first quarter of 2018 was $77.7 million, an increase of 8% over the $72 million reported in Q1 2017. Connectivity revenue for Q1 of 2018 was $18.2 million, an increase of 15% over the $15.9 million in the same period in 2017, primarily due to an increase in the revenue from our CORE Telecom purchasing cooperative and an increase in cross-connect revenue, which grew 24% over the same period in 2017. Other revenue, including professional services, accounted for $1.8 million in Q1 of 2018, up from $1.3 million in the same period in 2017. The Switch CORE purchasing cooperative continues to drive connectivity revenue growth, and its powerful network effects create value for customers and drive customer loyalty as has been reflected in our churn rates, which remain among the lowest in the industry. Switch's average annual churn rate for the three years ended 2017 was just 0.9% and was only 0.6% in 2017. Our churn rate for the first quarter of 2018 was just 0.1%. Gross profit in the first quarter was $42.9 million, a 2% decrease from $33.8 million in the same quarter of 2017, mainly due to a $9.5 million increase in the cost of revenue in the quarter, driven by a $4.5 million increase in depreciation and amortization cost related to additional assets placed into service in 2017 at The Core Campus and The Citadel Campus. Additionally, while power consumption increased 20% in Q1 of 2018, compared to Q1 2017, power costs increased only 16% as Switch continues to benefit from becoming an unbundled purchaser of energy. Direct labor increased $1.8 million in Q1 of 2018 compared to the same period in the prior year due to additional hiring throughout the past year to support the opening of additional colocation space placed into service and to support additional customer deployments. As a result, our gross profit margin declined to 44% in the first quarter of 2018 from 49% in the first quarter of 2017. SG&A expense in the first quarter of 2018 was $33.5 million compared to $19.3 million in the first quarter of 2017, an increase of 73% which was in large part attributable to a $9.7 million increase in the non-cash compensation expense during the period. A significant portion of which relates to the continued vesting of Common Unit awards to Switch Limited granted in connection with Switch's initial public offering. The Company also experienced a $2.3 million increase in professional fees in Q1 2018 compared to Q1 2017, including additional audit fees, legal fees and tax fees, all of which are associated with becoming a publicly traded company. Indirect labor increased by $1.8 million in Q1 of 2018 compared to the same period in the prior year due to additional hires related to preparing for and becoming a public company. Income from operations in the first quarter of 2018 declined to $9.4 million compared to $24.4 million in the first quarter of 2017 due in part to $12.4 million in equity-based compensation expense and the other expenses already discussed. Interest expense increased by $2.3 million to $6.3 million in the first quarter of 2018, primarily driven by an increase in our outstanding long-term debt from $539.7 million in the first quarter of 2017 to $590.5 million in the first quarter of 2018. Net income for the first quarter of 2018 was $4 million compared to $20.3 million in the first quarter of 2017. Adjusted EBITDA totaled $46.9 million for the first quarter of 2018 compared to adjusted EBITDA of $47.1 million in the first quarter of 2017. Adjusted EBITDA margin for the first quarter of 2018 was 48% compared to 52.8% for the same quarter in 2017. Capital expenditures for the first quarter of 2018 were $61.4 million compared to $107 million in the same quarter of 2017, a decrease of 43%. As mentioned in our year-end 2017 earnings call, Switch accelerated approximately $15 million of CapEx into 2017 to take advantage of vendor discounts being offered. During the first quarter of 2018, Switch spent $19.5 million in The Core Campus to expand power and cooling in Las Vegas 10 and for the continued site work and building of the shell on its Las Vegas 11 facility, which is planned to open in late 2018 or early 2019, adding another 340,000 gross square feet. Switch also invested $36 million in The Citadel Campus to support additional power and cooling for continued sector expansion. And Switch spent $4.3 million for additional expansion in The Pyramid Campus. Finally, Switch spent $1.6 million on site development at The Keep Campus, which is scheduled to open in 2019. Maintenance capital expenditure was $0.9 million for the first quarter of 2018, compared to $1 million in the same period last year. Growth capital expenditure was $60.5 million for the first quarter of 2018, compared to $106 million in the same period last year. Our existing facilities at our PRIME campus locations currently encompass an aggregate of 4 million gross square feet of space and up to 415 megawatts of power. At the end of the first quarter of 2018, the utilization rates of these PRIMEs based on currently available colocation space were approximately 91%, 48% and 77% at The Core Campus, The Citadel Campus and The Pyramid Campus respectively versus 91%, 52% and 50% in the prior quarter. The utilization rate at The Citadel Campus declined from the prior quarter as a result of continued sector expansion in anticipation of customer requirements. Looking now at the balance sheet. As of March 31, 2018, the Company's total debt outstanding, net of cash and cash equivalents was $374 million, resulting in a net debt to last quarter annualized adjusted EBITDA ratio of 2.0 times. At the end of the first quarter of 2018, Switch had liquidity of $739 million including cash and cash equivalents and $500 million of availability under our revolving line of credit. We believe this is sufficient to fund our growth plans for the foreseeable future without the need to go back to the capital markets and further dilute investors. Now turning to guidance. For 2018, we are maintaining our annual guidance. As Thomas mentioned, we signed a series of significant transactions in recent months, some of which we closed later than expected due to reengineering of the equipment specifications by the clients to use more advanced and higher-density equipment to take advantage of Switch's industry-leading power and cooling ecosystem. This had a corresponding effect on the timing of growth in Q1 2018. Some of the large deals, such as the 15-megawatt deal with an international streaming media corporation have deployment schedules and can take up to 24 months to fully ramp. We also have the largest pipeline of multi-megawatt transactions in our sales funnel that we have ever seen as a Company. Revenue is expected to be in the range of $423 million to $440 million. Recall, the guidance also includes a $9.4 million revenue impact related to a seven-year $280 million contract closed in 2016 with a strategic customer to reserve space at one of our facilities. Adjusted EBITDA is expected to be in the range of $216 million to $224 million. And capital expenditures are expected to be in the range of $260 million to $310 million. As a reminder, as an Up-C company, Switch will be reporting earnings per share numbers based on the shares at Switch, Inc., and the earnings attributable to Switch, Inc., based on its percentage ownership in Switch Limited. In summary, Switch offers its clients significant expansion capacity and material cost savings at the highest rated resiliency data centers in the world. We have a strong track record of consistent growth, and we are confident in our business model and expansion strategy over the next several years as we continue to attract global enterprises to our world-class facilities. Thank you. And let me now turn the call back to Thomas for some closing remarks.

[Thomas Morton:]

After 17 years of consistent organic growth at our Core Campus, Switch has begun to sell out the available sectors and ramp new customers at our Citadel PRIME and our Pyramid PRIME. Just as we have done in Vegas, we are creating our own Tier 1 markets in Tahoe Reno and in Grand Rapids, and we anticipate having the same success in Atlanta when The Key PRIME comes online in 2019. We have signed a series of large and impactful deals in recent months, and the funnel of large enterprise retail colocation opportunities remains the strongest we have ever seen. We look forward to announcing additional transactions in due course. I would, once again, like to take this opportunity on behalf of our management team to thank our employees, customers and our partners for their commitment and continued support of Switch. We would now like to open the line for questions.

[Operator:]

[Operator Instructions] And our first question will come from Frank Louthan with Raymond James.

[Frank Louthan:]

Great, thank you very much. Can you give us a little more color on the nature of the adjustment with the major customer there? And then just to be clear, with the impact of EBITDA from the public cost, is that sort of a run rate going forward or is that sort of a one-time in the quarter or does it start to relieve over the course of the year? Thank you.

[Gabriel Nacht:]

Hi, Frank. This is Gabe. As far as the impact of the customer in Q1 from a Q4 2017 comparison to Q1 2018, there was about a $3.3 million impact in this quarter related to that specific contract. And there will be about a $2.2 million impact in Q2 and then it drops down to about $1.8 million per quarter in the back half of the year. And with regard to the run rates on the SG&A on the professional fees, compared to 2017, obviously, we weren't contemplating our IPO with Q4 of 2017 and so these are additional costs that we are incurring as a public company. There's about $800,000 of that cost that is specifically a one-time audit-related fee item that will not be continuing into the future quarters of this year. That is a Q1 item only.

[Frank Louthan:]

Okay, great. Thank you very much.

[Operator:]

Next we have Tim Long from BMO Capital Markets.

[Timothy Long:]

Thank you. Two questions, if I could. If we could just talk a little bit about the 15-megawatt deal, I think Gabe you said, it's going to start – or Thomas said in July. And I think Gabe, you said sometimes these things take 24 months to ramp. But just give us a little bit of color on how aggressively you see this customer ramping once they start? And any color you can give us on pricing, would this be a discounted normal pricing just because the scale of it? And then maybe answer that one, and then I'll come back with a second.

[Thomas Morton:]

Fair enough, Tim. This is Thomas. And I’ll give you a quick response and Gabe can chime in with any financial items. The 15-megawatt deal ramps out at a megawatt in July and then a new megawatt every two months thereafter until they get to the full allotment of megawatts. It was not a deal that was heavily discounted. It is a retail colocation deal, not a wholesale white-box deal. It's a full service, full retail, fully priced deal.

[Gabriel Nacht:]

Obviously because of the size of that transaction, it's more aggressively priced than when we do a 10-cabinet transaction. But I just want to make sure that people understand. This is a powered shell wholesale deal. This is for a customer that wants everything that Switch provides, all of the resiliency, all of the technology, all of the efficiency, they want all of what Switch has and it's priced accordingly.

[Thomas Morton:]

It also involves a large amount of the telecommunication services as well, so they really took advantage of CORE and the opportunities that it offers.

[Timothy Long:]

Okay. Great. And then if I could just go back to the deals that I guess, were delayed a little bit. I just want understand, so the sequential decline would mean that – was the impact such that you would have expected to grow sequentially in the March quarter? And then could you just also talk a little bit about the risk to the next few quarters for other customers maybe having similar type of delays in there deployments?

[Thomas Morton:]

Sure. Yes, I think if these – if all of the transactions that we’ve now announced, as our Q2 closings had closed in Q1, we would have expected to see a sequential increase despite the $3.3 million adjustment, we would've expected a sequential increase. We know these deals have now closed, and we are very confident in our pipeline of large transactions, we can’t control the timing of those transactions exactly, but we still feel very good about our guidance and our ability to hit the numbers that we’ve set forth.

[Gabriel Nacht:]

Tim we have the largest pipeline of multi megawatt deals that we’ve ever had as a company and so with that reason that we feel that there was perhaps a slight delay and people implementing in the first quarter, but that’s just a timing issue. Unfortunately, these – or fortunately these deals are very complex. They’re very large and they take some time to move not just the colo, but they also have to move servers, move people and move infrastructure along with this transaction. So it takes them a little time to figure out all the logistics that they have to do, to do an implementation such as we have in our data centers. The flip side of that is that part of the reason that we have a churn of 0.1% is because once they land, they land and expand, they do not leave. So take a little longer perhaps to onboard, but there are also – there is a significant impediment to their departure as well.

[Timothy Long:]

Okay. Thank you very much guys.

[Thomas Morton:]

Thanks Tim.

[Operator:]

And next from JPMorgan we have Richard Choe.

[Richard Choe:]

Hi, I just want to follow-up a little bit, the $3.3 million impact was on a year-over-year basis and so the revenue pressure in the second quarter is going to less so by $1.1 million then in the first quarter?

[Gabriel Nacht:]

The $3.3 million impact Richard was sequential quarter-over-quarter, it was from Q4 to Q1. But there is – there will be an additionally reduced pressure into Q2, the impact again comparing to Q4 of 2017 which was the run rate revenue with the maximum reservation fee is $2.2 million impact versus $3.3 million impact.

[Thomas Morton:]

Yes. And Richard it’s important and I know you've heard this several times, but it’s important to understand that this was a planned deployment. This isn’t something that was unplanned or unknown. This is a seven-year contract with a strategic customer. And it was in order to accommodate their bifurcation from their other company, eBay and PayPal split, that we made this accommodation for them. And this is part of a planned seven-year deployment with them. And it was something that we have known and shared with everybody during the roadshow and then continue to discuss now.

[Richard Choe:]

And then to follow-up on the 15 megawatt deal, which I’m little surprise to hear that it isn’t wholesale deal, which is obviously positive, can you give us a little more color on what drove this kind of – I mean it’s a big deal, but at the same time you are getting good pricing, how should we think about it?

[Gabriel Nacht:]

I guess I’m not quite sure what you are asking and how you should think about it, hopefully, you're going to think about it very positively as we do. It’s an obviously large transaction and it’s priced appropriately for that size of a transaction, but I think the point that we are making is this isn’t cloud powered shell. This is a client that wants to use all of what Switch can offer to that client and we priced that with all of our technology and all of our availability, and resiliency built in.

[Richard Choe:]

I guess maybe the better clarification might be then on term like – is this a 10-year deal or…?

[Gabriel Nacht:]

No. I understood, it’s a five-year transaction. So it ramps in as I've stated and then it's stable for the full five. So it’s a five-year total term deal.

[Richard Choe:]

Great. Thank you.

[Operator:]

Next from Cowen and Company, we have Colby Synesael.

[Colby Synesael:]

Great. Thank you. Two questions if I may. I was wondering if you could just give us any color as it relates to guidance, how much of that is based on what's currently in your backlog and you, therefore, have visibility in terms of commencement, it's just a matter of getting to that point versus you still mean to get deals done in order to hit that guidance. And then secondly, as it relates to your lockup, I know the lockup tied to the IPO expired in April 3. But my understanding is that there's another aspect of the lockup tied to the Up-C structure and redemptions. And I was wondering if you could just give us some more color on that? Thank you.

[Thomas Morton:]

Sure. I’ll let Gabe talk to the backlog and then I’ll address the redemption question.

[Gabriel Nacht:]

Sure. Colby, thank you. With regard to our guidance, it does include the backlog that we've got built-in, but it also does require that we close some additional transactions. Our guidance on just backlog alone is not the way we work. We always do expect to close new transactions and to continue growing. As I said earlier, we feel good about our guidance where it sits, but I wouldn't say it's conservative. We feel it's achievable, but not conservative, and that's the way I would characterize the guidance, but it does require some new transactions coming in, we do have a good pipeline of new transactions.

[Colby Synesael:]

You didn’t mention Gabe – just one follow-up to that, Thomas. You mentioned, Gabe, earlier that you had some delays in the first quarter, but obviously, these since closed in the second quarter. But you obviously are maintaining your guidance. With all that said and recognizing as you said it's not necessarily conservative, should we at least be thinking low end of that range right now?

[Gabriel Nacht:]

I am not going to characterize where you should be thinking because, as Thomas described earlier, we have a very full sales funnels. And these sales funnels are needle-moving transactions, and any one of them can move the needle from one end to the other.

[Thomas Morton:]

Colby, let me give you one example, the content distribution company, the CDN that we recently signed for 15-megawatts. They took longer to sign, so we couldn't announce their signature until they sign, but they did not change their deployment time line. So they signed a little later, but they still decided to go and start their deployment at the beginning of July. So what that meant is that we had to have megawatts available faster, which we are able to accommodate due to the size and scale of our campus. So signings have been slower in the first quarter, but there's so many deals in the pipeline, and their time lines or deployment aren't necessarily adjusting. And that's part of what gives us comfort in reaffirming the guidance that we put out there.

[Colby Synesael:]

That’s really helpful. Thank you. And then I guess on the redemptions?

[Thomas Morton:]

Yes. On the redemptions, so – just so everybody understands and thank you for being studious there. Colby, we did have our lockup expire on April 3, but because of the way the structure of our organization is we have more than 100 members. So there are four times a year that people can redeem their Class B shares for Class A shares. The first time this year that that can occur is on May 18. And so on May 18, there will be approximately 13,400,000 shares that are Class B redeemed for Class A and then those Class A can be freely sold in the market. Now the thing to understand with that is just because somebody redeems Class B for Class A, it does not mean that they are going to sell. So we will have 13.4 million shares available to be sold in the public market, but they may remain in the people’s hands for however long they choose to hold them. But there will be that additional amount of available float on May 18 and actually closes on May 18. And I believe the next trading day is Monday, May 21, when those shares will be able to be traded.

[Colby Synesael:]

That’s super, helpful. Thank you.

[Operator:]

[Operator Instructions] Next from Jefferies, we have Scott Goldman.

[Scott Goldman:]

Hey, guys. Thanks for taking the questions. I guess follow-up on the strategic customer and thanks for providing the detail in terms of the step down that you provided, the $3.3 million and the $2.2 million. I think those numbers you gave are probably relative to the minimum contractual commitments you have with that customer, but there could be some upside depending on the usage. Just wondering what you're seeing in terms of the usage that the strategic customer has today and whether, perhaps there may be some upside to some of those numbers. And then secondly just noticed that the revenue growth coming from new logos is a bit higher this quarter than it has been in recent quarter, in recent years, wonder if that's just sort of a byproduct of the new capacity that's open in new markets or if that's been a concerted effort on your part to drive more business from new logos rather than the existing side? Thank you.

[Gabriel Nacht:]

Thanks, Scott. This is Gabe. I’ll take that and then Thomas jump in. With regard to the utilization from the strategic customer, that customer is utilizing significantly more than their minimum floor here in Las Vegas today. They're in the process of ramping up the Reno deployments. They're not over the minimums yet, and again, those minimums step up every single month. So we are in May and they've been ramping up since January from that minimum usage. But we feel very comfortable that they will exceed those minimums over time as once they reach June, and that minimum is 1.2 million a month, it stays at that level for the remainder of the contract. And given the customer's history, we feel quite confident that they will exceed those levels.

[Thomas Morton:]

Yes, we’re – this is Tom. I’ll jump in here, Scott, just one second. This customer - Gabe is right. Over the years, we've known them for eight years I believe, now. And they have always exceeded their minimums historically, but to be conservative in order to report, we report only what the actual commit is, but the run rate that they have always had with us has been higher than that.

[Gabriel Nacht:]

And with regard to that the contribution from new logos versus customers that have been with us over a year, I think the majority of the effect you're seeing Scott is simply one of timing. As we move throughout the year and add quarters, you will see more contribution coming from the existing customers, the folks that have been with us longer than a year and the ones that we count as new, the folks that have been with us less than a year simply because of their ramps throughout the years. Since we're in Q1, really, the customers that have been with us for less than a year have not had a chance to contribute as much revenue as some of the customers that have been with us longer than a year. So that has a natural tendency to decline over the year. If you look at our Q4 numbers I think it was about 90% of our revenue for the year came from customers that had been with us over a year and about 10% from new customers within that year. And you'll see that pattern continue this year as well.

[Scott Goldman:]

Great and just one quick follow-up to the last question on the lockups. You said May 18 was the first one. Can you give us the date of the second lockup expiration?

[Gabriel Nacht:]

The exact date hasn’t been set. But it will be in August. And then there will be another one in November. Correct.

[Scott Goldman:]

Great. Thank you, guys.

[Thomas Morton:]

Yes.

[Operator:]

Moving on for William Blair, we have James Breen.

[James Breen:]

Thanks. Just some questions just on the margin side, obviously margins decline quarter-to-quarter and you some explanation around that. Where do you feel like margins can be throughout the year and going forward here or sort of rebound back to that low 50s range in that sort of the steady state? Thanks.

[Gabriel Nacht:]

Yes, we still feel very comfortable with our target of a 51% EBITDA margin.

[Thomas Morton:]

Yes, James we had some one-time expenses, as Gabe mentioned, in connection with the IPO as well as the revenue impact, which we have planned for. But we believe that will be able to achieve the target EBITDA percentages at the end of the year.

[James Breen:]

Great, thanks.

[Operator:]

The next question will come from Jennifer Fritzsche with Wells Fargo.

[Jennifer Fritzsche:]

Great. Thank you for taking the question. Can you hear me?

[Thomas Morton:]

We can Jennifer.

[Jennifer Fritzsche:]

I just wanted to ask a bigger picture question. There's obviously been a concern on the data center space about new incumbents coming in. And I was wondering your thoughts there just general concern with a lot of infrastructure money behind these new entrants that the return and the yields are lower and that you could see some compression. I guess, can you offer some color on that? Are you seeing any influence on your business with that in regard to that? Thank you.

[Thomas Morton:]

Yes, Jennifer, that's an interesting question. It's the broad crystal ball type question. The answer is for us, we are still signing retail deals, and we are still able to maintain our price points. Will that change over time? Who knows, but some of these transactions where you start – you’re seeing sovereign funds and others come in, we're seeing those in some respect, in being box deals or wholesale deals, which is not our target market. So to the extent they are looking for a cap return on data center whitespace, good, but that's not directly in our market segment. So we may or may not be impacted a lot by that, but right now we are able to maintain our margin as shown by the recent 15-megawatt deal that we just sold or signed up.

[Gabriel Nacht:]

I also think there's going to be a natural dichotomy developing in the marketplace, and there's going to be folks that want cloud-type wholesale space. And then there's going to be other folks like the 15-megawatt deal we announced in Reno, that really want the efficiency, the scale, all of the technology and the resiliency that Switch can bring. And I think that really is what we're concentrating on these large enterprise type of transactions, and we believe we can continue to price appropriately, maintain our margins, there is obviously going to be a lot of competition for cloud business, that’s developing in the marketplace.

[Thomas Morton:]

Right, but we are able to – as part of the reason that we are able to offer the low cost of power at [$0.409], the low cost of telecommunications, the low cost of living, and being in a low or no tax zone that gives us four toggles that we can turn to optimize the pricing and lower the total cost of ownership without impacting our EBITDA in anyway.

[Jennifer Fritzsche:]

Great. Thank you. So is it fair to say as you talk about the cloud, I mean I think you said this on the IPO, better partner than outright customer, is that still kind of a fair stance as to where you sit?

[Thomas Morton:]

Look they're great customers, too. They just belong in the blend of everything seeking them as they’re still a customer would be a change in our model. So we love the cloud guys whether they are customers and/or partners, so we work with them extensively. We are going to be enhancing and have been enhancing our relationship with the cloud partners, and we would seek to bear an important part of what people are as a data center and where the market stands. Everybody needs some cloud, some colocation and some proximate to their offices or to the edge. And so the CORE and the cloud are necessary components to those two things. And so we will be providing the large-scale deployment for people. We will be providing their PRIMEs, but there will be a cloud component to that. Some of that will be in our site, and some of that will be adjacent to our site as in Atlanta with Google next door.

[Jennifer Fritzsche:]

Great. Thank you very much.

[Operator:]

And next from Cowen and Company, we will move back to Colby Synesael.

[Colby Synesael:]

Great. Thanks for letting me back on the call. I just actually have some modeling questions. The stock comp was notably high. I was just wondering if you can give some color on how we should be forecasting that going forward. And also, your churn was 0.1% per revenue went down obviously in the quarter. I'm just trying to understand why churn would not have gone up? Thanks.

[Gabriel Nacht:]

Sure on the stock comp, Colby, the stock comp associated with the IPO uses what’s called graded vesting accounting for that. So it is sort of frontloaded, so it was about $9.7 million of IPO-related stock comp this quarter and that will trending downward, but not very quickly. So you should still see about $9 million or so in the second quarter. And then it will start trending down from there, but obviously that’s a non-cash item. And then with regard to the churn, the way we measured churn as we are talking about customers that have left Switch and the monthly revenue associated with the customers that have left Switch compared to the revenue at the beginning of the period. So while revenue declined, these customers did not leave Switch and therefore not counted in our churn numbers.

[Colby Synesael:]

Great. Thanks. End of Q&A

[Operator:]

Ladies and gentlemen, that does conclude our question-and-answer session as well as today’s Switch earnings call. We would like to thank you all for joining us today and you may now disconnect.

[Thomas Morton:]

Thank you, everybody.

[Gabriel Nacht:]

Thank you all.