Switch, Inc.
Q2 2018 Earnings Call Transcript

Published: 14 Aug 2018

[Operator:]

Good day, and welcome to the Switch Second Quarter Earnings Conference Call. Today's conference is being recorded. At this time, I'd like to turn the conference over to today's speakers. Please go ahead.

[Irmina Blaszczyk:]

Good afternoon, and welcome to Switch's Second Quarter 2018 Conference Call. Joining me today, Thomas Morton, Switch's President; and Gabe Nacht, Switch's CFO. 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 characterizations 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, the most directly comparable GAAP measures and the reconciliation of these measures, please refer to today's press release regarding our second quarter 2018 results. This 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. Let me now turn the call over to Thomas Morton, Switch's President. Thomas?

[Erin Morton:]

Thank you, Irmina, and good afternoon, everyone. Thank you for joining us today. I will start today with a review of our 2018 business developments and strategic outlook. I will then turn the call over to Gabe Nacht, our CFO, for a discussion of our Q2 financial results and the updated outlook for 2018. After going public in the end of 2017, the business vision for Switch in 2018 has been to focus on strategic enterprise deals that leverage the unique capabilities of our PRIME data centers and thereby create a more valuable hybrid cloud technology infrastructure ecosystem for our customers and to secure a path of sustainable and profitable long-term growth for Switch. Today, we are in the process of adding to our business plan by launching the Switch enterprise elite hybrid cloud program. This service advises our clients on 4 future needs pathways to bring about the full enterprise adoption of the cloud, which has been lagging behind in industry projections. We believe that Switch's holistic hyperscale ecosystem approach is unique because it involves a deep dive into a client's needs for

[Gabriel Nacht:]

Today, I'm going to review our financial results for the second quarter of 2018. I will then provide our updated outlook for 2018. In the second quarter of 2018, we achieved record quarterly revenue of $102.2 million, an increase of $10.1 million from the second quarter of 2017. This represents 11% year-over-year organic growth, primarily attributable to a $6.8 million increase in colocation revenue and a $2.6 million increase in connectivity revenue. 39% of the revenue increase in the quarter resulted from new customers initiating service during the past year, while 61% of the revenue growth came from customers who have been with Switch longer than one year. In the second quarter of 2018, we derive 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 Q2 of 2018 was primarily related to increased volume of sales to existing and new customers. Colocation revenue for the second quarter of 2018 was $81.2 million, an increase of 9% over the $74.3 million reported in Q2 of 2017. Connectivity revenue in Q2 of 2018 was $18.9 million, an increase of 16% over the $16.2 million in the same period in 2017, primarily due to an increase in revenue from our CORE telecom purchasing cooperative and an increase in cross-connect revenue, which grew 25% over the same period in 2017. Other revenue, including professional services, accounted for $2.1 million in Q2 of 2018, up from $1.5 million in the same period of 2017. I would also like to highlight several additional metrics pertaining to the contracts we signed during the second quarter of 2018. As Thomas mentioned, we had a strong bookings quarter, signing over 550 contracts equating to over 20 megawatts with a total contract value of over $165 million and an average contract life of about 4 years. We included additional information about these metrics in the investor presentation posted on the Investor Relations section of our website. As we continue to win new logos and expand our relationships with existing customers, we also maintained what we believe is the lowest churn in the industry, which has declined to just 0.02% in the second quarter of 2018. Cost of revenue increased by $6.7 million in Q2 of 2018 compared to the same period in 2017 due to a $3.7 million increase in depreciation and amortization costs as additional assets were placed into service during the past year at The Core Campus and at The Citadel Campus, a $0.8 million increase in salaries and related employee expenses due to increased headcount to support the opening of additional colocation space placed into service and to support additional customer deployments and a $1.5 million increase in facilities cost. As a result, our gross profit margin was 46.0% in the second quarter of 2018 compared to 47.4% in the second quarter of last year. SG&A expense in the second quarter of 2018 was $31.1 million compared to $20.1 million in the second quarter of 2017, an increase of 55%, which was in large part attributable to $6.6 million in noncash compensation expense during the period, a significant portion of which relates to the continued vesting of common unit awards of Switch, Ltd. granted in connection with Switch's initial public offering. The company also experienced a $2 million increase in indirect labor as a result of additional headcount hired in the past year to support the company's IPO and public company operations. Additionally, there was a $0.6 million increase in professional fees in Q2 of 2018 compared to Q2 of 2017, including additional audit fees, legal fees and tax fees, all of which are associated with operating as a publicly traded company. Income from operations in the second quarter of 2018 was $15.8 million compared to $23.5 million in the second quarter of 2017, due in part to $8.2 million in equity-based compensation expense and other expenses already discussed. Interest expense increased by $1.2 million to $6.1 million in the second quarter of 2018, primarily driven by the increase in our weighted average interest rate from 3.36% in the second quarter of 2017 to 4.17% in the second quarter of this year. Net income for the second quarter of 2018 was $9.5 million compared to $15 million in the second quarter of 2017. Adjusted EBITDA totaled $50.3 million in the second quarter of 2018 compared to adjusted EBITDA of $46.8 million in the second quarter of 2017. Adjusted EBITDA margin for the second quarter of 2018 was 49.2% compared to 50.8% for the same quarter in 2017. Capital expenditures in the second quarter of 2018 were $99.4 million compared to $112.9 million in the same quarter of 2017. During the second quarter of 2018, Switch spent $57.0 million in The Core Campus to open the last sector of Las Vegas 10 and for 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 $31.5 million in The Citadel Campus to open the next 2 sectors and to purchase an additional 515 acres of land. Switch spent $8.0 million for additional expansion of The Pyramid Campus. Finally, Switch spent $2.8 million on site development at The Keep Campus in Atlanta, which is scheduled to open in the second half of 2019. Maintenance capital expenditure was $1.0 million for the second quarter of 2018 compared to $1.7 million for the same period last year. Growth capital expenditure was $98.4 million for the second quarter of 2018 compared to $111.2 million in the same period last year. Our existing facilities in our PRIME campus locations currently encompass 10 data centers with an aggregate of 4 million gross square feet of space and up to 450 megawatts of power. As of the end of the second quarter of 2018, the utilization rates at these PRIMEs, based on the currently available colocation space, were approximately 87%, 38% and 96% at The Core Campus, The Citadel Campus and The Pyramid Campus, respectively, versus 91%, 48% and 77% in the prior quarter. The utilization rate at The Core Campus and The Citadel Campus declined from the prior quarter as a result of continued sector expansion. Looking now at the balance sheet. As of June 30, 2018, the company's total debt outstanding net of cash and cash equivalents was $427 million, resulting in a net debt to last quarter annualized adjusted EBITDA ratio of 2.1x. At the end of the second quarter of 2018, Switch had liquidity of $684 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. Now turning to guidance. As Thomas discussed in his remarks, we have recently launched the Switch ENTERPRISE ELITE HYBRID CLOUD. Enterprise customers are taking additional time to evaluate the design of their long-term large deployments to take advantage of Switch's new offering. As a result, the initial closing time lines for these new and improved sales opportunities are going to extend beyond the traditional sales cycle. Given the dynamics impacting the financial performance this year, we are providing an update to our 2018 guidance as follows

[Erin Morton:]

With 1seven years of organic growth as a company, Switch continues to place clients at our CORE Campus in Las Vegas as well as expand into our Citadel PRIME in Reno, Nevada and the Pyramid PRIME in Grand Rapids, Michigan. Following the path established in Las Vegas, Switch is successfully establishing new Tier 1 markets in Tahoe, Reno and Grand Rapids. We also fully anticipate achieving exceptional success in Atlanta, Georgia when The Keep PRIME comes online in the second half of 2019. We anticipate continued success of our Enterprise Elite Hybrid Cloud offering, where the opportunities remain the strongest that we have ever seen. We look forward to announcing additional multi-faceted transaction, which leverage our CORE offerings to the fullest advantage of our customers. 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]. Our first question will come from Richard Choe with JPMorgan.

[Richard Choe:]

Given the changing guidance on the revenue side, it seems like revenues can be pretty flat. Is there something going on there? I know you had good signings, but on the flip side, just annualizing out to the midpoint of guidance, it seems like revenue isn't going to be ramping. So can you give us an idea of, given the signings, is there a churn event? And then is there repricing? And then when can we see the revenue ramp?

[Gabriel Nacht:]

This is Gabe. There really isn't anything going on other than the delay in the deals that we've talked about. We've had good signings. However, they still need to deploy, it's the deployment that creates billable revenue. And given where we are in August, we've got some good visibility as to what will be deployed throughout the rest of the year, and we want to make sure that we're putting forth numbers that we're confident in and that we're going to hit. And so that's the revenue guidance that we're putting forth.

[Erin Morton:]

Richard, this is Thomas. One other comment is there is not a churn event that's in our future right now. It is purely that we have more complex hybrid cloud deployments that we are doing, and they are causing our customers to revisit the technological aspects of their deployments to do a more robust deployment with us. When we engage in those conversations, it causes their deployment to slow down slightly in terms of timing. But those deals are not going away, and there is no churn. It is purely a timing issue in terms of deployment. It is still the most robust pipeline we have seen at the company.

[Richard Choe:]

But given the guidance and -- I mean, I think you said you were pretty conservative last time you gave guidance, and now you're bringing it down by a significant amount. And maybe I'm not doing the math correctly, but it seems like there's very little revenue growth going forward for the last two quarters. Am I reading that incorrectly?

[Gabriel Nacht:]

No, I think you're reading it correctly, and that's why we're forecasting relatively modest revenue growth in the next two quarters, given the deployment schedule that we have on that. If you recall, we typically do our price increases in the first half of the year, so that flows through. We also still do have a bit of a headwind from a strategic customer. Then their contract that we signed back in 2016, that does still have an impact on a quarterly basis in the back half of the year although not as much as in the first half of the year, but it is still there. So given all those factors, we forecast the guidance that we put forth.

[Operator:]

Our next question welcome from Tim Long with BMO Capital Markets.

[Timothy Long:]

Yes. Just two kind of related, if I can, just to talk a little bit more about kind of looking out on a sequential basis. You mentioned -- Gabe, you mentioned the strategic customer. Any change there to kind of the cadence of revenues that you were thinking when you updated us a quarter ago? And then also, the large 15-megawatt deal, I think that was supposed to start contributing in Q3. Is that one of the ones that is being delayed as well? And then after you talk about those 2, maybe just talk a little bit about kind of the infrastructure there and visibility? So do we need a step-up in the sales force number of -- smaller number of accounts per individual? Or what can we do to ensure that visibility into the customer with these new larger programs is improved?

[Gabriel Nacht:]

Sure, Tim. Thank you. As far as the first question on the strategic customer, the impact has not changed at all. It is actually very contractually set, so we know exactly what that impact is, and it's about -- going into Q3 and Q4, it's about 1.6 million in each -- at each of those quarters, and then we'll not have any impact in 2019. So that hasn't changed a bit. With regard to the deal we talked about last quarter, let me turn that one over to Tom.

[Erin Morton:]

So with regard to the large megawatt deal, they have indeed decided to reengineer their chipsets. What they started looking at is the Rob Roy investments and what Rob Roy is capable and these data centers are capable of. And they were finding up they could achieve much larger densities than they knew that they could achieve, and they have been redesigning their chipsets to optimize the data center infrastructure that they could be deploying or will be deploying in at Switch. That has caused their deployment to be pushed off by a couple of months, but they are still engaged in deploying. And in fact, they are extending their reach of their deployment or talking about extending the reach of their deployment inside of our data centers. So net-net, it should be a very significant positive for Switch. It's just causing a little bit of a delay while we have technical discussions with them about how their chipsets can be optimized for the environment that we provide.

[Timothy Long:]

And then just the sales force and visibility.

[Erin Morton:]

So we continue to expand our relationship with CBRE. CBRE has really been great in engaging with us. We are also engaged heavily with Rackspace and advancing our relationship with them. And then we continue to expand and enrich our internal sales force in order to make sure that we're able to effectively address the transactions that we are looking at. And the sales force, we've also included some technical advisers and technical people to help with the engineering on the customer side with respect to the types of gear and the level of gear that they're deploying inside of our facilities. It's really a holistic offering to our data center that is not being offered by others. It's a rethinking and a reimagining of how to put data centers and data center space out to the public. And I talked about that a little bit in my initial comment, but it is causing customers to take pause and figure a way that they can actually leverage and optimize their deployments with us. 70% of enterprise data centers are still inside the data center or inside the enterprise. And the reason that they're not coming out is because there isn't a holistic Tier 5 type offering available to them. We're the first to come out with that level of offering, and now they're thinking of engaging at that level of scale for the first time. And it's just taking a little bit of time for them to get their arms around all the various intricacies that are involved in that scale and that complexity of the deployment. But once it's done, they will move in, and we think that there'll be a tremendous amount of stability and legacy type environments they'll be moving into.

[Operator:]

Our next question will come from Scott Goldman with Jefferies.

[Scott Goldman:]

Maybe, Tom, just piggyback on that last comment you had there. I feel like we've heard a number of other companies out there talk about the hybrid cloud and targeting the hybrid cloud. And so I think you made some comments in your prepared remarks, so maybe you could just highlight for us the 1 or 2 key points of differentiation that Switch brings to the table. And do you have to change the organization or the approach in terms of going after this opportunity on a go-forward basis? And then I may have one follow-up.

[Erin Morton:]

This is Thomas again. First of all, no, we don't need to change our organization. This is just optimizing the existing infrastructure that we have. We have been one of the leaders or the leader in providing data center space for years, and this is just the market is catching up with what our offerings are and how we can achieve success for them. But as to Switch and some of our offerings and how they're unique, we talked about these before, but I'll quickly enumerate some of them, which is, one, that we are the only ones that offer a Tier 5 data center. Second is we offer public cloud interconnection services at very high rates of speed with 40-plus carriers. The other thing is that we have reinvented some of the health customers, reinvent their data center equipment and worked in collaboration with them to enhance their deployments with Switch and enhance the production -- productivity of their gear. So in addition to that, we have the tax benefit that come with Switch the fact that we are in environmentally safe zones and the fact that we are able to offer 100% green power at the lowest cost that they're able to achieve in any other location. So those are some of the items that make Switch unique, and those are some of the things that the companies are contemplating in connection with a holistic deployment with us. And it is that combination that is allowing them to be comfortable moving out of their enterprise data centers and into our data centers because our data centers have to be better than what they currently have at a competitive or better price point, and that's what we're able to provide.

[Scott Goldman:]

One question for Gabe. If you look at the revised guidance, the implied margins for the full year are probably a couple hundred basis points below where you saw that just a quarter ago. Is that largely a function of just the revenue trajectory that you've laid out for the back half of the year? Or is there something on the cost side that we should be thinking about as we go through the rest of the year?

[Gabriel Nacht:]

Well, it really is a function of the revenue trajectory. And as we talked about in the first quarter, we did staff up in order to support the customer signings that we've made and the deployment schedules, which are now being delayed a bit. So we have the staff on hand, and that is going to impact margins a bit as we move into the back half of the year. But we expect those margins to normalize and still are very comfortable with our long-term margin goal as we move forward.

[Operator:]

Our next question will come from Frank Louthan with Raymond James.

[Frank Louthan:]

You mentioned that there were changes in the sales force. Any material departures of other employees in the organization? And can you walk us through when the next several block ups come up and how many employees are affected and the amount of stock? And then I had a follow-up.

[Erin Morton:]

So this is Thomas again. There are no significant departures that we have to announce. The second thing is that the redemptions this quarter, everybody, I think, knows that it happens on August 17. The redemptions this quarter are 6.5 million -- 6.4 million common units that are redeeming to Class A. The next redemption after that occurs in the middle of November, and we don't have a forecast yet as to how many people will redeem during that period.

[Frank Louthan:]

And the revenue that you booked in the second quarter, when will that start to -- start billing? And when would it be at that full sort of $40 million annual run rate?

[Gabriel Nacht:]

Well, some will start billing in the second of the year, but the larger deals have ramps built in that can be upwards of two years. We talked about the large transaction that we signed earlier on this quarter already and when we noted that, that had 2-year ramp to it. Some of the other large deals also do have ramps, and so we expect that to be in full revenue by -- within the next 24 months.

[Frank Louthan:]

So within that $40 million that you booked, is any of that materially concentrated in a couple of contracts? Or how ratable is it across the 550?

[Gabriel Nacht:]

Well, we look at the $40 million, some of those represent renewals. Those are not all new contracts, and we do break that out in the slide deck that we provided on our website. So that includes our renewals to existing customers, but the new transactions that we booked this quarter, most of those are geared toward a few large contracts, one of which we've already talked about quite extensively.

[Operator:]

Colby Synesael from Cowen has our next question.

[Colby Synesael:]

The enterprise hybrid cloud strategy, it's the first time I'm hearing about it, so I apologize if it's been mentioned before. And you're citing that as the explanation for why you've reduced your guidance. But if I go back to your planning period, which I assume was in October, November, December of last year, sometime in that period, were you assuming that this was going to happen and it's just happening now later than anticipated? Or is it -- it just doesn't line up with me why that's the explanation for why you're reducing your guidance. And when I looked at the previous guidance, it was assuming some pretty notable step-ups in the back half of the year, maybe like 7% or 8% quarter-over-quarter. These enterprise deals, I assume, are fairly small at least compared to some of these hyperscale type deals that we've seen some other companies doing. Was there an expectation that you're going to win more of those than you ultimately have? Because, again, just looking at what the guidance had implied versus what you've done and what you're not doing with the guidance, it just doesn't seem to line up that the enterprise hybrid cloud is the explanation for why you're reducing your guidance.

[Gabriel Nacht:]

Well, first of all, Colby, thank you for that. Since our IPO roadshow, we've talked about where we thought compute was going and where we thought the hybrid cloud environment would go, and our focus was on the enterprise and helping them jump start that enterprise migration out of the enterprise-only data centers into a cloud environment. We've talked a lot about the fact that we're building the PRIME campuses for companies' PRIME deployments, their most regulated datasets, their most proprietary datasets, their most high-density datasets. And we fully expect that those enterprises will use the cloud or a significant portion of their compute, and they'll also need an edge deployment. We think that's where compute is going. We've been talking about that very consistently since the IPO roadshow, frankly. As far as our planning for this year, what we're finding is these enterprise deals are taking longer. We've had a number of opportunities, for example, where companies have come to us with several cabinets or several hundred cabinets they would like to move in, but there's a larger opportunity there to talk to them about fully utilizing a hybrid cloud, fully utilizing what our data centers can offer. And these take significantly long -- longer to close because we're no longer talking about 100 cabinets or 200 cabinets. We're talking about potential of thousands of cabinets. I think your hypothesis that these enterprise deals are smaller than some of the cloud deployments is, frankly, off base. The enterprise deals that we're talking about, some of them are absolutely as large as any of the cloud deployments out there. And they are complex. They involve the companies buying hundreds of millions of dollars of equipment, making sure their software stack is going to run appropriately, timing when they're going to move from their existing data centers or shut down their existing data centers. And so it does take a logistical planning, and we're finding that some of these are stretching out. We are not finding that any of them are going away, which is tremendously positive for us. So hopefully, that helps answer them.

[Colby Synesael:]

It does. And just one quick follow-up. You mentioned earlier on the call the 4 different components of your enterprise hybrid program. What is -- maybe you could spell it out for me. What is difference with what you're doing on a go-forward basis versus what you were doing before? I think, Thomas, in response to 1 question when you asked what's your differentiator, you mentioned 4 or 5 things, which you guys have mentioned before. Specific to this enterprise strategy, is it that you're selling a broader bundle of services, so you're going to start reselling SDN solutions or data center equipment? I'm just trying to understand what's different in the go-forward solution set, if you will, that you're going to be offering as part of this hybrid offering versus what you were doing previously.

[Erin Morton:]

Yes. Colby, thank you for that. And it's really a refinement of what we've been offering. This is not a change of course for the company. It is a refinement of our offerings and being able to express that to the customer in a way that they're beginning to or they are understanding in adopting those items. And by helping customers not only by data center but by power and then also by telecom and then working with the cooperative to help them buy and reengineer, reimagine their gear, we are getting deeper and deeper into the customers' deployment and helping them as a trusted adviser rather than simply as a data center provider. And that is a more holistic offering, a more holistic approach to the customers, and it is what is going to -- we believe is going to help customers move from their own enterprise data centers into a more robust and lower-cost alternative, which should be in sites, which is super nice.

[Gabriel Nacht:]

One of the things that we're also finding in this enterprise customer base is that they learn more about Switch and what we can offer. They're actually asking us to do more. One of the key things that we're finding is customers are asking us to do a complete telecom audit for them given our buying power through the CORE purchasing cooperative and those are time consuming, but they are also tremendous opportunities for us. And they're also asking us to do complete data center audits of their existing data centers and looking at their gear, looking at what they've currently got deployed, what their power usage is and thinking holistically about what they could possibly do with that in the future as they migrate to the next stack of computing equipment within a Tier 5 Platinum environment that can do densities that Switch can provide. So it really is a design and implementation process along with a sales cycle.

[Operator:]

Our next question will come from Erik Rasmussen with Stifel.

[Erik Rasmussen:]

I think you went through a little bit of this at some stages. But can you just walk us through the onboarding of these new customers to this new enterprise program for hybrid cloud just to understand the complexities around this as it relates to the sales cycle? Because it seems that it's evolving, this whole process and it could potentially demonstrate other slips further as we kind of go through this just as you're working with the customers on it. And then I have a follow-up.

[Erin Morton:]

Yes. Well, Erik, thank you very much. First is that not every customer is engaged at this level, right? We still have a significant amount of growth that comes from our standard customers and our standard deployments that we've enjoyed for a long time. Secondly, we have a lot of expansion that is coming from our existing customer base. So I don't want anybody to walk away and say we're wholly dependent on this particular aspect. But we're a multi-faceted data center provider. So these large deals, it does involve a greater amount of complexity, and I feel like I'm a little bit reiterating myself, so please forgive me. But by getting in with the customers and helping them do their deployments, we are actually getting in with specific customers and helping them modify that the gear that they want to buy, the chipset that they're having made and the gear that they're having configured in a way that they want to deploy it inside of our data centers. In addition, we're working with them on tax abatements. We're working with them on qualified opportunity zone investment, and then we're working with them on financial optimizations to their deployments. So there's financial component here. There are technical components here, and there are logistical components here. And these are large multi-megawatt transactions, and to put those all together and optimize them for timing in each of those work streams takes a little time, takes a little effort to make sure that it's done appropriately. And it is, at the end of the day, we think a very positive thing. It makes for a very trusted relationship. It makes for a very stable relationship, and it makes for a large amount of deployment inside of our facilities. Hopefully that helps.

[Erik Rasmussen:]

And then just as it relates to -- so we have the guidance for this year. You're about 10%. If you exclude the impact of eBay, about 7.5% at the midpoint. Things have kind of pushed out a little bit. When do you -- when should we expect to kind of get back to that 20% or that historical sort of growth rate that the company has demonstrated the past seven years and also in terms of a margin profile as well?

[Gabriel Nacht:]

Sure. Erik, as you know, we haven't really discussed 2019 guidance yet, and we're not prepared to do that on this call. However, as I said earlier, we're fully comfortable with our long-term margin profile and don't need to make any adjustments for our long-term view on our revenue growth profile or our margin profile.

[Operator:]

Next, we'll take a question from Sam Badri with Crédit Suisse.

[Ahmed Badri:]

My first question really had to do with connectivity revenues and how that keeps outpacing colocation revenues. And more specifically, there was a comment mentioned that cross-connect revenues were materially higher than the total growth rate, and I just want to understand what the dynamic is here. That doesn't really sound like a hybrid cloud type of workload. Maybe you could just give us a little bit more detail around that.

[Gabriel Nacht:]

Sure. Our connectivity revenue did grow faster than our colocation revenue, and those numbers are on the slide deck that we provided on our Investor Relations site. Connectivity revenue in the CORE offering that we can provide through our purchasing cooperative is a very unique aspect to what Switch offers. And the more people learn about it, the more they're taking advantage of it. Not only are they taking advantage of it with connectivity to and from our data centers, but they're taking advantage of it for their entire networks. And that's one of the things that we're seeing as a true sales opportunity with these Fortune 1000 companies that are seeing what we can offer on the connectivity side and asking us to do full telecom audits for them. As far as our cross-connects, as I think we've mentioned several times in the past, historically, because we sell full connectivity and full circuits, we did not necessarily concentrate on monetizing the last 200 meters of those circuits in what is typically known as a cross-connect. We've been much more aggressive in making sure that we are charging for those cross-connects today. And cross-connects grew in the second quarter year-over-year 25% cross-connect revenue, and it's about 3.5% of our total revenue right now and continues to increase.

[Ahmed Badri:]

And then are the cross-connects -- do they have the very similar contract structure as the colocation contracts with escalators or options like that?

[Gabriel Nacht:]

Yes, they're structured very similarly. Most of what we do is retail colocation with 3 to 5 year time horizons, and the connectivity side of those contracts is very similar as well.

[Ahmed Badri:]

Got it. And then my last question is just regarding the maintenance CapEx. Sounds like it was down year-on-year to a pretty low level. I think it was $1 million mentioned earlier. Can just explain how that -- like, are recent deployments and builds dramatically more efficient from a maintenance CapEx perspective for why this is actually occurring?

[Gabriel Nacht:]

No, our maintenance CapEx has always been low, and that's part of Rob Roy's design. When he designed the equipment that goes into our data center, he designed it with a mean time to failure in mind as opposed to designing it with the need to feed a service network as some of the equipment manufacturers that provide equipment to the general industry design their gears. So we just designed things with a longer mean time to failure. Our maintenance CapEx was a bit lower year-over-year than in the prior quarter, and really, that has to do with timing of certain maintenance CapEx that we do, timing of filter changes that we move out. So that does jump around a little bit from quarter-to-quarter, but in general, it stays at less than -- around 2% of our revenue, and that's where we're comfortable.

[Operator:]

Next, we'll take a question from Michael Rollins from Citi.

[Michael Rollins:]

Couple if I could, please. First, what was the backlog in annualized revenue at the end of the second quarter? And how did that compare to the backlog at the end of the first quarter?

[Gabriel Nacht:]

On the second quarter, we signed about $135 million -- just over $135 million of total contract value of signed deals in the second quarter if that's what you're asking.

[Michael Rollins:]

You talked about the backlog and the delays in installation and that you haven't lost the orders or the bookings. So I'm curious, if you look at June 30 as the end date there, what was the annualized amount of revenue that you booked but you haven't yet installed, to just sort of size that opportunity as we look forward.

[Gabriel Nacht:]

We don't specifically comment on our backlog, but when you talk about our backlog from period-to-period, we did sign $165-plus million worth of deals just in the second quarter, which is all backlog. Now some of that was for new customers and -- that are expansions and renewals of existing deals, and some of that is for brand-new customers. And that detail is on the website. So I think -- and we also provide the average annual contract length on the website. So with those 2 pieces of information, I think you can see what the annual backlog is.

[Michael Rollins:]

Let me try it a different way. Of the $25 million revenue change at the midpoint of guidance, how much of that was delays in sales, not getting the sales that you were looking for versus how much of that is actually booked in backlog but is just delayed in terms of the expected installation time frame?

[Gabriel Nacht:]

Okay. No, I follow you. I'd say it's about half. Half of the sales and signings are actually delayed, and we don't count them until we actually sign them. And the other half is delay in the installation. We did talk about the one large deal that we signed earlier in the quarter, and Thomas mentioned that they've pushed out their installation a bit. And that's also the case with a couple of the other transactions that we've signed, so I'd say it's about half and half.

[Michael Rollins:]

And then in terms of the buyback program, you mentioned the size of the buyback. You also mentioned some of the upcoming redemption dates, and then the expected size for the next one in August. So how does the buyback program work in terms of how should investors think about the opportunity for you to buy some or a significant portion of what's being redeemed and the mechanism in terms of the pricing for that versus you have to sort of wait a period of time or if it's less discrete? Just kind of curious how the practice works of buying the corporate units.

[Erin Morton:]

So this is Thomas. I'll give a comment on that. First of all, we use this -- we're going to use this buyback package for 2 purposes. The first is we will have extra cash, and we believe that there is an opportunity there for us to use some of the leverage that we have available to buy back some of our units. The second thing is that there is an advantage or a good optic for us to increase the float of the company, but there's also a balance there and that we don't want any particular redemption cycle for there to be a large rush to market. So we would use this buyback as a way to smooth out or manage the amount of redemptions that are going to occur in any particular quarter. And that will ease or make it more fluid in how the flow of new units go or new shares go to the market. So it's being used for those 2 purposes. As to the mechanism of doing it, there -- we will -- we have several requirements that go with us with the SEC at the pricing, but the purchases will generally be at market prices. And we will set those prices around the times that we are doing the repurchases.

[Gabriel Nacht:]

Redemptions.

[Erin Morton:]

The redemptions.

[Michael Rollins:]

And is there a room to do buybacks in between redemptions? Or this is only specifically to address redemptions, as you mentioned?

[Erin Morton:]

There is flexibility to do that, but we're targeting it right now for the reasons that I've stated.

[Operator:]

Our next question will come from James Breen with William Blair.

[James Breen:]

Just a follow-up on the connectivity side. You saw, I think, you said 16% growth year-over-year. And then you mentioned that you're helping companies with broader connectivity needs. Just trying to think about the size of that growth. Of the 16%, what percentage of that is coming from telecom that your customers are taking you that don't actually touch your data centers, they're using someone else in their network, where you're essentially just kind of reselling telecom services? And is the margins on that -- despite higher growth, are the margins lower their relative to the overall data center business?

[Gabriel Nacht:]

Yes, we don't have specific number on folks that are specifically taking circuits and how that's grown outside of our data center ecosystem. I can't tell you that the external connectivity that we sell, which is really the general connectivity, grew at about 9% quarter-over-quarter. Cross-connects grew at about 25% quarter-over-quarter. We do have other agents, revenue streams for agent revenue and fiber revenue that also grew significantly.

[James Breen:]

Is that 9% growth outside of cross-connects mainly from the customer front in the data center?

[Gabriel Nacht:]

You broke up a bit there, James.

[James Breen:]

Is the growth outside of the cross-connects mainly from the customer premises to the data center?

[Gabriel Nacht:]

It's both. It's from the customers' premises to and from our data centers, and it's also for circuits that don't touch our data center.

[Operator:]

[Operator Instructions]. And that does conclude our question-and-answer session at this time, and I would like to thank everybody for attending today's conference call. Thank you for your participation. You may now disconnect.

[Erin Morton:]

Thank you all.

[Gabriel Nacht:]

Thank you.