Switch & Data Facilities Company, Inc Q3 2008 Earnings Call Transcript

Switch & Data Facilities Company, Inc. (SDXC)

Q3 2008 Earnings Call

October 28, 2008 4:30 pm ET

Executives

Keith Olsen - President & Chief Executive Officer

George Pollock - Senior Vice President, Chief Financial Officer and Treasurer

Kathleen Heaney - Investor Relations

Analysts

Greg Miller - Deutsche Bank

Jonathan Schildkraut - Jefferies

Sri Anantha - Oppenheimer

Jonathan Atkin - RBC Capital Markets

Erik Suppiger - Signal Hill Group

Robert Dezego - SunTrust Robinson Humphrey

Manny Recarey - Kaufman Brothers

Richard Fetyko - Merriman Curhan Ford & Co.

Rod Ratliff - Stanford Group

Presentation

Operator

Good day, ladies and gentlemen, and welcome to the Q3 2008 Switch & Data earnings conference call. My name is Becky and I will be your coordinator for today. At this time all participants are on a listen-only mode. We will be facilitating a question-and-answer session towards the end of this conference (Operator instructions)

I would now like to turn the presentation over to your host for today's call, Kathleen Heaney. Please proceed, ma'am.

Kathleen Heaney

Thank you and good afternoon, everyone. This afternoon after the market closed, Switch & Data released third quarter 2008 financial results. A copy of the release may be found on the web site at switchanddata.com in the Investor Relations section.

Part of our discussion today may include forward-looking statements. These statements are not guaranteed of future performance and therefore undue reliance should be placed upon them. The Company undertakes no obligation to update any forward-looking statements in order to reflect events or circumstances that may arrive after the date of this conference call. We refer you to the Company's recent filings with the SEC for a more detailed discussion of the risks that could impact the Company's future operating results and financial condition. We will mention financial terms such as adjusted EBITDA and non-GAAP measure of financial performance. The management believes that it is a common and useful tool in evaluating the Company's performance. EBITDA is defined as operating income plus non-cash items including depreciation, amortization, stock based compensation, lease litigation costs, deferred rent and certain other costs. Our reconciliation to comparable GAAP measures can be found on the end of the earnings press release as well as on the Company's web site.

Participating on the call today is Keith Olsen, President and Chief Executive Officer and George Pollock, Chief Financial Officer. The question-and-answer session will follow their remark.

I will now turn the call over to Keith Olsen, President and CEO.

Keith Olsen

Thank you, Kathleen. Good afternoon, ladies and gentlemen. Thank you for taking your time to join us today. I want to welcome everyone to our 2008 third quarter earnings call. Switch & Data's third quarter results were strong. Our performance is the direct result from the continued execution of our strategy. Today, I will share with you the quarter's highlights and George Pollock, our Chief Financial Officer will review our financial results. After our presentations, we will open the call for your questions.

Our third quarter financial and operating results surpassed our expectations. This quarter's performance is the seventh consecutive quarter growth since our IPO. Our results and leading indicators support the increased guidance for 2008. With respect to 2009, we are optimistic for another year of strong growth for our business. This outlook is supported by our operating model of monthly recurring revenues and robust sales volume, strong market drivers and demand continuing to outpace supply.

Economic news had been bad and far reaching and news sources continued to report negative impacts to our economy. Our response has been to increase our channel checks and deepen our scrutiny for changes in customer demand. We continue to receive mixed signals above impacts on our customers' businesses. Certain customers have shared with us their plans when they are postponing some of their expansions. In smaller cases, some have actually indicated that some of these projects will stop. Other customers have indicated, however, that they will continue their expansions and in the number of cases, they are speaking of accelerating their expansion plans.

Overall, we have not seen a slowdown that is impacting our growth or our funnel. We have increased our 2008 yearend guidance for revenue and EBITDA and we expect 2009 to be another strong year for Switch & Data. Our optimism is founded on the demand that we see in the market.

Similar to our second quarter 2008, our third quarter sales were strong. We won more new customers in the third quarter than in any of the quarters this year. New deals were larger than the third quarter a year ago and our follows are as strong as they have been in years. I credit continued execution of our strategy, the timing of our product capacity increases and our customer focus for our strong business results. The timing of our capacity additions are being well received by existing and new customers looking to support their business needs.

As we think about our business, we look at both the near and long term aspects of the market. Near term, our business is again supported by multi recurring revenues. We haven’t continued to edge capacities to support our growth. New sales production is strong and our funnel supports the view of continued growth. For the longer term view, we look at balance sheet that has placed the ability to fund our future expansions. The broader market view includes the development of new IP and internet applications that continued to increase traffic. Our customer base is the Who’s-who of the internet and they look to our sites to support their application and services growth. This is evidenced by a long history of performance where 80+% of our new sales come from our existing customers.

I would like to end my presentation a reference from an interesting log reply recently read in a Forbes issue. There is another opinion about the long-term outlook for our industry. The September 29 article title Cisco's Next Big Bet discussed the world that we live in, the network sector growth. The biggest players in the internet; Amazon, Cisco, Google, IBM, Microsoft and others are investing and building infrastructure in existing applications to drive their growth and these investments will feed and generate new internet traffic. This traffic growth is a recipe for success to Switch & Data and our third quarter numbers speak to this growth.

Total revenues for the three months ended September 30, 2008 increased 24% from $35.4 million to $44.1 million for the same period of 2007. This revenue growth improved our data results. Third quarter better grow 25% from $11.2 million to $14 million over the same quarter of the prior year.

Our strong financial performance is a testament to the successful execution of our strategy. We are focused on internet dependent and network centric businesses and interesting model develops for our customers in our sight. As these customers continue to grow their traffic volumes either from or through our sites, they are driving more active packages from more interconnections concentrating traffic, concentrating customer internet connections over the infrastructure in our sites. This can lower their cost for bit low cost per package. As they add more power and interconnections to existing cabinets, they improved their costs. As they add more cabinets, they concentrate these vacancies for efficiencies. Customers are buying more of our data center and internet exchange services to support their growth and increases in IP and internet traffic.

To indicate our health and strength from our execution is the growth of IP and internet traffic through our tax switches. The traffic growth is 112% within the past 12 months. This is almost double the rate of the internet traffic reported by the industry. These trends reinforce our strategic focus on whom and where we target our resources. We support their needs by providing the right services in the right markets across our footprint. Another element of our strategy is to deepen our relationships with our customers. We think valuable insights to help best serve them in one investment we need to make to ensure the support of their growth.

Customers are not the only demand indicators. Industry insiders are another and they continue to report on traffic growth. ComScore Inc., a global information provider of the digital world reports that online video viewed in the US increased significantly. One example is the measure of online videos viewed by Americans in the month of July, a total of 558 million hours. Many companies that are listed in Counselor report for online video services are customers of Switch & Data's. This process along with demand out piece and supply continue to support our growth strategy and investments.

In 2008, we will add the capacities in the number of markets such as Dallas, Northern Virginia, New Jersey, Sunnyvale and Toronto. Consistent with our messages from past goals, we continue to look for properties that will support our future growth. Atlanta is another example of the execution of the strategy. As we stand today, we are in the initial design stages for Atlanta and our plan is to add these capacities late in 2010. Of course, we will keep you posted on our progress during future calls.

Our results for the third quarter are supported by the following operating metrics. Billed cabinets increased 11% from 6,636 in September 2007 to 7,347 in September 2008. Cross connects increased 9% from 19,124 in September 2007 to 20,879 in September 2008. In the third quarter, we crossed a major milestone related to cabinet ARPU. Our ARPU for the quarter was greater than 2,000 a month. Cabinet ARPU or average revenue per unit increased 12% from $1,816 in September 2007 to $2,026 in September 2008. This growth speaks to the strength in pricing and customers buying more services such as power and interconnections per cabinet.

Capacity utilization was 70% in the third of 2007 as compared to 63% in the third quarter of 2008. This reflects the impact of the new capacities we have added this year and as of September 30, we have 11,700 sellable cabinet equivalents. We opened our New Jersey facility in October. We have a number of customers' installations in progress and customers demand continues to build. We expect our capacity as this year to total 3300 cabinet equivalents which is an increase over our previous guidance of 3,000.

Before I turn the call over to George, I will leave you with four important points about our business. The forecast to IP and internet traffic growth is significant. Demand for our product and services are strong. We continue to execute and we have the capital inquired to continue our near term expansions and had built the financial platform from our operations to fund the future growth.

With that, I will turn the call over to George so you can review our financials.

George Pollock

Thank you, Keith. Thank you all for joining us today. Today, I will share our third quarter financial results with you and provide insight as we look into 2009. Let me start with revenue for the third quarter.

Total revenues for the three months ended September 30, 2008 increased 24% from $35.4 million to $44.1 million. Recurring revenues which consist of co-location and interconnection services were $41.6 million in the third quarter of 2008, an increase of 24% over the same period in 2007. Our revenue model continues to be driven by monthly recurring revenue which was 94% of total revenues in the quarter.

Non recurring revenues representing one time installation fees and services increased from $1.9 million to $2.5 million. Our EBITDA performance is also strong. In the third quarter, EBITDA increased from $11.2 million to $14 million, an increase of 25% over the third quarter 2007. The EBITDA margin also increased from 31.5% to 31.7%. Cost of revenues, excluding depreciation and amortization, increased from $18.7 million in the third quarter 2007 to $23.7 million in the third quarter 2008. This increase is attributable to high utility, rent and personal expenses associated with our facility expansion and revenue growth.

As a percent of revenues, cost of revenues increased to 1% from 53% in the third quarter of 2007 to 54% in the third quarter 2008. This increase was expected and is consistent with the continued investments in our business to add product capacities. Our sales and marketing expenses in the quarter increased from $3.8 million to $4.6 million. This increase was due to personnel expenses including wages, commissions and non-cash stock based compensation. As a percent of revenues, these costs decreased from 10.8% in the third quarter of 2007 to 10.5% in the third quarter of 2008.

Our general and administrative expenses increased from $3.7 million in the third quarter of 2007 to $4.5 million this quarter. The increase is due higher wages and non-cash stock-based compensation. As a percent of revenue, these expenses decreased from 10.5% in the third quarter 2007 to 10.1% in the third quarter of 2008. These decreases in sales and marketing expenses and general and administrative expenses as a percentage of revenues demonstrate the continued scaling of our business.

Consistent with our prior quarters, we continued our growth across our markets. We have previously discussed that 85% of our revenues are generated in our top ten markets. Looking at the third quarter 2008, over the same period in 2007, overall revenue growth was 24%, growth in the top ten markets was 26% and the growth in the rest of the markets was 14%. Site cash flow which we define as site revenue or site expenses increased 20%. The increase in our top ten markets was 21% and the increase in the rest of the markets was 19%.

Let me turn to the balance sheet. Our cash balance was $43 million at the end of the third quarter, our DSO was 22 days which was lower than the 27 days from the second quarter and is consistent with our average over the last few years. Bank debt was $120 million and our bank debt to EBITDA ratio was lower at 2.1 times versus the 2.2 times in the second quarter.

Capital expenditures were $64 million in the third quarter of 2008 and totaled $118 million through the end of September. Of this amount, 94% was for growth capital and for the full year 2008, we are on plan from our prior guidance of $165 million in capital expenditures.

In summary for the quarter, revenue and EBITDA exceeded our expectation. The recurring revenue and mostly fixed cost structure of our business model provides us with good insight through our financials and we are refining upward our 2008 annual revenue and EBITDA guidance. This is the third time this year that we have increased our guidance. We are increasing our 2008 annual revenue guidance from $170 million to $171.5 million. We are increasing our EBITDA guidance from $55 million to $56 million. This represents an increase in our EBITDA margin in 2008 from our initial target of 30.9% to the current outlook of 32.7%.

This increase in outlook reflects the momentum in our business and the outstanding results of this year. To recap 2008, we have secured big financing to support our growth, we continue to execute our strategy and the revise guidance three times and we have achieved our high year-over-year revenue growth in the Company's history. As we look towards 2009, we expect the following: the revenue to be between $207 million and $210 million, EBITDA to be between $71 million and $73 million and capital expenditures of $65 million.

Before we open the call for questions, I would like to emphasis the following. We have proven business model supported by recurring revenues, we continued to increase revenue, EBITDA and EBITDA margins and most importantly, our operating cash flows and strong balance sheet will continue to fund our future growth and with that, Keith and I would be happy to answer your questions. Operator, please open the line for questions.

Question-and-Answer Session

Operator

(Operator instructions) Your first question comes from the line of Greg Miller – Deutsche Bank.

Greg Miller – Deutsche Bank

Maybe if you can just give us an idea, an update of what is going with the New Jersey expansion in a little detail and when we should expect to see significant cabinet expansion coming on there and then maybe talk a little bit about your Atlanta announcement earlier this quarter and finally, just to comment on the CapEx for next year in the pretty substantial decline year over year with Atlanta coming on and what I would expect to the continued expansion in New Jersey, why would we will be expecting CapEx to be going down so much?

Keith Olsen

Sure, Greg. Let me first address the New Jersey. New Jersey opened up in October. We had strong demand, customers installs are going on as we speak, to funnel billed coming in from our sales report so we are thrilled with first of all with the fit and finish of the site for phase one, the customers that we have been touring through the facility have appreciated that. I know we put out a press release that talks about the few of the customers of course that are willing to be part of the press releases. I can share with you that a number of other leading internet companies, large scale internet companies have also selected our New Jersey site for their expansions.

As it relates to our next phase, that is the work that our construction engineering teams are working on and we expect to bring on the next level of capacities to New Jersey towards the later part of 2009 which is consistent with the long term plan. As it relates to Atlanta, Atlanta is as seen in my kind of opening remarks, was really an opportunity for us to secure an excellent site for the future growth of our business. We expect that we will be adding those capacities late in 2010 and so I do not anticipate any significant or any capital applied to the Atlanta site in 2009 and with that, I will ask George to respond to your third part of question which is our CapEx guidance, George?

George Pollock

Sure, Greg. We spoke about $65 million of capital spend in 2009 and that is consistent with our comments that keeping eye both about our fully funded business plan and our ability to support our continued growth with our current balance sheet and operations from cash flow.

Operator

Your next question comes from the line of Jonathan Schildkraut – Jefferies Group, Inc.

Jonathan Schildkraut – Jefferies Group, Inc

George, I am going to appreciate a little bit more on this CapEx, could you breakdown the $65 million of CapEx for next year maybe into some loose pockets call it ongoing and maybe tie it to some of the facilities expansions you are going on so that we could do a better job of understanding where the CapEx is being deployed and then I have some follow ups for that.

George Pollock

Sure, Jonathan. We spoke about $65 million, about $10 million of that is call it ongoing user retirement in terms of maintenance, about $40 million is for New Jersey and then there is $10 million to $15 million for customer installs and other fill-ins we may do.

Jonathan Schildkraut – Jefferies Group, Inc

Alright, great. We have been hearing a lot about changes in the competitive environment as capital has become more constrained particularly with some of the guys out there that we would consider more commodity co low, could you tell us over the last quarter and particularly over the last month if you have seen any changes in the competitive environment more broadly and then more specifically as it applies to the services that you offer.

George Pollock

Sure, Jonathan. We have not seen any real dramatic change from the competitive landscape. The funnel billed and this maybe be attributed to the funnel billed very strong as I have said that we have seen in years and some of that maybe acquitted to some customers. I think what we have attributed the growth certainly as you look at our second quarter and third quarter and certainly last month's result is we have added some nice capacities in Dallas, right in Sunnyvale, in Toronto and now, with New Jersey and so our selling, our distribution team really have had now a good set of capacity available to them and we see it as a direct result of those investments in bringing those capacities online which may be availing what they have been going on with some of the other competitors that maybe facing some more difficult times. We attribute our success very much tied to, of course, sent it on the network center for internet businesses and then specifically within the last few months of sales, tied to the capacity expansions that we have been talking about throughout 2008.

Jonathan Schildkraut – Jefferies Group, Inc

Okay, great. In terms of capital that you currently have in your balance sheet and the incremental capital available under the credit facilities, I understand you have about a $22.5 million delayed draw term loan and $15 million revolver. You also have the opportunity, as I understand that they ask for an increasing in availability under the facility of about $50 million. Can you tell us any update on your plans around those facilities? Do the providers of those facilities have any opportunity to maybe cutback or withhold some of that credit availability and as I understand that you have about $70 million of the $120 million term loan which floats relative to LIBOR swap out to lock interest rate. What kind of fluctuations have you seen on the remaining debt and have you considered trying to lock some of the rates there going forward?

George Pollock

Jonathan, good questions. So, we drawn down $120 million, we do have $22.5 million under delayed draw and $15 million under revolver. We do expect in the numbers we gave you to drawn down under delayed draw late this year or early next year. We do not expect any issues with that. Our bank group is pretty solid. We have had conversations about that delayed draw and it is normal course in terms of our business. So, that does not look to the many issue to us and as you know, it is committed from a solid bank group.

With respect to LIBOR of your question, we have a hedge in place on $70 million that expires in February and we have another hedge coming on place that is we have communicated previously in our 10-Q. We have recently put another hedge in place in the remaining $45 million so our debt is 100% hedge against LIBOR.

Jonathan Schildkraut – Jefferies Group, Inc

Alright, great. Finally, last quarter you indicated that a good portion, I think it was around 2/3 of your bookings were coming into the recently opened facilities, maybe Dallas, Sunnyvale and Toronto at that time, could you give us some color on maybe what it look like this quarter?

Keith Olsen

Yes, I think I can provide some color. First is that kind of year over year, when you look at the number of new deals and I am going to refer to one of our sales reports which are called our top five reports, the average size deal was up, it looks like about a little about the 25%. Most of the large scale deals are landing in the new build aspect we are speaking to but there was some good success in some of the other markets that we enjoyed; WikiPedia landed in our site which is a terrific sale for us and certainly helps with some of the deficits and revenues and say cash flows for [taper] as one I could speak to. I would ask my team to see if they could that number together as we are going through the rest of the Q&A so I can give you the specific of the exact percentage on what landed in the quarter for that period but over the top of my head, I do not have that number so we will do some good staff working, we will respond right back to you in this call.

Jonathan Schildkraut – Jefferies Group, Inc

Great, Keith. In your prepared remarks, you actually mentioned that the pipeline was strong but the Q also had gone out and started talk to some of your clients. How do you go about doing kind of internal channel checks? How do you keep your eye on expected future demands so that you know on the right as to pull the trigger on expansions?

Keith Olsen

Sure. The normal course had been through what we call our account planning process that Bill Roach running our sales team revealed as on our national account managers, our channel managers to walk through with the customers what their expansion plans are. Those also tied to the funnel management aspect of what we are looking for as to the types of capacities and deals that people are landing on. With increased scrutiny, what I have asked is for checking with the various segments and seeing if there is a Q pressure. As I reference in our last call, I talked about some of the smaller customers feeling more pressure than the big brands and I think that has a lot to do what businesses can self perpetuate versus better requiring from the capital markets and so we still that heightened pressure at the low end of the market.

At the high end of the market, we continue to see the expansions and some accelerations quite frankly and that is really tied to the capacities that we have brought on board and being able to address some what I would consider expansion that people looking for us to complete our bills and to be able to support that growth. I personally have started to call out to a number of different executives. About 10 days ago, I was with a couple of different CEOs, customers of minors as well as some channel partners to speak about the impacts on what they are seeing and feeling and it was pretty universal about the low end of the customers side. The top of the partners spoken about, they see that there is a point for them to accelerate because probably I will paraphrase what they shared with me but it sending around that as people stand around the water cooler or the coffee shops kind of thinking about the world's media aspect, they are making investments to capture market share and then I have seen any decline in demand for the aspects and things that they sell which then land and force for expansions inside of ours.

For the customer side of their expansions, their discussions had setting around they have not seen a significant change in their DSO. They still have strong funnels and they still see a significant demand and of course we see that because they utilize our site as market places to sell their services. I will say that two of the CEOs actually sell into the same service provider segment and therefore I would expect that their views would be very similar so as we start taking in the various things and seeing which customer segment, whom we are talking about from the account planning cycles that they have provided to us earlier in '08 for the late '07 as it relate to the projects for late '08 and into '09, in my prepared closing comments, send them around some of those projects now getting delayed. It is really just a more forceful rigor and then personal attention, spending some time now talking with our customers at the executive level, at the operations level and then of course making sure that our marketing teams are gathering as much contend from the web and periodicals or publications to getting better insights to how we are driving our revenue.

Jonathan Schildkraut – Jefferies Group, Inc

Alright. Can you just repeat the traffic statistics that you gave earlier on the call?

Keith Olsen

Yes, I was speaking in reference to the IP and internet traffic going through our patch switches have increased from January '08 through September '08, it is a 112% growth that is why I used the term within the year that is a 112% growth on our platforms.

Operator

Your next question comes from the line of Sri Anantha - Oppenheimer.

Sri Anantha – Oppenheimer

A couple of questions, could you guys talk about the booking trends and the recently opened New Jersey data center and if possible, could you guys quantify the amount percentage of revenue that is coming from the center in 2009 outlook and second question is as you guys are looking to 2009, could you guys talk about the visibility of revenue for 2009 guidance as well as if I am just looking at the mid end of the guidance, incremental EBITDA margins thing and nice expansion, if you guys touch on to some of the drivers that are contributing towards that margin expansion that will be helpful. Thank you.

Keith Olsen

Sure. Sri let me first address what some of the bookings are. Year to date, we have received 25 sales orders for New Jersey. We do not share revenue as it breaking down by sites so that is not information that we disclose and demands continues to coming in from our file resources and dialogues with our sales leaders. I will ask George to address the aspects of your few questions.

Sri Anantha – Oppenheimer

Keith, what do you say these 25 sales orders? Are these committed bookings today?

Keith Olsen

Yes, this means they are signed contracts and orders.

Sri Anantha – Oppenheimer

Okay.

Keith Olsen

Sri, just for you and if everyone on the call, that is all we have to speak to.

Sri Anantha – Oppenheimer

Alright, got it. Thank you.

George Pollock

Sri, your two questions, one was with respect to the float margins and the other question was with the respect to the insight into '09 revenue?

Sri Anantha – Oppenheimer

Yes.

George Pollock

Okay, good. The first question, as you know in our business with the monthly recurring revenue business tied to long-term contracts as we approach the end of this year looking into '09 in terms of view, about 85% of sale of the revenue for '09 is bookings from the contracts today. So, that gives us good insight into the '09 year and year because of the predictable nature of the business. And then from a margin perspective, it is I think very consistent what we have spoken about over the last couple of years in terms of incremental EBITDA margins. Incremental EBITDA margins '07 versus '08 will be about 40% in '09. They are closer to 45% with the guidance that we provided and it then continues to increase. It is completely dependent upon the amount of incremental product capacities that we bring online. We expected '08 to be a little lower because of the New Jersey's, Sunnyvale, Toronto analysis that accelerates in '08 with the current plan of '08 bringing on the Atlanta from a least perspective which is a nominal expense force during the year.

So, the incremental monthly return revenues generate very good incremental EBITDA margins at the site level that contribute to the increasing overall EBITDA margin.

Sri Anantha – Oppenheimer

I think earlier in the call, I think you had some comments with respect to your own channel checks with the customers and in that you mentioned some customers have said they will postpone their expansions in the small percentage even pretty much stop their project. Are these your existing customers or potential new customers that you expected to take your revenue from?

Keith Olsen

It is about the same, difficult.

Operator

Your next question comes from the line of Jonathan Atkin – RBC Capital Markets.

Jonathan Atkin – RBC Capital Markets

Couple of questions, if you could remind us how much of the revenue growth this quarter came from new logos as oppose to existing customers and I wonder if you could talk about some of the assumptions you are making on install intervals when you talk about 85% of 2009 revenue being booked in terms of the contracts?

Keith Olsen

Jonathan, if you would not mind, can I ask you to repeat the second part of your question?

Jonathan Atkin – RBC Capital Markets

Yes, just the trends that you are seeing in installation intervals.

Keith Olsen

Oh, the trends in installation intervals, what we talk about for our installation intervals is a set standard interval per service or per type of install whether it be standalone, cabinets and racks, customs cage, cross connects or power and each one of those had very specific and unified intervals. Sometimes, customers ask for us to be able to expedite which we are able to support. We have not changed any of our intervals. I do not know if that answers your questions but that is what we utilize in our response to the service look as we come back and say, it is a three-day interval, it is a five-day interval or it is a20-day interval based upon what they ask us and that has been consistent for years.

And on the third quarter, the number of new logos, is that what you asked?

Jonathan Atkin – RBC Capital Markets

Yes, the percentage of the new versus existing exactly.

Keith Olsen

On revenues? I do not have that but I know that we added 42 new logos for the quarter and we will do some bookings, some staff work to be able to pullback information. I would like to respond, Jonathan to Jonathan's question around the sales that landed in our expended facilities and more than 50% of our third quarter new sales landed in Sunnyvale, Toronto, Dallas and on New Jersey.

George Pollock

And Jonathan, 75% of revenues were from existing customers.

Jonathan Atkin – RBC Capital Markets

Great and then if you could tell us what, if any different you are seeing in terms of churn and then with then with the respect to the value added services, remind us whether you improve most of that and I assume that is inventory as oppose to nonrecurring and how much of the revenue are coming from value added services if there are any change going on there.

Keith Olsen

Yes, we have not seen much of a change. It is pretty nominal as far as the value added and George, you may want to just add there.

George Pollock

Sure. Jonathan, our churn in the third quarter was 1.1% down from the 1.5% in the second quarter and it is consistent with our full year view of about 1.2%.

Jonathan Atkin – RBC Capital Markets

Great and then finally if you could, I do not know if you mentioned this or not, I did not write it down but then the number of cabinet sold and the number of cross connects sold during the quarter?

Keith Olsen

Yes, we did, the cross connects force at the end of September 2008 was 20,879 and the number of sold cabinets was 7,347 as of September 2008.

Operator

Your next question comes from the line of Erik Suppiger – Signal Hill Group.

Erik Suppiger – Signal Hill Group

Well first, are you reaffirming your three-year guidance for 24% growth on the top line and 35% on the EBITDA line?

George Pollock

Yes, our three-year average '08, '09 and '10, yes.

Erik Suppiger – Signal Hill Group

Okay and then you brought your CapEx back pretty considerably from '08 to '09, what does that imply in terms of your growth after 2010 and I recognize you are not giving guidance but does this suggest that we would expect growth to at least level off or start coming down in light of reduced investment?

Keith Olsen

Erik, let me address that and thank you, we are not providing any 2010 numbers but I think what would may help you is that we expect our utilization rate on the capacities that we have added at the end of 2008 to be just below 60% and that is a significant reduction in utilization based upon the capacities we have brought online. These are where we were a year ago with those types of growth rates on a larger name.

Erik Suppiger – Signal Hill Group

So, are you suggesting that this will not impede your growth at least maybe in 2011 or so or 2010 because you are simply just filing a lot of the space you have already added?

Keith Olsen

Yes, I was not commenting on 2011. I am just providing you what the capacities are and expected to be from the complete 2008 bills and what our utilization rates are.

Erik Suppiger – Signal Hill Group

Well then, let me rephrase the question. Presumably, when you are doing your CapEx planning, you are evaluating capital constraints versus growth opportunities and it looks like you sited, you obviously there is a lot of concerns out there about CapEx constraints, were you sacrificing growth by giving up CapEx or what was kind of the thought process behind $65 million CapEx?

Keith Olsen

Sure, what was behind it was that we expect to add about a thousand cabinets in 2009 and so we are just continuing to see the growth.

Erik Suppiger – Signal Hill Group

Okay, you did not necessarily, you did not see demand that would justify higher investments in that, is that right, just because you have a lot of capacity right now?

Keith Olsen

No, what we have been speaking to is we have added the capacity, we have the capacity to support our 2009 plan and we are adding a thousand cabinet equivalents in 2009 from the CapEx spend and how George broke down the detail between ongoing maintenance customer fill-ins and then New Jersey.

George Pollock

We are speaking to the $65 million that is framed, it is framed with the fully funded business plan and it is still adding a thousand cabinets capacity in '08. As Keith mentioned, we end this year with fewer than 60% utilization. We have thousand next year; we have already spoken about the '09 capability in terms of EBITDA. Utilization continues to stay and check when we are able to continue to fund very nice growth for a while.

Erik Suppiger – Signal Hill Group

Okay, so you feel pretty good about the growth trajectory in spite of the reduced CapEx?

George Pollock

Yes.

Erik Suppiger – Signal Hill Group

Okay and then on Atlanta, so I guess you would sign the contract just recently but you are not going to be investing in that until 2010, is that right, it is just what the foreknowledge?

Keith Olsen

That is correct, Erik.

Erik Suppiger – Signal Hill Group

Why does it take so long to get that facility up?

Keith Olsen

Well, I think it speaks to the property and the deal that we were able to structure for that particular site. We have a motivated landlord and we ensure that this was a great site for us to look at building for future growth and therefore we wanted to be able to secure it and the terms and the conditions that we were able to secure the sight are very favorable and I believe George commented on that which has a very little drag on our bet for 2009 and so it is around timing and the way that we want to be able to utilize and deploy our capital capacity to support the long term growth of the business.

Erik Suppiger – Signal Hill Group

Okay and then lastly, the churn came down to 1.1%, thing seem to be going very well for you. Do you think that the churn will stay at these levels or in light of the tougher economy; do you think that we might start seeing that list a little bit?

George Pollock

Sure. The churn did come down to 1.1% and as we look towards the rest of this year, we expect to hit our target of about 1.2% for the year. As we look at '09, we are planning about that same amount of percentage but if we run the numbers, it is $2 million or more in incremental dollar churn. So we have taken that into account in our '09 planning that there could be incremental churn on the dollar base which is really the only thing you take in the bank versus the percentage as we continue to properly plan our business.

Erik Suppiger – Signal Hill Group

So, that sound as though you feel some pretty good comfort with the customers in viability within your facilities I guess.

George Pollock

We do.

Operator

Your next question comes from the line of Robert Dezego - SunTrust Robinson Humphrey.

Robert Dezego - SunTrust Robinson Humphrey

I just want to get, demand seems like it was going pretty well to you guys in the quarter and obviously your outlook for demand is pretty healthy. Could you talk about maybe just some of the individual markets or maybe some of the verticals where you are seeing strength and along those lines, could you maybe give us some color on the composition of your actual customer base today, maybe percentage of key verticals whether it is content provider or service provider, network providers? Could you give us an idea what your mix is today?

Keith Olsen

Sure. We have communicated about our mix. We focus in on the service provider community. What we include in the service provider community is Telco’s, content providers and service providers. So, think of the companies like the global Telco’s; AT&T, Verizon, BT, Telefornica then the content companies are the companies like Google, Yahoo, and Microsoft. That is how we classify. When we think of the service provider, we think of VeriSigns, the Cogents, the Akamais, the Limelights, etc so that is how we look and that is where we spend and focus our time. We have also on previous calls spoken about that when we aggregate what is used as vernacular, the enterprise government, we classified that only to what we call in other bucket. It is less than 5% of our recurring revenues.

So, our focus is that at exchange point and as such we see the demand set is pretty well spread across all three of those universes as you think of them packet growth as the content providers need to get that contents to more eardrums and eyeballs, they have to utilize more of the backbone providers and then of course there is the eyeball networks and we have based announcements certainly throughout 2008 around the number of different ones whether they be North American based, internationally based, the MSOs, the content providers, etc because of the ecosystem in the marketplace that our sites operate at.

Robert Dezego - SunTrust Robinson Humphrey

Okay and just one quick follow up, as far as your guidance for this year, you said you are going to add 3300 cabinets, the onset of 3000 but your CapEx stayed the same, can you kind of tell me how that work and whether you are going to save money on some spends and what is on..?

Keith Olsen

Actually there are probably some initial designs to some longer designs. We did fill-ins inside of existing lease footprint and so we have been able to across the couple of the filling projects to pick up some capacities.

Operator

Your next question comes from the line of Manny Recarey – Kaufman Brothers.

Manny Recarey – Kaufman Brothers

I was just kind of follow up to previous questions, Keith, in talking about Atlanta; you said the new facility, what are the utilizations in Atlanta now? I mean do you still have plenty of kind of headwinds or capacity to sell there?

Keith Olsen

Atlanta is a tight market for us right now. So, the capacity is tight and we know what the demand is. Right now, that is one of the areas that we are looking at on how we look at Atlanta as a potential filling in our existing site but that is work is to be define.

Manny Recarey – Kaufman Brothers

Okay and if I could ask the CapEx to '09 in possibly different way here, as the credit market open up, let us say in the mid part of next year, I mean how quickly you kind of ramp up CapEx can again? It seems you have plans if something like that happens, other areas you would want to expand and so forth so you could ramp that up fairly quickly?

Keith Olsen

I mean consistent with what we have been speaking to for a few years now, given the opportunity, if there is the right property and/or entity or site and the capital markets were favorable, we would absolutely do accelerate.

Manny Recarey – Kaufman Brothers

Okay and that gets to related part of that is as you move in 2009, there are probably would be some disrupt asset that it will come up. I mean what is your view on kind of to stand by that way?Keith Olsen

That has been a historical practice of Switch & Data. A lot of our carrier densities and site densities and sites and recurring revenues stay streams came from just those types of activities over a long history. So we have an excellent practice of being able to identify, acquire, integrate and then improve the financial performance of either assets or companies and fall them into the Switch & Data Company.

Operator

Your next question comes from the line of Richard Fetyko - Merriman Curhan Ford & Co.

Richard Fetyko - Merriman Curhan Ford & Co.

With respect to the additional 1000 cabinets in '09, are those mostly in New Jersey?

Keith Olsen

Yes.

Richard Fetyko - Merriman Curhan Ford & Co.

The plan is pretty tight I mean why would you still accelerate that expansion in '09 or would you consider that as you enter into '09 and you see demand continue to build in which you consider and I guess that was kind of...?

Keith Olsen

That is how we look at fill-ins. When we look at fill-ins, we look where do we get the best return on top of their existing kind of lease footprint and so that is about choices and in previous calls and certainly some of the conversations we have had publicly, we have spoken about certain markets where we decided not to make those fill-in investments and in others, we do and that is just kind of the leadership and management decisions we make throughout the year.

Richard Fetyko - Merriman Curhan Ford & Co.

Okay and then lastly, you mentioned that certain customers you were indicating some delays maybe are canceling some projects, I was just curious, was there any specific pattern in terms of whether they were Telco’s or content providers or service providers?

Keith Olsen

No, there was not. There was no typical profile, I think it is like said frequency, it was again commenting on the smaller customer versus the big customer but outside of that it covers the broad spectrum of the various service providers I again it is overshadowed the demand set and the acceleration that a number of the bigger brands based upon just sheer traffic and application growth around IP.

Operator

Your next question comes from the line of Rod Ratliff – Stanford Group.

Rod Ratliff – Stanford Group

Keith, most everything has been asked and answered here but to follow up on what Richard just asked and what have couple of other guys have asked, do you think that given what you just said about maybe a little bit more delay with the smaller customers, do you think that could be influenced by their own casual constraint and given that, do you think that you might see a proactive churn pickup amongst your smaller customers?

Keith Olsen

The answer to both is they are both possibilities. I mean I do not know. I can share with you what they have said which is in most cases, they are looking at their business and saying I need to delay and maybe just because they are being prudent to be able to see what can they get through. In other cases, we know for sure that they would stop because they are reconsidering. Some of the net new sales that we were able to secure were most of the people consolidating which is incremental demand for us but not necessarily for their existing player which maybe tied to a number of different decision points which is capacity and growth potential and things of that sort certainly within some of the expanded markets that we address over 2008.

Operator

You have a follow up question from the line of Jonathan Schildkraut – Jefferies.

Jonathan Schildkraut – Jefferies

Thanks, I had a question on power, over the course of the year, at least the first half; we obviously saw energy cost skyrocket. I am wondering how you handle that with your clients whether there was an opportunity to pass through some of those energy costs spikes that we saw and now we are seeing energy cost drop pretty precipitously, is there a potential that has taken advantage of those falling energy cost, as it applies to maybe some of the price increases that you have rolled through earlier in the ER and if so, is that part of the reason for your increase in EBITDA guidance? Thanks.

Keith Olsen

Sure, first we have not seen dramatic increases across the board. We operate 34 data centers across the broad markets that range from coal, gas, nuclear, etc so there is many different power sources supporting our broad footprint and so therefore we see some ebb and flows. We are also in a number of markets able to make pies on our power that fix the rate to ourselves and so we have not seen a dramatic or tremendous impact to the cost of power. We have been seeing and what we have been communicating certainly for a number of causes, as people's demand for power inside of the sites increases, they report prior to more infrastructures, more cooling and therefore more power use for the same square foot. And therefore, we have to be able to apply the appropriate pricings to support the incremental investments and incremental use. That is one of the drivers that are supporting the improved cabinet ARPU. George, I do not know if you have any other color or comments that you would like to add?

George Pollock

Just to the act of Keith, we operate as you said 34 data centers in a lot of market so some sites, most sites there has really been not much increase, some that has been more than the average and some that there has not where we then take advantage of it if we can, it is try to lock up power in certain deregulated market and that is really dependent upon when contracts come up, there is not so much prices dramatically falling that get to go locked in excepts for the contracts coming to expiration and we may have an opportunity to go in and try to lock in our longer term basis which it helps us fix the per kilowatt cost which is one element of the power cost that keeps the element is used but that does help us with our ability to predict the power as we look to '09 and certainly has given us confidence with respect to our end of our year and end of '09 and full year '09 guidance that we provided.

Jonathan Schildkraut – Jefferies

And George, in past you have talked about the effect of price increase is having a 2% to 3% lift on this year's result. Have you seen any change in the pricing environment and are you are assuming about it 2% to 3% lift from pricing for 2009 as well?

Keith Olsen

Jon and this is Keith, yes we have seen in real life the expected, this year it looks like we have about 3.5% impact. We are expecting about a 3% to 3.5% impact to our pricing effects on our recurring revenue for 2009.

Jonathan Schildkraut – Jefferies

Thank you again.

Keith Olsen

But Jonathan, I just want to make sure that we got that stat that you heard that more than 50% of our third quarter sales landed in the new expansions of all facilities in Sunnyvale, Toronto, Dallas and New Jersey.

Jonathan Schildkraut – Jefferies

How much landed in the new facilities? No, I am just kidding.

Operator

You have a follow up question from the line of Jonathan Atkin – RBC Capital Markets.

Jonathan Atkin – RBC Capital Markets

Yes, I wonder if you could comment on the trends that you are seeing in contract point and then with respect to demand in these new sites, can you give us a flavor for how much is coming from North American based companies as opposed to the rest of the world? I think in the past you can say that in some of your facilities, there has been a significant portion or over half coming from the rest of the world so I am just wondering..?

Keith Olsen

Sure. The demand that is coming in is for the third quarter was focused around North American base entities for the most part and clearly that just explain some of the expansions that we have made and the target of sales going in with opportunities for these types of companies. We will see based upon either decision cycles and some of the global providers on the frequency than when they are supplying incremental infrastructure, they typically land in a number of our gateways examples like Tiscali, [Chang-Wa], China Cash, people like that that have been incrementing their business and of course we are supporting each other with some PR announcements about their expansions and their growth traffics but the third quarter was focused principally on North American bases.

Jonathan Atkin – RBC Capital Markets

And then contract typically..?

Keith Olsen

Particularly, we have not seen a significant change. It is very consistent. It is averaging just about two years, anything beyond three years, we would want to put escalate as across the board pricing tables on one, two and three year term base so that is already fixed within the normal contract within pricing process.

Operator

Your last question is a follow up question from the line of Robert Dezego - SunTrust Robinson Humphrey.

Robert Dezego - SunTrust Robinson Humphrey

Could you maybe talk a little bit about use of ARPU or multi revenue per cabinet and utilization assumptions to your '09 guidance? Is there any kind of color you could give us on that?

Keith Olsen

We do not provide that type of guidance with ARPU. I will just re-state, ARPU continues to increase from 2 points, one is the pricing that we are just speaking to in answering the question around the impacts of increased pricing and its effect on MRO about 3.5% of recurring revenue and the other is the incremental services inside the same cabinet or rack, incremental cross connects or incremental power deployed which really speaks to what customer is doing as the concentrations and taking advantage of what we call a network effect within our sites which is where you get that content providers, the backbone providers and the eyeball networks to a very efficiently exchange of traffic and exchange of the business inside of our sites.

Robert Dezego - SunTrust Robinson Humphrey

And the last question is for your guidance, for your CapEx and EBITDA for next year, could you tell us how much of your capacity are expecting to draw down?

Keith Olsen

We have the delayed draw available of the $22.5 million.

Robert Dezego - SunTrust Robinson Humphrey

But is your guidance is something you draw the whole thing?

Keith Olsen

The $22.5 million, yes.

Robert Dezego - SunTrust Robinson Humphrey

And the $15?

Keith Olsen

We do not assume that we draw that down. That is a revolver so it can ebb and flow for the next four or five years.

Robert Dezego - SunTrust Robinson Humphrey

Okay, so you are just assuming $22.5 million and the remainder of the $15, you hold on to.

Keith Olsen

Yes, it depends on the cash balance. We try to target or we do target a $15 million to $20 million cash balance as we get into the end of the year until next year.

Robert Dezego - SunTrust Robinson Humphrey

Okay and just based on your demand outlook, if you had a $15 million revolver today, would your CapEx be $90 million?

Keith Olsen

I think that we would carefully study where we would deploy the incremental to take advantage of the demand.

George Pollock

Rob, one comment on your prior questions in terms of framing this on utilization, we are ending this year with just under 60% utilization based on the current trajectory. We are adding the 1000 cabinets to capacity in 2009 which will keep that utilization rate in the low 60s which again gives us the capacity as we continue to sell into the future years.

Operator

And there are no further questions at this time. I would now like to turn the call back over to Mr. Keith Olsen for closing remark.

Keith Olsen

Thank you very much. Ladies and gentlemen, thank you very much for your continued support. We appreciate it and we look forward to closing out 2008 and jumping in into 2009. Have a good day.

Operator

Thank you for participation in today's conference. This concludes the presentation. You may now disconnect. Good day.

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