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SAVVIS Inc. Q3 2009 Earnings Call Transcript 1 comment

October 28, 2009 | about: SVVS

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SAVVIS Inc. (SVVS)

Q3 2009 Earnings Call

October 28, 2009; 10.00 am ET

Executives

Phil Koen - Chief Executive Officer.

Greg Freiberg - Chief Financial Officer

Bill Fathers - Managing Director U.S.

Peggy Tharp - Director of Investor Relations

Analyst

Simon Flannery - Morgan Stanley

Colby Synesael - Kaufman Brothers

Sri Anantha - Oppenheimer

James Breen - Thomas Weisel Partners

Jonathan Atkin - RBC capital Markets

Jonathan Schild - Jefferies

Steve Salberta - Boenning & Scattergood

Robert Dezego - Suntrust

Erik Suppiger - Signal Hil

Winston Len - Goldman Sachs

Presentation

Operator

Good day, ladies and gentlemen and welcome to the SAVVIS communications third quarter earnings conference call. At this time all participants are in a listen-only mode. Later we will conduct a question-and-answer session and instructions will follow at that time. (Operator Instructions)

I’d now like to introduce your host for today’s presentation, Ms. Peggy Tharp. Ma’am, you may begin.

Peggy Tharp

Good morning and thank you for participating in the SAVVIS third quarter 2009 earnings call. I’m Peggy Reilly Tharp, Director of Investor Relations for SAVVIS. Earlier this morning we distributed a press release with detailed financial tables, which is available on our website at www.savvis.net.

In addition, we have corresponding slides available at that site, which will be referenced during this call. As always, please be aware that today’s discussion contains forward-looking statements as defined under federal securities laws.

Actual results could differ materially from the forward-looking statements due to various risk factors, including, but not limited to the factors disclosed in the company’s Form 10-K and other filings with the U.S. Securities and Exchange Commission, and we encourage you to review those disclosures.

Our presentation today will include references to certain non-GAAP financial measures that provide additional information for investors. In compliance with SEC’s Regulation G, our press release distributed today, which is posted on our website and furnished to the SEC on Form 8-K, includes both our rationale for why we believe non-GAAP information is important in describing our operating performance and the full reconciliation with the corresponding GAAP numbers.

Joining us on the call today are Phil Koen, our Chief Executive Officer; Greg Freiberg, our CFO; and Bill Fathers, our Managing Director, U.S. Today we will begin with overview from Phil will follow with the financial review. Phil will then provide an update of our strategic growth plan before during the call back over to the moderator for Q-and-A.

We’d like to now turn the call over to Phil.

Phil Koen

Thank you, Peggy. Good morning everyone and thank you for joining us today. For the third quarter, our overall performance met our expectations with stable revenue and stronger than expected adjusted EBITDA. During the quarter, we continue to grow in new areas in spite of challenging economic conditions and to the departure the American Stock Exchange, which was acquired by NYSE Euronext.

We’ve also made some exciting announcement regarding our growth drivers. Later in the call, I’m going to talk about these areas and in just a few minutes, Greg is going to discuss our financials and more detail. For now, I’d lake to take a step back and take a look at the market forces at work and discuss how these have impacted us to date and how we think it will impact us going forward.

First and foremost, bookings from the third quarter were up sequentially with total global bookings up 5%. This is following bookings growth of 4% in the second quarter. Clear indications are that we’re trending in the right direction and seen as slowly improving environment. In light of the challenging economy, we’ve been operating in.

I’m very pleased our ability to show incremental quarterly improvements in booking. This is despite the fact that we’ve seen no real change in purchasing behavior. Complex, enterprise deals like the one SAVVIS offers continue to have longer sales cycles. So while we have a healthy pipeline, we continue to see customers reluctant to make any swift changes.

Once customers finally commit to a course of action, the approval process remains lengthy. Overall, I don’t believe we’ll see any changes in the next few quarters and expect the 9 to 12 month sales cycle to remain status quo. Another area where this status quo is in places pricing.

For Colocation, we’re still tracking to our blended $50 average revenue per square foot rate. This is a flexible target and within our described range. We expect this amount to ebb and flow slightly based on churn related to departure of below market margin customers and due to changes in utilization of our standard, high and ultra power data centers.

For managed hosting, we continue to see uptake from real enterprises with real business models. In the third quarter, we saw wins from technology firms, customer product companies, medical and HR related businesses, transportation companies, financial firms and prominent global media players. Although, new logo growth return to a more tradition ale rate in the third quarter, we saw many strong wins in the quarter and added great names to our portfolio.

In network, I’ll be honest with you. It’s a battle. However, we’re starting to see a glimmer of light at the end of the tunnel. Our managed HAM revenue grew in the third quarter. However, this was muted by overall decline by internet access revenue. In addition, our application transport services revenue is growing, but the rate is not fast enough to overcome the general decline in the managed network revenue that is not associated with the data center.

So while the right network products are moving in the right direction, we still have a long way to go. We’ll continued work to transition away from low margin customers and trying to navigate to better quality revenue tied to our managed hosting business. The revenue in growth success we have had in the quarter and year-to-date is unfortunately being muted by churn.

Churn has not fully abated at SAVVIS and this seems to be inline the rest of the industry. While churn for the third quarter remains below 2%, we felt the full effect departure of the American Stock Exchange in the third quarter. While we have not seen churn related to market share loss to competitors, we have seen overall churn being driven by several trends.

Customers either being acquired, I think consolidating the infrastructure or they’re being economically challenged and then forced to downsize. In some instances, they built their own Colocation facilities and returning to an in source model. In addition, existing customers are carefully scrutinizing the current spending rates and eliminate costs wherever they can.

So while customers are happy with us and want to remain with us, they’re doing what they can to reduce IT spending including application consolidation wherever possible. Despite the continued impact of churn on our underlying business, trend seemed to be slowly improving. Nonetheless, we expect continued headwinds related to our ability to fight through this noise.

While year-to-date results show the progress of our transition, top line issues have not completely abated. To this point, we expect to see one of our few remaining large high content customers be part at the end of the fourth quarter, which Greg called out in our press release, as have any impact on our first quarter results.

While we originally expected this customers and churn in the third quarter, we now expect this event to occur at the end of this year. In addition to this expected transitional churn, we anticipate two financial institutions to churn in the first quarter 2010. Both are departing and take to our premier financial services this data center with the highest demand and growth in our data center portfolio.

In addition, the blended average per square foot of these two customers is 45% below our target market for this data center. This is a location where BATS Global trading just expanded housing spacing to help support the launch of the BATS U.S. Equity Options Exchange. Given our indicated pipeline, we’re reasonably confident we’ll be able to place these two customers in a reasonable amount of time.

Before I turn things over to Greg, I’d like to stress if SAVVIS would continue to work toward long term success by targeting revenue that is sustainable, profitable and capital efficient. We will continue to run this company to drive returns, which means we will continue to invest in the kind of growth that delivers cash flow and makes efficient use of our capital.

With that, I’ll like to turn the call over to Greg for a review of our financials.

Greg Freiberg

Thanks, Phil. Good morning everyone. I want to start on slide four. Total revenue for the third quarter was $213 million with hosting delivering $148 million of revenue and network services reporting revenue of $65 million. Gross profit was $95 million for the quarter or 45% of revenue.

Gross margin for the third quarter showed a 200 basis point improvement over the third quarter of last year and was inline with the second quarter. So, while some of this positive impact was due to lower utility costs, I’m really proud of those results because it’s hard but necessary work to cut costs and improve the operational efficiency when revenue declines.

SG&A for the third quarter was $53 million or 25% of revenue, excluding non-cash equity based compensation, SG&A was $46 million down from $47 million in the third quarter 2008 and up slightly from $45 million in the second quarter. Adjusted EBITDA for the third quarter was $51 million or 24% of revenue. On a year-over-year basis, adjusted EBITDA was up 7% while it was down 7% quarter-over-quarter, reflecting the loss of the American Stock Exchange.

Year-over-year EBITDA margin improved approximately 200 basis points and this reflects our continued attention to costs. One other metric I want to call out is our DSO’s which have dropped to just below 20 days and I really got give great credit year to outstanding accounts receivable team. Their operational efficiency and effectiveness help keep this ratio and check during the difficult economic times.

Moving to slide five, I would like to continue with the business review. Starting with managed hosting which remains the center point of our long term strategy. For the third quarter, managed hosting revenue was $63 million on an annual basis, this was down 6% and on a quarterly basis this was down 7%, both declines due to the loss of the American Stock Exchange.

As we work to fill the void left by AMEX, we are expanding in existing areas such as our collaboration with Thomson Reuters and a new area such as our cloud and our software the service our SaaS offering. So while Phil will go into more detail about the Thomson Reuters collaboration, I want to take a moment to highlight our SaaS offering. We’ve seen excellent growth since we first introduce that a little more than a year ago. Year-over-year, SaaS revenue grew 36% while on a quarter-over-quarter basis they grew 11%.

We showed stress that the success of our SaaS offering and the associated revenue is tied to SaaS providers who are our customers. So, these are the companies who are supplying the software to end users and we’re providing them the infrastructure do to so. So as their business grows and infrastructure needs growth, we grow along with them. In addition, our SaaS customers are particularly interacted to our cloud services, so we see good growth from them in this area.

Turning to Colocation, we reported revenue of $85 million in the third quarter on an annual basis, Colocation grew 9%. While it was relatively flat quarter-over-quarter, these results reflect our continued commitment to attracting enterprise customers to our data center. We are pleased with the success we’ve had in our Colocation transformation moving from large customers to enterprise customers. We don’t want to reverse the progress we’ve made to date here.

During our second quarter call, we discussed the potential for additional Colocation customer grooming either in the third or the fourth quarter. We now anticipate this will occur at the end of the year. This will contribute to the proximate $4 million to $6 million of Colocation revenue churn expected in the first quarter of 2010.

In addition, we expect some of this churn to come from financial vertical customers who have been hard hit by the challenging economic conditions. As Phil mentioned, these customers will be departing our NJ2 data center. While we continue to see strong demand for space and we expect to fill any vacancies in this location within a reasonable amount of time.

Finally, our network revenue declined to $65 million for the quarter. On a year-over-year basis, revenue declined 11% while on a quarter-over-quarter basis revenue was down 4% reflecting the loss of the American Stock Exchange. In the third quarter, we continued to see the results of excellent cost controls, which are responsible for our portion of the reduction in our cost of goods sold on a year-over-year basis. We continue to manage our network business for value.

Turning to slide six, total data center yield for the third quarter including our hosting area network averaged $87 per square and if you look at the chart on the left side of the slide, you can clearly see the quarterly decline, which was 5%. This decline was largely due to the departure of the American Stock Exchange. AMEX was the particularly unique customer and that they took up very little space, but provided significant revenue contribution.

Colocation averaged monthly revenue of $47 per square foot in the quarter, a slight decline from the second quarter has expected Colocation pricing has steadied and leveled off. While we still expect some additional improvement as a few remaining large icon to customers migrate away in 2010, we believe we’re in the right range here. Our average monthly revenue figure for Colocation is a composite of our 28 data centers and reflects three different power tiers, standard, high and ultra. As a result, we expect this number will ebb and flow overtime as Phil mentioned earlier.

What I’d like to draw your attention to, and this is something I do every time I meet or talk with investors, is the other half of the slide. On the top right, you can see that managed hosting made up 42% of our overall hosting revenue in the third quarter with Colocation making up the remainder. However, if you look at the bottom right pie chart, you will see despite this healthy revenue contribution, managed hosting accounts for only 4% of our average billed square feet. Together, these two pie charts show clearly the potential impact of even a small shift in our managed hosting footprint.

While there was a decline in managed hosting contribution in the third quarter, due to the departure of AMEX, we have continued to add managed hosting customers in the forward to further shifts in the two pie charts. As we continue to focus on managed hosting growth as the center point of our strategy, we also continue to focus on adjusted free cash know, which is shown on slide seven.

We’ve reported adjusted free cash flow of $15 million in the third quarter. I want to stress that number again. $15 million of adjusted free cash flow during trying economic times. As we weathered the loss of a large and profitable customer. While this marks the fourth quarter of positive free cash flow generation for SAVVIS, we expect this number will be negative in the fourth quarter as we expand NJ2X our financial data center complex. This is our first build out, since we completed our expansion a year ago. Today, we have 28 data centers with just under one million sellable square feet of capacity.

On slide eight, you can see that the second metrics that we have been targeting, cash return on capital employed, we remain steadfast in our belief that companies focused on growing managed hosting make better use of their capital. I think this slide accurately tells that story with companies like SAVVIS and Rackspace far outpacing.

Companies that are more focused on Colocation and cross connects. Wile we expect to expend additional capital as needed to maintain our leadership position in the financial vertical and to support the potential growth related to our collaboration with Thomson Reuters, we will continue to use our capital efficiently.

Turning to slide nine, I will quickly review our liquidity liabilities. Compared to last quarter, our gross leverage has remained steady at 2.8 times, while our net leverage has comedown slightly as our cash position has increased. Net leverage was 2.0 times with cash at the September 30 at $164 million.

I’m going to wrap up with the review of the full year 2009 guidance, which is shown on slide 10 and also provided in the earnings release. We now expect the adjusted EBITDA of $215 million to $220 million, an increase over previous guidance of $195 million to $210 million. Using the mid range of the guidance for full year 2009, would indicate year-over-year adjusted EBITDA growth of approximately 18%.

Total cash CapEx guidance is now between $120 million and $140 million. This is an increase over previous guidance of $110 million to $140 million and includes $10 million to be expended in 2009 for the expansion of the financial data center complex in metro New York, which was announced during last quarters earnings call.

Cash interest expense is unchanged at approximately $40 million to $45 million. We have, however, increased adjusted free cash flow guidance. We now expect $40 million to $50 million of adjusted free cash flow, an increase over previous guidance of $25 million to $45 million.

With that, I’ll turn the call over to Phil for a review of our major growth initiative.

Phil Koen

Thank you, Greg. I’m going to take a few minutes to walk you through three key areas, where we expect to see continued growth, through our strength in the financial vertical, through our collaboration with Thomson Reuters and through continued adoption and expansion of Cloud and SaaS.

Let’s start with slide 12, our financial vertical, just this past Monday. BATS Global Markets announced that it’s expanding its hosting space in Weehawken New Jersey data center. This expansion will support the launch of the BATS U.S. Equity Options Exchange. In addition, BATS is expanding our London Docklands data center and its expectation of continued growth of its Europe multilateral trading facility.

We’ve been trusted service provider for BATS since its founding in 2005. In addition to continue to provide high performance, proximity hosting of the trading platform will now serve as the hosting infrastructure foundation for their new U.S. Equity Options Exchange. Of note, more than 50 exchanges, dark pools and data feeds are currently supported by SAVVIS. This expansion is important to BATS and its customers, because it makes optional use of existing technical infrastructure.

It will allow to more than 400 members of the BATS Exchange to use existing connectivity to also access the BATS Options Exchange and it does not require members to move data centers or connectivity link. BATS Exchange is the third largest equity exchange operator in the U.S. BATS Europe, which has less than a year old already holds more than 4% market share in each of the major indices, including about 7% in the FTSE 100.

We were able to make this deal happened, thanks to the previously announced expansion of the Weehawken in New Jersey financial data center complex, which means, we will have the space BATS needs to grow. NJ2X extends the SAVVIS footprint the highest demand market for services, the New York, New Jersey financial hub.

In addition, wins like this one were a U.S., EMA and Asian businesses work together on a global deal, continue to stream in. We expect to see more of this collaborative effort going forward, as our agreement with Thomson Reuters should provide additional global opportunities.

The Thomson Reuters collaboration represents another exciting win for SAVVIS and we have provided details beginning on slide 13. This opportunity has three strong growth drivers associated with it and we see it as a natural expansion of our relationship with Thomson Reuters. It also provides for a continued expected growth for another key area or SAVVIS, the Financial Vertical and our associated Proximity Hosting offering.

First and foremost, together with Thomson Reuters, we will be developing expanding a vendor neutral, mutli-region strategic hosting solution, which will be powered by SAVVIS and available initially in six data centers in America, Europe and Asia. In addition, Thomson Reuters and SAVVIS, will work together to jointly develop and expand this hosting solution.

This combination of SAVVIS hosting facilities and existing Proximity Hosting franchise with Thomson Reuter’s global portfolio trading infrastructure solutions is expected to provide customer at the lower latency, improve the access to markets and reduced costs and complexity. It will allow customers to focus on their trading applications, while leveraging this global platform for infrastructure.

While the strength of our existing franchise and proximity hosting was one of the factors that led Thomson Reuters to select SAVVIS, this should further expand our Proximity Hosting business and allow SAVVIS to offer an extended suite of applications and content to our customers. We anticipate that this collaboration with Thomson Reuters will enhance our ability to grow our revenue more broadly in the financial vertical. Thomson Reuters services the needs of over 40,000 customers in over 70 countries. We believe there is opportunity to both deepen our penetration of these account and broaden our account base internationally.

Turning briefly to slide 14, I’d like to detail the three distinct opportunities for SAVVIS’s growth as a result of this collaboration. First, these are the deployment of Thomson Reuter solutions, which means that at each center, customers will be able to gain access to hosted versions of products such as Reuter’s market data system; Reuter’s data feed direct, Reuters consolidated fees and their tick history products among others.

Customers will also be able to access low latency data fees and secure cross connects to the exchanges, multilateral trading facilities and dark pools that are Colocated in our centers. Second, we expect to see a potential network effect related to this deployment. As Thomson Reuter’s customers realize the benefit of this initial hosted offering, they look to colocate other parts of the Thomson Reuters product portfolio, such as risk management applications that currently side in all data center or another third party facility.

Third, we expect to see additional growth as we work to gradually expand into broader outsourcing opportunities. This can potentially include Thomson Reuters customers who are interested in outsourcing their entire market data, mid market or back office infrastructure to Thomson Reuters in SAVVIS.

We see this as a largely underserved at fast growing opportunity. Our strategy will be to focus on target customers will bring strategic value to the global platform. Such as exchanges looking to expand their footprint or conduct the technology refresh. Even though we’re less than one month into this collaboration, I tried to give you additional color on slide 15.

So far we have won a number of deals totaling 420,000 of monthly recurring revenue or approximately $5 million of annual contract value. While we’ve seen success across all three regions this offering is particularly well received in Asia. Today we have more than 100 deals in the pipeline and this includes a number of large opportunities from well known banking institutions.

We’re also seeing some large global exchanges showing interest. On the operational side, the Thomson Reuters team has been established and we’re working together on customer deals. We have dedicated resources to making this collaboration success and we’re adding individuals as needed.

Our timeline remains on track and I look forward to having four data centers up and running in the first quarter of next year. As we’ve discussed, we expect this collaboration with Thomson Reuters to drive our expansion to other markets. Well Frankfurt is the first new market were expect to expand we also be expanding our existing Tokyo data center in the first quarter of 2010.

Let’s move on to slide 16 and another exciting area, cloud computing. As we move forward with our cloud 2.0 offering, Projects Spirit we’re also seeing real adoption of our open and dedicated cloud services. Bookings have been strong and many customers are building high bride clouds by starting with the dedicated cloud and bur seen to an open cloud.

To the third quarter, we import $2 million of cloud revenue and we now seen annual run rate of $8 million. Through Project Spirit, we’re helping move the cloud with complete virtual data center provisioning. Our next generation cloud services offers enterprise customers increased automation by giving them the ability to design a complete virtual private data center using our portal.

Our new platform will offer multiple grades of users’ selectable quality of service levels with next generation quality of service controls all available through our portal of first in the industry. In addition, our cloud 2.0 offering is lower cost and feature reached. Cloud computes, storage, security and network layers will be fully virtualized and automated, which can deliver more features at faster rates at significantly lower costs.

Finally, Project Spirit provides enhanced security. This new cloud platform will deliver enterprise great cloud services that will offer the tight security the customers are used to experiencing and dedicated IT environment. While all of these gives SAVVIS an advantage, what really sets us apart with our enterprise customers are our grades of service.

We offer customers the ability to select service grades that is appropriate to the critical nature to the application being operate in the cloud. This can directly affect and lower the costs. Customers of be able to move from lower to higher levels in support of application development cycles. Our legal around security has run true with customers as well.

Lately, it seems like everyday, you read about another data loss in the clouds with Project Spirit we’re providing fire-walling, and file integrity monitoring and exclusion detection provision services. SAVVIS aims to be part of the entire cloud market in the hard of the strategy is Spirit and the infrastructure cloud which provides a foundational set of services for other type of cloud as you can see on slide 18.

For example, for example, platform as service providers can offer application development environments based on our cloud which allows their customers to graduate from software phase to development phase to production phase all within the same platform.

Software-as-a-Service providers will find spear an ideal platform for their offerings as well. The data management, security, monitoring, support, and performance, which are available with our higher grades of service, will enable these customers to manage difficult combinations of rapidly changing needs and higher levels of availability on a worldwide basis.

For SAVVIS, SaaS continues to grow with revenue up 36% year-over-year. Bookings that remain strong and we exceeded our plan. Of note, we have found that our SaaS customers are among the largest consumers of our Cloud solution. Before signing off, I have to say that I’m pleased with the prospects and opportunities we have available to us.

We are committed to a long term strategy to build our existing data footprint focusing on managed sourcing new products like SaaS and Cloud expands our reach in the financial work on product semi hosting and continues to drive high returns to our investors. Here at SAVVIS, we believe that the fundamental surrounding how business operates IT infrastructure is changing.

Like most significant operational sifts, this is going to be a long term process. 100 years ago, businesses still operated their own electric dynamos and employed Vice President Electricity. Today, business is plug into the grid to get the power they need, when they need it. We expect the same transformation to take place in IT outsourcing, as companies realize the benefits of plugging into a data center to get the compute, network, security and storage they need when they need it.

Just as the industry is transforming, so is SAVVIS. I’m pleased to take this opportunity to announce that Bill Fathers will take an additional responsibility of leading our U.S. efforts beginning today. As you know, Bill has responsible for driving product management and product development and for overseeing our three strategic business unit and our Thomson Reuters relationship.

To more deeply integrate these functions within our sales efforts, we are structuring this team, so we will import directly to Bill. While we’re excited about the step forward, we’re disappointed to tell you that, Paul Goetz Senior Vice President, Sales will be departing SAVVIS at the end of the year. In the interim, he will be supporting Bill during this transition. We appreciate all Paul’s contributions and wish him the best going forward.

With that, I’d like to thank you for your time today and turn the call back over to the moderator for Q-and-A.

Question-and-Answer Session

Operator

(Operator Instructions) Our first question or comment comes from the line of Mr. Simon Flannery from Morgan Stanley; your line is open.

Simon Flannery - Morgan Stanley

Okay, thank you very much. Good morning. The very good cost performance this quarter; can you just drill a little bit more down into the big drivers of the gross margin and what we should expect sequentially in terms of costs given your higher EBITDA guidance? Then secondly, I have been lot and pressed about proliferation and about dark pools. Can you just give some sense of what you think is that should be expected on Washington and the impact of the business?

Greg Freiberg

Hi, Simon, It’s Greg. Let me take the first part of that. We’re extremely proud on the cost performance here, which driven there is on the gross margin side. We’ve been really good and Phil hit on this theme, which is we’re managing this business for the performance on it. We’ve been really good at taking out the cost and costs of good side.

I had a benefit on the utility side that I did not see the seasonal cost increase that I normally would have. Jeff has just done a fabulous job putting rigger into cost of operations organization and that’s reflective on the EBITDA guidance we gave going forward as well.

The other comment I’d make is on the SG&A. It is up a little sequentially from the second quarter to third quarter and this is a conscious decision on our part, really investing on the innovation and product development here into the Cloud storage, because those are necessary investments to get a very robust product platform work for us on the revenue opportunity.

Simon Flannery - Morgan Stanley

Was the utility cost benefit, was it a pricing or was it more that it wasn’t as hard to say didn’t have as much usage?

Greg Freiberg

Utility cost is benefit there.

Simon Flannery - Morgan Stanley

Okay.

Phil Koen

Simon, I’m going to have Bill to talk to the proliferation dark pools question that you raised.

Simon Flannery - Morgan Stanley

Thank you.

Bill Fathers

Thanks, Simon. So I think the first on say is that we’re not seeing the current regulatory discussions having an impact on demand for the services we offer, the infrastructure supporting the needs of those customers.

So, I guess the second point would be what do we foresee this impact demand anyway of no strong view one way or the other and I can see on the positive side, the potential specter of starting to regulate the provision of Colocation services by exchanges may drive improved demand for then you mutual clouds like SAVVIS and not to do it themselves.

The potential negative might be if in fact the regulation drives some level of price control and regulation of price for providing those services then that may have, I guess could be positive, could be negative impact. Beyond that level it will be just speculation and then let’s wait and see.

Operator

Our next question or comment comes from the line of Colby Synesael - Kaufman Brothers.

Colby Synesael - Kaufman Brothers

Great thanks for taking my questions guys. I had two questions one if you could talk a little bit about the comment you made about in sourcing. You mentioned that some of the customers that you guys deal with are potentially looking to move data centers back inside.

Its living caller in terms of and when this happen and how big of a concern you think this could be. The other questions have to do with Thomson Reuters, Thomson right now its going about 7% of your revenues. Is it fair to assume, its project is successful you think it supposed to be or will be. That implies Thomson should be 10% of revenue existing 2010? Thanks.

Greg Freiberg

Okay Colby, thanks. Regarding the in sourcing, I don’t think this is a surprise that big content folks have built huge data centers are moving towards in sourcing. Without naming any names, I think it was wildly reported that a number of these company have recently built or expanded it existing data centers.

Some of those customers have traditionally than colocated with us primarily and what I’ll call at below market rates the deals were down a number of years ago and I think with the strength of changes strategic there is a fast moving this back internally for reasons that their strategy.

For us, we’re trying to reflect that while this has been painful, sure with the loss of the short term revenue, I think it’s positive in the long term that we’re able to back fill this at more reasonable rates that enterprise, which is our target customer are willing to come to us.

Colby Synesael - Kaufman Brothers

So, basically what you’re saying, though, it’s the large web content company that you are still referring to it’s not necessarily other enterprise that customers they’re leaving?

Greg Freiberg

Yes that’s correct. We have not seen this trend as for as any enterprise customers this is large internet content base company.

Phil Koen

With regard to Thomson Reuters, I can understand why would ask that question, but we’re obviously going to dodge that one and not give any forward-looking view as to what it could be. Hopefully in my prepared remarks us given you a sense of how we’re viewing this opportunity in three different market forces and growth opportunities that we’ll be pursuing and we’ll obviously update you on every call as to our progress going forward.

Colby Synesael - Kaufman Brothers

Okay, and guys, I ask one housekeeping? You guys have provided enterprise versus large content in terms of percentage of revenue in the past I don’t think I saw, do you have that number?

Phil Koen

I think when you differences perhaps the presentation we gave last quarter just gave you a sense of the percentage of Colocation that was split between the two.

Colby Synesael - Kaufman Brothers

I mean 88% enterprise, 12% content just wondering if there’s an update on that.

Phil Koen

No, I think we’re try to do give you a sense that that ratios going to continue to shift away from obviously web content comes the enterprise.

Operator

Our next question or comment comes from the line of Sri Anantha from Oppenheimer

You’re line is open.

Sri Anantha - Oppenheimer

Yes, good morning and thank you. Phil, just I know the past you used to comment about sales pipeline and it maybe if you could provide some color on that, how is your sales part line look currently and also is a follow up to that, in your conversations with your customers, where do you think that IT budgets are currently trending for 2010?

Phil Koen

Sure, Sri. Thanks for the both those questions. I’d say that and I am commented that think on Q2 that overall, I think our sales pipeline continues to strengthen. We continue to see a nice pipeline, but more importantly the quality of the customer base and they are continuing to focus on the managed hosting piece of that continues to play out as we had hoped.

The flip side of that and I want to be clear that quite frankly, we have seen that comes through at rate that we had hoped, that’s the reason why I was giving the sense that our bookings were up roughly 5% from Q2, Q2 was up roughly 4% from Q1. We’re seeing nice, modest improvement, but obviously, we still have a long sales cycle, difficult market for approval process to navigate through. I don’t think that’s going to change in the next couple quarters as we go forward.

Regarding the IT budget, I think right now, we’re just beginning to see those conversations take place. I don’t have enough data to be able to give you a strong sense one way the other. It would be more Episonic and at a very high level that I think that most of the IT people that I talked to are hopeful that they’re going to see perhaps a slightly improved spending level from 2009, but I think that like everyone, everyone’s taking a hard look at what their revenue growth is going to be and what their volume needs are going to be?

I don’t think there’s a lot of confirmation, if you look across industries to say, with any degree of conviction that it’s going to be up, down, or sideways. So, I think we’ll just kind of have to play this one out over the next 90 days, or so as we continue to work on our internal plans and continue to engage our customer base. So it’s unclear at this point I guess the shortest answer I can give you.

Sri Anantha - Oppenheimer

Got it. Just, Phil, I don’t want like, a guidance on the Thomson Reuters contract, but I think it makes sense from a network effect comments that you made, but if you were to look at this contract over the next five years, what do you think is the potential revenue opportunity as it relates to SAVVIS? Secondly, is this contract exclusive with SAVVIS or Thomson Reuters can go with other folks and establish a similar relationship?

Phil Koen

Yes, Sri, again I understand exactly, why you’re asking us since a good question, but I’m gone that have to clearly the amount of information we can disclose around this contract is limited per the terms of the contract. I’m just going to have to steer clear to give you any speculative sense as to how big this could be. Clearly, we’re hopeful. We spent some time on this call that give you a sense of the three areas of growth. Thomson Reuters, clearly this is a strategic change front and I think the best way to leave it for now is that we’ll continue to update you on our progress quarter-to-quarter.

Sri Anantha - Oppenheimer

Is this an exclusive partnership with SAVVIS?

Phil Koen

We’re staying away from any disclosure around the specific terms on that.

Sri Anantha - Oppenheimer

Great, thanks a lot, guys.

Operator

Our next question or comment comes from the line of Mr. James Breen from Thomas Weisel Partners.

James Breen - Thomas Weisel Partners

Thanks, just a couple of questions, one with the revenue that’s churning off the first quarter the $4 million to $6 million. Can you give us any color in timing there is it early in the quarter or throughout the quarter? Then secondly, associate with that, if you talked about sort of transitioning from a lower margin to higher margin. Can you give us some sort of guidance in terms of how much EBITDA that equates on the income statement? Thanks.

Greg Freiberg

Hi, James, it’s Greg. So the $4 million to $6 million it’s an estimate of the revenue impact in Q1. So that number is inclusive of the customers going away that Phil highlighted. We think they’re going to come out. The best place I’d guide you towards is January. We just don’t have exact laser eyesight as to the precise date. That’s right I allude you to.

From that the EBITDA perspective, what we put in here is that target, we mentioned the target pricing for replacing into those. We gave an example on MJ2 side, is about 45% higher than what would be the blended average coming out. So that’s a good rule of thumb. What’s coming out, we’re going to sell it at a higher target replacement revenue rite rate and the difference between what’s going out and coming in would fall to the EBITDA.

James Breen - Thomas Weisel Partners

Okay. You can assume that the cost side of that is constant.

Greg Freiberg

Yes.

James Breen - Thomas Weisel Partners

Great, thank you very much.

Operator

Our next question or comment comes from the line of Mr. Jonathan Atkin from RBC Capital Markets; your line is open.

Jonathan Atkin - RBC Capital Markets

Yes, thanks for taking the question, wondered if you could just provide a bit of a recap on your international exposure as a percentage of the overall business and what sort of the role and the drivers are there and whether FX fluctuations played any role in our revised guidance?

Greg Freiberg

Hi, Jonathan, it’s Greg. So international is about 16% of our revenue performance and on a quarter-over-quarter basis I had about a 1% benefit on revenue lines from FX. As far as looking forward, while hit this speculate and what happens in a future.

Jonathan Atkin - RBC Capital Markets

Maybe qualitatively just contrast the drivers internationally, though that you see in the core U.S. business. Is it more financials weighted different verticals, network, or financials and enterprise?

Phil Koen

John, this is Phil. Let me try to take that. I think as you know, of the internationals business, it’s more heavily weighted our email operations with close to our APAC operations. We continue to see this past quarter email had very nice bookings, which we were very pleased with seeing. It’s a mix share of same types of customer base that we see in the U.S., financials and enterprises.

Additionally, we have a very healthy government business over there, which is a little bit different than we have in the U.S. I think the economic environment in the U.K. is similar, what you’re seeing in U.S. I think the underlying drivers towards an outsource solution are the same that we’re seeing here.

I think the team continues to be the laser focused on pursuing the same type of strategy we pursue here, when our product hosting the financial vertical clearly the sign of the BATS and the extension there and the launch of their new platform in Europe are all very positive. So we’re guardedly optimistic and that they’re on a same type of general improving trend that we’re seeing here in the U.S.

Turning to Japan, I think Japan overall continues to be very challenging. The Japanese market just generally speaking is a tough one. We will benefit as I alluded to in my prepared remarks that we are expanding our Tokyo facility, but that’s primarily being driven how the Thomson Reuters relationship.

Now the Thomson Reuters has a strong Asian presence and we’re very hopeful that the primary growth driver coming for Asia will be us to be able to ramp very quickly with the Thomson Reuters capability as they move to this hosted model. So that’s going to be the benefit for our Tokyo business and also benefit for our Singapore business.

Singapore, I think generally speaking is in approving market. It’s interesting that there’s some new supply that’s coming on and the data center business there. We continue to focus very heavily on our managed hosting solution, and we’re making what I’ll call steady, but measured progress as far as penetration of that market. So not too much change that I look at the Singapore in Q3 versus where they were in Q1 and Q2, but I do think going forward, they will be benefiting from the Thomson Reuters relationship just as Tokyo will be.

Jonathan Atkin - RBC Capital Markets

Okay and then project spirit, what does the revenue ramp look like qualitatively? Is there pretty much pre-selling, pre-marketing related to that or do you wait until next year before that really starts to kick in to sales model?

Phil Koen

Yes. Project spirit is clearly we’re going to wait until next year. We are in the process of releasing it to a beta. In a beta environment, we’re going to run it in a beta environment for a number of quarters as we get experience on people scaling their operations across that. We are absolutely out pre-marketing it. We have a number of beta customers already signed up. We’ll give you quarterly updates on the progress of that as we go through the next couple quarters.

Jonathan Atkin - RBC Capital Markets

Thank you very much.

Operator

Our next question or comment comes from the line of Mr. Jonathan Schild from Jefferies; your line is open.

Jonathan Schild - Jefferies

Thank you for taking the questions. Most of my questions actually have been asked and answered, but I was wondering if we could spend a little time on just the overall managed hosting market kind of both from a dedicated and Cloud perspective. It seems like every day we read an announcement about a new competitor and moving into this field, where somebody launching a Cloud service and I was wondering, Phil, as you look at into the development of the marketplace, what factors do you feel are going to be the differentiating ones, which will drive success.

My personal present is it won’t be technology alone. So, I just wanted to get your view there and then also, I’d like to get a sense along those lines as to, whether you think that you’ll see customers down converting from maybe dedicated hosting within your facilities to some kind of products in the cloud and whether that could create any revenue headwind and how that relates your yield per square foot as it applies to the managed hosting business. Thank you.

Phil Koen

Great question, Jonathan, it reminds me of a math class I once had where I’m trying to solve a multi very equation with only a couple variables. I wasn’t very good in math let’s you give any answer it. Let me dive in and tray to give you my view. First of all, you’re right on the cloud service inside of this a lot of different flavors coming out.

We have done and really focused heavily on is building and trying to answer business problem for the enterprise space. We’ve approached from and what is the headache, what is the pain that enterprise is facing today with regard to the traditional managed hosting solution. I want to draw a distinction here.

We think in terms of traditional managed hosting as well managing a bunch of devices, whether it’s a storage, whether it’s a server, whether it’s a switch or router, a fire - the world of managing devices and where a cloud is going as world managing resource capabilities. I do think that overtime, enterprises will move from that world of devices to the world of resources.

The rate that happens, I can’t tell you, our cloud services is really focused on making sure that that enterprise as they move to that, we address one of the most fundamental questions, which is quality service and grade of service is not one size fits all, but this if you’ve read anything about Project Spirit, we’ve spent a lot of time defining three different service levels, which gives the organization an opportunity to come at a lower service level, experience it, buy it and then grow to higher service levels as they move more core applications on to that platform.

So, that’s one huge differentiator. The second differentiator is around the securities side, then a lot of tress recently around as you move more and more data into the cloud, questions where does it reside, how secure is it, how can I trust it and we’ve spent a lot of time and effort around trying to integrate a very, very high level security around our cloud compute platform.

So we approach this from not a credits card swipe type environment where it’s the best efforts. We’ve approached this from truly an enterprise experience where we’re trying to create all of the types of capabilities and features that an enterprise would have in their own and operate model, but in a virtual private data center type of experience. The last piece of this is where I think we’ve had a lot of differentiation is through the portal.

So, this is all got to be done through an online experience and we this is where I think that two major advantages occur over the traditional what I’ll call outsourcing model, but where there are managing devices. Its first speed, so no longer where we have to call up SAVVIS and then we go and deploy and provision and that takes time. We do this through an online experience.

The second piece of this is control. The control rests with our customer and I think that that’s going to be a powerful reason why people will eventually gravitate towards this cloud experience. Regarding price points, what’s the impact on the financials, I think it’s safe to say that one other things that we’re hopeful is that we’re also going have a disruptive pricing experience here, where by people will be able to benefit to their side a lower cost structure.

That doesn’t necessarily mean it’s going to be lower margin or lower EBITDA for us. The flip side of that is one of the advantages of this is the economies of scale. So, what we’re able to do is hopefully offset that price experience was better cost structure, more using the economy of scale to be able to have the same EBITDA margin capability and I think, with the idea here to fuel faster and faster acceptance as more and more applications move on to that.

Maybe a longer term vision that takes a few years to play out, Jonathan, but that’s our view, that’s we’re marching towards, investing heavily in it. Greg talked about that in our SG&A, we think that’s the place we’re going to get higher returns and more differentiated services and hopefully where our customer’s own technology plans are moving towards.

Jonathan Schild - Jefferies

Great, if I can ask one more question. This has to do a little bit more with the financial services platform in the financial exchange segment. I’d like to get your view on how this is developing it seems like right now there is a bit of a land grab going on for these key relationships and certainly SAVVIS has had its share of wins.

It seems like these customers have a tremendous value proposition in terms of drawing other customers into your data centers as well as when competitors have the wins into their data centers with, I guess attempting to move into the Colocation business in the US., I guess that might just be the first sign of formal recognition of the magnet power of these financial services firms, particularly the trading platforms.

Is there do you have any view in terms of whether overtime these platforms start to push for discounts relative to your base whether at some point you’ll find your way in having to pay them you to be there. Whether there’s a potential to see ecosystem like nicely you’re next to trying create in the New York region really taking demand away from the broader markets. Thanks.

Phil Koen

Let me take a fab at this, I’ll also let Bill, because I think he has some additional views that might be useful to you. I don’t think this is a winner take all market. Let me start that. I just don’t buy into that belief I do think that this is very much similar to how other markets have evolved where you can have a bifurcation between what I’ll call exchange captive centers and venue neutral centers.

Our customer bases are going to choose based upon the value proportion where they’re going to go and deposit that application that risk management or trading platform. The fact of the matter is that we’re a real player and we have already a lot of center of gravity a lot of magnetism and just by the way of whom we already have in that facility and the ecosystem as you called, but we’ve already build out with people like Thomson Reuters and fabs and the dark pools we have there.

So, unlike a Greenfield experience where we always have the chicken and egg problem, we don’t have that and I think that I see this market continue to mature where I can understand where an - NASDAQ would build their own data center, but I predict that they’re not going to be so my myopic to put all their eggs in one basket that their one also hedged in the selves to be able to play in a venue neutral facility.

So I think this is where there is going to be increasing returns to the entire group and whether a third party provider like ourselves who stayed true to the venue neutral strategy which we think is the right one or whether you see exchanges say well, we want to build a wall garden and play in that, companies will decide which one is best for them. So, that’s the best I can give you kind of how I think this, I’m looking to Bill, if you want to add anything to that.

Bill Fathers

Sure, I think I take the view that measure most is what customer demand is it and customer had the trading firm in the center of high side both I see that they’re buying requirements shifting quite radically at the moment. Increasingly they’re looking to do trade across different asset classes. They’re also looking to do trading on a more global basis were all in just more in region.

So, from their perspective, what they’re looking for are locations where they can conduct across trading all which would be low latency the equity and foreign exchange all in the same place. They also want to be do cost region trading. So that wants to buy just in one region effectively buying from up cost regions as well.

So, that starts to characterize the customer demands and so I think a large trading firm would look at a solution by perhaps one of the income but exchanges like noise and look extent to which is able to noise able attract other asset class and other exchanges into their facility, then that maybe attractive and equally if noise perhaps and deliver footprint to helps and cover the pan European and pan Asian markets as well, hat maybe attractive as well, so we could have clearly what we think the customer demand is, we’re charging towards trying to meet that need.

Jonathan Schild - Jefferies

Great, thank you for taking the questions.

Greg Freiberg

Thanks, John.

Operator

Our next question or comment comes from the line of Mr. Steve Salberta from Boenning’s & Scattergood. Your line is open.

Steve Salberta - Boenning & Scattergood

Hi, guys. Are you passing the lower power prices on through to your customer?

Greg Freiberg

Hi, Steve, it’s Greg. On a kilo side, essentially what we’re doing here is we’re pricing for the kilowatts. So when you’re looking at what is the Colo pricing for the customer, you look through to that. Now, as that relates to the Colo, the revenue per square foot that we’ve reported here, there’s the three different data center types. So it is a blended basis that’s the $50 per square foot. You see that bit of ebb and flow. Does that answer your questions?

Steve Salberta - Boenning & Scattergood

I’m just wondering that the average revenue per square foot in the Colocation business went down fairly flat, but it went down slightly. Should we, kind of look at it, just kind of continuing at this level and is the pricing of power a driver there?

Greg Freiberg

It’s leveling off to $50 a square foot. You’ll see a little bit of 47, 48 sort of range.

Phil Koen

Steve this is Phil. Just put a little bit of a sharper view on this. I think, to answer the question directly. When our cost structure changes, we don’t change the pricing structure to our customers. So we capture the benefit of cost structure goes down we get the hit when our cost structure goes up.

The second piece is around the observation, the revenue per square foot change. That’s more of a function of math it self. We simply look at the denominator, the number of square feet at the end of the quarter. So it’s not time weighted at all. So if a customer came out, right at the end of the quarter, or came in depending on when the billing actually occurred, you can have fluctuations in that revenue per square foot number. So that’s a little bit of noise. I would say that noise which we’re seeing is really based upon timing of exits and entrances.

Steve Salberta - Boenning & Scattergood

Okay. Now, can the two financial customers that are leaving, can that be accretive to the average revenue per square foot? Just buy them, leaving if you don’t resell the space, or even though they’re lower the market rate, is what they are paying still above the average corporate revenue per square foot?

Phil Koen

I know, we showed clearly is that averages what we see in the appendix to the earnings release. So the answer your question, yes, I mean, if you are below that average and leads, the denominator comes out, the revenue comes out the number will go up. What we’ve done historically overtime, however, is back fill that, moving towards that $50, that’s the reason, why if you go back over the last two years, you’re seeing that number move dramatically from I don’t remember exactly but probably in the $30 range up to where we are now. So we’ve said over and over again, our blended average is what we’re driving to is $50.

Steve Salberta - Boenning & Scattergood

Are they paying less than $47?

Phil Koen

Yes, that’s the reason why we said that, when we look at our target market rate that there’s opportunities there for significant increases.

Steve Salberta - Boenning & Scattergood

Is there any managed services, or network services component of those two customers those two that will go away?

Phil Koen

Dominions.

Steve Salberta - Boenning & Scattergood

Okay. My final question is, on the hosted area network. How large is the managed hand component of that and with it growing, when would you expect that will drive that entire sub-segment to begin to grow on a year-over-year basis?

Phil Koen

So the managed portion of that, so this is again on the last page of the earnings release, where we’ve got the whole series and network in a table there, that’s a composition of both the managed and Internet access and IP transit. So, Phil’s comment, was gleaning a little to say well in the total, it’s going down the component would then improve. I think you accurately said that in your question. So, yes, it’s still growing and growing very nicely. I’m going to look at feed for some metric up and give that visibility going forward.

Steve Salberta - Boenning & Scattergood

Okay, great. Thank you.

Phil Koen

Yep.

Operator

Our next question or comment comes from the line of Mr. Robert Dezego from Suntrust; your line is open.

Robert Dezego - Suntrust

Hi, thanks for taking the call. On the $4 million to $6 million churn that you’re expecting in the first quarter of 2010. Does that just the internet customer that does not include the two financial customers?

Greg Freiberg

No. That’s for all of them.

Robert Dezego - Suntrust

That’s for all of them.

Greg Freiberg

Yes.

Robert Dezego - Suntrust

Could you just give us a total kind of estimate on the square footage that you’re expecting to lose in the fourth quarter and first quarter through this churn just for modeling purposes, we can get a feel for how large these deals are?

Greg Freiberg

Unfortunately not, this is something that we want to keep close to our vest from a competitive perspective, and so no.

Robert Dezego - Suntrust

Okay and then second question is, on the guidance that you gave last quarter versus the guidance you gave this quarter, was the expectation of these customers going to leave in the third quarter and I guess the question is, how much of a benefit to your guidance did you get from these customers leaving you later than you expected? Was there any other kind of foreign exchange impact in the guidance?

Greg Freiberg

Obviously the guidance reflects all of the best information we have at that time when I give you the guidance number. Each time we give a new number, it’s everything we know at that moment and so it’s a combination of a lot of different factors. The biggest factor I point to is why I raised the guidance this quarter versus last quarter. We’ve done better on the cost side.

Robert Dezego - Suntrust

I’m trying to get, what your expectations were in the two guidance numbers? How much of that is from these churn from these customers, you obviously know more information now? We can’t put a dollar around it or any kind of…?

Greg Freiberg

No, not given a dollar on it.

Robert Dezego - Suntrust

Okay and then my last question is any thoughts on the switch and data combination and the impact you think this new combined energy could have on new business in any of the market that you overlap with these guys?

Greg Freiberg

No comment.

Robert Dezego - Suntrust

Okay. Thank you very much.

Operator

Our next question or comment comes from the line of Mr. Erik Suppiger from Signal Hill; your line is open.