Terremark Worldwide, Inc. F2Q10 (Qtr End 9/30/08) Earnings Call Transcript

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 |  About: Terremark Worldwide, Inc. (TMRK)
by: SA Transcripts

Terremark Worldwide, Inc. (NASDAQ:TMRK)

F2Q10 Earnings Call

November 9, 2009 5:00 pm ET

Executives

Hunter Blakenbaker – Vice President Investor Relations

Manuel D. Medina – Chairman of the Board, President and Chief Executive Officer

Jose A. Segrera – Chief Financial Officer

Analysts

Mark Kelleher – Brigantine Advisors

George Sutton – Craig-Hallum

Chris Larsen – Piper Jaffray

Analyst for Jonathan Schildkraut – Jefferies & Company

Jonathan Atkin – RBC Capital Markets

Steve Salberta – Boenning & Scattergood

[Toby Vetitero – Federated Investors]

Mike Marburg – Ramsey Asset Management

[Aaron Shashadry] – Credit Suisse

Sri Anantha – Oppenheimer & Co.

Operator

Welcome to the Q2 2010 Terremark Worldwide Inc. earnings conference call. At this time all participants are in listen only mode. We will conduct a question and answer session towards the end of this conference. (Operator Instructions) I would now like to turn the conference over to your host today Mr. Hunter Blankenbaker, Vice President Investor Relations. Please proceed.

Hunter Blakenbaker

Welcome to Terremark’s fiscal 2010 second quarter earnings conference call. With us today are Manny Medina, Terremark’s Chief Executive Officer and Jose Segrera, our Chief Financial Officer. Please note that slides related to today’s call are available on Terremark’s website at www.Terremark.com under the investor relations link.

During our call today we will be making forward-looking statements. Any statement that refers to expectations, projections or other characterizations of future events including financial projections and future market conditions is a forward-looking statement. Actual results may differ materially from those expressed in these forward-looking statements. For more information please refer to the risk factors discussed in Terremark’s Form 10K for fiscal 2009, the Form 8K filed with the SEC today and today’s press release.

Terremark does not undertake any obligation to revise these forward-looking statements to reflect future events or circumstances. We will also provide non-GAAP measures on today’s conference call. We provide a reconciliation of those measures to the most directly comparable GAAP measures and a list of the reasons why the company uses those measures in today’s press release.

With that, I’ll turn the call over to Manny.

Manuel D. Medina

I’m pleased to report our team delivered an exceptional quarter on all fronts. We produced strong revenue and EBITDA growth and exceeded or met our financial targets. We reported record bookings demonstrating strong demand for our expansion facilities and our comprehensive suite of products and services ranging from the network to the cloud. We also continued our product leadership with several additions and enhancements to our cloud platform.

I’ll briefly touch on some of the financial highlights before providing a more detailed update on our business. I will also provide an update on our cloud strategy and the success we are having there. The key financial metrics of revenue and EBITDA were very strong and in line with our expectations. Our second quarter revenue was $69.8 million, an increase of 17% over the prior year period and at the high end of our guidance. EBITDA was $18 million representing 82% growth from the prior year period and in line with our guidance.

What really stood out this quarter was the significant acceleration of our cloud computing revenue. As you recall last quarter we broke out revenue solely attributable to our cloud platform to facilitate tracking this success. I am pleased to report that cloud revenue increased 420% over the previous quarter to an annual run rate of $13.2 million from $2.5 million. This demonstrates that tremendous growth opportunities in this nationwide market and our industry leading platform provides a real competitive advantage.

I’ll provide more color on the drivers of our success of how we’re addressing this market later in my prepared remarks. The robust pipeline with which we entered the quarter translated in to record quarterly bookings of $34.2 million of which $28 million were recurring, also the best in our history. We saw strength across all of our products and geography with our average deal size climbing to $211,000, a 163% increase from the year ago quarter.

Companies today continue to fund mission critical projects that have good ROIs and drive productivity. Our federal bookings were particularly strong with $6.7 million in the quarter of which $6 million were recurring. We continue to strengthen our cloud leadership within the government sector as we signed three new federal agencies to the cloud including WhiteHouse.gov and the Department of Transportation.

Our federal pipeline continues to remain robust comprised of defense and civil agencies seeking co-location, enterprise cloud, security and disaster recovery services. We entered the quarter with 1,119 customers including 64 new customers. More than 70% of our bookings were from existing customers including customers like 3Com, [inaudible], Google, Lego and H&R Block.

Additionally, our pipeline remains at record levels driven by a significant increase in the number of large enterprises looking outsource some or all of their IT infrastructure. The IT budgets of many of these large enterprises were virtual frozen over the last 18 to 24 months but they have now begun undertaking projects like widespread hardware refresh or datacenter consolidation and expansion.

These conversations represent and ideal opportunity to introduce the benefits of the cloud to a very receptive budget conscious customer. Lastly, while we are only six weeks in to our third quarter, our bookings are off to the best quarter start in our history and we are encouraged by these early trends.

In summary, with our strong first half results combined with our second half visibility, we remain confident in the fiscal year targets we laid out in February. Now, I’d like to turn the call over to Jose to discuss this quarter’s financials and our guidance in more detail.

Jose A. Segrera

During my discussions today I’ll first review our Q2 financial results and then provide a more detailed looking in to our guidance for the third quarter and full year fiscal 2010. As Manny discussed, we had a strong second quarter driven by our recurring revenue growth and solid execution by our entire organization. Total revenue for this quarter was $69.8 million compared to $59.6 million in the prior year, a 17% increase.

As we anticipated, recurring revenue accounted for 93% of our total revenue and increased to $64.7 million compared to $61 million in the prior quarter and $54 million in the previous year, increases of 6% and 20% respectively. Total project type revenue was $5.1 million in Q2 versus $4.8 million in the prior quarter. Project revenues this quarter were primarily related to equipment resales.

Our federal government business remained very strong and accounted for $15.5 million or 22% of our second quarter revenues. Recurring government revenue increased 6% from the previous quarter to $14.6 million. Our Q2 overall churn remained below 2% of annual recurring revenue. Our federal government churn related at zero during the September ’09 quarter however we expect some revenue churn in our federal business during the December ’09 quarter related to the discontinuation of a specific contract with one of our federal customers.

This contract had been ongoing for over five years however, funding was discontinued at the end of the federal government’s last fiscal year, September 30th. The services that will be impacted are co-location and network services and will have an approximately quarterly revenue impact of $2.5 to $3 million. It is important to note that we continue to provide a significant amount of services to this federal customer and during this current quarter have already sold them additional services.

Similar to last quarter, managed services represented 54% of total revenues, co-location 39% and exchange point services 7%. Our annualized recurring revenue yield per square foot was 1,974 in the second quarter compared to 2,045 in the prior quarter. This is consistent with our expectations that our yield would be in the 2,000 per square foot range during fiscal 2010 as we ramp up our co-lo revenue at our NCR facility.

Looking ahead to fiscal ’11, we expect our recurring revenue per square foot to increase due to the revenue contribution from our successful cloud efforts. As Manny mentioned, we continue to see strong demand for our uniquely differentiated product set and we reported record bookings of $34.2 million. Our bookings this quarter were balanced with co-location representing approximately 45% and managed services approximately 55%.

Approximately $3 million of the bookings were from customer up sells in our NAP West expansion this quarter. These bookings will be deployed in the first quarter of fiscal 2011 when our NAP West expansion opens. During the quarter utilization of total net co-lo space increased 29.8% from 28.3% the previous quarter. Our total co-location space increased to 448,000 square feet as we added 5,000 square feet at our NAP Sao Paulo.

Utilization of built out co-lo space increased to 64.3% at September 30th ’09 from 60.5% last quarter. Cross-connect build to customer increased to 8,789 at September 30th ’09 representing increase of 4% and 18% compared to the prior quarter and prior year respectively. Total cost of revenue increased to $39.8 million in the September ’09 quarter compared to $36.7 million in the June quarter and our second quarter gross profit margin remained steady at 43%.

The increase costs were primarily related to a seasonal increase in our power costs as well as incremental expenses related to the expansion of our Sao Paulo facility. This expansion provides a great platform for continued growth and we have already signed customer contracts that will be deployed there in our fourth quarter. As Manny will discuss we have established a new small presence in Istanbul Turkey driven by customer demand. We will see some expenses related to the ramp of this operation during Q3 and Q4 this fiscal year.

Sales and marketing expenses for the September ’09 quarter came in as expected at $6.1 million compared to $6.3 million in the first quarter. We expect sales and marketing expenses to remain steady in Q3. General and administrative expenses were $8.5 million for the September ’09 quarter compared to $8.2 million in the June quarter. We expect general and administrative expense for the third quarter again to be in the $8 to $8.5 million range. Total SGA& was $14.6 million or 21% of revenue, a slight decrease from the first quarter.

For the quarter ended September 30 ’09 our adjusted EBITDA was $18 million or 26% of revenue. This reflects an 82% increase from the previous year and an 8% increase from the June quarter. Our recurring EBTIDA was $17.3 million a 10% increase over the prior quarter and a 106% increase from the previous year. Our interest expense this quarter was $13.9 million reflecting a full quarter of interest expense from the new bonds we issued this past June.

Moving on to the balance sheet and liquidity, our cash balance remains strong at September 30th and was $130.7 million. Our accounts receivable team had a solid collections quarter resulting in a reduction of accounts receivable to $37.7 million at September 30th ’09 from $41.8 million at June 30th ’09. Depreciation and amortization expense remain steady at $8.9 million at the September ’09 quarter.

As expected we had a strong operating cash flow of approximately $20 million for the September ’09 quarter. As we discussed last quarter our quarterly operating cash flow will fluctuate on semiannual bond interest payments. Therefore, we will see operating cash flow come down in the December quarter and then back up in the March quarter.

Capital expenditures or the September ’09 quarter were approximately $31 million. This included $12 million related to the NAP in the capital region, $3 million to our Miami NAP and $2 million to our California NAP. Our technology and maintenance cap ex was approximately $14 million primarily related to the build out of our vCloud Express platform and additional capacity needed to accommodate the significant growth of our enterprise cloud platform.

We continue to expect fiscal 2010 total cap ex to range from $90 to $95 million. The main components are as follows: $50 million for NCR; $10 million to fund our expansion in Santa Clara; $5 million related to our Miami NAP; $5 million for our expansion in Sao Paulo; and $20 million related to our technology and services delivery platforms.

Looking ahead to our third quarter guidance, we expect revenue of $73 to $76 million including approximately $8 to $10 million in non-recurring revenue. For the December ’09 quarter we expect EBITDA to range from $19 to $21 million. As Manny mentioned, we are comfortable with our fiscal 2010 guidance of revenues from $290 to $300 million and EBITDA between $80 and $85 million.

Similar to last year we had very strong visibility in to the second half of the fiscal year. Our comfort level with our full year guidance is based on the following: we are guiding to approximately 9% sequential quarterly revenue growth in the second half based on our strong bookings of the first half of the year and the early strength we are seeing in our Q3 bookings. Additionally, our significant cloud wins with the federal government will help offset the churn that I discussed earlier.

We continue to expect project revenue to account for approximately 10% of our fiscal 2010 revenue and anticipate an increase in non-recurring revenue in the second half of the year based on specific customer contracts and opportunities. Again, this is consistent with our trend in second half of last fiscal year. Lastly, consistent with past trends, our EBITDA flow through for the second half of the year is projected to be in the 55% to 60% range.

Now, let me turn the call back to Manny so he can tell you more about our recent successes.

Manuel D. Medina

We obviously think the business is performing well today and our model has us well positioned for the future. As a leading global service provider we’re truly at the intersection of the future of IT. Whether it’s virtualization, cloud computing, virtual desktop or innovative storage technologies to name a few, the opportunities in front of us are immense. Our key challenge today is how to prioritize and profit from these major paradigm shifts.

To help utilize on these substantial opportunities we announced two important organizational changes designed to optimize our diverse portfolio of products and services and ensure we successfully leverage the investments we’re making in people and technology. Specifically we appointed Marvin Wheeler to the new role of Chief Strategy Officer which integrates the corporate strategy and M&A functions under one leader in order to bring a heightened level of focus on our overall product portfolio, our global strategic partnerships and ultimately our growth prospects.

We also announced the appointment of Nelson Fonseca to the role of Chief Operating Officer to help drive operational efficiencies across the company including both federal and commercial and to ensure a continued focus on execution excellence.

Moving on, I would like to provide more color on our cloud services success and the key drivers of the significant increase in our cloud revenue. Without a doubt the largest contributor to our strong results is the federal government. As has been well documented in the press, the new administration is driving a major transformation of the federal government IT infrastructure through the adoption of cloud computing technologies in order to achieve significant long term cost savings.

Terremark has established a leadership position in the federal government’s transition to the cloud through our proven ability to provide significant savings combined with our highly secure facilities, best in class information, security and cloud based disaster recovery solutions. Our early success with the federal government has clearly validated our technology leadership which is accelerating our commercial customer’s interest in an adoption of cloud computing.

To capture this momentum we have deployed a sales strike force composed of our best and brightest that is solely focused on driving new opportunities from Fortune 500 companies. We have an aggressive and ambitious cloud product portfolio is consistent with the needs of our customer. The cloud has evolved in to more than just a quite [inaudible] and storage capacity. The cloud is an enabling technology and the architectural foundation from which we deliver infrastructure as a service, provide a world class foundation for SAS and platform as a service partners or provided a fully managed enterprise solution in a fully secure environment.

Essentially, the cloud is the cornerstone of true IT as a service at significantly lower cost and much greater efficiency compared to traditional models. The cloud and the virtualization technologies that enable it have formed the way in which IT is designed, provisioned, managed and delivered and provides the engine for the agile business innovation and execution that CIOs require.

Leveraging our strength and infrastructure management our long history of providing virtualized IP services and our leadership in the field of managed services and information security, we will continue to differentiate ourselves in the evolution of the cloud.

Moving on to our expansion plans, we’re pleased with our progress and continue to see strong fundamentals and demand for co-location, managed hosting and cloud services driven by macro trends such as outsourcing, the extraordinary growth of web content and applications and datacenter consolidation projects being undertaken by large enterprises.

In Santa Clara, the first 14,000 square feet of expansion space will be ready for customer deployment in the first quarter of our fiscal 2011. As we expected, existing customers like Akamai and Shutterfly have already signed contracts to expand in to this new space. It is opportunities like these with customers that are growing, performing well and have a very long term prospects that we remain very confident in the Santa Clara market.

Construction of the second 50,000 datacenter in the NAP at the Capital Region or NCR is progressing on schedule and we continue to expect completion and customer deployment in the fourth quarter of fiscal 2010. The pipeline for our NCR facility continues to build and remain very strong. As we near completion of the datacenter demand from larger commercial enterprises has accelerated and our federal pipeline continues to remain robust.

Our international operations accounted for 15% of our total revenues and continue to perform very well. We expect demand and pricing trends to remain positive in our international market and our solid pipeline consists of large well known regional and global enterprises. Our European operations had an outstanding quarter having signed several new multinational companies and secured expansions with a number of our current customers.

Our strong presence in this region particularly in Amsterdam is strategically important to our business and presents significant long term opportunities for Terremark. Our Latin American team in Sao Paulo Brazil and Bogotá Columbia continue to perform at a high level driven by strong demand from multinational customers and a strong local economy. Due to our continued success in Sao Paulo we’re bringing on an additional 5,000 square feet of space in our third quarter and are pleased to announce that Yahoo will be our first customer in the expansion space.

Driven by specific customer demand from our large multinational customers, we have opened a small datacenter in Istanbul Turkey. Turkey’s strong economy, growing base of international business and rapid broadband Internet penetration make it an ideal addition to our strategic footprint in key global markets.

In closing I would like to reiterate that we are very pleased with our results and remain on track to meet our fiscal 2010 guidance. Looking ahead we are at the forefront of a major shift in the way IT is procured and delivered and I firmly believe we have the right vision and strategy to secure very significant growth opportunities and return for our shareholders. With that, we would now like to take your questions.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from Mark Kelleher – Brigantine Advisors.

Mark Kelleher – Brigantine Advisors

The first thing I wanted to ask was just a clarification, the cloud revenue you said that’s $13.2 million of annualized run rate, did I get that right?

Manuel D. Medina

Yes.

Mark Kelleher – Brigantine Advisors

So about a little over $3 million in the quarter, is that how we read that?

Jose A. Segrera

So the number we’re putting out there is our contracted run rate at the end of each quarter. So, at June 30th ’09 contracted in place was $2.5 million, not 100% of that was deployed but just given the nature of those types of contracts they get turned up pretty quickly so in the $13.2 million now was at September 30th our contracted run rate. So, the answer is no that’s not the revenue that got recognized in the September quarter the majority of that will get turned up pretty quickly here during Q3 and Q4. Does that make sense?

Mark Kelleher – Brigantine Advisors

A little more color on that, is that primarily with the federal government, is the majority of that with the federal government?

Manuel D. Medina

Right now Mark the majority of the growth has been with the federal government. We do expect that to change as we now have significant prices on our pipeline but right now the majority of that has been the federal government.

Mark Kelleher – Brigantine Advisors

One last question, on the 50,000 NCR coming up on schedule, how much of that is pre-sold? How much of that is well in hand?

Manuel D. Medina

Well, we have right now 30% actual signed contracts but we do expect to have a significant amount of more signed by the time that we speak to you next quarter.

Operator

Your next question comes from George Sutton – Craig-Hallum.

George Sutton – Craig-Hallum

So a few of your comments Manny, I wanted to get a little bit more clarity around, you mentioned pipelines are at record levels, you mentioned that the corporate customers’ budgets have been frozen for the last 18 months and you mentioned that you’re off to the best quarterly start in history so what I believe you are saying, and correct me if I’m reading this wrong, is that that best quarterly start may be in part due to some kind of that frozen corporate IT budget?

Manuel D. Medina

Without a doubt, yes.

George Sutton – Craig-Hallum

So if I were to look at some of your bigger opportunities in your pipeline how would you characterize the breakdown between federal opportunities and corporate?

Manuel D. Medina

I think today still a majority corporate with a growing trend on the federal side but I think you’re seeing a significant healthy balance between both with an increase in new spend that we’re seeing on the large enterprise side.

George Sutton – Craig-Hallum

One other thing for me, you had released the vCloud Express during the last quarter, what kind of feedback have you gotten on that and what sort of expectations do you have over the next few years there?

Manuel D. Medina

Again George, the vCloud Express is complementary to our enterprise cloud which is really our main focus. It’s still in beta. The reports have been outstandingly well received both the pricing, the performance, etc. It just complements our existing enterprise extremely well for a lot of our existing customers and potential customers that don’t want to go through the formal sign up and they just want to swipe the credit card and be done. So, we do expect that to be a very important integral part of our cloud offering as we continue to move forward.

George Sutton – Craig-Hallum

You mentioned [inaudible] and I wondered if you could just give a little more of a sense of?

Manuel D. Medina

Yes, what we’re doing is we took as I said the brightest, and I don’t mean that the rest are not because I think we have probably one of the best sales forces in the world from the training point of view but we took really a team composed of sales as well as sales engineering and basically really targeting the same way we went out and targeted several agencies in the federal market a few quarters ago and now we’re seeing immense success on that market. It’s really translating a success to really just targeting – actually it’s really like Fortune 100 but like I said fortune 500, very, very large enterprises which all have some kind of a cloud strategy today and we’re helping them kind of actualize their cloud starting the same way we did with the federal government.

George Sutton – Craig-Hallum

Is this a few people, a dozen people?

Manuel D. Medina

It’s about three people, that’s all.

Operator

Your next question comes from Chris Larsen – Piper Jaffray.

Chris Larsen – Piper Jaffray

I was interested to hear the comment about Sao Paulo and the international expansion, I’m wondering if you can talk a little bit about your thoughts there whether you’re going to continue to expand internationally and was that – did Yahoo reach out to you or did the customer reach out to you to expand? Or, maybe just a little bit of the genesis of that decision as well.

Manuel D. Medina

One of the things Chris that we’re seeing is like for example not only in Sao Paulo but what we’re seeing also and the reason we opened a small datacenter in Istanbul is our very large multinational customers once you establish a relationship of trust with them they actually want you to go and help them on much more than a regional basis. So, in the case of Sao Paulo without a doubt we’re seeing a very significant interest from large enterprises such as Yahoo.

I guess I can say yes, in the case of Yahoo, they actually were very interested in us being able to accommodate them there so we obviously did. This is kind of whenever we’re looking at any of these expansion there’s no different than the way we open in Bogota driven by IBM, etc., this is the way that we do it and basically having a significant interest from an existing global customer that needs your help there.

At the end of the day we’re still very US centric, 85% of our revenues is generated in the US, it still is going to be our main focus but however, being extremely opportunistic when it comes to opportunities that are as risk free as you can get in our international expansions.

Operator

Your next question comes from Analyst for Jonathan Schildkraut – Jefferies & Company.

Analyst for Jonathan Schildkraut – Jefferies & Company

I was wondering if you could give me the sense of the size of the deals that you’re seeing and how this is changing the sales cycle in particular?

Manuel D. Medina

The size of the deals in respect to just general across the product set or a specific product set?

Analyst for Jonathan Schildkraut – Jefferies & Company

Mainly, you can give it to me in general and you can put that in the framework of the sales cycle? I mean is this pipeline now going to be much longer because of the size of these deals?

Manuel D. Medina

Let me address first on the sales cycle, absolutely not. On the contrary, the great thing about the cloud is that the sales cycle significant shortens that. As you’ve seen the trending on our bookings per quarter is actually increasing significantly and as I said in my prepared remarks that we’re starting off to the best quarter ever. So no, the sales cycle for sure is not expanding. Jose, do you want to talk about the size?

Jose A. Segrera

What we saw this quarter, average new deal size bumped up to about $210,000 to $211,000 on an annual basis per contract and if you also look at our average annual revenue per customer that also bumped up to about $230,000 so we’re definitely seeing an uptick in size. But, like Manny mentioned in terms of again, kind of deals from start to finish there’s no deal there relative to what we’ve seen historically.

Analyst for Jonathan Schildkraut – Jefferies & Company

Just one more, can you maybe give me an update on your traditional managed hosting business beyond the cloud?

Jose A. Segrera

Look, we’ve continued to see strength, I think you can look and if you look at our revenue trends over the past two quarters, during this fiscal year because obviously the cloud, the bulk of that revenue is going to be coming in the second half of the year so if you just look at Q1 and Q2 on a quarter-over-quarter growth rate you’re going to see that growing consistent with the business. You can see our revenue mixes remain steady between co-lo and managed hosting over the past two quarters so they’ve both been growing strong.

Then, we’ll start to see in the back half of the year some of the cloud revenue have more of an impact and then obviously going in to fiscal ’11 we’ll hit there with a stronger base but it’s been very balanced. If you look at our bookings as well, for this quarter again they were balanced between co-location and the managed services.

Analyst for Jonathan Schildkraut – Jefferies & Company

Do you guys disclose how many cloud customers you had this quarter?

Jose A. Segrera

No, we have not. I think we’ve seen a big increase from the $2.5 million to $13 million and we’re seeing the uptick in the average deal side. If you were to drill down and look at our average kind of cloud deal size, that’s attractive to the overall average, actually larger than average so as we talked a few quarters ago we’re going for the cloud not to sign up the $10,000 a month deal but these are in some cases triple digit a month type deals.

Operator

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

Jonathan Atkin – RBC Capital Markets

Two questions, given the record recurring bookings I’m just wondering how conservative you view your guidance which you maintained rather than changed in light of the strong quarter. I’m just wondering how to think about that? Then the co-lo mix has increased year-on-year at the expense of managed and given the cloud momentum that you just had been referencing, how do we think about that mix over the next several quarters?

Manuel D. Medina

I’ll answer the second question and I’ll let Jose answer the first one. On the second question is the revenue yield per square foot really only is a direct factor of all the new space that has been put in to service at NCR right now so that’s what’s driven it. We do expect that to continue going back up at the end of our fiscal 2010. So in other words just the mathematical formula having substantial more space that has been put in to service versus the amount of revenue being recognized on our cloud and managed services.

Jose A. Segrera

On the guidance for the year we feel comfortable with the full year guidance like we have in the past. When you look at the book we had record bookings, a chunk of that will kick in, in fiscal ’11 that we’ve called out but even if you pull that out it was still right at the high end of our kind of record quarter bookings. So, we feel real comfortable with the rest of the year. Then also pre-booking some of the California space gives us kind of an extra boost going in to fiscal ’11.

Operator

Your next question comes from Steve Salberta – Boenning & Scattergood.

Steve Salberta – Boenning & Scattergood

Can you discuss the government business that you mentioned was going to transition out, what datacenter is this business in and what’s the reason for it?

Manuel D. Medina

Let me just address the reason is just literally just September 30th funding and basically the customer, which is an existing great customer of ours had one of its contracts not funded and that was deployed. It was deployed in a couple of our datacenters. It includes 2,000 square feet of co-lo and network services will have some decreasing cost on the network and power costs and bandwidth costs but basically that’s exactly what it is. As Jose and I mentioned in our prepared remarks we already sold this customer additional services. This is one specific contract that was not funded on September 30th.

Steve Salberta – Boenning & Scattergood

Specifically in the government –

Manuel D. Medina

By the way, I just want to add before is that September 30th passed, this is the time of the year when everybody is out. September 30th was very good for us in a number of other ways, we signed a significant number of new contracts that we signed and we lost one along the way. So, there’s no other contracts or customers that we are concerned that this is any kind of issue it is just basically the fact of life when you’re dealing with federal government that September 30th is an important date. In that particular case we gained a lot more than we lost.

Steve Salberta – Boenning & Scattergood

Then when you look inside the government recurring bookings, how is that shaping up or how does that look, the mix between co-location and managed services?

Manuel D. Medina

Right now it’s a healthy booking, right now it’s more on the managed service side only because their deployment takes a little bit longer but it’s also healthy on the co-lo side as well.

Jose A. Segrera

During the quarter slightly more than 50% on the federal side was on the managed services side relating to a lot of the cloud offerings but there were also additional bookings that came in related to co-location up in Virginia. So, we’re seeing good traction and momentum on both sides.

Steve Salberta – Boenning & Scattergood

My final question is, I guess it’s almost two questions, one the government business and the other the commercial business with respect to how long it takes a booking to turn in to revenue? Is there a difference between co-location and managed services? Can you bring one side of it on to the income statement faster?

Manuel D. Medina

Managed services you can bring them on faster typically particularly with the cloud. I mean co-location depending on what point of the move you’re actually talking to the customer. It can be as little as 90 days or it could be as much as 180 days depending on how involved, if it’s a migration of an entire datacenter or not. I think overall managed services can always be turned up quicker than co-location.

Jose A. Segrera

The only thing Steve that I’ll add to that is obviously with the first pod in [inaudible] we’re still ramping up from some of the initial bookings from some of the large deals that we signed up pre-opening and right when we opened the facility.

Operator

Your next question comes from [Toby Vetitero – Federated Investors].

[Toby Vetitero – Federated Investors]

Just a quick clarification on the guidance and the outlook, so when I look at your numbers revenues going to be up roughly first half to second half going to be up 20% and then EBITDA looks like it’s up 40%, 45% to 50% first half to second half. Given the Q3 guidance it looks like a lot of it’s coming in Q4. I’m just wondering what the dynamic is there that’s going on that would cause a huge sequential jump in the March quarter? Then also the follow on to that, what would cause the sales to go up 20% and EBTIDA to go up more than double that, what’s going on with the costs?

Jose A. Segrera

So a couple of things that I think will be helpful if you look at, and you can actually go back just from a trend perspective, you can go back and look at fiscal ’08 and fiscal ’09 and you’ll actually notice kind of in the prior years we’ve typically had about 65% of our EBTIDA coming in the back half. This year where we’ve guided to kind of at a midpoint or consensus will be just under 60% of EBITDA coming in the second half of the year. So, as the business continues to grow and mature, you’re seeing that come down year-over-year.

The second thing you’re going to have is obviously we’ve had great bookings now in the Q2 quarter and some of these bookings are going to be ramping up during – we won’t get a full Q3 quarter of some of these new bookings and some of these larger cloud bookings so we’ll have a full quarter of those bookings that will come in in the fourth quarter of this year. So those are a couple of dynamics.

From a cost perspective obviously the EBITDA growth rate is going to outpace your revenue growth rate when you have the flow throughs that we experience in our business. So, if you look at it from that perspective a lot of the contracts that we’ve signed up, a lot the cloud revenue, there really isn’t too much incremental cost to bring in the business that we’re going to need to bring on during the second half of the year to support those revenue streams.

[Toby Vetitero – Federated Investors]

That’s pretty much just a function of the operating leverage then?

Jose A. Segrera

Correct, correct.

[Toby Vetitero – Federated Investors]

Then one other one on the Turkey facility, what’s the size of this? What drove that? Are you looking to expand there, is this one customer there, are you going to build it out further?

Manuel D. Medina

This is kind of like consistent on how we’ve really expanded everywhere else like for example, the way we started in Bogota where you start with a very small facility. This is not really material from the point of view of a financial point of view, it’s a very small facility. We do have options without having to commit to expand in the existing facility in Istanbul. This is driven by existing customers today that have a significant interest in us being able to help them there.

Istanbul, Turkey in general but Istanbul is one of the most dynamic markets for the Internet today. Actually, some of the best known websites like Facebook, etc. actually this is one of the primary markets today. When you look it’s in between east and west and basically driven by existing customers we plan to seat there. There’s not a significant risk but at the same time it’s exciting because it just augments the power of our network of NAPs all the more by having a point of purchase in such an exciting market like Istanbul.

[Toby Vetitero – Federated Investors]

Are there a lot of other people in Turkey? Do you have a lot of competition there?

Manuel D. Medina

No, there isn’t. That’s one of the things that makes it more exciting. Turkey, in a totally different region is more analogous to how we did Bogota. There’s not a lot of competition, there’s not really a neutral peering point. There are a lot of things that are potential that they have a very small incumbent but however the countries open so incredible, incredible appetite in demand for security and cloud products. It’s really just a very, very good way for us to – having the strong thing that we have in Europe, it’s a very low risk way for us to put our toe in to a very, very dynamic market.

Operator

Your next question comes from Mike Marburg – Ramsey Asset Management.

Mike Marburg – Ramsey Asset Management

First, when you look out over the next couple of years based on what you’ve laid out for us so far the next say 30 months, we don’t see you needing to go back to the capital markets to raise money externally. Does the international or the cloud computing successes, do they change that dynamic?

Manuel D. Medina

No, we don’t have any plans to tap the capital markets any time soon.

Jose A. Segrera

No. When you look at it even from a cloud perspective it’s very capital efficient in terms of how we’re deploying it, small incremental chunks. If you look at our liquidity today and just based on the past rate, we’re 100% funded for our planned expansion with the big dollars obviously going to the co-location facilities so the answer is no.

Mike Marburg – Ramsey Asset Management

Then as it relates to the cloud computing, the IRR and the cap ex sort of little mini model that you’ve laid out for us in the presentations and that’s very helpful, as you deploy, and the cloud computing is working, do you see anything in terms of the frame work you provided us? Are the upfront costs, the maintenance costs, the IRRs, are they looking about in line with the different scenarios you laid out?

Manuel D. Medina

Absolutely. As a matter of fact, one of the things that is very important when it comes to our cloud offering, and I’ll take this opportunity to just remind everybody, I kind of mentioned a little bit in my prepared remarks that this is a lot more than just raw compute, capacity and storage. Really what give the premium to our cloud is the services we wrap around it. We don’t expect those IRRs to come down any time soon. To be perfectly honest with you, I’m a lot happier today when we sign a cloud deal than when we sign 1,000 square feet of co-lo. Let’s put it this way.

Mike Marburg – Ramsey Asset Management

Finally, on the announcement about the cloud enabled disaster recovery offering, can you just distinguish that in terms of what’s unique about that versus the standard service? What’s particular to disaster recovery?

Manuel D. Medina

The most important part of it is that you don’t have to deploy a full set of dedicated alternative infrastructure in a separate data center. We basically deploy in our own cloud infrastructure, we deploy a disaster recovery solution for you that basically is as robust as a dedicated one but it costs you 40% to 50% less. We do expect – that product is already very popular, we do expect that to continue to be very popular as we deploy.

Mike Marburg – Ramsey Asset Management

Are you actually –do you have the mirroring and disaster recovery software? Is it just focused on the computing infrastructure?

Manuel D. Medina

It’s all working as we speak.

Operator

Your next question comes from [Aaron Shashadry] – Credit Suisse.

[Aaron Shashadry] – Credit Suisse

Just a couple of quick questions, the first one it sounds like in you previous quarters you talked about a sequential trend line of about 7% sequential revenue growth and 55% EBITDA flow through. It looks like you’ve sort of called slightly higher growth, is that pretty much just a catch up of sort of a timing related thing?

Jose A. Segrera

What we’ll see in the back half and as we’ve guided to from last February when we laid out the numbers for the full year, we have about 10% of our revenues coming in on the non-recurring side and we’ll see that tick up a little bit at the back half of the year so that’s going to impact those revenue growth rates.

[Aaron Shashadry] – Credit Suisse

Then maybe I missed this earlier on but did you give out your churn rates commercial and federal?

Jose A. Segrera

On the commercial side it was right around 2% and consistent with what we’ve been seeing and on the federal side we had no churn during the September quarter.

[Aaron Shashadry] – Credit Suisse

The last one, just a general question, you saw the Equinox deal for Switch and Data, I just want to get your take on the need for consolidation in this market. Is there any, even looking out a year or two, do you think there’s any slowdown coming in terms of growth and basically what impact of the transaction do you expect to see on your operations?

Manuel D. Medina

The only part of that question that I’m going to answer is the fact that we don’t expect to see any slow down on growth. We’re very, very busy executing and really picking our spots but I have no comment on the Equinox Switch and Data transaction.

[Aaron Shashadry] – Credit Suisse

The last one, I just wanted to get – can you talk about your utilization basically in Miami, NCR and Santa Clara right now on the facilities that you’ve built out?

Jose A. Segrera

When you look at the utilization rates we went from about 60% to 64% on the built out space and the growth really was evenly spread out between deploying more customers, turning up more build revenue in the kind of first pod at NCR. Miami continues to sell at a good pace. We will probably be at a point here towards the end of this fiscal year, we’ll start getting ready to build out the next chunk of space here in Miami for fiscal ’11. Then California, California has done great we’ve obviously increased a big chunk of our expansion there and we deployed to incremental customers during this quarter in our existing pod which is already fully sold but some of that revenue is ramping up. So, it’s really been consistent.

Even our international facilities, like Manny mentioned, Brazil is picking up nicely, Bogota is doing real nice, we’re actually going to pull in, in Bogota about $750,000 to $800,000 of additional cap ex this year to get going on some more expansion there. So, overall it’s been very nice.

[Aaron Shashadry] – Credit Suisse

The last question, NCR you’ve talked about how much you have of the new pod already pre-booked, I think that number was 30% the last time you talked to us as well. Is that generally meeting your expectations for how quickly you expected to sign contracts there?

Manuel D. Medina

Very much so and as I said earlier we do expect to have additional contract signed by the time that we can give an exact firm date of when we can actually light up the facility, which we’re getting closer to that point right now. We do expect to sign additional contracts so we do expect to have additional contracts signed by the time that we review our next quarter.

Jose A. Segrera

It’s no different than what we saw with the first pod, I mean folks can go out there now and that’s on our slide charts, you can see a picture there of the NCR of the construction in progress about a month ago. So, as you get closer to open like Manny said we’ll see those bookings pick up.

Operator

Your next question comes from Sri Anantha – Oppenheimer & Co.

Sri Anantha – Oppenheimer & Co.

Jose, I just wanted to be sure, the guidance for the remaining part of this year still includes the federal customer that’s going to churn away, the impact is more for next fiscal year not this year?

Jose A. Segrera

Yes, it reflects that and there an impact in this fiscal year but that’s baked in to the guidance and just as we said just looking at the back half of the year given the bookings that we’ve had, the start that we’ve had to this third quarter now we are very comfortable with our guidance for the year.

Sri Anantha – Oppenheimer & Co.

This customer is just churning away as the contract came to an end it’s not like an early termination here?

Manuel D. Medina

That’s correct.

Sri Anantha – Oppenheimer & Co.

When you look at cloud services, clearly you guys had pretty impressive growth here and it’s running at a pretty nice annual run rate, how much of that success is coming from new customers or some of your existing managed services customers are also moving to cloud services?

Manuel D. Medina

The great majority of the success of that Sri right now is new customers.

Sri Anantha – Oppenheimer & Co.

So there’s very little of your existing customers are moving away to that.

Manuel D. Medina

As of now, yes.

Sri Anantha – Oppenheimer & Co.

When you look at your fiscal ’11 outlook where do you think the short fall from the federal customer is going to make way? Are you looking at more growth at your commercial segment as opposed to federal segment or are there other contracts in the pipelines in the federal segment that you expect to more than make up the loss of that customer.

Manuel D. Medina

No, we expect to more than make up. If you were looking at ’11, we haven’t put out numbers yet, we do expect our federal business to remain at least on the percentage basis what it is, if not more.

Operator

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

Jonathan Atkin – RBC Capital Markets

I wondered if you could talk a little bit about the growth you saw in co-lo and how much of that came from existing customers filling up space versus new customers? The same question for managed, dedicated managed services. Then, of the growth that you saw from existing customers overall, was there a noticeable trend between federal versus commercial?

Manuel D. Medina

I think on the second part of the question I think that the noticeable trend it’s more on the federal side. However, certainly when it comes to co-lo and our regular managed services particularly hosting and security, etc. it’s really I would say more on the commercial enterprise side. The co-lo is kind of balanced.

Jose A. Segrera

John, one of the key things to look at and this stat has remained consistent for a bunch of the last quarters, is our bookings and about 65% to 70% of the bookings coming from that existing customer base. So, the majority of the growth is coming from the existing customers. We did have a real nice increase in new [inaudible] this quarter, average deal size went up. So I think that trend continues to be growth from existing customer base and bring in 40 to 50 new customers a quarter with an increase in deal size now.

Operator

Ladies and gentlemen that concludes the Q and A portion for today’s call. I would now like to turn the call over to Mr. Manuel Medina, Chairman and CEO for closing remarks.

Manuel D. Medina

Well, I just want to thank you very much for your continued interest. We certainly are very excited with where we are. It’s great times for our company and we’re thrilled to have you as our shareholders. Thank you very much and we look forward to talking with you next quarter.

Operator

Ladies and gentlemen that concludes today’s conference. Thank you for your participation. You may now disconnect. Have a great day.

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