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CyrusOne Inc. (NASDAQ:CONE)

Q4 2013 Earnings Conference Call

February 20, 2014 08:00 a.m. ET

Executives

Anubhav Raj – VP, IR

Gary Wojtaszek – President and CEO

Kimberly Sheehy – CFO and Treasurer

Josh Snowhorn – VP and General Manager, Interconnection

Analysts

Jordan Sadler – KeyBanc Capital Markets

Jonathan Schildkraut – Evercore Partners

Simon Flannery – Morgan Stanley

Stephen Douglas – Bank of America

Barry McCarver – Stephens Inc

Frank Louthan – Raymond James

Vincent Chao – Deutsche Bank

Omotayo Okusanya – Jefferies

Operator

Good evening ladies and gentlemen. Thank you for standing by, and welcome to the CyrusOne Fourth Quarter 2013 Earnings Conference Call. My name is Ed, and I will be your conference operator today. At this time all participants are in listen-only mode. After the prepared remarks, the management from CyrusOne will conduct a question-and-answer session and the conference participants will be given instructions at that time. As a reminder this conference call is being recorded. (Operator instructions)

I would now like to turn the conference call over to Anubhav Raj, Vice President, Treasurer and Investor Relations. Please go ahead, sir.

Anubhav Raj

Thank you Ed. Good evening everyone, and welcome to CyrusOne’s fourth quarter 2013 earnings call. Today I am joined by Gary Wojtaszek, President and CEO; and Kim Sheehy, CFO.

Before we begin I would like to remind you that our fourth quarter earnings release, along with the fourth quarter financial tables are available on the Investor Relations section of our website at cyrusone.com.

I would also like to remind you that comments made on today’s call and some of the responses to your questions deal with forward-looking statements related to CyrusOne and are subject to risks and uncertainties. Factors that may cause our actual results to differ from expectations are detailed in the company’s filings with the SEC, which you may access on the SEC’s website or on cyrusone.com. We undertake no obligation to revise these statements following the date of this conference call, except as required by law.

In addition, some of the company’s remarks this morning contain non-GAAP financial measures. You can find reconciliations of those measures to the most comparable GAAP measures in the earnings release and financial tables, which are posted on the Investor section of the company’s website.

I would now like to turn the call over to our President and CEO, Gary Wojtaszek.

Gary Wojtaszek

Thanks, Raj. Good morning everyone and welcome to CyrusOne’s fourth quarter 2013 earnings call. I like to begin by saying that CyrusOne had a tremendous first year as a public company, beginning with the successful IPO last January.

2013 was centered around growth, including strong organic revenue growth from record leasing with significant contributions by both existing and new customers. Expansion of our footprints more than 1 million square feet of raised floor space and the roll-out of new products and services, such as the CyrusOne National Internet Exchange that enhanced our value proposition to our customers.

Also I want to thank the 260 team members at CyrusOne, who I have the pleasure of working with everyday, which really make this a very fun and enjoyable place to work. Their commitment to our customers translated into this strong operational and financial performance we accomplished in 2013, and positions us very well for 2014.

The story for CyrusOne has always been one of growth. From the company’s beginning a dozen years ago through the time the [Indiscernible] owned the company, and then through Cincinnati Bell’s ownership, and up to the successful IPO last year, the one thing that has not changed has been the company’s ability to profitably grow, and we are confident that our record of growth will continue through 2014.

My discussion today is going to be focused on explaining our results through the lens of our strategic growth drivers, and afterwards Kim will discuss our quarterly financial results in more detail. And shown on Slide 3, you can see that CyrusOne managed to put up a lot of [Ws] this year, but none more important than delivering on our financial guidance. We basically delivered every metric we committed to and the strength of our platform continued to grow as the year progressed, when the team was able to more fully focus on running the business, and not spend the time preparing for our IPO, which was a big-time commitment in 2012 and the first part of 2013.

Our fourth quarter revenue was up 25% compared to the fourth quarter of 2012, while full revenue was up 19%. Normalized FFO and AFFO were up 40% and 54% respectively over the fourth quarter of the same period. Fourth quarter adjusted EBITDA was up 40% over the fourth quarter of 2012 and full year adjusted EBITDA was up 20%.

We leased 47,000 square feet of co-location space in the fourth quarter, culminating in a record of 77,000 square feet for the year. The reason we are particularly high in leasing velocity in our Texas markets as well as in Phoenix.

We are also pleased to announce a 31% increase in the quarterly dividend for the first quarter of 2014 to $0.21 per share. Finally, we continued to execute on our plan to strategically build on our platform to meet customer demand and growth our grow our Fortune 1000 customer base. The purchase of 14 acres of land in northern Virginia will establish a presence for CyrusOne on the East Coast and enhance the geographic diversity of our portfolio. We also acquired 22 acres of land in Austin, which further strengthens our already dominant position in the fast-growing Texas region.

Turning to Slide 4, I will focus my discussion today on the key strategic initiatives we focused on, which are all aligned towards continuing to ensure our company’s profitable growth and explain what we are doing in each of these areas. As you can see in the upper left corner of the slide, revenue grew at a 37% compound annual rate from 2009 through 2013, which includes the CyrusOne acquisition.

Each of the four drivers shown have contributed significantly to our current growth trajectory, and we expect will continue to do so going forward. These drivers include expansion by our existing customers, acquisition of new logos, development of new channels and products and portfolio expansion. On the following slides I will talk about each of these in greater detail.

Moving to Slide 5, the first key growth driver is our existing customer base, which for the year accounted for 56% of our growth in annualized rent. We have a high quality customer base, which includes 129 Fortune 1000 companies, representing approximately 75% of our annualized rent. We also have to mention the large and growing energy vertical, which generates approximately one third of our business. Lastly, we have a healthy mix of metered power and full service customers as our customers business with us has increased, our rent mix has shifted more towards longer term metered power contracts, and we expect that trend to continue. We believe our existing customer base can be an important source of growth going forward as we estimate that we still have less than 10% of our current business today.

Turning to Slide 6, new customers are a second key growth area. We believe that the high quality of our assets and the reputation for serving large enterprises have been key differentiators for us in attracting customers that are looking to purchase a data centre service. Our overall customer base has increased to 612 at the end of the fourth quarter, a 16% increase over last year.

Our target of Fortune 1000 customer base continues to grow with a total at 129, up 12% from last year. We believe that our past success attracting and retaining Fortune 1000 companies has helped us develop our sales and operational approach to meet the needs of these organizations. At our core, CyrusOne fundamentally believes that this is a service delivery business and the long term success of the company is solely contingent upon providing exceptional customer service.

Often times, the Fortune 1000 CIO may not know all the questions to ask, but since we have already done it 129 times, we provide comfort and guide them along the process, which basically assures and reaffirms in their mind that CyrusOne understands their service needs and the critical nature of the assets that they are entrusting us to manage.

Moving to Slide 7, the third key growth driver is new channels and products. Our historical focus has been direct to customer sales, and in 2013 the team closed a record number of contracts. We have seen significant productivity growth from our sales team as the average revenue production per sales employee increase significantly in 2013. To complement this model, we have increased our focus on indirect leasing channels, including value added resellers, system integrators and hosting providers.

We believe our mix of both direct and indirect channels will help us reach our target customers and efficiently scale our business. New products are also contributing to significant growth. For example, the introduction of the National IX platform enhanced our interconnection revenue stream and helped drive co-location rental growth.

As the chart on the bottom of the slide shows, the [Indiscernible] is trending higher. Approximately 85% of our new leases in the fourth quarter include IX services, up from 75% in the third quarter, and 68% in the second quarter when we launched that program. Total interconnection revenue for the quarter was consistent with past quarters at approximately 4% of total revenue, and we expect it to remain in that 4% to 5% range.

We are also continuing to see customers deploy with us across multiple sites, and we expect that our National IX will increase the readoption rate. Currently about 60% of our revenue is generated from customers in multiple CyrusOne locations. As we continue to add markets and customers, we create a networking effect that accelerates further adoption.

For example, as we discussed before, our enablement platform for the Cloud, which we refer to as Sky for the Cloud, provides a home for the Cloud and a customized data hall. It is designed to optimize power, usage, effectiveness and enable fast interconnection that business partners, content providers, networks, Internet service providers, as well as a marketplace of buyers and sellers.

This platform facilitated the addition of several cloud vendors to our customer base and each new cloud vendor enhances the value of our offering as we are now able to offer more choices for our enterprise customers in selecting a cloud provider. Over the past year, we signed close to two dozen Cloud vendors, which is in an industry vertical that we never really targeted before, but were attracted to the world-class facilities that CyrusOne operates, as well as the close proximity of being able to sell their services to 129 of the largest enterprises in the world. And notably, we are in conversations with practically every large Internet-based company, who just 18 months ago had never even heard of CyrusOne.

Turning to Slide 8, the final key growth driver is portfolio expansion. As our massively modular design approach results in a quick build at a low cost. Once we have constructed up power shell, the incremental cost to build it drops significantly. We estimate that the cost per megawatt per incremental build is approximately 30% lower than our average cost due to upfront investments for the shell and land.

Given our ability to construct the data hall in 12 to 16 weeks, once we have powered shell up we can meet demand on a just in time basis. The financial benefits of our business model are highlighted on the slide, which shows the development yield of our assets. This includes all the capital including CIP, and we have invested in land and shell for future growth.

As shown, our unlevered yield was 18% last quarter, which is consistent with the last 5 quarters. We achieved the constant yields because of the way we engineer our product and the speed of which we deliver it, which ensures that we minimize the amount of capital we are investing.

On the stabilized property in our portfolio, we are generating a 23% unlevered development yield. Slide 9 shows that we have substantial runway for growth from the development of existing assets. We estimate that we can increase our co-location square footage by 85% with existing undeveloped powered shell and powered shell currently under development on an average build cost of less than $6 million per megawatt.

If we were to develop all the land we currently own, we estimate that we could increase our square footage by almost 400% at an average build cost less than $7 million per megawatt. This gives us tremendous ability to scale our business very efficiently, and also allows us to leverage our design and build team so that they can focus on establishing a presence in two other markets each year without having to increase our staffing requirements.

The expansion of our portfolio provides further value to our customers as all of our locations become tied together with the CyrusOne IX product. This ensures that our customers can replicate their existing multisite data center architecture using CyrusOne data center platform that we have built. For example, in Texas the high-performance computing centre in Houston that is capable of supporting 900 watts per foot of power density for supercomputer applications can be replicated and bagged up in our San Antonio, Austin or Dallas facilities.

Continuing with portfolio expansion on Slide 10, I want to spend a moment talking about the addition of northern Virginia. As we have mentioned previously, it is our intention to add two new markets per year to our portfolio and Northern Virginia is our latest addition. Perhaps most importantly northern Virginia will establish a presence on the east coast, which is critical to growing our targeted enterprise customer base and building a national platform.

In order to attract and retain Fortune 1000 customers, it is important to be where they are. There are nearly 150 Fortune 500 companies within a 300 mile radius, which is the latency circle of less than 5 milliseconds, which is necessary for replication. The presence of abundant fiber position in northern Virginia is one of the most highly connected Internet locations in not only the country but also the world. Demand is extremely high in the market given low electricity cost, a favorable tax climate and a low incidence in natural disasters.

We expect to begin development on the property in the first quarter, with the facility coming online in the later part of the year. We also to continue to expand in existing markets. As you may remember from last quarter’s call, we were able to lease out our first facility in San Antonio in under 15 months, and are currently out of inventory there. It is critical for us to maintain inventory in our markets, and are excited to have broken ground on our second San Antonio facility last week. It is currently scheduled to come online in the latter part of 2014 as well.

We are also constructing a third facility in our Houston West campus. We will be building around a 320,000 square foot shell in the first phase of that facility in 2014. Houston has historically been a strong market for us, and we have struggled to keep pace with the demand we have seen there. We believe having ample powered shell in the market will enable us to have sufficient inventory to quickly and efficiently respond to market demand.

Lastly in Slide 11, we have provided the simple chart in terms of how CyrusOne creates shareholder value. Our approach is a simple one. We want to maximize our development yield for in place assets, while maintaining a healthy growth trajectory. And looking at the component parts, we believe in our ability to sell a wide variety of products from individual cabinets to 60,000 square feet of space plus the IX products and other services that we sell to our customers allows us to charge a higher price per foot than companies who don’t offer these services and products.

Additionally, our massively modular design techniques allow us to build quickly at a low cost, thereby minimizing the amount of capital we are deploying. Lastly, as I just mentioned in the earlier part of the presentation, we are very focused on accelerating our revenue growth by the key strategic initiatives that I just discussed. To close, I am pleased with the results we delivered in ’13. We put a lot of Ws on the scoreboard this year in terms of achieving our financial and operational objectives, and I am confident that 2014 is going to be an even better year.

I will now turn the call over to Kim, who will provide more color on our financial performance and speak to 2014 guidance. Thanks a lot.

Kimberly Sheehy

Thank you, Gary. Good morning everyone and thank you for joining us today. As Gary highlighted, we had a great first year as a public company and had strong momentum going into 2014. I will provide additional color on the fourth quarter financial results and speak to the annual guidance for 2014.

Continuing with Slide 13, revenue for the fourth quarter was $72.3 million, an increase of $14.3 million or 25% from the fourth quarter of 2012. The year-over-year increase was driven by a 234% increase in lease co-location square feet and additional IX services with both new and existing customers contributing significantly to this growth.

Leasing activity remained strong, and as Gary said, we followed up a record third quarter by leasing approximately 47,000 co-location square feet in the fourth quarter. The leases signed in the fourth quarter were for 7.3 megawatts of power, primarily at our Dallas, Houston West and Phoenix facilities. Based on square footage, the weighted average term of this quarter’s executed leases was 43 months and approximately 74% of the square footage leased was to metered power customers.

82% of the new leases have escalators at a weighted average annual rate of approximately 2.9%. In the fourth quarter, we recognized approximately 18% of contracted revenue for leases that were executed during this period, we estimate that in the first quarter of 2014 we will recognize approximately 73% of the revenue run rate from leases signed during the fourth quarter, but the remainder being recognized by the second quarter of 2014.

For leases signed during the third quarter of 2013, approximately 96% of the revenue run rate was recognized in the fourth quarter. Our revenue churn for the fourth quarter was 1.1%, in line with the churn rate in recent quarters. Full year 2013 churn was 4.1%, down 0.5 percentage point compared to full year 2012 churn of 4.6. In the quarter, we renewed leases for 17,400 square feet and 1.5 megawatts of power.

The renewals in the quarter consisted of contracts relating to 20 customers, 19 of these customers renewed at their current level of service, and pricing on an average rent per kilowatt basis for these customers remained flat. The remaining customer increase their footprint and converted from a full service to a metered power contract.

As I mentioned on last quarter’s call, it is challenging to compare these types of contract to each other as the rent in full service contract is inclusive of power, while the rent in metered contract does not include power.

Moving to Slide 14, net operating income was $48 million for the fourth quarter of 2013, an increase of $10.6 million or 28% from the fourth quarter of 2012. Our NOI margin of 66% was up 2 percentage points from last year, reflecting the impact of operating leverage at our existing facilities as utilization increased from 78% in the fourth quarter of 2012 to 85% last quarter.

Adjusted EBITDA increased by $11.5 million to $39.9 million, up 40% from last year. Sales and marketing expenses were down significantly compared to last year as we reduced participation in corporate marketing events compared to the fourth quarter of 2012, offset partially by an increase in general and administrative expenses as we incurred additional costs as a result of operating as an independent public company.

The 6 percentage point increase in the adjusted EBITDA margin is primarily driven by increased utilization. Normalized FFO for the fourth quarter was $23.6 million, an increase of 40% from the fourth quarter of 2012. The increase was primarily driven by growth in adjusted EBITDA, and our AFFO for the quarter was $20.8 million, an increase of 54% from last year.

Slide 15 compares our performance on a sequential basis. Revenue increased $4.8 million or 7% from the precious quarter with NOI increasing by $4.7 million, as property operating expenses were essentially flat compared to the prior quarter as higher facility expenses were partially offset by lower electricity cost. This is consistent with what we expected and what we have said previously regarding the impact of operating leverage in our business once the facilities were brought online.

The adjusted EBITDA margin of 55% was up 1 percentage point from the third quarter driving by the higher NOI margin. Both normalized FFO and AFFO increased by 8% in line with the increase in adjusted EBITDA for the quarter. Slide 16 shows a market level snapshot of our portfolio comparing year-end 2013 to year-end 2012. Utilization was up 7 percentage points compared to last year even with a 13% capacity increase, reflecting particularly strong demand in our Texas and phoenix markets.

We also maintained fourth quarter utilization flat with third quarter, despite a 6% capacity increase as a result of the commissioning of the new data hall in Dallas in October.

Capital expenditures in the fourth quarter of this year were $63 million compared to $81.9 million last year. As Gary mentioned, we acquired 2 land parcels during the quarter in Northern Virginia and Austin for a total of $15 million. We spent approximately $16 million in Houston this quarter, primarily to complete the power capacity addition at our Houston West One facility, and to construct raised floor and add power to our Houston West Two facility, a project which we expect to be completed in the fourth quarter.

During the quarter, we spent approximately $15 million in Dallas, primarily to complete the build out of the second Dallas Carrollton facility. We spent approximately $7 million in San Antonio, primarily to add power capacity at our existing facility. We also spent approximately $10 million at our remaining locations adding power capacity at our Phoenix and Midwest locations.

Slide 17 shows our net debt and market capitalization, our cash balance at the end of the year was approximately $149 million, a decrease of $64 million from the end of September. The decrease in cash was primarily driven by investments of capital in the business.

Our net leverage is currently at 2.5 times annualized fourth quarter 2013 adjusted EBITDA, and as of year-end 2013, we had $373.8 million of available liquidity to fund our growth plans. On January 10, we paid a cash dividend of $0.16 per share on the company’s common shares and common share equivalent for the fourth quarter, which is a dividend yield of 2.9% based on December closing stock price.

As Gary mentioned, we are increasing the dividend for the first quarter of 2014 to $0.21 per share, a 31% increase over the 2013 quarterly dividend. In considering, how to maximize value to our shareholders, we must take into account the returns we believe we can generate through reinvestment opportunities. So we are very thoughtful in determining the optimal allocation of cash both in short-term and long-term consideration.

Currently there is no shortage of attractive investment opportunities. Therefore we anticipate maintaining a relatively consistent payout of our AFFO for the foreseeable future as we continue to invest in our existing facilities as well as new markets.

And now turning to guidance, Slide 18 shows our outlook for the full year 2014. We expect revenue to be between $305 million and $315 million based on executed leases through the fourth quarter and expectations for 2014. We expect adjusted EBIDTA to be between $160 million and $165 million and normalized FFO per diluted share and share equivalent to be between $1.55 and $1.65.

And I want to point out that the implied adjusted EBIDTA margin assuming the midpoint of revenue and adjusted EBIDTA guidance range is approximately 52%, which is in line with the full year 2013 margin. The difference between the fourth quarter 2013 margin and the implied full year 2014 margin is driven by several factors, including an expected increase in annual property tax assessments in 2014 for capital deployed in 2013, seasonality and electricity usage and prices, and margin dilution in the second half of 2014 as new properties come online.

We expect capital expense to be in the range of $280 million to $310 million with development capital in the range of $275 million to $300 million and reoccurring capital between $5 million and $10 million. I like to provide some color on our capital expenditures, which we show on the next slide.

Slide 19 provides additional detail regarding 2013 capital spending and assumptions on 2014 spending. In 2013, we spent approximately $216 million on development capital, primarily to expand our facilities in existing markets in the Southwest. With this spending we constructed 220,000 square feet of powered shell, developed 140,000 square feet of co-location space, and added 38 megawatts of power capacity.

We also acquired 91 acres of land, including 77 acres in Texas across three markets and 14 acres in Northern Virginia. In 2014, we expect to spend between $275 million and $300 million in development capital. We estimate that approximately 70% to 80% will be spent in existing markets for the construction of 400,000 square feet to 450,000 square feet of powered shell, development of 150,000 square feet to 175,000 square feet of co-location space, and power capacity additions of 25 megawatts to 30 megawatts.

Also, supportive of our strategy to grow our Fortune 1000 customer base and enhance the geographic diversity of our portfolio, we plan to expand into two new markets in 2014, including Northern Virginia as well as another location, which we expect to be in a position to announce in the coming months. So to recap, the increase in development capital expenditures in 2014 is driven by new market expansion, the construction of more co-location space, and significantly more powered shell compared to 2013, partially offset by reductions in power capacity added in land purchase.

The reason we are significantly increasing the construction of powered shell is our strong 2013 leases completed have completely left us out of inventory in markets such as San Antonio. Having available powered shell in the market allows for quick and efficient future co-location expansion. Slide 20 shows our forecasted capacity of co-location square feet at the end of 2014 compared to the beginning of the year. The expected construction of 200,000 square feet to 235,000 square feet would increase our footprint by approximately 25%.

We forecast in 2014 with between 1.25 million square feet and 1.3 million square feet of co-location space. We have several major projects currently in process or scheduled to begin in the near future. We expect to complete the construction of approximately 38,000 square feet of raised floor and the addition of six megawatts of power capacity at our Houston-West Two location. We are also beginning construction of the shell for our Houston West Three facility and our second San Antonio facility, which we expect to come online in the second half of this year.

We are also constructing raised floor and adding power capacity at our Dallas facility and adding power at our Phoenix location. As Gary mentioned, we expect to begin development in Northern Virginia in the first quarter with the facility coming online later this year. Projects we expect to begin later in the year, include adding co-location space at our Phoenix location and development in a second new market. Lastly, I wanted to quickly address the questions we received regarding Cincinnati Bell’s ownership. As you know, the lockup on Cincinnati Bell’s equity expired in January, and a shelf registration for CyrusOne is expected in late march.

We have frequent communication with the Cincinnati Bell management team. Cincinnati Bell has been consistent in their message that any sale of CyrusOne equity will be carefully balanced with Cincinnati Bell's need for cash and the current market environment. As the largest stakeholder in CyrusOne, Cincinnati Bell's interest in maximizing value has the balance sheet flexibility to be patient, and will act responsibly when approaching potential monetization.

Their earnings call is later this morning, and we expect their commentary will be in line with ours. In closing, we are very pleased with the performance in 2013 with record leasing of record number of customer additions and strong demand for our IX products, all of which drove strong organic growth in revenue EBIDTA and FFO. We also believe we are well positioned for another strong year in 2014. We remain focused on meeting the needs of our customers through our evolving mix of products and services and growing our Fortune 1000 customer base as we expand our footprint. Thank you for your time today. This concludes our prepared remarks. And operator we will open the line for questions.

Question-and-Answer Session

Operator

Thank you. (Operator instructions) And our first question comes from Jordan Sadler of KeyBanc. Please go-ahead.

Jordan Sadler - KeyBanc Capital Markets

Thank you, and good morning. First question, I wanted to touch base on the development specifically just honing it on Northern Virginia for a second, could you walk through the expected economics there, this being a new market versus, you know, some of the existing markets in the Southwest and obviously Cincinnati?

Gary Wojtaszek

Sure. Hi Jordan. It is Gary here. Thanks for joining the call today. I think that development yield that we'll be getting in Virginia is going to be consistent with the development yields that we've generated throughout the portfolio. You know, as we were talking about in some of my remarks, this company has been growing organically for a number of years, originally starting in Houston and Cincinnati and then expanding into all the other markets that we are currently in.

So I think the current yields that we're able to generate now, which is about 18% unlevered, should remain consistent as we build out our platform there. I think the way we are deploying our capital in terms of our cost to deliver megawatt of capacity and the speed at which we can bring it on is going to ensure that we are going to deploy the similar amount of capital in the new markets and I think that that market in Virginia is really kind of star for our product.

I recognize that there is a lot of different competitors in the Virginia market, but I don't think any of them are providing the types of products and services that we are going to be offering them, and that is that one market that we have gotten more demand and request from all of our customers over the last 18 months that we haven't been in, which is the reason why we're going to be establishing a presence there.

Jordan Sadler - KeyBanc Capital Markets

Okay, and this initial build of – that's on your schedule of $26 million to $30 million of cost for the first three megawatts, which I guess round numbers that's a little north of 9 million per meg, is that sort of the initial phase and that would be expected to come down closer to 7 or so over time or how should we think about that cost?

Gary Wojtaszek

Yes, yes. Yes, that comes down considerably, you know, what we were talking about in my prepared remarks was that each incremental megawatt of capacity that we're bringing online is about 30% less than the 7 million that we're targeting. So, you know, it's roughly about $5 million in incremental meg, go forward.

Jordan Sadler - KeyBanc Capital Markets

Okay, and the total build out there, what's your ability in terms of total megawatts?

Gary Wojtaszek

420,000 gross square feet, and about 40 megs.

Jordan Sadler - KeyBanc Capital Markets

Okay. Then moving onto sort of bigger picture on the development spend, Kimmie went through it, yeah, you talked about a little bit in terms of, overall the Capex being up as much it is to bring on some more powered shell, comes at a little bit of an interesting time industry wide – industry wide, is, you know, some of the larger competitors have scaled back their speculative developments. So, are you viewing this as sort of a opportunistically as a good time to become more aggressive or is it just, you know, a function of, you know, specific markets in and sort indications from customers. Maybe just give us a sense of why now is the right time to get more aggressive on spending?

Gary Wojtaszek

The way we deploy our capital is really just a derivative of the demand forecast that we are seeing from our customers, and, you know, I can tell you that, I mean this year, I mean, we have been building and selling out at a record pace. And I think with all the marketing and the sales efforts that we have been working on over the last 18 months, they have really been kind of paying off for us. We were sitting on our strongest funnel ever, and I have been kind of saying that consistently this year, I mean, the funnel has continued to grow as the year has progressed.

So, we are seeing a lot of demand from customers for the services that we are providing them, and we feel pretty confident that we are, you know, we are going to be able to sell out those - those facilities. But it also goes back to like when we were initially growing in this marketing, I mean, we are minimizing the amount of capital that we are deploying, I mean, that whole massively modular design approach is something that we focus on very, very intently, and so – so when we think about it, you know, we are not going to be throwing a boatload of capital in the infrastructure portion of that investment, and that's the stuff that we can scale up really quickly.

So we try to minimize it, you know, to the extent that we totally missed our - you know, the forecast. We are not really putting out a lot of speculative capital there. But to answer your primary question, everything we are doing is all relative to the demand forecast that we are seeing from customers.

Jordan Sadler - KeyBanc Capital Markets

Lastly, a quick one for you Kim, I didn't catch the commentary on the impairment taken in the quarter, the 2.8 million, can you maybe just give us some color?

Kimberly Sheehy

Sure. That impairment was related to a specific set of assets that were deployed in Houston a few years ago, that they were actually chillers that were a technology that was used, that's not what we use today. And they weren't as efficient and we decided to pull those, you know, decommission those and put our standard equipment in. So at the end of the year, we knew that was going to happen, so we went ahead and took an impairment on those assets.

Jordan Sadler - KeyBanc Capital Markets

Is there anything – are there – is there any other equipment like that or there any more chillers like that – in the legacy portfolio that could be swapped out?

Kimberly Sheehy

No, they are really - no they are really event - that was just a one time decision made by a previous management team just to try that new technology, and there's nothing else like that.

Jordan Sadler - KeyBanc Capital Markets

Okay, thank you.

Operator

Our next question comes from Jonathan Schildkraut of Evercore, please go ahead.

Jonathan Schildkraut – Evercore Partners

Great, two questions if I may. First, you know, in terms of the bookings outlook for 2014, you know, you showed a 61% increase in bookings in 2013, you noted earlier that productivity in your sales force increased by about 45% per headcount, you know, you have probably one of the more seasoned sales force, but I don't think it's growing. So, when we think about bookings level for this year, you know, if we average out, maybe, over the past four quarters, is that the right way to think about it or there are still further productivity gains that you can get out of the sales force, or will you be looking to scale your sales force any further. And then my next second question just has to do with the percent of customers in multiple locations. You know, previously, I think you talked about more than 50%, today, you are talking about, nearly 60%, is there any way you can give us maybe where you were a year ago to give us a sense of how this is really scaling. Thanks.

Gary Wojtaszek

Yeah, the – on your last question, it's 60% in terms of revenue, the number of customers is around 20% in locations. We will get back to you on what that trend has been, you know, in terms of last year, this period. But it's definitely increasing. And relative to the sales productivity so, so – you know, we can only squeeze more out of cash, you know, we are always trying that the - the quarter is too high, but I think there is lots of opportunities here to do more.

We are really happy with the sales productivity that we were able to get the team this year. I think that is a function of just having more focus on training efforts, you know, partnering things that we have been working on over the last year, so really started to pay off.

But I think in terms of just broad numbers, and we were definitely going to be looking at adding, you know, a couple of more folks to the team, and continuing to build out that platform. To the extent that you get a person trained up quickly, you know, they really begin paying for themselves, right away, so, if you got a really good person, that begins contributing quickly, the return on that investment is very high. The other thing, you know, I point is that, our indirect channel program, which we started about two years ago, has really taken off as well, and that's really kind of complementing the direct sales initiative that we have done.

Jonathan Schildkraut – Evercore Partners

Great. Thank you for taking the questions.

Gary Wojtaszek

Sure.

Operator

Our next question comes from Simon Flannery of Morgan Stanley. Please go ahead.

Simon Flannery - Morgan Stanley

Great, thank you. Good morning. Kim you talked about the dividend increase, capital spending increase, you know, the leverage of 2.5. How do you think about, what the right leverage for this business is, it sounds like, you know, obviously your current business momentum is strong. You see a lot of opportunities out there. You know, but you are giving more back to shareholders, you are increasing Capex. What's the right level of -- leverage for this business going forward? And then Gary, could you just touch a little bit more Interconnect, it looked like it was a big part of the sales process. The people are really embracing that. And now you got open IX coming forward, maybe you can provide a little bit more color on, you know, how that's going to roll out over the course of the year? Thanks.

Kimberly Sheehy

Thanks Simon. On the leverage question, we have been pretty consistent that, you know, we are comfortable with the business at four times EBITDA leverage. So, that's sort of where we fit at this point.

Gary Wojtaszek

And in terms of the open IX, you are right, Simon, you know, we have seen steady increase in the customers taking that product, it was about two thirds when we launched it in April, and up to three quarters in the next quarter, and end of this last quarter at 85%, and, you know, we are getting, you know, over 20% left in ARPU associated with it.

I think that that is going to continue as the -- you know, as the year progresses. And I think the open IX initiative is really going to, you know, hopefully accelerate that. We put out a press release a month or so ago about, you know, several of our facilities, you know, being having the open IX certification, and the way we are looking at the open IX initiative is that, that is something that is just going to help further adoption of that product, particularly for the enterprise customers.

You know, as you know, the majority of our business is enterprises and for the most part, they don't really kind of operate the same way your internet or digital media content companies do, meaning that, they don't really understand how to take advantage of the internet for their transport and telecom needs, as efficiently as the internet companies do, so we are doing a lot of training and education with that group of customers.

So, as their businesses shift to do more of their business away from traditional ways on online, that's going to become an even more important value proposition for enterprise customers. The way we look at the open IX initiative, what that is basically trying to do, is create an alternative to some of the other primary competitors in the space that are dominating these IX platforms. The folks behind that initiative are the big internet companies, the digital media and content guys that are looking to create an alternative player in that space.

Since we basically don't do any business today to any great degree with any of those big internet companies, you know, we expect that, you know, we are going to get a lot of benefit, out of the open IX initiative as they look to create a competitive alternative to some of the more monopolistic IX points in, you know, in the country.

Simon Flannery - Morgan Stanley

Is that something we will see this year or do you think it's kind of a several year development?

Gary Wojtaszek

You know, I think it takes a long time, I mean, you know, I know a lot of investors are concerned about this being very, you know, very – you know, disruptive and I think eventually money is going to go where it's most wanted, but these things never grow quickly. It's going to take a long time, I think, for that to transition out. The only other wildcard and that could accelerate is, if there is just, you know. A factor collective push by some of the proponents of that, to try to create alternative IX parts.

Simon Flannery - Morgan Stanley

Thank you.

Operator

Our next question comes from Stephen Douglas of Bank of America. Please go ahead.

Stephen Douglas - Bank of America

Thanks for taking the question. Maybe another on Northern Virginia, that's obviously a pre–established data center market, but as you pointed out there, there are a lot of competitors there and, you know, supply has been increasing particularly with potential sub-lease arrangements, so I guess, could you maybe walk through some of the assumptions that you made there on the business case in terms of competition, and how do you expect, and then secondly, how much do you expect to have pre-sold when the facility opens given the interest levels you talked about from your existing customers? Thanks.

Gary Wojtaszek

Sure. Yeah. I think when you look at the market, you really have – you really have to kind of peel back the layer of the onion, and look at what products are really in that market, and you know, and then you can get a perspective of what is it that we are offering.

So, when we look at that market, it's a really big market. I mean, there is a couple of players that are dominating the space but they are providing a product, and in particular a service that - that we don't provide or are actually they are not providing a service, that we do provide that our customers really want from us. And so, you know, the services that we provide to customers is something that we don't see as currently really available in the market.

The ability to go in and a provide customer a cabinet up to, you know, 10 megawatts of capacity and all the services around that, is something that we see as an opportunity. We currently compete with everyone in all the markets that we are at, I mean, for instance, and Dallas is one of our strongest markets this year. And we feel very comfortable that the product and service offering that we are providing our customers is something that they will continue to purchase from us.

So I think we could be very complementary to the existing product in that market and I think if we just continue to stick to our knitting, and do what we have been doing for the last decade, I think we are going to be successful in Virginia.

Stephen Douglas - Bank of America

And then maybe on the amount that you expect have pre-sold, by the time that opens?

Gary Wojtaszek

Yeah. We don't know, I mean, you know, what we have is continued demand from all of our customers, right, but the – you know, when you are selling to enterprise customers, right. If you don't have product available in a particular location, you are basically just selling them a dream and any -- any real estate developer, you know, can sell a dream to a customer, what it really takes is the product available, before they take you serious.

Because again it goes back to our focuses on enterprise customers are basically entrusting us with the most mission-critical gear, and so they are not going to go into any type of decision and agree to go with anyone on a speculative basis unless you have product available there. We saw that last year when we launched Phoenix. I mean, you know, we had opportunities early on to basically sell out, you know, a good chunk of that facility, and that particular customer was very wary because they didn't think that we would be able to, you know, bring that facility online in the timeframe that we would.

And so what we have learned in this is that, you know, you can't do it, you know, you can't really convince companies until you have it, what we are doing is a much more proactive concerted effort and marketing campaign to get people really, really comfortable early on to see if we can pre-sell that, but as of right now, we have got no hard commitments for any presales.

Stephen Douglas - Bank of America

Got it. Thanks guys.

Operator

Our next question comes from Barry McCarver of Stephens Inc. Please go ahead.

Barry McCarver - Stephens Inc.

Hi, good morning guys. Great quarter and thanks for taking my questions. And I guess, first off, shifting away from Northern Virginia and focusing on Texas, certainly my channel checks indicate that demand for co-location in Texas seems to be ramping up even above 2013 levels. I am wondering if you can comment, if you are seeing the same thing, and maybe discuss, some of your specific markets where you have – where you have got a lot of capacity and where you see growth in 2014?

Gary Wojtaszek

Yes, I am not surprised that you are hearing that Barry, and thanks for, you know, for the kudos on the quarter. Yes, look, I think in general, Texas is a phenomenal market. We have got a government here that is so pro-business, so active generating new folks. I mean, we are located in Dallas here, there is a thousand people a day that are moving to the Metroplex area. It's an incredible [Indiscernible] sound that's going on from the round rest of the country, into this market, as more -- as more corporations come here, and it is no surprise that between Dallas, Houston, Austin and San Antonio, there are four of the fastest growing markets in the country, and as a power well to that, what happens is, you know, customers are basically demanding more and more data center space because the demands of their employees are basically such that they are putting more of their business here.

In addition for that, I mean, it's a great place from a, you know, from a natural disaster perspective, you know, they passed, you know, additional tax legislation last year in the state of Texas that makes it really attractive, in addition to that, we have separate tax legislation passed for our building in Dallas for two separate tax deals. It makes our particular location very attractive to customers. I mean, you know, the way I look at what's going on in Texas in general is that, this is a ten-year, you know, transformation and I think Dallas is going to be, you know, the second-largest city in the country in short order.

Barry McCarver - Stephens Inc.

Okay. That's been [endowing], one question for Kim on the guidance. If you look at the way revenue is laid out for 2013, you had sequential revenue growth picked up in each quarter of the year and leading to a much stronger ramp in revenue in the second half of 2013 than you had in the first half. Is there any reason to think that -- that's going to repeat in 2014 or do you expect sequential growth to be a little bit more even throughout 2014?

Kimberly Sheehy

You know, it is hard to say, right because sometimes, it's hard to predict when leases are executed, and then some of them ramp quicker than others. So, you know, we did have, as we said before, in Q3, the contracts that we signed, you know, we saw those pick up into revenue relatively quickly compared to what our normal is. So, I would, you know, I would say, I would expect ’14 not to be quite as lumpy, but, you know, this is -- it is hard to say.

Barry McCarver - Stephens Inc.

Okay. Fair enough. Thanks a lot.

Operator

Our next question comes Frank Louthan of Raymond James. Please go ahead.

Frank Louthan - Raymond James

Great. Thank you. So looking at your growth going forward, you know, what percentage of your revenue is now coming sort of say from outside the traditional enterprise customers, maybe some internet content or others that you haven't traditionally sold to and 12 months from now, do you think -- is that exposure going to be higher and how do you see that sort of diversification coming?

Gary Wojtaszek

Yeah, it's still relatively well -- I mean, 75% of our revenue is still kind of generated from that Fortune 1000 base, and there is one or two internet guys that are in there, but it's still -- it's still relatively low. I do expect over time though that it will increase just because we are in conversations with all these different companies that we never really spoken to before and so I -- I would expect it to increase going forward, but there has not really been, you know, any significant new contracts that have moved our percentage up.

Frank Louthan - Raymond James

Okay, and then, can you talk just a little bit about the economics of the customers on metered power versus full-service, kind of which -- where do you see that trend going for your base?

Gary Wojtaszek

Yes, I mean, it's absolutely going to go more towards metered power, and less towards full -- full-service. You know, if you look at the business just like on an IRR basis, I mean, you definitely get a better return for the -- for the all in customers. If you look at this on an NPV basis, so take into account the bigger deployments, the longer term, you got a higher NPV on the metered power, you know, customers. So, it's you know, it's you know, it's a big difference between returns on that, but NPV is really what we are focusing on.

But the way we think about it though, is that, how do we supplement, you know, the lower-price that you have on some of those metered power deals with other services that we are providing like so the IX is one, different resiliency, powers resiliency differences that we are doing, multiple site deployments, all things like that are all geared with the focus of how do you drive ARPU up, you know, relative to the capital you are deploying against that customer.

Frank Louthan - Raymond James

Okay. Great, thank you.

Operator

Our next question comes from Vincent Chao of Deutsche Bank. Please go ahead.

Vincent Chao – Deutsche Bank

Hi, good morning everyone. Just wanted to go back to the capital plan here, I appreciate the comments earlier, the slide there with the liquidity. But if you think about the Capex spend, plus the dividend that you are paying out this year, you know, you pretty much utilize that entirely, just curious how you are thinking about capital raises thereafter, or maybe even later in the year, you know, balancing that against sort of your thoughts on the interest rate environment and that kind of thing.

Kimberly Sheehy

Thanks Vin. You know, really where we sit today is the same place that we have been communicating, you know, at the IPO, with the proceeds and the revolver we put in place. We have funding for our capital plans, you know, from that point up to two years. So we will clearly be looking at this as the year goes on. And you know, as far as, we certainly have plenty of room from that perspective under our leverage if that, you know, if the markets are attractive and that's what we want to do to fund our continued capital investment.

Vincent Chao – Deutsche Bank

Okay, so not really taking in account sort of, you know, current interest rate environment versus potentially what it could be down the road when you may need the new capital a bit more?

Kimberly Sheehy

Yeah, I mean, I think we will certainly take it into consideration, I mean, we have to look at you know, everything and what we are forecasting they need to be this year and next year.

Vincent Chao – Deutsche Bank

Okay, and just maybe another question, you had mentioned a couple of times that you are not really doing a lot of business with the larger internet players, but it sounds like conversations have increased with them. I am just curious is that more along the lines of sort of been dropping in displacing your existing locations, so they can get actually with your customers and vice versa or you are talking about larger deals, [Indiscernible]?

Gary Wojtaszek

Yeah, it's actually both Vincent.

Vincent Chao – Deutsche Bank

Okay. And I guess how do you balance sort of the wholesale deals where you are sort of – again [Indiscernible] good and bad, you are having significant leverage and, you know, it will be a double edge sword, I guess, how do you think about all that and as you are thinking about getting them on, in a larger deal is more important.

Gary Wojtaszek

I mean, I think about all these new customers in terms of how much money we are going to make. And you know – and that's we engage all these guys, I mean, the one thing that we do is, you know, since we have, you know, a shared infrastructure platform, right and I think that's important to understand because that enables us to basically manage that risk easily because if that particularly customer wants to move out, you know, space we can backfill that, you know, by putting in all the other customers that we have on that particular amount of real estate. So, it's not, you don't have the same type of exposure for like a dedicated type facility with one big customer, and there that is one customer within a mix of many other customers in that same facility.

Vincent Chao – Deutsche Bank

Okay, thanks. And just okay maybe one – I know we talked about [Indiscernible] and you mentioned marketing spend was down year-on-year causing your sales and marketing line to be little bit lower. I was just curious as we go into ’14, do you think a 4% margin on that line, is it reasonable way to think about the business?

Kimberly Sheehy

Yes, and I think in ’14, we would like to spend a little more in sales and marketing, so – but I mean, not you know, it's not a drastic change. So, I think that's a good run rate.

Gary Wojtaszek

Generally speaking, you know, our preference is that, we would like to spend more in sales and marketing to the extent that we can afford it and we are running, you know, maybe better to a plan we like to take some of that money, and you know, put it further down into additional sales and marketing efforts. Those are something that are really kind of paying off, very, very well, you know, from an investment return perspective and that's something that we would like to do more of.

Vincent Chao – Deutsche Bank

Okay. Thanks guys.

Operator

Our next question comes from Omotayo Okusanya of Jefferies. Please go ahead.

Omotayo Okusanya - Jefferies

Hi, yes. Good morning everyone. Great quarter, great outlook, so we are really happy to see that, we just wanted to push a little bit further on Northern Virginia. First wanted to understand this idea of how the cost for future expansion there drops, I think right now you look at the number, it seems like it's costing a $9 million per megawatt but you said, for every successful – for every successive megawatt it's going to cost you $5 million.

Gary Wojtaszek

Yeah, I mean, for modeling purpose usually we assume an average of about 7 million bucks.

Kimberly Sheehy

Right, what you are seeing in the number so is the, you know, the land and the initial shell that we are building, and in the first flood of power infrastructure, so as we add the additional power, the average is where you will see the decrease.

Omotayo Okusanya - Jefferies

Okay, that's helpful. And then again, just kind of given how much supply is coming on online in that market, I do agree there is lot of demand but there is also a lot of supply from [DLR, from DST, from OSP], a whole bunch of people have space in their data centers. So, just kind of curious, this idea why you feel so confident, it's the right time to grow there, just given how much supply, isn't that market like, can you kind of educate us a little bit about what do you think is really different from your product versus their product that gives you confidence that the demand will come your way rather than to theirs?

Gary Wojtaszek

Yes, I mean we are talking to [DST and DLR], they are basically doing, you know, predominantly just wholesale type deals with not a lot of services, you know. We will do larger deals but our sweet spot is smaller deals for customer with more services. All the deals that we did this year and I mean there is only been, you know, just a handful of them, you know, that we are over a megawatt, most of our deals are generally small.

So, you know, when we are thinking about going in that market, we are doing it relative to, you know, if you rank ordered all the customer requests that we had over the last 18 months in terms of the location, that people wanted product from us, and it would be Virginia, and so you know, listening to our customers in terms of them asking us to -- for product there is the number one reason why we are going, but then secondarily, as we think about our IX platform having access and connectivity into that market, which is one of the most interconnected markets in the country, and then linking up that facility into our broader platform will create bigger networking effects as we roll out our IX solution, because what we believe long term is that all enterprise companies are going to be heading down the path, we are going to be doing multiple site deployments in our facilities and to do that, you need the high quality facilities along with the connectivity solution as part of it.

Omotayo Okusanya - Jefferies

Okay. That's helpful. But again, even in that market, you do have, you know, QTS that kind of have this wholesale and a retail product in Richmond, you have [Indiscernible] also expanding in that market, again just trying to understand how you really compete against people who already have a local presence in that market?

Gary Wojtaszek

You know, if you speak to any of our customers, what they are going to tell you is the number one reason that they choose to go with CyrusOne, is because of our customer service, our flexibility, our attentiveness to their needs and the services that we provide them. Not a single one of our customers will ever tell you that we have got the whitest white floors, that our generators are super powerful, and it's all these softer issues that are really the reason why customers do business with us.

And I think it's no different than why any consumer does business with any -- any vendor that they choose to do business with. If you provide great customer service at a really fair price, where people thinking they are getting value for, they are going to continue to do business with it. In terms of supply, Dallas is a huge data center market. Just about every single data center competitor in the country has a facility here, and we compete everyday with everyone here and we are very confident that the product that we are putting on the market wrapped with the service that we are providing is something that really resonates well with our customers, and we are looking to replicate that success in Virginia.

Omotayo Okusanya - Jefferies

That's great. Just one more -- in regards to building up the indirect leasing channel, what will that involve in regards to hiring new staff, what would that involve in regards to additional sales and marketing cost or G&A cost in 2014?

Gary Wojtaszek

No, that's something that we started working on two years ago. Actually Fred, who joined us from HP, who ran all of their own sales in the oil and gas industry is signing up that initiative for us. He is hired a couple of other individuals on his staff now. We are up to I think around four people now. And that's something that we just continue to develop and roll out and it's a tricky thing to get going, there is lot of education in the process, educating our -- those main customers on how to sell our product and then also trying to manage the channel conflicts between our direct sales force and the indirect channels but that's come along nicely.

Omotayo Okusanya - Jefferies

Okay, great. I think just one more, I appreciate you indulging me, do you see open IX versus the IX system that you guys have built over the past year or so. Again you did have your data centers open IX certified, but I am just thinking long-term wise, you know, you are charging and getting great margins on your IX platform versus open IX that's going to get a very low, if any kind of interconnection fee, I am just kind of curious how you manage that inherent conflict between wanting to adopt it versus it is also resulting in lower margins for your IX platform.

Gary Wojtaszek

Yes, I think you got to look at all the stuff kind of holistically, right. I mean, you know, we are predominantly selling data center space. The connectivity platform is kind of a stalking horse, in order to basically drive more -- more co-location sales. So, when you are looking at that for customers, you are looking at holistically and okay, he is going to buy so much IX products, so much co-location, you know, and there is four different types of IX products. They are included in that. So, you look at the whole thing holistically and come up with a price that you know make sure that you are going to make a nice return on that contract.

Omotayo Okusanya - Jefferies

Got it, okay. Thank you very much.

Gary Wojtaszek

Sure. Thanks.

Operator

Our next question comes from [Indiscernible] of Bank of America. Please go ahead.

Unidentified Analyst

Hi, thanks very much for sneaking me in here. Kim, I just wanted to follow-up on your comments to make sure I understand what you said on the funding, so the guidance does imply that the company would run out of cash, you know, this year. So would you tap the revolver as backup, or are you looking at putting more permanent debt capital into place?

Kimberly Sheehy

Yes, we would first use the revolver to the – and then we would tap the market when it felt like, you know, the right time to tap the market, that's you know, we have 225 million available on the revolver and, you know, that's why we put it in place, so --

Unidentified Analyst

Okay. And then how do you think about minimum liquidity, either you know, cash on the balance sheet and available revolver?

Kimberly Sheehy

Yes, I mean, we look at it and we have a floor that we, you know, we have in our mind that we would not go below, and you know, just to keep -- to make sure that we have ample cash when we need it.

Unidentified Analyst

Okay. And then you know, given that everyone seems to continue to think we are going to be in a rising rate environment, you know, from a macro perspective, so, I mean, how should we expect the company to be opportunistic, you know, in the near-term, if markets allow you just to put some additional capacity in place on the debt side.

Kimberly Sheehy

I mean, we wouldn't rule it out. But I mean, we have no plans you know, as we sit here today.

Unidentified Analyst

Okay. Okay, thanks very much.

Operator

This concludes our question-and-answer session. I would now like to turn the conference back over to Wojtaszek for any closing remarks.

Gary Wojtaszek

Alright, well thanks everyone. I appreciate you taking time to talk with us today, and, you know, we feel really good about the results we put up this year, and we think 2014 is going to be a repeat. Thanks a lot. Have a good week.

Operator

The conference has now concluded. Thank you for attending today’s presentation. You may now disconnect.

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