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SAVVIS, Inc. (NASDAQ:SVVS)

Q2 2010 Earnings Call

July 27, 10:00 am ET

Executives

Peggy Reilly-Tharp - Director of IR

Gregory Freiberg - Chief Financial Officer, Principal Accounting Officer and Senior Vice President

James Ousley - Non-Executive Chairman, Chief Executive Officer and Member of Business Development Committee

William Fathers - Senior Vice President of Global Sales and Marketing

BryanDoerr – Technology Officer

Analysts

Robert Dezego - SunTrust Robinson

Mark Kelleher - Brigantine Advisors

[Thre Anaz] – Oppenheimer & Company

Michael Bowen – Guggenheim Securities

Colby Sneasel – Cohen & Company

Edward Casper – Morgan Stanley

Donna Jaegers – D.A. Davidson & Co.

Frank Louthan – Raymond James & Associates

James Brein – William Blair

Grave Howell – Wells Fargo Securities

Jonathan Atkin - RBC Capital Markets Corporation

Erick [Sethenger] – Sigma Hill.

Chad Bartley – Pacific Crest

Brian Zachery – Deutsche Bank

Operator

Good day, Ladies and gentlemen. And welcome to the SAVVIS Second Quarter Earnings Conference Call. At this time, all participants are in a listen-only mode. Later we will conduct a question-and-answer session and instructions will follow at that time. (Operator Instructions).

As a reminder, today’s conference is being recorded. I’d now like to turn the conference over to your host, Ms. Peggy Reilly-Tharp.

Peggy Reilly-Tharp

Thank you. Good morning, and thank you for participating in SAVVIS’s Second Quarter 2010 Earnings Call.

I’m Peggy Reilly-Tharp, Senior Director of Investor and Corporate Communications with SAVVIS.

Earlier this morning we distributed a press release with detailed financial tables, which is available on our website at SAVVIS.net.

In addition, we have corresponding slides available at that site, which will be referenced during this call.

As always, please be aware that today’s discussion can contain forward-looking statements, as defined under Federal Securities Law. Actual results could different materially from the forward-looking statements due to various risk factors, including but not limited to the factors disclosed in the company’s Form 10K, and other filings with the U.S. Securities and Exchange Commission. We encourage you to review those disclosures.

Our presentation today will include references to certain non-GAAP financial measures and provide additional information for investors.

In compliance with the SEC’s Regulation G, our press release distributed today, which is posted on our website and furnished to the SEC on Form 8K, includes both our rational for why we believe non-GAAP information is important in describing our operating performance, and the full reconciliation with the corresponding GAAP members.

Joining us on the call today are Jim Ousley, our Chairman and Chief Executive Officer; Greg Freiberg, Chief Financial Officer; Bill Fathers, Senior Vice President of Global Head of Sales and Marketing; and BryanDoerr, Technology Officer.

Today, we’ll being with a financial review from Greg, followed by an overall update from Jim. Bill will then present a sales summary, followed by a cloud update from Brian, who will then turn the call back over to the moderator for Q&A.

With that, I would now like to turn the call over to Greg.

Gregory Freiberg

Thanks, Peggy. Good morning, everyone. I’d like to start with the Second Quarter Results, which are on Slide 4.

But before I begin, I want to remind everyone of some significant events which occurred last year.

In the second quarter of 2009, we had a 6 ½ million early-termination fee related to the departure of the American Stock Exchange following its acquisition by Nike Neuronax.

In addition, at the end of the fourth quarter of last year, we saw approximately 6 million of churn related to four total location customers. So in total, we lost more than 12 million in quarterly revenue that we needed to grow through.

I think this quarter’s results, which I’m about to share with you, shows that we have successfully replaced that amount.

Turning to the second quarter of this year, total revenue was $220 million, up 2% on a quarterly basis. Year-over-year total revenue was up 1%.

On June 16, we completed the acquisition of Fusepoint for approximately $121 million. Excluding both the second quarter 2010 revenue from Fusepoint, and the second quarter 2009 MXBPF, total revenue for the second quarter was up 3% on a year-over-year basis.

Turning to Overall Hosting, we’ve reported $158 million of revenue for the second quarter, which was up 4% on both an annual and quarterly basis.

Managed Services revenue was $75 million in the second quarter, up 5% on a quarterly basis, and up 10% on an annual basis.

Total Location revenue for the second quarter was $84 million, up 2% on a quarterly basis and down 1% year over year.

Moving on to Network Services where we reported revenue of $64 million for the second quarter, on a quarter-over-quarter basis, overall network revenue was flat, while on a year-over-year basis, it was down 6%.

At 53% of overall network, Core Network is now larger than sustaining network. This is the first quarter where Core revenue has outweighed sustaining, and this shift puts us firmly on the path to reversing the decline in the overall network business. We still expect to see sequential quarterly growth in this business by the end of 2010.

Core Network revenue continued to grow and was up 6% on a quarterly basis, and 24% on an annual basis. This growth is related to clients in our data centers, Thomson Reuters, and the uptake of converged cloud, which includes network connectivity. As expected, sustaining that core revenue has continued to decline and went down 6% quarter over quarter, and 26% year over year.

For the quarter, SAVVIS had gross profit of $102 million. And this amount included nearly $2 million of non-cash equity-based compensation. On a quarterly basis, gross profit was up $4 million, and on an annual basis, it was up $3 million.

Excluding non-cash equity-based compensation, gross margin was flat quarter over quarter and was up 1% year over year.

SG&A for the second quarter was $57 million, or 26% of revenue, and included $5 million of non-cash equity-based compensation, and approximately $3 ½ million of Fusepoint acquisition and integration costs.

SG&A was up approximately $5 million on a quarter-over-quarter basis, and approximately $6 million on a year over year. As expected, we increased SG&A spending as we ramped up sales and marketing efforts.

Adjusted EBITDA for the second quarter, excluding approximately $3 ½ million of Fusepoint acquisition and integration costs, was $55 million, or 25% of revenue.

On a quarter-over-quarter basis, adjusted EBITDA was up 1% while it was flat on a year-over-year basis.

Leveraged free cash flow for the second quarter was negative $13 million and this reflects the investments we have made in our Global Data Center footprint this year. And this was in addition to higher success-based capital expended for new client wins. Leveraged free cash flow was down on a quarterly and an annual basis.

Although I won’t spend too much time on Slide 5, we’ve included it so you can get a true idea of our quarter-over-quarter and year-over-year growth.

In the second column, we’ve shown our consolidated Second Quarter 2000 revenue. In the third column, you can see our quarter-over-quarter growth, excluding Fusepoint. The next column shows year-over-year growth excluding Fusepoint. And the final column shows year-over-year growth excluding the American Stock Exchange ETF.

I’d like to call out just a few numbers that exclude the AmEx ETF. Specifically, total hosting revenue was up 8% year over year, while managed hosting revenue was up 19% year over year.

Adjusted EBITDA was up 13% year over year. And in addition to the AmEx ETF, this growth excluded approximately $3 ½ million of Fusepoint acquisition and integration costs.

Now, if you’ll turn to Slide 6, I’d like to review our guidance for the year. Thanks to our continued strong organic growth, we have decided to provide full-year 2010 revenue guidance of $912 to $927 million, which includes the Fusepoint acquisition.

In addition, we have raised our adjusted EBITDA guidance to $220 to $240 million, an increase over previous guidance of $210 to $225 million. This doesn not include $5 to $6 million of Fusepoint acquisition integration costs that we expect for this year.

For Cash Interest Expense, we expect this amount to be between $55 and $60 million. This is an increase over previous guidance of $40 to $50 million, and it is due to expected changes in our debt structure.

Our cash CapEx guidance for 2010 is now expected to be between $190 and $210 million. This is an increase over previous guidance of $180 to $200 million, and still includes $50 to $55 million for data center expansion.

The increase in cash CapEx guidance reflects expected capital expenditures for Fusepoint.

To date, we have completed the Chicago and New York Metro Data Center expansions. We expect our DC expansion to be wrapping up in the next few weeks, and our Slough expansion following shortly.

Before turning things back over to Jim, I’d like to walk through the changes during the quarter to our debt structure on Slide 7.

On June 1, we announced the acquisition of Fusepoint for $121 million in cash. On June 16th, we closed this acquisition, which was funded by upsizing and drawing $110 million on our revolving credit facility.

On July 1, we commenced a tender offer for our 3% convertible-senior notes due in 2012. Note holders who tender will receive $990 for each $1,000 of convertible notes.

On July 9, we announced our intention to enter into new senior security facilities. These facilities are expected to provide for total borrowings of up to $625 million, and will consist of a term loan of up to $550 million, maturing in 2016, and a $75 million revolving credit facility maturing in 2014.

The net proceeds will be used, together with cash on hand, to repay existing indebtedness. This will include funding the repurchase of the convertible senior notes, the repayment of any outstanding amounts under our existing revolver, and other bank and vendor financing, as well as any related fees and expenses.

Any net proceeds not used to repay existing indebtedness will be used for general corporate purposes.

Later this week, we expect to announce pricing for the $625 million senior secured credit facilities. In addition, the tender offer is set to expire this Thursday, July 29. You can expect that we will provide additional details via a press release as soon as possible.

Finally, during the first week of August, we expect to close and fund our senior secured credit facilities and we will update you again at that time.

Let’s take a moment now to look at the chart on Slide 6, which visually represents the changes in our liabilities over the past few months. The second column shows the debt on the company’s balance sheet as of June 30. Our total debt position was $766 million and our net debt was $647 million.

As of March 31, our total debt position was $649 million and our net debt was $504 million. The increase in debt is due to $110 million that was borrowed to find the acquisition of Fusepoint.

In the second quarter, total leverage, including current and short-term debt was 3.6 times versus 3.0 times in the first quarter. Net leverage was 3.0 times in the second quarter versus 2.3 times in the first quarter.

The change in total and net leverage is due to the additional debt borrowed in the second quarter to fund the Fusepoint acquisition.

Moving to the third column, you will see the addition of the expected $550 million Term Loan B, which again is expected to be used to repay the $110 million revolver, existing debt of $82 million and the $345 million of convertible notes. All of these balances are as of June 30.

Looking at the final column following the expected changes in our debt structure, total proforma debt would have been $778 million as of June 30th, consisting of $228 million in capital lease obligations and $550 million of New Term Loan B.

The proforma net debt as of June 30th would have been $660 million with proforma total leverage of 3.5 times and proforma net leverage of 3.0 times.

As of June 30th, the company had $119 million of cash, a decline from the $146 million in cash as of March 31st. The company used cash on hand to fund its investment activities for further growth, which included our data center expansions and our investment in our cloud services, as well as to fund the June acquisition for Fusepoint.

And with that, I will ask you to turn to Slide 8 as I hand the call over to Jim Ousley, for a strategic update.

Jim Ousley

Thank you, Greg. And thank you all for joining us this morning. The last time we spoke was a little over a month ago when we held our NJ2S launch event webcast. And at that time, I told you we were ahead of our internal plans for the quarter. So today, I’m glad that we’re able to update you on our success.

In the second quarter, we once again, outperformed our internal plans for revenue, bookings, installs, churn and renewals; key metrics we track very closely.

We’re pleased with the momentum we are experiencing throughout the organization, particularly the improvement we’re seeing in the U.S. led by our new Senior VP of Sales, Jim Mori and his team.

I’d like to point out that we are seeing these broad improvements in our organic growth as Fusepoint has not previously been included in our internal measurements.

The success we have seen in the first half of this year has left us poised to exit this year at double-digit growth. Growth rates for both revenue and adjusted EBITDA.

We look forward to building our successive quarterly strength as we continue implementing our new programs and process improvements, and benefiting from these efforts.

To better understand how much we’ve improved, I’d like you to turn to Slide 9 so you can get a better view of how this compares to last year.

In terms of gross bookings, we’ve improved 28% over the first half of 2009. This strength is due to our focus on sales programs and sales process improvements over the past six to nine months.

In addition, as you know, we’ve been spending more on our sales and marketing efforts, and the improvement we’ve seen in our bookings is evidenced that are approach is working.

Our efforts have reinvigorated and motivated our sales team on a global basis.

We’ve also focused on execution and picked up the pace of our installs. This is improved 26% over the first half of last year. And a lot of this credit goes to our Senior VP of Global Operations, Jeff Von Deylen and his team’s continued focus on shortening installation windows and improving order quarter quality, communicating more effectively with our clients during the initial stages of our relationships with them.

During the first half, we continued to make great strides in conquering churn. As you can see, we reduced churn by 53% when compared to the first half of 2009.

This quarter, our churn was in line with last quarter’s churn of 1.3%. We’re still very pleased with where we are in terms of churn and this is just another example of our client's focus that’s really paying off.

Another reason for reduced churn is our improvement on retaining clients. During our NJ2X webcast, I spoke you to about our focus on renewals. It’s common sense that it costs less to renew an existing client, even if we have to give a little in terms of total pricing in some instance, than it does to win a new client. And our aggressive renewal strategy is definitely working.

For the first half of this year, we’re renewing at twice the rate when compared to 2009. The average contract renewal is also for 29 months or greater. By the time – by the end of this year, we expect to have 2/3s of our 2011 contracts wrapped up. As a result, churn should continue to climb into next year.

Finally, I’d like to introduce you to a new metric, which we call net-new revenue.

This is installs minus churn, and it has improved nearly 1,000% over the last past 12 months. I think this number is the best indicator of how our sales efforts have been working in concert with our renewed client focus and has been helping us move ahead in terms of revenue growth.

Let’s turn to Slide 10 and talk about the largest piece of our business, the financial vertical, which represents 27% of total revenue or $60 million in the second quarter. This was up 9% compared to the first quarter of 2010.

To fully appreciate this, you must consider the second quarter of 2009 was the last quarter we received any type of revenue from the American Stock Exchange. By reporting flat growth versus the second quarter of last year, we have successfully grown through this significant churn, and this was done during year of economic uncertainty.

Last week I spent a day with our lead salespeople from around the world, and I can tell you the message was loud and clear. The financial vertical has returned to strength. The challenges from 2008 and 2009 are behind the financial companies and there’s been an important change in how many of these companies are thinking about their IT requirements.

We’re seeing a significant shift way from a legacy mindset, where financial institutions felt compelled to own and manage their own solutions. Today, financial firms are looking for someone to deliver comprehensive solution in a short amount of time, and this includes a converged cloud, which delivers an appropriate combination of [inaudible] location, manage and cloud across our global Tier 1 network.

Banks and other financial companies are finding they can’t provide these types of services as quickly or as effectively as required because of the cutbacks, etcetera they experience in 2008 and 2009. As a result, they’re turning to someone like SAVVIS.

You can see in the results recording the clients we’re adding. For the first half, the financial vertical bookings are 36% of our internal plan. In addition, the financial vertical represented over 40% of our bookings in the second quarter. This included the addition for the dark liquidity crossing network for Barclays Capital and USB’s Investment Bank’s Alternative Trading System, in addition to seven other major financial vertical clients.

In total, we know have more than 900 vertical clients and we are now supporting approximately 200 exchanges, dark pools and data feeds.

In short, we’ve been able to replicate our success with key clients in the financial vertical and as a result, we continued to expand our relationship in this area.

Before I turn the call over to Bill, I’d like to tell you a quick story about one of our financial vertical clients as it represents a lot of our activity.

This firm when through some economic issues during the downturn, as did most financial companies, and actually turned some business away from SAVVIS.

Our team continued to work with this company and as a result, we are now going to be fully managing their entire infrastructure. This firm picked SAVVIS because our cloud, our network, and our experience and agility.

This is just one of the many opportunities we see with our financial clients and this goes beyond the U.S. and stretches around the world.

As I stated before, SAVVIS paid a price during the financial meltdown, but now it’s going to reap the benefits in a big way or our continued focus and commitment to this major market segment.

This is just one of the many opportunities we see with our financial clients and this goes beyond the U.S. and around the world.

Globally, we continue to explore expansions with Thomson Reuters. Today, we’re looking at Brazil, Sydney, and Mumbai as others. In these instances, Thomson Reuters serves as an anchor tenant and helps fund the initial capital requirements.

We lease the data center space from a local provider and handle all of the infrastructure services. From there, we have the potential to expand our use beyond our relationship with Thomson Reuters as we see new business opportunities develop.

This relationship clearly helps Thomson Reuters, but also helps SAVVIS accelerate its international expansion.

And now to provide some details around other significant clients, I’ll turn things over to Bill Fathers.

William Fathers

Thanks, Jim. Good morning, everybody. While Jim showed you our year-over-year growth for the first half, I’d like to share our second quarter bookings growth, which was up 7% over the first quarter.

I’d like to discuss some of the bigger client wins with you, and also give you an idea of why enterprises pick SAVVIS. So if you’ll turn to Slide 12, we can get started.

During the second quarter, more than in any other quarter, we’ve recorded a significant increase in bookings in the financial vertical with major wins across all three regions. That included two of the largest clients in the UK and across Asia selecting SAVVIS as their infrastructure services partner.

One of these U.S. based institutions is an excellent example of the continued acceleration and expansion we’re seeing in proximity hosting deals. This was a three-year agreement with monthly recurring revenues of approximately $280,000. But for this firm, which manages the largest electronic trading platform in the world, we’re providing co-location and network services. And unlike the competitors, have the capability to easily supply other services beyond co-location.

And in this instance, we were competing against both exchanges and traditional co-lo vendors as well as financial services providers. We won this deal because none of these competitors could provide connectivity to such a large variety of trading venues and sources of liquidity.

And in addition to our flexibility, there’s unmatched access to the financial community, already established in our NJ2 extended center complex, helped seal the deal.

I know Jim has been talking to you a great deal about our financial vertical strength, but a win like this really highlights the value of our established financial vertical community.

I’d like to turn now to a larger UK-based retail-bank contract we signed during the second quarter. The MRR for this deal was started around $165,000 a month, and ramped to $345,000 over the next several quarters.

And for this client, we’re providing a highly-available multi-data center solution. This is a converged-cloud combination, which includes traditional hosting in conjunction with SAVVIS Symphony Open and SAVVY Symphony Dedicated, and it’s all delivered across our secure low-latency network.

The client identified a business need to transform their online client services in order to secure existing business and win new market share while managing risk and profitability.

To do so, they’re building an integrated eBusiness solution comprised of the single platform which offers pre-trade, trade and post-trade services in addition to providing access to other services. And we offered the client a twin-site data center solution between our Reading and Slough facilities and have designed a hybrid of traditional dedicated and open-cloud environments to each of their test-development pre-production, and quite significantly, their production and disaster-recovery environments.

We’ve also provisioned low-latency network connections for some major currency exchange venues. And the real significance of that win is we’re seeing customer put their production environments onto our cloud platforms.

And in this instance, we’re also competing against major bidders, such as Equinox BT, Rackspace, IBM, and we won the business thanks to our ability to meet existing demand and expected growth on the cloud platform.

This is just as valuable as our history in delivering and supporting financial applications for large investment institutions. Our survey standardization, automation and agile cloud services were also major differentiators. As a result, we now have a retail bank on our cloud platform.

Next up is one of the world’s largest media companies. They signed a three-year collaboration with SAVVIS for total contract value of more than $30 million. SAVVIS will be the primary infrastructure services provider for the entire group portfolio spanning online, premium cable, and film production across the U.S. and Europe. This includes fully-managed hosting, cloud and co-location services.

And to win this deal, SAVVIS engaged in a collaborative effort which included the combination of both solution selling and education. We were already providing some managed hosting services for this client, and this put us in the position to gain access to other areas of their global business.

By working as a trusted advisor, we were able to win over the executive team and make this expanded relationship a reality.

One final new client win from a large consumer brand company, before we head into the next slide – we signed a three-year deal to provide this enterprise with an entire interactive marketing infrastructure, for a total contract value of more than $6 million. This amount includes professional services for migration and program management.

This company is one of the most widely recognized brands in the world, and more than 92,000 employees. It sells over 3,000 different brands in over 200 countries, and we’re providing a full-managed SAVVIS Symphony dedicated cloud solution. It’s absolutely critical that their brand is well protected by SAVVIS globally. However, we’ve gone beyond just security and given them the flexibility they need to rapidly respond to market trends while still providing the most stringent security. This was a win with an existing client, as we already host over 450 of their websites around the world.

Our dedicated team, including operations, helped the client achieve their goal and SAVVIS win the deal. It took six months of rigorous design and collaborative workshop sessions, but it’s worth it when they fully determined that SAVVIS was the trusted partner to help them leverage cloud services, greater scalability, flexibility and cost efficiency.

Now, if you’ll turn to Slide 13, I’d like to talk to you about just one more client, and a little further about the concept of converged cloud. I don’t think it’s any secret, after last week’s CIO Magazine interview with Michael Harte, that the Commonwealth Bank of Australia is a SAVVIS client. And if you ask [inaudible], Harte is serious about cloud computing.

Now, I hate to steal someone else’s words, so I will fully credit Michael Hart, straight out of his very simple-but elegant explanation of why enterprises are moving to cloud.

In the story, which is available at CIO.com, Harte explained why cloud is going to be the future of outsourcing. The Commonwealth Bank of Australia wants to get out of infrastructure computing and into fine-grain components and highly granular data, so they can supply their customers with the services they want at a value. Their customers are demanding more convenience, accessability, and richness in the services they consume. So that’s where CBA is investing its IT dollars.

The firm is trying to shift away from spending half of its budget maintaining the lights-on infrastructure and instead, get more of that money into creating really high-value, highly-responsive services rather than putting money toward the backend.

And as I know Bryan has shared with you before, not every application booms in the cloud, but there are certain types of activity that will create more value if they are moved into the cloud since this frees up budgets and resources.

The whole concept of converged cloud is all about getting better utilization from service that are operating at different capacity. And this is true when this is occurring inside the organization or with a partner like SAVVIS.

By working with companies like SAVVIS, the Commonwealth Bank of Australia can run application development and testing domains privately inside, or publically outside of the corporation and have these applications scale up within minutes.

Once they’ve developed and tested those capabilities and they’re operating at full production, CBA can determine whether they stay outside in the public cloud, or if they should be moved.

Cloud can be provisioned within minutes rather than days and weeks, and it allows for very nimble pay-as-you-go kind of service capability. And the places can determine whether they want to price their applications inside their four walls, or whether they wan to go outside.

Here at SAVVIS, we see the concept of converged cloud as very valuable to enterprises such as CBA.

Our assets work together to fully embrace the cloud model and deliver the appropriate combination of co-location, managed services, and network to our clients.

And importantly, as these enterprises look to move mission-critical applications to the cloud, many are increasingly concerned with the privacy and security of that data as well as the performance of their client-based applications. They may address these requirements through our network solutions which are integrated with SAVVIS Symphony.

Our converged cloud includes network options such as public cloud – public connectivity over our Tier 1 IP network backbone, and connectivity across our secure, low-latency quality-of-service-enabled ATS network, our Core MPLS Place Service.

So before I hand things over to the real cloud expect, Bryan Doerr, I’d just like to update you on our annualized cloud run rate, which is not at $14 million. And for the second quarter, we had quality revenue growth of nearly 25%. And we have a very strong pipeline and the same strong growth trends across our main sales verticals.

With that, I’ll turn you over to Bryan.

Bryan Doerr

Thanks, Bill. Good morning, everyone. Bill just talked about the concept of converged cloud, and I’d like to expand on this discussion by talking a bit more about our overall cloud offering on Slide 15.

In June, our SAVVIS Symphony Virtual Private Data Center, or VPDC, went from beta to general availability. VPDC is one of the industry’s first enterprise class, virtual-private data center solutions.

I know you keep hearing about Enterprise Class cloud, and I’d like to provide a little more clarity around this concept.

First, enterprises have a variety of needs in their IT infrastructure. They need inexpensive services that support early stage development and non-transaction based application. They need capabilities for non-mission-critical production applications, and they need the highest available monitoring and performance associated with mission-critical applications.

So a truly enterprised class cloud is going to help them address this wide variety of needs. SAVVIS does this through its multi-tiered service level and network profile, and through the availability of managed infrastructure and advanced security features across all of these tiers.

Additionally, clients can match their cost to their grade of service and ultimately to their application. So in summary, SAVVIS Symphony VPDC let’s enterprises create their desired infrastructure for each of their different applications within pre-defined service levels found inside our secure multi-tiered cloud and at optimal cost.

With VPDC, enterprises get increased user control for complete virtual data center provisioning with advance user design and enhanced security practices which were previously available only in dedicated IT environments.

This is combined with hourly usage-based billing with no long-term commitment and provides for tremendous additional cost savings.

When combined with our global data center footprint, and network options ranging from our Tier 1 public IP access to private low-latency connectivity, enterprises can have the cloud solution they need available anywhere in the world.

VPDC really showcases what enterprises are looking for in cloud application hosting. Like overall hosting needs, security needs vary by application. Our VPDC offers a range of security solutions from basic services in our lowest cost tier of service, to comprehensive enterprise cloud security which will be found in the tier of service best serviced to mission-critical applications.

At this tier of service, we will be offering [inaudible] security, parameter and application firewalls, intrusion detection and prevention, file integrity monitoring. Frankly, we believe VPDC’s security services will be the benchmark for application hosting in the cloud.

As Bill mentioned, SAVVIS offers the converged cloud solution which gives clients the ability to fully embrace the cloud model and deliver it in conjunction with the appropriate combination of co-location, managed services and network to our clients.

Now, think about this. If you’re hosting an application and you need advanced security services, like integrated threat management or protection from anti-denial service attacks, when you move to a cloud-hosted infrastructure you still need these accesses to these security services.

Likewise if you’re operating a corporate-wide area network to protect your data and ensure application performance, you still need this network capability when your application is hosted in the cloud infrastructure. SAVVIS can meet both of these needs.

We have about a 31-global data centers spanning North America, Europe and Asia. We offer a fully-managed cloud infrastructure with 24/7 enterprise support, and enterprise-class SLAs.

Importantly, we provide secure, low-latency MTLS network connectivity which allows enterprise clients to combine hosting with cloud or combine private and public cloud.

Now, if you’ll turn to Slide 16, I’d like to give you an idea of how the industry is seeing the future of cloud.

Research shows that cloud computing is one of the fastest growing components of cloud services. Industry analysts are seeing greater-than-expected interest in cloud computing and acceleration of adoption of cloud computing among enterprises. We do not believe cloud computing is caught up in a height cycle. We believe cloud computing represents a significant increase in the value proposition of managed services and a fundamental shift in the purchasing paradigm of these services.

As a result, industry analysts expect cloud computing services to grow at a 56% compounded annual growth rate from 2009 to 2014. And after listening to Bill, you shouldn’t be surprised to learn that the financial services sector is expected to be one of the most aggressive adopters of cloud.

I know this goes against everything you’ve heard about ramp and server hugging at financial firms, but as Jim discussed earlier, these institutions have realized that they no longer have an inexhaustible capital budget to spend on IT. They can’t continue with legacy IT approaches and still maintain leading-edge IT performance.

They’re a strong example of the improved value proposition and are adopting the cloud paradigm for infrastructure acquisition.

And it’s clear from Bill’s new client summary, like three of the five top MR wins are financial institutions, that there has been an tectonic shift in IT buying for this industry.

Firms like these and other enterprises plan on using cloud solutions for even the most core business operations within the next two to three years. These are the same applications they have jealouslessly guarded from many decades.

By then end of 2013, industry analysts expect that end users like these firms will consider cloud infrastructure solutions as part of mainstream IT. This is good news for companies like SAVVIS. What’s even better news is that by the end of 2014, 25% or more of the enterprise IT workloads are expected to be cloud based. But that still leaves 75% of IT still using more traditional solutions such as co-location and managed, which brings us directly back to the concept of converged cloud.

Enterprises need a cloud solution that offers more, more security and reliability, measurable and guaranteed service, and flexibility.

But in addition to that, they need to know that they can connect back to their applications that they are co-located or even in their own data centers. In addition, they need to know their data is being transported across a secure-reliable low-latency network.

So when enterprises look at all the components in concert, they’re looking at a SAVVIS Symphony converged cloud solution.

And with that, I’d like to thank you for your time today and turn the call back over to our operator for questions and answers.

Question-and-Answer Session

Operator

(Operator Instructions) Our first question comes from Robert Dezego of Sun Trust Robinson.

Robert Dezego – Sun Trust Robinson

Hi. Good afternoon. Good quarter. I just had a couple of quick questions. The first one is can you talk about any foreign currency exposure in the guidance – kind of what the FX impact was between this guidance and the last guidance.

And it seems that even though the quarter was strong, even though you did talk about some of those cost coming into the second quarter, can you talk about some of the offsets to some of the higher costs that came through in the quarter and how you’re able to still grow EBITDA pretty healthily given some of those headwinds you talked about last quarter?

Gregory Freiberg

Hi Rob, thanks. It’s Greg. Let me take those. So on the FX side, in the current quarter, FX knocked us negatively about $1 million compared to the first quarter. And then from an EBITDA, it really didn’t impact us because I have a lot of my expenses more on the Euro side, so I had a benefit that muted out that.

And I think the other side in term so the EBITDA for the quarter, you’re right. So reporting in that $54 million, just above where it was for the first quarter. And you know, we tried be really transparent about where that would land.

The underlying sales and marketing increase in the first quarter to the second quarter was about $3 million. And we were able to offset that by doing a better job across the board on our management of the expenses.

Then I think to the EBITDA – how did that impact into the guidance side for the FX? You know, we give a range on the guidance, and so $1 million is not enough that I try to move the number – I call that out as part of the range.

Robert Dezego – Sun Trust Robinson

Okay. And just on the last question, you know, we’ve seen a – a bigger-picture question. We’ve seen a lot of companies talk about the cloud and managed-hosting offerings, and this seems to be a pretty good competitive mixture. Can you talk about any changes you’re seeing on the competitive front and besides the internal IT departments, you know, decided to make an outsource move, you know, what does the big competitive environment look like today and who are you seeing? If you could talk a little bit about that, that would be great.

William Fathers

Thanks for the question. It’s Bill Fathers here. I think perhaps the comment I’d make is perhaps over the last three or four quarters we tend to see the big systems integrators now more in the competitive mix than previously. Their value proposition tends to be more on the lines of to an end customer, we can build you anything you’d like. You know, if you’d like a private cloud, we can build that. If you’d live a service that sort of tends to be a much larger more complex project, whereas obviously our value proposition is around our existing cloud platform and any slight integration work we need to do to bring the client onto our existing platform.

So ours plays very much around scale, and as we scale up the number of customers and the volume on our cloud platform, then we’ll see more and more benefit. Where systems integrated is tended to make more of a, we’ll build a different cloud solution for every client per your value proposition

So that’s probably the big shift I’ve seen. And that’s true in Europe and Asia as well over the last three or four quarters.

Robert Dezego – Sun Trust Robinson

All right, great. Thanks, good quarter, guys.

Operator

Our next question comes from Mark Kelleher of Brigantine Advisors

Mark Kelleher – Brigantine Advisors

Good morning. Thanks for taking the question. I wanted to ask about the churn. You did a great job replacing the MX and working through that. As you look out over the next several quarters, do you see any other unusual churn events? I know there’s the New York Stock Exchange that’s doing some pulling of the ARCHA Exchange and some other things.

Can you just tell us how you’re looking out at the demand, particularly in the financial services end in New York with regards to churn? Thanks.

Jim Ousley

Thanks for the question. This is Jim Ousley. Right now we are not seeing any major churn items in this year. Obviously, you know, we said last year the fourth quarter was the high-water mark of all those big Internet providers and so on, are all basically out of our mix now.

As far as the financial sector, all of those are pretty much behind us. There’s still, as you mentioned, ARCHA, we still are not seeing that that is going to be a major churn item for us this year. And we have other opportunities with them as well.

So right now, we’re relatively comfortable, and as I mentioned in my comments, based on the contract renewals we’re getting we think we’re going to be able to keep our churn under control into 2011.

Mark Kelleher – Brigantine Advisors

Great. Thanks.

Operator

Our next question comes from [Thre Anaza] from Oppenheimer & Company.

[Thre Anaz] – Oppenheimer & Company

Yeah, good morning, and thank you. Greg, or Jim, you know, for the first time you guys were talking about network services being essentially flat. Maybe if you guys can provide some color, what’s driving that. And the second, is the roll out of cloud services, up to a certain extent, helping the growth in the network services business?

And also, Greg, if you could provide an update on the synergy from the Fusepoint acquisition, that would be helpful. Thank you.

Greg Freiberg

On the network side, clearly we’re seeing an impact by Thomson Reuters. The network opportunity is – or the network requirements that Thomson Reuters are critical to the solution we’re providing to Thomson Reuters, both on the legacy business with them and the new electron network capabilities that are being promoted now. So that is having a big impact.

And also, as was mentioned, our cloud offerings, most of our major enterprise customers that are looking at cloud are wanting to integrate network as part of that so they have the security and predictability that they require. So both of those are definitely influencing our core network business to a positive effect.

James Ousley

And then on your question to this synergy front with Fusepoint, so we’re delighted with Fusepoint, getting the access into the Canadian market, the three data centers, the price. We’re well into that process and we feel comfortable with what we said previously, which is $8 million of synergies in year in 2011. So we’re off and running.

[Thre Anaz] – Oppenheimer & Company

Got it. And Bryan, or Bill, just one question on the cloud. Clearly, I think different companies are taking different approaches towards the platform layer. I’m just curious, you know, what is our strategy here? Would you guys like to have your own platform, or does it make sense just to partner with an existing platform provider out there?

Bryan Doerr

Well, there’s a couple of things that affect this decision. Certainly owning our own platform is important. We believe we know how to bring all the different technologies important to delivering cloud services together in a high-performing cost-saving platform.

We also, through that kind of ownership, are able to differentiate our service with features at a highest level. For example, like the multiple qualities of service that you see in our cloud. So we think that’s important.

There are also though, other moods happening in the industry related to – you see certain things happening related to brokering. And I think that what our strategy right now is to have a platform that allows us to be capable of meeting the needs across a full range of what would otherwise potentially be brokered capabilities. So offering somebody else’s cloud isn’t part of our current offering. We differentiate in the platform space.

[Thre Anaz] – Oppenheimer & Company

Great. Thank you.

Operator

Our next question comes from Michael Bowen of Guggenheim Securities.

Michael Bowen – Guggenheim Securities

Okay. Thank you. Good morning. A couple questions. I was wondering if you could give us a little bit of your further thoughts on, you mentioned Brazil, Sydney and Mumbai, looking to expand in those markets. Can you give us an idea on – just frame those markets a little better for us and whether you think margins would be different on a customer-by-customer basis in those markets?

Also, there seems to be a move a foot now, we’ve seen announcements by Twitter, Facebook, this morning; 37Signal came out and they’ve all said that they are going to keep some of their outsource data centers, but they’re also going to build their own. Some of these are being built in Idaho and Oregon, and other such things. We’ve seen this from Facebook as well. Or pardon me, from Yahoo as well.

Can you tell me what you’re seeing and hearing, and what type of – how disruptive will this be potentially to the overall model in how you’re preparing for this move because now it seems like it’s more than just one or two companies. It seems to be somewhat of a trend. Thanks.

William Fathers

Thanks for the question. This is Bill Fathers here. So in terms of expanding into new markets, it’s very much cloud driven. So Thomson Reuters, along with our top-ten financial services customers, most of whom are purely interested in going into these markets to get access to these new trading environments. And obviously, the markets of a lot of these countries is opening up very, very quickly and automating quickly.

So firstly, this is not a speculative build that we think they’ll come. When we look at entering into these markets, it’s typically off the back of having secured commitments from several customers going into each market.

In terms of margin, I think, yep, absolutely, we go in with our eyes wide open in terms of the need to get higher margins. And the way we do that is by making sure we’re adding value, i.e. a full comprehensive suite of managed services.

So a typical example would be perhaps one of the big buy-side firms who perhaps is deploying their prime brokerage capabilities into – and we’re seeing them all wanting to diversify into Mumbai, Russia, Brazil, Indonesia, as each of them is trying to gain exposure to these new markets.

We seem to try and bundle four or five of these customers’ demands and provide them with a completely comprehensively managed service that would include managed hosting, potentially cloud platforms, and certainly network connectivity.

So very much a market trend happening quickly. We’re seeing a very strong demand in a lot of these markets. And as you’ve mentioned, we’ve already expanded into two markets during the second quarter and we’re assessing potential future expansion. But obviously, we don’t sacrifice the margin criteria as we go into those things.

The second – just in terms of the commenting on the Twitters of this world, this is kind of something we’ve experienced in the last, frankly, eight or nine years. When companies like Twitter and perhaps you could put Google out there, achieve a certain level of scale and the scale is vast, it does make economic sense for them to perhaps start to look at deploying their own capital and building their own data centers should they wish to.

But in many cases, these companies have reached scaling points where, you know, potentially it essentially makes economic sense for them. But to give some ideas of scale, I mean, they’re probably reaching somewhere in the order of one-million square feet of space and at that point, that may well make sense to them to look to start to build their own.

So we don’t chase that market. I think we’ve learned in the past that that’s not a great market for us to chase. So you know, in terms of adjustable market opportunity, I don’t see anything [inaudible] potential opportunity.

Michael Bowen – Guggenheim Securities

Okay. Thank you.

Operator

Our next question comes for Colby Sneasel of Cohen & Company.

Colby Sneasel – Cohen & Company

Thank you for taking my question. I wanted to talk first about your guidance. The guidance includes the range and revenue of about $15 million and includes the range of about $20 million in EBITDA, which seems like a lot considering you’re already half way through the year. So I was wondering if you could give us some color in terms of what would have to happen for you to hit the low end versus what would have to happen to hit the high end. And then I have a followup question.

Greg Freiberg

Hi Colby, it’s Greg. Reintroducing the revenue guidance was the first time, and we really felt like three strong quarter of bookings performance. We reflected back on the run-rate nature to our business. And we felt like it would be a good chance for us to give the messaging around through what was a hard time for us and we’re coming out of the other side.

In terms of the size of the range, you know, kind of the revenue is that recurring impact to it. So even a great booking performance, it takes one to two quarters to get it installed. So the revenue number, we think we’ve got a little bitter knowing what it’s going to be at given that recurring revenue basis to it.

Colby Sneasel of Cohen & Company

It is right to say then that the biggest doubt for revenue guidance is how quickly you install opposed to churn or something else occurring?

Greg Freiberg

Absolutely. You got it. That’s it.

Colby Sneasel of Cohen & Company

And on EBITDA, what would it be?

Greg Freiberg

On EBITDA, you know, there’s more things that can come with the puts and the takes as you come through the rest of the year. You know, ironically, as we continued to – for example, even on the sales and marketing front, a big driver in there is the commissions. We’re paying a lot more commissions relative than what was in our plan because bookings are ahead of our internal plan.

And so you could have a little bit of a – the benefit is the velocity of EBITDA as you exit the year. But not necessarily the numbers you put up within the year.

You should expect us to tighten that range as we get to the next quarter.

Colby Sneasel of Cohen & Company

Okay. And then my second question has to do with Fusepoint in Canada. You know, at your end of 2X event, you noted that you were looking at potentially acquiring a data center in the City of Proper Toronto so you can go more aggressively after the financial services vertical, which I think was a big point in terms of why you wanted to get into the Canadian market. Yet your CapEx guidance remained at about $50 to $55 million for expansion cap. Can you walk through what your current thoughts are in that regard? And then also as it relates to Fusepoint. You mentioned previously that about 20% of those revenues comes from a consulting type business, which you are not necessarily that excited about. Can you walk us through what your current intentions are with that component of the business. Thanks.

Gregory Freiberg

All right, so on, you know, I think on the – we’re studying Fusepoint at the moment, and if and when we reach that conclusion on doing another expansion there, kind of like if we did anywhere across all of our markets, we’d announce it. And so we’re not at that threshold point where we’ve decided where the next investment is going to go.

Colby Sneasel of Cohen & Company

It’s not less likely or more likely at this point?

Gregory Freiberg

Correct.

James Ousley

This is Jim. I think it’s fair to say that we’re looking at expansion opportunities, but they would not be big capital requirement situations. It would be working with an exchange and so on, and so you would not see a big capital requirement.

Gregory Freiberg

And then in regards to the application services business, we have concluded that that business is non-core to the combined entity for us. And so it’s being held as an asset held for sale, which is an accounting definition. And it’s not included in our revenue performance. If you looked at Page 2 of our Press Release, I think we put some notes there around – we have income loss from discontinued operations net of income tax. And when you get our 10Q, there will be some more information.

So that application services business is not going to be part of our operating results and we’re looking at selling that.

Colby Sneasel of Cohen & Company

Just to remind me, so you did $48 million of annualized revenue in the first quarter. Did that include the application business?

Gregory Freiberg

Yes, it did. And that application services was around $9 or $10 million of that.

Colby Sneasel of Cohen & Company

Okay. And then your guidance – in the second quarter, do you use point revenue as well as in the guidance for the year? That does not include any revenue from that business?

Gregory Freiberg

Correct. It’s not included in our second quarter numbers. It’s all in that one line income loss from discontinued operations.

Colby Sneasel of Cohen & Company

Great. Thank you so much.

Operator

Our next question comes from Simon Flannery of Morgan Stanley

Edward Casper – Morgan Stanley

Hi. This is Edward Casper, in for Simon. I just had a question about co-lo pricing. I think there was some comment made at the NJ2X opening that there were 5% cost savings. I’m being asked by some customers. How much is this going to impact numbers and is it reflected in the sequential co-lo pricing decline that we saw this quarter? Thanks.

James Ousley

This is Jim Ousley. I think it was my statement that may have caused some of the thoughts. When we renew contracts, and I mentioned we’re having a great renewal scenario, typically there will be some concessions for a longer-term contract to go forward.

That being said, what we’re also seeing, which I also tried to emphasize is that typically we’ll add additional services to the contract in almost all cases. So the total contract and the monthly revenue and margin actually goes up in most of these contracts. So we don’t see – so our forecast and so on doesn’t have a 5% decrease in it because that’s not what we’re seeing with the new contract extensions that we get. We get additional services and additional value-add services typically around those.

So you should not see a major impact.

Gregory Freiberg

Edward, this is Greg. To the other part of your question, which is do you see it in the yield that we have per square foot, or what – I think your question was trying to get to that area. What I would comment there is on a co-location front, within the second quarter, Chicago was finished in the first quarter, NJ2X in the second quarter. We’ve not fully filled those facilities yet and we put those into some hot markets. So we reported co-lo revenue for square foot at 47.5 at the second quarter.

No change to our previous comments, which is leveling off 48-50 range.

Edward Casper – Morgan Stanley

Okay, great. Thanks so much.

Operator

Our next question comes from Donna Jaegers of D.A. Davidson.

Donna Jaegers – D.A. Davidson

Good quarter, guys. Two quick questions. You talked about the pricing comments in co-low. Also managed hosting was also down quarter over quarter. Can you comment there, is that the cloud that’s cannibalizing it, sort of lower prices, or what’s going on in managed pricing.

And then also Greg, on your interest expense guidance, it doesn’t jive with what I’m hearing as far as the price talk on this new offering. So what exactly is included in your guidance? Do you have the new $550 million note built in there yet?

Gregory Freiberg

Hi Donna. It’s Greg. So thank you. On the first question, the pricing on the managed front, we reported 975.4 of managed revenue per square foot in the second quarter. It’s down just a bit from the first quarter of 984. And really, that’s a mix of newer customers that are coming into SAVVIS. You know, it’s revenue as a whole was up 4% sequentially, just looking at SAVVIS’ underlying performance.

So we’ve gotten that top line moving. But as new customers come in, they’re not getting as many products and services yet. You know, so it’s a modest decline sequentially. I think you’ll continue to see some of that modest decline, but the overall revenue line is growing pretty well for us.

And then I think the other part, the interest expense, you know, you’ll see some – we expect to price it this week, and you should see some of those details coming out pretty darn quickly here.

And I think, you know, we used what our internal assumptions are and I think you can recalc it to find that in the range we gave. But that’s where we see it.

Donna Jaegers – D.A. Davidson

Okay. So the $550 million is included in the $55 to $60 million cash interest cost?

Gregory Freiberg

It is. It is, Donna.

Donna Jaegers – D.A. Davidson

All right. Thanks.

Operator

Our next question comes from Frank Louthan of Raymond James.

Frank Louthan – Raymond James & Associates

This is Mike, for Frank. Thanks for taking the question. First off, can you talk about the new NYSC Data Center? What impact are you seeing from that, or do you expect any going forward?

And then can you talk a little bit about M&A? What should we expect from you going forward. And maybe just to reiterate your strategy there. Thanks.

William Fathers

Great. It’s Bill. I’ll take that first question. Thanks for the question. So yeah, I guess [inaudible] to open their new data center there in the coming weeks or quarters. And you know, extensively, that is, as I think we’ve all talked about for some quarters, that’s a new competitor coming into the New York marketplace.

Certainly in terms of impact on our business, I think pretty much all of the customers that were going to move to that data center, that we’ve seen that happen over the last three or four quarters. There was a sort of slight movement of customers that were looking to move for our center into the new one.

In reality, what happened is most of our customers decided to deploy an additional set of infrastructure in the [inaudible] office facility, and have to keep their infrastructure in our facility because it’s where there are several dozens of other trading venues that they trade on. So it’s not a all or nothing.

As that comes online in the coming quarters, that’s, I guess, a new competitor. I guess the positive is a potential to have some of their trading platforms in there. The negative is physical location. It’s a long way – in latency terms, it’s a long way from the core of the New York Trading Market. So that’s a bear they’ll have to overcome.

Gregory Ousley

And on the M&A side, I think it’s fair to say you won’t see any major M&A transaction in the short term. You know, we’re going to integrate Fusepoint and we’ve got aggressive expansion plans in conjunction with Thomson Reuters that I think will take our capacity and so on.

So I think it’s fair to say that there wouldn’t be any major M&A transactions beyond those two activities for the foreseeable future.

Frank Louthan – Raymond James & Associates

Great. Thanks for the questions.

Operator

Our next question comes from James Brein of William Blair.

James Brein – William Blair

Thanks. Just a couple quick questions. One, with respect to the SG&A costs, obviously you stepped up this quarter and you talked about that a bit. Can you talk about what part of that, of the increase is maybe variable versus fixed, meaning, how much of it do you expect to go quarter to quarter based on where the bookings go. And should we expect now sort of a high $50 million range on a quarterly basis?

And then secondly, with respect to the network group, [inaudible] asked a little bit about it, but are you seeing any sort of fundamental turns there where there’s generally, you know, demand is picking up on the balance side that’s offsetting some of the price declines? Thanks.

Gregory Freiberg

Okay. Hi James, it’s Greg. On the SG&A in the future, so we reported $56.9 of SG&A in the second quarter and I’ll give you some of the components to that; 3 ½ million of that number is acquisition and integration costs. So you know, if you’re trying to work back to what are some of the underlying drivers, you can put that into a separate bucket. $5.1 million of that is non-cash equity-based comp. So if you worked that work, you get to an underlying of everything else is $48.3 million. And that was an increase of about $3 million compared to the same underlying number for the first quarter.

That biggest driver, that $3 million increase was commissions. And the also, a piece of the marketing, sales and marketing and some of the promotions that we have going on.

What I guide you is that the underlying 48 number, that number is in the range of, or it might be growing a little bit as you look for the rest of the year. The non-cash equity-based comp, you can do that calculation separately.

The acquisition integration, 3 ½, I think we said earlier, for the full year we expect it to be $5 to $6 million. So there’s another couple of million that’s going to come as we continue to integrate Fusepoint for the rest of this year.

Does that answer your question on the SG&A?

James Brein of William Blair

It does. Thank you.

Gregory Freiberg

And then the network trends, Bill, did you want to address that?

William Fathers

On the price increase, it’s a dangerous statement, but maybe some bottoming out at the wholesale end. Perhaps, you know, you can’t go much lower than two bucks a meg, so definitely some bottoming out there in terms of the wholesale pricing trends.

But that’s now a very small dissention of our revenue, so it doesn’t have a great impact. Otherwise, in terms of BPN pricing, no, relatively stable. As you probably know, we’re moving a number of our customers from legacy BPN product to our latest BPN product offering. The rate of which that is going is slightly faster than we thought it would. We’re not seeing any significant price erosion as we move them from the legacy to the new product offering.

James Brein of William Blair

Have you seen volumes pick up in the network?

William Fathers

Yeah. I think Jim alluded to it at the top of the call. The Thomson Reuters Alliance relationship, where we’re selling in 90% of the deals we’re closing there incorporate both co-location and network. The clients there want to get access to either their own home office or other sources of trading. So that’s great.

And cloud, you know, the typical cloud sale is a customer putting their infrastructure in two or three of our data centers. And they need connectivity between those data centers. So again, cloud is pulling through network revenue as well.

James Brein of William Blair

Great. Thank you very much.

Operator

Our next question comes from Grave Howell of Wells Fargo Securities.

Grave Howell – Wells Fargo Securities

Thank you, everyone. Thanks for taking the questions. I just had a couple actually.

I guess first off, if we strip out one-time items in Q1 and Q2, it looks like the co-location side of the business is growing around 7% annualized give or take. How should we think about the normalized co-location revenue growth going forward now with Fusepoint in the next –

James Ousley

Hi Grave. So I think the co-location, the biggest thing for us, I think we’ve recognized this at the beginning of the year, is we weren’t growing it and weren’t participating in that market as well as what we thought. So we adjusted out commission plans right at the beginning of the year. And that’s really what’s driving our increased performance around the co-lo front, better focusing around doing a good job with selling it and getting the commission right.

I think, you know, we have capacity to come online for NJ2X, which is really helpful in Downtown Chicago, which is [inaudible]. So our growth rates are going to be somewhere, I think where you’re talking about.

However, the underlying – I think some of the research analysts who look at what is the average growth rates for co-low is usually in the 14% range as a [inaudible]. I’m not sure we’re going to be performing at that range because it would required a heck of a lot more CapEx investment for expansion than we’ve done at SAVVIS. We’re probably a little more conservative on that capital side.

Usually your performance on co-lo growth rates are directly proportionate to how much investment and capital you’re doing. So I guide us something less than the overall market, but better than where we’ve been in the past.

Grave Howell – Wells Fargo Securities

Okay. That makes a lot of sense. And then, I know you guys have talked about this somewhat, but do you see any significant potential for your new cloud offering to accelerate managed hosting revenue growth? And then just how should we think about margins in your cloud business versus the traditional managed hosting site?

Gregory Freiberg

So the answer to the first questions is yes. You know, that’s one of the strengths that SAVVIS has, is the fact that by combining cloud with other types of services in the hosting space, we saw the larger number of problems and hence, have more opportunity for marketplace adoption and growth.

So we absolutely think that cloud services as a part of a multi-service or hybrid solution will have a positive impact on the larger set of service sales at SAVVIS.

Margins for our cloud product, we haven’t been specific about them, but they are in line with the other managed hosting products that we have. So we don’t see that as diluted.

Grave Howell of Wells Fargo Securities

Okay, great. And then just one final question if I could. I know you’ve already touched on this, you don’t expect any impacts from the NICE ARCHA exchange in 2010. Is there a way to size up like what the potential headwind would be in 2011? I assume it’s significantly smaller than the AmEx churn that you guys had in 2009.

William Fathers

Yeah. I guess it’s probably too far away to start to speculate, to be honest. Yeah, I mean, I can’t say it’s maturing to the level of the AmEx churn that occurred last year. But when, if and how much, frankly, is still very much up in the air at this stage in 2010 as to whether, you know, when, if and how much there may be an impact as we go into 2011 from that.

Grave Howell of Wells Fargo Securities

Okay. Great. Thank you very much.

Operator

Our next question comes from Jonathan Atkin of RBC Capital Markets.

Jonathan Atkins – RBC Capital Markets

Yes, thanks for taking the question. I’m interested in Thomson Rueters. You did bring them on this year in two of your international locations and I’m wondering what contribution is that making in rough order of magnitude to your 2010 revenue outlook?

And then as you look at the monthly recurring margins that you expect from that relationship going forward, how does that compare with your other managed hosting products in cloud?

Gregory Freiberg

Hi, Jonathan, it’s Greg. So you know, it’s really not a big impact. The two markets; we brought on New Frankfort, Hong Kong this year. You know, it’s a few million in revenue at end year, and you get back to the recurring revenue if you don’t put it in right at the beginning of the year.

But we have the potential, we’re growing that through the year and exiting the velocity at the end of the year.

I’m sorry. Do you mind repeating the second part of your questions?

Jonathan Atkins – RBC Capital Markets

Yeah, and in the operating margins that that business brings in, I’m assuming that it’s a fairly [inaudible] service that you’re offering to them. It doesn’t require much customizations. So how do margins compare with –

Gregory Freiberg

Thank you for that. So you know, this is essentially where we lease wholesale space in the data center, in those two markets. So the EBITDA margins, or operating margins are not going to be the same as our wholly-owned facilities. I put them somewhere in the 9% to10% range.

What we like to do then though is that’s an entrée into that market where really we’re leveraging existing products to sell to those new customers that Bill was talking about earlier. And then as you gain that momentum, then you look at the business gage, whether you want to build yourself.

Jonathan Atkins – RBC Capital Markets

I understand. Thank you very much.

Operator

Our next question comes from Erick Sethenger of Sigma Hill.

Erick Sethenger – Sigma Hill

Hi. Good afternoon, good morning. First off, just on Fusepoint, you’ve told us that I think they were doing about $3 million a quarter of EBITDA before. Did you give us the Q2 EBITDA performance and any revenues for Fusepoint?

Gregory Freiberg

Hi Erick, it’s Greg. So on this slide set, on company remarks on Page 4, it gives the Fusepoint results and the SAVVIS results for within the quarter. And it’s only a step period in the quarter; we had about two weeks of Fusepoint in our results. So it’s itemized there.

Erick Sethenger – Sigma Hill

But can you give it to us what it would be on a normal quarter?

Gregory Freiberg

Well, you know, I’ll probably go back to my guidance there because we’ve given – we’ve incorporated Fusepoint into the full year guidance that I gave. If you were to try to look at that sub period and work that out to an annualized – I don’t think that’s probably helpful. There’s too many – you can try to extrapolate and expand it forward, there’s too many other things in such a small two-week period to make it an annual number.

What I shared in what we closed the acquisition, or we announced the acquisition and then what I put into our guidance for the year.

Erick Sethenger – Sigma Hill

All right. And I assume that what you had said at the time the transaction was – I think you did about $3 million in the first quarter. I assume extrapolate from there that it’s continuing to grow from that level. Is that correct?

Gregory Freiberg

Yes. We stand by that. I haven’t seen anything that changes what we said.

Erick Sethenger – Sigma Hill

Okay. Just on your European operations, or you slough operations, any thoughts in terms of European weakness from either the economy or from the debt issues going on, or particularly in the UK, any of the public sector cuts or anything? Any thoughts on how that’s affecting business?

William Fathers

It’s Bill here. Thanks for the question. I would say it hasn’t impacted our performance yet to date. Our outlook for the remainder of the year there, we absolutely factor that in. We haven’t see a slow down as we enter into the third quarter in terms of new bookings or churn, but I think we’re ll mindful that the conditions there, you know, could start to get more dicey as the year progresses.

So short answer, it hasn’t impacted us so far. However, the outlook for the rest of the year in Europe, we have to factor that in.

Erick Sethenger – Sigma Hill

Okay. And then lastly, your gross bookings have grown about 28% on a year-over-year basis. Can you tell us – that’s for the first half. Can you tell us how your sales organization, the number of sales people, quota-carrying people, how is that grown in relation to that gross bookings growth?

William Fathers

Yeah, it’s Bill again. So in absolute terms, the number of quota-carrying reps hasn’t increased at all, but of course, we have changed a number of individuals to drive up productivity over all. At the top of the year we talked about really focusing on some specific verticals and organizing our sales force around specific verticals. And also to ramp up any investment that Jim’s mentioned in the overall marketing and marketing activity in general, which has obviously increased [inaudible].

So in absolute terms, our number of sales reps, sorry, H1 last year and H1 this year is the same in terms of quota-bearing reps globally. How we’re organizing them on the level of marketing spend has shifted materially.

Erick Sethenger – Sigma Hill

Have their quotas gone up materially along the same lines, or is that why the commissions are up so much?

Williams Fathers

You know, I don’t want to just give you an off-the-top-of-my-head answer; the sales since October-November last year, and I don’t now off the top of my head whether the quota went up from first half last year.

Greg Freiberg

Well, the quota’s gone up, but more importantly their productivity has gone up. And as Greg mentioned, we don’t pay on necessarily on accomplishment on quota, we pay some, but we pay on bookings. So since we’re way over on bookings, we’re paying more commissions on bookings earlier on.

Erick Sethenger – Sigma Hill

Very good. Thank you very much.

Operator

Our next question is from Chad Bartley of Pacific Crest.

Chad Bartley – Pacific Crest

Thanks. I had a clarification, but I think you guys hit those. I thought I dropped out of the queue, but I’ll take this opportunity to ask about Fusepoint. Maybe I missed this. Did you guys say specifically what you expect revenue contribution to be for the little over two quarters that you have it?

Gregory Freiberg

Hi, Chad. It’s Greg. No, we didn’t. What I gave was this period in the second quarter, as Fusepoint contributed and then it’s baked into our full-year guidance that we gave.

And then my additional comment, at the time of the acquisition, we certainly did size Fusepoint and I shared that we haven’t seen anything that changes what we mentioned then.

Chad Bartley of Specific Crest

Okay. So we should take out, or back out the application service piece?

Gregory Freiberg

That’s right. So the application services is $9 to $10 million of revenue of the $48 million in total.

Chad Bartley of Specific Crest

Yeah, okay. Thanks so much.

Operator

Our next question is from Brian Zachery of Deutsche Bank.

Brian Zachery – Deutsche Bank

Hi guys. Just two quick questions. First, with regards to the bookings, has there been any change in terms of contract length that you’re seeing with customers, either longer or shorter, given the macro environment?

And then secondly, with regards to the cloud and the $14 million, can you give us a sense of how much of that is with existing customers, how much of that is with new customers? And the portion that’s existing customers, is that new applications moving to the Symphony Platform or is that existing applications on the managed hosting moving to the cloud platform? Thanks.

William Fathers

In terms of contract duration, we’re not seeing any shift there. I mean, our default position there is three year managed services contracts.

If any trend, we’ve done a number of the larger deals in the first half of the year. They tend to do five-year rather than three year. So perhaps some elongation.

In terms of cloud, probably 75% of the cloud revenues have come from existing customers and 25% have been new customers acquisitions, but skewed more to, in revenue terms, skewed much more towards existing customers.

And then probably split 50/50, new projects where it’s a new app, or a new – quite often customers sort of look at their own infrastructure and say we need to save some money in 2010 or 2011. Let’s see if we can shift the application onto the cloud platform, or let’s see if we can buy some software-as-a-service to displace some of our existing legacy software. And that tends to be where we end up getting a new project up and running.

A lot of the big financial vertical wins were brand new trading platforms or brand new dark pools. And in the consumer brand space, you know, their turnover is immense and they tend to have new marketing campaigns once a month if they want to put on a new cloud platform.

Brian Zachery – Deutsche Bank

Perfect.

William Fathers

I hope that helps.

Brian Zachery – Deutsche Bank

Yeah, that’s helpful. Just one followup. On the – what is the revenue impact to you when a customer moves from a traditional managed to the cloud?

William Fathers

You know, what you tend to find so far is the customers will buy some cloud services and will probably buy a lot of other services as well. So you know, you think you might see some potential revenue erosion as they moved onto a low-unit price cloud platform. The reality, on an account-by-account basis is we have much, in so many cases, more wallet share of that particular account that there’s plenty of room for us to grow as they expand with us onto the cloud platform.

That said, it’s a trend we do watch very carefully and you know, if we feel that there’s a material risk of revenue erosion from moving them onto that platform, we’ll need to develop strategies around that as well. But it’s not a trend we’re worried about right now.

Brian Zachery – Deutsche Bank

Thanks for the insight guys.

Operator

I'm sorry. No additional questions at this time.

Peggy Reilly-Tharp

Great. Well, we’d like to thank everyone for joining us today. And we look forward to sharing our Third Quarter results with you at the end of October.

Operator

This concludes our conference call. You may disconnect.

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