Switch & Data Facilities Q3 2007 Earnings Call Transcript

Switch & Data Facilities Co., Inc. (SDXC)

Q3 2007 Earnings Call

November 13, 2007 4:30 pm ET

Executives

Kathleen Heaney - Investor Relations

Keith Olsen - President and Chief Executive Officer

George Pollock - Chief Financial Officer

Analysts

Colby Synesael - Merriman

Gregory Miller - Deutsche Bank

Jonathan Schildkraut - Jefferies

Manny Recarey - Kaufman Brothers

Mark DeRussy - Raymond James and Associates

Dave Coleman - RBC Capital Markets

Sri Anantha - CIBC

Jeff Osher - JMP

Presentation

Operator

Good day, ladies and gentlemen, and welcome to the Third Quarter 2007 Switch and Data Earnings Conference Call. My name is Eric and I will be your coordinator for today.

At this time, all participants are in a listen-only mode. We will facilitate a question-and-answer session towards the end of the conference (Operator Instructions).

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

Kathleen Heaney

Thank you, and good afternoon everyone. This afternoon, after the market closed, Switch and Data released third quarter 2007 financial results. If you do not have a copy, one may be found on the Website at switchanddata.com in the Investor Relations section.

Making presentations during the call today will be Keith Olsen, President and Chief Executive Officer; and George Pollock, Chief Financial Officer.

Before we begin our formal remarks, I need to remind everyone that part of our discussion today may include forward-looking statements. These statements are not guarantees of future performance, and therefore, undue reliance should not be placed upon them.

The Company undertakes no obligation to update any forward-looking statements in order to reflect events or circumstances that may arise after the date of this conference call. We refer all of you to the Company's recent filings with the SEC for a more detailed discussion of the risks that could impact the Company's future operating results and financial condition.

In addition, I would like to point out that during the course of our discussion this afternoon, we will mention financial terms such as adjusted EBITDA, which is a non-GAAP financial measure. While this is a non-GAAP measure of financial performance, management believes it is a common and useful tool in evaluating the Company's performance.

Adjusted EBITDA is defined as operating income plus non-cash items, including depreciation and amortization, stock-based compensation expense, asset impairment and deferred revenue expenses. A reconciliation to comparable GAAP measures can be found at the end of the earnings press release that was issued today, as well as on the Company's Website.

With that, I would like to turn the call over to Keith Olsen, President and CEO. Keith?

Keith Olsen

Thank you, Kathleen. Good afternoon ladies and gentlemen. Thank you for your time today. I would like to welcome everyone to our third quarter earnings call. George and I have been looking forward to this call. We have strong results to report.

I will address and review our operating highlights and George Pollock, our Chief Financial Officer, will review our financial results. After our presentations, we will open the call for your questions.

The third quarter results were strong. We delivered record financial results. Customer demands are strong and we are accelerating our investments for the future. Revenues for the third quarter were up 26%.

Our revenues for the third quarter were $35.4 million, up from $28.2 million in the third quarter 2006. This organic revenue growth improved our third quarter adjusted EBITDA. EBITDA growth was 54%. We generated $11.2 million of EBITDA, up from $7.2 million of EBITDA in the same period in 2006. These results were the highest in our Company's history.

When we are on the road or speaking to the market, one of the strengths that we speak to is our broad geographic footprint. We will continue to beat the drum about our broad footprint as a competitive advantage.

And for this call, I will share with you what our customers are saying about the value of our site footprint. And later in the presentation, George will review the financial results of our markets.

Broadvox, a voice-over-IP service provider, has expanded across the footprint to reach new markets to reach new customers. They landed in nine Switch and Data markets; Atlanta, Chicago, Dallas, Denver, Los Angeles, Miami, New York, Seattle and Tampa. Broadvox's CTO, Sergey Galchenko, said we gave them extensive geographic reach, which allows them to immediately expand into new markets nationwide.

Phil Goldsmith, COO of EdgeCast Network, said our broad footprint, our flexibility, capacity and hands-on support helped them deliver above and beyond their customers' expectations. Another customer example is Hibernia Atlantic, an international submarine cable operator, who landed in our Buffalo and Philadelphia sites.

These are just some of the examples of our customers capitalizing on the site footprint we have across North America.

I am hopeful you had a chance to read our third quarter press release, where we highlighted some additional customer wins. Azoogle, a search engine, landed in our Toronto site, Marchex, a content provider, landed in our Seattle site, and Telmex, an international telco, landed in our Dallas site. These examples illustrate that customer demand continues to drive strong operating results and metrics.

Our metrics for the third quarter includes the following. Billed cabinets increased 20% from 5,526 in September 2006 to 6,636 cabinets in September 2007. Cross connects increased 10% from 17,417 at the end of the third quarter in 2006 and 19,124 at the end of the third quarter this year.

Our cabinet ARPU or average revenue per unit for the third quarter was $1,816, which was up 5% over the same period of the prior year, and revenue churn has decreased from 1.7% in the third quarter of 2006 to 0.9% in the third quarter of 2007.

This is the lowest churn rate we have experienced in seven years. With the strong cabinet sales, our cabinet utilization grew to 70% at the end of the third quarter, up from 64% at the end of the same period last year.

We have discussed in prior calls that we would add 1,000 cabinets to our existing sites in 2007. In the third quarter we added 200 cabinets, bringing the total cabinet adds to 800. As of September 30, we have 9,500 sellable cabinets.

In our last earnings call, we announced expansions in Dallas, Toronto, and Sunnyvale. We expect these expansions to add an additional 1,300 cabinets through the first quarter of 2008.

And yes, our expansion story continues. Early last week, we announced our newest site in New Jersey. This site will serve the New York metro market. We are really excited about this new site.

The New York metro market is a strategic global communications hub for the world and an asserting one for Switch and Data. This year, we have experienced 40% plus growth year-over-year in the New York market.

This New Jersey site more than doubles our cabinet capacity in New York area and opens our customers' connectivity to more than 300 networks. We expect that 1,300 cabinets in this site will be online by the third or in the third quarter of 2008 and when completed, this site will support 3,000 cabinets.

Although, the previously announced increment of 1,300 cabinets from Dallas, Sunnyvale and Toronto combined with 3,000 additional cabinets in the New York market adds 45% to our sellable cabinet capacity for 2008 and 2009.

These capacities are to support the strong demand we see from our customers in these markets. I hope you can see now why I was so thrilled about this quarter in our business. With strong results, great demand from our customers, and the investment in capacities, all speak for the strength of Switch and Data.

With that, I would like to now turn the call over to George Pollock to review our financials.

George Pollock

Thank you, Keith, and thank you all for joining us today. Let me first speak to the momentum in the business and what that means for the current year. As Keith mentioned, we delivered record revenue and record adjusted EBITDA in the third quarter.

We are raising our 2007 guidance based on these strong results. We are increasing our 2007 revenue guidance to $137 million, up from $135 million. We are increasing our 2007 adjusted EBITDA guidance to $42.5 million, up from $42 million, and we are maintaining our 2007 capital expenditure guidance in the range of $37 million to $39 million.

As Keith mentioned, revenue was $35.4 million in the third quarter of 2007, up from $28.2 million in the third quarter of 2006, an increase of 26%. Recurring revenues, which consist of colocation and interconnection services, were $33.5 million in the third quarter of 2007, up from $26.9 million in the third quarter of 2006, an increase of 25%.

Non-recurring revenues in the quarter were $1.9 million compared to $1.3 million in the third quarter of the prior year. Cost of revenues, excluding depreciation and amortization for the third quarter, was $18.7 million as compared to $15.8 million for the third quarter 2006. As a percentage of revenues, cost of revenues declined to 53% in the third quarter, from 56% in the third quarter of 2006.

Our sales and marketing costs increased from $3.1 million to $3.8 million, an increase of $0.7 million. As a percent of revenue, our sales and marketing expense has remained consistent at 11%. General and administrative expenses increased from $2.8 million to $3.7 million, an increase of $0.9 million. As a percent of revenue, our general and administrative expenses have remained flat at 10%.

In addition, our total stock-based compensation expense for the quarter was $1.1 million. We generated adjusted EBITDA of $11.2 million, up from $7.2 million in the third quarter, an increase of 54% over the same period in 2006.

Our adjusted EBITDA margin increased to 31.5% in the third quarter 2007, up from 25.6% in the same quarter of the prior year. Capital expenditures for the quarter were $6.4 million, of which approximately 90% was to support our growth.

Following on Keith's remarks, here are some additional insights to the value of our geographic footprint. We previously discussed that 85% of our revenues are generated in our top ten markets. For third quarter 2007, over the same period in 2006, our overall revenue growth was 26%. The growth in the top ten markets was 26.2% and the growth in the rest of the markets was 22.8%.

Site cash flow, which we define as revenue less site expenses, increased 38%. The increase in our top ten markets was 36% and the increase in the rest of the markets was 59%. Our business continues to generate significant cash flow. This cash flow continues to strengthen the balance sheet.

Cash increased during the quarter almost $4 million to a balance of $45.9 million. Our bank debt is down to $39.1 million and our DSO remains strong at 18 days as you can see, a strong third quarter.

Now, looking to 2008, our preliminary guidance is as follows. We expect revenues of $165 million, we expect adjusted EBITDA of $51 million, and we are projecting capital expenditures of $155 million to $165 million.

In this $155 million to $165 million, this includes $125 million for our Dallas, New Jersey, Sunnyvale and Toronto expansions. With this additional capacity, we expect 24% average annual revenue growth over the next three years and 35% average annual EBITDA growth over the next three years.

Before we open the call, let me recap the strong third quarter results. We generated record revenue, record EBITDA, we’ve raised our 2007 guidance, and we have a strong balance sheet for the future.

And with that summary, Keith and I will be happy to answer your questions. Operator, please open the line for questions.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from the line of Colby Synesael with Merriman. Please proceed.

Colby Synesael - Merriman

Hey, thank you for taking my question.

Keith Olsen

You are welcome, Colby, how are you?

Colby Synesael - Merriman

Good, thanks. So, quick question. Regarding your 2008 EBITDA guidance, can you talk about how much of your build-up is, specifically with New Jersey is built into that in terms of the cost that's associated with that build-up before you actually start to see revenues?

George Pollock

Sure. We filed an 8-K with respect to the New Jersey site, so the extent that they are certainly public. With respect to the time to build versus time to revenue, we will start to incur cash line expense in the middle of the year and start to incur the incremental headcount and utilities about that time.

Revenue is expected to come online in the third quarter, in 2008, as we mentioned right about 1,300 cabinets of capacity. The impact in 2008 from the New Jersey site isn't necessarily meaningful to the 2008 guidance.

Colby Synesael - Merriman

Okay. And obviously, we saw a nice sequential uptick in margin expansion in this quarter. Was there anything one-time there or was it just a matter of the business hitting a significant point in terms of hitting scalability, just a little bit of color there would be helpful as well? Thank you.

George Pollock

Sure. Continued scale in the business, no one-time items. There was on the pressure side, obviously with seasonality and utility expense was more than the second quarter, but the increase in billable cabinets, almost 450 cabinets billable at the end of the second quarter or third quarter versus the second quarter, and the commensurate revenue associated with those cabinets has driven nice scale in the business in the third quarter.

Colby Synesael - Merriman

Great, congratulations.

Keith Olsen

Thank you.

Operator

Your next question comes from the line of Gregory Miller with Deutsche Bank. Please proceed.

Gregory Miller - Deutsche Bank

Thanks guys. Congratulations.

George Pollock

Thanks, Greg. How are you?

Gregory Miller - Deutsche Bank

Good, good, great with the quarter. Maybe to just recap real quickly, I just got a little bit distracted there when you were going through the total additions and what the inventory is going to look like as we roll through 2008 and 2009.

The 9,500 cabinets currently, what's being added heading into the first quarter, where do you think you are going to be at the end of '08 and then the end of '09 in terms of total inventory available for sale?

George Pollock

Sure. Sure, Greg. Yes, we will be adding 1,300 cabinets from Dallas, Sunnyvale and Toronto in 2008 and 1,300 cabinets from the New Jersey site build. So, you are looking at 2,600 cabinets that will be added from the first quarter through the end of the third quarter between those builds, and that is on top of the 9,500 of existing cabinet capacities.

The remainder of the New Jersey site build will be built out in 2009. And so, you would look at the total being 13,800 when you go through the '09 horizon with those types of builds that we are speaking to.

Gregory Miller - Deutsche Bank

Okay, that's clear. And then separately, you just mentioned utility expense up in the quarter. Is that something that and I apologize, or was it seasonally related or is that something that given the existing conditions in the marketplace we should expect to prevail throughout the year?

George Pollock

We have seen continued increases due to demand of more, which is a result of more sales. There is a seasonality impact in the third quarter that we would see compress a bit in the fourth quarter.

Gregory Miller - Deutsche Bank

Okay. And then, finally, but I certainly could hop back on the queue here is just on the funding, it would seem that there is need to fund the incremental CapEx here to get you to $155 million to $160 million. Presumably the preference there is on the bank side?

George Pollock

Well, we are in conversations with our advisors as we speak with respect to the optimal solution to the financing for the business.

Gregory Miller - Deutsche Bank

Okay.

George Pollock

The balance sheet is strong, we have $46 million in cash, we are generating almost $12 million in EBITDA per quarter, so we have a strong foundation to build upon and we are, as I said, speaking with advisors to determine the best way to finance the growth.

Gregory Miller - Deutsche Bank

Understood. Well, great quarter guys. Thanks.

George Pollock

Thank you, Greg.

Operator

Your next question comes from the line of Jonathan Schildkraut with Jefferies. Please proceed.

Jonathan Schildkraut - Jefferies

Thanks for taking the questions guys, an excellent quarter.

George Pollock

Hey, Jonathan, thank you.

Jonathan Schildkraut - Jefferies

A couple of questions. First, I guess, I am trying to go back to Colby's question here, George. Just trying to figure out kind of the incremental impact from the expansions on your EBITDA for 2008, just trying to figure out I guess, without the incremental cost of carrying New York in front of, the New York facility in front of EBITDA inflection, so if there was a negative drag from that expansion in 2008, if we could try to quantify that?

George Pollock

Sure, Jonathan. Let me quantify for the Toronto, Sunnyvale, Dallas, New Jersey, I will give you a total impact. We expect the impact to be about $4 million to $5 million in '08, negative impact from those sites.

Jonathan Schildkraut - Jefferies

That's perfect.

George Pollock

To EBITDA.

Jonathan Schildkraut - Jefferies

All right. Great. Also, I noticed that you had a fairly large increase in capital leases during the quarter. If you could give us some color on that. And then finally, George, if you could just kind of walk us through the three year targets for revenue and EBITDA growth again.

George Pollock

Sure, let me speak to the capital lease accounting, as I think, lease accounting is a fairly technical guidance or technical rules with respect to accounting. The Sunnyvale lease that we signed in August qualified as a capital lease and that is the number that you are seeing on the balance sheet.

The subsequent leases that we’ve signed, New Jersey for example, is under that review as we speak. So, it's a function of the technical accounting and the balance on the current balance sheet is all Sunnyvale.

Jonathan Schildkraut - Jefferies

Great. You guys have an untapped credit facility, is that correct?

George Pollock

It's about $10 million.

Jonathan Schildkraut - Jefferies

All right, thank you.

Keith Olsen

Thanks, Jonathan.

Operator

(Operator Instructions) Your next question comes from the line of Manny Recarey with Kaufman Brothers. Please proceed.

Manny Recarey - Kaufman Brothers

Hi. Good evening, thanks.

Keith Olsen

You too, Manny.

Manny Recarey - Kaufman Brothers

The CapEx guidance for 2008, in fact you made an announcement and you have to speak it can be about $80 million for the just of the New Jersey expansion.

George Pollock

Manny, can I ask you to just repeat that question, it was breaking up a little bit on our end? We apologize.

Manny Recarey - Kaufman Brothers

Well, sorry about that. The CapEx guidance for 2008, if I look at the press release you guys put out last week, maybe I misunderstood, was for I think $75 million to $85 million in 2008, was that just for the New Jersey facility?

George Pollock

Yes, it was, Manny.

Manny Recarey - Kaufman Brothers

Okay. And then a couple of other questions and with all the concerns about the financial services vertical, are you seeing any difference there with regard to demand out of that vertical?

George Pollock

We have not seen any negative impact from the financial sector at all.

Manny Recarey - Kaufman Brothers

Okay. And then, the last question, and it seems like your top ten markets are doing well as and also your secondary markets. So, the competitors and investors day, they sort of looking at the secondary markets but they don't necessarily see the same opportunity. What do you see in the secondary markets that continue to drive the business there?

Keith Olsen

Sure. There is a couple of difference days that customers utilize our site footprint. For a couple of examples, I have talked about it was to reach, they are able to reach new markets rapidly. So, when you think of some of the service provider community, which is where we spend a lot of our time, looking at the footprint to go into these other markets other than just the top ten.

And that's what that incremental revenue is driving the types bit of growth that George referenced. And so, it's a reach mechanism that is absolutely in lockstep with our overall business strategy.

Manny Recarey - Kaufman Brothers

Okay, thanks, and good quarter.

Keith Olsen

Thank you very much.

Operator

Your next question comes from the line of Mark DeRussy with Raymond James and Associates. Please proceed.

Mark DeRussy - Raymond James and Associates

Hi, good afternoon. A couple of questions for you.

Keith Olsen

Hello Mark.

Mark DeRussy - Raymond James and Associates

I think Keith you mentioned, or maybe George did, the question about Toronto, Dallas and Sunnyvale, and what the negative EBITDA impact would be, was that the $4.5 million to $5 million, or did that $4.5 million or $5 million include also New Jersey?

Keith Olsen

It also included New Jersey.

Mark DeRussy - Raymond James and Associates

Okay. Speaking of New Jersey, can you give us a feel for or some color around the thought process that went into going ahead with this deal and in particular if you could help us understand how you evaluated the demand that you are expecting to realize in that facility?

Keith Olsen

Sure. As I kind of went through the earlier description in the presentation, New York is one of our fastest growing markets. We have 40% year-over-year growth in that market and it's really coming from our core customer base. When you think of our overall revenue growth, 80% to 90% of our new sales come from our existing customers.

So, we have very good insights into what their capacity requirements are and their demands. Combine that with a number of the macro drivers tied to the volumes in rich content and IP traffic growth, we selected that New Jersey site first with an existing data center, which has terrific what I will call, bones or skeleton infrastructure, flow ratings has access to ample power.

And so, therefore, as we see the types of demands in those types of mega markets, it made all the sense in the world for us to be able to pick up that property. Of course, when linking that with our heavily advanced market in New York, which has access to over 300 networks, which is one of the key drivers and one of the reasons why our sites are so attractive to the service provider community.

Mark DeRussy - Raymond James and Associates

Okay, last question is, if you subtract your total CapEx guidance from the $125 million that you laid out, there is about $30 million to $35 million, how do we think of that, I am presuming that it's incremental expansion and if you guys targeted, let's say, another 1,000 incremental sites per year in that number?

George Pollock

Sure, Mark, let me answer that. It's about $30 million of incremental. Almost half of that is customer installations for which we charge for.

Mark DeRussy - Raymond James and Associates

Okay.

George Pollock

Almost half of it is customer installations and then the maintenance. Our maintenance is expected to be about 5% of revenues.

Mark DeRussy - Raymond James and Associates

Okay. All right, that explains it. Thanks a lot.

George Pollock

Okay.

Operator

Your next question comes from the line of Dave Coleman with RBC Capital Markets. Please proceed.

Dave Coleman - RBC Capital Markets

All my questions have been answered. Thank you.

Keith Olsen

Thank you, Dave.

Operator

(Operator Instructions) Your next question comes from the line of Sri Anantha with CIBC. Please proceed.

Sri Anantha - CIBC

Yeah, good evening. Thanks for taking my questions.

Keith Olsen

Hello, Sri, how are you?

Sri Anantha - CIBC

Good. How are you?

Keith Olsen

Good, thank you.

Sri Anantha - CIBC

Question, as you guys are looking at these expansions, George, if you could just give us a color, or Keith, how much of this expansion is just being driven by demand from existing customers as opposed to new customers?

And the second question is, as I look at your 2008 guidance, George, going back even at absent the expenses associated with your expansions, the EBITDA looks somewhat low relative to your current run rate. Are you guys just being conservative here or is there something that we should look for as we model our 2008 estimates? Thank you.

Keith Olsen

Sure, Sri, I will answer the first part of the question. Our business plan has always been focused at the high end of our customer base. When you think of the expected traffic increases coming from the top brands, our top couple of hundred customers that’s whose driving a lot of the growth in our centers.

80% to 90% of our new sales come from our existing accounts and that’s where we see the greatest amount of demand. We absolutely do see net new brands coming in or new logos coming into our sites and centers to support that.

But, the overwhelming demand comes from the biggest brands in the Internet and IT space and that is where we have formulated our plans for expansions. I will turn the second part over to George.

George Pollock

Sure. Sri, with respect to the EBITDA, the guidance I think, we’ve provided is realistic in terms of what we believe we can deliver for 2008. There is an impact of $45 million from the expansions that we spoke about. That creates 4% to 5% compression in the margins and we are projecting 31% EBITDA margin. Without that, call it 30%, 35%.

31% is what we have generated in 2007. We are looking at this business as a three to four year outlook on our EBITDA and our expectation, even with these expansions is that we will be able to achieve 40% EBITDA margins in three to four years and that's our continued target and we believe we are on pace to do that.

Sri Anantha - CIBC

Great. Thank you guys.

George Pollock

Thank you.

Operator

Your next question comes from the line of Jeff Osher with JMP. Please proceed.

Jeff Osher - JMP

Hey guys, nice quarter.

Keith Olsen

Thanks Jeff.

Jeff Osher - JMP

Just not to beat a dead horse, but stated another way your EBITDA margin, can you just maybe talk about the contribution margin net of the $3 million to $4 million, because it looks like that's going to cost you about, call it, 3 points at the middle of that range.

If you gave yourself credit year-over-year for that, call it, again $4.5 million, you are looking at a $13 million increase in EBITDA and $28 million of revenue as a guidance, that's about a 47% contribution margin. Can you just help us shape our thoughts going forward on, I think, the more important metric, which is that contribution margin?

George Pollock

Well, I think, if you look at contribution margin, the second quarter over first quarter this year was 47%, the third quarter over second quarter was 62% and the fourth quarter is going to be a bit higher than that, again, because of some seasonality with compression and utilities and the fact that there is just more or less work days in the fourth quarter.

We look at this again going back to that three to four year view, we expect to be able to generate 45%, 50% incremental EBITDA margins over that period of time. We’ll see quarters like we have seen this year, 47%; 62% higher than that.

Then we will see a bit lower in the 30% to 40% as we invest because of the time to build, time to revenue concept. But, over the long-term, we expect that to be in that 45% to 50% range.

Jeff Osher - JMP

And then, just with regard to the $4 million to $5 million of EBITDA here, which will come in the form, I guess, of lower revenue on a higher OpEx base. Is that going to be front-end loaded in '08 or is that going to be linear throughout the year?

George Pollock

Yes, it's actually, it's fairly linear.

Jeff Osher - JMP

Okay. So, we won't see a ramp then towards the second half. I guess that begs the question on, as we look into the first half of '09, we should see EBITDA margins begin to expand materially off of that 31% level as you begin to generate revenue on the front-end loaded OpEx?

George Pollock

Yes, we would expect the margins with the existing real estate base, we would expect those gross margins to continue to increase and move towards our target of 40% that will jump off in 2009.

Jeff Osher - JMP

Okay. That's great, that's very helpful. And if I can, just one follow-up, with regard to the finance staff that I think a couple of callers pointed towards, how do you guys think about, what's the right multiple as far as debt to EBITDA we should be thinking about kind of as a longer-term target, or if you can just maybe talk broadly to that? Obviously, you have substantial ability to lever up EBITDA; can you just maybe talk broadly about that?

Keith Olsen

Yes, the strength in our balance sheet really gives us a number of different options and we are working with our advisors and our bankers to really come up with what the formulas should be or our alternatives should be, and with that hardened on any particular yet path. We are in discussions looking at, as I said, in a number of different alternatives right now.

Jeff Osher - JMP

Okay, thanks a lot guys. Keep it up.

Keith Olsen

Thank you.

Operator

Your next question is a follow-up question from the line of Jonathan Schildkraut with Jefferies. Please proceed.

Jonathan Schildkraut - Jefferies

Thanks, thanks again. George, I will actually get you to reiterate the three-year expectations for the Company.

George Pollock

Sure. So, I will reiterate that. As we look, leaving 2007 and then in '08, '09 and '10, our three-year view is the, call it, CAGR, annual average growth rate of about 24% on revenue and EBITDA of about 35%.

Jonathan Schildkraut - Jefferies

Great.

George Pollock

And if you can recall, we had a target this year of about 14%.

Keith Olsen

Right.

Jonathan Schildkraut - Jefferies

That's right. Okay. Couple other questions here. First, I noticed non-cash lease expense came up by about $300,000 in the quarter. Was there any one-time event in that number or is it are we looking at a higher non-cash lease expense on a go-forward basis?

And then, from a more strategic perspective, if you could comment on the overall pricing and demand trends that you are seeing, and also a little color on the power maybe either on a per square foot or per cabinet basis in the new New Jersey facility? Thank you.

George Pollock

Okay. Let me answer the first question.

Keith Olsen

First question and I will answer the next one.

George Pollock

And I will turn it over to Keith. In terms of the non-cash rent, we will see an increase in the non-cash rent primarily driven by the new leases. We have more real estate at Dallas, Toronto, those are adding to the real estate.

There is some free cash rent here at the beginning that are added back to EBITDA and create a higher cash rent number, and we will see that going forward.

Jonathan Schildkraut - Jefferies

Okay.

Keith Olsen

Jonathan, this is Keith, on the pricing, very consistent. Our prices are actually very healthy, it has to do with the demand in the markets. We absolutely, as we have communicated before, see different kind of sets of strength in pricing, but will or uptick.

And we will continue to evaluate the markets and see where our price points are vis-à-vis the competitive marketplace. Right now, there is strong demand, strong pricing, and it's resonating with our customer base, based upon the value proposition that we offer.

High network densities and neutrality are clearly as we add more connections on top of their installed footprint, right, the customer count and the cross connect count give us a very good ratio of the value that they are able to generate in our sites.

As it relates to the power, our current designs are for over 200 watts per square foot based upon rent floor.

Jonathan Schildkraut - Jefferies

All right. Great. What was the gross square footage at the end of the quarter?

George Pollock

It was about 940 to 950. Let me look at that for New Jersey.

Jonathan Schildkraut - Jefferies

Okay. And I will ask as you look that up, the cabinet add in the quarter was fantastic, 452. I don't know if I have seen you guys post a quarter of that magnitude, I think the fourth quarter of last year was still very strong.

Did you have one large customer or was this just simply having capacity in the right markets or was it just pent up demand that all just got deployed during the course of the current quarter?

Keith Olsen

Yeah, Jonathan, I think it has to do with just the timing of certain deals landing and they happened to align themselves. Not one single large deal, our sweet spot is kind of 50 square foot to 500 square foot, right, and that's the way people deploy themselves inside of our sites.

That's very consistent with what we saw, it just has to do with timing. As we report in quarters and as we look at when billings start and things of that sort, that doesn't necessarily align with the way decision and sometimes they line up stacked upon each other and sometimes they are spread out over some of the periods.

George Pollock

Hey, Jonathan, on the square foot, the end of the third quarter was about 765,000 square feet. New Jersey was then sized up sequential to that, which adds 163,000 square feet, which takes the total to 928,000 square feet.

Jonathan Schildkraut - Jefferies

I got it. All right, thanks so much.

Keith Olsen

Thank you, Jonathan.

Operator

(Operator Instructions) It appears we have no more audio questions in queue. I would like to turn the call over to Keith Olsen for closing remarks.

Keith Olsen

Thank you very much. Ladies and gentlemen, thank you very much for your time today, and of course, for all of your support. We look forward to speaking to you at the end of our next quarter. You have a wonderful day now. Take care.

Operator

Thank you for your participation in today's conference. This concludes our presentation. You may now disconnect and have a good day.

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