Executives
Elizabeth Corse - Director, IR
Philip Koen - CEO
Jeffrey Von Deylen - CFO
Analysts
Colby Synesael - Merriman Curhan Ford & Co.
Thomas Watts - Cowen and Company
Jonathan Atkin - RBC Capital Markets
Jason Armstrong - Goldman Sachs
Simon Flannery - Morgan Stanley
Donna Jaegers - Janco Partners, Inc.
Mark Kelleher - Canaccord Adams
Manuel Recarey - Kaufman Bros
Srinivas Anantha - Oppenheimer & Co.
Thomas Seitz - Lehman Brothers
Brian Horey - Aurelian Management
Jonathan Schildkraut - Jefferies & Co.
Richard Keiser - Sanford Bernstein
SAVVIS, Inc. (SVVS) Q4 FY07 Earnings Call February 4, 2008 5:30 PM ET
Operator
Good afternoon, and welcome to the Savvis' Fourth Quarter Investor Conference Call and webcast. This call is being broadcast live, at www.savvis.net, and recorded for replay on Savvis' website. At this time, all participants are in a listen-only mode. After the presentation, we will conduct an interactive question-and-answer session. Ms. Corse, please go ahead.
Elizabeth Corse - Director, Investor Relations
Welcome everyone, and thanks for joining us. I am Elizabeth Corse, Director of Investor Relations for Savvis'. I hope you've all had a chance to review the press releases we distributed this afternoon. Those are both posted on our website, if you need them. There are also slides on our website, savvis.net, that support today's webcast. We have two executives here today to talk with you: CEO, Phil Koen; and CFO, Jeff Von Deylen. After they review the quarter's business activity and financial results, they will take your questions.
Please be aware that today's discussion contains forward-looking statements, as defined under Federal Securities laws. Actually results could differ materially from our projections due to various risk factors including, but not limited to, the factors disclosed in Savvis' Form 10-K and other filings with the US Securities and Exchanges Commission. And we encourage you to review those disclosures before making an investment decision.
Our presentation, this afternoon, will include references to certain non-GAAP financial measures that provide additional information for investors. In compliance with SEC's regulation-G, our press release distributed today, posted on our website, and furnished to the SEC on Form-8-K, includes both our rationale for why we believe non-GAAP information is important in describing our operating performance and the full reconciliation with the corresponding GAAP numbers.
Now, I am pleased to introduce Phil Koen, Chief Executive Officer of SAVVIS.
Philip Koen - Chief Executive Officer
Good afternoon everyone, and thanks for joining us today. Having completed a challenging, but ultimately successful transition year, the SAVVIS team is really looking forward to 2008. I am going to focus my remarks today on how our achievements in 2007 has set us up for a very positive 2008. Jeff will review the Q4 results and our financial expectations for next year then I am going to dig more deeply into our business drivers. Of course, we'll be happy to take your questions after our prepared remarks.
Let me begin with an acknowledgment of the great contribution Jonathan Crane has made to SAVVIS success over the last two years. His energy and enthusiasm have inspired all of us. We are very fortunate that his efforts to realign and focus our sales efforts have left us very well positioned to achieve our sales goal. So, thank you Jonathan.
Now onto the results.
On slide 4, we have labeled 2007, a year of transition, which you also could call a year of heavy lifting. At the start of last year, we were burdened with a 15% coupon on about $350 million worth of debt. More importantly, we saw there our potential for growth was limited by space constraints and outdated network architecture. We took several steps to address the challenges. We issued a 3% convertible to replace our 15% debt. We analyzed our asset portfolio and monetized two low-growth revenues streams. Then we used the proceeds from those sales to fund a program to increase our data center capacity by 30% and to position us to attract a larger share of higher value, higher margin business.
We brought four new data centers on line in September and October. We were on time and on budget. But what matters more is that we have been very successful at selling that space. We already have signed contracts for 40,000 square feet of about a 100,000 square feet sellable space. In addition, we successfully induced two below-market Colo-only customers to leave our datacenters, turning back to us at no cost more than 50,000 square feet of sellable Colo-space. We have been selling well into that space as well.
But this transformation is about more than just adding space. We have been able to charge higher prices on Colo, our rates have moved form $31 to $36 per square feet over the last month. Our goal is to continue to drive that higher. We are also rolling out network services that enhance our existing and our new hosting services. And that continue to take us beyond the commoditized Colocation business.
As a result of our heavy lifting in 2007, we are pleased to report revenues growth of 12%, and 65% adjusted EBITDA growth on a pro forma basis. With adjusted EBITDA margin expanding from 13% a year ago to 19% in 2007.
That was a significant effort, and we are very pleased with our 2007 successes. And 2007 was about transition. 2008 will be all about execution, as shown on slide 5.
We have launched a number of initiatives, some are more outward facing, they include continued product enhancements and introductions that will enable us to form ever-closer stickier and more valuable working partnerships with our client. Other initiatives are inward facing. For example, we hope to drive productivity improvements through our SAP and OSS implementations. We plan to continue to sharpen the focus in integration of sales, marketing and customer service. Our biggest initiative, however, is our continuing expansion program.
Later in the call, we will go into more detail on our 2008 program. For now I want to make just one point. We continue to see signs of customer interest and hear from customers that the trends in the IT environment favor our approach and the mix of services and capabilities that we are offering. Simply put, we have seen no change in demand for our services. The fundamentals of our business remain solid.
Now on slide 6, I want to review the foundation of our approach to growth in 2008 and beyond. First, let me emphasize that our long-term financial target is not just to grow revenue but to grow revenue at high margin. As you saw in 2007, we are very willing to sacrifice revenue growth in the short term in order to improve our long term margin expansion opportunity; driving more dollars to the gross profit and adjusted EBITDA line. The payoff is real, our reported adjusted EBITDA margin increased two percentage points in Q4 from a year ago. More evidence of our discipline is that we don't necessarily take the first Colo customer that comes along in order to get an immediate revenue benefit. Instead, we seek out the business that will use our Hosting Area Network, Managed Hosting and other services to drive more revenue from our datacenter investment. Our strategy providing, both, Colo and Managed Hosting our datacenters is another driver of high returns and cash flow.
Our product mix may also provide some hedge against the current economic downturn. I don't believe that any business is truly recession-proof, and clearly the uncertainty in the economic environment has increased. However, we do have a compelling value proposition. Our Colo and Managed Hosting solutions offer enterprises relief from CapEx cost. And outsourcing can provide significant total cost of ownership saving.
Those savings and the gain and productivity enterprise can achieve by deploying IT improvements mean that we haven't seen any significant pressure on our sales prospects to-date. We'll continue to monitor our funnel, pricing discussions and sales cycles for signs of slowing. We'll be disciplined in our response if we see such signs.
There is a lot more than cost equation driving the outsourcing decision. The complexity of the technology environment and the lack of competitive differentiation offered by infrastructure, point to outsource the infrastructure management as a natural choice. Innovations like server virtualization and software as a service accentuate that need. We continue to leverage those strengths in 2008 and beyond.
I'll spend a few moments talking about the fourth quarter, now, beginning with the highlight on slide 7. Both sales and service turn in great statistics in the quarter, which I'll detail in a moment. Very importantly, we achieved a strong installation pace. In Q4, our average built square footage increased by about 30,000 square feet, growing to 593,000 square feet building. This is the highest level we've seen in seven quarters. You may recall our average built square footage fell in Q2 and Q3 '07 as the result of reclaimed space from two Colo-only customers.
We launched the latest of our virtualization solutions. Foundation Hosting offers a managed virtualized environment with a customer controlling the operating system. It is a lower cost version of our Virtualized Intelligent Hosting Service deployed in HP servers and VMware software.
We also rolled out our Proximity Hosting offering in Singapore with the Singapore Exchange as our anchor exchange. Strengthened installations help drive solid growth in Colo revenue while the Managed Hosting revenue continues to validate the attractiveness of this distinctive product. Managed Hosting grew 8% from Q3 and 23% from a year ago. I am very pleased with the growth rates we have achieved in Q4.
Slide 8 shows an important driver of that growth. Utility Computing, which includes a Virtualized Intelligent Hosting Service we introduced in spring of 2007, was up 76% year-over-year and 21% quarter-over-quarter. VAH revenue is starting to appear in that total and the take-up continues to be impressive. We've signed another 16 clients, since October, bringing our total to 39 in a little over two quarters of selling a new product.
The graph on slide 10 shows the bookings and churn numbers. With lower churn in Q4, we maintained a very attractive spread between new revenue signed and existing revenue lost to disconnects and price erosion. As expected, the churn percentage was high in network services than hosting. The strong booking's result, about $92 million of annualized revenue, was driven significantly by Colo sales as we signed contracts in the Phase I datacenters, as well as Boston and Dallas on space and legacy IDCs reclaimed through positive churn in the first half of 2007.
Jeff will give you additional detail on our progress in selling our [ph] datacenters and reclaimed space. So that's the view from my perspective on SAVVIS and the markets we serve. We've achieved a great deal in 2007 with important operational and financing initiatives very successfully completed. We are well positioned for 2008.
Fundamental long-term trends are driving demand for our services. We have got the product portfolio and the infrastructure to meet that demand and continue to develop more offerings. We are fully funded and our leverage ratios are very attractive. We are looking for achieving about 20% revenue growth on a pro forma basis and about 40% pro forma adjusted EBITDA growth in 2008.
Now I will let Jeff take you through the numbers.
Jeffrey Von Deylen - Chief Financial Officer
Thanks Bill, going to go over four kind of key components in my discussion. One, a quick view of the full year results. Secondly I will go over the quarterly results and then get into some of the more business drivers for the quarter; talk about our cash flow and balance sheet and then provide a review of our 2008 guidance in some of the key metrics.
Slide 12 recaps the abbreviated income statement for the full year. Here are just a few of the highlights. Total revenue was up 4% on a reported basis and up 12% on a pro forma basis. Adjusted EBITDA increased 31%, again on a reported basis and was up 65% on a pro forma basis. That's a margin improvement of 600 basis points from 13% pro forma 2006, to 19% pro forma 2007. We show the pro forma results as we believe the underlying business is a better reflection without the impact of CDN, the datacenter assets we sold, and the Telerate business eliminated by the merger of Reuters and Telerate. The pro forma results also exclude non-cash stock-based compensation that's part of our income statement.
As reported, the impressive net income and EPS numbers in 2007 are result of the gains of our sales of the CDN and datacenter businesses. Those gains were largely tax free as our NOLs generated from previous periods shielded this year's income.
Now onto the quarterly results. Slide 13 shows abbreviated quarterly comparisons. We've shown the pro forma and reported numbers for the year ago period and for Q3 and Q4 2007. And again we have excluded non-cash comp from all of the presentations on this page.
Quarter-over-quarter strong hosting results from both Managed Hosting and Colocation drove solid revenue growth of 4% sequentially, as we install business one in the second and third quarter. Gross profit was up 10%, reflecting revenue growth and lower utility cost in the cooler fall month. These benefits were partially offset by slightly higher costs for new datacenters. SG&A grew 10% driven by increased payroll commissions and other expenses.
Adjusted EBITDA for the fourth quarter was up 11% from the third quarter, demonstrating the success of our margin improvement efforts. Note, as well, that our... on a GAAP basis, our EPS... and we had positive EPS in the third quarter and that was a loss in the fourth quarter of $0.05 per share. This loss reflects higher depreciation, amortization expenses as well as higher interest costs as we move datacenters from an under-construction phase to in-service.
On a year-over-year basis, our reported revenue was down 1% reflecting the impact of the sale of assets, the Telerate... and the Telerate consolidations as well as lower network revenue. Those challenges were largely offset by 23% growth in Managed Hosting. Adjusted EBITDA was up 9% from a year ago which is testimony to the higher quality, higher margin revenue. So despite revenue actually being slightly down, our EBITDA dollars and margins were up.
On a pro forma basis, revenue was up 8%, as growth in Managed Hosting and Colo more than offset lower network revenue. Adjusted EBITDA was up 38% from a year ago on a pro forma basis. In the fourth quarter, we had about $3.9 million negative impact to adjusted EBITDA from our Phase I and Phase II datacenters. I will provide a little bit more color on that in a moment.
From our key internal metrics, is adjusted EBITDA. And we have been successful growing that from $28.6 million on a pro-forma basis a year ago to $39.4 million in this current quarter, a 38% increase. That reflects the success of our investments targeted to drive higher margin business. Adjusted EBITDA margin has steadily increased as a percentage of revenue, as shown on the graph on slide 14.
The third quarter in 2007 in this graph included about $3.2 million of operating costs associated with the new datacenters where we had cost incurred prior to any revenue. In the fourth quarter those costs totaled about $5.5 million, but were partially offset by $1.6 million of revenue.
Talk more about the impact of costs and revenue on our datacenter expansion, when we look at the 2008 outlook. But slide 15 gives you a view into the impact of the new datacenters in the third and fourth quarters. The Q3 impact, as I said, was about $3.2 million of negative EBITDAs, we had cost-only, and no revenue contribution from the first four Phase I datacenters, as they approached opening in late September and early October. In Q4 we had a small amount of revenue from the new IDC and an increase in cost reflecting rents, utilities and staffing for the Phase I datacenters and early stage cost for the Boston and Singapore Phase II datacenters.
On slide 16, we update you on the progress of selling both into the new datacenters and the space that we reclaimed for Colo-only customers in the first half of the year. In the new datacenters we have sold about 40,000 square feet of space... of space now, and about half of that... about half of what's available for Collocation. Equally important is that we've begun installing those customers and expect to have all of that sold space installed in the first and second quarters of this year.
We are tracking installation schedules carefully, and with some of these customers, as we discussed in October, we've accommodated request for phase installs to allow for the migration from other datacenters. Beginning in the fourth quarter, we implemented to take-or-pay provisions to protect our revenue and forecast from customer delays.
In terms of the space we reclaimed earlier this year, we expect to sell about 56,000 square feet of Colocation from the returned space. As of December 31st, we sold more than half of that space, at prices well above the previous customers. We've installed most of that space sold by the end of this 2007, and expect that the remainder will install in the first quarter. We continue to expect, we'll sell and install the remaining square feet by the end of second quarter. With that space already booked today we have replaced 78% of the revenue we lost, in just over half of the available space.
Slide 17 focuses on our cash flow. The highlights for the fourth quarter include operating cash flow of $27 million and cash CapEx of $100 million which included the $53 million for datacenter expansion and our network upgrade. For the full year we generated a $117 million of cash from operations, and spent about $349 million of cash for capital investments.
In addition to the cash CapEx, we also financed about $42 million of capital investments thorough Cisco to support our network improvements. Our cash CapEx that was the $349 million, we had about $226 million of that for expansion projects, primarily for the new datacenter investments. Our non-project CapEx for the year was about $123 million. And of that about 60% to 70% went to success-based spending, which is inline with our historical experience.
That success-based CapEx is primarily for hardware we purchase on behalf of our Managed Hosted customers as they enter into new contracts with us. We recovered that capital spend, usually in the first year of the contract and expect to spend about 20% to 30% of the total contract value for each new Managed Hosted deal. The remaining 30% to 40% of our non-project based CapEx is for ongoing support of our infrastructure.
And finally and to remember that the majority of our capital expenditure program this year were financed by the net sale proceeds of $390 million that we generated in the first half of this year.
Another significant achievement during 2007 was repositioning of our balance sheet, given the current instability in the debt markets, we feel very comfortable and pleased with our current leverage position. We closed the year with about $183 million of cash which was slightly ahead of our projection, as shown on slide 18. With total debt of just over $500 million, our leverage ratios remained attractive. Total debt to 2008 projected adjusted EBITDA is about 2.5 times, a very manageable level, while our net debt to 2008 adjusted EBITDA is about 1.6 times. With continued generation of operating cash flow and expansion plans for 2008 funded by the asset sales of 2007, we feel well positioned in the current economy. So that's where we stand for the end of 2007.
Now for our outlook on 2008, as shown on slide 19, and that again is for very attractive revenue growth of a rate of between 19% and 21 % on a pro forma basis. Or 15% to 17 % on a as reported basis. Our CapEx plans include about $150 million of spend for the Phase II datacenters we are building out in Boston, Chicago, Dallas, London, New York and Singapore. The remaining CapEx of about another $150 million will include 60% to 70% success-based spending; again typically for hardware and software purchases to support new Managed Hosted business.
With adjusted EBITDA growth of 36% to 43% on a pro forma basis and 24% to 31% on an as reported basis and the lower CapEx in 2008 versus 2007, we are looking forward to creating significant stockholder value next year.
I thought I'd also give a little bit of color on some of the below the EBITDA line expenses. We intend to pay about $130 million to $140 million of depreciation and amortization in 2008, we also expect about $25 million to $30 million of interest expense in 2008 and an effective tax rate in the low single-digits.
Our slide 20, I've laid out some of the metrics of our 2008 plan. We continue to sell and install into available datacenters at a space of about 30,000 to 35,000 square feet of net Collocation space added per quarter. As we roll out the Phase II datacenters with Chicago opening in March, Dallas in the second quarter, and Boston, London, New York and Singapore adding additional space in the second half, we should accelerate towards the higher end of that range as the year progresses.
On the cost side, we expect to add about $5 million to $6 million of new costs in the first quarter from our expansion efforts and then after that, an additional $1 million to $2 million in each subsequent quarter. That $1 million to $2 million will be largely tied to costs associated with the growth in revenue. We have new network costs and salary increases that add about $50 million for the year and those are really spread evenly throughout the quarters. So, think of those as costs ahead us at the beginning of the year, and will be flat throughout the quarters.
In addition we do expect that SG&A to increase slightly in the second quarter and beyond as a result of the impact of commissions and other administrative costs related to the datacenter expansion. As Phil said, we're on the alert for any signs of slowing our pipeline, pushback on pricing, longer sale cycle or increasing contract cancellations, and we will respond quickly if we see any of those signs slowdown.
Now with that let me turn it over to Phil for wrap up.
Philip Koen - Chief Executive Officer
Thanks Jeff, I want to dig into our business model a bit before Q&A. I hope you all know what an important piece of our strategy Managed Hosting is. We began offering this service in about 2002 and built much of our success on it for two primary reasons. First, our offering is competitively differentiated with high barriers to entry. Second, we drive strong per unit revenue from this product. The graph on slide 22 helps show why that works so effectively.
As you see average monthly revenue generated per bill square foot from our mix of services is double that of Colo-only space. This higher revenue realization from our fixed asset investment is fundamental to our value proposition. And since our Managed Hosting Solutions is highly automated, we generate strong flow through margins as well.
Another key metric we are measuring with this graph is the movement of our Colocation footprint to market prices. We are now at an average of $36 a square per month, up 16% from a year ago with almost 40% more growth to come as we move to the $50 level benchmark. The increase from Q3 is only 1% reflecting the backend loaded installs in Q4. Average Colo pricing will increase as we roll-off existing contracts and install customers into our new high-power datacenters moving into low-40s by the time we exit 2008.
So, how does this translate into high ROIs we see. On slide 23 we've laid out some metrics associated with two different kinds of datacenter investment. With these hypothetical datacenters, we've assumed building about 55,000 square feet of raised floor which will generate roughly 35,000 salable square feet. In both cases, we expect the capital cost to build the datacenter would be approximately $60 million.
After that the metrics look very different for a Colo-only center, shown in light blue in the graphs or a datacenter split about 80-20 between Colo and Managed Hosting. For the Colo center revenues capped out once this space is fully installed by about year three. For the hybrid center, given the greater revenue yield from our Managed Hosting, revenue growth through year eight at full capacity, the data center generates more than double the revenue of a Colo-only center.
You can see in our assumptions that the CapEx requirement for the mixed new center is higher than for Colo-only. However, the higher adjusted EBITDA flow through margin and significantly higher revenue potential mean that the hybrid IDC generates, over 10 years, twice the cash as a Colo-only center. This is a powerful argument for the strength of our judicious expansion program.
And the operational and cost benefits of outsourcing IT infrastructure have proven powerful with our customers. As an example, we summarize a case study we did quite recently for a perspective Managed Hosting customer on slide 24. This tech company had outsourced some aspects of its infrastructure, but was unhappy with the provider. The IT group was considering taking the applications back in-house. We analyzed their options, and were able to demonstrate savings potential of over 50% with a SAVVIS solution, including the implications of indirect costs, like down time, insurance and loss opportunity as valuable IT staff get redirected toward training and maintenance and away from application development.
We do this analysis for many of our prospects and often find savings opportunities of 10% to over 50%. Even in some cases where total cost of ownership isn't an issue, the operational benefits are often enough to drive a buy decision; especially in recessionary environment, with companies seeking to keep strong cash cushions, this is a compelling story. By the way, we are installing this customer today with just about $1 million of annualized recurring revenue expected; a perfect sweet spot customer for SAVVIS.
We are well prepared to meet our customers' demand for both Colo and Managed Hosting with an attractive datacenter footprint, as shown in slide 25. By year end, we expect to have just under 1 million sellable square feet of datacenter space in 13 of the world's best markets. Importantly, both our legacy and our expansion datacenters, offer customers an attractive package of security, reliability, and power availability. We are very pleased with the datacenter footprint we are building. While we are always alert to great opportunities for growth, we are not currently targeting any specific markets for additional builds. We are committed to a judicious, gradual investment schedule that never puts us too far over our ski tips.
As Jeff noted, we sold just over 40,000 square feet of the 100,000 in the Phase-I data centers; which have been open for just over a quarter now. That's a great pace of sales and we are very pleased with market reception.
I hope this discussion has been helpful to you. I think it's vital that our investors understand our strategy and how we are executing against it. We are pleased to have some significant challenges behind us and looking forward to reaping the benefits as we work to ensure our efforts in 2007 pay off with solid growth in 2008.
We would be happy to take your questions now.
Elizabeth Corse - Director, Investor Relations
Matthew, if you will assemble the question queue for us.
Question And Answer
Operator
Absolutely. [Operator Instructions] Our first question comes from Colby Synesael from Merriman.
Colby Synesael - Merriman Curhan Ford & Co.
Hey thank you for taking my question. You just touched on the sale about how the four new facilities are... you guys have already about one third full. Do you think that that's been a good gauge then for the additional facility that you are building now in the first and second half of 2008? My other question, what's the lead time that you guys need to buy equipment for the Managed Hosting Services. In other words, what is the potential that, if in fact we do experience some sort of economic downturn that you guys could be stuck with a lot of equipment that you just didn't need to buy?
Philip Koen - Chief Executive Officer
Okay Colby, thanks for your question. Regarding the... actually it was 40,000 square feet on a 100,000. So it's closer about 40%. I think that's a terrific pace. Now, I think what I want to draw your attention to is that these are... demand is very much locality driven. So, while I am very pleased with that kind of pace, I don't think it would be good to extrapolate that to every single market. Some markets we know, for example, London is currently facing a shortage of space. So, I will expect to see that once we get that open, to be rather brisk market. And that's not to say that the other markets that we are opening are unattractive, but may not have the exact same demand and supply characteristics. I think that we've given... I am looking for Jeff, that we normally think about, that when we build a facility that from the time that we open to be fully sold out is approximately, how long.
Jeffrey Von Deylen - Chief Financial Officer
We said 18 to 24 months in terms of sold and then installed.
Philip Koen - Chief Executive Officer
So, I think that still stands to be a good benchmark as you think about all of these extensions. With regard to the second question, I'll let Jeff wait in here. The strategy we've employed on the Managed Hosting is we buy once we have a signed contract. So, the idea here is never be exposed with buying forward on equipment that we wouldn't use. And normally the equipment we are buying is pretty readily available, not specialized type of items for Managed Hosting. Jeff, you want to add anything?
Jeffrey Von Deylen - Chief Financial Officer
Yes, I think the only... on the utility product, Colby, that is we have... I'll say, we keep a little bit of inventory because that is one of our value propositions is to be able to install quickly and the customers can grow with us, but that is... we don't have significant capital exposure on the Managed Hosting side, unless we have a signed contract we are not out buying HP or Sun or other gear. And that would be dedicated hosting. Obviously we think our value proposition to more of the utility model or the... or our VIH product is a better model for the customer, because it allows them to grow their business, but again we really do not have significant exposure at all on inventory.
Colby Synesael - Merriman Curhan Ford & Co.
Okay, great, and then just real quickly, you guys... in the past you guys have given out quarterly guidance, it looks like this quarter you chose not to do that any specific reason?
Jeffrey Von Deylen - Chief Financial Officer
Yeah the quarterly guidance we historically had, and I know we readjusted after we sold the datacenters last year, again that was for a half year guidance. So, we have always tried to stay away from specific quarterly guidance. So, we kind of stayed with that theme. We have a full year guidance. And I think the slide on... I guess, it's the slide 20... that provides some further color, was just to give folks an opportunity to show how we think the revenue and cost would expect to come in over the year, but again we are really focused on, on the long term and how we position the Company for value here.
Colby Synesael - Merriman Curhan Ford & Co.
Okay, thank you very much.
Operator
Thank you. Our next question comes from Tom Watts from Cowen.
Thomas Watts - Cowen and Company
Congratulations on the solid results.
Philip Koen - Chief Executive Officer
Thanks Tom.
Jeffrey Von Deylen - Chief Financial Officer
Thanks Tom.
Philip Koen - Chief Executive Officer
Nice to hear that.
Thomas Watts - Cowen and Company
... apologize for my voice, I have a cold here. But there have been some reports out there that already... with... there is lots of datacenter capacity be open that there is even pressure on prices in some markets. Have you seen that at all and are those markets where you participate, or is that really different type of capacity?
Philip Koen - Chief Executive Officer
Well, Tom, let me get to the punch-line. As I said in the earlier remarks, we literally have just not seen anything to indicate that there is a fundamental change in the pricing environment in which we have been operating for some time now. What we found, and I think the number speak from themselves that our new datacenters have a very attractive and are hitting the sweet spot or what the market demands. As far as, I read as much as you do in the published reports out there and I think we have a fairly detail interim marketing effort what we track expansions and we segment the business based upon what people are looking for.
A lot of the space in our estimation that's being built, is what I will believe... what I'd characterize as targeted towards wholesale providers. And as you all know, we have a longstanding relationship with people like Digital Realty Trust where we have written on their underlying facility than we build on top of that.
The DRT, when they go and build a large facility for the wholesale market, they are usually looking for one customer or a number of people, couple of customers to take the entire building. That's a different market than what we are serving. So, while I do think that there has been a number of projects that have been announced, it will still be interesting to see how quickly they actually get built, and the bottom-line here is that quite frankly we have not seen any, anything to suggest that the pricing environment has changed for the product that we deliver.
Thomas Watts - Cowen and Company
Okay. And then you mentioned that you are looking at 18- to 24 months to fill a datacenter. Since we have a lot coming online this year, does that mean that in late 2009 and 2010 we should expect another CapEx cycle?
Philip Koen - Chief Executive Officer
Well, what we have always thought of as far as our capacity planning, is that you never want to be in a situation where you are not able to handle the expansion plans of your existing customer base. And I think we said before, roughly 80% of our new order... of our orders comes from our installed base. The strategy has been for us to build small, incremental facilities... and that's for a number of reasons, which I think are pretty obvious and the idea would be that you are constantly looking at your current capacity and then you try to time the addition of space tied to how much you've been consuming.
So, you will never see us go and build the one spot like 300,000 square foot, 350,000 square foot facility in one market. That just doesn't... isn't our strategy. You would see what we have been doing is building smaller facilities from 17,000 square feet to 30,000 square feet, tying to the capacity requirements on a market-to-market basis. And again that allows us to be reactive if the market were to change we are just never too far over, as I said, over our ski tips. And what it does do is allow you to move towards, as best you can adjust and time type of delivery model for your facility based revenues.
Thomas Watts - Cowen and Company
Okay. And then just one final question. Any update on the Welsh, Carson stake, are they not sellers until the stock gets back to 50, will that overhang continue?
Philip Koen - Chief Executive Officer
Well, we can't speak for Welsh, Carson, and I am delighted to have them as a financial sponsor quite honestly. So, I think that they feel that this is great investment. They have been with us for some time, and I think that they will make their own decisions at the appropriate time. And I really don't have any insights to that.
Thomas Watts - Cowen and Company
Great. Thanks very much.
Operator
Thank you. Our next question comes from Jonathan Atkin from RBC Capital Markets.
Jonathan Atkin - RBC Capital Markets
Yes, good afternoon. I wondered if you can comment on particular sectors that you are seeing the strength from. I know you said 80% of sales typically are from the existing base. But across sectors any kind of different trend that you are seeing? And then with respect to kind of the internal changes in management that you referenced today and in the past couple of months, what is it that's actually happening in terms of the integration of sales, marketing customer service, what's changing going forward that maybe hasn't been the case up till now? Thank you.
Philip Koen - Chief Executive Officer
Okay, John. With regard to the trends by industry, let me start off with one that is very pleasing to us, it's just the continued success that we're seeing in our Proximity Hosting area. This is one that, this is kind of interesting, because obviously this is directly targeted to the financial vertical. And given all the press out there concerning the concerns with financial, this continues to be a very nice service that we offer. And the reason is quite obvious, it's strategic. This allows with the movement towards more automated trading, this allows our financial customers to improve their ability to execute in automated world.
Since our... all of our services, I think, are more strategic, we seem to be a little bit more, I think, isolated than other companies might be as we go across all types of verticals. So, the long and short of it, is that today I can tell you that we haven't seen any fundamental changes across any verticals as we go to market. And the important point here is the fact that as companies look at their IT infrastructure and wrestle with the decision whether this is core to them or simply context, I think we are incredibly well positioned as more and more companies realize there is simply no strategic value in own and operate your own IT infrastructure. And the preferred way to got market is a service-based model.
And that's everything we have been working on so hard in the last year. And I think, in spite of a little bit of uncertainly in a kind of a global economic basis, I think that we continue to be in a very strong position.
With regard to the internal changes we have a very strong line up in the form of some very seasoned executives, in the form of Paul Goetz, who is joining us in driving the North America sales. Jim Mori has been with us for a long time, and asking Jim to really focus on the customer service and delivery side of the equation to make certain that we're driving as much value to our customers not only installation, but after sales support. And then James Whitmore who has joined us to drive our marketing. So, I think this is simply an ability for the organization to get tighter, more tight with me going forward, and continue our focus on not only sales execution, but sales support and you'll see more and more of marketing effort as we move forward.
Jonathan Atkin - RBC Capital Markets
Thank you. And then finally any changes in the competitive environment?
Philip Koen - Chief Executive Officer
None that I can tell. The same people that we see out there 12 months ago are the same ones that we see today. There seems to be strong pricing discipline in the market. I think that tells you that the supply and demand factors are still in good shape as far as the Collocation. And I think that the as we look forward the demand and interest in our ability to deliver managed solution continues to resonate well with our customer base and the potential customers we are talking to.
Jonathan Atkin - RBC Capital Markets
Thanks very much.
Operator
Thank you. Our next question comes from Jason Armstrong of Goldman Sachs.
Jason Armstrong - Goldman Sachs
Great thanks. Couple of questions, maybe I'll split them up. The first is... I know you are staying away from quarterly guidance, but maybe from a high level. Can you help us think through just the near-term EBITDA trajectory, and I say that in the context have you talked about $5 million to $6 million in additional cost in the first quarter. Now you've just posted a $5 million increase in quarterly EBITDA in the legacy business, and you are sort of scaling the new expansion datacenter.
So, seems like we have a shot of actually growing EBITDA 1Q versus 4Q, I think, despite what many would have thought to the contrary coming out of the Analyst Day. So, can you offer comments on this? I hate to focus so near term, but it really gets more to the '08 outlook and sort of the comfort level with guidance. Is the comfort level here because we are going to get a strong start for the year and that really helps de-risk the backend of this? And then I will follow-up with another question.
Jeffrey Von Deylen - Chief Financial Officer
Yes, hey, Jason it's Jeff. On the datacenter side, again, I think what we try to do on laying out some of the cost drivers was indicate that there are some fixed... I will call them fixed costs, because they're rent and staffing and other things that are coming at us right out of the gate, and that's kind of what we tried to do in terms of laying out the additional datacenter costs, as well as the additional wages, as a results of annual salary increases and then our network costs.
So I don't want to try to wind down into the quarterly guidance. We tried to stay away with that... stay from that, but if you look at sort of our Q4 cost, and then add on these, what we know as sort of known cost increases. We thought, at least, articulate a little better or a little bit more clearly how we think the costs are going to go over the course of the year. And then obviously as we get outside of that first quarter, a lot more of the cost are little bit less lumpy in terms of upfront in terms of the new datacenters, because all... obviously, we will add some costs, but they will be offset by revenue increases.
I know that doesn't give you the exact... the exact numbers that you are looking for, but I think it gives you a sense that there are some real cost that hit us right out of the gate. And then as we continue to install and grow revenue EBITDA dollars and margins expense.
Jason Armstrong - Goldman Sachs
Okay. I guess, I was just looking for up/down 1Q versus 4Q. Maybe, so second question, and you've talked about high incremental margins in the past. If you look at the legacy business, this quarter you did 77% incremental EBITDA margins. It seems obviously much higher than usual, very strong result. Can you talk about the underlying configures to that type of operating leverage you saw on the business?
Jeffrey Von Deylen - Chief Financial Officer
Q3 to Q4?
Jason Armstrong - Goldman Sachs
Yes.
Jeffrey Von Deylen - Chief Financial Officer
Yes.I mean, I think what you are seeing there is good cost management on the base. And obviously as we actually have some of that reclaimed space sold and installed, it has a favorable margin. Now, the other thing when you think about that utility cost is that utility costs were actually down Q3... Q4 from Q3, that's the seasonal impact that we have. Q4, Q1 our utility costs are going to be few million dollars lower than they are in Q2, Q3. Just because of the temperature, so that. So, we do get a bit of a swing in the fourth quarter from the third quarter. And that's all attributed to legacy business, since the new data centers really didn't have any power cost in the third quarter.
Jason Armstrong - Goldman Sachs
Okay, thanks.
Operator
Thank you. Our next question comes from Simon Flannery from Morgan Stanley.
Simon Flannery - Morgan Stanley
Okay, thank you, good evening. I think you had made a reference to changing some of the terms of the contracts towards a take or pay contract. Can you just give us some details about how that kicked in, and is that on all older contracts and what was the thinking behind that? And then also on the revenue per spill square foot for Managed Hosting that ticked down sequentially just wanted to understand the dynamics there? Thanks.
Philip Koen - Chief Executive Officer
Sure, hi Simon. On the contracts, one of the things that we are disappointed by at the end of the third quarter was some of the sales... we have great sales, but the installs happening over a longer period than what we would have liked. So, we were very disappointed in the fourth quarter as new sales were completed that we... that customers... that the expectations in terms of when those customers were installed and then the communication between our sales organization and the customer were very clear. So, we had a number of examples where we for... again in certain markets with the demand very high, where we were telling customers if you want to take the space that we have other customers willing to take it, and even though we will accommodate a phase the very... the first part of that, let's just call it half of that revenue or half of that space needs to be installed and billing within a very short cycle.
So those... that's just some of the discipline we went through in the fourth quarter to really make sure the organization and our customers' expectations were clear that this is a high demand market and it isn't just about selling, but it's also about selling and recognizing revenue. So, I think that kind of gives you a little bit of color of some of the things we did and that on going forward contracts that's a very, we have a very robust process in place between sales and product and finance.
Simon Flannery - Morgan Stanley
So is that sort of from October time or November or
Philip Koen - Chief Executive Officer
November timeframe.
Simon Flannery - Morgan Stanley
Forward, okay.
Philip Koen - Chief Executive Officer
Okay, and then on the managed per square foot number. I think what they did... what you have there is a mix of services that some times drive. I think if you look historically back that isn't always that kind of bounces around a little bit. What we've done there on the Managed Hosting is try to give a metric that people can look at, even though as you look at that Managed Hosting dollars per square foot, that probably isn't the most relevant measure, because you are talking about did we sell servers or storage or professional services so. It's a metric, but I can tell you that within a range that will bounce around a little bit and you shouldn't be concerned that a change in the business or a change in pricing is really mix of services and was it more managed or utility or more storage versus compute.
Simon Flannery - Morgan Stanley
Okay. Is that sort of a one quarter dip you think or is ?
Philip Koen - Chief Executive Officer
No, I think you'll see that bouncing around a little bit. But I think that generally that range that we have historically said, historically shown in 1,200 to 1,300 range is reasonable.
Simon Flannery - Morgan Stanley
Okay, thank you.
Operator
Thank you. Our next question comes from Donna Jaegers from Janco Partners.
Donna Jaegers - Janco Partners, Inc.
Hi, two questions. You mentioned in your presentation that if the economy slowed down that you would respond quickly, what sort of leverage do you have that you can respond with?
Philip Koen - Chief Executive Officer
Well Donna, I think the one that's the easiest one is you slow your hiring. Obviously, with kind of growth rates we are talking about on a pro forma basis for revenue, the headcount... we have a headcount plan that adds people. So, you pull back on that very, very quickly then you start looking at other sort of discretionary spending areas that normally just management would pull back.
You hit on a good point, though, in practicality we still have a fairly high fixed cost base. That's one of the reasons why we have such high flow through margins. Now offsetting that, however, is the long term nature of recurring revenue model. So, outside of controlling the headcount and variable spending, those are the things that we would look at very, very quickly.
Jeffrey Von Deylen - Chief Financial Officer
I think on a cash flow side, you also see, if you... obviously, if you sold last your, the CapEx at $150 million of non-project based CapEx would be lower. So, that is really directly, I think where the questions earlier, and that is directly tied to new business being signed. So those are... I think there is both an EBITDA or income statement impact as well as the cash flow impact.
Donna Jaegers - Janco Partners, Inc.
Okay, and the your installed time. Can you give us any sort of metrics on... I know it's difficult, because Managed Hosting is a much more complicated install, but do you have any metrics as far as how you are progressing on that to try to be the most efficient on installed time?
Philip Koen - Chief Executive Officer
Yes, Donna, that's a great question. Unlike a simple model where if we were just installing racks we could give you a next date. Given the diversity of the type of service we offer, I don't think that's really relevant. The way that I answer this is to say that we have reached our service a plan installed time and as we look back over this past year, we have been operating with those planned intervals. What we want to do now going forward... this is the reason why we are making investments in so much of our internal systems and SAP and our operations support services it's just to try and improve that. And that's one of the things that Jim Mori in his role in the client services side. This is really going to be very focused on. So, I don't have a metric other than to share with you that this is something that's important to us and as we go through '08. We'll be looking to improve on those standard intervals across all of our product lines.
Donna Jaegers - Janco Partners, Inc.
Great, thanks guys.
Operator
Thank you. Our next question comes from Mark Kelleher from Canaccord Adams.
Mark Kelleher - Canaccord Adams
Thanks, you guys said you had 593,000 square feet billing, is that right?
Philip Koen - Chief Executive Officer
That's correct.
Elizabeth Corse - Director, Investor Relations
Yes.
Mark Kelleher - Canaccord Adams
And that's out of how much footprint, how much square feet?
Philip Koen - Chief Executive Officer
Roughly 880.
Mark Kelleher - Canaccord Adams
880, okay. And the Phase II build-out, how many square feet is that for this year?
Philip Koen - Chief Executive Officer
Phase II build out was 120,000 square feet.
Mark Kelleher - Canaccord Adams
Okay, and one more capacity utilization question. If you look at your infrastructure for your utility computing, what's the capacity utilization on that?
Philip Koen - Chief Executive Officer
I don't think there is... there is not an easy answer to that question, because I think what you are asking is from a Phase IV rather from installed equipment capacity.
Mark Kelleher - Canaccord Adams
Well, no, actually I am curious as to how much more revenue you can get out of your existing equipment before having to spend more CapEx on more servers and storage to support the utility computing?
Jeffrey Von Deylen - Chief Financial Officer
Yes, in the utility... Mark, this is Jeff... on the utility platform that rolled out in more than a dozen centers. So, I can't tell you that any... certainly in any, in all of those locations there is an ability to grow in, because we do have blades and storage, so excess storage capacity in blades, but it isn't.
You shouldn't think of that as we pre-bought, a quarter or huge amount of new revenue we have what we... sort of normal intervals in terms of... what we expect to sell, because again one of our value propositions with our existing base is to be able to install quickly, but you shouldn't think that we have millions and millions of dollars of equipments sitting there that we can just turn on over night.
Mark Kelleher - Canaccord Adams
Okay. And then just quickly back to the square footage utilization. The comfort level, typically a number of people uses 80%. Is that, if you get to 80% utilization, is that typically where you consider building out again?
Philip Koen - Chief Executive Officer
Well, I think that you probably... because the way that we report on it, truly a net sellable square footage basis. So you got to be careful what that 80% is up, but I think that what we would look at as we start moving above that 80% level is where you probably need to start expanding again. And again this is market-by-market driven. So the metric we are giving you when you talk 80%, you are talking across, not every facility, is that 80%. So we look very hard on a market-by-market basis, what the demand, what the supply, what... where our existing customer base is and then we go and make a decision a very tactical and judicious decision as to where we want to expand.
Jeffrey Von Deylen - Chief Financial Officer
I think that customer decision is important because as we mentioned in December. We, for example, we have a center in Chicago where we expect to reclaim fairly 50,000 square feet from a customer. So, I think we have to look at those, it's obviously very low priced footprint from a revenues generation today. So, we have to look, again, not only at what the demand is, but also are there any customers that may not likely be the right customers for us in terms of paying market prices.
Mark Kelleher - Canaccord Adams
Okay, and one last question. You haven't talked about your new network build-out. How is that progressing and is the churn still very high there?
Philip Koen - Chief Executive Officer
Yes, Mark. We are very pleased with the... with the progress we've made on the build-out. I mean it's substantially completed that was done... by the end of the year. What we told people is that we now have a six-month period here. We have to start building funnel and building interest. We're early... very early on in that ball game right now. And basically as we are moving against our plan, we are, I think, offering right at the levels where we thought we'd be, both from an interest level and from a churn standpoint. So we've said and I think Jeff talked about in his remarks that for the first half this year is going to be rather anemic and we would expect to see improvement in the second half of the year as we have rebuilt the funnel and started converting orders, actually, into revenue.
Mark Kelleher - Canaccord Adams
Okay, great. Thank you.
Operator
Thank you. Our next question is from Manny Recarey from Kaufman Brothers.
Manuel Recarey - Kaufman Bros
Thanks for taking my question. One... two quick ones. The churn in the quarter was, I think, 1.7% you said and that was including the network services and the Hosting.
Jeffrey Von Deylen - Chief Financial Officer
That's correct. All the products, yeah.
Manuel Recarey - Kaufman Bros
Did you give out the number for just who lives on the Hosting side?
Jeffrey Von Deylen - Chief Financial Officer
Wedidn't give out the specifics Manny, but the network churn was higher in the hosting both Colo and Managed Services would have been... been lower than that.
Manuel Recarey - Kaufman Bros
Okay. Excuse me, I am sorry. And then just one quick question, on the... from a competition perspective and capacity. With the uncertainty on the outlook for the economy, you notice any, maybe slowdown in build by others that are out there or is it... another way to look at is the lead time for some of the equipments bound to shorten at all?
Philip Koen - Chief Executive Officer
Well I... let me try to answer that, our intelligence is probably as good as anyone else out there. I mean we do have... we can drive white sites buy sites for sure, but when you take a look at the amount of capacity that's been announced, what I don't know is how much of that is actually being built.
I suspect that for some people they maybe revaluating that, but I don't really have any hard data to confirm or confirm that suspicion. All I can tell you is that, as we look at our customer, our funnel, our pricing level; our business remains healthy. We are operating and getting the price points that we anticipated in the new build, what's wonderful about our footprint, it's highly diversified and that we are able to handle everything from very high power requirements that back to more legacy and traditional type of power requirement. And that if you look at the 30,000 that we installed, the split was almost half between legacy and new.
So, it tells me that our product offering is covering the broadest breadth of market that we can address, and we seemingly have the right product for the right market. I don't think that the overall supply and demand characteristics for those companies that have good product mix are fundamentally going to change, because of the strategic nature of some of these outsourcing decisions. That remains to be seen as we go through this, clearly it's a little bit more uncertain today than it was... from a general standpoint... than it was four or five months ago. But I have yet to see anything that suggests that there has been a fundamental change from a competitive position.
Manuel Recarey - Kaufman Bros
Okay, thanks.
Operator
Thank you. Our next question comes from Sri Anantha from Oppenheimer.
Srinivas Anantha - Oppenheimer & Co.
Good afternoon, thank you. Phil you talked... in comments you indicated you haven't seen any impact of the macro environment, but just listening to some of the outsource and IT services company, some have indicated that they have seen some push out of implementation as well as contracts. Did you guys had any discussions with your customers? I know you indicated that you are willing to accommodate some of your customer request. The second one is, I know there is some space that you're expected to reclaim later this year, could you just give us an update on that and what are your plans for the space? Thank you.
Philip Koen - Chief Executive Officer
Okay. Sri, let me try, as far as the accommodation to our customers, it is really more along the lines in the large bookings that we have for Colocation. Jeff, talked a little bit about this in his remarks and some of the additional things that we put in place in the October, November timeframe to address the... so that we get fairly compensated if someone wants to have a what I'll call a phased-install. Those were primarily... they were primarily attracted to it, a small handful of customers and was basically done on a business, for a good business reason. That's different from what you might be alluding to, it's just a general slowing down of people wanting to take the Colocation space.
In fact, what we've asked our sales organization to do is that, if someone really doesn't need the space don't try to sell it to him right now. I'd much rather have my sales organization focused on identifying those customers that have immediate need, and fulfilling those need rather than entering into reservation agreements and things like that.
So, today I can tell you that we have not seen a pushback... a general pushback other than the few customers that we've had these negotiated agreements in place for what I'll call phase installs. And they are usually tied to rather larger types of sales agreement. As far as the reclamation of the space that we've talked about in Q4, I am pretty certain that we will be reclaiming that, unless that customer wants to come and pay the going rate. As we all know and you have heard that Chicago market is a very... it's a tight market from the supply and demand standpoint. I'd be surprised that they have customers who came and was willing to pay the going rate. But if they did, that would be a pleasant surprise.
So on the out most realistic assumption, I am assuming we will be reclaiming that, and that's a good thing for us, because that's simply in my view adding another datacenter on market that continues to be attractive to us. And our game plan is to do what we would do and that's sell it. And stay tuned we'll tell you how that unfolds as we go through this year.
Srinivas Anantha - Oppenheimer & Co.
Thanks, well, could you just me remind what is the total square foot that you are going to reclaim in Q4?
Philip Koen - Chief Executive Officer
It's roughly 50,000 square foot.
Srinivas Anantha - Oppenheimer & Co.
50,000. Okay, thank you.
Operator
Thank you. Our next question comes from Tom Seitz from Lehman Brothers.
Thomas Seitz - Lehman Brothers
Yes, thanks for taking the question. Couple if I may. You mentioned that customer count in your discussion of utility solutions and virtual hosting, I missed the exact number. But I was wondering, I was interested if you could tell us what percent of these, if any, started off as Colo-only customers. And you've got a flag from us, for perhaps releasing the positive churns space slower than we might have originally forecasted. And the reason that you gave, which is a good one, is that the opportunity to up-sell. And I was wondering if you could point to anything in this area that illustrates the prudence of that sales strategy? And then secondly, can you talk about the credit quality of the incremental customer coming on? Just any sort of color here would helpful given what looks like a slowing economy?
Philip Koen - Chief Executive Officer
Sure, Tom, the customer count I gave was for our virtual intelligence hosting product that we launched in the later part of '07, and already the number was 39 customers. So, this is a basically HP play with the VMware. And that take-up rate in the last little over two quarters has been very impressive to me. And I think continues to push us as the premier company in this area of utility and virtualization computing. So, that's separate from the comment you asked about when we took the churn and being able to up-sell our existing customer base.
So, two things are happening there. We are booking some additional Managed Hosting within that. But even more importantly is the price gains that we have gotten on that space is spectacular. I think that Jeff said in his prepared remarks, 78% of the revenue is already been replaced with less than, I think, right around 50% of the space being sold. So, I think that shows you that was the prudent business decision. Anecdotally, I can tell you that as I look across the funnel, and I look across the mix, the mix continues to improve in favor of more value-added services to the Managed Hosting, away from just pure Colo. So all the effort that we have gone into messaging and the sales organization training and making certain that we are selling the... what I think is our sweet spot, is taking hold. I will turn it to Jeff now to talk about the credit quality.
Thomas Seitz - Lehman Brothers
Thank you.
Jeffrey Von Deylen - Chief Financial Officer
Yeah, and two other things on the customer count. I think you know it's sometimes difficult to just measure customers in particular. But two of our very large installs in this quarter were actually in the case of our largest VIH customer was a traditional customer buying Colo and other services. And then in the case of one of our... a large Managed Hosting customer was buying primarily Colo and moved up. And these are very, in our top 25 lists, in terms of customers. So, we did have some nice wins, in terms... especially focused on sort of big, larger customers that we have.
In terms of credit quality, I haven't seen anything that is changing. In terms of that we have a... historically, we've had a very low bad debt percentage, less than 1%. Our DSOs continue to remain strong. I think on a net basis our DSOs are less than 30 days, and historically have been in that less than 30... somewhere in the 25 day range. So, we continue to, obviously, watch it. We've got a pretty good credit quality. I think the other thing that's nice is these services are typically pretty critical in the company. So they have to be in pretty bad shape for us to not pay, meaning they are not going to be around as a business, because this is... these are one of the last services that you'd want to get turned off. So we have the proverbial to ensure that we don't get IWAC [ph] with customers.
Thomas Seitz - Lehman Brothers
Okay, great. Thank you very much.
Operator
Thank you. Next we'll hear from Brian Horey from Aurelian Management.
Brian Horey - Aurelian Management
Thank you. I just wanted to go over your capital plan a little bit for the year. So you have got about $300 million in CapEx in round numbers, and you have got $183 million in cash. Do you expect to draw on the revolver in order to fund the balance of the CapEx program?
Jeffrey Von Deylen - Chief Financial Officer
At this point, in our current plan, we don't have to draw on the revolver. Obviously we are going to generate cash from the business. So EBITDA is kind of our proxy for operating cash. So we'll generate cash from... from the business available cash, and then we do have a bit of the CapEx that we'll fund through, I talked about a Cisco financing. There is another 25 or so million of capital that we can fund through to that line that we have with them. And then we are looking at other alternatives, but at this point we are... it's not a requirement for us to incur additional debt to finance our capital program.
Brian Horey - Aurelian Management
Okay and then on the contracts that you are signing today, could you remind me what your typical contract term is in terms of lengths?
Jeffrey Von Deylen - Chief Financial Officer
On the Managed Hosting side, typical is three years. It will be two to three years on the Colocation side. Again, I think it's two to three years with... probably the contract terms are... probably drive down that range a little bit shorter. Although I think one of the value propositions we have on the Colocation side is some companies who may have been builders of data centers in terms of some of our larger customers now look to outsourcing and we've been may be the beneficiaries of that as they are looking to come to us because I think we offer a lot more flexibility. When you build a data center you are talking about a 10-year investment. And as an internal... trying to make that work from an internal rate of return, it's difficult. So I think the flexibility of our two and three-year contracts are something that are... essentially some of our larger Colo customer are looking at harder things.
Brian Horey - Aurelian Management
Okay. And what kind of outs does the customer typically have in those contracts if they decide they no longer need the space?
Jeffrey Von Deylen - Chief Financial Officer
I mean, typically it's penalties of remaining life of contracts or there may be a negotiated amount of the remaining life. If it's Managed Hosting the penalties are typically more severe because we've got CapEx at risk. But again, we haven't experienced that in the past.
Brian Horey - Aurelian Management
Okay.
Jeffrey Von Deylen - Chief Financial Officer
I mean, there is... it's pretty onerous for folks to leave early.
Brian Horey - Aurelian Management
Okay. And then just a follow-up on one of the earlier questions, do you have some kind of credit metrics buckets that you put customers in in terms of trying to measure their relative credit risk?
Jeffrey Von Deylen - Chief Financial Officer
I mean, as we sign up new customers, I mean, we go though the typical credit scoring. We use D&B and other services, look at financial statements, if they are not public will get on the phone with their finance group. But that's... but then once we get a customer in, we are really just monitoring their receivables through our normal billing collection process. Obviously if somebody is historically slow payer, then we'll put them in a specific bucket. But again, our number of customers in terms of size is just not that... 500 customers drive significant amount of the business here. So really focusing on those is... makes... gets as comfortable as where we are at.
Brian Horey - Aurelian Management
Okay. Is there a way for you to characterize what percentage of revenue stream comes from, say, venture-funded companies or other younger smaller companies that may be a little bit riskier from a credit standpoint?
Jeffrey Von Deylen - Chief Financial Officer
Yes, I don't have those... certainly don't have those stats here with me, but again we monitor it pretty closely on a deal-by-deal basis. Again, I think our largest customers are some of the most widely known names in industry between our financial services and our... and some of the... in the larger internet infrastructure kind of company. So, I think our credit quality of the... at least our top 25 is very good.
Brian Horey - Aurelian Management
Okay, thank you.
Operator
Thank you. Our next question comes from Jonathan Schildkraut from Jefferies and Company.
Jonathan Schildkraut - Jefferies & Co.
Thanks for taking the questions.
Philip Koen - Chief Executive Officer
Hello, Jonathan.
Jonathan Schildkraut - Jefferies & Co.
A couple of things. First on the sale of the data center space. It seems like you guys had a good quarter particularly on a reclaimed side, and I was wondering if there was a separate sales process or if customers have a choice between moving into, say, new space or reclaimed space within a given geography. And as a subquestion to that, have you found that any customers have requested shifts from one... from older facilities or reclaimed facilities, or actually just older facilities into the new facilities? And if so, does that account for any of the 40,000 square feet that you sold in your Phase I data centers?
Philip Koen - Chief Executive Officer
John, this is Phil. The answer to that question, the way we do this is based upon the power requirement. The last thing you want to do is to take... and of course, if you are going into the new data center space, it's a significantly more expensive than is the way that facility is built and what we are delivering is a higher value than legacy. So the demand for the space that we saw this past quarter, I think, should give people good comfort that given the rest of our facilities, and we're addressing a very, very wide market. We cover everything from most demanding to traditional. Not everyone... I mean, contrary to popular notion out there, not everyone needs 150 watts a square foot. There is a hell of a lot of applications that are still required in the 50 to 70. So price is a huge discriminator, and also we do a lot of work with the customer to make certain we fully understand what their power requirements are to match their needs with the product that we have. So we have not seen a shift that people, other than if they need is that higher power requirement space, and we are willing to pay the price that goes with it.
Jonathan Schildkraut - Jefferies & Co.
All right, great. In terms of the statistics around 78% of the revenue replaced out of the reclaimed facilities using only 53% of the footprint, I think that initially the company had said that you had about $20 million of revenue coming out of the 70,000 square feet of reclaimed space, which implies on a monthly basis around 24 bucks per square foot. It seems like this having 78% of the revenue coming from 53% of the square footage would imply an increase in yield of about 50%, which based on my 24 number would imply that you are selling at around $35 to $40 per square foot for that reclaimed space. Is my math off?
Jeffrey Von Deylen - Chief Financial Officer
I believe the one area your math is off is we lost... given the... we went from a gross level down to a net level of space left to sell, which was 56. We started at a higher space and then because of ... you have taken... you are gone from one customer and data center, in most cases two customers, but in the data center you are gone from that one customer, then splitting the floor plan up into multiple customers. You lost some square feet there, and as well as we reserved a bit of square feet for Managed Hosting. So I think our actual revenue per square foot on that data center space that we are realizing is higher than what you are computing.
Jonathan Schildkraut - Jefferies & Co.
Okay. A little earlier Phil talked about some of the incremental space coming into the market, particularly from some of the REIT guys, and you have talked about how that was really a different customer base people who are looking for large blocks of space, 20,000 to 50,000 square feet or above coming out of data centers. You had a couple of those style customers move out of your data centers arguably because they were the wrong customers for you. So it was in market that you once competed in and going forward it seems like you are competing in a little bit different space. I was wondering if you could tell us about some of the subtleties of the approaching, I guess, a different group of customers with a different product suite and maybe also tell us about kind of the overall sales cycle for selling some of the managed service products that you are offering?
Philip Koen - Chief Executive Officer
Okay, Jon a big question. Let me try to parse it. First of all, let's be very clear. I think you need in talking about the change in the customer base, let's make sure that we're really focused on containing that for the Colocation. Our managed services customer base isn't changed a bit and we've talked about this at length that sweet spot for us and I even gave an example in my prepared remarks of... sweet spot is a company is spending between 50,000 and 100000 of MRR. We continue to mine that space very effectively and continue to see nice prospects in that area.
As far as the change in customer base in the colo, you are right. However, what we need to understand is that a majority of these customers signed these contracts at a time when Cable & Wireless or Exodus was either in bankruptcy or in financial distress. So the... unfortunately at that particular point in time, the company was just trying to fill the space up regardless of who the customer was or any type of strategy as to right customer mix. And what we have been trying to articulate and hopefully we have done a good job of it today is that 2007 was a year of transition. We purposely said that being in the wholesale large block business of colocation is highly undifferentiated and that's not where we should be focusing our efforts, nor does it give us the best return on our investment.
So with the 70,000 gross that we reclaimed and as we've said we have another 50,000 of that coming back at the end of '08, we are substantially, substantially down the highway. And I think that the results of this quarter, I think clearly demonstrate the soundness of that business judgment and on top of that as we have said over and over again, what's the most important thing for us is profitable revenue growth. We are very fixated on driving our margins up. Top-line is interesting, but it's really important that we expand the margin and grow the EBITDA accordingly. So you're always once tempted to pull on the revenue lever to back-off on that, but I think this has been a very disciplined approach and are thinking about how we attack the markets that we have a competitive advantage and I am very pleased with the execution so far and in '08 we are going to continue to do... focus on that and try to distance ourselves from the rest of the competition.
Jonathan Schildkraut - Jefferies & Co.
All right. Well, thanks again on a very solid quarter.
Philip Koen - Chief Executive Officer
Thank you.
Jeffrey Von Deylen - Chief Financial Officer
Thanks Jon.
Operator
Thank you. [Operator Instructions]. Our next question is from Richard Keiser from Sanford Bernstein.
Richard Keiser - Sanford Bernstein
Hi. Just wanted to ask may be a longer term question. One could conceivably argue that virtualization tools and especially VM's offering, which is so easy to implement might slow the need to transition to outsourcing data center and data center computations. And I just wanted to know you are reporting really strong growth there. But I wanted to see if... how you felt about that and just how companies were seeing it?
Philip Koen - Chief Executive Officer
Richard, everything that we see today doesn't suggest that at all. As a the matter of fact, it's the contrary. We think that moving from server sprawl to virtualization sprawl puts huge pressures on enterprise IT shops as far as monitoring and being able to manage in a virtualized state. Coupling that with the different types of skill sets one needs, I think is... develops a very compelling model as to why we're seeing the type of interest in such products as our Virtual Intelligent Hosting product line. So while no one knows for sure and it becomes an interesting debate, the avenues to date suggest to us that virtualization actually is an enabler for an outsourced solution. And that's certainly where we are putting our bet and where we are spending our R&D dollars and developing our assistance to be able to really be able to take this to the highest level possible and I think that this is the key area of differentiation for us versus everyone else out there.
Richard Keiser - Sanford Bernstein
Is that approach from a company perspective different by a company type? For example, do you see some of the larger companies that are perhaps maybe more savvy with your networks doing it in-house? I mean VMWare is priced to be ROI positive at a 2 to 1 sever consolidation ratios and you're getting like 5 to 10. So it's really a no brainier. Just wondering if the company is attempting to move to an outsourced solution immediately or those who perhaps are a little bit less sophisticated want you guys to just hand all the details or is there any insight you can give us on that?
Philip Koen - Chief Executive Officer
Other than anecdotally, what I will tell you is that some of the customers that we have in this 39 that we talked about are very sophisticated. And normally when we do this, we are doing a number of other things rather than just virtualization. That's the power of the model. We probably are taking on in addition to that low balancing stores requirements being able to sell a [indiscernible] on top of that. So it truly is a view that rather than piece meal [ph], just take on a virtualization sever to manage that. I want to be out of the IT game entirely. It's a game changing decision for enterprises. And that in a net shell is the reason why we feel at least today have not seen anything to the contrary so that in spite of sort of a global economic uncertainty that our business model continues intact and the fundamental reasons for going to an outsourced solution in a churn environment could be argued even to be a stronger reason to move that way.
Richard Keiser - Sanford Bernstein
Okay, thank you.
Philip Koen - Chief Executive Officer
Okay, thanks.
Operator
Thank you. [Operator Instructions]. Our next question is a follow-up from Donna Jaegers of Janco Partners.
Donna Jaegers - Janco Partners, Inc.
Hey, thanks for taking all the questions guys. Just one follow up on your Proximity Hosting product, you talked about how well it was selling, Radiance has a competitive product and I think Equinix as well. How are you positioning your product versus the competition here?
Philip Koen - Chief Executive Officer
Well, Donna, I think that there is... the Equinix product is not the same. The difference for us is that we actually house in our data centers the exchanges themselves, and they have... we have a number of exchanges in our facility compared to the competition. Radiance, true from a network proximity hosting solution does have a similar solution to what we have. This where the actual exchange is sitting the facility, but through low latency network connections, we are able to give the lowest connections possible to an automated trading platform. So there it's a matter of who has a stronger customer relationship. Clearly we have been in the financial vertical for very, very long time by virtue of our close relationship with Reuters, and it also is who has data centers that can address the global footprint, which our finding is that a number of these exchanges are interested in moving into new geographical segments. And if you take a combination of our network capability in conjunction with our global reach, I think we are in a very unique position and it's something that I will tell you from a critical company initiative, it's something that we have a lot of leadership resources addressing this and we are aggressively going after this market.
Donna Jaegers - Janco Partners, Inc.
Great and during your Analyst Day, there was a talk about sort of a lot of the other services that go along with the Proximity Hosting, be it interconnections to the exchange, so you are getting that sort of that higher margin in your connection business plus the storage... more virtual storage sell through, those both in the sales that you are seeing in Proximity Hosting you are getting these sort of add-ons as well?
Philip Koen - Chief Executive Officer
Yes, and thanks for bringing that up. I will tell you that to give you a rough order magnitude, we are seeing anywhere from a 4 to 6X price uplift with our Proximity Hosting solution versus just a rock hollow. So we are very pleased and we think that this is a... again I want to make sure I don't overstock this. I mean, we are in the very early innings of this, but... and we are still learning a lot about it, but it seems to be right off our sweet spot of what we have been preaching for some long... for a long time of the... value of this intersection of network for managed capability.
Donna Jaegers - Janco Partners, Inc.
Great, thanks, Phil.
Operator
Thank you. I am showing no other questions in queue.
Philip Koen - Chief Executive Officer
Well thank you very much for joining us on our first quarter call and we look forward to giving you an update at the end of Q1 of '08. Thank you.
Operator
Ladies and gentlemen, thank you for your participation in today's conference. This does conclude the program and you may now disconnect. Everyone, have a great day.
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