Switch & Data Facilities Q4 2007 Earnings Call Transcript

Switch & Data Facilities Co. Inc. (SDXC)

Q4 2007 Earnings Call

February 19, 2008 4:30 pm ET

Executives

Kathleen Heaney - IR

Keith Olsen - President and CEO

George Pollock - CFO

Analysts

Kevin Stanley - Jefferies and Company

Jonathan Atkin - RBC Capital

Colby Synesael - Merriman

Chris Chapple - Deutsche Bank

Manny Recarey - Kaufman Brothers

Sri Anantha - Oppenheimer

Jurgan Usman - Wachovia Securities

Erik Suppiger - Signal Hill

Dave Coleman - RBC Capital Markets

Robert Norman - RPS Incorporated

Presentation

Operator

Good day, ladies and gentlemen, and welcome to the fourth quarter 2007 Switch and Data Earnings Call. My name is Jaydee and I will be your conference coordinator for today. At this time, all participants are in a listen-only mode. We will be facilitating a question-and-answer session towards the end of today's conference (Operator Instructions).

I would now like to turn your call over to Miss Kathleen Heaney from ICR. Please proceed.

Kathleen Heaney

Thank you. Good afternoon everyone. This afternoon, after the market closed, Switch and Data released fourth 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.

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

After their presentation we will open the call for questions. 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. EBITDA is defined as operating income plus non-cash items, including depreciation and amortization, stock-based compensation expense, asset impairment and deferred rent expenses. A reconciliation to comparable GAAP measures can be found on the end of the earnings press release, 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 and thank you for your time today. I would like to welcome everyone to our 2007 fourth quarter earnings call. This is a special call for us today. 2007 was a strong of execution and accomplishment for Switch and Data. We became a public company, we executed on our business plan and we exceeded our goals and expectations that we set throughout 2007.

When the entire year is tallied, 2007 was an exciting year for Switch and Data. I am proud of the Company's accomplishments and I'm excited about the opportunities ahead for Switch and Data. I wish to thank our customers, our employees and our shareholders for their support.

During our call today, George Pollock and I will take you through Switch and Data's fourth quarter and 2007 results. Our first quarter revenue increased 29% from $29.1 million to $37.5 million in the same quarter of the prior year. This strong organic revenue growth improved our fourth quarter EBITDA. Fourth quarter EBITDA growth was 42%. We grew from $8.9 million of EBITDA in the same period in 2006 to $12.7 million of EBITDA for the fourth quarter 2007. And for the full year 2007, revenue increased 24% and EBITDA increased 34%. In our first four quarters as a public company, we beat our expectations for both revenue and EBITDA.

As I look at our business, our financial results were excellent. Customer demand is strong and our business momentum accelerated. On our last call we spoke of expansions and capital requirements. Today, I am happy to report that we have strong support from our banks for our debt financing and we anticipate closing on it in March. This funding will enable us to expand product capacities for 2008 to meet our customer demand.

Allow me to spend a few moments discussing examples of the demand drives in our industry. Internet packet growth continues and internet centric customers continue to grow and expand at our sites. Over the past couple of months, we've heard companies announce investments that support the continued growth of the internet economy. One excellent example I read reported that as many people watched the CNN political debate on YouTube as they did via a traditional CNN broadcasting.

This is testament to the acceleration and broad base use of the internet. The internet economy is also spawning new devices and end points for consumers, all accelerating online demands, effectively more IP packets. Apple's iPhone and iTouch are examples of new wireless devices, which allow users to capture media content. These devices and others are broadening the universe of end points, and increasing the duration of online interactions.

AT&T recently announced investments regarding their new generation video services. They've reported that over 12,000 users are being installed each week. These are excellent examples where our customers are enabling web centric applications that generate more digital bits, which contribute to internet packet growth. Internet packet growth is a demand driver for Switch and Data.

I will share with you a few customer wins in the fourth quarter that supports our demand thesis, Easynet, a large scale Pan European ISP chose two of Switch and Data peer points in it's US for landing. Forbes.com, a leading media and online content provider that attract millions of viewers with their rich media content chose to utilize our sites as exchange points for their business. And Freewheel Media, an online video advertising company whose customers include a number of internet media companies chose Switch and Data as their place to collocate and gain access to the network densities in our sites.

These customer wins are examples of the growing internet economy. These customers will drive increased packets through our sites. As customers continue to move applications to the edge, this further plays to our value proposition of having the broadest neutral footprint in North America.

Later on our presentation, George will provide the financial details on the growth across our markets. Our business supports the growth of the internet economy. The internet relies on a efficient exchange point to support its growth. Switch and Data is a neutral service provider and our sites support diverse network density effectively. Our sites play a critical role in a development and growth of the internet economy.

And our customer growth provides the demand for our services. Our 2007, operating metrics speak to how we have capitalized on this demand. Billed cabinets increased 17% from 5,843 in December 2006 to 6,833 in December of 2007. Cross connects increased 10% from 17,755 at the end of December 2006 to 19,577 at the end of December 2007.

Cabinet ARPU or average revenue per unit increased 9% in the fourth quarter from $1,699 in the same period of the prior year to $1,851 in 2007. Capacity utilization was 71% in the fourth quarter of 2007 as compared to 66% at the end of the fourth quarter of 2006. In the fourth quarter, we added 200 cabinet equivalents, bringing the total cabinet adds in 2007 to 1,000. And as of December 31st, we have approximately 9,700 sellable cabinet equivalents.

Now, let me bring you up-to-date on our couple of our larger expansion projects that we announced early on 2007. Our Sunnyvale site is opened for business. We are installing customers and the pipeline is strong. Toronto is expected to come online before the end of April and Dallas before the end of May. With regard to our expansion in New Jersey, we took possession of this facility earlier this month and we expect to bring the first phase online late this year. We will report on our progress as the work continues. Our overall plan is to add approximately 3,000 cabinet equivalents throughout 2008. These planned capacities are to support the growth from our customers and the demand we see across the markets.

Our recent 2007 customer satisfaction survey provides additional insights into our customer's future buying decisions. The survey indicated that 92% of our customers plan to purchase additional services from Switch and Data. Business planning and capacity investments are critical disciplines to support our long-term growth. Management uses a select measures, tools and market sensing techniques for our plans development, monitoring and overall execution.

When you combine the insights from our customer satisfaction survey, the strength in our sales pipeline, the consisting contribution to our sales growth from existing customers, which ranged in 2007 between 80% and 90% of new sales revenues, this gives us great visibility, so we can anticipate demand for our services.

These insights as well as our business model, where 95% of our revenues are monthly recurring revenues, provides management with the operating levers for running our business and our investment decisions. Customer insights, the growing internet economy combined with the strength of recurring revenue supports our optimism for 2008.

It is now pleasure to turn the call over George Pollock to review our financials. George?

George Pollock

Thank you, Keith, and thank you all for joining for us today. For 2007, our financial results were strong. Our quarter over prior years' quarter revenue growth accelerated throughout 2007. Quarter one up 18%, quarter two up 22%, quarter three up 26%, and quarter four up 29%. Revenue increased from $29.1 million in the fourth quarter 2006 to $37.5 million in the fourth quarter 2007.

During the fourth quarter 81% of our sales were from existing customers. Our revenue models continue to be driven by monthly recurring revenue, which represented 95% of total revenue in the quarter. Recurring revenue which consists of collocation and interconnection services increased from $27.7 million in the fourth quarter 2006 to $35.3 million in the fourth quarter 2007, an increase of 28%.

Non-recurring revenues increased from $1.4 million in the fourth quarter 2006 to $2.2 million in the fourth quarter 2007. On an annual basis, revenue increased to 24% from a $111 million to $137.5 million. Cost of revenue excluding depreciation and amortization increased from $15 million in the fourth quarter 2006 to $18.5 million in the fourth quarter 2007. This increase is primarily from personnel, utility and rent expense increases commensurate with our facility expansion and revenue growth. As a percent of revenues, our cost of revenue is declined from 51.5% in the fourth quarter 2006 to 49.3% in the fourth quarter 2007.

Our sales and marketing cost increased from $3.1 million to $4.6 million for the fourth quarter 2007. As a percent of revenue, the percent increased from 10.7% in the fourth quarter 2006 to 12.3% in the fourth quarter 2007. This increase is primarily from higher wages, commission and non-cash stock-based compensation of $1.1 million.

Our general and administrative expenses increased from $2.5 million to $3.6 million in the fourth quarter 2007. As a percent of revenue, the percent increased from 8.5% in the fourth quarter 2006 to 9.7% in the fourth quarter 2007. This increase was primarily from an increase in wages and non-cash stock-based compensation of $700,000.

Our EBITDA increased from $8.9 million in the fourth quarter of 2006 to $12.7 million in the fourth quarter of 2007, an increase of 42%. For the full year, EBITDA increased from $31.6 million to $42.5 million, an increase of 34%. EBITDA margin increased from 30.7% in the fourth quarter of 2006 to 33.8% in the fourth quarter of 2007. And for the full year, the EBITDA margin also increased from 28.5% to 30.9%.

Capital expenditures were $13.8 million for the fourth quarter of 2007 and $33.9 million for the full year. We continue to see solid growth across all of our markets. The importance of this is underscored by the following metrics; we have previously discussed that 85% of our revenues are generated on our top 10 markets. For the fourth quarter 2007, over the same period in 2006 overall revenue growth was 29%. The growth in a top 10 markets was 28.9% and growth in the rest of the markets was 29.4%.

Site cash flow which we defined as revenue less direct site expenses increased 38%. The increase in our top 10 markets was 35% and increase in the rest of the market was 62%. Keith mentioned that customers continue to move to the edge. Our 29% revenue and 62% site cash flow growth in our other markets speak to the strength of our footprint and supporting our customer growth.

Our business continues to generate significant cash flow from operations, which in turn strengthen our balance sheet. Some highlight includes, end of year cash balance was $45.6 million, our bank debt was down to $38.2 million and our DSO was healthy at 22 days at yearend.

Looking towards 2008, we are reiterating our financial guidance as follows. We expect revenues of $165 million, we expect EBITDA of $51 million and we project capital expenditures to be approximately $165 million. We had a strong fourth quarter and an excellent 2007 and we look forward to continued success in 2008.

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

Question-and-Answer Session

Operator

(Operator Instructions). Your first question will come from the line of Jonathan Schildkraut of Jefferies and Company. Please proceed.

Kevin Stanley - Jefferies and Company

Hi, guys. This is actually Kevin for Jonathan.

Keith Olsen

Yes. Hello, Ken. How are you?

Kevin Stanley - Jefferies and Company

Good. How are you?

Keith Olsen

Good. Thank you.

Kevin Stanley - Jefferies and Company

I just want to get a little more clarity around the New Jersey facility and the financing. You guys said that you expect to close it in May. What is -- is there a plan if that doesn't get done or the cost are little higher than you expect?

Keith Olsen

Yeah. Let me address first, we expect to close in March.

Kevin Stanley - Jefferies and Company

I'm sorry, March.

Keith Olsen

Yes. And I'll turn it over to George to respond to the cost for the pricing

George Pollock

Sure. Sure, Ken, this is George. We're confident that we'll close it in March and we have several commitments for our lead bank. We're in the process of completing documentation and running it out to close in March. And from a pricing perspective, I think as we all know, with the current status of the credit market the spread has certainly increase from last summer. However, the spread is also being offset by the fact that LIBOR is down materially since December. So the pricing is in line with our expectations and we continue to be very confident that this will close next month.

Kevin Stanley - Jefferies and Company

Okay. Is it possible for you guys to delay construction if it doesn't close on time?

George Pollock

Sure. We have a number of levers with respect to that the business in terms of CapEx and OpEx and to the extent that there was a delay, we're certainly can push that. Having said that, demand continues to be robust and we're on plan to continue our build throughout the year.

Kevin Stanley - Jefferies and Company

Okay. So I guess post closing about six months until the facility opens?

Keith Olsen

Post closing about six months. Yeah, that's the appropriate for the first phase. That is correct.

Kevin Stanley - Jefferies and Company

For Phase I. Okay. And how many cabinets were going to be in Phase I?

Keith Olsen

1,300 cabinets.

Kevin Stanley - Jefferies and Company

Okay. Great. Thanks a lot guys.

Keith Olsen

You're welcome. Thank you.

Operator

Your next question will be from the line of Jonathan Atkin of RBC Capital. Please proceed.

Jonathan Atkin - RBC Capital

Yes. I wonder if you could maybe comment on trend you saw in the quarter and how you see those drivers kind of playing out in '08? And also, on the West Coast you did extend the PAIX facility, I'm just wondering how that fill rate is trending, I guess on the second floor of that facility that you opened up within the past 12 months.

Keith Olsen

Sure.

Jonathan Atkin - RBC Capital

Then I have a follow-up.

Keith Olsen

Sure. And thank you for your question. Churn for the year ended just under 1%. For the quarter, it was 1.2% and we see very consistent views across the churn rate as we are anticipating in for 2008. As it relates to Palo Alto, demand is strong, it continues to fill and we're very selective in the customers that are landing within that Palo Alto site. As you know, it's the most dense commercial exchange in North America.

Jonathan Atkin - RBC Capital

On the interconnection business in general, can you comment on how much of the -- kind of what portion is it between a carrier and a tenant, versus two tenants trying to connect traffic among themselves within the data center, any idea of kind of what that--?

Keith Olsen

Yeah. I don't have that detail. I am sure that we can take that offline and come back to you, but I don't have that detail at the tip of my hand right now.

Jonathan Atkin - RBC Capital

And finally, there have been some changes in terms of the composition the Board of Directors and then in terms of strategic sales type position. If you could maybe elaborate little bit about are there any further changes that you're making and are these changes having any impact right now in term of how you sell the product or approach the market?

Keith Olsen

Sure. We're thrilled with the folks that we have been able to have join our Board. If you take a look at their backgrounds, they're very strong in software, software distribution, certainly -- a part of the whole Web 2.0 software distribution over the web, certainly, the media and entertainment aspects. And it's really part of the overall growth and evolution of a company going from a year ago, a little over year ago being a private company to a public company and increasing that the capacity and the dimension on our Board. So we are thrilled with the additions.

As it relates to some of the increase in our sales and distribution capabilities, these are folks that we've known for a number of years in the market and we were at a position now to add those capacities to be able to drive incremental sale forces as it relates to the capacity builds that will be building throughout 2008. As in any business, there is a time to build, it's not only the capacities, but it's also the distribution. So, you can get those aspects aligned to have the types of growth that we expect for the business over the next few years.

Jonathan Atkin - RBC Capital

And then, finally, you have announced in the past an Internet [control] partnership with a European colo provider and I wondered if you could maybe provide some perspective as to how -- what impact that's having on your business?

Keith Olsen

Sure. The relationship that we struck with our two marketing teams was really one of lead referral. And there are some active leads that are being exchanged between both companies now.

Jonathan Atkin - RBC Capital

Thank you.

Keith Olsen

You're welcome. Thank you

Operator

Your next question will be from the line of Colby Synesael of Merriman. Please proceed.

Colby Synesael - Merriman

Great. Thank you for taking my question.

Keith Olsen

Absolutely. Colby, how are you?

Colby Synesael - Merriman

Doing pretty good. Just a few questions here. One, obviously, we saw a significant margin improvement quarter-over-quarter. I was wondering if you guys could just talk, generally speaking about what think the contribution margin is to your core business for each incremental dollar revenue that you guys are now generating.

Also, just wanted to confirm on the type of debt, I want to make sure that that's a straight debt, opposed to you guys talking about potential doing a convert. Also, it looks like your fourth quarter CapEx was a little bit late, versus what our expectations were. But it seems now you're going to the higher end of our guidance for 2008, talk about what got shifted out there?

And then, finally, on the international expansion, you guys didn't mentioned Easynet as a customer that you won this quarter. You now have some competitors in the market that have both internationals as well as domestic properties. Can you talk about why you think you're able to win a customer like that from somebody who can offer, potentially both markets? Thanks

Keith Olsen

George, what don't you take first couple and I'll take the Easynet question.

George Pollock

Sure. So Colby, I think there were four questions. We'll address one as margin, two as debt, three as CapEx, four is international.

Colby Synesael - Merriman

Yeah.

George Pollock

Okay. So the first question on your margins, we spoke about our long-term view of 45% to 50% incremental on EBITDA margin. In 2007, as we look quarter-over-quarter, we generated second quarter, quarter-over-quarter was 46% and the third quarter was 62% and fourth quarter was 73%. So, we had nice flow through margin growth. That is obviously been generated by high incremental EBITDA margin.

We do expect to have a bit of flattening in '08, as we bring on the additional capacities in the markets that we spoke of Dallas and Sunnyvale and Toronto, New Jersey. So we'll bring it on incremental expense. The overall margin was 33.8% in the fourth quarter. We're guiding to an overall margin in '08 of about 31%, given the expansions in some of the additional expenses. But what that does is, it sets up continued margin expansion into 2009 with the significant product that we're bringing online in 2008.

With respect to the debt, we can't clarify that that our expectation is that this is a senior debt, straight up bank financing. And that's what we'll be closing on here in March.

Colby Synesael - Merriman

Did you say you can or you cannot clarify?

George Pollock

I can't clarify that this is a debt -- this is a bank debt financing.

Colby Synesael - Merriman

Okay. Great.

George Pollock

Not a convertible equity feature, it's debt. CapEx the $ 34 million was the cash that we spent in the year for capital. The accrued amount on the balance sheet is a little bit higher, so it's purely timing between '07 and '08 in terms of products. We brought Sunnyvale online here just recently. We accelerated some of the build to do that with the cash. From a cash perspective, it's catching up to that. So at the end of the day the CapEx is really pure timing. And the fourth question with respect to international expansion--

Keith Olsen

No, not expansion but our ability to attract internet and international service providers and content providers has to do with the carrier densities and the pairing exchanges that we support, both on in Eastern and the Western Coast. We certainly have very able-bodies competitors, but our value proposition and the people that they needed to interconnect too. So exactly the decision point and that's how we were able to secure the business.

Colby Synesael - Merriman

You are winning those customers in, call it, the top four or five markets in the U.S, where you are seeing more competition obviously.

Keith Olsen

Like anything else where there is more market demand, there is more competition, so the answer is, of course.

Colby Synesael - Merriman

And then if I could just squeeze one more in there. Are you guys still maintaining your three-year outlook? I think, if I recall correctly it was like 35% EBITDA growth and I think like 24% revenue growth?

George Pollock

Yes. We are.

Colby Synesael - Merriman

Okay. Thanks a lot.

Keith Olsen

Thank you, Colby.

Operator

Your next question will be from the line of Chris Chapple of Deutsche Bank. Please proceed.

Chris Chapple - Deutsche Bank

Hi, guys. Thanks for taking my questions. Maybe I missed it but did you give you the size of the credit facility you are expecting?

George Pollock

No, we did not.

Chris Chapple - Deutsche Bank

Okay. Is there anyway you can comment on that?

George Pollock

Sure. We are looking to the range of the credit facility is $120 million to $160 million.

Chris Chapple - Deutsche Bank

Okay. Great. And then just on the pricing environment, if you could comment on any changes and trends you've witnessed or even more anecdotally if you've noticed an increasing customers pushing back to you on price, seems to be a pretty big concern in the marketplace. And then if you could maybe quantify how much for your 2008 revenue increase is coming from price increases?

Keith Olsen

Sure. Pricing trends are very consistent with what we saw throughout 2007. There was just much pushback then as there is now. It has to do with kind of a quotient of worth we're paid for and certainly the aspect of improving a price point, as legacy contracts get renewed based upon just costs increased and the value proposition that we provide. As it relates to 2008, our plan costs were very consistent pattern of approximately 3% of our revenue increase will come from pricing actions that land in 2008.

Chris Chapple - Deutsche Bank

Okay. Great. Thanks guys.

Keith Olsen

Sure.

Operator

Your next question will come from the line of Manuel Recarey of Kaufman Bros.

Manny Recarey - Kaufman Brothers

Thanks and good afternoon.

Keith Olsen

Yes, good afternoon, Manny. How are you?

Manny Recarey - Kaufman Brothers

I'm doing well.

Keith Olsen

Good.

Manny Recarey - Kaufman Brothers

Can you comment the side cash flows from the non-top 10 markets was up 62%? Just kind of curious what was driving that?

George Pollock

No. It's continued revenue and in those markets where the incremental spend is less vis-à-vis the larger markets. The flow through margin on the revenue is that much higher. So it drives a higher side cash flow growth on a period-over-period basis.

Manny Recarey - Kaufman Brothers

Okay. Can you just refresh my memory on the cabinets capacity adds, how they're coming on throughout the year, it look -- I think the Dallas, Sunnyvale and Toronto are about 1,300 is that -- that's going to come on mostly in the first quarter? And the expenses with that are associated with or begin in the first quarter?

George Pollock

Yeah, Manny, let me just cover that again. Because I know that I probably covered that quickly. Our Sunnyvale site is already open for business. We're installing customers and we see great demand for that site. Toronto site will come on board before the end of April. And our Dallas site will come on before the end of May. We don't anticipate our New Jersey coming on board until the end of the third quarter right now.

Manny Recarey - Kaufman Brothers

Okay. So the operating costs start to hit the books when you open up the facilities. So that's how to think of it?

Keith Olsen

In general the ramp tends are preceded by a few months depending on the market, but in general the power, the maintenance, the labor is in last step and begins to ramp with the site opening.

Manny Recarey - Kaufman Brothers

Okay. And then, George, I didn't -- I'm not sure if I heard you correctly but the capital array or the bank debt is going to be 140 to 160 or 150, I missed the second part?

George Pollock

It's 140 to 160.

Manny Recarey - Kaufman Brothers

Okay. Thanks a lot.

Operator

Your next question will be from the line of Sri Anantha of Oppenheimer. Please proceed.

Sri Anantha - Oppenheimer

Thank you and good afternoon.

Keith Olsen

Yes, good afternoon, Sri.

Sri Anantha - Oppenheimer

A couple of questions. George, could you comment on strength in any specific vertical here? George, accrete -- has that changed during the past couple of months and also on as we look at 2008 guidance, could you talk about the incremental expensed that are going to be associated with the new cabinets that are coming online. Is it going to be more front-end loaded as you bring this cabinet? So when we model these, should we expect a gradual ramp in EBITDA from 1Q'08 to 1Q'08? Thank you.

George Pollock

Sure. Sri, what was the first question again?

Sri Anantha - Oppenheimer

The strength in any specific vertical and have that stayed consistent throughout the year, any change in this particular quarter?

George Pollock

Sure. Right now, we're seeing a very consistent demand set coming from CDNs, .MSOs, the Internet content companies. We are seeing an increase in media and content companies increasing the scale of their internet of services as one of the accelerators. But across the main segments that we service, which we're focusing on, what we call the service provider community, Telcos, ISPs, ASPs, MSPs, MSOs, CDNs and alike. And we see that very consistent across the board. That's the reason why I touch on the types of customer wins and the demands that we see in the market.

Keith Olsen

And Sri to your second question, we expect '08 to behave like '07 in terms of increasing revenue and increasing EBITDA as we go quarter-over-quarter.

Sri Anantha - Oppenheimer

Got it. No, but when we look at 1Q '08, George, I'm just expecting like how much of an incremental expense should be modeling like what is the delta or on an approximate percentage? Because I am sure it's going to decline but if you look at 2007 the EBITDA has not declined that much but I expect probably it's going to be more at this particular year just because of the amount of capacity that's coming online.

George Pollock

Sure. So we'll see back to Manny's question. We'll see the larger part of the incremental expense coming from the additional sites starting to ramp in the second quarter. We do get the FICA reset impact in the first quarter of a New Year. We haven't provided quarterly guidance.

Sri Anantha - Oppenheimer

Got it. Okay. Thank you.

Operator

Your next question will come from the line of Jurgan Usman of Wachovia Securities. Please proceed.

Jurgan Usman - Wachovia Securities

Thank you very much. Good afternoon, guys. How are you?

Keith Olsen

Yes. Hello. How are you?

Jurgan Usman - Wachovia Securities

Good, good. Thank you very much. Couple of questions, first of all, I just want to extend Sri's question a little bit. Have any of the vertical shown any weakness at all during the quarter? And then second one is that what's your customer mix now? Has there been any shift?

Keith Olsen

Sure. We have not seen any weakness from a major contributing segment of customers in our site or in our sales. As it relates to -- could you just recap the second part of your question for me again?

Jurgan Usman - Wachovia Securities

Yes. The customer mix, I guess in terms of vertical percentage of revenues coming from whichever vertical.

Keith Olsen

Yes. Again, we categorize the community that we focus on as service providers and that's whom I was including as Telcos, the ISPs, the ASPs, the MSPs, so in other words, the managed service providers. The CDNs are the primary focus of where we concentrate our marketing and sales efforts, and we see continued sets of demand coming from them. The new segment that I referred to was more around some of the announcements we made with Forbes as well as CBS who are increasing the scales of their internet services. And are making buy decisions, their buying decisions very much in lock steps or similar from a value proposition perspective like the other internet content companies. So very much comfortable with how we approach them, their decision criteria and our ability to meet their needs.

Jurgan Usman - Wachovia Securities

Okay. The next one is considering that your higher recurring revenue business model, and then about 80% to 90% of your revenue is coming from your existing customers. How confident are you with your guidance, very comfortable?

Keith Olsen

We're confident in our guidance, and that's what as George had stated.

Jurgan Usman - Wachovia Securities

Okay. And the last one, has there been any changes in terms of contract lines at all?

Keith Olsen

No. Actually, we still see the average to be about two years and we see that some of the developing internet companies look for shorter term. And the larger Telcos are looking for three years or beyond, and we try to calibrate to a three-year term with them.

Jurgan Usman - Wachovia Securities

Okay. Sorry, this the last one I promise.

Keith Olsen

No, that's okay

Jurgan Usman - Wachovia Securities

Okay. A look at the churn going up from 0.9% I guess in Q3 to 1.2% in Q4, what contributed to the churn increase there?

Keith Olsen

Sure. There was a single large customer Pac-West that had filed bankruptcy and during those bankruptcy proceeding they rejected our contract. And we actually, as they moved out of that space we've already filled that space with revenue and it was just that kind of one-month blip.

Jurgan Usman - Wachovia Securities

All right. Thank you very much, guys.

Keith Olsen

You're welcome.

Operator

Your next question will be from the line of Erik Suppiger from Signal Hill. Please proceed.

Erik Suppiger - Signal Hill

Good afternoon. Can you hear me, all right?

Keith Olsen

We can hear you fine.

Erik Suppiger - Signal Hill

Good. So, on the financing front, it's sound like your credit facility is coming along, is there any -- are there any other aspects to your balance sheet where the more challenging credit environment might be an issue for you or has it changed any of your expansion plans at all of this point?

George Pollock

No. This is George. No it had not.

Erik Suppiger - Signal Hill

There is no other aspect that you have much exposure to an ongoing challenging environment?

George Pollock

With respect to the balance sheet, no.

Erik Suppiger - Signal Hill

Okay. Have you seen evidence from many of your competitors or anything in terms of changes in build-out or capacity plans?

Keith Olsen

No, we have not. As it relates to the build outs, there are many different segments that utilize data centers as part of their product portfolio within the exchange point side of the business, which is what we address. The demand is strong and the build outs are meeting that demand for ourselves as well as our competitors.

Erik Suppiger - Signal Hill

Okay. And on the Sunnyvale facility, can you give us any sense; is pricing -- are you seeing higher prices, can you give us any flavor for how pricing there would compare to your other facilities since its brand new?

Keith Olsen

Sure. Our Sunnyvale plan is actually operating right where we needed to be as far as pricing. Our pricing discipline is really tight to market and what we supply as far as the carry densities and power and cooling specifications. So it's a behaving and operating just as we had planned.

Erik Suppiger - Signal Hill

Can you give us any sense for how it compares to your average pricing?

Keith Olsen

Well, we run three peers of pricing basically based upon the footprint across North America and it's in the upper end.

Erik Suppiger - Signal Hill

Very good. And then, lastly, are you seeing nice selection of new customers coming on board in light of the new Sunnyvale facility?

Keith Olsen

What we see the; we see the same cadence to our business, which is our focus from our distribution team is on our top customer set, which are driving most of the internet growth. And then we see it kind of certainly supported by incremental brands joining our sites and joining our footprints across the board. Especially, in the context that George has provided about the other markets and the revenue, and the site cash flow growth there supporting the same thing. As companies are looking to move closer to the edge that footprint is becoming a more valuable component to our overall value proposition.

Erik Suppiger - Signal Hill

Great. And last question actually is there any seasonality going to the March quarter or giving that little tougher economy, right now, is there any thoughts in terms of the linearity throughout the year in terms of your revenue growth?

George Pollock

No impact on revenue. There is a bit of expense pressure on first quarter what I call the FICA reset, just to re-up on wages and FICA dollars as well as we start to see the increase in utility expense as the month gets warmer and it's more power and more cooling to take care of the power. But revenue should continue to ramp as expected.

Erik Suppiger - Signal Hill

Very good. Thank you very much.

Keith Olsen

Thank you.

Operator

(Operator Instructions) Your next question will come from the line of RBC Capital Markets of Dave Coleman. Please proceed.

Dave Coleman - RBC Capital Markets

Thank you. Just a follow-up on the bank facility you're trying to put in place. Is that going to be a long-term facility? What's maturity on that? And is there any need to replace that within the year with longer term debt?

George Pollock

Good question now. This is a long-term facility the tenure will be comparable to the current credit facility that we have in place and there is not a need to have to replace this in the near term.

Dave Coleman - RBC Capital Markets

Okay. Thanks. Is the facility, is it tied to the Northern New Jersey credit facility or is at the corporate level?

George Pollock

It's at the corporate level, again, similar what we have in place today.

Dave Coleman - RBC Capital Markets

Great. Thank you.

Operator

Your next question will be come from the line of Robert [Norman] of RPS Incorporated. Please proceed.

Robert Norman - RPS Incorporated

Hi, guys. How are you?

Keith Olsen

Very good.

George Pollock

Hi, Bob, how are you?

Robert Norman - RPS Incorporated

Just quick question guys. The $165 million of CapEx, it looks like it will almost double the long-term assets of the company. Could you give me an idea of where the major chunks of that are going and over what time period over what course?

George Pollock

Sure, Bob, the spend is mostly in our New Jersey, Sunnyvale, Toronto, and Dallas. $125 million of the spend is in those market. That spend started in the fourth quarter and will be fairly radically through fourth quarter of this year.

Robert Norman - RPS Incorporated

Great. It was great reports guys. Thanks a lot.

Keith Olsen

Thank you, Bob.

Operator

And there are no more questions in queue. I will turn the call back over to Keith for closing remarks.

Keith Olsen

Ladies and gentlemen, thank you very much for your time today. Thank you for your support. You have a pleasant day now.

Operator

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

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