Switch & Data Facilities Company, Inc Q1 2008 Earnings Call Transcript

Switch & Data Facilities Company, Inc (SDXC)

Q1 2008 Earnings Call

April 29, 2008, 4:30 pm ET

Executives

Kathleen Heaney - Investor Relations

Keith Olsen - President and Chief Executive Officer

George Pollock - Chief Financial Officer

Analysts

Jonathan Schildkraut - Jefferies

Jonathan Atkin - RBC

Srinivas Anantha - Oppenheimer and Company

Jurgan Usman - Wachovia Securities

Colby Synesael - Merriman

Mark DeRussy - Raymond James

Presentation

Operator

Good day ladies and gentlemen, and welcome to the First Quarter 2008 Switch and Data Earnings Conference Call. My name is Lisa, and I will be your operator for today. At this time all participants are in listen-only mode. We will conduct a question and answer session towards the end of this conference. (Operator Instructions). As a reminder, this conference is being recorded for replay purposes.

I would now like to turn the presentation over to Ms. Kathleen Heaney, please proceed ma'am.

Kathleen Heaney – Investor Relations

Thank you. Good afternoon everyone. This afternoon, after the market closed, Switch and Data released first 2008 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. Adjusted EBITDA is defined as operating income plus non-cash items, including depreciation and amortization, stock-based compensation expense, asset impairment and deferred rent expenses. Our reconciliation to comparable GAAP measures can be found at 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 - President and Chief Executive Officer

Thank you, Kathleen. Good afternoon ladies and gentlemen and thank you for your time today. I would like to welcome everyone to our 2008 first quarter earnings call. I will address our operating highlights, and George Pollock, our Chief Financial Officer, will review our financial results. After our presentations, we'll open the call for your questions.

We began this year with another strong quarter. First quarter revenue increased 27% from 31.4 million to 39.8 million in the prior year. This strong organic revenue growth improved our EBITDA. First quarter EBITDA growth was 41%, with EBITDA of 12.6 million as compared to 8.9 million in the first quarter of 2007.

The value propositions of our sites and Internet exchanges continue to resonate with our customers' need to support their business growth. We capitalized on this demand which positions us well for the balance of 2008. Demand for our services is strong. We are executing our plans and in the first quarter we announced the on time funding of our expansion plan.

The internet is an essential and growing need for consumers' everyday lives. Broadband has become a necessity for communication, commerce, and entertainment. On the enterprise side, businesses continue to transition mission-critical applications like CRM, ERP, and telecom based services to internet based models.

Cisco predicts that by 2011 Internet video traffic will be 20 times what it was in 2006 and overall internet volume of traffic are projected to quadruple by 2011. These numbers speak to a future of demand for our services. Our carrier neutral model, coupled with interconnection services continues to be an appealing valued proposition for our customers' IP based traffic.

Switch & Data's dense interconnected sites provide our customers the ability to bring content closer to the edge, where the enterprise and the consumer reside, and several recent statements by our customers confirm these expectations. SouthBank made an announcement that they are preparing for their North American traffic to grow by 100% in the coming year. Biznet, the Indonesian ISP, announced that they anticipate explosive growth of their social networking applications. ISPs like these use our Internet exchanges to connect and peer with high-volume websites.

Our sites are critical to our customers' evolution and acceleration of their Internet services. This demand continues to drive our financial and operating results. I've already shared with you our financial highlights, and I wish to report on some of the following operating metrics for the first quarter. Billed Cabinets increased 17% from 5,987 in March 2007 to 7,044 in March 2008. Cross connects increased 9% from 18,194 at the end of March 2007 to 19,797 at the end of March 2008. And Cabinet ARPU, or average revenue per unit, increased 8% from $1,761 in the first quarter of 2007 to $1,900 in the first quarter of 2008. Capacity utilization was just over 70% in the first quarter of 2008 as compared to 67% at the end of the first quarter2007. And as of March 31st we had 10,000 sellable Cabinet equivalents.

Our business model has strengths. 95% of our revenue is multi-recurrent revenue and in the first quarter 89% of our new sales revenue came from existing customers. Our metrics continue to scale as ARPU continues to trend up.

On our calls like this I like to share some recent customer wins as a window into our business. EchoStar, a satellite provider of high definition video programming, became a customer in the first quarter. Limelight a content delivery network expanded their IP peering operations in to four additional sites.

Speakeasy, a voice over Internet telephony service from Best Buy, added space and power in five sites as they continue deploying their service to consumers. And lastly, VM Wear, a global leader in virtualization solutions, chose to land on our site to support their latency sensitive applications. Their selection criteria highlighted the excellence of our technical support.

These examples of customer expansions speak to our need to expand our capacities. In the first quarter we successfully locked up the debt financing to fund our expansion plan. The financing closed in March, which was in line with the expectations that were set on our last two calls. And the closing of this facility speaks volumes about our business, our operating model, and our management team's execution. I'm sure George will share with you the details of our financing.

This financing supports our expansion plan which will add 3,000 cabinet equivalents in 2008. In speaking about our expansions, allow me to provide an update on some of our construction projects. We've already shared with you that our Sunnyvale sites had opened. Our Toronto site opened yesterday; Dallas is expected to be completed by the end of May and work is starting in our New Jersey site and we are on schedule to open Phase I at the end of September.

The results of the first quarter reflect the strength in our business. Our customers continue to build in our sites. We are investing to support our customers' growth, and we have delivered excellent results. And with that, I will now turn the call over to George Pollock to review our financials. George?

George Pollock – Chief Financial Officer

Thank you, Keith. Thank you all for joining for us today. The first quarter was another good quarter for us and the solid performances reflected in our results. Revenue increased from 31.4 million in the first of 2007 to 39.8 million in the first quarter 2008, an increase of 27%. As Keith had mentioned, 89% of incremental sales were from our existing customers and our revenue model continues to be driven by monthly recurring revenue which represented 95% of total revenue in the quarter.

Recurring revenues which consist of collocation and interconnection services increased from 29.8 million in the first quarter of 2007 to 37.6 million in the first quarter 2008, an increase of 26%.

Non-recurring revenues increased from 1.6 million to 2.2 million. Cost of revenues excluding depreciation and amortization increased from 16.4 million in the first quarter 2007 to 20.4 million in the first quarter of 2008. This increase is primarily from rent, utilities, and personnel expense commensurate with our facility expansion and customers' growth. As a percent of revenues, cost of revenues declined from 52% in the first quarter 2007 to 51% in the first quarter 2008.

Our sales and marketing expenses increased from 3.8 million to 5.3 million this increase is primarily from increasing wages and non-cash stock-based compensation. As a percent of revenue, these expenses decreased from 12% in the first quarter of 2007 to 13% in the first quarter of 2008.

Our general and administrative expense increased from 3.9 million to 4.3 million in the first quarter of 2008 and this increase is primarily from the increase in wages and non-cash stock based compensation. And as a percent of revenue these expenses decreased from 12% to the first quarter of 2007 to 11% in the first quarter of 2008. Our EBITDA increased from 8.5 million in the first quarter of 2007 to 12.6 million in the first quarter of 2008, an increase of 41%. The EBITDA margin increased from 28.4% in the first quarter of 2007 to 31.7% in the current quarter.

Net income for the first quarter of 2008 was 0.3 million and included a write-off of previously capitalized debt issue costs of 0.7 million.

As Keith mentioned we completed the 157.5 million debt financing on March 28. Closing on this financing in the first quarter was an important milestone for us and fully funds our current expansion plans. As of March 31st, $120 million was outstanding. We used a portion of the proceeds from the financing to payout the existing bank debt of 38.2 million, we used a portion to pay 3.9 million fees related to the financing and the balance of the proceeds are on our balance sheet.

With respect to interest expense, interest expense in the first quarter was 2.5 million and included a $1.1 million decrease in the fair value of our interest rate swap. Excluding the future changes in the fair value of the interest rate swap we expect bank debt cash interest expense to be approximately $2.3 million per quarter for the rest of the year.

Capital expenditure were 24.9 million in the first quarter of 2008 and this included 23 million for growth capital expenditures, and we still expect to spend $165 million CapEx in 2008.

Consistent with our prior quarters we continue to have growth across all of our markets. We have previously discussed that 85% of revenues are generated in our top 10 markets. For the first quarter of 2008 there was a same period in 2007 overall revenue growth was 27%. Growth in the top 10 markets was 28% and growth in the rest of the markets was 21%. Site cash flow which we defined as site revenues or site expenses increased 30%. The increase in our top 10 markets was 28% and the increase in the rest of the markets was 43%. This further reinforces the value proposition of our board geographic footprint.

And the strong revenue growth in our top 10 markets which is complimented by the growth in the other markets is driving increase in cash flows from operations which in turn strengthens our balance sheet.

An highlight for the balance sheet for the first quarter include the following. DSO remains strong at 19 days, the cash balance was 110 million, our outstanding bank debt was 120 million, and our bank debt to EBIDTA ratio was still low at 2.4 times.

Looking towards the remainder of 2008 we are increasing our financial guidance as follows. We are increasing revenue guidance from 165 million to 168 million. We are increasing our EBDITA guidance from 51 million to 53 million.

In summary our momentum 2007 continues with our strong first quarter and we look forward to continued success in 2008. Keith and I will be happy to answer your questions. Operator please open the line fro questions.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from the line of Jonathan Schildkraut with Jefferies, please proceed.

Jonathan Schildkraut

Good evening and congratulations on a good quarter guys.

Keith Olsen

Thank you very much Jonathan.

Jonathan Schildkraut

I had a couple of questions about some of the capacity rolling on and some of the costs. I did notice that there was a bit of a spike of cap leases in the quarter and I was wondering if any of the new leases around the expansion facilities had entered your financial statements through the cap lease line? And then if you could kind of just remind us what the Cabinet adds associated with the expansions that you mentioned Sunnyvale which is open, Toronto which opened yesterday and Dallas and how many Cabinets you are going to add in New York at the end of September? That would be really helpful.

George Pollock

Okay. Yeah I would say the first question on the capital lease is Jonathan. That is a New Jersey lease. We actually signed it in the fourth quarter but it was effective in February and that is the capital leases on the books. The Dallas and Toronto leases are operating leases.

Jonathan Schildkraut

Great and the Cabinets coming online from the four facilities again?

Keith Olsen

Sure. It's 500 at Sunnyvale; 400 for Toronto and 400 for Dallas. And we expect an increase of around 1,300 from our New Jersey Phase I.

Jonathan Schildkraut

Okay, great. If you could give us a little color on the competitive environment; one of the things we often talk about is how you compete in different areas than some of the expansion sites coming on from the other providers. Can you could give us some color on the competitive environment and, as well, some color on MRR and your pricing assumptions embedded there, because MRR seemed to increase significantly more than we were anticipating and I'm just trying to get an understanding of what you're facing out in the market and maybe what went into that.

Keith Olsen

Sure. The way that we look at our markets, we have our top 10 and then other. And, I think George went through those numbers. George, would you just go through those numbers again, a little bit on the growth both of revenue and site cash flow?

George Pollock

Sure. On the site cash flow growth was 30% overall. And it was 28% in the top 10 markets and then 43% in the other markets.

Keith Olsen

Right and so, Jonathan, what we see is continued, you know, the concentration of growth is in our top 10 markets, in which case we see most of our primary competitors in those major areas. The rest of the footprint is also supporting expansions from our historical customers that are moving closer or out to the edge to be able to deliver more content closer to either the businesses or the consumers that they're servicing.

The competitive environment has not changed from our perspective over the past few quarters of what we've seen. It is a competitive environment. There are a lot of very capable companies with capacities to be able to support some of these customer decisions. And what we look at it from the standpoint is how well our sales forces positioned? And then, once our operations teams are handling the account installations and kind of the running of the datacenter, we typically enjoy nice incremental sales from the existing customers. 89% of our new sales came from our existing customers.

As far as pricing, there's continued strength in pricing. From what we see, it's a carryover from 2007 and our expectations are that kind of the 3% to 3.5% increases in our price points will carry forward as contracts come up for renewal. And we saw some of that strength in some of our larger contracts that were executed in the first quarter.

Jonathan Schildkraut

Alright; fantastic. My last question, and then I'll circle back because I'm sure you have a number of other analysts here. You mentioned that Limelight moved into four additional sites. I believe the total number of sites now, for Limelight, is 17 and I know that some investors have expressed some concern about Limelight's long-term viability. I'm wondering, you know, have you had any discussions with them and what your outlook is and how meaningful they are as a contributor to your overall revenue pie? Thanks.

Keith Olsen

Sure, I'll ask George to comment first on the customer mix at the top, percentages and things of that sort. Limelight continues to grow as do the other CDMs across our footprint. What I was referencing was they're increasing the number of sites that they're peering in and those are incremental peer points because, as they're pushing more and more rich content out, they want it to get to more peering centers here in North America. And that's the expansion they went through. And of course our normal dialog is just to support our customers' growth and that's exactly what we're doing. I think if you look at, and I'll ask George to comment – most individual customer is greater than – it's less than 5% of any concentration. And that's as much detail as we'd speak to as far as customers sizing within our revenue base.

Jonathan Schildkraut

Alright thanks a lot.

Operator

Your next question comes from the line of Jonathan Atkin with RBC. Please proceed.

Jonathan Atkin

Yes, good afternoon. Can you hear me okay?

Keith Olsen

We can hear you fine, Jonathan. How are you?

Jonathan Atkin

Yes. So, I wonder if you have any kind of observations on the amount of supply for colo space that's coming in on the market, both in your top markets as well as maybe some of your second tier markets. And then secondly, you recently have made some additions to your management team in terms of a new VP of Technology and then prior to that a director of Content and Entertainment. And does that suggest media and entertainment is kind of a faster growing vertical for you than across span of the industries that you're selling to? Or can you kind of comment on that dynamic and how the management changes might be kind of affecting today's operations?

George Pollock

Sure. We were thrilled that we're going to have Mike Mowen join our organization. He's been in the data center side of space on the IP side of the business, since I can remember. I was familiar with his excellent work prior to him joining AT&T through the Surfnet acquisition. And very consistent with just the evolution of our company and increasing the scope and the capacities of what we are providing. Michael was an excellent individual to add or complement the existing management team. He's reporting in to Ali Marashi, who is our CTO David Reitman, who is the lead on our Content and Entertainment, we have known selling in to that particular market place. And as more Media and Content becomes IP enabled, it's very consistent with the value propositions of whom we've been servicing, which is IP Packets are driving volumes. They drive the interconnections and, therefore, it resonates with our overall value proposition. And it's very consistent in the way that we go to market. We're just asking David to lead this initiative with a heightened focus from a sales distribution and what I would consider a market development aspect with the large media companies moving more of their content through IP.

Jonathan Atkin

And then on supply?

Keith Olsen

On the supply side, what we see is there's a constant demand coming from our customers. One of the aspects that we look at very carefully is, whom do we concentrate on? Whom do we look at as far as our competitors in the market place? And I know that, in a number of reports that I've been able to review, sometimes there's some double counting going on as some of those larger kind of real estate oriented datacenter providers have, you know, their numbers and then some of the service providers are actually taking that inventory as their own. And so what we look at right now is demand is outpacing supply in our primary markets, those top 10. And certainly we would have to continue to make investment in our infrastructure for power and pooling resources in the other markets to keep pace with our customers' demands. So we see that other people are opening up more and more capacities. It does not seem to be dampening the demand set that we're seeing come through from our customers and companies that we're targeting.

Jonathan Atkin

Thank you.

George Pollock

Welcome.

Operator

Your next question will come from the line of Srinivas Anantha with Oppenheimer and Company. Please proceed.

Srinivas Anantha

Yeah, good afternoon thank you for taking my call.

George Pollock

Hi, Sri.

Srinivas Anantha

The couple of question guys could you talk about the demand in your secondary markets? That seemed to be picking up quite a bit. At least our research suggests that's going to accelerate over the next couple of years. If you guys can talk about the utilization of your datacenters, especially in the secondary markets, that would be helpful. And secondly, could you guys talk about the churn? I know in the past you guys used to give a churn for the recurring revenue. I'm not sure if I missed that, so if you guys would give that. And then finally, could you guys talk about some of these datacenters that are out there, you know, single operator/double operator datacenters? You know some of these, I think there don't have the necessary power requirement. And with a lack of access to capital, do you think that's going to pick up the pace of consolidation in the datacenter space? Thank you.

Keith Olsen

Sure. That's quite a list, Srinivas. Just let me make sure that I get each of those components. What we see, as far as the other markets for ourselves, we merchandise a market at our sites as a North American footprint, as well as markets of one. And so, we see kind of up ticks, both in the markets on one type of decisions as well as our large scale multi-location customers ever increasing their footprint inside of our footprint, to be able to get closer to the consumer or closer to the businesses; whether they be Telcos or ISPs that are servicing their customers through landing their fiber on our sites and then actually getting their traffic or customer on that as one aspect. As well as just being able to interconnect and not have to backhaul as much traffic, between exchanges or through the meet me rooms, you know, within our sties. That's what's driving some of the performance in the other markets and clearly is what's driving in the top 10 markets. As it relates to the consolidation, we have not seen the impacts of that. As you know, we constantly look at opportunities for growth whether they be real estate or businesses. Switch and Data has an excellent track record of acquiring companies and facilities and incorporating them their footprint and their operations into the business to optimize not only revenue performance but also our bottom line performance. And right now, we see that there is a plethora of types of decisions for many types of datacenter decisions; some requiring the higher density of the net new builds that ourselves and some of our competitors are doing out in the field. But there's also incremental decisions in the market place around what had been built previously that are certainly satisfying certain decisions in that market place because we enjoy those decisions, not only in our top 10 markets but in our other markets as well. I'm sure that we'll pay close attention as things continues to develop. We are thrilled that we have the support from the banks to put together our financing package to meet our build plans and our capacity growth plans to fulfill our business objectives.

George Pollock

And Sri, you had a question about churn?

Srinivas Anantha

Yeah.

George Pollock

Churn in the first quarter was 1.1% and, as you may remember, we measure churn as a percentage of recurring revenue. The third quarter it was .0.9%, fourth quarter was % 1.2 and the first quarter was 1.1%, consistent with the prior quarters and historically low for us.

Srinivas Anantha

And George, one quick question; could you also talk about the ramp of your Cap Ex for the remainder of the year? I know, is it going to be a lot more front end loaded? Or, how should we model the Cap Ex for the remainder of the year?

George Pollock

It wasn't front end loaded because the first quarter was only almost $25 million of the $165 million. We'll start to see that ramp up here in the second quarter as we've completed Toronto and Dallas. And then we'll see a bigger number in the third quarter as we move towards Phase I, completing Phase I in New Jersey.

Srinivas Anantha

Fantastic, thanks a lot guys and good quarter.

George Pollock

Thank you.

Operator

Your next question comes from the line of Jurgan Usman with Wachovia Securities. Please proceed.

Jurgan Usman

Ah yes; thanks for taking my call how are guys?

Keith Olsen

Very well, Jurgan how are you?

Jurgan Usman

I am good thank you very much. A couple of questions first of all, I noticed that you only added six new customers this quarter, sequentially. I was wondering whether that is just a conscious effort on your part or you see something else there. And then the second one, also on the incremental interconnections, it looks like you added only about 220 this quarter, versus, I guess, previous rates of about, let's say, between 4 to 600 or so. So I was just wondering what you see over there. I know that revenue is actually in line so that suggests kind of, like, bigger, bigger connections, I suppose.

Keith Olsen

Yes. Jurgan actually our prove is up kind of on sequential quarter basis and has to do it migration to faster medium interconnections.

Jurgan Usman

Okay.

Keith Olsen

Alright, As far as the customers, it has to do with our distribution and cycle times and things that are closing. When we look at the way we count a net new logo, if someone starts an installation in a period and then continues to place incremental orders, that's a focus of our distribution strategy because they are the biggest movers of IP traffic. So, our focus is incremental decisions within the broad based and then very targeted decisions on whom we're looking at. In connection with some other Cross connect overall growth, sales production for March -- and I had the company historians go through the documentation, but March Cross connects sales production was the best ever. Now we'll see that coming forward in our revenues, when they get installed in our billing. But March was by far, the best in any of the history that we've seen. So, we see things, like I've said, on a number of these calls. There are timings; there's infrastructure that lands and then, as their network demands, that's when the interconnections flow and it has to do with some of the timing elements associated with that.

Jurgan Usman

Very well and just one last question; as I guess power cost becomes a bigger part of your cost base as well as your customers' data cost, I was just wondering what kind of efforts have you guys done or are doing in terms of trying to minimize the cost of -- minimize the usage of power or I guess the greening of your datacenters, whether you have done any efforts there. Thanks

Keith Olsen

Sure that’s very good question, because there's a lot of things that you certainly can do at a very high level. When we do the technology refresh in our datacenters, we absolutely put in the newest and best types of equipment that improve our efficiencies, and of course, it has a lot to do with design around venting and airflow. So you think of datacenter construction and management as a physics project, and it has to do with airflow aspects, cooling densities, and the ability to make sure that your installs are taking advantage of the infrastructure design that Ali and his team are responsible for and so you have the technology site investment which is what we have been improving the infrastructure in across our sites. And then certainly within our new builds we have the opportunity to increase the power efficiency of across that footprint.

As it relates to power leveraging from the standpoint of customer use of course you know that’s tied within our contractual agreements in which case if we had a increase in our utility expense greater than 5% within the term of the agreement. We have the opportunity to of course pass that on.

Jurgan Usman

All right thank you guys, congratulations.

Keith Olsen

Thank you very much.

Operator

Your next question comes from the line of Colby Synesael with Merriman.

Colby Synesael

Thank you for taking my question.

Keith Olsen

Hi Colby how are you?

Colby Synesael

Good thanks. Two questions, one it looks like in your outside top ten markets I think you guys mentioned you grew 21%. If I remember the last quarter you guys mentioned that was 29%. So I was wondering if you could talk about what was the shift there that lead to that? And then my second question just wanting to confirm that you guys are still believing in the three year compounded annual growth rate now with what you provided on your third quarter conference about 24% for revenue and about 35% for EBITDA. And is that true and I am hoping it is. If that is true how much of the growth in 2009 is based on the new facility that are coming on line?

George Pollock

Hi Colby this is George. How are you?

Colby Synesael

Good.

George Pollock

Yeah I will take that second question. We are confirming the growth expectations that we have talked about in terms of the 24% and 35%. As we look through '08 we expect continued acceleration of the revenue within the flow that with respect to EBIDTA primarily driven by more products coming on line with obliviously Toronto, Dallas and New Jersey. And that supply will resonant with the accelerated growth through '09.

Colby Synesael

So do you guys like put a percentage on the amount of the growth that we are going to see in '09 that’s coming from the new facilities? What would that be?

George Pollock

Yeah I don't know the exact percentage from the new builds. Part of that is some of these are just add-ons, Dallas and Toronto for example are just augment to the existing facilities. So we are not necessarily breaking down what's new. It's just a run rate of what we are selling into. And then you go – or to support that run rate that we currently experience.

Colby Synesael

Okay I guess what I am trying to get at is how much of growth now is that the point. Even though you have 70% utilizations and another 30% to sell into how much of growth going forward is really dependent on you guys adding new facilities?

Keith Olsen

In '09 it contributes a good percentage. As you said, there's close to30% of the capacity as of March31st, but you also understand that as your capacity utilization increases the types of deals that you can take, because you may have 50 or 100 Cabinets, or Cabinet equivalents, in a site, but it may be spread over 10 to 12 locations in that site, that we might not be able to, as George talked about the expansions in Toronto, the expansions in Dallas will provide us the ability to be able to take on the larger types of deals from our customer demand set versus just the smaller footprints once your capacities get into the 70's.

Colby Synesael

So have you gone to the point where you had to turn some customers away in some of our top ten markets because you just don't have the capacity right now?

Keith Olsen

It’s not the capacity it’s the actual available foot print in the site. So someone says I need ten or 50 – let's say somebody says somebody said I need 20 contiguous cabinets in a particular site. We may have 50 cabinets, but the largest grouping is nine. So they would either have to only take the nine and wait for the expansion or would have to turn them away and yes that does occur.

Colby Synesael

Okay.

Keith Olsen

And that’s why we know the run rate of demand is extremely strong, and it’s all based upon the cabinets that we are using and the things of that sort. To answer your question on the quarter-over-quarter aspect. We spoke about the percentages the bulk of our incremental revenue comes out of like top ten and so, you could have one or two nice size deals change that percentage figure from 29 to 21. What we like to see is that kind of that double digit growth, but the real impact are to he groupings overall site cash flow increase.

Colby Synesael

So you would not attribute that to the macro economy people potentially slowing down their build ins…..

George Pollock

That’s not what we see. No

Colby Synesael

Okay great thank you guys.

George Pollock

Welcome.

Operator

(Operator Instructions). Your next question comes from the line of Mark DeRussy with Raymond James. Please proceed.

Mark DeRussy

In kind of a follow up to the previous question, could you guys give us some color around where we are in the New Jersey build out? You've got five months to open, so would you give some kind of progress report? Are we in the permitting stage, have we got the power equipment ordered, is it going to be there on time, et cetera, et cetera? And then the follow on to that would be where are we in terms of visibility on getting those 13,000 cabinets leased up in a timely manner? Where are we in terms of discussions with customers? Thanks.

George Pollack

Hi Mark, it's George. Sure, in terms of status we are in the permitting demo stage, the long lead items have been ordered. So we're on target with our expectations of bringing this Phase I on at the end of September.

Mark DeRussy

Okay.

George Pollack

And in terms of our sales efforts, obviously we've communicated to our customers and to the public that we're bringing this site online. Typical of our builds and as we bring these sites online we start to take orders about 60 days out from completion.

Mark DeRussy

Okay. Alright, thanks.

Operator

(Operator Instructions). There are no additional questions at this time. I would now like to turn the presentation back over to Mr. Keith Olsen for closing remarks.

Keith Olsen

Thank you very much. Lisa. Ladies and gentlemen thank you very much for your time and your support. At this time this concludes our first quarter’s earnings call. Have a good evening.

Operator

Thank you for your participation and today's conference, this concludes the presentation. You may now disconnect. Good day.

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