Executives
Elizabeth Corse - Director of IR
Philip J. Koen - CEO, Director
Jeffrey H. Von Deylen - CFO, Director
Analysts
Colby Synesael - Merriman Curhan Ford & Co.
Simon Flannery - Morgan Stanley
Tom Watts - Cowen & Co.
Jonathan Atkin - RBC Capital Markets
Manuel Recarey - Kaufman Bros. Equity Research
Srinivas Anantha - Oppenheimer & Co.
Mark Kelleher - Canaccord Adams
Nicholas Netchvolodoff - Lehman Brothers
Jonathan Schildkraut - Jefferies & Co
Jason Armstrong - Goldman Sachs
SAVVIS, Inc. (SVVS) Q2 FY08 Earnings Call July 29, 2008 5:30 PM ET
Operator
Good afternoon, and welcome to the SAVVIS Second 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 listen-only mode. After the presentation, we will conduct an interactive question-and-answer session. Ms. Corse, please begin.
Elizabeth Corse - Director of Investor Relations
Welcome everyone and thanks for joining us. I am Elizabeth Corse, Director of Investor Relations at SAVVIS. We distributed a press release this afternoon with detailed financial tables, that's available on our website at savvis.net. We also have slides supporting this discussion on our website. CEO, Phil Koen, and Chief Financial Officer, Jeff Von Deylen are here to talk with you today, after they review the quarter and the business environment, they'll take your questions.
Please be aware that today's discussion contains forward-looking statements as defined under federal securities laws. Actual results could differ materially from our projections due to various risk factors, including but not limited to the factors disclosed in SAVVIS's Form 10-K and other filings with the U.S. Securities and Exchange Commission, and we encourage you to review those disclosures. Our presentation, this afternoon, will include references to certain non-GAAP financial measures that provide additional information for investors in compliance with the 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 rational for why we believe non-GAAP information is important in describing our operating performance and the full reconciliation with the corresponding GAAP numbers.
Now may I introduce Phil Koen, Chief Executive Officer of SAVVIS.
Philip J. Koen - Chief Executive Officer, Director
Good afternoon everyone and thanks for joining us. We are pleased to report solid second quarter results today. Halfway through the year, we are executing successfully against our plan, so we are reaffirming our guidance for the year-to-date. I'm going to open with some highlights from the quarter, then review the business environment for each of our revenue lines. Jeff, will take you through the numbers in detail and after that I have planned to close with some ideas about how our highly differentiated value proposition really resonates with our enterprise customers. And, as always, we'll take your questions before we wrap up this evening.
So let's begin. Q2's highlights are on slide four, starting with solid revenue growth, the total revenue were up 13%, year-over-year on a pro forma basis and 5% from Q1, driven by growth in hosting revenue. Colo was up 25%, pro forma from a year ago and 10% from Q1, showing the power of our new data centers. Managed hosting performed strongly, up 27%, year-over-year and 6% quarter-over-quarter with both utility and traditional managed offerings continuing to attract new and expanded customer relationships. As expected, network services revenue declined slightly in the quarter.
As good as revenue was adjusted EBITDA number is our key focus, and we are very pleased with the $44.7 million in the quarter, despite the cost associated with data centers we're bringing into services this year.
Operationally, we have some important achievements opening data centers in Chicago and Dallas and our expanded Singapore facility, opened in July. We've extended Proximity Hosting with the help of the London Stock Exchange and Best in the U.K., the Intercontinental Exchange and the Chicago Mercantile Exchange in Chicago and the Singapore Exchange in our Singapore center. This is a great value-added service we offer that draws enterprises with securities trading functions from the largest to the smallest to these IDCs for both Colo and managed hosting services combined with the low legacy [ph] cross connections to the training platforms in that facility.
We launched an important customer service initiative that will enable us to attract satisfaction more closely and drive improvement. That will help us ensure, we continue to track new customers and expand relationships with existing customers. One customer that honored us with a significant award was the U.K.'s Home Office, a cabinet-level government department. They presented us with their Supplier Value Award for Best Technology Implementation against some very heavy competition.
Now let's turn to some perspective on the current business environment in which SAVVIS operates. I'll start with some color on the colocation market. We had a strong footprint of diversified data centers, there is a detail look at our IDCs as an addendum to today's slides. This provides a great base, with which to meet the varying demands of our customers. We've broken out our footprint into standard, high and ultra power density centers on slide five.
The two main points, I want to make here are, one, that generally demand continues to outstrip supply for colo and two, that pricing is rational and stable, when we look it on a kilowatt equivalent basis. About half of our sellable square footage is in standard power density category with less than a 100 watts per square foot. These are the centers where we command about $30 to $45 per square foot per month. I think some people have a mistaken idea that these IDCs are in low demand, but in fact they continue to sell at steady pace as we approach the saturation point. In fact, in Q2, 20% of our installs were into our standard powered IDCs and these centers are about 70% utilized today. The high power IDCs comprise roughly a quarter of our sellable square feet and have seen some of the strongest demand so they are about 80% utilized today.
These centers price at roughly $40 to $65 per square foot per month.
Finally, at the ultra high-end all of our expansion data centers opened in 2007 and 2008 deliver at least 125 watts per square foot, facing strong demand as you bring them on to the market with pricing achieving a level of about $60 to $80 per square foot, on average. Even in these centers though the largest users are price sensitive and we've willingly [ph] walked away from large footprint deals because the customer wasn't willing to meet our price objectives. We won't sacrifice our return objectives for a quarter or two faster revenue growth and we are well able to sell smaller footprints to our core target customers.
That strong demand for our centers supports our business model of remaining selective in our sales approach. We want to work with customers who will make the most of our relationship with SAVVIS. This idea is the segway in for my view on Managed Hosting on slide six, since a key element of our colo differentiation is SAVVIS's great value-added offering and Managed Hosting as well as network. More that 40% of our colo customers use some element of Managed Hosting. That Managed Hosting offer includes, Traditional managed where we own and operate dedicated equipment for our customers, the high availability, utility compute platform, introduced in 2004, which provided dynamic capacity for a pay by the drink model and Virtualized Intelligent Hosting, a lower cost way to get the benefits of virtualization without the challenges of doing it yourself. There has been absolutely no change in the fundamental demand for these offerings. We had a strong second quarter for Managed Hosting, both from a booking and revenue perspective, which demonstrates that our value proposition continues to resonate with the enterprises.
We are seeking the same level on inspection and approval we discussed since April with clients taking longer than has previously been typical to sign off on these multi-year, multi-million dollar contracts. This is understandable when you consider the complexity of these deals. Our Managed Hosting offering isn't turning up a lamp sack for a couple thousand dollars a month. What we're offering at a high-end, customized solution for complex business needs. Our solutions almost always include a professional services component to enhance the computing, storage and security capabilities. Our typical customer is a large or mid-size enterprise deploying complex web-based hosting applications. We are developing a strong reputation with brand-based companies whose web performance is critical to marketing success.
For many of those customers, the applications they're deploying our network intensive and the SAAVIS network services are another way we can add value. The network layers readily into both colo and Managed Hosting offerings, providing a premium over hosting only providers for clients who want a truly bundled single-source solution.
To break into its components on slide seven, the smallest piece of our network revenue is unmanaged bandwidth we sell wholesale to customers... to carriers. This is a smart price market that has been under pricing pressure to greater and less degree for about four years. It's only 17% of the network revenue stream and we sell only where we have ideal capacity and can get price points that still make sense for us.
The HAN is our current success story as data center clients use our hosted area network to provide Internet access for their data. Over 90% of colo customers use the HAN. It's essentially a super cross connect that can take our clients from the SAAVIS data center to any appearing [ph] point they want. The value of this offering is clear and 16% year-over-year growth in Q2. As I said before, our managed network strategy has great potential, but clearly needs more over.
We have great solutions with our state-of-the-art application transport network. Our customers tell us they want to get managed network and managed hosting services from a single provider. However, solid new wins in 2008 have been more than offset by churn from our VPN-only base of clients. We are delivering new marketing and sales programs to our team in the second half, designed to highlight the value of the bundle approached to managed services and we'll keep you updated as we work to deliver on the promise of this competitive differentiator. I want to assure you, we are focused intently on returning the network revenue strength to a growth phase.
Now we'll be handed off to Jeff for the financial review.
Jeffrey H. Von Deylen - Chief Financial Officer, Director
Thanks Koen. I would like to go over slide nine, which is abbreviated P&L and it shows the quarterly comparisons, both for this quarter, for the first quarter, for prior year quarter and in a pro forma view. We've excluded non-cash comp from both the gross profit and the SG&A line for each period and show both pro forma and reported numbers for a year ago.
Quarter-over-quarter, as Phil mentioned, total revenue grew 5% from the first quarter. On a year-over-year basis, revenue was up 6% and on a pro forma basis, total revenue was up 13%, which we believe is the most relevant year-over-year comparison.
Our gross profit improved to 43%, as the new data centers began to generate more revenue than the cost. SG&A, while was up 3%, sequentially from the first quarter, actually declined to 22% of revenue during the quarter, which was down from 23% of revenue in the first quarter. The increase in the dollars, reflect higher commissions paid on the install business that we installed during this quarter. That net result was a very strong adjusted EBITDA growth of 11% compared to the first quarter, reflecting revenue growth, cost control and improved performance from our new IDCs. As a percentage of revenue, adjusted EBITDA margins expanded to 21% from 20% in the first quarter.
Now, let's talk a little bit more about the details of the revenue streams, which we've laid out the three revenue streams, Colo, managed hosting and network services on slide ten. Colo growth was actually ahead of our expectations and grew 10% from the first quarter. This achievement was a result of our strong bookings in the prior quarters and an excellent pace of installations, both into the legacy and to the new data centers.
Managed hosting growth of 6% from the first quarter was also at the high end of our expectations, as we successfully installed business told in previous quarters. Our total hosting revenues for both the managed and colo together increased 8% from the first quarter and was up 26% on a pro forma basis from the second quarter of a year ago. Our network services revenue declined about 1% in the first quarter of 2008 and was down 4% from a year ago.
Looking forward, we are comfortable with the sequential growth ranges we projected in April, and those were the colo revenue growth in both Q3 and again in Q4 will be between 5% and 9%. The growth in managed hosting will be between 2% and 6%, on a sequential basis. And on the network side, we are anticipating that continued rationalization of the client base, which will drive decline in the quarterly revenue for the second half.
Now let's talk about the expansion data centers and the progress that we've made. You can see that on slide 11. The new data center revenue more than doubled to $14.2 million during the quarter. The new data centers rates [ph] adjusted EBITDA breakeven or just about $20,000 of positive EBITDA, as we ramp the revenue into the fixed-cost base. We continue to see an attractive fill rate on the new data centers with about 67% of the colo space in the Phase I data centers sold. We also opened the Singapore data center in July and together with the Boston, Chicago and Dallas data centers, we've sold about 32% of the colo space in those centers. Our expansion IDCs continued to generate colo prices averaging just under $70 per square foot per month, while the yield per square foot, including managed hosting and network services is just over $80 per square foot in those centers.
In total, as we talked about on the opening, our adjusted EBITDA grew by $4.4 million from $40.3 million to $44.7 million in the quarter. You can see on this slide the new data centers contributed about $2.7 million of this improvement while the legacy hosting businesses contributed the other $1.7 million. In total, on a fully allocated-basis, our hosting revenue includes both the managed hosting and the colo revenue, contributes approximately 26% adjusted EBITDA margins during the quarter and that was up from 25% adjusted EBITDA margin in the first quarter. On a fully allocated-basis, our network services business has adjusted EBITDA margins that have remained in the low teens for each quarter and contributed approximately $8 million to $8.5 million of adjusted EBITDA each quarter.
On slide 12, we show that we are pleased with the progression we've made in colocation pricing. We're up 2% sequentially over the first quarter and up 12% year-over-year, we've made steady improvement towards our target of $50 per square foot across our entire footprint and our overall yield remains strong in over $80 per square foot. The overall sequential decline you see from the first quarter on our overall revenue per square foot is a result of mix shift. As we've shared with you in the past, the colocation revenue, especially in the new data centers will grow faster than the managed hosting revenues, as we feel that... as the fill rate is 18 to 24 months for the colocation and five to seven years for the managed hosting space. However, we are clearly expecting that the contribution for managed services will continue to drive our long-term data center yield to over $100 per square foot over the next several years.
Now let's add a bit of color on the utility rate increases that we have seen and experienced. Just to give a little bit more color, our energy cost, as a percentage of hosting revenues have been in the range of 11% to 14% of hosting revenues over the past five quarters. In the third quarter, you can expect that to be at the high-end of the range as a result of higher cooling cost due to higher temperatures and that seasonal impact we've seen certainly over the last few years. We've recently seen experienced... are seen energy cost increases in our LA, DC and New York markets. Currently, our colocation client contracts allow for us to pass through these cost increases to our customers after a 30-day notice period, and after the first 12 months of their initial contract.
We expect that the dollar impact of these known increases will be approximately $750,000 per quarter, which should largely be offset by the increases to customer billings that are beginning in August. We clearly are monitoring all of our other markets and reacting quickly to the changes in energy cost and the changes those may have to us in the future. One of the strongest point of SAVVIS is our conservative balance sheet and our under leverage position as we show on slide 14. During the quarter, we completed a $35 million sterling long-term debt facility or a $70 million U.S. facility to fund our build out of our U.K. data center. We completed this financing to better match the currency inflows and outflows for our U.K. investment. At the end of June, we had a total of approximately $580 million of long-term debt and capital leases. We would expect that balance to grow to approximately $610 million by the end of the year as we draw down the remaining balance on the U.K. facility as that build out is complete. We would also expect to end the year with approximately $100 million of cash.
Given our expectations for year-end debt and cash balances, our leverage position with adjusted EBITDA for this year at a mid-point of $182.5 million. We expect that our leverage will be about 3.3 times levered on a gross debt basis and about 2.8 times levered on a net-debt basis. Our expected new annual cash interest costs are approximately $40 million. Based on our forecasted adjusted EBITDA for 2008, our EBITDA covers about 4.6 times our cash interest cost, giving us a strong position to fund our future business requirements. With our adjusted EBITDA expanding over the course of this year and into 2009, as we began to leverage the fixed cost of the new data centers, our leverage and coverage ratios should continue to improve.
As Phil mentioned, we have reaffirmed our guidance for 2008 as we have laid out on slide 15. We continue to expect pro forma revenue growth in the low double-digit range with the dollar range of $840 million to $870 million, for the year. We are confident in achieving adjusted EBITDA margins of 21% to 22%, and pro forma adjusted EBTIDA growth of approximately 24%. Of the $280 million to $300 million, we expect to spend for capital expenditures about $145 billion $150 billion is for previously announced data center expansions. Below the adjusted EBTIDA line, we anticipate about $130 million to $140 million of depreciation and amortization, about $30 million to $35 million of net interest expense and tax expense of about $1 million to $2 million, reflecting our anticipated AMT expense for cost.
On slide 16, we reiterate some of the metrics behind our 2008 outlook. After a strong installed base in the second quarter, we have about $60 million of annualized revenue in our backlog. As we install that revenue over the second half, we'll begin to recognize that revenue. We would assume that we'll continue to grow colo revenue by about 5% to 9%, sequentially as we continue to install revenue into the new data centers, we expect managed hosting to grow about 2% to 6%, sequentially, in each of the next quarters and as I indicated previously, we are at the high-end of both of those ranges in the second quarter, but remain comfortable with the range of our sequential growth rates, given the natural fluctuations that we've seen from quarter-to-quarter.
On the cost side, we continue to add about $2 million per quarter related to new IDCs. In addition, utility costs will be higher in the third quarter than in the second quarter by about $3 million as a result of the warmer weather required and required higher coolant cost. We've taken measures to control discretionary costs and will continue to manage revenue and expense ratios aggressively.
As a final wrap up to my section, I'd like to announce an organizational change. We've made the decision to relocate the investor relations function from our Virginia office to our corporate headquarters here in St. Louis. Elizabeth has made the decision to stay in the Washington DC area and as a result shall be leaving SAVVIS after four years with the team. We've identified a new IR Director who will start officially on August 18th. Elizabeth, will be working with us to ensure a smooth transaction through the end of the quarter. Both, Phil and I would like to thank Elizabeth personally for all of her hard work and leadership of the IR function over the last four years. She was instrumental on helping SAVVIS, create an IR presence after our acquisition of Cable & Wireless through our preferred stock conversions, a significant secondary offering and the expansion of both our self-stock coverage and our buy side ownership list. I know she has developed many strong relationships with many of you over those years and will be talking with you directly over the course of the transition in the weeks ahead. We wish her all the best as she moves to next phase of her career.
With that, well I'll turn it back over to Phil.
Philip J. Koen - Chief Executive Officer, Director
Thanks Jeff. Earlier I talked about colo, managed hosting and network services. One of the key points I hope I made clear is that each of these offerings are synergistic with the others. The real values of SAVVIS for our customers and ultimately for our investors is a power of bundling service elements to create IT infrastructure as a service.
Beginning on slide 18, we are taking a look at a few customer examples to help you understand how we're adding value with this approach. First, an entertainment company wanted a robust reliable platform on which to develop and deliver online games. They chose SAVVIS's Virtualized Intelligent Hosting, which was delivered in the second quarter this year. We've evaluated the infrastructure we created for them as flawless. And we've already expanded their SAVVIS installation to meet market demand. This customer plans the double their Virtualized Intelligent Hosting footprint in the second half with a potential to grow to more in 2009 as they introduce new online multi-player games and grow their subscriber base. This customer has also chosen to use a number of SAVVIS's managed security services to provide a secure online gaming environment.
On slide 19, the $600 million per year work force management company came to SAVVIS to provide a fully managed hosted solution to the more than 30 million customers. Their existing operating model are providing remotely managed solutions, required support and maintenance for over 20 versions of their platform, require a significant cost and time with the [ph] IT support group to trouble shoot and resolve the issues. The customer in SAVVIS joined a joint... form a joint task force to design and develop a managed hosted solution that would meet the specific compliance and technical client-server platform as well as develop joint marketing materials to demonstrate to their customers the operational and financial improvement that they would drive as a result of implementing a managed environment. As a result of the moving to a managed hosting environment, the company has realized savings at over 30% relating to the support and maintenance of their product. For SAVVIS, this account represents nearly $1.8 million in annualized revenue and we've seen a nearly ten-fold increase in the average monthly bookings since embracing to managed hosting platform.
Finally, slide 20, reflects a major win for SAVVIS. This is a global financial services firm, one of the world leaders in their field. They view SAVVIS or colocation professional services for many years and one of their business divisions recently came to us for rapid deployment of a tier-I application. SAVVIS was instrumental in deploying a highly complex implementation project with a very aggressive timeline. As a result the customer successfully launched their new online platform. As they work to drive more services over the web, this group developed overlapping IT platforms that created inefficiency, the lack of scalability for their offerings. SAVVIS provides a managed network solution over a managed hosting platform that enabled the client to drive new services quickly and efficiently out to their end users. SAVVIS has solidified it's standing as a trusted device by meeting and exceeding all implementation milestones set by the customer and as a result, has opened the door for additional opportunities. While this assignment is well above our typical deal, we were happy to help. Today, the customer is generating over $20 million of annualized revenue as we continue to roll out new services. So I hope that helps you visualize why customers seek SAVVIS solutions and why we are confident at targeting customers that use multiple services as the right approach to minimize our investment requirements and maximize our returns.
Now I just got back from a trip to the U.K., Singapore and Tokyo, and I want to spend a moment on our opportunities in those markets with slide 21. We are getting very good traction outside the U.S., and I am very pleased what we have accomplish. Even better, I am enthusiastic about what lies ahead. As I look across our global footprint, I am impressed with our strength in Europe. We opened a new data center there at exactly the right time. Our U.K. team is conducting an increasing number of tours there everyday. Managed hosting has always been a strong offer in the U.K. and today its gaining greater strength.
In Asia Pacific, the economic environment is robust and again the timing of our Singapore expansion is spot on. The fundamental growth of enterprises in that market is driving strong interest, especially in our managed hosting and network services. At both these markets, we're offering Proximity Hosting Services targeted at the financial services electronic trading community. We've secured strategic relationships with several key exchanges, including the London Stock Exchange, BATS, U.K., and the Singapore Exchange. These are in addition to new partners in the U.S. that include, Chi-X, Intercontinental Exchange, and the Chicago Mercantile Exchange as well as others we hope to announce in the coming week. With managed hosting, Proximity Hosting and strong market demand I think we've got a lot to look forward to in our non-U.S. market.
I'll close by emphasizing again that we're managing this company for the long-term as laid out in slide 22 and we are very pleased with our prospects. Our target customers continued to do deep inspection around their decision-making, but they are enthusiastic about our infrastructure solutions as a great approach to very real challenges. We are executing against our plan to meet the challenges of 2008 while building and growing for the long-term.
And Jeff and I will be happy to take your questions now.
Question and Answer
Operator
[Operator Instruction]. Our first question comes from Colby Synesael with Merriman.
Colby Synesael - Merriman Curhan Ford & Co.
Just two basic questions, one from a strategy standpoint, you mentioned that [inaudible] with your last comments, that you guys are focused on the long-term of the company, if you look the results obviously the upside came from the pure colocation portion of the business, will it make sense for you guys to have more of your self focusing more on just the colocation at this point, or you guys think that that's well balanced? My second question has to do with just market-to-market, any markets where we are seeing, strengthening or weakening [inaudible] first quarter? Thanks.
Philip J. Koen - Chief Executive Officer, Director
Colby, this is Phil. Thanks for your question. Well I'd like to say that I think the strength came from both colo and managed... the sequential growth rates were at the high end of what we had telegraphed is what we think about. To answer your question directly we are not a colo play. The issue there is that we don't have the footprint and we don't deploy the amount of capital in building data centers that some of the real estate and other players who are focused in this. So our whole value proposition here is use colocation as the first step point… and outsource solution, but to move people up the value stack and we are really focused about driving the highest returns we possibly can on that data center investment.
So it's not about can we just fill it up as fast as we can because simply what you have to do then is turnaround and deploy increasing the amounts of capital to continue to run that race. We think a more prudent strategy is to continue to focus on building long-term value through trading people up to higher and higher levels of managed services. I'd point to you that last customer example is a great example of exactly how that strategy works.
Regarding market-to-market strength, the core markets we are in across the U.S. continued to see good solid demand. I don't feel and I don’t see any indication that there are any differences from one particular market to another, especially when you factor in the type of customer we are going after. So at this particular point in time, we don't see any difference in the various markets in which we compete.
Colby Synesael - Merriman Curhan Ford & Co.
Great. Thank you.
Operator
Our next question comes from Simon Flannery with Morgan Stanley.
Simon Flannery - Morgan Stanley
Okay. Thank you very much. Good afternoon. You cited the ongoing, the legacy profitability at about 22% of EBITDA with expansion markets approximately breakeven. Can you give us a sense of how long you think it will take the expansion markets to reach the legacy level of profitability and is there anything inherently different in the expansion market where the book of business that might cause them to ultimately have higher margins. And I just wanted to follow-up on the energy point, it sounds like there is a little bit of timing difference, but overall most of the energy increases your can pass through to customers, so we shouldn't be modeling necessarily on a sort of negative impact on EBITDA in Q3 from previously, is that right?
Jeffrey H. Von Deylen - Chief Financial Officer, Director
Yes. Hi, this is Jeff. On the energy, you're right, on timing it's… we have a customer notification requirement and then if we do have issues where we kind of guarantee the price for 12 months. So there are customers who are in contract that will… who would have some risk and although we are certainly mindful of forward pricing etcetera what we’re committing, but I don't think that we have much exposure on energy prices and we've been able to from a recovery standpoint recover most of what we see as loan cost increases, going forward.
Simon Flannery - Morgan Stanley
Okay.
Jeffrey H. Von Deylen - Chief Financial Officer, Director
And then on… your second question was on expansion result, let's say, I think the opportunity is the expansion data centers, the extension results could have higher EBITDA, primary because you're going to have the legacy business, the historical network services business are in that legacy business. So what I am trying to do on the prepared remarks is talk about what are the hosting margins... sorry total hosting margins, again this is on a fully allocated basis are at 26%, up from 25% and the network margin remains in the low teens, so 11%, 12% range, so that is predominant bigger part of the pride today and it become...as we continue to grow the hosting business and that become more of the overall revenue stream, I think the legacy expansion centers have… opportunity to have higher margins.
Simon Flannery - Morgan Stanley
And the timing for the expansion center is to get to kind of this low 20's rate, is that in another 12 months or is that three to four year as you load up the managed hosting?
Jeffrey H. Von Deylen - Chief Financial Officer, Director
Yes, I think… we said on… the first phase is to kind of give a reference is that we would… in the first phase that we would generate 30% to 40% EBITDA margins in the phase I data centers. So, we expect that... that will ramp up pretty quickly, obviously what you see in the expansion data centers today is cost in front of revenue where we have fixed cost that we have talked about, whether it’s rent or network and headcount and that should continue to turn around pretty quickly.
Simon Flannery - Morgan Stanley
Okay. Thanks.
Operator
Our next question comes from Tom Watts with Cowen & Co.
Tom Watts - Cowen & Co.
Congratulation on the performance. Phil, last call you talked about a little bit of a lengthening of the sales cycle you are seeing, particularly in the managed hosting side and with enterprises. It looks like you’ve won some great contracts, but could you talk overall what you are seeing in the sales cycle process and are their economic effects here?
Philip J. Koen - Chief Executive Officer, Director
Sure Tom. Thanks for the comment. From… the comment that we made in the Q1 where we saw this kind of a nine to 12 month sales cycle, we have not seen any change in that, we are still operating that environment and the build… big driver here is simply the layers of approval when deeper scrutiny goes around this. So, I think that we are at that level. I don't think there is going to be anything would suggest at this point, there is no evidence that that's changing, either positive or negatively. And we’ve geared our own plans around that kind of... that time line.
Tom Watts - Cowen & Co.
Okay, separate area on the virtualized computing, I know when you first started out a lot… the preponderance of sales were in the firewall and security area, perhaps you talk about what sort of mix are we seeing in virtualization, how much of it is compute versus storage, versus security, versus network and is that shifting?
Philip J. Koen - Chief Executive Officer, Director
I probably don't have the level of [inaudible] kind of give you an overall higher level comment. So, in the virtualization, that fits in our hand product in the firewall, virtualized firewall, virtualized load-balancing capability and as we said we’ve seen a very nice take up rate of 16%, year-over-year growth. And I think that will just discontinue. In Virtual Intelligent Hosting platform we’re talking about is using VMware on HPC class plays, which we introduced recently and it’s a lower price point, doesn't have the same high availability capability than our utility platform and serve kind of a nice middle chunk of a market that we haven't addressed yet. And what we are seeing there is we are continuing to see a nice adoption rate to the VIH platform, but interesting enough we are also seeing more virtual instance per box being turn out. So, you get a double worming [ph] affect. Still very early on, too early to draw any long-term trend from this because it has been relatively new to the marketplace, but so far I've been pleased with the adoption rate and how we’ve executed to get that.
Tom Watts - Cowen & Co.
And then just finally, one of the concerns always is that Thompson Reuters network revenue did go away, particularly with their merger integration, I know that’s actually many, many contracts under a master umbrella [ph] contract. Were there any developments in the quarter that, could you give greater insight where that might be going?
Philip J. Koen - Chief Executive Officer, Director
Well, I think we put out a press release and said that we renewed that contract on substantially the same terms as old contracts, so nothing is changed from that. And it was a one-year renewal. I view this as an opportunity, quite frankly for us to expand our relationship with Reuters as they go through that integration as you will know, they’ve put out their some pretty hefty targets for consolidation savings. And I think that we play predominant… a great role to be able to go and help them get that. I will also tell you that our relationship with Reuters, just beyond the network element has expanded over the last 12 to 18 months. So I'm feeling very comfortable with our current position with Reuters and I see this as an opportunity.
Tom Watts - Cowen & Co.
Okay. Thanks very much.
Operator
[Operator Instructions]. Our next question comes from Jonathan Atkin with RBC Capital Markets.
Jonathan Atkin - RBC Capital Markets
Yes. Good afternoon. A couple of questions, one is wondered if you can give us a little bit of color on churn and the trends there during the quarter, what the primary drivers were. And then in your legacy facilities and it’s vital you break out expansion versus legacy. Focusing on legacy, can you talk to us about the revenue growth and also the margin trends, are there going to be similar sequentially for the foreseeable future as what we saw during the most recent quarter and could you tell us also what maintenance CapEx was in those legacy sides?
Jeffrey H. Von Deylen - Chief Financial Officer, Director
Sure, Jonathan, to [ph] get all the questions out. From a churn rate perceptively we had ticked down slightly from the first quarter to 1.7%, but again we, I think feel good about where we are at from a churn perspective, so that’s just kind of gives you one data point on the churn. In terms of... I’m not going in order, I need to... can you re-ask the second question, and I will come back to the maintenance CapEx on the data center.
Jonathan Atkin - RBC Capital Markets
Yes. The legacy side you broke out kind of your growth between expansion and legacy, the legacy revenue growth was obviously, relatively modest, given utilization there and the margin trend is relatively flat and is that the type of sequential trend that we can kind of expect going forward in the legacy facilities?
Jeffrey H. Von Deylen - Chief Financial Officer, Director
In legacy, most of the network is in the legacy, so you’ve got, I think you got to kind of try to strip out of the network separately because the network is... network revenue is declining. So that's kind of masking some of the growth, but I think you’re… most of the growth clearly is going to come from the new expansion data centers, although as we continue to sell managed hosting to customers in all data centers, I think there is an opportunity that that will be sort of spread evenly, but clearly our footprint in our legacy data center is from a growth perspective is not as... the opportunity is not as good. So that's... when you think about the legacy business growth I would just in terms of thinking about to take the networks revenue out for both quarters and I will give you better sense of what the hosting only related growth is.
And then on the maintenance CapEx, I mean we... we didn't... we haven't talked specifically about the CapEx in terms of success phase maintenance, I could tell you on an annual basis the way we think about maintenance CapEx is in that $20 million to $25 million range and that's been pretty consistent, 2007 and 2008 with 55%, 60% of that going to the data centers. So… and largely going to the older data centers, obviously the new data centers would have no maintenance CapEx at this point.
Jonathan Atkin - RBC Capital Markets
Right. And then finally you talked about the growth over the next two quarters in managed hosting and can you... I assume the product set is going to be primarily server maintenance, management as opposed to some of the newer cloud [ph] computing and virtualization products, but just wanted to confirm that that’s the right way to think about it?
Jeffrey H. Von Deylen - Chief Financial Officer, Director
Well, I mean, I think it's across the product line. I think we have... I mean, as we think about that, that platform we've… I think you should be thinking about it on the virtualized platform of whether that are [inaudible] computer storage or whether it's VIH or VMware I think those are the services that I think are resonating most with the customers today and that's where we are driving the best growth. As opposed to the older traditional will manage your Dell and EMC, storage and compute, customers clearly are going to the virtualized platforms where they can… where the scalability of the platform, they get the benefit of that as oppose to just the benefit of our operating their environment.
Jonathan Atkin - RBC Capital Markets
Great. Thank you very much.
Jeffrey H. Von Deylen - Chief Financial Officer, Director
Sure thanks John.
Operator
Our next question comes from Manny Recarey with Kaufman Bros.
Manuel Recarey - Kaufman Bros. Equity Research
Thanks. Just one question, with the better performance in the colocation and on the managed hosting was anything from the operational kind of sales execution that was different in the quarter or was it just the overall kind of market demand and guys are able to capitalize upon it better?
Philip J. Koen - Chief Executive Officer, Director
I think, every quarter operationally we get better from the sales execution standpoint and I also think there is obviously an element of the market demand out there. Clearly Manny, our message has continued to be one that we want a sell solution. We are not a colo space [ph] play and so we are trying to get our sales organizations the move from that kind of mentality and to selling integrated solutions. And I think that we are making good progress along that lines witnessed by the nice quarter we had in managed hosting.
Manuel Recarey - Kaufman Bros. Equity Research
Okay. Thanks.
Operator
Our next question comes from Sri Anantha, with Oppenheimer & Co.
Srinivas Anantha - Oppenheimer & Co.
Yes. Thank you. Couple of questions, Phil as we look at the average revenue here, it stayed relatively constant and based on your comments you seem to indicate the pricing seems to be holding up pretty well, can you just give us some color if the solid pricing with colo being offset by network services and managed hostings. And also could you just talk about how the pricing trends in managed services in general, overall? Thank you.
Philip J. Koen - Chief Executive Officer, Director
Okay. Let me take the last part, the pricing around managed hosting. So much of that is contingent upon the bundle solution and what elements are in there. So, there is going to be some just natural noise, they come through that number, if we just look at the managed hosting alone. I think that Jeff, in his comments when you look at the average revenue kind of per yield taking all our square footage divided by our total revenue does have some element of mix. Clearly the colocation revenue tends to have… is a bigger market, it’s a well defined market growing at a faster rate than the overall managed hosting market and so mix shift comes in and has affect on that.
With regard to colo, I think the important point that I wanted to make here is two-fold, number one, is that there is still a favorable pricing trend across our entire footprint and secondly that I think when you have to... when you look at pricing it’s somewhat confusing to look at colo prices, simply like dollars to square foot or dollars per cabinet because really the important factor that we really saw at the end of day is the amount of power that’s being consumed. That's why we have taken some time to try to give to you a sense of how our footprint matches up and the spectrum of being able to identify needs against standard power requirements up to really ultra high power. And what’s interesting we do a lot of work in this and I think we have a deep understanding of this, especially against our competitive base is exactly where market clearing prices are on the kilowatt hour basis or kilowatt basis.
The second point of this is that there is an elasticity of demand, especially for the higher powered facilities, there are clearing prices at which if you fall down below you can dial up demand pretty quickly and there is also prices that you go above it, you're going to get the counter point of that. So, that phenomena continues to play out especially for those individuals who are really focused on larger footprints, which is not on actual space. And what we are really more focused on, is continue to drive towards a total return on investment as we look at the overall colocation investment we have. So we are very, very focused on making certain that we are hitting the price points that we want to achieve in order to get our ROI models. So, I’ll pause there, I’m hopeful I've answered the questions you asked, and if you have a follow up, I’ll certainly take it.
Srinivas Anantha - Oppenheimer & Co.
Thanks Phil, thanks for details. Just one follow-up on an earlier question, I know Reuters contract you mentioned that they have recently renewed, but the way I am just trying to understand that it’s a matches with this agreement. Is there a revenue commitment that they have done that they are going to spend an X amount and if so how does that correspond to the revenue that you guys have generated from that contract in 2007?
Philip J. Koen - Chief Executive Officer, Director
Yes the... what we have is a Master Service Agreement and underneath that there is individual service orders, they contract for services delivered at price points and term. So, what we have done is we have renewed the Master Services Agreement and underneath that while these individual service orders that continue to live on. There is no revenue guarantee or commitment tied to that Master Services Agreement.
Srinivas Anantha - Oppenheimer & Co.
Got it. And just lastly on the expenses, Jeff, I know you indicated that seasonally you’ll see higher power expenses as you go into 3Q. Did you have any of those benefits in 2Q and were there one of the reasons why your SG&A was definitely well below what we are expecting here?
Jeffrey H. Von Deylen - Chief Financial Officer, Director
No. And just to be clear, the energy cost are all in cost of revenue so there is… so really what we think about if we just kind of look at even historically our utility cost and are being fairly flat as a percentage of revenue in that 11% to 12% range although then they tick up in Q3 and that’s... so it's really a Q3 issue. So we've been up “get any benefit in Q2 from that.”
Srinivas Anantha - Oppenheimer & Co.
Thank you.
Operator
Our next question comes from Mark Kelleher with Canaccord Adams.
Mark Kelleher - Canaccord Adams
Hi, guys.
Philip J. Koen - Chief Executive Officer, Director
Hi.
Mark Kelleher - Canaccord Adams
Nice quarter.
Philip J. Koen - Chief Executive Officer, Director
Thank you.
Mark Kelleher - Canaccord Adams
I want to go back to the colocation exceeding the managed services. Is there any explicit connection when you sell the colo, any agreement with those customers that they will later take managed services?
Philip J. Koen - Chief Executive Officer, Director
Mark, in some instances there is a explicit agreement that they will take some and in other instances there is a strong belief that they will. So I don't want to overplay this, I think the key point here is that and after a very specific type of customer. I think that we've talked about this at length in prior calls as to who is our natural player and who isn't. And to that extent, we continue to try very hard, to track that customer who has a propensity to buy more than just rob space. Clearly, our model is fully predicated on driving as much revenue out of it invested dollar in a data center as possible. And you are not going to do that by simply just selling space.
Jeffrey H. Von Deylen - Chief Financial Officer, Director
Mark, I think a couple of other ways we do that if you just kind of get the details of opportunities coming to us is through our pricing and pass the end approval. Clearly, we want to understand what other services over time could be purchased. Clearly, those are contractual at the time and then to the commission plan, I mean colocation is the lowest from a revenue perspective, our lowest compensated and managed hosting is the highest. So we kind of try to use those other, those two levers as well as we work through with the sales organization on the prospect and who ultimately we want to try to having a data center and to Phil's point that he made on the colo's there were opportunities over the first six months where we have taken, turned down opportunities that were very one price focus and very colo focused.
Philip J. Koen - Chief Executive Officer, Director
Mark, I want to add one other comment that there is somewhat of a self regulation affect in here too is that the customers who want to be able to buy into a strategy, which gives them flexibility to continue to change their IT infrastructure and move to a service based delivery is one of the reasons why they are attracted to our collocation. Let me give you an example to that. They think about their storage needs, but they prefer to go and operate their own stores or will they be able to move into a managed store solution. When you think about Internet access, be able to plug into our virtualized firewall load balancing capability, and then be able to attract on top of that managed security services. These are the customers so they think how they are evolving their needs are the natural individuals that we want to attract as opposed to someone who gets locked in a cage... there are other providers that when you move them you are locked in that cage and that's the only thing you are going to get. So there is a natural draw here where people are beginning to understand the flexibility of our model and I think we do a good job of attracting those guys.
Mark Kelleher - Canaccord Adams
And do you keep track of how much of your space is not being maximized or utilized by how much is just colocation. Do you have customers that are sort of stranded that you would rather have out?
Philip J. Koen - Chief Executive Officer, Director
Well. We obviously in the last 18 months have gone on a free active campaign to take a big footprints out there clearly we're never going to buy any managed services. So I'd tell you that that is well there is one more piece that we talk about that comes at the end of... in November of this year. And clearly, then as we look at... as we look at the installed base we know who are bringing in and why we’re bringing those people in as far as people of a longer legacy make sure when their contracts come up we're constantly trying to be able to make certain we can up sell them.
So there is a strong component here of up selling and I think that... I think the... the real thing is that we have something to value here. This space is highly differentiated, it's the… it’s one of the few places I know as your business change you can sing [ph] resources with one individual to address those needs, that's very different then getting locked in a cage and just having a ride with whatever is available to you in that spot, which tends to be just power and space.
Mark Kelleher - Canaccord Adams
Are you seeing any competitive... competitors coming close to you in that offering, how is the competitive environment?
Philip J. Koen - Chief Executive Officer, Director
Yes. I think again we had a segment to market and I tried to give you a sense of who are natural customers are and the complexity of what we are dealing with and the kind of range of what we see as kind of the natural sweet spot on contract size as composed to other guys out there who have a very good offering, but at a lower complexity level. What we are not dealing with is turning up a LAMP stack. We're not dealing with a customer who wants to buy one server and take 1,200 bucks, give me a LAMP stack and that's about it. That's not our natural sweet spot, that's not what we have to offer, that's a great business by all for sure. But we're looking at mid-to-larger enterprises where we can become a trusted partner and help them change the way they think of IT and infrastructure. So the world is... you have to bifurcate the world on their complexity and that clearly we are in the more highly complex type of managed offerings than other people.
Mark Kelleher - Canaccord Adams
Okay. Thanks.
Philip J. Koen - Chief Executive Officer, Director
Thanks.
Operator
Our next question comes from Nick Netchvolodoff with Lehman Brothers.
Nicholas Netchvolodoff - Lehman Brothers
Hey, guys. I know we've talked about pricing in general demand, but could you also talk about the size of your new customers versus your existing base and how that's trending. What your thoughts are and the implications over that?
Jeffrey H. Von Deylen - Chief Financial Officer, Director
Nick, I think on new opportunities, clearly this quarter we had some very nice managed hosting wins. I think when we, think so laid out on slide kind of the… what the average MRR, I think the contract value, but when you think about MRR is $50,000 to $100,000 of spend a month. So we had some very nice new wins in the quarter, who are very focused on this complex, more complex services some very interesting web hosting or web basing brands where they are choosing us to manage what is a critical asset for them. So that would kind of be... some of the successes we had on the managed hosting side.
I think on the colocation side, I think it's a bit all over the map in terms of size of customer wins, but I think one thing as we… again is that footprint narrows in terms of different data centers, I think you'll see us… you’ll see the colocation side of that being probably more targeted to smaller footprints from a size and then really focused on what is the value proposition of buying managed services. And we've a number of wins, each quarter where the customers buy multiple services, they buy colocation and managed services right out of the gate.
Nicholas Netchvolodoff - Lehman Brothers
All right.
Jeffrey H. Von Deylen - Chief Financial Officer, Director
Because they need… in many cases they want colo for a legacy application that would... that they just want to keep it run, because that's the way they’ve done it, quite clearly having a path to migrating to some of our managed services.
Nicholas Netchvolodoff - Lehman Brothers
Okay thanks. Great quarter.
Jeffrey H. Von Deylen - Chief Financial Officer, Director
Thanks.
Philip J. Koen - Chief Executive Officer, Director
Thanks.
Operator
Our next question comes from Jonathan Schildkraut with Jefferies.
Jonathan Schildkraut - Jefferies & Co
Thanks for taking my questions, guys. Couple here. First, if you can tell us about your sales channels, are you still primarily using a direct sales force and kind of give us some color on sales force productivity, often that you guys have talked about the past? And along those lines, I think... this quarter didn't seem and I may have missed it that you broke out the bookings number, which is up then you had done. And I've a follow up. Thanks.
Jeffrey H. Von Deylen - Chief Financial Officer, Director
Yes. First of all, on… almost of our sales comes from our direct sale force, so that is essentially when we think about the complex sales that we get into and try… and differentiating our services between what we are going after versus a less complex sales, that is the way we've sold and... almost, again on most of our sales come from that direct sales force. In terms of breaking out… historically we've not provided sales productivity numbers I think just from a competitive standpoint and then in terms of you'd ask a question about sales bookings this quarter. I think what we tried to Jonathan on the projections for the revenue is break out the revenue by the service categories and give you a sense of what are projected growth rates are for manage, for colo and for network, feeling like that would give a little better visibility as oppose to bookings, which did intend to necessarily...what necessarily, easily converted into what next quarter’s revenue or for the future revenue. So, that's kind of one of reasons we’ve made that change.
Jonathan Schildkraut - Jefferies & Co
Okay. During Phil's comments, he mentioned that Thomson Reuters, there was a hope that at some point down the line you may transition them, or be able to win additional service contracts with them. I was wondering, as you kind of envision what possible services they may sign up or what we can think about?
Philip J. Koen - Chief Executive Officer, Director
Yes. Jonathan, I think there is a couple of things there are interesting opportunities for us to go after, one is with the Thomson data collection network, which the Reuters is taken a hard look at is how should they approach that. As you all know, the traditional Reuters side of that piece is already locked into a long-term agreement with BT, the Thomson piece for that is up for grab, so that's… and since Thompson was primarily a domestic U.S. focused organization, there might be a nice opportunity for us to try to take a piece of that.
The other piece of this is that they are looking at, I don't want to get into too much detail, because this is really more of a competitive thing for Reuters. But they are looking at how they might be able to do some interesting things with a FAS based delivery model. And as you all know, we’ve talked about in the past that we have a target market initiative where we are developing a FAS solution. As a matter of fact, we've already had a number of successes with Thomson customers. I think... we have an opportunity there to try to go after… as Reuters thinks about how they go to market that we might be able to help them with the managed hosting solution that is really in a FAS based model.
So those are two opportunities that we know upfront that we are looking at hard. No promises, you got to go win it. But clearly, there is an opportunity for us to go execute against.
Jeffrey H. Von Deylen - Chief Financial Officer, Director
I think one thing to put in context, Jonathan, as well is the Reuters business is… when you eliminate the [inaudible] side of the business, which is obviously they acquired and made a decision to disconnect and migrate their services. The Reuters business has grown year-over-year from the second quarter and year-to-date. A lot of the growth frankly is in the hosting side of business, I mean the network business has held up and has a little bit of growth. So really the hosting services that we've captured and won that we announced last year are continuing to do well. And as Phil mentioned, they think about how they transform their business, I think our hosting assets and delivery of services together with our expertise for the network are really position us well with them, but obviously still we got to go and we got to go win it.
Jonathan Schildkraut - Jefferies & Co
Well, congratulations on a good quarter and also wanted to say thank you to Elizabeth to... it's been a pleasure working with you over these several years and we definitely appreciate your contribution.
Elizabeth Corse - Director of Investor Relations
Thanks Jonathan.
Operator
[Operators Instructions]. Our next question comes from Jason Armstrong with Goldman Sachs.
Jason Armstrong - Goldman Sachs
Hi, thanks. Good afternoon. I'll just keep it to one in the interest of time. In terms of power requirement in legacy data centers, you guys did a great job I think of breaking out in sort of three segments, the powering capability and sort of the penetration utilizations to that, as we think about clients are obviously from you're stats still taking the sub-100, but there is obviously going to be a general migration upwards in terms of what clients demand. Can you step us through the pace at which you are upgrading powering capabilities in some of these data centers... it have the basis sub-100 watt right now, how quickly can some of this move into the sort of 100 to 125 range?
Philip J. Koen - Chief Executive Officer, Director
Yeah Jason, let me take a stab at this. First of all, let me clear that it is very difficult for you to go and retrofit a facility that's been architect at 100... whatever power rating that it has been architect at and to upgrade it. It's prohibitive and quite frankly you would probably be better served to go build the new one.
So, we've talked about this before that as we look at our distribution and power capability... I would like the distribution we have and there has been this notion out there that somehow there is no demand for 100 watt and less type of square footage power rating and what I'm telling you is that there is, there is still a lot of legacy applications out there that don't require ultra-high power requirements. And quite frankly if you think, you got for a little bit of a longer-term view on this, then I don't think anyone has the answer, but it’s interesting when you think about that today at these higher power requirements and given the cost of power clearly is going up and by the way these comments were made when oil was at 60 bucks a barrel, and you know, whatever it's today at a 120 or north, that in three years, the cost of the server... the cost of power exceeds the cost of server.
So, I wonder, what you really achieving by continue to do that and I do think that this notion that some were sub-100 watt facilities are going to be dinosaurs is just not incorrect. Clearly, as you continued to expand your footprint, you tend to build out at prior… at little bit higher rating and your mixed shifts just naturally over time. But the flip side of this and this is why it’s important to understand that the price per square foot is misleading one that what we look at is how much are you really paying on a kilowatt equivalent.
And by properly pricing a kilowatt equivalent, we still get our returns. So, I don't have a specific answer for you how quickly these things change. Clearly today there is relative to a year ago less demand against that. But by witness the fact, that we had some pretty healthy installs, there is demand there. And we managed that actively... what you don't want to do is to take a facility that is rated at an ultra-high and move a customer into that simply because they like the new facility that doesn't require it. So, you got to manage that requirement to your capability and it’s we view this as kind of a fleet of capabilities out there that we actively manage.
Jason Armstrong - Goldman Sachs
Okay, that's great. Thanks and Elizabeth best of luck to you.
Elizabeth Corse - Director of Investor Relations
Thanks, Jason.
Operator
I am not showing any further question at this time.
Philip J. Koen - Chief Executive Officer, Director
Well, thank you again for joining us on the call, and we look forward to updating you at the end of Q3. And very best of luck to Elizabeth. We really appreciate everything you have done.
Elizabeth Corse - Director of Investor Relations
Thank you Phil.
Operator
Once again, ladies and gentlemen, thank you for participating in today's program. This does conclude our conference. You may all disconnect and have a wonderful day.
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