Switch & Data Facilities Company, Inc. Q2 2008 Earnings Call Transcript

Switch & Data Facilities Company, Inc. (SDXC)

Q2 2008 Earnings Call Transcript

July 29, 2008 4:30 pm ET

Executives

Kathleen Heaney – IR

Keith Olsen – President & CEO

George Pollock – SVP, CFO and Treasurer

Analysts

Jonathan Schildkraut – Jefferies

Sri Anantha – Oppenheimer

Greg Miller – Deutsche Bank

Colby Synesael – Merriman

Manny Recarey – Kaufman Brothers

Erik Suppiger – Signal Hill Group

Rod Ratliff – Stanford Group

Jonathan Atkin – RBC

Presentation

Operator

Good day, ladies and gentlemen, and welcome to the Q2 2008 Switch and Data Earnings Conference Call. My name is Antoine and I will be your operator for today. At this time all participants are on a listen-only mode. We will conduct a question-and-answer session towards the end of this conference (Operator instructions). I would now like to turn the call over to Kathleen Heaney. Please proceed, ma'am.

Kathleen Heaney

Thank you and good afternoon, everyone. This afternoon after the market closed, Switch and Data released second quarter 2008 financial results. If you do not have a copy, one may be found on the Web site 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 presentations, 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 arrive after the date of this conference call. We refer all of you to the Company's recent filings with the SEC for a more detailed discussion of the risks that could impact the Company's future operating results and financial condition. In addition, I would like to point out that during the course of our discussion this afternoon, we will mention financial terms such as adjusted EBITDA, which is a non-GAAP financial measure. While this is a non-GAAP measure of financial performance, management believes it is a common and useful tool in evaluating the Company's performance. EBITDA is defined as operating income plus non-cash items including depreciation, amortization, stock based compensation, lease litigation cost, preferred rent and certain other costs. Our reconciliation to comparable GAAP measures can be found on the end of the earnings press release as well as on the Company's Web site. With that, I would like to turn the call over to Keith Olsen, President and CEO. Keith?

Keith Olsen

Thank you, Katherine. Good afternoon, ladies and gentlemen and thank you for your time today. I would like to welcome everyone to our 2008 second 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 will open the call for your questions. Before I speak to our metrics, I wanted to share with you some insights from the quarter. They all relate to the continued strength in our business.

The second quarter was the best sales production quarter for the Company ever. Bigger deals, more booked MRR or monthly recurring revenue speaks to the demand for our services. These customer decisions are consistent with the forecasted reports of increasing sets of development centered on IP and Internet enabled applications. The results are across the board from our perspective. Bigger deals enabled by our recent expansions, more deals form larger decisions across multiple sites reconfirming the value of our broadside footprint and a strong interconnect core of supporting our customers traffic growth. We posted outstanding results in the second quarter, which was our sixth consecutive quarter of growth since our IPO.

Second quarter revenue increased 26% from $33.2 million to $41.9 million over the same quarter of the prior year. This strong revenue growth helped impressive EBITDA performance for our business. The second quarter EBITDA grew 45% from $9.8 million to $14.2 million over the same quarter of the prior year. Our EBITDA margin grew from 29% to 34% over the second quarter of 2007.

A number of factors contributed to our second quarter results including the increased product capacities in a number of markets including Dallas, Sunnyvale, and Toronto. Continued sales and revenue growth from our existing customer base, larger size new deals as well as expense management actions improving our bottom line. As our momentum continues our business accelerates. Earlier this year we raised guidance for our revenue and EBITDA targets for 2008. The numbers for this quarter put us on a trajectory to surpass these targets. George will speak more on this topic in just a bit.

We have been on the road meeting investors, speaking to customers and gaining incremental insights from the markets we serve. When we speak with investors, they wish to gain additional insights on supply and demand. When we speak with our customers, it's all about demand and deployments. Our customers' interests are centered on how we will assist them with their business growth. Strong demand for data center and interconnection services continues to drive growth for us.

The root of this demand is increasing volumes of IP and Internet traffic. This traffic is based on fundamental changes in the way consumers in businesses rely on the Internet for entertainment, information, communication and commerce, in other words, all aspects of our personal and professional lives. Investors continue to ask about the announcements on bills, the balance of supply and demand and the impacts on pricing. This topic is important to understand as it relates to the differences in both business' and operating models across the provided categories. I will refer to each of the each of the categories of data center providers as follows.

There's one group that is the real estate or wholesale providers. There is a second group that can be classified as carrier-specific providers. And then, of course, there's the third group or the carrier neutral services providers and Switch and Data is a neutral service provider. Each category has a mix of demand drivers and suppliers. We operate as a carrier neutral service provider as well as an Internet exchange point. Our offers includes diverse connectivity options, carrier choice, peering and exchange point services and our methods of operation and technical support are unique to our model and require different levels of technical and operational support.

These differences resonate with our customers decision points. New supply in our carrier neutral category is the subset of the overall data center capacities coming online. Companies scaling to deploy new IP centric applications need efficient exchange points to support their growth. As our customers launch new applications and services, they will continue to contribute to this growth, and this traffic growth increases demand for the services we provide. Currently customer demand is outpacing our supply in a number of markets and we continue to add capacity to meet this demand.

Switching gears from this macro discussion about the industry, I would like to take this to ground level for a few highlights that contributed to our second quarter success. Two thirds, two thirds of the new business we won in the quarter landed in Dallas, Sunnyvale, and Toronto. These are the sites that we have increased our product capacities in the first half of 2008. You may recall that we have spoken about these particular projects during the past few earnings calls. These Internet-centric companies are really Switch and Data's companies and customers to supply. And it may be helpful to understand our customers businesses, the way they use our sites to gain further appreciation for the reasons behind the strength and demand from our existing customers.

It's not only from what they tell us but it's the observation that we have that the demand drivers for our business remain strong. Most of our customers fall into three main categories or segments. There is content providers, there is services providers and there's network providers. These three customer segments comprise much of the supply chain of the Internet. Content providers need to scale their service and interconnections to get their content and applications onto the Internet. The service providers like CDNs and Internet infrastructure providers need to add scale to provide services that facilitate the efficient movement of traffic across the net. And the network providers who carry the content to and from its end users or other last mile providers are also scaling their operations to support larger volumes of Internet and IP traffic growth.

Across the supply chain, the creation of new applications and rich media content requires scale and density. These customer sets are Switch and Data's customers and they all will be growing their businesses, they all require incremental space, power and interconnections in our sites to support their applications and traffic growth. To better illustrate this growth, allow me to speak to a few of our second quarter wins. And I'm hopeful that these customer examples will provide context to what I just shared.

Amazon.com the leading online retailer added capacity to serve new content to consumers. Xenaverse, a company which helps communications service providers in Iraq, expanded into new sites in the quarter to support service offerings like its mobile data roaming solutions. And Comcast, a leading cable TV and communication provider expanded its networks in our sites to support the deployment of Voice over IP.

Also contributing to our strong second quarter results and performance was an increase in the size of the new deals that we won. The average deal size in the second quarter 2008 was 54% larger than in the second quarter of 2007. We had significant wins with new logos including software maker Adobe; content provider, Various, Inc.; and data mining company, Greenblum. Additional wins in the quarter included NTT, Level 3, Time Warner Cable, China Cash, and Reliance Globalcom. These are examples of growth from our existing customers.

Our new business wins and our success selling it to the new site capacities underlying the strong demand for our services and support our investment thesis. We have already added more cabinet capacities in the first half of 2008 than we had added in all of 2007. We are on track to meet our 2008 expansion plan of 3000 incremental cabinet equipments of capacity. We continue to look for opportunities to invest in capacities and infrastructure to meet our customer demand. I have shared with you financial highlights and insights into the demand for our services. I'll recap a few of the key operating metrics for the quarter.

Billed cabinets increased 15.1% from 6,184 in June 2007 to 7,117 in June 2008. Cross connects increased 8.8% from 18,775 at the end of June 2007 to 20,419 at the end of June 2008. Cabinet ARPU or average revenue per unit increased 9.1% from $1,809 in the second quarter of 2007 to $1,974 in the second quarter of 2008.

Capacity utilization was 65% in the second of 2008 as compared to 69% at the end of the second quarter of 2007. This reflects the impacts of the new capacity we added in the first half of the year. In the second quarter, we added 950 cabinet equivalents, and as of June 30th, we had approximately 11,000 sellable cabinet equivalents. The growth forecast for IP and Internet traffic from the analysts and the leading technology companies are robust. These forecasts paint a bright future for the types of services that Switch and Data provides. I am proud of the Switch and Data employees and the business results we delivered in the first half of 2008 and with that I'll now turn us all over to George Pollock to review our financials. George?

George Pollock

Great. Thank you, Keith. Thank you all for joining us today. I will review our second quarter financial results and provide additional insight to the quarter's solid performance. Let me start with revenue.

Total revenue increased from $33.2 million in the second quarter of 2007 to $41.9 million in the second quarter of 2008, an increase of 26%. 75% of sales were from existing customers which is lower than in prior quarters as the current quarter reflects the impact of several large new customer wins that Keith mentioned earlier. Our revenue model continues to be driven by monthly recurring revenue which was 95% of total revenues for the quarter.

Recurring revenues which consist of collocation and interconnection services increased from $31.5 million in the second quarter of 2007 to $39.5 million in the second quarter of 2008, an increase of 26%. Non-recurring revenues increased from $1.8 million to $2.4 million and our cost of revenues excluding depreciation and amortization increased from $17.4 million in the second quarter 2007 to $21.6 million in the second quarter 2008. This increase is primarily from rent, utility and personnel expenses commensurate with our facility expansion and revenue growth.

As a percent of revenues, cost of revenues remained constant with the same period in the prior year at 52% of revenues. Our sales and marketing expenses increased from $4 million to $4.9 million. This increase is primarily from personnel expenses including wages, commissions and non-cash stock based compensation. As a percent of revenues, these costs decreased from 12.2% in the second quarter of 2007 to 11.6% in the second quarter of 2008.

Our general and administrative expenses increased from $3.8 million to $4.3 million for the second quarter 2008. The increase is primarily from an increase in wages and non-cash stock-based compensation. As a percent of revenue, these expenses decreased from 11% in the second quarter 2007 to 10% in the second quarter of 2008.

EBITDA increased from $9.8 million in the second of 2007 to $14.2 million in the second quarter of 2008, an increase of 45%. And the EBITDA margin also increased from 29% to 34% in the current quarter. Net income for the second quarter of 2008 was $1.1 million and earnings per share was $0.03.

Consistent with our prior quarters, we continued our growth across all of our markets. We have previously discussed that 85% of our revenues are generated in our top ten markets. For the second quarter of 2008, over the same period in 2007, overall revenue growth was 26%. The growth in our top ten markets is 28% and the growth in the rest of the markets was 17%. Site cash flow which we define as site revenues or site expenses also increased 26%. The increase in our top ten markets was 27% and the increase in the rest of the markets was 21%, which further reinforces the value proposition of our broad geographic footprint.

For example, we booked new business from Amazon, Cogent, Comcast and Xenaverse in our other markets in the second quarter.

Let me provide a few comments about the balance sheet for the second quarter. The cash balance was $91 million. Outstanding bank debt was $120 million and our bank debt to EBITDA ratio was still low at 2.2 times.

Capital expenditures were $29 million in the second quarter of 2008 and $54 million year to date, which includes $48 million for growth capital expenditures. What does this strong performance mean to date for the remainder of 2008? As you saw in today's release, we are increasing our annual guidance. We are increasing the revenue guidance from $168 million to $170 million. We are increasing EBITDA guidance from $53 million to $55 million, and we are reiterating our 2008 CapEx guidance at $165 million.

This increase in revenue and EBITDA guidance reflects the momentum in our business and the outstanding results of the first half of the year. We will remain focused on meeting the needs of our customers, on executing on our business plan and on achieving our financial objectives.

With regards to our strong growth and revenue accelerations, we have filed a Form S3 with the SEC consistent with preparing ourselves for the future. The S3 provides us the flexibility to issue several different types of securities depending on market conditions and enables us to issue debt, primary shares, secondary shares or some combination. Since our IPO 18 months ago, we have communicated to the market and our investors that we would continue to pursue opportunities to accelerate revenue growth. The SEC filing to raise capital is consistent with the execution of our business strategy to accelerate growth and the incremental funding enables us to continue to invest in the business.

In summary, we have exceeded our expectations for the first half of 2008 and we look forward to future – to further success this year. With that, Keith and I would be happy to answer your questions. Operator, please open the line for questions.

Question-and-Answer Session

Operator

(Operator instructions) Your first question comes from the line of Jonathan Schildkraut with Jeffries. Please proceed with your question.

Jonathan Schildkraut – Jefferies

Good evening and thank you for taking some questions.

Keith Olsen

Sure, Jonathan.

Jonathan Schildkraut – Jefferies

I'm looking at the results for the quarter and MRR certainly came in very strong but cabinet adds, net cabinet adds were a little bit lighter than trends had been. Given your commentary on the bookings and sales production, could you give us some color relative to the cabinet adds in the quarter?

Keith Olsen

Sure, Jonathan. The bookings specifically were tied to the new contracted sales and we will see those cabinet adds showing up in our future quarters revenue results. As a release the cabinet adds, certainly the cabinet adds were not as significant as we have seen in the past. What we saw was a significant customer that we had for the past 18 months or so. InfoSpace, was utilizing one of our Seattle data centers as an outsource option until they had built up their own data center. And that significant churn which you – our churn number was up when we look at cabinet equivalents also contributed to the elimination of some of the gross adds that we had. From a gross adds perspective, it was still a strong quarter but some of the churn for some of the large cabinet removals of InfoSpace significantly modified the net side.

Jonathan Schildkraut – Jefferies

Okay. Could you give that churn number?

Keith Olsen

Yes. Our churn for the month was at 1.5%

Jonathan Schildkraut – Jefferies

And that's MRR?

Keith Olsen

That's correct.

Jonathan Schildkraut – Jefferies

All right. Great. I'm looking at your guidance for the remainder of the year and based on your commentary around bookings and some of the strength we are seeing in the broader market, it looks like your guidance is conservative, and I'm wondering if there is a level of conservativism in there or if there are certain events that may not be obvious that we should be aware of?

George Pollock

Jonathan, this is George. No, it's normal course. We'll continue to see the revenue grow. As we spoke about during the year with respect to our guidance, as we bring on incremental capacity in the markets, those costs hit us in the quarters as we bring online the capacities. So, in the second quarter, for example, we have not yet seen the full impact of Dallas or Toronto, Northern Virginia. We will see full quarter impacts in the third quarter as well as bringing on New Jersey and then a bit of the seasonality with utilities. So, we do see a bit of a compression on EBITDA margin percentage in the third quarter. We are still guiding to a increase from 31% to over 32% in the full year margin. So, we are confident in the business. Again, it has to do with investing in the business and there's no one time type expectations that are hindering the continued expansion of the margin.

Jonathan Schildkraut – Jefferies

Great. And you said you would expect to see some margin compression in the third quarter?

George Pollock

Yes. I would say relatively it's 34% in the – almost 32% in the first quarter, 34% in the second quarter. It kicks off a bit in the third quarter and then we see the nice ramp back up in the fourth quarter, which will contribute to a full year view of north of 32% on the margin which is up from last year and almost 1.5 point up from our original guidance.

Jonathan Schildkraut – Jefferies

Great. Along those lines, the non-cash lease expense came up a little bit more than we expected in the quarter, at $1.4 million, approximately. And I know that as you take on other projects that that number may continue to grow. Was there anything special in this quarter's number or this is another number that we should be working off of, this is a good number to be working off of on a go forward basis?

George Pollock

Yes. Nothing of any – anything outside of the ordinary, it's just as we continue to renew leases and extend terms out 10 years to 15 years up with respect to the straight line rent. So, it's more just normal course of business execution. We spoke about the Toronto, Dallas' the leases are coming on line, that certainly will have some impact as we roll through this year.

Jonathan Schildkraut – Jefferies

Great. One follow-up question and then one housekeeping item. Looks like accounts payable and accrued expenses spiked a little bit in the quarter. Could you give us some color there? And then finally can we get the gross square feet number as of the end of the quarter?

George Pollock

Yes. So, your first question, the spike has to do with the timing of payment of capital expenditures. On the bottom of the statement of cash flow, you'll see the disclosure on the amount of CapEx expenses in the accrued and accounts payable line. So, it's really normal course as we ramped up our spend in terms of $165 million. It's pure timing of payment.

Jonathan Schildkraut – Jefferies

Great.

George Pollock

Your second question, gross square foot, 806,000, and then with New Jersey coming online in September, 970,000.

Jonathan Schildkraut – Jefferies

All right. I'm going to follow up with you offline because that doesn't match up to numbers I had before.

George Pollock

Okay.

Jonathan Schildkraut – Jefferies

All right. Thank you again for taking the questions.

George Pollock

Sure. Thanks, Jon.

Operator

Your next question comes from the line of Sri Anantha with Oppenheimer. Please proceed with your question.

Sri Anantha – Oppenheimer

Yes. Good afternoon. Thank you.

Keith Olsen

Hello Sri. How are you?

Sri Anantha – Oppenheimer

Good. How are you?

Keith Olsen

Good, thanks.

Sri Anantha – Oppenheimer

Guys, the MRR came in much better than expected, obviously the cabinet adds were lower. Could you guys talk about the pricing trends and –?

Keith Olsen

Pricing trends have been consistent from the standpoint of the expected uplift to this year about 3.5% on revenues. I think what you have to focus in on is the strong interconnection quarter that we had

Sri Anantha – Oppenheimer

Yes.

Keith Olsen

Right? And so very significant in the mode and the sizings of our interconnection revenues on top of – across the whole platform of the business.

Sri Anantha – Oppenheimer

Got it. And, George, on the power expense, utility expense, there’s so many things going up. Could you guys talk about what percentage of your cost of revenue today the percent you really spend and how has that been trending during the past couple of quarters? Thanks.

George Pollock

Sure, Sri, how are you? We have not spoken specifically about the percent of utilities in costs of revenues. What I can say is there are certainly some markets that have been impacted with increase in utility expenses. Many markets are flat and a few markets have actually ticked down a bit. As we look at the impact to margins and as we are able to continue to drive value with respect to our services we do not see a negative impact to EBITDA margins from increase in utility expenses.

Sri Anantha – Oppenheimer

All right. The CapEx also just seem to be coming in lower than expected. But then, you are also guiding to the CapEx remaining the same. So, should we expect a steep ramp as you go into 3Q or 4Q or is there a possibility some of that could be pushed into 2009?

George Pollock

Primarily around timing so as again we reiterated the 165, we are in the middle of the New Jersey build and it's just a matter of how we get invoiced and when we actually cut the check. So, there would be an acceleration in the second half but it would still total to the 165 at the moment on the interim basis, it's just pure timing.

Sri Anantha – Oppenheimer

Good. Thanks a lot, guys.

Keith Olsen

Thanks, Sri.

Operator

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

Greg Miller – Deutsche Bank

Thanks, guys. And good job on the quarter.

Keith Olsen

Thanks Greg.

Greg Miller – Deutsche Bank

Just a couple of follow-ups on Jonathan's questions. I think he pretty much did a pretty good sweep here. With two-thirds of the new business coming from the Sunnyvale, Toronto, and Dallas, is that revenue that hit the quarter or is that just net –?

Keith Olsen

Net bookings.

Greg Miller – Deutsche Bank

Bookings, okay. So, that's something that as we see the incremental costs in the third quarter, we should see the commensurate revenues while –

Keith Olsen

That's correct, Greg. That is correct.

Greg Miller – Deutsche Bank

Okay. And was that to fulfill like a significant backlog that you had or that should then taper in the fourth quarter and roll into 2009 or was that just simply a business that came on as soon as you started marketing open space?

Keith Olsen

Sure. As we have talked about on these calls before, we start our marketing of our expansions in our new sites 60 days prior. And what we were able to secure was the strong demand in the markets and the timings of customer decisions in line with the customer ready dates of those sites. Of course, there's always the sales teams working with their customers based upon what their known plans are and have an understanding for our CRV so I'm sure that there's some bit of a pop that comes based upon the opening. But it was consistent with the way that we had been marketing and merchandising our expansion plans 60 days out.

Greg Miller – Deutsche Bank

All right. Good. And then the only other question was the markets, the non-top ten markets the 17% top line growth. What's the current thought process on those markets? Are they every bit as important to the Company as they have been historically or has there ever been any consideration to potentially divesting the slower growth markets and to –?

Keith Olsen

Yes. I think George touched on that a little bit with some of the significant customers and their orders have landed in the non-top ten markets. This particular quarter on a number of the deals that I referenced also included multiple sites which although the bulk of the revenues land in the top ten which is consistent with our capacity adds, a number of the deals also fell into the footprint – into the rest of the footprint which is a strategic advantage that we have here in North America.

Greg Miller – Deutsche Bank

Okay. Thanks a lot guys. I appreciate it, and again congrats.

Keith Olsen

Thanks, Greg.

Operator

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

Colby Synesael – Merriman

Okay. Thanks. Just real quickly with the pending capital rate coming, are you guys looking at potentially going into the new markets or do you continue to anticipate spending more on the markets you're already in that would include potential opportunities both domestically as well as internationally? And also I think Greg just mentioned that your growth was about 21% in your future [ph] markets. Can you put in your top ten markets in this quarter and I think it was 17%, I think last quarter was 21%. Am I reading too much into it that we could potentially being weakness in some of the non-top ten markets or is it pretty much across all your markets the same trend that we saw in the first quarter? Thanks.

Keith Olsen

Sure. First is that we haven't made any decisions on the capital plans going forward other than what we have announced. The S3 filing was really setting up the stage to give us the flexibilities. When we make those types of decisions that we will be positioned and ready. As it relates to the percentage growth, percentages are always very interesting. We had a very strong quarter in bookings in the top markets and I spoke specifically about how much of that of those bookings fell into Dallas, Sunnyvale and Toronto. So, we still see the other markets as being significant to our customer decision plans and adding to both top line and to the site cash flows that we expect to get from the rest of markets.

Colby Synesael – Merriman

To verify on the first question again, maybe a little differently. Regardless of the S3 that you just filed, when you think of the business strategically from today's perspective, do you think that at some point you need to be in other markets to continue to grow at rates for the next year or two from what we are seeing today or do you think that the markets that you are in are going to suit you just fine?

Keith Olsen

That's an excellent question, Colby. I think as we continue to look, and I have stated on previous earnings calls, as we looked to the incremental markets what we would be looking at is if we can get the same rates of return on invested capital, that would be one of the driving factors for us and certainly for the business to look elsewhere outside of the markets. Right now, the strategy that we have articulated consists of deeper in the top markets and utilizing sellings across the rest of the footprint, which is consistent with the plan that we are executing today.

Colby Synesael – Merriman

Great. Thank you.

Keith Olsen

You're welcome.

Operator

Your next question comes from the line of Manny Recarey with Kaufman Brothers. Please proceed with your question.

Manny Recarey – Kaufman Brothers

Thanks. Good afternoon, guys. Congratulations on the quarter.

Keith Olsen

Hi, Manny. How are you?

Manny Recarey – Kaufman Brothers

Couple quick questions here. The lost customer you mentioned was Infosys?

Keith Olsen

InfoSpace.

Manny Recarey – Kaufman Brothers

Oh, sorry InfoSpace. Have they completely left or there’s still some more cabinets that they are going to be taking out?

Keith Olsen

Actually, completely out. They had looked at a shorter-term time period. They actually – it's one of those good news, bad news stories. The churn showed up in this quarter. They had initially looked at a much shorter time period for their build to be completed. We enjoyed, I think, approximately six months longer duration of them utilizing it and then they moved out when they were prepared.

Manny Recarey – Kaufman Brothers

Okay. So, obviously, you have no problems filling up that space again?

Keith Olsen

The Seattle market is a very strong market for us. We have two sites there and this is one of the sites that we had to interconnect to get the carry densities and we've seen good demand in that site as well.

Manny Recarey – Kaufman Brothers

Okay. And can you talk a little bit about this competitive supply side on the Ethernet collocation? You spoke about sites that they saw that are to be up in the second half of '09. They had to start building now but nothing is being done on the lots or whatever. Are you seeing all these similar types of environment where you have to – other competitors who don't have the capital let's say are pushing out some builds?

Keith Olsen

I've read and heard some of those. I have not seen that impact. What I have seen is the uptick in demand in a number of our markets which is what I shared today on the call. Most of that is tied to customers looking to be able to expand either into net new markets for themselves or to go deeper inside of the existing footprint that they've already deployed. I know George and I ran through a number of the names. All of those players are significant suppliers of the Internet supply chain. And if that really resonates with the types of decisions, again, there aren't many – there isn't a lot of capacity being built vis-a-vis in the neutral collocation and exchange point services and so we see the continued pressure on the demand side based upon the overall packet volume growth.

Manny Recarey – Kaufman Brothers

Okay. Thanks. One housekeeping (inaudible) new revenue came from existing customers, you say it dipped down. What was that percentage? I missed that.

Keith Olsen

I don't know if we stated it. George, did you? I believe it’s 75%, Manny, which, for us historically, we've always been an 80% plus. That really speaks to some of the large net new deals that I highlighted.

Manny Recarey – Kaufman Brothers

Okay. Thanks.

Keith Olsen

You're welcome.

Operator

Your next question comes from the line of Erik Suppiger with Signal Hill Group. Please proceed with your question.

Erik Suppiger – Signal Hill Group

Congratulations. Great quarter. First off, in light of the S-1, can you talk about what you think your longer-term growth rates might look like if you do the financing that you are contemplating?

Keith Olsen

I don't think we’ve talked about and linking the financing to our growth rates. I know that previously we spoke that over the next – now it's 2.5 years. But it was a 3-year rising of 24% and average (inaudible) revenue growth and getting in the 3.5-year period the EBITDA margin up to 40% over those time periods. It was not linked to our S-3 filing. Our S-3 was the strategy of getting ourselves prepared as we think about the future. We have not communicated nor formulated the hardened plans for execution.

Erik Suppiger – Signal Hill Group

So, might we think that 24% could come up if you do that or is the $300 million, would that be part of your previous plans to raise capital and therefore no change on the long-term growth rate?

Keith Olsen

Right now, there's not long-term change on the growth rate.

Erik Suppiger – Signal Hill Group

Okay. Would you say that that would be – would the $300 million, something that – would that be consistent with what you were previously planning and therefore it's not prudent to change that? Or is it just that you haven't walked through the plans? You're not going out with new guidance on that front?

Keith Olsen

We are not going out with new guidance on that at this time.

Erik Suppiger – Signal Hill Group

Okay. Secondly, regarding the revenue from existing customers, I think it was 89% last quarter and it came down to 75% so it actually would have come down. Is there something outside of the InfoSpace churn that would have caused that?

Keith Olsen

I think – let me just be clear. I'm sure some other folks need this as well. MRR is those revenues. Booking is what you contracted in monthly recurring revenue. And so the percentiles that we speak to are the new orders not necessarily related to the billed revenues. Eric?

Erik Suppiger – Signal Hill Group

Okay.

Keith Olsen

Okay?

Erik Suppiger – Signal Hill Group

All right.

Keith Olsen

So, when you have large new logo deals. That will in a particular time period happens to be for the quarter that we are referencing here, the large new logo deals were more significant than what we have seen historically in the past as a percentage of new sales production.

Erik Suppiger – Signal Hill Group

Okay.

Keith Olsen

And new sales production will show up in the latter months as the cabinets get installed by our customers and they then turn it to MRR.

Erik Suppiger – Signal Hill Group

Okay. Very good. That might –

Keith Olsen

Okay.

Erik Suppiger – Signal Hill Group

That made sense. The new facilities sound like they are going very well. Can you comment as to whether or not they are tracking ahead of plan or any thoughts in terms of how rapidly they are filling up relative to your expectations?

Keith Olsen

Sure. Dallas has had the strongest growth and is ahead of plan. Sunnyvale is a tad over, and Toronto is probably just out or a shade under plan.

Erik Suppiger – Signal Hill Group

Very good.

Keith Olsen

And demand is strong. Everything has to do when you think about the timing of contracts and the timing of when the customer actually deploys and lands based upon when we start the sales and marketing of this site and then when do we see it. We expect, certainly, we expect those three sites to come in at or above plan based upon us taking guidance up.

Erik Suppiger – Signal Hill Group

Very good. And then lastly, it looks likes the cross – or two things. Did you give the customer count? And then secondly, the cross connect growth seemed to be very good this quarter, were there any big customers that drove that or was it the new facilities that drove that or was there any particular trend that was contributing to that?

Keith Olsen

Sure. I think we talked about he cross connect aspect. In our press release, we did have the customer count, 915.

Erik Suppiger – Signal Hill Group

Okay.

Keith Olsen

The cross connect growth is something that we had spoken about before. I think last earnings call I was asked about our – we had a lot of cabinet adds but not a lot of cross – relative to cross connects. Typically, customers are landing their infrastructure and then as they start ramping those cabinet equivalents up into production, that's where we see the demand for the cross connects. So, it's certainly a timing issue as we spoke in previous earnings calls. We did see a significant uplift from across the customer base as they continue to roll out their expansions and also to groom and add higher capacity cross connect to support the Internet traffic growth that they are either expanding, expecting or the rollout of their new services. It would not isolate it to a certain segment of customer. It was across the board we saw an uptick.

Erik Suppiger – Signal Hill Group

Very good. All right, congratulations. Thank you.

Keith Olsen

Thank you.

Operator

Your next question comes from the line of Rod Ratliff with the Sanford Group. Please proceed with your question.

Rod Ratliff – Stanford Group

Well done. Thank you. You have fairly impressive ARPU stats across the board. Are you seeing any particularly strong industry verticals that you can speak to?

Keith Olsen

Sure. Sure. Each of our earnings calls we speak about our average revenue per unit and a unit is a cabinet equivalent as we report. The three primary segments of – less than 5% of our business comes from what we classify as enterprise. The rest come from a very broad statement of service providers, content providers, service providers and network providers. And we see typically the service provider community and the network provider community driving the most amount of footprint. In other words, more locations with more interconnections connections, and the content providers being in larger installations with more interconnections on a site basis. Customer density across the board of where see this uptick is really tied to three factors as far as the average revenue per unit increases. This contribution from increased power resources that they are requiring, increased cross connects, and, of course, the renewal of contracts where we have communicated about 3.5% increase in billed revenue from our pricing actions.

Rod Ratliff – Stanford Group

All right. Could you speak to anchor tenants for a minute or still trying to stay away from them and concentrate on the larger number of customers to keep the base diverse? And related to that, do you anticipate better margins backfilling the space that InfoSpace vacated?

Keith Olsen

Yes. Let me – we don't open up our new sites and look for anchor tenants. Our process and practice has been approximately 60 days prior to our customer ready date, we start marketing and merchandising the site. We have been successful with this certainly over the years. Certainly this second quarter results where I spoke about two-thirds of our new sales dollars, not necessarily new sales decisions fell into Sunnyvale, Toronto, and Dallas. It's very consistent with our methodology and we are thrilled with the segmentation and the customers that we are targeting. I think we named probably somewhere close to a dozen different customers, all falling within those three buckets of content, service, and network provider which really drives the ecosystem of the sites and the value proposition that we support as an exchange point. As it relates to the InfoSpace location, I think that the margins will be consistent.

Rod Ratliff – Stanford Group

Okay. One last one, the growth in non-top ten markets or comparatively speaking how it looks versus the top ten markets, would you say that's more related to available capacity or outright demand or is it both?

Keith Olsen

It's principally driven by demand.

Rod Ratliff – Stanford Group

Okay. Great, thank you, again.

Keith Olsen

You're welcome.

Operator

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

Keith Olsen

Hello, Jon.

Jonathan Atkin – RBC

Hello. I was wondering if you could comment on the larger deals that you signed this quarter. Do you see that trend repeating going forward where your average size deal might start to pick up? And what implications might that have for cost connect intensity and mix of cost connect versus colo?

Keith Olsen

Yes. That's a very good question. The large deals so far – the larger deals so far have been in – when we talked about deals, for example there was a significant number of them that were multi-location this particular quarter. And so when they are multi-location like that they typically drive the types of interconnection densities that are consistent with the rest of our customer mix. When we start talking about some of the larger content folks, they typically have not been on a square footage basis giving the same amounts of cross connects. But they typically are acquirers of exchange peering ports which provides the revenue density that we are looking for. Of course, we are looking at each of the cubic network feed in our data centers and as we layer on incremental power, incremental interconnections whether they be ports and/or cross connects and on high capacity interconnections is really what's driving the ARPUs for our business.

Jonathan Atkin – RBC

Okay. And then just taking the big picture view of expansion possibilities not being specific, but if you look at green field versus brown field versus M&A or other avenues, are they all equally attractive or what do you see the pros and cons of each approach?

Keith Olsen

Yes. In the absence of something that I could sink my teeth in, I don't know whether I can say pros and cons. I can say that we have been working the fill-ins of our existing real estate with capacity heads. We have been building net new sites more in a green field like environment or taking over an existing data center and then having to reengineer it to bring it up to the power and cooling standards to support the decision points that we look at. And, of course, the Company has historically been very successful in its M&A activity and has built its – a number of its competitive positions through acquisition. So, if it's the right multiples and it's the right data center or it's the right location, those are the things that we look at. And I believe we have a favorite path yet. But when those opportunities present themselves, I'm sure that's when we'll be making those decisions.

Jonathan Atkin – RBC

Great. Thanks very much.

Operator

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

Jonathan Schildkraut – Jefferies

Thanks. Sorry to circle back around here on you guys, just two more quick questions. In the past, you have given us a breakout of CapEx by ongoing and expansion. I was wondering if we might get that breakout again. And finally, there was some taxes in the quarter which is something we really haven't seen in the past and then I'm wondering if we can get some color there as well? Thank you.

George Pollock

Sure, Jonathan. I'll answer those questions for you. First on the taxes, yes, we saw some accrued taxes in the first half of the year. It has to do with being ahead of plan, therefore causing us to run out of some net operating loss carry forwards in Canada and a handful of specific state restriction. We booked at $1.1 million year to date. We expect that to come in around $2 million to $2.5 million for the full year.

Jonathan Schildkraut – Jefferies

Thank you.

George Pollock

Restate the first question?

Jonathan Schildkraut – Jefferies

In the past you've given us CapEx broken out ongoing and expansion and I was wondering if we might get the same detail again? Thank you.

George Pollock

Yes. CapEx for the first half of the year was $54 million in total, $48 million was growth.

Jonathan Schildkraut – Jefferies

Wonderful. Thanks a lot guys. Really appreciate it.

Keith Olsen

Thank you, Jonathan.

Operator

Your next question is a follow-up question from the line of Colby Synesael with Merriman. Please proceed with your question.

Colby Synesael – Merriman

All right. Thanks. When you look at your customer base today and you mentioned InfoSpace is a customer who just left. How many other customers do you think are in your base that could potentially afford to build their own data center? And also the same standpoint, have a business model that would make sense for them to do that? Have you done any type of analysis like that?

Keith Olsen

Yes, we have, Colby. As a matter of fact when we took InfoSpace in, we knew that it was short-term project. So, it wasn't like we were surprised. They came in and negotiated saying, we need this for so long and one of our sites in Seattle would support that, and we said, it's a good way for us to improve our site cash flows. And so, that's atypical order from us, it just so happened that it churned in this quarter.

Colby Synesael – Merriman

And is there any other customers’ that are in your base today that you know of over the next six months, year that you expect a similar situation to happen?

Keith Olsen

Not that I'm familiar with that's like an InfoSpace, no.

Colby Synesael – Merriman

All right. Thank you.

Keith Olsen

Yes.

Operator

(Operator instructions) Please hold briefly for your next question.

Keith Olsen

Ladies and gentlemen, thank you very much for your time today. We really appreciate your support. Have a good evening.

Operator

Thank you for participation in today's conference. This concludes the presentation. You may now disconnect.

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