SAVVIS, Inc. Q4 2009 Earnings Call Transcript

Feb. 03, 2010 5:37 PM ETSAVVIS, Inc. (SVVS)
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SAVVIS, Inc. (NASDAQ:SVVS) Q4 2009 Earnings Call Transcript February 3, 2010 10:00 AM ET

Executives

Peggy Tharp – Director, IR

Greg Freiberg – CFO

Jim Ousley – Chairman and Interim CEO

Bill Fathers – SVP, Global Head of Sales and Marketing

Bryan Doerr – CTO

Analysts

Jonathan Schildkraut – Jefferies

Simon Flannery – Morgan Stanley

Sri Anantha – Oppenheimer

Colby Synesael – Kaufman Bros.

Donna Jaegers – D.A. Davidson

James Breen – Thomas Weisel Partners

Vijay Singh – Janco Partners

Winston Len – Goldman Sachs

Robert Dezego – Sun Trust

Steve Salberta – Boenning

Alex Kurtz – Merriman Curhan Ford

Mark Kelleher – Brigantine

Frank Louthan – Raymond James

Chad Bartley – Pacific Crest

Eric Suppiger – Signal Hill

Operator

Good day, ladies and gentlemen and welcome to the SAVVIS fourth quarter earnings conference call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will follow at that time. (Operator Instructions). As a reminder, this conference is being recorded.

I would now like to turn the conference over to your host today, Peggy Tharp, Director of Investor Relations. Please begin.

Peggy Tharp

Thank you, Shawn. Good morning and thank you for participating in the SAVVIS fourth quarter 2009 earnings call. I’m Peggy Reilly Tharp, Director of Investor Relations for SAVVIS. Earlier this morning, we distributed a press release with detailed financial tables, which is available on our website at savvis.net.

In addition, we have corresponding slides available at that site, which will be referenced during this call. As always, please be aware that today’s discussion contains forward-looking statements as defined under federal securities laws.

Actual results could differ materially from the forward-looking statements due to various risk factors, including, but not limited to the factors disclosed in the company’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 today 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, which is posted on our website and furnished to the SEC on Form 8-K, includes both our rationale for why we believe non-GAAP information is important in describing our operating performance and the full reconciliation with corresponding GAAP numbers.

Joining us on the call today are Jim Ousley, our Interim Chief Executive Officer; Greg Freiberg, our Chief Financial Officer; and Bill Fathers, Senior Vice President and Global Head of Sales and Marketing; and Bryan Doerr, our Chief Technology Officer.


Today, we will begin with a financial review from Greg, followed by a strategic industry overview from Jim. Bill will present a sales update, followed by Bryan who will provide additional color and information around our cloud strategy before we turn the call back over to the moderator for Q&A.

I would now like to turn the call over to Greg.

Greg Freiberg

Thanks, Peggy. Good morning, everyone. I'd like to start with the fourth quarter results, which are on slide four.

Total revenue for the quarter $220 million with hosting delivering $155 million of revenue and network services reporting flat revenue of $65 million. And let me stress that second point again because I think flat network revenue is an indication of the early success we are seeing in the transformation of that network customer base. We are seeing network strength in our financial vertical and also with customers who bundle network with our hosting service.

For the quarter, gross profit was $99 million, which included $1 million of non-cash equity-based compensation. On an annual basis, gross profit was up nearly $1 million and on a quarterly basis, it was up $4 million. Gross margin of 45% showed an 80-basis point improvement over the fourth quarter of 2008 as we reaped the benefits of cost savings efforts and mix shift to higher-margin hosting services. Compared to the third quarter of 2009, gross margin improved by 50 basis points, as we saw the quarterly improvement in our ability to leverage revenue growth.

SG&A for the fourth quarter was $51 million or 23% of revenue and that includes $5 million of non-cash equity-based comp. SG&A was up by slightly less than $2 million on an annual basis and reflected an improvement of more than 100 basis points in SG&A margin. On a quarterly basis, SG&A was down $2 million while margin improved 170 basis points.

Our adjusted EBITDA for the fourth quarter was $55 million or 25% of revenue. On a quarter-over-quarter basis, adjusted EBITDA was up 7%, while on a year-over-year basis, it was up 6%. Adjusted EBITDA margin improved 100 basis points quarterly and 160 basis points annually. Again, this reflects our improvement in the areas of hosting and network cost savings and a shift in revenue mix.

In addition, we recorded $2.2 million of early termination fees in the fourth quarter with the majority of this amount coming from customers in the U.K. Leveraged free cash flow for the fourth quarter was negative $14 million, reflecting the expansion investment we made in our NJ2X data center complex.

Now, turning quickly to our full year, we reported revenue of $874 million, up 2% over 2008. Our total revenue growth was impacted by churn related to the expected departure of the American Stock Exchange, foreign currency effects, and declining network revenue.

Also in the full year, overall hosting made up 69% of revenue and was up 8% year-over-year. Network revenue came in at $267 million and was down 9% on an annual basis. Gross profit improved 5% to $394 million with gross profit margin up approximately 150 basis points to 45%. SG&A was $203 million for 2009, an improvement of approximately 4% when compared to 2008. Adjusted EBITDA for the year was $220 million, up 19% over 2008. Adjusted EBITDA margin was 25%, a 360-basis point improvement over the prior year.

Finally, we generated $50 million of leveraged free cash flow in 2009. And I'm really pleased with that result, specifically our ability to expand our adjusted EBITDA margin and drive significantly more free cash flow than our competitors.

On slide five, a great deal of the success we have seen over the past year is due to our continued focus on driving the right customers into our data centers. The left side of slide five shows fourth quarter colocation and managed services utilization, which we have contrasted with overall hosting revenue for the same time frame. Managed services still takes up less than 5% of our overall utilized footprint. However, it makes up 44% of our hosting revenue.

So our ability to generate a significant amount of revenue off such a small portion of our footprint helps demonstrate the revenue leverage of our model. We expect to see long-term movements in these two graphs as managed services such as cloud and our related SaaS offering continue to grow.

On the right-hand side of the slide, we have a refresh of our colo customer footprint. As you can see, our colocation transformation is nearly complete. Three years ago, when we were just beginning this process, Internet content customers made up more than 50% of our colo revenue footprint. As you can see, we have successfully increased the number of enterprise customers who are more likely to buy additional SAVVIS products and services. Today, these customers make up more than 90% of our colocation revenue footprint. As expected, we still have a handful of Internet content customers. However, these customers only make up around 10% of our overall colo revenue.

I would now like to turn to slide six in cash return on capital employed for SAVVIS and our peer group. As we have said many times in the past, we believe that our focus on managed services will not only drive our growth going forward, it is also a better use of our capital. As you can see, companies with a strong focus on managed services provide a much better return on capital.

As in the past, we still expect to spend capital to maintain our leadership position in the financial vertical to address any markets where we see signs of constraint and to continue our cloud R&D innovation. Nonetheless, our focus on cash return on capital employed ensures that we will continue to use our capital efficiently, and I will talk more about CapEx plans for 2010 in a few minutes.

Before that, I would like to quickly review our liquidity and liabilities on slide seven. In the fourth quarter, our gross leverage ticked up slightly to 2.9 times from 2.8 times. Net leverage also moved up slightly to 2.2 times from 2.0 times in the third quarter. The slight increase in our leverage ratios resulted from an increase in capital lease obligations.

During the fourth quarter, we finalized the plans to extend our lease terms and to expand our existing footprint at our downtown Chicago data center by 50%. This resulted in our CH4 data center being reclassified as a capital lease, valued at $38 million in aggregate. As of December 31st, the company had $161 million of cash, a slight decline from the $164 million in cash as of September 30th.

I'm going to wrap up with a review of our guidance for 2010, which is shown on slide eight and was also provided in our earnings release. We expect adjusted EBITDA of $205 million to $225 million, while the midpoint of this amount, $215 million, is just shy of our 2009 results. I'd like to remind you that an estimated $16.5 million of the adjusted EBITDA we saw last year will not recur in 2010. This includes $5 million related to the first quarter American Stock Exchange revenue and $6.5 million related to the early termination fees we received from them in the second quarter. It also includes the $3 million ETF we recorded in the first quarter and the $2.2 million in early termination fees we received in the fourth quarter of 2009.

Total cash CapEx guidance for 2010 is between $180 million and $200 million. This is an increase over 2009 CapEx of $133 million and includes approximately $53 million for the following expansion plans. We are in the midst of completing the first phase of the financial data center complex expansion in Metro New York. So by the end of the first quarter, we will have 22,000 sellable square feet available at our NJ2X data center.

We will also build out the second half of our DC4 data center which many of you have toured. This will result in an additional 6,000 sellable square feet. And just outside of London, we plan to build out the previously unfinished first floor of our Slough data center. This will add nearly 20,000 sellable square feet to that facility. As we announced earlier today, we will be expanding our data center in downtown Chicago, which will yield an additional 5,500 square feet.

Finally, we will see slight year-over-year increases in maintenance and customer growth CapEx as we continue to invest in R&D innovation as we expand our enterprise-grade cloud services. The remainder of our 2010 is for cash interest, which we expect to be between $40 million and $50 million.

And with that, I'll ask you to turn to slide 10 as I hand the call over to Jim Ousley for a review of our major growth initiatives.

Jim Ousley

Thank you, Greg. Good morning to everyone and thank you for joining our call today. Since Greg has already addressed the quarterly and annual financials, I will just highlight a few of our 2009 accomplishments.

For revenue, as you've seen, we reported $874 million, which was a 2% growth during a very challenging economy, plus we also saw expected churn related to the American Stock Exchange and some other Internet content customers. However, we were pleased with our growth in key market verticals as we added major new enterprise customers.

For our hosting business, annual revenue of $607 million resulted in a growth of 8% over 2008. Colocation contributed $341 million and was up 12% year-over-year. Managed services reported a revenue of $266 million and was up 2% year-over-year, there again showing some strain due to the departure of the American Stock Exchange. We did show year-over-year improvement in adjusted EBITDA of $220 million, which was up 19% over 2008. This also was a 360 basis points of adjusted EBITDA margin improvement over the prior year.

During 2009, we did accomplish a great deal. We reported cloud revenues of – an improvement of over 93% year-over-year. And Software-as-a-Service, we saw 2009 revenue of $71 million, up 38% over 2008. We announced new services and saw a very positive growth in both of these important service sectors, which included some significant major new enterprise customers.

We saw good customer wins in our financial vertical and believe 2010 will be a robust year for us in the sector. To help address this opportunity as Greg just mentioned, we are expanding our data center capacity to meet the anticipated demand. Specifically, we are expanding our New Jersey data center where we just added new customers during 2009 like Credit Suisse and CrossFinder.

We also saw existing customers expand their relationships with us. BATS in October – in October, BATS Trading announced their expansion in NJ2 and London Docklands data centers. Needless to say, we can't mention expanded existing relationships without talking about Thomson Reuters. We are now collaborating on the deployment of their solution in some of our global data centers and Bill will provide an update in this exciting area a bit later in this call.

Finally, as Greg already showed you, we have nearly completed the transformation of colocation customer base, moving from the fourth quarter of 2006 when our Internet content customers took up a majority of our footprint to today. Internet content players today currently take less than 10% of our data center space. This is a key strategic change that we have executed over the last several years.

Turning to slide 11, I would like to provide you with a look – we are seeing in the industry and what our related plans are for 2010. According to industry analysts, in 2009, actual average IT spending as a percentage of revenue was just 3.4%, a low point for the industry, which we have not seen since 2001. However, the same analysts are now saying they expect things to turn around in 2010, which should return customer spending back to levels we saw in 2008. We are seeing the same thing in the marketplace.

Of particular interest to SAVVIS is that managed services content continue to see significant growth. A recent Forrester study found that interest in outsourcing and cloud services is expected to see strong growth this year and beyond. In addition, colocation is still continued – expected to continue to grow through 2012. However, some industry analysts believe that pricing may have hit a peak in North America and in Europe.

On the network side, while the overall industry continued to decline in 2009, enterprises still were increasingly looking to outsource the management of their networks. Not surprisingly, enterprises prefer to work with a single outsource network provider who can provide to help reduce costs, improve availability, and security of their networks.

IT industry opinion [ph] expects continued strong interest and adoption of virtualized services and cloud computing. Cloud services, including SaaS, are gaining traction as enterprise looks to respond more quickly to the changing market dynamics and to lower their over IT costs. Industry analysts believe that cloud services will represent around 14% of the total IT services market by 2013. And we believe our focus and investments in this area will be very beneficial in 2010 and beyond.

Finally, the industry also expects to see good prospects for IT growth in Asia and in the Western and Central Europe with slightly lower – slower growth in the U.S. So you can expect to see us expand our products, service, and sales and marketing efforts in these geographies.

We look forward to capitalizing on the positive movement that is taking place in our industry. Our objective is to grow our overall hosting business along with the market. Our challenge and our opportunity is to convince customers of the value of divesting high-cost data center facilities, while moving to a provider that offers high-value solutions that address their requirements.

We are also putting a new focus on our network business. We have formed a dedicated organization. We are providing a separate network financial breakout so you can see our progress in both our core network business and our more mature sustaining network business. While I think this helps provide a clearer picture of our network, this does not mean we are content to let our sustaining network business language. The purpose of the new network organization is to stabilize our entire network business while continuing to provide the key integrated network and hosting and services that are a unique value add for SAVVIS, for our network customers, as well as our hosting customers and prospects.

In 2010, we will continue to demonstrate our market leadership by providing leading-edge cloud services. Bryan is going to talk in some detail a little bit later in the call, but I want to stress in advance that our strategy in this market, like our overall strategy, is to target enterprise needs.

Our investment in the latest technologies coupled with our years of experience in offering virtualized infrastructure services to enterprise gives us a distinct advantage over low end and other providers. The enterprise marketplace has spoken and we have listened. Enterprise customers are looking for reliable service and delivering at all times. They want a level of quality that meets the standards of the rest of their IT and corporate functions and that is what SAVVIS delivers.

We plan to expand our international growth and I talked about this when I spoke with you a few weeks ago, to assure you that we are investigating a number of avenues and we are looking at our existing global partner relationships in determining how we can enhance and expand upon such.

We are also selectively exploring additional growth opportunities. We are looking at both global opportunities to expand our geographic footprint and at areas that can help us increase the breadth of our service offerings.

And finally, we are driving our customer service efforts to be even better. As you know, we adopted the Net Promoter concept several years ago. Although we have already showed significant improvement in our Net Promoter score, we plan to expand on the success. We will continue to deliver superior uptime across our network and our data centers in addition providing low delivery intervals and a positive experience for all our customers.

So as you can see, there is no shortage of opportunities in front of us, and of course a few challenges as well. However, I truly believe we have the organization, the technology, assets, strategy and vision to deliver exceptional value to all of our customers.

With that, I would like to turn the call over to Bill Fathers for a global sales update and what we expect to see in 2010. Bill?

Bill Fathers

Thank you, Jim and good morning, everybody. And if you will just turn to slide 13, I'm going to elaborate on what Jim has just shared with you.

As we mentioned just a few weeks ago, the fourth quarter reflected our best bookings quarter in 18 months, up 23% over the previous quarter. In addition to an overall improvement, we are beginning to see a return to strength in the financial vertical and after a long hiatus, financial firms are finally returning to making investments in growth projects, which in turn is driving investment in IT infrastructure.

We are also seeing an increased interest in outsourcing and enterprise customers remain dedicated to lowering IT costs, clearly the global economic downturn has put a severe strain on their budgets. But these customers are now more willing to spend money if they can see immediate results. And this means they want to see both the fast and long-term payback from their IT investments. SAVVIS' strategy is to show customers how these goals can be achieved through outsourced IT infrastructure services, be it colocation or cloud services.

We are also healthy growth from indirect channel sales. By working with companies like Thomson Reuters and Cognizant among others, we have opened up whole new avenues for SAVVIS' growth and these aren’t isolated arrangements. And as we see the potential for significant opportunities to enhance the revenue growth through these types of relationships with entirely new markets and buyers, the expose – being exposed to the benefits of working with SAVVIS.

Demand remains strong for SAVVIS, particularly for multinational corporations looking for global solutions. These enterprises are looking for consistency in their IT outsourcing and this is where SAVVIS excels, we are able to deliver products and services across multiple verticals and deliver these solutions as a team around the world, which greatly simplifies the purchasing and management of global IT system deployments for our customers.

Demand for cloud services is also strong. We are seeing enterprises accelerate their adoption of cloud-based solutions and if you will turn to slide 14, I'll walk you through more of what we are seeing in this market.

As Jim mentioned, we saw a strong full-year cloud revenue of $7.4 million, which was up 93% year-over-year. For the fourth quarter, cloud revenue was $2.5 million, showing quarter-over-quarter growth of 25% and year-over-year growth of 105%. And in terms of cloud customers, a third of all cloud bookings in 2009 came from new logos. These new enterprise customers came from a variety of industries and verticals including consumer brands, health care, software, human resources, and the financial vertical.

When it comes to our existing customers who added cloud services, we saw similar types of companies making the move to cloud. However, our media customers currently seem to be the most eager to take advantage of the cost savings and flexibility that SAVVIS cloud offers.

So how are customers using our cloud? Here are two quick examples, both new logo wins for SAVVIS. Firstly, a large media company is using cloud to make the significant unpredictable increases in volume and compute requirements that they experience as they provide a national student testing and assessment service. With SAVVIS' cloud, the company is able to burst and capture the compute resources they need for their peak usage times.

Another example is a consumer brand company with over 500 external websites supporting more than 100 well known brands. The company is constantly running coupon and brand promotions and in addition to other giveaways to drive end users to their sites and ultimately to retail stores.

With SAVVIS cloud compute capabilities, consumer brand companies like this one can burst and add compute capacity when they need it to hand their unpredictable web demand. In addition, this particular company was able to deliver immediate savings of over 60% when compared to their in-house solution. And cost savings like these are helping to make outsourcing for cloud solutions a compelling solution for enterprises.

And Jim mentioned earlier, that Gartner pegged the addressable cloud compute market for 2009 $1.2 billion, reflecting good growth in the number of businesses that move to hosted cloud computing services. By 2012, same analysts group estimate the market will grow to just under $5 billion with even more enterprises moving to cloud computing infrastructure servicing.

Turning to slide 15 on our Thomson Reuters collaboration that we talked about last fall, let's start with the three growth drivers that we believe are associated with this effort. And I know this is a rehash for some of you, but I think this relationship serves as a template for how we will be growing going forward.

First, we are in the mix of deploying the Thomson Reuters solutions in some of our global centers. And this means that these customers will come into SAVVIS data centers to connect to Thomson Reuters. And from there, we would expect to see a network effect develop with these customers as they find it easier, quicker, and more cost-efficient to be located near the Thomson Reuters solution.

And the third growth driver, which is more long term, we take these customer relationships to the next step and in this phase, we would expect to build our existing services and relationships to win global outsourcing deals. And to date, we have won deals worth approximately $770,000 of monthly recurring revenue or about $9 million of annual contract. And we are seeing business across all three regions and currently have over more than 90 deals in the pipeline. This collaboration is on target with five data centers currently deployed including two sites in London. The Thomson Reuters sales force is now mobilizing and as a result, we expect to see further acceleration of pipeline growth going forward.

And up next, we expect to have Tokyo and Frankfurt online by the end of the first quarter and you can expect to see additional international development as well. Our next targets include an expansion in London in addition to potential build-outs in Hong Kong and Sydney.

Now, if you turn to slide 17, Bryan Doerr will provide you with an update on our cloud services strategy.

Bryan Doerr

Thank you, Bill and good morning. I'd like to start by updating you on the new name for our overall cloud offering.

Back in December, we announced an expanded relationship with Cisco whereby we will integrate the Cisco unified computing system as the compute tier of our next-generation cloud platform, previously known as Project Spirit. At the same time, we announced the name of our overall cloud offerings, which are now known as Savvis Symphony. There has been a long road to this point, but I'd like to take you down the path for this year.

In 2004, SAVVIS was at the forefront of our technology with our utility compute and storage offering. This was one the industry's first multi-tenant hosting platforms that offered the benefits of virtualization to reduce costs and provide higher availability to enterprise customers.

From 2007 through 2009, we introduced our dedicated and open cloud computing solution, which is hypervisor-based virtualization. Our dedicated cloud offerings is a private cloud infrastructure, providing virtualized hosting while our open cloud offering is a multi-tenant, public cloud platform, providing virtualized computing.

These two services offer our clients the flexibility to combine multi-tenant and dedicated services in a secure overall hosted solution. Today, these are known as Savvis Symphony dedicated cloud and Savvis Symphony open cloud. This year, we will officially roll out Savvis Symphony VPDC, which is currently in beta.

Symphony VPDC offers customers a multi-tenant public cloud infrastructure with the ability to build complete virtual private data centers that include network, security, computing, and storage capabilities designed by the enterprise customer and our advanced user portal. And of course, customers only pay for what they use.

Additionally, Symphony VPDC provides these complete VPDC solutions in multiple service grades, allowing customers to further align their application need and the cost with the underlying infrastructure.

As Jim stressed earlier, through SAVVIS Symphony VPDC, we are one of the first cloud providers to offer an enterprise class virtual private data center with multi-tiered quality of service capabilities. This means that we are delivering to enterprises what they have asked for in cloud computing, quality, reliability and security at the appropriate service levels and price points for their application.

On slide 18, I have tried to provide some visual representations of how our Symphony services work together and independently. We created SAVVIS Symphony with enterprises in mind. While many small and medium businesses might make deals with lower-end solutions, enterprises can be very different as we've discussed. Not only do enterprises have higher security need, they demand greater assurance of the predictability of their applications' performance. With Symphony, we can address both low-end and high-end service requirements.

I'd like to take a few minutes to share our 2010 cloud strategy with you. In short, we plan to target enterprises by providing a broad range of integrated IT infrastructure services with flexible business terms. Beneath it all, this is why cloud is so pivotal to the growth of managed services generally. Our customers are telling us they have variable needs that are best met with pay-as-you-go billing. When these services are combined with traditional hosting services, they maximize the overall value of outsourced IT infrastructure.

The move to cloud services for enterprises will not be one of simply uploading all corporate applications to public clouds. This is where SAVVIS' broader portfolio of infrastructure services will help by giving customers the freedom to choose colocation and traditional hosting services in combination with dedicated clouds, which offer flexible capacity and public clouds, which provide lowest cost and end-user-directed provisioning.

SAVVIS offers a compelling alternative to enterprise managed data centers and IT infrastructure at both cost control and performance levels. Just as important, SAVVIS' ability to offer private and public network connectivity between enterprise data centers and SAVVIS data centers further simplifies and encourages the move to outsourced managed services.

Finally, we will position our cloud infrastructure as a key component of our web hosting, test and development, and financial vertical solutions. This approach is particularly well suited to SAVVIS. Our existing strength in each of these areas combined with the value proposition of cloud-delivered infrastructure enables us to leverage our customer base to grow our cloud and our overall business.

And with that, I would like to thank you for your time today and turn the call back over to our moderator for Q&A.

Question-and-Answer Session

Operator

Thank you. (Operator Instructions). One moment for the first question. Our first question comes from Jonathan Schildkraut with Jefferies.

Jonathan Schildkraut – Jefferies

Great. Thank you for taking the questions. My first question has a little bit to do with the selling effort at SAVVIS and the overall selling environment. Historically, the company has kind of had a single sales force to focus on the three product areas. It seems that today you made some reference to maybe breaking out some of the network efforts. And I was wondering if you could tell us about the sales effort at SAVVIS, if there are any changes to the organization and kind of how you are attacking the three businesses that you are going after.

Bill Fathers

Sure, Jonathan. It's Bill Fathers here, I have responsibility for SAVVIS Sales [ph]. So firstly, as Jim alluded to, we have carved out a portion of our sales force to focus specifically on the opportunities from network business. And that doesn't mean we don't continue to see great opportunities to sell network services to our hosting client base, but we are seeing that there are new opportunities in new markets for the network sales group to be selling DTN and other services to a whole new type of customer.

Of the second shift I'll say is in the last six or 12 months, we've seen a very significant shift towards our larger customers wanting to buy from us on a global basis where customer relationships we've established in the U.S. typically now want to expand their footprint with us in Europe and Asia.

Final point is around verticals. So we are also placing more emphasis on selling into specific vertical markets. The financial, immediate verticals are both being areas of great success for us and we are now introducing two new vertical themes in 2010, focusing on the needs of consumer brands and also software companies and we are lucky enough to have some fantastic consume brand and software companies, some of the top 10 in the world already as clients.

So I hope that's helpful.

Jonathan Schildkraut – Jefferies

That is. I'd like to ask one more question and then I'll circle back into the queue. In terms of CapEx guidance that was provided today during the course of the presentation, there was reference to some markets that weren’t exclusively included in the expansion CapEx numbers. As we look into 2010, given your noting that there are potential expansion markets, should we think that there is an opportunity here for you to potentially spend more on CapEx than the current guidance implied?

Greg Freiberg

Hi, Jonathan. It's Greg, I'll take that one. So I talked about the NJ2, the completion of that facility, which we previously announced, the DC4 facility, expanding Slough to the floor, building out the previously unfinished first floor, and then downtown Chicago CH4. So those are the ones that we've lined up in terms of what we are actually going to do and that's part of the guidance that I gave. So if we were going to hit something else, we'd come back and be more transparent about that.

Bill Fathers

And just – it's Bill again. Jonathan, just to add to the point, the expansions we referred to in the context of the Thomson Reuters expansions would be done with joint investment by the customer there. So no significant incremental capital requirement.

Jonathan Schildkraut – Jefferies

Okay. And there is no mention of Singapore here, but that is necessary to support that Thomson Reuters relationship, correct?

Bill Fathers

It is, but we are lucky enough to have a footprint already in that city that can meet our needs for the foreseeable future.

Jonathan Schildkraut – Jefferies

Excellent. Thank you. I'll circle back in the queue.

Greg Freiberg

Thanks, Jonathan.

Operator

Our next question comes from Simon Flannery with Morgan Stanley.

Simon Flannery – Morgan Stanley

Thanks very much. Good morning. It was encouraging to hear some of the commentary around the booking trends in the fourth quarter. Perhaps you can sort of talk about how that sort of ramps October, November, December, January, fairly steadily suggest a good recovery and a bit more clarity about where we – the book – bookings to revenue kind of cycle, how long is that and when should we start to see these hitting?

And then if you could just comment on churn, on the content side you've given some good disclosure there about what's left. But anymore potential content churn that you are seeing beyond the one you referenced at the end of the fourth quarter and churn generally amongst your enterprise customer base? Thanks.

Bill Fathers

Great. Simon, it's Bill. I'll certainly handle the first part of that question around bookings trend. So yes, 23% uptick in the fourth quarter. Probably a combination of two factors. One was perhaps cyclical in terms of it was end of year and therefore, there was a need to spend budgets especially on projects that are driving 2010 plans for growth or cost savings.

And then also – yes, definitely some improvement in the demand – in the underlying demand. And as we called out, probably financial vertical, the most prominent there with significantly in the growth and demand in that vertical. Obviously, going into Q1, it's very early stages. So –

Greg Freiberg

Why don't I take a crack at that one, Bill? So this – hi Simon, this Greg.

Simon Flannery – Morgan Stanley

Good morning.

Greg Freiberg

In – so what we've tried for the Q1 is you should expect to see the downturn – a downtick like we previously said. So that – what we previously communicated is still accurate. And then we disclosed that the $6.1 million of churn did occur right at the end of the year. Previously, I said that could be $4 million to $6 million and there was a timing bit of it. It's all gone, so we expect that that's going to happen in Q1 will come down.

Typically, there is about a quarter lag between a sale and it gets installed as well. So we – our plan is at Q2 forward, we really churning – moving along really well. The third part of our question had to do with the churn anymore. And no, at this time we don't have any more churn event that we are seeing and we want to share.

Jim Ousley

This is Jim Ousley. I would mention also that as far as our plan for bookings is a significant increase over the 2010 period for bookings each quarter. So I think you'll – one measurement you'll be able to start to see is whether we continue to be able to achieve our bookings plan, we will show very strong growth year-over-year in bookings.

Simon Flannery – Morgan Stanley

Right. Thank you.

Operator

Our next question comes from Sri Anantha with Oppenheimer.

Sri Anantha – Oppenheimer

Yes, thank you and good morning. A couple of questions. Greg, for the first time you have seen like your network services revenue being stable here on a sequential basis. Could you talk about sustainability of that trend going forward? And I was also curious about your comment previously where a renewed effort on the network business, does that mean that are you guys trying to stabilize the non-core portion of the network business?

Greg Freiberg

Hi, Sri. I’ll take the first part. This is Greg. So the network services stable in the fourth quarter. Yes, I'm pretty proud of that too. That's great because we've been seeing a decline for quite a while. I think there will be another bit of a decline in Q1 in the network business, but we are getting close to where that is starting to be stabilized and then going forward from there. And if you look at the projection points, just trend the core and sustaining element, you can kind of see where that's going yourself.

And then Jim, you want to?

Jim Ousley

I would say that our core network business clearly, we are seeing good growth opportunities and so both are using SAVVIS hosting sales force as a channel and the dedicated group that we've got, we'll see growth there. The sustaining business is going to go with the market. It's trending down and the key there and I think the important part of what we've done here with the dedicated group is if you really focus on cost control in this sustaining side, we can make that a good business and not have the kind of impact it's had in the past. So you should be able to see both of those going forward.

Sri Anantha – Oppenheimer

Got it. On guidance, if I'm looking at your guidance, even if I'm look – taking the mid range of the guidance and excluding the non-reoccurring benefits in 2009, you are still guiding to around 5% growth on the EBITDA, especially with the strong booking growth that we saw in 4Q and some of the customer churn, it still appears conservative. Greg, can you just maybe point to some other moving parts there or some of the expansion costs that you talked about? Are they limiting the EBITDA in 2010?

Greg Freiberg

Yes. Sri, the biggest impact to that is the churn of that right at the end of the fourth quarter. And then we've got to replace that. So that $6.1 million that's now gone. So that's the biggest impact when you do the year-over-year comparison. And then we are focused on that velocity growth of second quarter forward.

Sri Anantha – Oppenheimer

Got it. And then just a last question on the managed hosting. We saw a nice sequential growth, even if you exclude the $2.2 million. The revenue, for the first time we saw the growth. Could you talk about what some of the drivers resulting in that growth and is it increased demand from existing customers or was it just more new customers taking higher value-added services? Thank you.

Bill Fathers

Sri, it's Bill Fathers. I'll take that one. So in terms of managed hosting, I think three main drivers. One is around outsourcing, we are closing more large value deals where we are taking over all of the customers' infrastructure. That's the first one, driven by cost savings. Frankly, we've gotten better in executing on those kind of opportunities.

The second one, if we called out one particular vertical, definitely the software vertical and the adoption of Software-as-a-Service is a huge area of growth for us. And I think Jim specifically pulled out. And then the third driver would be our cloud platform. And we are seeing cloud be a part of a very high percentage of our opportunities. So even if we say colo and managed hosting relationship, they are typically buying some part of colo and that – in both Software-as-a-Service and cloud, our new logo acquisition rate is growing steadily.

Sri Anantha – Oppenheimer

Thank you.

Operator

Our next question comes from Colby Synesael with Kaufman Bros.

Colby Synesael – Kaufman Bros.

Great, thank you for taking my questions. I just wanted to talk about CapEx linearity during the year. So you stated $180 million to $200 million. Just curious if you can maybe break that out or at least give some context in terms of how that's going to play out in each quarter. And also, I was wondering if you can maybe even break that out further and talk about how much is going to storage in each data center and then I have a follow-up question.

Greg Freiberg

Thanks, Colby. So I've actually got a slide that can help answer that, on slide eight of what we handed out. In the bottom right corner, you can see $190 million, which is the midpoint of that CapEx guidance, the respective breakout by maintenance, customer growth and expansion. So it's $50 million, $87 million, and $53 million respectively that goes into there.

And then I think of that $53 million, which is at mid – for the expansion piece of those facilities I mentioned, we previously said that there is about $10 million remaining for NJ2X. And so you have the balance sitting there for the rest of those. And we are actually the beneficiary because for Slough, that's a previously unfinished floor. So the construction capital cost for us to finish out those facilities works out to the – about $1,000, $1,500 a square foot, which is pretty low construction cost typically for those remaining facilities.

Colby Synesael – Kaufman Bros.

Okay. And then in terms of these build-outs, do you expect any meaningful impact on EBITDA margins during the course of the year as it relates to the builds?

Greg Freiberg

No. There is a capital cost for when we put those things in place, so not a meaningful impact. The drivers here would be that churn event right at the beginning of the year and then we are continuing to show our investment in innovation and R&D, which we think is critical for restoring managed hosting to double-digit growth that Bill was speaking about.

Colby Synesael – Kaufman Bros.

Okay. And then just one last quick question. Is there any early termination revenue implied in your 2010 guidance as it relates to EBITDA?

Greg Freiberg

No. We are trying to stay away of that. All our customers are with us.

Colby Synesael – Kaufman Bros.

Okay, great. Thank you.

Greg Freiberg

Thank you.

Operator

Our next question comes from Donna Jaegers with D.A. Davidson.

Donna Jaegers – D.A. Davidson

Hi, thanks for taking my question. You've been so nice to break out revenues of cloud and SaaS for us. I was wondering if you could break out revenues for Proximity Hosting and also talk a little bit more about what you are expecting in 2010 with the New York Stock Exchange moving to MAVA [ph] and how that changes the dynamics for your business?

Greg Freiberg

Hi, Donna. I can only answer the first part. Sorry, we got part of what you wanted. But no, I don't want to break out for Proximity. Bill, do you want to take the second?

Bill Fathers

Yes. And I guess, we can follow up, Donna, on that specific metric. The current time frames are I think that NYSE's platform – let's put it the other way around. So NYSE have made it clear they are going to be building a new platform in MAVA and then the time frames of their Mexican NJ2 not yet clear, unlikely to be '10, early '11. So probably too early to say, obviously we were able to announce that BATS have maintained their commitment to us and are also launching their Options Exchange in – on new NJ2X facility, which we – I guess, last made that announcement just a short while ago and it will be very interesting to see how quickly BATS Options Exchange start taking market share from some of the incumbent suppliers there.

Donna Jaegers – D.A. Davidson

Bill, can I just follow up on that since you wouldn't give me a revenue breakout? When you are selling network services for Proximity Hosting or for hosting in general, since you don't have much of a local network, can you talk a little about what your network offerings are?

Bill Fathers

Yes. So the – in terms of the actual figure and the growth rate and we'll actually follow up with you quickly on that, and it continues to be a very high growth area for us. Customers who do come into the center are either buying access to other exchange menus, which we have all of them on our network and I guess we are also now seeing a trend where customers in the U.S. actually want to get access to exchange venues from Europe and Asia and equally, we've had a surge of business in Japan when we announced having Proximity Hosting to local companies there who actually want to get access to U.S. exchanges.

So our ability to provide that over the wide area network, that has been great. Perhaps one other piece – obviously, the Thomson Reuters alliance played into this. It's very often the same electronic trading platforms that are going into our centers and we are seeing nearly all of those customers pull through network business as well. Often, connectivity back to their local office or wide area network connectivity to exchanges or liquidity venues locally.

Donna Jaegers – D.A. Davidson

Great. Thank you.

Bill Fathers

Thanks.

Operator

Our next question comes from James Breen with Thomas Weisel Partners.

James Breen – Thomas Weisel Partners

Thank you. Just a couple of quick questions. One, with respect to next quarter, in the first quarter, is there any seasonality in the cost side that we should expect – you saw EBITDA margins come up this quarter, are we going to see a drop again next quarter before they start to grow again?

And then secondly, with respect to the network revenue, is there any sort of ballpark that you can give us in terms of how much of the network revenue you view as sort of intimately tied to the colocation and the cloud business as opposed to separate revenues from outside customers? Thanks.

Greg Freiberg

Hi, James. So on the first quarter seasonality, no, there is not really a seasonality impact. Usually, they will start coming in the second quarter with utilities that have the seasonality would start to come into play.

And in the second part, how much of the revenue, what I'd really guide you towards is what we said as core on the network. That's what we are selling and that's what we are focusing on and growing. And so that's tied to the financial vertical and honestly, it's a driver for us to selling successfully managed hosting services, because that network allows us to control the SLA quality to the customers.

James Breen – Thomas Weisel Partners

Great. And then just one follow-up on the data center builds. Sort of can you talk about strategically how you are thinking about that in the decisions you've made to expand in Chicago and a couple other areas?

Bill Fathers

Yes. So very much demand driven and we are seeing, I guess, certainly in those financial – Chicago's case, it's a – lot of it driven by the financial vertical, although we have other – demand from verticals as well. So that's one of the things as we've just recently deployed the Thomson Reuters platform into, which is in turn driving an increase in demand. We obviously are lucky enough to have a number of other exchanges or liquidity venues in there as well, which continues to drive demand.


Equally, the DC market, I think the combination of great strong demand, great track record of selling into the pipeline there and obviously relatively low build cost for us as well, as we are expanding an existing footprint.

Just also on your point around the linkage between our network business and our cloud offerings, obviously we won't go into too much detail there, but generally speaking, people are attaching managed network services to provide connectivity back to their own locations or other data centers. So we do see a high pull-through rate. When we sell cloud services, they typically want to buy managed network as well.

James Breen – Thomas Weisel Partners

Great. Thank you very much.

Operator

Our next question comes from Vijay Singh with Janco Partners.

Vijay Singh – Janco Partners

Thank you. A question on Symphony VPDC. I was wondering if you could give us some color on when would the commercial rollout be and when you expect that to be a meaningful contribution to your cloud revenues.

Bryan Doerr

Thanks for the question, Vijay. This is Bryan Doerr. So we previously announced that we expect Symphony VPDC to be GA [ph] offering in the first half of 2010. So we haven't made any refined step – decisions with respect to that date, on that point yet. And then of course, we see that even with – depending on what happens, where of course months of the year remains and one of the nice things about cloud solutions is that their typical lag between an order or a booking and recognition of revenue is greatly reduced.

So for customers provisioning their services and having them – in essence, instantly delivered. So we expect that revenue contribution, while perhaps not initially meaningful on a macro level given total top line revenue, certainly will grow rapidly and become an interesting and relevant part of our cloud services and managed hosting services very quickly.

Vijay Singh – Janco Partners

And what's the early indication, Bryan, as you have talked to customers or prospects, what's the early indication in the marketplace?

Bryan Doerr

So we've seen a couple of early pieces of feedback and as I mentioned in my prepared remarks, we are actually operating beta customers now of all types in our offering. And early indications are that we are seeing what we had thought – what we think to be more virtual machine uptick per virtual private data center than we kind of initially expected and we are starting to see the interesting questions from our enterprise focus about very large numbers of virtual machines, again, on a transient basis, not forever, but large numbers of virtual machines as part of a specific spot need.

And so those are very exciting because that's exactly the kind of service at this part of our hosting – our infrastructure services portfolio is meant to address and is really previously untapped market for SAVVIS because these kinds of things either weren’t solved effectively in the past given physical and static provisioning or done internal to the data center of the enterprise. So the fact that they are starting to bring those kinds of questions to us is an important indicator that we think we are on the right track.

Vijay Singh – Janco Partners

Great. Thank you.

Operator

Our next question comes from David Barden with Bank of America. David, your line is open. Please go ahead with your question. Could you try pressing your mute button please?

Our next question comes from Winston Len with Goldman Sachs.

Winston Len – Goldman Sachs

Thanks for taking the question. So I think heading into 2009, I think one of the key messages was that the global data center expansion was done and there will be a focus on upselling colocation customers in the existing space of managed hosting. So can you give us an update on the traction they are gaining in terms of upselling these customers and how they fall up on the hosting margin?

Greg Freiberg

So I would say – and it's Greg. So you are absolutely right. And going back to 2007, 2008, as a company we spent quite a bit of money on the capital, expanding our data center footprint. 2009 was a very low capital expansion year and we've been focusing on selling into the enterprise set. So that process is underway. Bill, you want to?

Bill Fathers

Yes. I think what we are seeing is – certainly around the success we are seeing in outsourcing solutions is that customers tend to want to buy the combination of colocation, managed hosting, and now of course, some cloud services as well, and typically need some network connectivity. So it's definitely the way I put this, is not necessarily about upselling the colo base. It's as we grow our customer base and we take on new customers, they very often want to buy a combination of the two or three things.

So there are a number of cases where a customer decides they put one bit of their infrastructure in just pure colo and then they now look to – look further outsourcing, yet that same customer then perhaps also looks at managed hosting and cloud solution offerings, but if I look at the influx of new customers in 2009, an increasing percentage of them buy all three services from us. So that's probably the way I see it's growing.

Greg Freiberg

And the second part of your question, Winston, on the last page of the press release, we've got a table that shows the average monthly data center revenue per billed square foot. And I think you are asking about the trend on managed hosting revenue per square foot. Is that right?

Winston Len – Goldman Sachs

Yes, that's definitely up, that's a good thing.

Greg Freiberg

Yes. For the first time, as you look across left or right. So –

Winston Len – Goldman Sachs

Right.

Greg Freiberg

But in fairness, I have on the beneficiary of that $2.2 million ETS in there. So the underlying would have been about flat.

Winston Len – Goldman Sachs

And maybe just a follow-up question on the hosting margins. I think excluding that early termination benefit this quarter, it looks like hosting segment EBITDA margins actually declined 90 basis points year-over-year. So can you talk a little bit about the trends driving this 4Q decline, maybe some of the significant drivers for 2010 margins to think about?

Greg Freiberg

Yes. So that one is pretty straightforward. That's the loss of AMEX. So the year-ago quarter, we had the American Stock Exchange. It was a very high EBITDA margin customer.

Winston Len – Goldman Sachs

Got it. And maybe just to slip in a quick one on the U.K. site, I think this is the second time that there is a U.K. managed hosting customer that terminated their contract value. Could you just provide some update about what's going on there?

Bill Fathers

Yes. I think it was nothing other than economic downturn in both cases. So they were both companies who were experiencing severe economic downturn themselves. I think one was fundamentally restructuring and therefore they sort of – to get – to terminate their contract with SAVVIS.

Winston Len – Goldman Sachs

Great. Thank you.

Greg Freiberg

Thanks, Len.

Operator

Our next question comes from Robert Dezego with Sun Trust.

Robert Dezego – Sun Trust

Hi, thanks for taking the call. Just two quick questions. One – as I think about the comments on colo pricing, you believe – some industry analysts have peaked in 2009. Are you seeing that in your data centers and could you maybe talk about your ARPU expectations for colo if you do believe the pricing has peaked? And then I got a follow-up after that.

Greg Freiberg

Hi, Robert. It's Greg. We reported colo revenue per square foot at $48.9 in the fourth quarter and what we previously said is that's been leveled off for us at about the $50 range and the last three or four quarters, we've actually been a bit below that $47, $48, $49 sort of rate. So we anticipate that it's going to stay about where that lower range is. Bill, would you like to add anything?

Bill Fathers

No, I just – back to the point we've made a few times around. Low – for lower powered centers that's probably a fairer statement. This is a – higher power centers is a key market, but I wouldn't say we are seeing that trend.

Robert Dezego – Sun Trust

Okay. And then the follow-up here is, free cash flow was a big story obviously in '09 and in 2010 with the expansion plan, we are clearly getting off that free cash flow path. Is this an indication of a longer-term expectation that you are going to need to keep building out space as we head into 2011 and 2012? The big question is, this build, this accelerated build in '09, is this going to – how long you think this is going to keep you with enough space and should we expect this to be more of a longer-term, bigger CapEx, bigger growth, bigger colo kind of story?

Greg Freiberg

No – so Rob, no, we don't ever intend to go down that route what you are describing. And the biggest reason there is we changed the who we sell colo to. We focus on selling the colo to the enterprise customer and colo is part of that three-product solution that Bill was speaking about earlier.

And so – the other piece of this, we think they are pretty efficient build that we are doing with fairly low construction cost per square foot. So – but with that said, we are not afraid or embarrassed to do a build where there is a great customer need and a great return. And so in those markets, we are seeing some real demand and those business cases made sense as I looked at them.

Robert Dezego – Sun Trust

Okay. Thank you very much.

Operator

Our next question comes from Steve Salberta with Boenning.

Steve Salberta – Boenning

Can you talk a little bit more about your thoughts on pricing of Symphony? I think the industry pricing has been pretty transparent out there. And just when you look at the different pieces, where do you come out relative to your peers?

Bryan Doerr

This is Bryan. So we haven't announced our final Symphony pricing yet, but I'll – I can certainly add some color to kind of give you sense for where we think we fit. You might recall, in my prepared remarks I talked about how Symphony is made up of three different service grades and those are selected with a real eye toward meet – not just meeting customer needs in a particular way with certain features, but also targeting the price points we see from various providers in the marketplace.

So at the low end of that service, you see – we expect a price point very competitive with what we think to be the mass market hosting providers and even for our enterprise buyers, that price point – and that service grade has a specific role. It might be for test and development or for some non-transaction based processing elements that are in their application portfolio.

As you move up to the highest grade, kind of just giving you some booking, the highest grade of service is still very, very attractively priced because it’s based on multi-tenant economics that allow us to be very, very efficient in terms of how the capital is deployed and leveraged over a customer base, but it does come with more resource reservation, more significant service levels, service commitments and a richer feature set and suitable for a higher grade of enterprise application.

And so it is much – it is more expensive at a price point level than what you might see in the mass market, but still because of the multi-tenant aspects of it, significantly less expensive than you might find in other traditional hosting offerings.

So we have definitely studied the market and see our service at the low end very competitive with those services and at the high end, very competitive and a significant cost savings opportunity for our clients where their applications fit that deployment model.

Steve Salberta – Boenning

And the industry cost of the cloud service seems to be about half of it bandwidth related. Where do you fall out on that? Will you break out the bandwidth component and put it in network services revenue?

Bryan Doerr

Yes, we will. So the services that connect – obviously, our clouds are in our – our cloud implementations are in our data centers. There is the what we would call the inside the data center network, which is – would – is probably part of the hosting business, but then external network connectivity, both Internet-based, say for customers – of our customers accessing or users of our customers' services accessing the application, that would all show up in network services.

And then, as I mentioned in the prepared remarks, private network connectivity that allows our customers to connect their data centers to our data centers and their end users over private networks to our data centers will all show up in our core network service business.

Steve Salberta – Boenning

So would you expect about half of the revenue to be basically network services?

Bryan Doerr

I don't have an answer there yet at this point. So I think I'll have to wait to see how the traffic bears out. It's clearly to going to vary based on use case of the customer. So rather than guessing an answer, I think I'll have to wait and see.

Steve Salberta – Boenning

Okay. And my last question, guys, is the $6.1 million sequential decline that you guided to in colocation, is that a net number or is there bookings that you've seen that could offset that and the reported number wouldn't actually be that – down that much?

Greg Freiberg

Hi, Steve. It's Greg. So unfortunately, that's kind of the lay of the land we faced on one January, all $6.1 million of run rate in the quarter is gone and then we are busy installing some of those fourth quarter sales and the like.

Steve Salberta – Boenning

Great. Thank you.

Operator

Our next question comes from Alex Kurtz with Merriman & Company.

Alex Kurtz – Merriman Curhan Ford

Yes, thanks for taking the question. Bill, a question for you around managed hosting. You mentioned that the financial vertical has showed a lot of strength recently. Could you just give us a little more context about what about those kinds of environments in data centers that you guys are selling well against and sort of who are you displacing when you win those deals?

Bill Fathers

Yes, thanks for the question. Typically, in-house solutions. So I think financial customers looking for access to large amount of compute capacity physically in the right place. They want to be physically next to the exchanges or liquidity venues that they are trading with. And they want a commercial model where they can have a great deal of more flexibility than their own in-house solution. So it can be a great nuts-and-bolts solution.

For example, a large sell side trading company recently acquired something like 5,500 calls from us in which they are deploying a big grid compute environment. And the commercial structure we have with them allows them to flex up and down to 7,000 calls or 8,000 calls one week and down to 3,000 or 4,000 the next, which reflects the ebb and flow of their trading patterns. And the economic benefit for them doing it with us versus an in-house solution is 25%, 30% cost reduction.

Alex Kurtz – Merriman Curhan Ford

This is a follow-up question for you and Bryan. As you guys roll out these new cloud offerings, where is the demarcation line between – with the sales force as far as how those – like VPDC that you guys are rolling out this year, how is that message to the sales force and thus to the customers as you guys sell that and as well as your managed hosting business?

Bill Fathers

So far pretty straightforward. The existing enterprise sales force sees strong demand for these products from their customers. And so that's great and we have a sales overlay to help make sure they understand enough about that particular capability. What will be interesting is the extent to which this gets us into new markets. And if we see – do that, there are other kinds of customers other than our established enterprise base who are interested in cloud services, then we would think about changing our go-to-market plan.

Alex Kurtz – Merriman Curhan Ford

Thank you.

Bill Fathers

The great point Bryan made is, typically a cloud seems to (inaudible) month. So it's great in terms of revenue recognition.

Alex Kurtz – Merriman Curhan Ford

I imagine for now the environments that you are selling both products into are pretty different on the VPDC side as you are going for test and devs and managed hosting, obviously Tier 1s. Is that right?

Bill Fathers

I think that we just – we won't get to it. But that was probably the story this time last year, huge shift. People are putting production, computational databases, trading platforms, high volume e-commerce websites into virtualized data center and cloud platforms. So yes, a big, big shift. We were perhaps a bit too muted in the way we commented on that.

Alex Kurtz – Merriman Curhan Ford

Okay. Thank you.

Operator

Our next question comes from Mark Kelleher with Brigantine.

Mark Kelleher – Brigantine

Thanks for taking the question. Most of my questions have been asked and answered. But just maybe a couple of numbers questions. Looking at capacity utilization, I think your number is 1.4 million per square feet of raised floor space and a little over 600,000 square feet utilized. Are those the right numbers?

Greg Freiberg

I missed what you said, but I can give you the percentage. It's about 67% utilized.

Mark Kelleher – Brigantine

So it's just – that’s the number. That works. And I don't know if you – could you break out Thomson Reuters as a percent of revenue?

Greg Freiberg

They are – 7% to 8% has been the contribution point for Thomson Reuters' revenue for the company.

Mark Kelleher – Brigantine

All right. And then just one last question. How about maybe an update on the CEO search? How is that going?

Jim Ousley

We – as I mentioned a couple of weeks ago, we do have a search committee at the Board level that are in place. We've hired a search firm and we do have the first set of candidates that the search committee is exploring. So we would expect – we would hope that it would be a rapid conclusion to the search. So far we are in the guts of it and proceeding down our anticipated path.

Mark Kelleher – Brigantine

Okay. Thanks.

Greg Freiberg

Thanks, Mark.

Operator

Our next question comes from Frank Louthan with Raymond James.

Frank Louthan – Raymond James

Great, thank you. Can you give us an idea – looking at the content customers that are still there, glad to see that's trending down, but can you give us an idea of how profitable those customers are? And at what point – what percentage of revenue can we expect their deflections [ph] so you would be much less consequential on your broad numbers? Thanks.

Greg Freiberg

So I've been shy to give specifics around what would be the margin contribution from those guys. Typically, they are paying a below market rate for the revenue. But as every time you've got an existing revenue stream and they are paying their bill every month, you are not spending any SG&A to support them too much. They are just – it's a pass through.

So that is clearly the situation with those guys. They are on the low end of what our average would be though in terms of a gross margin. And I'm sorry, could you repeat the second part of your question, Frank?

Frank Louthan – Raymond James

Well, I just wanted to see – that’s helpful, I see that the low end of the gross margin. I assume that they are sort of at the below average on the EBITDA as well, I would hope. But where – as far as – what point is it do – should we be less concerned that those deflections are going to have a little impact on the broader numbers and the growth in the rest of your business can start to flow through? Is that more of an 8% of revenue or they need to get to 2%, where should we be looking for that inflection point?

Greg Freiberg

I think Jim could probably address this, but the real message for us we've got to start managing our way through these now that we've got them down to less than a handful so that we stop having to communicate to you that there is a churn event. We got to find a way to run them through from here.

Jim Ousley

And that's the real emphasis is we need bookings and we are starting to see bookings levels that this won't be something that will need to be highlighted at 10% or less of our overall market. We will be growing fast enough with new bookings to cover it.

Frank Louthan – Raymond James

Great. Thank you.

Operator

Our next question comes from Chad Bartley with Pacific Crest.

Chad Bartley – Pacific Crest

Hi, good morning. Thanks a lot. Sorry if I missed this, but I wanted to ask about the expansion plans or the capacity you are going to add and do you see London and Chicago – can you give us a sense of timing for when those projects are going to be done?

Greg Freiberg

So we are kicking off those efforts obviously now. I think the – it's going to be the majority of this year and probably online Q1 of next year. There is typically about a 12-month effort from when you kick it off before you actually have the space available.

Chad Bartley – Pacific Crest

Okay. Thanks a lot.

Operator

Our next question comes from Eric Suppiger with Spring Hill – Signal Hill, pardon me.

Eric Suppiger – Signal Hill

Good morning. On the CapEx, on the customer growth piece, you have that growing about 30%, $67 million going to $87 million in 2010. Can you talk a little bit about what the driver for that growth is? I typically think of that as driven by customer adoption of your managed services. Do you see that accelerating to – is that reflecting an acceleration in your managed services there or is that more about just building out the cloud infrastructure?

Greg Freiberg

Hi, Eric. So the quick answer is both and we are restoring managed hosting to double-digit growth. I mean, that's certainly been our – where we think it's got to be a centerpiece of our strategy. We lost the big customer last year. So that's part of it.

The other part of it is we are keeping up – ramping the effort around product development and innovation. And as Bill and Bryan walked through, all of the efforts that we are taking out of the leadership position around the cloud, that capital R&D cost is also in that number.

Eric Suppiger – Signal Hill

Can you give us any sense for how those two would split out in terms of the $20 million increase you have year-over-year?

Greg Freiberg

No, but let me work and see if I can do something going forward for you.

Eric Suppiger – Signal Hill

Okay. Second question is you talked about your international expansion and you talked about prospects for acquisitions. Do you see any assets out there that look interesting? Do you think anything on the coming – in the near future in terms of international acquisitions or anything like that?

Jim Ousley

We definitely are looking at several options. As we speak, there are some interesting assets out there. So I would say that if we are going to do something, you wouldn't have to wait until the fourth quarter to hear that we are going to do something internationally either through a partnership arrangement or an asset purchase arrangement.

Eric Suppiger – Signal Hill

And then finally on the VPDC infrastructure, is that based on Cisco UCF severs or is that the HP servers or is the combination of the both?

Bryan Doerr

Actually, it's a combination of both and so – yes, you have both in the solution today.

Eric Suppiger – Signal Hill

Very good.

Bill Fathers

Could I just quickly follow up on the question around data center availability? So we were just confirming to make sure we've been public on this and so just to rattle through it, the expansion in New Jersey comes online in the second quarter this year. Chicago that we announced today comes online this quarter. The London second floor expansion is third quarter and the DC expansion is in the third quarter this year as well.

Eric Suppiger – Signal Hill

Great. Thank you very much.

Bill Fathers

Thank you.

Operator

Thank you. Ladies and gentlemen, this does conclude the conference. We'll now like to conclude the conference. Thank you for your participation. You may now disconnect. Good day.

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