Internap Network Services Corporation (INAP) CEO Peter Aquino on Q2 2018 Results - Earnings Call Transcript

Internap Network Services Corporation (NASDAQ:INAP) Q2 2018 Earnings Conference Call August 2, 2018 8:30 AM ET

Executives

Richard Ramlall - Vice President, Investor and Public Relations

Peter Aquino - President and Chief Executive Officer

James Keeley - Chief Financial Officer

Analysts

Dan Kurnos - The Benchmark Company

Frank Louthan - Raymond James

Jason Kreyer - Craig-Hallum

Operator

Good day, ladies and gentlemen, and welcome to the Internap Corporation Second Quarter 2018 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 call is being recorded.

I would now like to introduce your host for today’s conference, Richard Ramlall, Vice President of Investor Relations. Sir, you may begin.

Richard Ramlall

Good morning and thank you for joining us today. I’m joined by Pete Aquino, our Chief Executive Officer; and Jim Keeley, our Chief Financial Officer. Following prepared remarks, we will open up the call for your questions. The slides we reference in the call are available on our website in the Events and Presentations section of our IR page.

During this call, we will present both GAAP and non-GAAP financial measures. A reconciliation of non-GAAP measures to the most directly comparable GAAP measures are included in today’s earnings press release.

Management believes that our presentation of non-GAAP financial measures provides useful supplemental information to investors regarding our results of operations, and our non-GAAP financial measures should only be considered in addition to and not as a substitute for or superior to any measure of financial performance prepared in accordance with GAAP. The earnings press release is available under the Financial Information section of our Investor Relations page under the Quarterly Results link.

Today’s call contains forward-looking statements as described on Page 2 of the slide presentation we reference in this call, which we urge you to read. These statements are not guarantees of future performance. Because these statements are based on certain assumptions and involve risks and uncertainties, there are important factors that could cause our actual results to differ materially from those in the forward-looking statements. We discuss these factors in our filings with the SEC, which are available from the SEC or on our IR website. We undertake no obligation to amend, update or clarify these statements made as of today, August 2, 2018.

Now let me turn the call over to Peter Aquino. Pete?

Peter Aquino

Thank you, Rich, and good morning, everyone. We had a solid quarter and officially turned the corner. Most of our effort is now shifting towards increasing market share and organic growth, as we wind down and complete our real estate improvement work by year-end. INAP 2.0 is a growth company with improving free cash flow.

We are committed to increasing our share in the growing data center infrastructure and services industry. We are targeting a very large addressable business market in the metros that we serve. And INAP now has the capability to providing a full solution to customers requiring colocation, innovative cloud and managed hosting, high-performance and low-latency network services. Our model is to team with our customers to meet their needs and we believe the demand trends what we offer are only going up.

So let’s turn to Slide 4 and walk through the second quarter highlights. In the second quarter, we recorded significantly higher revenue and EBITDA sequentially and year-over-year. The increase includes a full quarter of SingleHop plus favorable growth trends in our integrated managed services and cloud products and high-density colo.

We’re seeing a mix of installed and new local customers expressing great interest in our new products and services, leveraging our Tier 3 flagship data centers. In addition, our backlog for colocation was replenished with new sales in wholesale and retail bookings in the second quarter and remains strong at approximately $23 million for just the largest project.

The other good news was that churn, especially in INAP International was at its lowest levels in history. With revenue stabilized and beginning to grow, we are also capturing incremental cost benefits in the back office. We are focused on network cost savings and acquisition synergies. Initiatives that we have in place give us the confidence to project the strong second-half performance in 2018.

Included in our revised outlook are the remaining cleanup items from prior years and we’re well on our way to exiting four non-core data centers in 2018. Including the two closures completed last year at San Francisco and New York City, this now brings the total to six non-core data center exit.

In all cases, the closures were in non-core rendered sites and markets where we already operated our own data center flagship with much better economics and performance. This was the logical business decision that ultimately improves profitability.

If you count the company’s former headquarters facility outside of Atlanta, we’ll end up exiting seven costly real estate leases, totaling approximately $10 million a year. Any future facility rationalization will be part of normal course. But for now, we have accomplished our primary objectives.

INAP’s new smaller headquarters is officially in Reston, Virginia, where strategy and capital allocation decisions are made. The majority The majority of our operations teams is concentrated in Atlanta, Chicago and Montreal. We’ve been making the necessary changes in our business for sustainable performance. The second quarter is representative to the solid turnaround. The results, team and positive culture focused on customer service and pay for performance is aligned with shareholders.

As a result of our work and overall team performance, I’m proud to announce that INAP was recently certified as a great place to work in the United States. We’re thrilled that employees are committed and motivated to work at INAP to build shareholder value. Congratulations to everyone on the team that help make INAP a great place to work.

Let’s now turn to Slide 5. The INAP data center services portfolio is very expansive and getting stronger everyday. Looking at a snapshot of our portfolio today, we announced two new deals that would give us Tier 3 colo inventory in opportunistic markets where our team has traction.

First, we announced this week that we now control new strategic data center facility in the Phoenix market, in Chandler. This state-of-the-art facility was formally owned by Bank of America, who will remain as an anchor tenant. We wanted to secure this Tier 3 facility from the acquiring commercial real estate group to stay ahead of increasing demand and providing runway for our sales leaders. This greater Phoenix market is a high absorption zone, and we were fortunate to find a great platform with at least 10 megawatts for the future.

And second, we recently signed a cross-selling arrangement with COLT Data Centre Services in the UK. This allows us to market Tier 3 data center inventory in London. We will reciprocate and offer our U.S. colo inventory to COLT to market as well. We are very bullish on this new sales opportunity. In addition, our SingleHop acquisition gives us some additional space with Digital Realty in Chicago. We will continue to work well with the DRT team to optimize our portfolio.

As we net off the four non-core closures this year and add the data centers of BofA in Phoenix and COLT in London, INAP now has 56 data centers in 21 markets worldwide. We’re now up to 99 POPs and managing over 1 million gross square feet in over 100 megawatts of power. As we continue to improve our network facilities to strengthen our resiliency and offer our net services, our customers will greatly benefit from our consistent high-performance and low-latency standards.

As we reflect on this global infrastructure footprint, we are confident that we can attract even more customers and partners and we’ll continue to get up. Referring to the data center metrics in our press release today, the combination of adds and deletions of properties across our footprint result in a net increase in occupancy from 61% to 65%.

We’re moving in the right direction in training out non-core assets to improve our profitability at the same time.

So at this point, let me turn it over to our CFO, Jim Keeley.

James Keeley

Thanks, Pete, and good morning, everyone. First, let me say how excited I’m to be part of the INAP team. I’ve been here for almost two months. I’m looking forward to the opportunity to help the company continue its march to drive top line growth, increase profits and ensure that our investments in CapEx and sales and marketing provide a solid return.

That being said, let’s move on to quarterly results. Please note as mentioned in our last report that effective in the first quarter of 2018, we realized our segments geographically. We decided to make this change in conjunction with the SingleHop acquisition to better align and manage our global data center operations and assets. The new reporting segments and historical comparisons are presented in the release we issued this morning.

Now let’s turn to the consolidated earnings summary Slide 6. Total revenue as reported was $82 million in the second quarter of 2018, an increase of 10.5% sequentially and 17.7% year-over-year. The sequential increase was primarily due to a full quarter’s impact of SingleHop and an increase in cloud revenues.

On a pro forma basis for SingleHop and excluding closure in data centers that we’re exiting, recurring revenues increased from 1% as solid increase in cloud and high-density colocation revenues were offset by small declines in network.

Net loss in the second quarter was $13.9 million, including $3.8 million of other expenses such as $1.4 million stock-based compensation, $800,000 from exit restructuring activities, $800,000 for reserve adjustment on non-income tax contingency, $800,000 for other non-recurring costs.

On a normalized non-GAAP basis, second quarter 2018 net loss decreased by just $3,000 to $10.1 million from a net loss of $10.4 million in the prior quarter and increased $4.2 million versus $5.9 million in the prior year. The year-over-year increase was primarily due to debt extinguishment/modification expenses, data center closures in the second quarter of 2017, offset in part by higher depreciation and amortization and higher interest expense.

Adjusted EBITDA in the second quarter was $28.5 million with adjusted EBITDA margin of 34.7%. Adjusted EBITDA increased by $2.8 million versus the prior quarter to $5.4 million year-over-year. The adjusted EBITDA margin was relatively flat sequentially and grew 160 basis points compared to the second quarter of 2017. Positive EBITDA performance was driven by revenue growth, including SingleHop’s contribution and cost reductions.

In the second quarter, we realized the majority of the hard cost synergies that were expected from the SingleHop acquisition approximately $2 million to $3 million annualized. Capital expenditures in the second quarter were $11.1 million, compared to $6.4 million last quarter, $6.7 million in the second quarter of 2017.

Second quarter spend was more in line with our plan in the first quarter spend. Similar to last year, we anticipate our second-half CapEx investments to be somewhat higher than the first half of the year and full-year capital expenditures to fall within our guidance range. Second quarter 2018 adjusted EBITDA less CapEx was $17.4 million, a decrease of $1.9 million sequentially and $1.1 million versus the second quarter of 2017.

Now let’s turn to Slide 7, our INAP U.S. Business Unit. U.S. revenue totaled $64.1 million in the second quarter of 2018, an increase of 12.2% sequentially and an increase of 18.4% year-over-year. The revenues increase was primarily due to the full quarter’s contribution of SingleHop, offset in part by lower non-recurring and network revenues.

U.S. business unit second quarter 2018 contribution was $29.2 million, resulting a 45.6% contribution margin, which is 90 basis points lower sequentially and 620 basis points higher than prior year. The sequential decline in margin is due to the decrease in non-recurring and network revenues, both high margin products.

The year-over-year increase was primarily due to a combination of cost reductions, exits of underperforming data centers and operating to capital lease improvements. As we progress through the year, we will continue to look for opportunities to drive margin expansion in the business unit, both by increasing revenues and by reducing costs through additional network efficiencies.

Now let’s go to Slide 8 to discuss our INAP International business unit. International second quarter revenue totaled $17.9 million, an increase of $800,000, or 4.5% sequentially to $2.4 million, or 15.2% year-over-year. The sequential increase was primarily due to the full quarter of SingleHop and a 5.5% increase in iWeb revenues in Canada.

The year-over-year increase was driven primarily by the financial consolidation of INAP Japan and the addition of SingleHop. International business unit contribution of $6 million was flat sequentially and decreased 1.1% year-over-year. Second quarter international contribution margin of 33.7% declined from 35% sequentially and from 45.5% year-over-year.

The sequential decrease in margin was primarily due to paying rent on our new facility in Montreal that’s currently being built out and not yet generating revenue. This build out is expected to be completed in the third quarter. The year-over-year decrease was largely due to the exclusion of INAP Japan last year to 2017 revenue declines Japan.

Moving to Slide 9 entitled cash flow and balance sheet summary. Free cash flow defined as cash generated from operations less capital expenditures was $4.3 million in the second quarter of 2018, an increase of $7.1 million in the prior quarter and a decrease of $3.7 million in the prior year. The sequential increase was primarily due to lower debt issuance fees, working capital timing, offset in part by higher capital expenditures.

I mentioned previously, capital expenditures were $11.1 million in the current quarter comprised of $6.9 million of growth-related spend and $4.2 million of maintenance. Maintenance capital includes approximately $2.6 million of data center upgrades, primarily in Atlanta.

Cash interest was $15.5 million in the second quarter. As reported in April, we amended the company’s credit agreement to lower the interest rate margin on our term loan by 125 basis points, saving the company approximately $5-point million in annual interest, all else equal. This brings another free cash flow to $19.8 million, compared to $10.2 million in the previous quarter and $15.6 million last year.

Cash and cash equivalents were $14.7 million at the end of the second quarter of 2018 versus $15.0 in the prior quarter. The decrease of $1.5 million was primarily driven by the $2.5 million increase in interest expense, the debt issuance fees of $1.6 related to the term loan repricing of people, offset in part by working capital timing.

Total debt of $662.7 million includes $231 million in capital lease obligations, $158.3 million of our capital lease obligations are excluded from debt for paying covenant purposes as they – for operating leases at the time of the refinancing. Our covenant-based leverage ratio was 5.2 in the second quarter of 2018, 5.1 in the first quarter and 4.2 in the second quarter of last year.

Turning to Slide 10, second quarter 2018 financial guidance update. Given that our adjusted EBITDA performance is trending above our full-year outlook as we continue to drive network cost down, control our operating costs and leverage revenues, we are raising our guidance ranges on adjusted EBITDA and adjusted EBITDA less CapEx.

We expect adjusted EBITDA in the range of $110 million to $120 million this year, an increase from our previous guidance of $105 million to $115 million. Accordingly, our adjusted EBITDA less CapEx range increases to $70 million to $75 million. For revenue and capital expenditures, we are reaffirming our prior guidance for 2018. We are seeing positive growth from recurring revenues resulting from a solid backlog and a strengthening pipeline.

However, we believe it prudent to hold the line on our revenue guidance pending the completion of our closing of underperforming assets.

Now let me turn the call back to Pete.

Peter Aquino

Again, let’s turn to our closing Slide 11. INAP 2.0 evolves, we’re capable of delivering on a full spectrum of data center and cloud services, including colocation, network, private/public cloud, environmental and managed services. We will also coattail in trends of hyperscale public cloud growth. We can either overlay our managed services or on-ramp our customers to the [indiscernible] global transport network.

So as customers transform their IP organization and since there are different ways that they can go to market, INAP will be their trusted partner in every stage. We believe that there are very few companies like ours, I can say that, and deliver a quality bundled products and services to fill their needs.

The other takeaway is that, INAP is operating within a pretty large addressable market in major cities around the world. It is estimated that our addressable market maybe three times larger than the wholesale market, primarily targeting hyperscalers. All of these leads us to believe that we have a great opportunity to rise with the trends and be successful over the long-term.

As we have demonstrated, we’re poised to grow as a standalone and improve between partnerships, which can be opportunistic in any market, where we have a presence around the world and finding ways to grow without getting overextended in spec builds. Our model is to partner when it’s mutually beneficial and aim to capture as much share as possible just in time.

As we get larger and gain scale, INAP will continue to be a perfect match for sophisticated customers who require complicated IT and network solutions to help their businesses perform at their best. We’re adding the right products and infrastructure to do just that and across several verticals including software, social media, ad tech, gaming, entertainment, financial, and healthcare services. We are committed to growing in lots of that as our customers succeed.

So looking ahead and finally with the turnaround virtually complete by the end of this year, we’re uniquely positioned as a public company to jump offense and consolidate tuck-ins, work within partners and ultimately, accumulate accretive deals. We are in a path to transform INAP into a company with long-term sustainable growth, and our motivated team continues to execute on plan.

This concludes our prepared remarks. At this point, we’d like to take your questions. Operator?

Question-and-Answer Session

Operator

Thank you. [Operator Instructions] Our first question comes from Dan Kurnos with The Benchmark. Your line is now open.

Dan Kurnos

Great, thanks. Good morning. Nice to hear kind of the progression here, Pete. Let me just – I think, I heard you guys talking about 1% increase in recurring revenues. So as you mentioned several times in the call, you’re turning the corner on organic growth here underlying. Just maybe give us the sense of with your opportunity, how – maybe piece of play how that accelerates? I understand that there’s significant time from book-to-bill there.

So where that kind of goes over the next 12, 24 months? How you see that improving? And on the customer side, you acquired SingleHop to kind of fill in a need in the text that – or a hole in your portfolio. Can you talk about what you’re seeing from – now that you have the capability under your belt for a full quarter, order demand is coming in or increasing wallet share, if you will, with existing customers after that acquisition?

Peter Aquino

Thanks, Dan. That’s basically the whole script. So let me start with the first level. We’re really excited about the organic growth. If you net out the closures, we grew about 1%, and we knew we’d turn the corner soon. We were almost flat in the first quarter when you consider non-recurring items, but we’re pretty much there. But to your point 1%, where do you go from here. And the bigger backlog gets and the faster we can install the backlog, the better the organic growth is going to be.

As you can see what we’re doing at the same time is, we’re adding better products to the mix, though SingleHop brings that. And the innovative platform allows us to cross-sell into the INAP customer base and the progress we’re seeing is quite good. I’m very, very excited about the early progress that we’ve made, and I think what you do is much more.

And I think what you’re also finding with this company is that, when we talk to a customer, we’re providing intentionally a bundle solution that includes not only private cloud or managed services, but high-density colo in the market they want to be in, even on the edge and also a network that they can come to us at a one stop shop type of mentality. And I think that also attracts customers and partners.

The deal that we did with COLT is pretty interesting, because when – our platform is great, and the markets we’re in are phenomenal across the globe. And if they can get access into our footprint as we look to fill in space in the case of international in London, it’s a good win-win situation, because you don’t want to keep building these properties in spec and hope that they will come. The partnership is the way to go, and we’re tracking really good partners.

So if you add all that together from a revenue standpoint, we’re looking at a bunch of things adding new products, our sales team is getting stronger every day, we had really good markets and now that we partner we can mix it up and just stay ahead of this curve.

So once we turn the corner on organic growth, the question now is how much more can we do. And we’re certainly throwing a lot of ideas on the table to try to gain scale naturally and with partners and it started come to fruition in our numbers. So that’s really the story.

The other good news today as a takeaway is, we probably spent a year-and-a-half just cleaning up some, what I would call, non-core facilities and low-hanging fruit on cost-cutting, that’s pretty much done too. There’s always room for improvement and we always find that opportunities to do so. But our increase in EBITDA guidance suggests by getting a lot of that done, we can grow naturally and expand our margins as well. And I hope you see today that our confidence in margin expansion is part of the story and that’s what we’re up to at this point.

Dan Kurnos

That’s helpful. And if I can just ask real quickly on the customer side. Obviously, the Bank of America win is pretty meaningful. I know, obviously, it was probably pretty difficult. I know you guys have had trouble in the past getting logos out there officially into the market, so I doubt we’re going to get contract details. But now that you’ve gotten everything kind of right-sized. Can you just talk about the stickiness of – from new customer profile versus sort of historic expectations on the churn rate and just some of the economics at all if you’re willing to disclose around new contract, contract lengths or expansion capabilities?

Peter Aquino

Yes, it’s a good question. Obviously, when you have high-density colo and you perform well and you have Tier 3 data centers, we call them black ships. We have great facilities down. There’s really no reason relative to the competition why somebody would leave. It’s the same old story somebody can be consolidated or acquired and therefore they’re consolidating their footprint somewhere.

You may have some folks naturally wanting to go to the cloud themselves and there are some churn related to that. But for the most part Tier 3 high-density Colo is very sticky and the churn rates are quite low, because they’re making an investment to enter your building probably with a lot of trust, so that’s the good news.

The cloud business on our side when you think about managed services and the options, it’s just a different animal when it comes to churn. And their satisfaction with the company almost has nothing to do with their turf. It has to do more with the project they’re working on. Think about movie studio in Montreal, we had really good success in that vertical. And those movies start and finish three to six months in terms of cloud spinoff.

So we report that as churn, but it’s really not officially turned in the historical sense, it’s a project and that’s in our body. The good news is in international specifically, that’s even getting better than it was. And so we don’t report churn rates specifically. But the fact that we’re growing organically now suggests that, we’re getting help on both sides. We’re getting more deals on the tables, they’re bigger deals and the churn is improving.

And colo is very stable and managed services and cloud is the nature of the beast, because it’s in many cases, it could be spontaneous, it could be fun up, fun down. There’s a lot of options, and you don’t typically sign a three-year deal on a private cloud business necessarily, because it’s very flexible. So that’s the nature of our company. And again, to the extent, customers are satisfied by our services and buying more, that’s upside for us.

Dan Kurnos

Got it. Thanks for all the color, Pete. I appreciate it.

Peter Aquino

You’re welcome.

Operator

Thank you. And our next question comes from Frank Louthan with Raymond James. Your line is now open.

Frank Louthan

Great, thank you. I think, you – did you mention there’s a $23 million in bookings in the quarter. Can you give us an idea of sort of where that that’s been trending and the split between colo and hosting? And were there any dark fiber sales in the quarter or what’s sort of the update on the fiber networking part of the business that you’ve been trying to launch?

Peter Aquino

Sure. Thanks, Frank. Let me work backwards. The dark fiber that we have from – for most part Zayo, they make your markets. We have five markets your mark for Metro E deployment. We have the fiber in place. We bought the CAN gear. We announced that. We’re deploying it now. So by the fourth quarter, we should start seeing an opportunity where the sales guys can put Metro E in their bag and we’re rushing to do that. We’re actually training a lot of the sales guys now unless what we can offer. We may roll that out in stages. But the markets that we’re in includes Dallas, Santa Clara Bay Area, New York City, we have a fiber in Montreal even.

So we have really good markets that we can launch. And we’re getting actually calls from other operators that want to use our metro rings, too. So it might be a B2B product at the end of the day, I’m not sure. But we really like that progress. The backlog of $23 million that we called out, if – you may recall that I publicly released that number post the first quarter call well into the second quarters. So I’ve seen that number for a while. It actually got reduced by 20%, 30% as we install some of the bigger customers, especially out of Santa Clara, Seattle, Phoenix, and then we basically sold to replace it.

So $23 million to $25 million or maybe more could be our future, where the wholesale deals come in just later on task. And as you know, they tend to take anywhere from one month to three months to install the whole phase. If you think about the $23 million backlog as they disclosed last time, that was only six. And that’s a total contract value that would suggest, these are bigger deals and three-year deals longer-term, their colo.

The backlog for cloud, honestly in this count – I didn’t even count it, start in that number for the most part. So we’re only disclosing today selective big or I would say, more wholesale like deals not quite hyperscale, but big customers in that 23. And just to give you all a flavor that now this company hasn’t sold big deals in the long time and we have our ceilings down to do that.

So we’re very encouraged. The bigger the deals, the bigger the backlog. And we’re now at a point, where instead of free game across all these metros, we have a lot of capacity and then we have to balance where we have and see other challenges. We may have capacity in one market and we’re really hot in other market, we end up doing what we did in Phoenix, where we caught the bus. And you have two choices either stop and say, it’s full 99% or keep your momentum going. And the B2B deal in Phoenix represents the two cushion shop.

We’ve got a great facility in a market that’s somewhat short of power, so we have a facility that has a lot of power. It allows customers that are in our DRT site in Phoenix to now see where they can go next. So that’s great, and it also allows us to take advantage with our team in a market we’re good at.

So if you can imagine a portfolio chart that we have in all the markets where we’re working in, it’s a little bit of where is the customer demand at that point and then move to that quickly, so you can capture it. Certainly, we don’t want to be in a position to turn business away. So we’re really flexible capital allocation here out of Reston is getting more – it’s more challenging and fun. And then for the most part, he guys are telling us what’s – how to prioritize.

Frank Louthan

Got it. And what was the SingleHop contribution in the quarter?

Peter Aquino

This is a very good question and I’m glad you asked it. When we closed SingleHop on February 28, that that next day SingleHop was integrated. In other words, it was mixed into INAP cloud that moment. We don’t really have the single SingleHop’s second quarter clean number as a standalone, because it’s not we merged that immediately.

So we’re tracking SingleHop as a standalone in our body. It’s in the cloud business. And it’s rightfully so, because they want and the sales team start selling into the INAP base. And day two, our back office took over SingleHop’s back office in synergy in terms of the finance department and the operation. The team is really more. So we’re not tracking SingleHop, because it doesn’t exist as an entity in our body going forward. And makes a little challenging, because we can hear in Jim’s script, we’re trying to suggest that quarter-over-quarter improvements, primarily due to SingleHop and the listeners are going to say, well, exactly what is SingleHop? And the answer is, mushed. It’s morphed into INAP. There is no SingleHop standalone number.

So that’s just to help you. But for the most part, if you took, and I do this all the time. If you take SingleHop clean in the pro forma of the first quarter, you can – you could estimate, all else equal, if you impute that number into the second quarter dollar-for-dollar, the difference is the growth that came out of cloud SingleHop generated for the most part in terms of talent. But we have incremental growth, because we did this deal and that’s showing up in our numbers, too. So that’s a long way to say, and I don’t have a clean number for you, but you can impute that growth came out of that deal.

Frank Louthan

Got it. Okay. Thank you.

Operator

Thank you. And our next question comes from George Sutton with Craig-Hallum. Your line is now open.

Jason Kreyer

Hey, good morning, guys, Jason on for George. Pete, you have landed some pretty substantial deals over the last few quarters. Obviously, we can see that in the $23 million in bookings that you reported. And just wondering if you can give us a better feel for what are the factors that are driving these wins? As you get feedback from those customers, what differentiated you that caused them to choose you guys?

Peter Aquino

Hey, Jason, it’s a good question. I mean, honestly, think about our traction in DRT site in Phoenix, as an example. A customer can go to DRT or they can go to us in DRT and in fact, the matter is we are providing a full service solution. We have a lot of products that a customer would want, including nano services, including network connectivity, high-performance, low-latency, lot of times they want a solution. And if you go to Tier 3 data center and buy racks and power, you still got to figure it out from an IT perspective and it’s complicated.

So we offer that complete bundle, that is our differentiator. The other thing that is clear is that, when we have our own flagship where it’s a – all the critical power and the infrastructure is ours, we control a lot more. Our margins are better. Our people are in the building. It’s a great opportunity to walk a customer and tour them through and you basically built soup to nuts.

When they look at the Tier 3 data center and compare to others, it is honestly, it is very little difference in whether you walk into an Equinix facility. DRT, Syrus 1 or INAP, the Tier 3 facility built by engineers to a spec. We built them like that. That’s the flagships we have. So when you’re looking for service, you’re really trying to figure out as a customer, is it a trusted supplier, can they do more than just colo and how fast can they move. As you know, one of the benefits we have and we inherited this since we have capacity now.

So when customers walk through our Tier 3 centers, they can buy now and that is the secret sauce at some point and that’s what we’re doing in Phoenix you just got to stay ahead of that demand.So that when they walk through your Tier 3 facility and you’re out of space then you lose an opportunity. So it’s really a balancing act. But our platform is really good and we’re really proud of it and where we can spend money to make them even better. We make them better or we get out of them. And we’ve taken our medicine in the last two years of getting out of facilities that were not good.

And so that – the good news is that’s behind us and we’ll rationalize the future of our real estate from a proactive perspective. But they were six or seven includes the headquarters facility that were just burning a hole in our pocket and improved the EBITDA. So that’s a long way saying, it’s a real estate management company to a certain extent and customers really like the product that we put on the field.

Jason Kreyer

Got it. Thanks for the color, Pete. One more just – so one component of your strategy has been to ramp up headcount and the majority of that was on the sales front. Just wondering if you can give us a snapshot of where that is today versus maybe where it was a year ago? And then how you see the productivity ramping?

Peter Aquino

You talked about the sales team specifically Jason?

Jason Kreyer

Yes.

Peter Aquino

Okay. We, as you know, we started off with a very small sales team. We built it up to about 60 people that was before SingleHop. SingleHop probably add another 15, that puts us about 75 people that are quota variance in some form or fashion. And that’s a pretty good size for what we’re doing.

What we continue to do is try to improve that productivity and we’re doing more and more training, especially with the SingleHop products now available. Now the sales team is at full strength in terms of numbers. However, we’re constantly looking for ways to improve that team and we are.

Jason Kreyer

Got it. Okay. Thank you.

Operator

Thank you. This concludes today’s Q&A session. I would now like to turn the call back over to Mr. Aquino for closing remarks.

Peter Aquino

Thank you, operator, and thank you, everyone, for your attention today. We look forward to our next communication. Have a great day.

Operator

Ladies and gentlemen, thank you for participating in today’s conference. This does conclude the program. You may all connect. Everyone, have a great day.