Switch Inc (NYSE: SWCH), a retail colocation provider focused on the enterprise data center segment, today announced its Q3 2021 earnings and provided updates on its full-year 2021 guidance, leasing, development pipeline, and REIT conversion plans.

Financial Performance in Q3 2021 – Switch Inc

In Q3 2021, Switch Inc reported revenue of $158.1m, an 11.6% increase quarter-over-quarter, and adjusted EBITDA of $76.9m, a 2.7% decrease quarter-over-quarter. Therefore, the company’s EBITDA margin was 48.6% in Q3 2021, a ~7.1% decline quarter-over-quarter.

Degradation in Switch’s EBITDA margin was driven by higher power costs in the summer (particularly Nevada) and the inclusion of the Data Foundry acquisition in its operating results – which contributed a ~75 bps reduction in margins.

Revenue Composition

Switch generates its revenue from providing colocation space and related connectivity services to enterprises, financial companies, and government agencies, amongst others. Below is breakdown of the company’s revenue by its two key segments:

  • Colocation: revenue of $125.9m (80% of total), equating to a 10.1% increase quarter-over-quarter
  • Connectivity: revenue of $29.3m (18.5% of total), equating to a 17.7% increase quarter-over-quarter

Full-Year 2021 Guidance

Overall, Switch Inc lowered its full-year 2021 guidance due to a large customer delaying its commencement and lower power pass-through revenues.

Including Data Foundry

For full-year 2021, Switch projects revenue of $590m to $595m ($593m at the mid-point). Additionally, the company forecasts adjusted EBITDA of $307m to $314m ($311m at the mid-point).

Excluding Data Foundry (Legacy Switch 2021 Guidance)

For full-year 2021, Switch projects revenue of $564m to $567m ($565m at the mid-point). Additionally, the company forecasts adjusted EBITDA of $296m to $302m ($299m at the mid-point). Finally, the mid-point of the company’s guidance implies a year-over-year increase of 10.4% and 11.4% in revenue and EBITDA, respectively.

Operational Performance in Q3 2021 – Switch Inc

Portfolio

Switch operates 5 data center campuses (PRIMES), representing 510 megawatts of power capacity. Overall, these data centers comprise 5.1 million sqft in the United States, supporting over 1.3k customers.

Leasing

In Q3 2021, incremental lease signings were $16.2m, up 1.9% from the $15.9m of signings during Q2 2021. Additionally, lease signings of $16.2m are in-line with the company’s recent quarterly average of $15m+. In total, the incremental lease signings represented 9.5 megawatts of power capacity.

Switch Inc’s leasing included a 3-megawatt deal at the Rock Campus (Austin) with Apple. Also, the company executed an expansion order with FedEx for incremental colocation and network services at the Core Campus (Las Vegas) and the Keep Campus (Atlanta) totaling $2.4m in annualized revenue. Finally, Switch signed a multi-year expansion order totaling 1+ megawatts with a semiconductor customer at the Citadel Campus (Tahoe Reno) and the Keep Campus (Atlanta).

Switch’s incremental lease signings of $16.2m were driven almost entirely by existing customers ($15m), as opposed to new logos ($1m).

Backlog

Switch’s booked-not-billed backlog as of quarter-end was $36.6m, a decrease of 42% quarter-over-quarter. Notably, the reduction in the company’s backlog was driven by nearly $40m in annualized revenue commencements during Q3 2021. Of Switch’s total backlog, $20.0m (55%) will contribute to the remainder of 2021 revenues.

Churn

Customer churn was 0.2% in Q3 2021, which was in-line with churn of 0.2% in Q2 2021.

Development Pipeline – Switch Inc

Active Development

Presently, Switch expects to complete construction on three new data centers at the Core Campus (Las Vegas), the Citadel Campus (Tahoe Reno), and the Keep Campus (Atlanta) between Q2 2022 and Q2 2023.

Switch Inc Active Development Pipeline Q3 2021

At full build-out, these three facilities will comprise 150 megawatts (8.6k cabinets) of power capacity and 1.3 million sqft.

Planned Development

Switch is also completing site preparation work on five additional facilities, including two at the Core Campus (Las Vegas), one at the Rock Campus (Austin), one at the Citadel Campus (Tahoe Reno), and one at the Keep Campus (Atlanta). Specifically, these assets have planned completion dates ranging from 2024 through 2026.

Switch Inc Planned Development Pipeline Q3 2021

Overall, these planned developments will comprise 213 megawatts (11.9k cabinets) of power capacity and 1.9 million sqft upon full build-out.

REIT Conversion – Switch Inc

In November 2021, Switch’s Board of Directors voted to convert to a REIT and to pursue completion of the conversion by January 1, 2023. The company’s announcement closely follows activist hedge fund Elliott Management becoming Switch’s largest Class A investor in August 2021.

Switch Inc’s President, Thomas Morton, stated on the company’s Q3 2021 conference call that “converting at this time is something that will drive shareholder value”. Indeed, a REIT conversion may help to close the company’s valuation gap to its data center REIT peers including Equinix, Digital Realty, CyrusOne, CoreSite Realty, and Iron Mountain, amongst others.

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