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Switch Inc (NYSE:SWCH)
Q3 2019 Earnings Call
Nov 7, 2019, 5:00 p.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good day, and welcome to the Switch Inc. Third Quarter 2019 Earnings Conference Call. [Operator Instructions] Please note this event is being recorded.

I would, now like to turn the conference over to Matthew Heinz, VP of Investor Relations. Please go ahead.

Matthew Heinz -- Vice President of Investor Relations

Thank you, operator. Good afternoon and welcome to Switch's Third Quarter 2019 Conference Call. On the call today are Thomas Morton, Switch's President; and Gabe Nacht, Switch's CFO. Today's call may include forward-looking statements including references to expectations projections or other characterizations of future events or market conditions. Actual results may differ materially from those expressed in our forward-looking statements which are subject to certain risks uncertainties and assumptions. Our statements are made as of today and we assume no obligation to update our disclosures. We describe some of these risks in our SEC filings specifically our Form 10-K particularly in the section entitled Risk Factors. In addition today's call includes discussion of non-GAAP financial measures which should not be considered in isolation from or as a substitute for financial information prepared in accordance with GAAP. Please refer to today's press release and supplemental package for further information including a reconciliation of non-GAAP measures. Our third quarter 2019 press release has been furnished to the SEC as part of our Form 8-K and is available on our investor website at investors.switch.com.

I will, now turn the call over to Switch's President, Thomas Morton.

Thomas Morton -- President and Chief Legal Officer

Thank you Matt, and good afternoon everyone. Thank you for joining us today. Switch continued its solid business momentum in the third quarter of 2019 achieving year-over-year revenue growth of more than 14% our highest growth rate since Q4 of 2017. Our strong revenue growth in the third quarter was driven by favorable conversion of our booked not billed backlog increased co-location demand from new and existing customers and improving growth trends in telecom revenue which grew by 13% compared to the year ago quarter. Due to the stronger than forecasted third quarter revenue performance and continued strength in our sales pipeline we are once again increasing 2019 guidance as detailed in our earnings press release and our investor presentation. Gabe will speak to the specific changes and drivers of our guidance increase later in today's call. Moreover we have been pleased with the ongoing ecosystem development at our Citadel and Pyramid Campus locations which now combined represent 12% of consolidated revenue as of Q3 2019 up from 8% in the prior year quarter.

For the nine months, ending September 30 these two PRIMEs have accounted for nearly half of our incremental revenue growth in almost 2/3 of our incremental EBITDA growth compared to the same period in 2018 driven by a combination of new logo signings and strong incremental demand from our existing customers. We are pleased to inform you that we now have over 100 customers participating in our Citadel ecosystem. When speaking to investors we are occasionally asked about Switch's ability to replicate the success of our Las Vegas campus at our newer PRIME locations. Given the sheer scale of the Core Campus which now in its 11th year of operations it can be difficult to fully appreciate the progress we have achieved in our Citadel and Pyramid locations within just three years of their launch. We have been successful in leveraging the CORE's thriving customer ecosystem and our industry-leading designs and operation to accelerate adoption of the new PRIME locations.

We are doing so, using the same CORE principles of building at massive scale in locations that offer lower cost low to 0 taxes 100% green energy robust connectivity and low risk of natural disaster. Based on the success of these new PRIMEs we are confident in Switch's ability to replicate a success in Las Vegas as we expand naturally. Indeed our customer base has proven to be supportive of our vision as evidenced by the favorable growth trends we have seen in multicampus customer revenue. As of Q3 2019 our revenue from multicampus customers represents 28% of total revenue compared to 16% a year ago reflecting a 98% year-over-year increase. We expect this trend will endure over time as customers continue to see compelling value in Switch's ability to deliver north- to- south and east-to-west redundancy enabling enterprises to replicate or diversify their critical hybrid IT operations within the world's most secure and only Tier five designed and operated technology solutions ecosystems. Overall customer activity levels continue to be robust in Q3 as we executed more than 620 contracts representing a total contract value of $115 million with a weighted average term of approximately four years.

We added 19, new logos in the third quarter including a leading global clothing and accessories retailer a California-based oil and gas producer and a Texas-based specialty chemicals manufacturer. Importantly Switch successfully negotiated several key customer contract renewals in the quarter signing multiyear extensions with six of our top 30 customers totaling more than $70 million in contract value and resulting in a 5% increase to the aggregate recurring revenue run rate for these customers. Included in these renewals was a 4-year extension with a leading global semiconductor manufacturer and a top five existing Switch customer representing $12 million of annualized recurring revenue in the Core Campus. In addition to the extension the customer also increased its power commitment in Las Vegas and expanded its footprint to The Citadel Campus with a 3-year co-location agreement representing $2.5 million of incremental annualized revenue. We also executed multiyear renewals with two of our longtime hospitality and gaming customers in the Core Campus representing a total of more than $22 million in contract value. In total our third quarter renewals and associated customer expansion activity resulted in a greater than 8% increase in monthly recurring revenues when compared to the prior run rate for these customers.

We continue our efforts to further accelerate our already strong momentum with key hyperscale cloud platforms as we continue to build a truly differentiated hybrid-cloud offering. Year-to-date we have added seven senior sales professionals to the Switch team assembling what we view as a world-class enterprise technology sales organization. At this juncture our 2019 sales hiring initiative has been a success. Going forward we will continue to expand the team's headcount in a prudent and strategic manner. Our recent addition to the Switch strategic sales team represent a diverse group of highly accomplished industry veterans with specialties ranging from hyperscale and hybrid cloud to telecommunications to commercial real estate. Most importantly we believe that each of our newly hired and pre-existing sales professionals are technologists at their core which is a critical factor in ensuring the Switch carries forward with the entrepreneurial culture set in motion by Switch's founding principles. We also continue to work closely with the broker community and managed services providers to augment our internal sales force. With respect to our construction pipeline we are on track to open sector three of Las Vegas 11 in Q1 2020 with 20 megawatts of additional power schedule to come online over the course of the next year.

In The Citadel Campus we expect to open a new sector in Q4 2019 with two additional sectors in 20 megawatts slated for 2020. We also continue to move forward with the expansion in The Pyramid Campus with sector three scheduled to be available for clients in Q4. Lastly we anticipate customer billings to commence in The Keep Campus during the first half of 2020 based on signed customer contracts that have occurred during Q3 and subsequent to quarter end. We also remain in active dialogue with additional customers regarding 2020 deployments in Atlanta. As previously announced we have secured the rights to contiguous parcels comprising approximately 80 acres in total located at our Core Campus in Las Vegas. As discussed on last quarter's call the planning phases for our next major expansion of the Core Campus are well under way. Upon full buildout we estimate the expansion will add more than 200 megawatts and 2.6 million square feet to what is already the largest technology ecosystem in the world. We look forward to providing additional updates as we advance development in 2020.

I will now turn the call over to Gabe to discuss our financial results. Gabe?

Gabe Nacht -- Chief Financial Officer

Thanks, Thomas. Today I'm going to review our financial results for the third quarter of 2019 and discuss our outlook for the remainder of 2019. In the third quarter of 2019 we achieved quarterly revenue of $117.6 million an increase of $14.8 million or 14.4% compared to the third quarter of 2018. This is primarily attributable to a $12.6 million increase in co-location revenue. 48% of the year-over-year revenue growth in Q3 2019 resulted from new customers who initiated service during the past 12 months while 52% of the revenue growth came from customers who have been with Switch longer than one year. More than 95% of our revenue in the quarter was recurring in nature consisting primarily of co-location and telecom services which includes cross-connects broadband and external point-to-point connectivity. Co-location revenue for the third quarter of 2019 was $95.1 million compared to $82.4 million reported in Q3 of 2018 an increase of 15%. Telecom revenue in Q3 of 2019 was $20.9 million increasing 13% compared to $18.5 million in the same period in 2018.

Other revenue including professional services accounted for $1.6 million in Q3 2019 compared to $1.8 million for the same period in 2018. Switch has become a strategic partner to over 950 customers and we added 19 new logos in Q3 of 2019. As of September 30 2019 Switch had over 15000 billing cabinet equivalents generating over $2300 per cabinet equivalent in monthly recurring revenue. We had more than 6000 billing cross-connects as of September 30 and cross-connects accounted for approximately 3.7% of total revenue in Q3 of 2019 compared to 3.6% in the year ago period. Now turning to bookings. During Q3 we executed 622 contracts comprising more than 16 megawatts with total contract value of $115 million and annualized revenue of $34 million at full deployment inclusive of both renewals and sales of incremental services. In the third quarter we signed $7 million of incremental annualized recurring revenue inclusive of $6 million in incremental bookings from existing customers and approximately $1 million from new customers. As of September 30 2019 our booked not billed backlog stood at over $22 million in aggregate annualized revenue including contractual ramps and contracts yet to commence billing.

Approximately $11 million of annualized recurring revenue, commenced from backlog during Q3 which combined with contractual ramps and accelerated power commit increases from certain large customers helped to drive a $6 million sequential increase in total revenue during the third quarter. We expect approximately $1.5 million of revenue contribution from backlog during the fourth quarter of 2019 with the remainder contributing in 2020 and beyond. Revenue reductions from customer churn remained low in Q3 of 2019 at 0.1% compared to 0.2% in Q2. As a reminder we define churn as the reduction in recurring revenue attributable to customer terminations or nonrenewal of expired contracts divided by the revenue at the beginning of the period. The metrics discussed on today's call are all available in our investor presentation posted on the Investor Relations section of our website. Cost of revenue increased by $3 million in Q3 of 2019 compared to the year ago quarter primarily due to increases in depreciation labor and connectivity.

Excluding depreciation amortization, and equity-based compensation expenses our Q3 2019 adjusted gross profit increased 18% year-over-year to $85.3 million. A reconciliation of gross profit to adjusted gross profit is provided in the appendix section of our investor presentation. SG&A expenses in Q3 of 2019 were $37.3 million compared to $31.1 million in Q3 of 2018 an increase of 20%. The increase in SG&A was primarily attributable to higher professional fees and labor expenses. Income from operations in Q3 of 2019 increased 45% to $18.1 million compared to $12.5 million in Q3 of 2018. The growth in operating income was primarily attributable to an $11.8 million increase in gross profit offset by a $6.2 million increase in SG&A cost. Interest expense decreased by $0.7 million to $6.7 million in Q3 of 2019 primarily driven by lower LIBOR rates compared to the same quarter last year. We expect interest costs to increase in Q4 resulting from the $70 million drawn on our revolver in September to facilitate land purchases data center construction and share repurchases. Net income for Q3 of 2019 was $7.1 million compared to net income of $4.7 million in Q3 of 2018. Net income in the third quarter of 2019 includes the impact of a $3.9 million noncash adjustment on interest rate swaps.

Adjusted EBITDA totaled $56.7 million for Q3 of 2019, compared to $50.9 million in Q3 of 2018 reflecting year-over-year growth of 11%. Our adjusted EBITDA margin for Q3 of 2019 was 48.2% decreasing from 49.5% in the year ago period due to the aforementioned increases in SG&A related to professional services and labor. Capital expenditures in the third quarter of 2019 were $121.2 million and included $28.9 million to acquire approximately 36 acres for future development in the Core Campus in Las Vegas. Excluding the land acquisitions capital expenditures were $92.3 million compared to $60.4 million in the same quarter of 2018. Compared to the year ago quarter and excluding land acquisitions the 53% increase in Q3 capital expenditures was driven by higher investment in the Citadel Pyramid and Keep Campus locations with slightly lower spending in The Core Campus. On a year-to-date basis excluding land total capital expenditures were $192.4 million compared to $221.1 million for the year ago period. Switch invested $33.3 million in the Core Campus for data center construction and equipment primarily to support customer demand at our Las Vegas 11 facility.

As of September 30 2019, Las Vegas 11 sectors one and two were 97% contractually committed with sector three expected to open in Q1 of 2020. Switch also invested $28.4 million for ongoing construction at The Keep Campus in Atlanta where we anticipate customer billings to commence in the first half of 2020. Switch spent $24.2 million in The Citadel Campus for construction on two additional sectors expected to open in Q4 of 2019 and Q3 of 2020 respectively. Finally Switch invested $6.4 million for additional expansion in The Pyramid Campus where we expect to open a new sector in Q4 of 2019. Maintenance capital expenditures were $1.8 million for the third quarter of 2019 or 1.6% of revenue compared to $3.3 million and 3.2% of revenue in the same quarter last year. Growth capex for data center construction and improvements was $90.5 million for the third quarter of 2019 compared to $57.1 million in the same period last year. As of September 30 2019 the Switch PRIMEs had capacity for 21000 cabinet equivalents within our open sectors of which 90% were committed under contracts compared to 89% in the prior quarter and 85% in the year ago quarter. The Q3 2019 utilization rates of these PRIMEs based on committed cabinets and currently available co-location space were approximately 93% 72% and 92% at The Core Campus The Citadel Campus and The Pyramid Campus respectively compared to 93% 66% and 91% as of Q2.

At full buildout, our existing constructed facilities comprise an aggregate of nearly 4.4 million gross square feet of space up to 455 megawatts of power and nearly 25000 cabinet equivalents. Looking now at the balance sheet. As of September 30 2019 the company's total debt outstanding net of cash and cash equivalents was $619.7 million resulting in a net debt to last quarter annualized adjusted EBITDA ratio of 2.7x compared to 2.3x in the prior quarter. As of September 30 2019 Switch had liquidity of $482.5 million including cash and cash equivalents and availability under its revolving line of credit. We believe this is sufficient to fund our growth plans for the foreseeable future. As disclosed in our 8-K on October 4th Switch Inc. issued 2.4 million shares of Class A common stock to members of Switch Limited and concurrently canceled an equivalent number of shares of Class B common stock in connection with the exercise of member redemption rights.

In addition, to the exchanges that occurred we spent $49.2 million to repurchase 3.2 million common units of Switch Limited at $15.39 per common unit. Subsequent to this transaction we had approximately $15 million remaining on our $150 million repurchase program. Now turning to guidance. As a result of the third quarter outperformance relative to our prior forecast we are increasing our 2019 guidance as follows. We expect 2019 revenue in the range of $454 million dollars to $456 million from a prior range of $442 million to $448 million. We expect 2019 adjusted EBITDA in the range of $225 million to $229 million from a prior range of $223 million to $229 million. In capital expenditures excluding land acquisitions in the range of $245 million to $265 million from a prior range of $210 million to $260 million.

And now I will turn it back to Thomas for some closing remarks.

Thomas Morton -- President and Chief Legal Officer

In conclusion, we firmly believe that Switch is well aligned with industry dynamics and favorably positioned to accelerate enterprise migration into a hybrid cloud environment. We continue to execute on our pipeline of large enterprise retail co-location opportunities which remain robust. We look forward to announcing these transactions in due course. We would once again like to take this opportunity on behalf of our management team to thank our employees customers partners and our shareholders for their continued support of Switch.

We would now like to open the line for questions.

Questions and Answers:

Operator

[Operator Instructions] And the first question will come from Aryeh Klein with BMO Capital Markets.

Aryeh Klein -- BMO Capital Markets -- Analyst

Maybe can you explain a little bit on the net new bookings performance. How broad based was it across your campuses. And then maybe with all the new sales additions should we start to see contribution from new customers step up from here?

Gabe Nacht -- Chief Financial Officer

Sure. Thanks Ari. This is Gabe. In this -- third quarter we actually signed an awful lot of renewals with our existing customers and some of our larger customers and as you see the net new bookings number was not quite as strong as we have typically seen in the past. And as you know our business is not one that runs on 90-day cycles. So whether the quarter ends on a specific date relative to a customer signing is not something that we really track or manage to. It just so happens that post quarter-end we have signed a number of additional customer contracts most of which are incremental revenue. Since the third quarter ended we have already signed over $74 million of total contract value of which -- which represents nearly $13 million of incremental annualized revenue.

So, where you see the net new bookings number that's just a factor of timing. We are very comfortable with our sales pipeline and our sales velocity and the direction that the campus locations are going. And in fact you asked about the adoption across our campuses part of what drove the number in revenue in Q3 the growth in revenue in Q3 was an expansion faster than expected on ramps for two of our larger Las Vegas customers and faster than expanded ramps and The Citadel campus. And post-Q3 we have signed our first two customers in Atlanta which is exciting for us and we will be talking more about that in the Q4 call.

Thomas Morton -- President and Chief Legal Officer

Ari, thank you. This was a great question. The -- this is Thomas. We also wanted to give you an answer to your question regarding the sales pipeline. It's a new sales team and part of the contribution post-Q3 came from that sales team including some of the bookings in Atlanta. So they have hit the ground they're running and they're closing business.

Aryeh Klein -- BMO Capital Markets -- Analyst

Great. And then, just on the renewal activity in the quarter is obviously quite a bit. Were -- most of those contracts were scheduled to expire and then maybe can you talk to lease expirations in 2020 compared to 2019?

Gabe Nacht -- Chief Financial Officer

Some of those contracts were scheduled to expire and were typical renewals. Others were in the later stages of those contracts and we advanced renewed and extended along with an expansion in several of those renewals. And as far as our pipeline for 2020 it -- our typical contracts are about four years in length. So one can expect that a quarter of the contracts will be up for renewal in any given year.

Operator

The next question comes from Jon Petersen with Jefferies.

Jon Petersen -- Jefferies -- Analyst

Sorry, about that. The delay in The Keep Campus it looks like you got pushed back by a quarter. I think you mentioned a little bit about it in your prepared remarks. So maybe I guess is it construction delays there is just when the customers want their leases to commence how should we think about that?

Thomas Morton -- President and Chief Legal Officer

Yes. This is Thomas. Thank you very much Jon. It's a great question. The answer is that The Keep Campus is continuing on schedule. It takes some time once the building is open for customers to move in and billing to commence. So when we talk about the timing of revenue from The Keep Campus we factor in those realities but the campus itself is progressing very well and we look forward to an on-time opening and letting customers begin their move in and their extension of their facilities over to our campus.

Jon Petersen -- Jefferies -- Analyst

Okay. And then just one more. The EBITDA margin looked a little lower this quarter than what we have seen in recent quarters. Haven't had enough time to dive into the model here but I mean is some of that related to some of the new sales people you brought online in the extra G&A there or are there other factors impacting the margin here in the near-term?

Gabe Nacht -- Chief Financial Officer

Sure, Jon. This is, Gabe. Some of it is indeed is related to SG&A because as you know we have added a new sales team this year and as they're getting their pipelines up to fruition and we are seeing the closing on some of those sales pipelines post quarter we are carrying the full G&A expense. But if you go back historically the third quarter is typically our lowest margin quarter and it's primarily due to power cost. While we hedge about 80% of our power load 20% does float and power cost do increase in the summertime in addition to usage increasing during the summer because we are simply having to cool hotter air. So that's the primary factor that drives the EBITDA margin of variance in Q3 but we did have some higher SG&A expense and we also made a contribution to a program that Switch has been supporting for years. It was $0.5 contribution that all hit in Q3 and that you are seeing the effects of that.

Thomas Morton -- President and Chief Legal Officer

Yes. And so, we have been very good in supporting our community and making sure that we support education in children and we plan to continue that. Occasionally those donations come up and hit in a particular quarter as this one did but we believe it's very important that we do our part to support our community that we exist in. So we made a contribution in that regard.

Operator

Your next question comes from James Breen with William Blair.

James Breen -- William Blair -- Analyst

Just one in terms of -- a couple of questions in terms of your customer base the growth coming from are you seeing customers buying -- growing in all your facilities like single customers growing in all the facilities. And then secondly just on Atlanta any update there in terms of how are you feeling about the opening? Any sort of soft signing around that would be great.

Gabe Nacht -- Chief Financial Officer

Yes, Jim. This is Gabe. As far as our multicampus, customers we are seeing continued expansion across the board. We now have 117 customers that locate with us in more than one campus. And if you look across our entire revenue base 28% of our revenue is coming from customers that come from more than one campus that house their gear in more than one campus. So we are tremendously excited about that and it's proving the model the model that we expected to prove out that customers want to deploy in multiple locations because they either have their primary deployment in Las Vegas with redundant deployment in Reno or they want to expand their westward deployment eastward into our Grand Rapids campus and we are very excited about Atlanta. You talk about soft signings while we actually had hard signings and we have signed customers in it that we will deploy in the early part of next year and we have an ongoing pipeline of discussions with additional customers for that market. So we are very bullish on it.

Thomas Morton -- President and Chief Legal Officer

Yes James. This is Thomas. We believe that Atlanta is on schedule to have the building ready for customers to load in and they will start to load in on time we will have revenue commencing from that facility in the first quarter and we believe that we will begin -- continue to sign more customers. We have signed initial customers and we know that that facility is going to be a success. So we are signing additional customers currently and we have a strong pipeline for that facility in that market in general.

Operator

The next question comes from Erik Rasmussen with Stifel.

Erik Rasmussen -- Stifel -- Analyst

Just may be coming back to Atlanta again. Sorry for -- but you mentioned signing some customer contracts and then subsequent to the quarter can you talk about the types of customers or maybe would you consider one of these in anchor sort of tenant or is it any sort of color on the types of customers so far that you've been signing.

Gabe Nacht -- Chief Financial Officer

Well we have talked about signing our first two enterprise co-location customers and they are enterprise customers and we will provide additional color on Atlanta in the following call.

Thomas Morton -- President and Chief Legal Officer

There is -- Erik there is as you know some restriction from our customers about what we can announce and when we can announce it and so as soon as they authorize us to make an announcements of the particular size of their deployment we will do so. But we wanted to make sure that you the market was aware of these signings even though they were post quarter. So that you knew that they -- we are gaining momentum and actually locking in signed contracts for customers in that area.

Erik Rasmussen -- Stifel -- Analyst

Great. And maybe just -- can you talk about sort of the dynamics driving the accelerated pace revenue growth that you're seeing I guess in Citadel and The Pyramid Campus?

Gabe Nacht -- Chief Financial Officer

Yes. The primary driver has been just additional faster demand from some of our larger enterprise customers. We signed a number of deals earlier in the year that ramps built into them with expected time lines and we found that some of those customers including customers like eBay FedEx and others have been hitting those ramp numbers faster than they initially expected. And so that's been driving the acceleration of revenue growth particularly sequential revenue growth. And it's also driving our expansion of capex if you notice our capex number is higher than expected and all for the right reasons. We always talk about the fact that Switch builds just in time and we build based on customer demand. And we have got strong customer demand so we have been building a lot of T Skips and we have been adding cooling and infrastructure to our facilities to accommodate that increased customer demand.

Thomas Morton -- President and Chief Legal Officer

So you often hear us talk about the fact that 60% maybe 70% of our revenue growth comes from existing customers and in Q3 48% of our revenue growth came from new customers and only 52% came from existing customers. So we are continuing to expand logos and expand upon the platform of growth for our campuses.

Operator

Our next question comes from Frank Louthan with Raymond James.

Frank Louthan -- Raymond James -- Analyst

Just -- sorry if you mentioned this earlier but the pipeline from Atlanta is that what is sort of the mix? Is that from existing versus new customers? And it is the sale -- are the sales coming primarily from some of the new commission salespeople? And then will anything start moving in our being installed in that campus in '19 or would all be in '20 when it starts billing?

Thomas Morton -- President and Chief Legal Officer

So the -- I'll answer the third part of that question first. This is Thomas. Greatly three-part question. The first is that people -- the campus will be open at the end of this year beginning of next year. So they will start loading in in 2020 or when the campus is ready for people to start loading into. Secondly they are new logos that are going into that campus. We are talking with existing customers but the new customers are new logos and thirdly they are generated in part by existing sales team and in part by the new sales team. So the new sales team have close people that are going into Atlanta as new logos.

Operator

The next question comes from Richard Cho with JPMorgan.

Richard Cho -- JPMorgan -- Analyst

Just wanted to follow up, a little bit I guess you guys had mentioned in your prepared remarks that the backlog is going to add $1.5 million in revenue sequentially. But as we saw in the third quarter there is a faster move in that you've mentioned. What kind of level of variability in terms of upside can we see why people moving in faster and if maybe you can tell us what the third quarter expectation was versus the actual sequential growth? And then I have a quick follow-up on Atlanta.

Gabe Nacht -- Chief Financial Officer

I think our third quarter expectations were in line with our previous guidance and we have exceeded that quite nicely and so we are upping in our guidance somewhere in the $10 million range because we expect that growth to continue sequentially. So does that answer your question Richard?

Richard Cho -- JPMorgan -- Analyst

Yes. No that's good. And then in terms of Atlanta is there much more capex left and how should we think about as you mentioned you the just-in-time with people moving in how should we think about capex going forward and is there going to be any ramp in opex also or is that kind of -- will that be baked in in the fourth quarter or will that ramp into the first quarter?

Thomas Morton -- President and Chief Legal Officer

Richard there is always going to be capex expenditures in a PRIME and that's a good thing because if we are spending capex it means that we are increasing the amount of infrastructure that's available for our customers. And if we are increasing the amount of infrastructure for our customers it's because those customers are growing. So that's a good thing. As to capex when -- particular for this campus when you first start doing a PRIME there is a frontloaded amount of capex. That frontloaded capex is to set the facility to bring in the initial water the initial power the initial telecom fiber etc. and once that initial infrastructure is put in place the supplemental infrastructure that's required to accommodate customer growth is incrementally smaller and we have seen some tail down on Atlanta and we will see some tail down in 2020 and I'll turn to Gabe for specific numbers on that.

Gabe Nacht -- Chief Financial Officer

Yes. As you can look, at our guidance number we have raised the midpoint of capex guidance by about $20 million and that really is not related to Atlanta. Atlanta continues on pace and there will be capex in Atlanta in the fourth quarter but that was expected. The increase in capex and the guidance is primarily related to faster expansion of the Citadel and the Core Campus. And that's really what's driving that number. As we move into 2020 of course we haven't provided any guidance for 2020 yet but as we put a campus into service a lot of the expenses that are capitalized during the construction phase do shift to operating expenses and we will talk more about that as we present 2020 guidance.

Operator

[Operator Instructions] The next question will come from Michael Rollins with Citi Investment Research.

Michael Rollins -- Citi Investment Research -- Analyst

A couple of questions. First, one of the selling point that you talked about before with your customers is the opportunity to be close to some of the clouds and enable that hybrid connectivity. Can you share some examples of maybe what you're seeing from the customer base as cloud adoption is continuing in the marketplace and how you see this hybrid cloud architecture evolving within your data centers? And then the second question is whether or not you are evaluating new markets to expand into whether it's in the U.S. or internationally and how you're thinking about going from the current four markets around the country and possibly looking to go maybe where there's some customer demand from customers that you're currently serving?

Thomas Morton -- President and Chief Legal Officer

Mike, thank you and, good to hear your voice. As to being close to the clouds as you may recall Google is right next to us in Atlanta. Google has also located a facility up in Reno Nevada and then they are building a facility near us in Las Vegas Nevada. So we have proximity with those and we have announced some relationships with Google with respect to fiber interconnects on those campuses. So we have a good connection there. We also have Amazon on-ramp deployments in each of our campuses and then as Amazon starts to launch Amazon Outpost we expect to see those deployments on our campuses as well. So we have good affiliations with the various clouds and we expect that to continue. As to new markets we are really focused on building our digital cities and the gravitas of those digital cities bringing in an increasing number of customers and increasing number of cloud providers and an increasing number of telecommunications providers as they all work and collaborate with each other in those digital ecosystems. So we think that those are becoming self proliferating and we are really focused on building out those four PRIMEs and making them successful.

Gabe Nacht -- Chief Financial Officer

And a couple of things, to add to that. If you recall last quarter we did talk about signing a major cloud customer we didn't announce the name here in our Las Vegas campus and the interesting thing about that signing is it's the first time that one of the major cloud providers is putting an entire availability zone which means their tri-redundant availability zone with one provider in one location. And the reason that they were able to do that is because they are locating in three different sectors within our campus and they view each one of our sectors as a Tier five platinum stand-alone data center. And so they believe that the redundancy and the resiliency is sufficient for them to locate an entire availability zone in one location. And that's tremendously exciting and is really a very different model for any of the clouds.

With regard, to international Mike we do have an international joint venture that does have a facility up and running in Milan Italy and Amazon has taken half of that facility and we also have a facility in Thailand. At this point we are not looking to expand internationally. We are focused on the four PRIMEs. The one differentiator between Switch and some of the other peers in our industry is that if you look at the land that we have at each of our PRIME campus locations we have enough runway to last five to 10 years on these four PRIME campuses without needing to acquire any more additional land. So we are not constrained in any way shape or form and believe that that campus ecosystem model is a key differentiator for Switch and is the strategy that we want to pursue.

Operator

Ladies and gentlemen this concludes our question-and-answer session.

[Operator Closing Remarks]

Duration: 45 minutes

Call participants:

Matthew Heinz -- Vice President of Investor Relations

Thomas Morton -- President and Chief Legal Officer

Gabe Nacht -- Chief Financial Officer

Aryeh Klein -- BMO Capital Markets -- Analyst

Jon Petersen -- Jefferies -- Analyst

James Breen -- William Blair -- Analyst

Erik Rasmussen -- Stifel -- Analyst

Frank Louthan -- Raymond James -- Analyst

Richard Cho -- JPMorgan -- Analyst

Michael Rollins -- Citi Investment Research -- Analyst

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