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Switch Inc (SWCH) Q4 2019 Earnings Call Transcript

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SWCH earnings call for the period ending December 31, 2019.

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Switch Inc (SWCH -0.07%)
Q4 2019 Earnings Call
Feb 27, 2020, 5:00 p.m. ET


  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:


Good day, and welcome to the Switch Incorporated, Fourth Quarter 2019 Conference Call and Webcast. [Operator Instructions]. After today's presentation, there will be an opportunity to ask questions. [Operator Instructions]. I would now like to turn the conference over to Mr. Matthew Heinz, Vice President of Investor Relations. Please go ahead, sir.

Matthew Heinz -- Vice President of Investor Relations

Thank you, operator. Good afternoon, and welcome to Switch's fourth quarter and full year 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 a 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 fourth quarter 2019 earnings press release has been furnished to the SEC as part of our Form 8-K and is available on our Investor website at

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

Thomas Morton -- President and General Counsel

Thank you, Matt, and good afternoon everyone. Thank you for joining us today. 2019 was a highly productive year for Switch on a number of fronts. Our fourth quarter and full year 2019 financial results reflect sustained business momentum and positive underlying demand trends. Full year 2019 revenue increased 14% year-over-year to $462.3 million and our adjusted EBITDA of $231.1 million represents 15% year-over-year growth. Our reported 2019 results include adjustments related to the adoption of ASC 606 and ASC 842 accounting standards, which impacted our full year revenue and adjusted EBITDA by $6.1 million and $5.4 million, respectively.

Excluding these adjustments, Switch's 2019 revenue increased 12.4% to $456.2 million slightly above the high end of our guidance range, and representing a 500 basis point acceleration in revenue growth compared to the prior year growth rate. Beyond the improvements in our growth trajectory, and financial metrics, 2019 was a year of solid execution for Switch delivering upon several key strategic objectives that we believe will sustain our long term growth.

Most notably, these include completing construction at our Keep Campus in Atlanta, and deepening our relationships with new and existing strategic enterprise clients by offering industry leading capabilities for hybrid cloud adoption. I am pleased to report these critical goals were attained during 2019, and we believe Switch has never been better positioned to capitalize upon the opportunities that lie ahead.

Other notable achievements during our 2019 year include the following. Switch received the United States Environmental Protection Agency Excellence in Green Power Leadership Award for increasing the prevalence of renewable energy. Nvidia recognized Switch's class five Platinum data centers as pre-qualified AI-ready infrastructure for rapidly deploying artificial intelligence.

Switch received the Smart Energy 2020 Data Center Energy Efficiency Award at the 2019 Smart Energy decisions Innovation Summit. Switch's CIO Missy Young hosted the Google Cloud Empowering Female Leaders event at the Innovation Center on Switch's Core Campus. This event highlights industry leaders, and diversity champions who discuss their experiences around building an inclusive workplace. Switch announced the completion of a licensing agreement with Vertiv for Switch's revolutionary hot and cold aisle containment technology and proprietary data center HVAC systems invented by Rob Roy.

Switch collaborated with NASA on its TCL 4 drone traffic management testing. The data collected during these historic test flights was presented to the FAA to help them inform future rules, policies and traffic management procedures for operating drones safely over populated areas. Switch was awarded the Fortress Award by OpenText Elite for combining technology and process to mitigate risk and cost around litigation, digital investigation, data security and compliance.

As discussed on last quarter's call, customer installations in the Keep Campus are scheduled to begin in Q1 at our ATLANTA 1 facility. We currently have ten customers committed to deploy in Atlanta during the first half of 2020. And our sales teams continue to pursue an active funnel of attractive opportunities, including a balanced mix of new and existing customers.

With respect to the Atlanta co-location market in general, which now serves as Switch's fourth prime location and regional hub for the South Eastern United States, we see tremendous long term upside. This optimism stems from Switch's unique advantages surrounding enterprise hybrid cloud delivered through our patented and highly efficient data centers designs invented by Rob Roy. Our low cost, 100% green energy offering access to the Switch, telecom purchasing cooperative, and attractive sales tax incentives. We continue to make meaningful progress toward growing our customer ecosystems outside of the Core Prime, as our Citadel and Pyramid locations now represent 13% of the consolidated revenue as of Q4 2019, up from 9% in the prior year quarter.

During 2019 these two Primes accounted for over 40% of our incremental growth and approximately two-thirds of our incremental EBITDA growth compared to 2018, demonstrating the powerful operating leverage inherent in our model as the Switch Primes continue to scale. Moreover, we continue to experience favorable trends in multi campus customer revenue. As of Q4 2019, more than 135 customers have deployed in two or more of the Switch Primes representing 34% of total revenue. This compares to just over 100 customers and 23% of revenue in the year ago quarter, equating to a 70% year-over-year increase in multi campus revenue.

Sales velocity gained momentum in 2019, as Switch signed over $500 million in total contract value during the year, representing a 16% increase in sales volume compared to 2018. We added over 110 new logos in 2019, which accounted for $22 million of annualized revenue bookings, a significant increase from just over $12 million in new customer bookings during 2018.

We believe this trend is largely attributable to our strategic focus on targeting larger initial deal sizes, and increasing holistic service partnerships with high quality enterprise class corporations. Fourth quarter sales activity was also robust, notwithstanding traditional seasonal year-end headwinds, as we executed 618 contracts representing total contract value of $138 million with a weighted average term of approximately four years.

Q4 was our most productive quarter of 2019 in terms of incremental annualized revenue bookings, with $20 million in signings, including $17 million from existing customers and $3 million from new logos. We added 29 new customer logos in the fourth quarter alone, including a nationwide cable television and broadband provider in the Keep Campus, a Michigan based health insurance provider in the Pyramid Campus, and a leading radiation oncology provider in the Core Campus.

We also had several notable wins in Q4 from existing Switch customers, including a 3 megawatt expansion, totaling $24 million in contract value from a leading e-commerce platform in the Citadel Campus; a 4 megawatt expansion totaling $23 million in contract value with a top cloud storage provider with deployments in both the Core Campus and the Citadel Campus, and a multiyear renewal plus 600 kilowatt expansion with a leading domestic streaming video platform customer, totaling $18 million in contract value.

Now, turning to our construction milestones and project pipeline. During 2019, we delivered 20 megawatts of new power capacity in the Core Campus, coinciding with the opening of two additional sectors at Las Vegas 11, totaling 1,560 cabinet equivalents. We opened sector three of Las Vegas 11 in mid-February, with an additional 780 cabinet equivalents and the third ten megawatt power system is scheduled for delivery in mid-2020.

In the Citadel Campus, we opened a new 460 cabinet sector in Q4 2019 with one additional sector and 20 megawatts of power slated for 2020. In the Pyramid Campus, we have completed construction on a new sector with 530 cabinet equivalents, which will open in Q1 2020, following the signing of an anchor customer in the space.

The Keep Campus has an initial inventory of 12 megawatts and 780 cabinet equivalents. As a reminder, the Atlanta 1 facility is a two sector design with a total cabinet equivalent capacity of 1,560. The timing of Sector 2 delivery and subsequent construction on the Atlanta 2 Shell will be dependent on customer absorption.

We continue to move forward with the planning and permitting process for Switch's next phase of expansion at the Core Campus in Las Vegas. We have begun site work and infrastructure development to support our Las Vegas 14, Las Vegas 15 and Las Vegas 16 facilities. And we expect to begin construction of the next Las Vegas data center later this year.

Upon full build out, the Core Campus expansion project will comprise five new data centers, adding more than 200 megawatts and 2.6 million square feet of incremental capacity. We look forward to providing additional updates over the course of 2020. Finally, our initial guidance for 2020 represents revenue growth of over 11% and adjusted EBITDA margins of approximately 50% at the midpoint of the range. Gabe will speak to the specific details and drivers of our guidance later in today's call.

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 fourth quarter and full year of 2019 and discuss our outlook for 2020. Unless otherwise noted, metrics discussed during this portion of the call reflect the adoption of ASC 606 and ASC 842 accounting standards, which have been applied retroactively to our 2019 financial results.

A full reconciliation to our pre ASC 606 and ASC 842 financials can be found in the appendix of our investor presentation on the Switch Investor Relations website. In the fourth quarter of 2019, we achieved quarterly revenue of $120.5 million, an increase of $17.3 million or 16.8% compared to the fourth quarter of 2018.

This is primarily attributable to a $14.9 million increase in colocation revenue, and includes a $0.5 million positive adjustment from the adoption of ASC 606 and 842. On a pre ASC 606 and 842 basis, fourth quarter revenue of $120 million reflects 16.3% year-over-year growth, up from our Q3 2019 growth rate of 14.4%.

The acceleration in fourth quarter revenue growth was driven by continued strength in our colocation business, which grew 17.5% in addition to improving growth trends and connectivity revenue, which increased 14.1% compared to the year ago quarter. 47% of the year-over-year revenue growth in Q4 2019 resulted from new customers who initiated service during the past 12 months while 53% of the revenue growth came from customers who have been with Switch longer than one year.

For the full year 2019, 62% of total revenue growth was attributable to existing customers with 38% from customers initiating service after January 1, 2019. More than 95% of our revenue in the quarter and the year was recurring in nature, consisting primarily of colocation and telecom services, which include cross connects, broadband and external point to point connectivity.

Colocation revenue for the fourth quarter of 2019 was $97.8 million, compared to $82.9 million reported in Q4 of 2018, an increase of 18%. Telecom revenue in Q4 of 2019 was $21.1 million increasing 14.4% compared to $18.4 million in the same period in 2018. Other revenue including professional services accounted for $1.6 million in Q4 2019, compared to $1.9 million for the same period in 2018. As of December 31, 2019, Switch had approximately 16,500 billion cabinet equivalents, generating over $2,400 per cabinet equivalent in monthly recurring revenue.

We had more than 6,500 billion cross connects as of December 31, and cross connects accounted for approximately 3.8% of total revenue in Q4 2019 consistent with the year ago period. Now turning to bookings. During Q4, we executed 618 contracts comprising more than 14 megawatts, representing total contract value of $138 million and annualized revenue of $46 million at full deployment, inclusive of both renewals and sales of incremental services.

In the fourth quarter, we signed $20 million of incremental annualized recurring revenue inclusive of $17 million in incremental bookings from existing customers, and approximately $3 million from new customers. As of December 31, 2019, our booked not billed backlog stood at over $37 million in aggregate annualized revenue, including contractual ramps and contracts yet to commence billing.

We expect our backlog to contribute approximately $20 million of incremental revenue during 2020, with the remainder contributing in 2021 and beyond. Revenue reductions from customer churn remained low in Q4 of 2019 at 0.2% compared to 0.4% in the year ago quarter. As a reminder, we define churn as the reduction in recurring revenue attributable to customer terminations or non-renewal of expired contracts divided by the revenue at the beginning of the period. Cost of revenue increased by $8.3 million in Q4 2019 compared with the year ago quarter, primarily due to increases in depreciation, power and labor costs.

Excluding depreciation, amortization and equity based compensation expenses, our Q4 2019 adjusted gross profit increased 17% year over year to $87.8 million. A reconciliation of gross profit to adjusted gross profit is provided in the appendix section of our investor presentation. SG&A expenses in Q4 2019 were $38.7 million, compared to $31.1 million in Q4 of 2018. The increase in SG&A was primarily attributable to higher professional fees and labor expenses. Income from operations in Q4 of 2019, increased 8.5% to $18.3 million compared to $16.9 million in Q4 of 2018.

The growth in operating income was primarily attributable to a $9 million increase in gross profit offset by a $7.6 million increase in SG&A costs. Interest expense increased by $0.7 million to $7.2 million in Q4 of 2019, primarily driven by higher debt balances on our revolver offset by lower LIBOR rates compared to the same quarter last year.

As of December 31, 2019, we had $585 million outstanding on our term loan, and $170 million drawn on our $500 million revolver. Net income for Q4 of 2019 was $12.9 million compared to net income of $11.2 million in Q4 of 2018. Net income in the fourth quarter of 2019 includes a $2.8 million gain on interest rate swaps or less than $0.01 per diluted share.

Adjusted EBITDA totaled $57.6 million for Q4 of 2019 compared to $53.6 million in Q4 of 2018 reflecting year over year growth of 7.5%. Our adjusted EBITDA margin for Q4 of 2019 was 47.8% decreasing from 52% in the year ago period, primarily due to the aforementioned increases in SG&A related to professional services and labor.

We expect SG&A growth to moderate in 2020, resulting in a normalization of adjusted EBITDA margins toward the historical 50% range. I will discuss our 2020 margin expectations in greater detail during the guidance portion of the call. Capital expenditures in the fourth quarter of 2019 were $86.4 million, compared to $54.4 million in the same quarter of 2018. Compared to the year ago quarter, and excluding land acquisitions, the 59% increase in Q4 capital expenditures was driven by higher investment in the Core, Citadel and Keep Campus locations offset by lower spending in the Pyramid Campus.

Excluding land purchases, full year 2019 capital expenditures were $278.8 million compared to $252.8 million in 2018, an increase of 10%. In the fourth quarter of 2019, Switch invested $37 million in the Core Campus for data center construction and equipment, primarily to support customer demand at our Las Vegas 11 facility.

As of December 31, 2019, Las Vegas 11 Sectors 1 and 2 were 95% contractually committed and an additional 780 cabinets of inventory were added with the opening of Sector 3 in mid-February of 2020. Switch also invested $25.2 million for tenant improvements at the Keep Campus finalizing construction on Sector 1 of our Atlanta 1 facility in preparation for Q1 2020 customer deployments.

Switch spent $22.2 million in the Citadel Campus for ongoing construction on two additional sectors, one of which opened in Q4 of 2019 having 460 cabinet equivalents, and the second is expected to open in Q3 of 2020.

Finally, Switch invested $2 million in the Pyramid Campus as we prepare to open a new sector in Q1 of 2020. Maintenance capital expenditures were $1.5 million in the fourth quarter of 2019 or just 1.2% of revenue, compared to $2.8 million and 2.7% of revenue in the same quarter last year. Growth capex for data center construction and improvements was $84.9 million for the fourth quarter of 2019 compared to $51.6 million in the same period last year. As of December 31, 2019 the Switch PRIMES had capacity for 21,400 cabinet equivalents within our open sectors, of which 91% were committed under contracts compared to 90% in the prior quarter, and 86% in the year ago quarter.

The Q4 2019 utilization rates of these primes based on committed cabinets and currently available colocation space, were approximately 94%, 75% and 97% at the Core Campus, the Citadel Campus and the Pyramid Campus respectively, compared to 93%, 72% and 92% as of Q3. At full build out, excluding Atlanta 1, our existing constructed facilities comprise in aggregate of nearly 4.4 million gross square feet of space, up to 455 megawatts of power and nearly 25,000 cabinet equivalents. The Atlanta 1 facility will have 310,000 gross square feet of space and up to 35 megawatts of power.

Now, looking at the balance sheet. As of December 31, 2019, the Company's total debt outstanding net of cash and cash equivalents was $784.3 million, resulting in a net debt to last quarter annualized adjusted EBITDA ratio of 3.4 times, compared to 2.7 times in the prior quarter. As of December 31, 2019, Switch had liquidity of $354.7 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 recent 8-K filings, during the fourth quarter of 2019, we repurchased 4.3 million common units of Switch Limited for a total of $66.3 million reflecting a weighted average price of $15.54 per common unit.

As of December 31, 2019, there were 240.8 million total shares outstanding, including 89.8 million Class A shares and 151 million Class B shares.

As disclosed in our 8-K on January 10th, 2020, Switch, Inc. issued 4.6 million shares of Class A common stock to members of Switch Limited and concurrently cancelled an equivalent number of shares of Class B common stock in connection with the exercise of member redemption rights.

This transaction brings our Class A public float to over 94 million shares or approximately 39% of total shares outstanding as of February 1, 2020. Based on Member Redemption Notices received to date, we expect an additional 7.9 million Class B shares to be exchanged for Class A common stock on April 2nd, 2020.

Now turning to guidance for 2020. We expect 2020 revenue in the range of $507 million to $521 million reflecting 11% organic year-over-year growth at the midpoint. We expect 2020 adjusted EBITDA in the range of $251 million to $261 million, reflecting an increase of 11% compared to 2019 and an adjusted EBITDA margin of 49.8% at the midpoint.

We expect SG&A to remain elevated in Q1 before leveling off throughout the remainder of 2020. Lastly, we expect capital expenditures excluding land acquisitions, in the range of $290 million to $340 million. Approximately two thirds of our 2020 capital budget is slated for new construction at the Core and Citadel Campus locations.

We have begun site work and infrastructure development to support our Las Vegas 14, Las Vegas 15, and Las Vegas 16 facilities, and we expect to begin construction of the next Las Vegas datacenter later this year. We're also continuing the ongoing build out of our Tahoe Reno 1 facility, which continues to experience strong customer demand. Offsetting the increased investment in our Nevada Primes, we expect capital intensity in the Keep and Pyramid Campus locations to moderate during 2020, with incremental investments being largely dictated by sales velocity as the year progresses.

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

Thomas Morton -- President and General Counsel

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 colocation 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:


Thank you. We will now begin the question-and-answer session. [Operator Instructions]. And the first question will come from Frank Louthan of Raymond James. Please go ahead.

Frank Louthan -- Raymond James -- Analyst

Great. Thank you very much. So wanted just -- on the guide, the growth appears to be slowing a bit. You're growing over 16% in Q4 and a little bit better than what you're guiding to for the full year. You know, you're taking on some space and seeing the bookings. But why would the growth rate decline and what would it take to get to say the higher end of your range of guidance? Or are you just being a little conservative here?

Thomas Morton -- President and General Counsel

Hey, Frank, this is Thomas Morton. Thank you very much for your question. Actually, I will let Gabe answer this one because that is something that we noticed as well. Yeah, on a full year basis, if you look at the full year, obviously, we're growing off of a slightly elevated base because of the 606 and 842 adjustments that added about $6 million, $6.1 million of revenue.

So if we look on a pre-adjusted basis, we're really expecting to grow at roughly the same rate. It's obviously at the beginning of the year. We want to make sure that we are putting forth a range that is achievable. And the comps as we go into 2020 become a little bit more difficult than they were in the past year. So we believe that a consistent growth rate is achievable and is prudent to put forth at this point.

Frank Louthan -- Raymond James -- Analyst

All right, Great, and then I think you mentioned there's -- you got ten new deployments or so set up for the Atlanta Campus. Can you characterize those between new and existing customers?

Thomas Morton -- President and General Counsel

Yeah. We've got ten new customers. At this point, I think four are new and six are existing. And they will be deploying in the first half of the year.

Gabe Nacht -- Chief Financial Officer

Yeah. Of the six that are new, there are a couple that are deploying in different divisions of their Company. They're the same Company, but it's a new division of that enterprise.

Frank Louthan -- Raymond James -- Analyst

Great. Okay, thank you very much.

Thomas Morton -- President and General Counsel

Thank you.


And our next question will come from Michael Rollins of Citi. Please go ahead.

Michael Rollins -- Citigroup -- Analyst

Thanks. Couple of questions. First, can you talk about the yields and the returns on capital that you've been seeing over the last 12 months versus maybe a couple of years ago? And just how competitive conditions are influencing the future return prospects as you're deploying new capital?

And then just separately, maybe just an update on the distribution front and where you're seeing the bookings coming from between direct and indirect sources? Thanks.

Gabe Nacht -- Chief Financial Officer

Okay. As far as return on capital over a two year period, our return on capital invested has gotten better, because a couple of years ago, all of the capital that was spent to launch the Grand Rapids campus and the Reno Campus were included and we had just begun -- they were included in the denominator, and we just began filling that space.

So, we've seen our return on capital increase over the last couple of years. We will obviously be putting the Atlanta facility into service in Q1. So you'll see a chunk of capex move into the denominator for that return on capital calculation. So, it is a bit lumpy. But over time, as far as our yields, we've seen consistent pricing. We've been able to maintain our 2,400 plus per cabinet all-in revenue. And we build a different mousetrap. So while there are folks out there that are looking for wholesale space, it's essentially powered shell at the lowest price they can possibly get.

Those aren't the people that we're chasing. We want customers that understand what Switch is about, understand our differentiated platform, understand our efficiencies, our technology, and understand that in terms of total cost of ownership, when you look just -- beyond just the co-location price, we're able to deliver a value formula that that they find compelling.

Thomas Morton -- President and General Counsel

Yeah, Mike, thank you. This is Thomas. And Gabe is absolutely right that we are able to be in areas where there are tax advantages, power advantages, and obviously we have Core offering significant telecommunications advantages. So when they look at a TCO basis, we are able to offer those three items without impacting what we are offering the space at. And so we have been able to maintain our price point for our space because we look at it with the customer on a TCO basis.

And on that basis, we compare favorably against any peers, as well as our product is industry-leading. So we've been able to maintain and sustain. We also work a lot with either regulated entities or entities that want to deploy their core and most critical infrastructure with us. And in that case, they are more sensitive to uptime and resiliency than they are to saving $5 or $2 or some amount of money per KW. I think you also asked about distributions. We have had a history of changing or increasing our distributions. We will look toward possibly doing that or not doing that as revenues go forward in the future. But it's not something that we are speaking to at this time.

Gabe Nacht -- Chief Financial Officer

So, I think, Matt -- I'm sorry, I think Mike, you were talking about distribution of our sales and where the contracts are coming from. We continue to see contract growth from our channels. We continue to see contract growth from our commission based sales force that we put in place last year. And of course, our traditional sales force continues to bring in transactions as well. So we're very happy with the sales pipelines on all fronts.

Michael Rollins -- Citigroup -- Analyst

Thank you.


Our next question will come from Richard Choe of J.P. Morgan. Please go ahead.

Richard Choe -- J.P. Morgan -- Analyst

Great. Thank you. I wanted to ask you about -- you said you're focusing on larger deals. And still a lot of your new signings are coming from existing customers. Can you talk a little bit about what's changed from maybe a year or two ago where you're actually talking with your customers about bigger deals?

And -- or is it just the customers that you've signed over the past few years are just larger customers, and they want bigger deployments?

Thomas Morton -- President and General Counsel

Well, we continue to have our normal growth from our existing customer base, and we are a retail co-location Company. So, while 10% -- our top ten customers represent about 36% of our revenue, that means, we have 900-plus other customers that represent the other 64%. So we are still a retail co-location Company.

But as we've talked about over the past year, and particularly in 2018, we had a bit of a slowdown in our revenue growth because we were having more strategic discussions with some large customers about their technology strategy going forward for the next decade or so. And we were able to turn what would have been a typical co-location cabinet deal into a much more strategic relationship with customers like FedEx, customers like eBay continue to expand with us, customers like Box that we've talked about.

So, these are much larger deployments. And they do take time and our normal growth that we see every month customers coming to us and saying, I need two new cabinets, four new circuits, five new cabinets, etc that continues. But we're at a $500 million kind of base, and those things get you to a certain level of growth, but to get to a number that moves the needle, you need some larger deployments. And that's what our sales team has been focusing on.

Richard Choe -- J.P. Morgan -- Analyst

And then the MRC per cabinet went up from $2,300 to $2,400, it seems like -- is that pricing being better, customers doing something else? Can you talk about that a little bit?

Thomas Morton -- President and General Counsel

Yeah. It's really not -- a, we're not seeing any contraction in pricing, but it's also as people dense up, they consume more power per cabinet. And that is increasing the yields from that cabinet because there's more power being consumed.

Richard Choe -- J.P. Morgan -- Analyst

Great, thank you.


Our next question comes from Sami Badri of Credit Suisse. Please go ahead.

Sami Badri -- Credit Suisse -- Analyst

Hi, thank you. I just had kind of two cuts of the same question regarding 2020 guidance. And the first one is how should we expect the seasonality of the year to actually flow? Is it front end loaded? Is it backup? I just want to understand kind of the acceleration here if there is one or like just general seasonality growth rates.

And then to cut that in a different way, do you expect connectivity revenue to start to over-index compared to colocation revenue in 2020? And if not, like maybe can you give us some rationale why that's not the case?

Gabe Nacht -- Chief Financial Officer

So historically -- I'll start with the second half first. Historically, telecommunications revenue has grown along with colocation because obviously a data center is just a center unless it's connected to data. So every cabinet needs some form of connectivity, and Switch is uniquely positioned to provide that connectivity through our cooperative at prices that are compelling to customers and to take advantage of the power of the cooperative purchasing environment.

So it has traditionally grown along with colocation. However, there are customers that are understanding that Switch can deliver connectivity that doesn't have to touch any of our data centers at the same compelling price. And if their corporate contracts expire with carriers, they're taking advantage of the power of the cooperative to lower their own telecommunications needs.

So we're not forecasting an over index in 2020. But it could very well be the case, particularly with some of these large enterprise organizations that literally spend hundreds of millions of dollars a year on connectivity. That's not however in our guidance or in our forecast. As far as seasonality goes, we've talked about the fact that we've signed a certain number of Atlanta contracts. They will start deploying throughout the year.

So as the year progresses, we'll see more revenue from those contracts. We previously announced on our last quarter call that we received an expansion order from eBay going into 2020 and that will ramp throughout the year, the Box contract will ramp throughout the year. So as we move into the year, we'll see revenue continue to grow.

However, the 842 adjustments that we took in this quarter will have an impact, particularly in Q3. As we get into the back half of the year, the growth in Q3 numbers this year are now elevated because of a contract that fiber IRU contract that we entered into with a major cloud provider because under the new leasing guidelines has to be classified as a sale, a sales type lease.

So rather than taking that revenue over a 20 year IRU, we had to take it all in Q3. And so you'll see about a $4 million-plus impact due to that in Q3 compared to the numbers that we previously reported. So as we get into the back half of the year and are comping against that number, you'll see probably a bit of a decline in the growth rate in Q3 because of that.

Thomas Morton -- President and General Counsel

Yeah, Sami, this is Thomas. Your Telco question is great because we also -- as Telco is also evolving in terms of its technology, so you will see in the industry, there's some change in MPLS purchases and this transitions to new product types. That creates a disruption in the marketplace. And it creates a change in the way that we are selling products and the products that we are selling.

So with that change or that transition happening with our customers this year, we also want to be a little conservative on what we were throwing out there initially for the numbers, for the telecommunications team, so they had time to absorb that adoption.

Sami Badri -- Credit Suisse -- Analyst

Got it. Thank you, guys, for that. And then just one follow-up. In your prepared remarks, you mentioned that 4Q '19 or at least the fourth quarter is typically not your seasonally productive year as far as signings. But in 4Q 2019 it was. And my question here is just that, is that more attributable to the new sales force coming in, and being commissioned based and being productive and motivated in that way? Not that everyone else in your organization is not motivated, but I'm just saying maybe there is a little bit of an element of that coming in.

And if it's not that, is it possible that there's a new campus coming online, which is Atlanta and therefore signing started to ramp through. Like, which one of these things is it and maybe it could be both? But could you give us more color on that?

Gabe Nacht -- Chief Financial Officer

I think it's sort of all of the above. If you recall, in our last quarterly call, we reported our third quarter bookings number. But then we mentioned that right after the end of the quarter, we signed three large deals. Now those are in the Q4 bookings. Historically, as you're getting toward the holiday period, things from a booking standpoint just tend to slow down. This year we signed three large contracts right after the end of the September -- September period. So, those are in our Q4 numbers. Our commission sales team is producing and we signed a number of deals, including a new transaction for Grand Rapids in 2020.

So I think it's a bit of all of the above. And it's just about timing of when customers actually sign. And it just so happened three of the large ones signed in October.

Thomas Morton -- President and General Counsel

Yeah. And there were a couple as Gabe mentioned that were going to be potentially Q3 signings, but the customer just decided to roll over to Q4 to make sure it hit their books in Q4. And there is also we had a signing in GR or Grand Rapids Pyramid Campus that was done by the S3s or the new commission sales team. And then we've also had a signing in Atlanta that was brought in entirely by the new commission sales team. So, they are definitely on the ground and producing.

Sami Badri -- Credit Suisse -- Analyst

Got it. Thank you, guys.


And our next question will come from Erik Rasmussen of Stifel. Please go ahead.

Erik Rasmussen -- Stifel -- Analyst

Yeah, thank you. First, maybe on the -- your announcements about the Keep Campus. It sounds like you got ten customers signed on? Would you consider any of those customers sort of an anchor customer or maybe sort of the makeup of that? And is it sort of what you would have expected at this time given that you're just now opening up?

Thomas Morton -- President and General Counsel

Yes, thank you very much, Erik. It was great. The -- the answer is no, I don't consider any of these to be major anchor tenants. But it is a plurality of tenants that gives us resiliency. So the fact that they're not one massive one actually gives us diversity of revenue. So that's a strength for us. There was a report that came out if that's what you're alluding to that we had signed a six megawatt deal. That reporter has corrected that statement and issued a correction online.

So that was a false bit of news that we have now spoken with them, and they have changed their report. So, what we looked forward to, we do have a robust pipeline for large tenants in Atlanta. And we look forward to doing announcements in due course, as I said during my opening remarks, as soon as the customers allow us to make those announcements.

Erik Rasmussen -- Stifel -- Analyst

Got it. And then maybe just my second question. The guidance for the year, $32 million at the midpoint above what you did this past year. I think you had mentioned that there's about $20 million from backlog. So it leaves about $12 million. How do you see sort of you filling that gap and that seems to be a pretty achievable level considering sort of the revenue opportunities and sort of the momentum you're heading into this year? So how should we think about the guidance?

Gabe Nacht -- Chief Financial Officer

Well, our guidance, I think is about a $50 million increase from where we ended up this year and $20 million of that will come from backlog. So, we've got to sell just as we do every year. When we set guidance, we look at what our books not filled is. We look at -- at what our pipeline is and what our probability of closing is. And we come up with a forecast.

But we're expecting to grow about $50 million next year, $20 million of which will come from backlog, so the team is selling hard as always in order to make up that $30 million gap.

Thomas Morton -- President and General Counsel

And as our sales team likes to point out, it is not just sell, it is sell, install and fill this year.

Erik Rasmussen -- Stifel -- Analyst

Thank you.


Our next question will come from Nathan Crossett of Berenberg. Please go ahead.

Nathan Crossett -- Berenberg Bank -- Analyst

Hey, good evening, guys. I think you said that Phase 1 of the Atlanta was 35 megs of power. So how much of that is now leased with these ten tenants?

Gabe Nacht -- Chief Financial Officer

It's up to 35 megawatts. As you know everything we do is modular. So we only install cooling and power enough to handle the customers that are moving in. And so as we sign contracts for more megawatts we'll install more power and more cooling. And that's how we do all of our data centers. And that's how we're able to deploy capital efficiently. So it's up to 35 megawatts. We have not installed megawatts that kind of megawatts the first power system is 12 megawatts, and that's what's been installed.

Thomas Morton -- President and General Counsel

Yeah. And Nate, let me tell you, because kind of what happened to and this is an interesting point is we have Nap 7, for example, and that's been sold out since 2010-2011. There is an ability in Nap 7 to produce 100 megawatts of power. We are currently producing 60 megawatts of power out of that data center, even though the floor space has been sold out for eight years.

So depending on what the customer load and the customer desire is, we may never put 35 megawatts in that facility. We will put as much as the customers need with the ability to add more incrementally as customer demand rises.

Nathan Crossett -- Berenberg Bank -- Analyst

Okay, that's helpful. This is an unrelated question, but I wanted to ask about potential REIT conversion. Now that the Class C shares are gone, is it possible you could eventually convert to a REIT? How should we think about that? What are the hindrances for you converting to a REIT because almost everybody is right now --[Speech Overlap].

Thomas Morton -- President and General Counsel

No, that's always a great question. Because what happens is, if we had gone out as a REIT we couldn't have converted to an Up-C. We went out as an Up-C when we went public, and that always leaves open the option of converting to a REIT. And if we find it to be tax and otherwise advantageous to do that, then we will do so.

We currently do not have it in our forecast to convert to a REIT. We don't see a significant advantage to converting to a REIT. And we do look at ourselves as a technology ecosystem solutions Company. And so we are providing services that are not readable income streams. And we will continue to do that. So there is flexibility by us being an Up-C that we would not enjoy if we were REIT.

So as long as we are continuing to evolve and diverge our revenue sources in order to increase the number of offerings we have and thereby gaining stability and keep our growth going to move with the market, we will continue to take advantage of the nimbleness that's afforded to us by being an Up-C.

Gabe Nacht -- Chief Financial Officer

That's correct. And then financially while REITs are viewed to have a tax advantage because they're passed through entities as an Up-C, we do have our partnership that is continuing as a pass through entity and Switch Inc. which is the taxable corporation on top of what we book a tax provision, we are not a taxpayer, because as a non-REIT, we're able to take accelerated depreciation on much of our equipment that REITs don't enjoy because they've specifically gone to the IRS and received tax rulings that allow them to classify certain parts of their equipment as real estate assets and depreciate them as real estate life assets.

Whereas we depreciate most of our power systems, air handlers, etc on a five to seven year life. And so we're not a cash taxpayer. So I think it's a perceived advantage to be a REIT, not a real advantage. And as Thomas alluded to, first and foremost, culturally, we're a technology Company. We do things quite differently than others. We're in the business that are more real estate [Indecipherable]. We respect them all. We have great relationships with our peers. They just think differently about the markets we're always thinking about where is technology win.

Nathan Crossett -- Berenberg Bank -- Analyst

Okay. Thanks.


[Operator Closing Remarks].

Duration: 52 minutes

Call participants:

Matthew Heinz -- Vice President of Investor Relations

Thomas Morton -- President and General Counsel

Gabe Nacht -- Chief Financial Officer

Frank Louthan -- Raymond James -- Analyst

Michael Rollins -- Citigroup -- Analyst

Richard Choe -- J.P. Morgan -- Analyst

Sami Badri -- Credit Suisse -- Analyst

Erik Rasmussen -- Stifel -- Analyst

Nathan Crossett -- Berenberg Bank -- Analyst

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