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Switch (NYSE:SWCH)
Q2 2020 Earnings Call
Aug 06, 2020, 5:00 p.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:


Operator

Good day, and welcome to the Switch, Inc. second-quarter 2020 earnings conference call. [Operator instructions] Note please, this event is being recorded. And I would now like to turn the conference over to Matt Heinz, vice president of investor relations.

Please go ahead.

Matt Heinz -- Vice President, Investor Relations

Thank you, operator. Good afternoon, and welcome to Switch's second-quarter 2020 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 described 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 second-quarter 2020 earnings 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

Thank you, Matt, and good afternoon, everyone. Thank you for joining us today for our second-quarter 2020 earnings call. Switch continued to execute favorably upon our strategic and financial objectives through the first half of 2020. Our second-quarter financial results reflect sustained momentum and solid demand trends across all of our PRIME Campus locations.

Second-quarter revenue increased 13% year over year to $126.9 million, and adjusted EBITDA of $69.1 million represents a 17% year-over-year growth. We continue to track in line with our 2020 operating plan, and our sales pipeline for the second half of 2020 remains robust. As such, we are reaffirming our 2020 financial outlook and guidance. Importantly, Switch has maintained 100% continuity of our operations for our clients across all of our data centers on all four of our PRIME Campus locations throughout the COVID-19 pandemic.

We have implemented a comprehensive set of protocols to ensure the health and safety of our data center employees and visitors, including entry questionnaires, contact tracing, hand-sanitizing stations in high-traffic areas, no-touch temperature checks and mandatory base coverings. Meanwhile, our non-data center operation staff has adapted favorably to a remote work environment for which the mandate has been extended through the end of Q3 2020. Our return-to-office time line remains dynamic as we continue to closely monitor the COVID-19 case trends and adhere to the state and federal protocols. We continue to experience favorable customer expansion trends toward our newer PRIMEs, as evidenced by a 54% year-over-year increase in multicampus revenue during Q2 2020.

Campus locations outside of Las Vegas represent 15% of our consolidated revenue as of Q2 2020, an increase from 11% in the prior-year quarter. For the six-month period ending June 30, 2020, revenue at the Core Campus grew 10%, while revenue at the Citadel and Pyramid PRIMEs grew at a combined rate of 70% year over year, thus accounting for 45% of our incremental revenue and 60% of our incremental EBITDA growth compared to the first half of 2019. Second-quarter bookings activity remained steady as we executed nearly 700 contracts representing a total contract value of $79 million and a weighted average term of four years. We signed over $12 million of incremental annualized revenue in Q2, which is consistent with our trailing 12-month average.

Incremental revenue bookings include $2 million from new logos and an additional $10 million from existing customer expansions. New customer additions remain strong with 21 new logos signed in the second quarter. Notably, new customer wins included the largest U.S. grocery store chain at the Core Campus in Las Vegas, a leading accounting and tax audit firm at the Keep Campus in Atlanta, a nationwide provider of satellite broadband services at the Citadel campus in Tahoe Reno and a Chicago-based quantitative trading firm at the Pyramid Campus in Michigan.

Approximately 20% of our second-quarter contract value was attributable to the Citadel, Pyramid or Keep Campus locations as our newer PRIMEs continue to see a disproportionately higher share of bookings relative to their current revenue contribution. Switch also saw strong telecom bookings in the second quarter, accounting for 45% of total annualized revenue signings, compared to a historical average of 15% to 20%. This reflects the differentiated value proposition when compared to our peers of our core telecom purchasing cooperative and a period of heightened demand for connectivity services. One of these telecom wins was a leading grocery store chain operator signing a five-year network services agreement totaling $5 million in annualized revenue at full deployment.

This customer first came to Switch for colocation services in Q2 of 2019 and has since continued to increase its spend with us as the company has chosen to leverage the core cooperative to connect its national store footprint of more than 500 stores while consolidating its service providers to significantly reduce network costs. Similarly, a leading regional bank signed a three-year network services agreement following their recent colocation deployment in our Pyramid Campus. By working with Switch Connect, our telecom audit services division and the Core Cooperative, the customer was able to reduce network spend by more than 30% while expanding and upgrading connectivity to its branch locations. Both of these transactions highlight the strategic nature of the core cooperative telecom offering, enabling our colocation and connectivity sales teams to engage in a collaborative fashion to capture a higher portion of IT spend and maximize value to our customers.

Other notable colocation wins in Q2 include a 500-kW expansion from a Fortune 100 aerospace and defense contractor, in addition to a 250-kilowatt compute node deployment by a top three cloud infrastructure provider at the Core Campus. This is the second major cloud provider to deploy an availability zone directly on Switch's campus, further advancing our unique, hybrid, multi-cloud strategy which enables sub-1-millisecond latency between enterprise and cloud workloads. We are also pleased to report that the first major cloud platform deployed on Switch's campus has officially launched its seventh U.S. region in Las Vegas, which is now open to customers in the Western United States.

Due to Switch's unique and patent-protected TRI redundant power and HVAC configurations, as well as the extra scale size of the Vegas Campus, currently more than 2.4 million square feet, this provider was able to deploy fully three separate and bulk-tolerant availability zones across the numerous buildings on Switch's Core Campus. We continue to work closely with all major cloud service providers to create a best-in-class hybrid ecosystem across Switch's PRIME footprint. Strong sales momentum has continued subsequent to quarter end, including expansion orders from two technology customers in the Citadel campus, totaling $1 million of incremental annualized revenue and a new health services provider in the Keep Campus that we believe is highly strategic to our rapidly growing healthcare customer ecosystem. With regard to our strategic and sustainability initiatives, we continue to advance Rob Roy's forward-thinking, multiyear, gigawatt Nevada program which began in 2015.

Switch and its partners recently announced a renewable energy project comprised of three solar fields, combined with an innovative battery storage solution, enabled by Tesla's mega pack technology. We are extremely pleased to be working alongside thought leaders across the renewable energy landscape, including Capital Dynamics, Tesla, Con Edison and First Solar. The current phase of the Gigawatt 1 project involves the construction of an additional 375 megawatts of solar energy, bringing total production capacity to over 550 megawatts, plus 800-megawatt hours of battery storage. Upon its completion, the Northern Nevada location will constitute the world's largest behind-the-meter solar, plus battery array deployment, placing zero burden on the legacy public utility grid.

The estimated $1.3 billion infrastructure cost for the project will be 100% privately funded by the capital dynamics, clean energy infrastructure investment team. Switch has entered into a 25-year power purchase agreement for the electricity produced by the project. This agreement will enable Switch to provide 100% renewable energy to our Nevada colocation customers for the foreseeable future at rates that are as low as one-fifth of those available just over the border in California, securing our leadership position in sustainable and affordable data center solutions. Continuing on the topic of sustainability, we are pleased to announce the recent launch of Switch's ESG web portal at our website, switch.com.

The site provides in-depth insights to our various programs and policies surrounding corporate governance, environmental sustainability and human capital. Switch was upgraded to low risk in a recent report from Sustainalytics, a leading independent voice on corporate ESG practices. The updated 2020 report ranked Switch in the top 12% and of Sustainalytics global universe of over 12,000 companies. We are pleased by this outcome and look forward to our investors reviewing the information now available at our ESG web portal.

We remain in close contact with various other ESG research platforms in an effort to even further enhance our market-leading policies, disclosures and risk ratings in order to fully inform both active and passive investment decisions. Social responsibility, community involvement and sound corporate stewardship have long been core elements of Switch's culture. Given the rising importance of sustainable business practices and rapid growth and thematic ESG investing, we believe a compelling opportunity exists to attract new investors to Switch as we educate the marketplace on our ESG-related practices. Now turning to our data center construction milestones and project pipeline.

We expect to deliver an additional 2,000-plus cabinet equivalents and 20 megawatts of incremental power infrastructure during the second half of 2020. This includes the Q3 deployment of a 10-megawatt power system in the Core Campus to facilitate customer ramps in Las Vegas 11. Moreover, we are targeting a Q4 delivery of two new sectors at the Citadel Campus, totaling 1,320 cabinet equivalents and 10 megawatts of power. Also, during Q4, we expect to finalize tenant improvements on Sector 2 of ATLANTA 1, adding 780 cabinet equivalents.

Additionally, during the second quarter of 2020, we continued on-site development work at the Core Campus in preparation for the future construction of five new data centers, the first of which is Las Vegas 15 with a target delivery of mid-2022. We continue to prepare to capitalize on the market opportunities addressed by our three new divisions: Switch Edge, Switch Century and Switch Vault, together with the other related services that support and expand upon our technology ecosystem. We will provide further details to investors as we move forward with our analysis and client interactions. 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 second quarter of 2020 and discuss our outlook for the full year. In the second quarter of 2020, we achieved quarterly revenue of $126.9 million, an increase of $14.9 million or 13.3% compared to the second quarter of 2019. This is primarily attributable to an $11.7 million increase in colocation revenue and a $3.2 million increase in connectivity revenue.

19% of the year-over-year revenue growth in Q2 2020 resulted from new customers who initiated service during the past 12 months, while 81% of the revenue growth came from customers who have been with Switch longer than one year. The disproportionate growth contribution from existing customers in the second quarter of 2020 was driven by several large new customer contracts that commenced billing in the year-ago quarter, which, by definition, are now counted as existing customer growth contributions we expect this ratio to normalize in future quarters to reflect our historical pattern of 60% to 70% existing customer growth. More than 95% of our revenue in the quarter 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 second quarter of 2020 was $102.6 million, compared to $91 million in Q2 of 2019, an increase of 12.8%.

Connectivity revenue in Q2 of 2020 was $22.8 million, increasing 16.2%, compared to $19.6 million in the same period in 2019. Other revenue, including professional services, accounted for $1.5 million in Q2 2020, compared to $1.4 million for the same period in 2019. As of June 30, 2020, Switch had approximately 17,200 billing cabinet equivalents, generating approximately $2,400 per-cabinet equivalent in monthly recurring revenue. We had more than 8,000 total cross-connects as of June 30, and cross-connects accounted for 4.1% of total revenue in Q2 2020, compared to 3.4% in the year-ago period, reflecting a 37% growth rate.

Now turning to bookings. During Q2, we executed 698 contracts, comprising approximately six megawatts, representing total contract value of $79 million and annualized revenue of $24 million at full deployment, inclusive of both renewals and sales of incremental services. In the second quarter, we signed $12 million of incremental annualized recurring revenue, inclusive of $10 million in incremental bookings from existing customers and approximately $2 million from new logos. As of June 30, 2020, our booked, not billed, backlog stood at $24 million in aggregate annualized revenue, consistent with the prior-quarter backlog as new signings essentially offset Q2 revenue commencements.

We expect our backlog to contribute approximately $3.5 million of incremental revenue during the remainder of 2020 with the balance contributing in 2021 and beyond. Revenue reductions from customer churn remained low in Q2 2020 at 0.2%, down from 0.4% last quarter and unchanged compared to the year-ago quarter. 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. Cost of revenue increased by $10.1 million in Q2 2020 compared to the year-ago quarter, primarily due to increases in depreciation, power and connectivity costs.

Excluding depreciation, amortization and equity-based compensation expenses, our Q2 2020 adjusted gross profit increased 13% year over year to $94.1 million, reflecting an adjusted gross margin of 74.2%. SG&A expense growth moderated in Q2 2020, coming in at $33.4 million, compared to $32.9 million in the year-ago period and down from $40.1 million in Q1 of 2020. The sequential decline in SG&A was primarily attributable to a reduction in professional fees. In addition, the implementation of remote work protocols reduced second-quarter SG&A by approximately $1 million due to a reduction in travel expense, marketing and general administration expenses.

Income from operations in Q2 2020 increased 21% to $25.3 million, compared to $20.9 million in Q2 2019. The year-over-year growth in operating income was primarily attributable to a $4.9 million increase in gross profit, offset by a $0.5 million increase in SG&A costs. Interest expense decreased by $0.8 million to $6.7 million in Q2 2020 as lower LIBOR rates offset higher debt balances on our revolver. As of June 30, 2020, we had $582 million outstanding on our term loan and $260 million drawn on our $500 million revolver.

We reported Q2 net income of $13.3 million, compared to net income of $4.7 million in Q2 2019. Second-quarter net income includes a $4.1 million loss on interest rate swaps equating to a $0.01 impact on our reported net income per diluted share. Adjusting for the loss on interest rate swaps, our net income per diluted share was $0.06. We provide a full reconciliation of GAAP net income attributable to Switch, Inc.

to adjusted net income attributable to Switch, Inc. in the financial tables of our Q2 2020 earnings release available on our Investor Relations website. Adjusted EBITDA totaled $69.1 million for Q2 2020, compared to $58.8 million in Q2 2019, reflecting year-over-year growth of 17.5%. Adjusted EBITDA margin for Q2 2020 was 54.5%, increasing from 52.6% in the year-ago period, primarily due to the previously mentioned reduction in SG&A as a percentage of revenue.

We continue to expect that adjusted EBITDA margins will remain within our traditional low 50% range for the remainder of this year. Capital expenditures in the second quarter of 2020 were $85.6 million, compared to $54.2 million in the same quarter of 2019. Capital expenditures in all four of our PRIME Campus locations increased compared to the year-ago quarter, particularly in the Keep and Citadel PRIMEs, which accounted for 65% of total Q2 capex. This was primarily attributable to construction on two new sectors at TAHOE RENO 1 to accommodate strong customer demand, as well as construction of the second sector in ATLANTA 1.

We also invested $23.4 million on the ongoing site development work for Las Vegas 14, 15 and 16 and $7 million in the Pyramid Campus for additional power and cooling infrastructure. Maintenance capital expenditures were $1.9 million for the second quarter of 2020 or just 1.5% of revenue, compared to $1.5 million and 1.3% of revenue in the same quarter last year. Growth capex for data center construction and improvements was $83.7 million for the second quarter of 2020, compared to $52.7 million in the year-ago period. As of June 30, 2020, the Switch PRIMEs had capacity for 23,300 cabinet equivalents within our open sectors.

At quarter end, 89% of our total cabinet inventory was committed under contracts, compared to 88% in the prior quarter and 89% in the year-ago quarter. The Q2 2020 utilization rates at these PRIMEs based on committed cabinets and currently available colocation space were approximately 93%, 86%, 72% and 23% at the Core Campus, the Citadel Campus, the Pyramid Campus and the Keep Campus, respectively, compared to 93%, 84%, 71% and 21% in the prior quarter. At full build-out, including ATLANTA 1, our existing constructed facilities will comprise an aggregate of nearly 4.7 million gross square feet of space, up to 490 megawatts of power and over 26,000 cabinet equivalents. Looking now at the balance sheet.

As of June 30, 2020, the company's total debt outstanding, net of cash and cash equivalents was $864.6 million, resulting in a net debt to last quarter annualized adjusted EBITDA ratio of 3.1 times, down from 3.3 times in the prior quarter. As of June 30, 2020, we have liquidity of $271.7 million, including cash and cash equivalents and availability under our revolving line of credit. As disclosed in recent 8-K filings, during the second quarter of 2020, our members redeemed 11.5 million common units, resulting in the issuance of an equivalent number of Class A common shares. Switch also spent $20 million to repurchase 1.1 million units, bringing the total quarter and shares outstanding to $240.6 million, including $106.8 million Class A public float, representing 44% of total shares outstanding.

July and August redemptions totaled 2.1 million common units, and we expect an additional 250,000 units to be redeemed on October 1, bringing our total public float to approximately 109 million shares or 45% of total shares outstanding. Finally, we are reaffirming our guidance for 2020 as follows: revenue in the range of $507 million to $521 million, reflecting 11% organic year-over-year growth at the midpoint; adjusted EBITDA in the range of $251 million to $261 million, reflecting an increase of 11% compared to 2019; and adjusted EBITDA margin of 49.8% at the midpoint; capital expenditures, excluding land acquisitions, in the range of $290 million to $340 million. And now I will turn it back to Thomas for some closing remarks.

Thomas Morton -- President

Thank you, Gabe. 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. Thank you all. We would now like to open the line for questions.

Questions & Answers:


Operator

[Operator instructions] Our first question today will come from Frank Louthan with Raymond James. Please go ahead.

Frank Louthan -- Raymond James -- Analyst

Great. Thank you. So 12% utilization in Atlanta, pretty good just starting out. Where do you think that can get by year end, looking at sort of at the pipeline? And then what would it take to get up past the midpoint of guidance? What would we have to see to accelerate there? You're running on a run rate to get a little bit below that right now.

Do you think that can change and get a little bit higher in the back half?

Gabe Nacht -- Chief Financial Officer

Frank, this is Gabe. I'll take that. As far as Atlanta utilization, we've signed four new customers this last quarter. And the utilization percentage, remember, is based on our open sector right now.

The second sector is slated to open prior to year end so that will obviously increase the floor space in the cabinet availability in that facility and drop the utilization rate. So trying to predict where the utilization rate is going to end up this year is really tough for us to do, and it's not something that I'm -- that I'm able to do at this point. All I can say is that we have a number of contracts that we are working on in Atlanta. We have good activity in that facility.

We have a lot of interest in the area for that facility, and we're very, very confident in the way it's rolling out. And, Thomas, anything to add there?

Thomas Morton -- President

Yes. We continue to deploy new customers every quarter in that facility. We've made some more sales into that facility even this quarter. And so we continue to see a robust pipeline, and we have many large projects that we are working on.

Whether they close and when exactly they're going to land, it's more determined by the customer than it is by us. We have the inventory and the ability to deploy them, and we're working with them to coordinate their delivery cycle. As to overall. If we're going to hit the midpoint or hit our guidance we provide, guidance of revenue between $507 million and $521 million.

And that's the guidance that we are sticking to through Q2, and we believe that we will hit that guidance range.

Gabe Nacht -- Chief Financial Officer

Yes. And as far as being above the midpoint, Frank, it really just comes down to the timing of customer deployments. As customers deploy, we're able to build cabinets and recognize revenue. Obviously, COVID does impact the ability for customers to travel.

They utilize some of our folks and for smart hand services to help put servers in racks and whatnot. But if, for their large deployments, they generally have to bring staff down. We have full safety protocols to allow them to do that. But nevertheless, some customers are impacted by COVID and travel restrictions.

Frank Louthan -- Raymond James -- Analyst

Great. And just a follow-up. What -- walk us through where the current status is with the edge compute nodes and what the interest level is in that product currently?

Thomas Morton -- President

Yes. It's been a short time since we announced at our last earnings call, wasn't that long ago, it's typical of a Q1 earnings call in Q2. They tend to be compressed, so there hasn't been a material amount of advancement to report to you on that -- those projects. But we continue to work very diligently on those projects, and we believe that we will have some announcements to make prior to the end of this year.

But the projects do continue to advance. We have seen a number of large customers show interest in multiple deployments of sites. And when we do make an announcement, I expect it to be a multifaceted announcement with more than one site and more than one customer. So it's just going to take a little bit more time to get through there and not the 60 days that we have between the two calls.

Frank Louthan -- Raymond James -- Analyst

Great. Thank you very much.

Operator

And the next question will come from Tim Long with Barclays. Please go ahead.

Brendan Lynch -- Barclays Investment Bank -- Analyst

Hi. Good afternoon. This is Brendan Lynch on for Tim. Maybe just following on the Switch Edge question there.

Can you just give us some details on the nature of the initial conversations? What are clients most excited about? What's giving them pause at this point? Just some details there.

Thomas Morton -- President

Yes. And there's no pause. Its go forward, go fast. But the -- what is causing them to be interested is the same thing that we reiterated on the last call.

It is a robust platform that is far more resilient and more efficient than other opportunities that are out there and much more secure as well. It is also -- as typical of Switch, it is flexible and its architecture and its structure, and that allows customers to deploy in city in a flexible and expandable way at a reasonable cost and in a way that is more resilient and secure than they have in other alternatives. So we have a number of customers that we're working with, and that helps us to identify locations, which locations to deploy and which locations to deploy first. And when you have a confluence of customers and needs, then you are coordinating all of them to where you are going to go in your first build, your second build and your third, etc.

So we are working on those coordination efforts, as well as securing all the necessary infrastructure to make the deployments. And this is infrastructure, and infrastructure takes a certain amount of time to get rolling. But once it does, it builds momentum upon itself, and it continues at a very good clip. So we're making sure that we do it right and that we don't stumble out of the gate, so we're taking our time.

And even in this unique situation that we all have in this world, we are making sure that we deploy, continue to advance and that we're doing so in a prudent and efficient fashion.

Brendan Lynch -- Barclays Investment Bank -- Analyst

Great, great. That's helpful. And then maybe some details on the colo agreement with the top three global cloud provider. What's the size of the initial deployment and the line of sight to future expansion? Maybe any implications that you see for interconnection growth as a result of this client?

Thomas Morton -- President

Yes. We believe that there will be interconnection growth as a result of this client. This client has already reached out through us to a number of our customers to facilitate utilization of their services by these customers, and that is something that we would expect to continue as they continue to grow and deploy and expand and as our customers identify the fact that they are there and continue to seek out their services. So this is part of what we've done in our ecosystem is deploying locally multiple cloud options for our customers.

And because they're deployed inside the same facility, they're able to connect between the cloud and the customer deployment in picoseconds of connectivity latency, and they don't have as much or any regulatory implications because it is just simply a fiber connection between one cage to another cage. So they are in a facility that has met their regulatory needs. They are doing interconnects with a cloud provider within that regulated facility -- regulatory-approved facility, and they're able to do so in picoseconds of connectivity latency. So it's a very appealing platform for our customers and a very appealing place for our service provider to deploy.

And so we believe that having multiple options for our customers will further engender success in this area.

Gabe Nacht -- Chief Financial Officer

And this is really the hybrid cloud vision that we've been talking about for quite some time. We've talked last quarter about one of the first major cloud providers putting in place a three-part, TRI-redundant availability node within one campus at Switch because of the resiliency of each of our sectors, which they view as a stand-alone data center [Inaudible] fully fall tolerant. So rather than picking three vendors in three different geographies to create what is typically their TRI-redundant availability zone, they put it all at Switch, all at one campus in three different sectors. And that was a really important strategic decision for them and a strategic win for Switch.

Now we have the second customer doing something very, very similar and putting a full availability node within Switch. So that, as Thomas said, they can connect directly to our nearly 1,000 customers all in a single location. So that's the advantage to the clouds. It's an advantage for our customers, and that's the vision for hybrid cloud that we've been expounding.

And clearly, we do business with all the major clouds. But to have two of the largest cloud directly within our campus, not just uplinks to their cloud node somewhere else in the United States, is a tremendous advantage for us.

Brendan Lynch -- Barclays Investment Bank -- Analyst

Great. Thanks for the color.

Operator

Our next question will come from Nate Crossett with Berenberg. Please go ahead.

Nate Crossett -- Berenberg -- Analyst

Hi. Just on the back of that question, I think you mentioned interconnection could go up in that center now that you have the second cloud. Could you help us kind of size how much interconnection growth we could actually see from that?

Gabe Nacht -- Chief Financial Officer

Go ahead, Thomas, I'm sorry.

Thomas Morton -- President

That's a tough one. And Gabe, you can eliminate with any more specificity you want. That really depends on the adoption rate of customers to the two cloud providers, and that is difficult for us to forecast in regular times. In these times, it is even more difficult for us to forecast.

But there is no doubt that that will grow. The rate at which it grows is going to be subject to their individual needs, the customers and their ability to work in these times to make those deployments happen. But certainly, we are here to facilitate that growth and do everything we can to make sure that the two entities are connecting and that they are doing so in a positive manner that facilitates the growth of the ecosystem generally.

Gabe Nacht -- Chief Financial Officer

And, Nate, we did talk last quarter about the fact that we were seeing additional demand for connectivity, simply given the fact that everybody is working remotely, and the world has moved to a connective universe right now because people can't meet in person. And we saw some of that come forward in the numbers in Q2. We saw connectivity growth of over 16% in the second quarter, and our cross-connect revenue is now about 4.1% of total revenue. So we saw good growth in total connectivity growth and in cross-connect specifically.

We would expect that to continue as COVID continues and even beyond COVID now that the world understands that they can operate in an affected way, in a remote environment. And as many companies are announcing that they're planning to shift to a more distributed workforce, I think that just bodes well for us in the long run. And as we have additional cloud providers within our walls, that clearly gives an opportunity for our customers to connect directly and increase that cross-connect revenue.

Nate Crossett -- Berenberg -- Analyst

OK. That's helpful. And just one. I wanted to ask about the dividend increase was a big, large step for you guys.

Just curious how you think about deploying capital for new projects and you got this edge project you're working on versus paying advance investors versus -- via dividend.

Thomas Morton -- President

Yes. Talk about -- a little bit about the theory of why the dividend, and then Gabe can talk about capital allocation, the overall capital allocation probably a way to divide that question. But great question. But we wanted to adjust our dividend slightly to a level that will be meaningful as a component of the total return for our investors, but we want to do that also while maintaining flexibility to continue to invest growth while staying neutral on our leverage.

And those two things are the balance that we wanted to do, and we believe that getting our dividend to this level made it a meaningful consideration for our investors. So, Gabe, do you want to talk a little bit about overall capital allocation?

Gabe Nacht -- Chief Financial Officer

Yes. I agree with Thomas wholeheartedly. We do straddle a couple of different worlds. In terms of our DNA, we really do operate as a technology company.

That's where our heart and soul is. That's certainly where Rob's inventions lead us, but we are compared to a group of companies that are structured as REITs. While we would not expect our yields to match a REIT yield because we're not required to distribute our income in the way that they are, and we want to redeploy our capital for growth more than -- is our primary objective. We did want to get our dividend at least to a level where it was meaningful to investors as part of their total return.

And that was the strategy in boosting the dividend at this point. Plus, we feel we're well capitalized. We have liquidity. If you look at our balance sheet, our leverage is just over three times.

So we feel we can boost that dividend and still deploy our capital for growth while meeting all of those shareholder objectives. But in terms of capital allocation, we'll revisit the dividend probably on an annual basis, now that it is at a level that we feel is meaningful to investors. But our primary capital allocation is going to be toward growth, and we do feel we're well capitalized to attack on all of the initiatives that we've outlined.

Nate Crossett -- Berenberg -- Analyst

OK. Just to follow up on that quickly. So does that mean your tolerance for leverage has gone up a little bit just because the dividend is higher now? Or --

Gabe Nacht -- Chief Financial Officer

Yes. We've said all along that we don't have a leverage target. You see our revenue is recurring in nature, so it is very leverageable, and we have very little churn. So it is a very leverageable model.

We just have never needed leverage. Because of the way we deploy capital modularly and because of all the equipment that goes into our buildings is essentially just in time based on customer demand, we're able to deploy capital very efficiently. And for the 20 years we've been in operations, we've always had low leverage. We're not opposed to leverage.

We just simply haven't needed it. So I don't think our tolerance for leverage has changed at all. We just -- we have the flexibility to create additional yield in our dividend while still meeting all of our long-term objectives for growth.

Thomas Morton -- President

I think, yes, Gabe's answer is perfect. We often get asked why, in fact, we're not levering up further. But we agree that we and our board felt that we had room in our leverage model to increase our dividend and make it even more attractive to our investors. And so we took the opportunity to do that.

Nate Crossett -- Berenberg -- Analyst

OK. Thanks, guys.

Operator

Our next question will come from Erik Rasmussen with Stifel. Please go ahead.

Erik Rasmussen -- Stifel Financial Corp. -- Analyst

Yes. Thank you for taking the questions. Maybe just to circle back on the guidance. In terms of -- when we look at sort of year-to-date performance, and I appreciate the comments on sort of revenue.

And if we're looking at sort of the -- maybe getting to the midpoint of guidance based on where we stand today year to date. But your EBITDA year to date seems to be suggesting a much higher level. Maybe if you just comment on sort of the puts and takes for the second half of the year as you sort of arrived at that outlook, and then I have a follow-up.

Thomas Morton -- President

Yes. No. That's correct. Yes, Erik, welcome to the call.

We don't expect the Q2 margins to continue throughout the second half. In Q3, we had seasonal cost increases due to higher power usage, not in rates, because we've stabilized that, but natural usage. But there are expenses that we continue to avoid because of COVID. But we don't want people to expect that the COVID savings are going to be part of our norm.

And if there are some return to normal that happens in Q3 or Q4, we will see those expenses that we're saving on COVID move back toward a more moderated or more consistent manner than we've seen in the past. So I wouldn't -- I would understand that you are getting toward Q2 EBITDA being higher, and that might lead to a year-end high, but there are particular dynamics in play. Both have seasonality of our expenses on power and the savings that we're incurring in COVID that will moderate that in the back end. Gabe, anything you wanted to add to that?

Gabe Nacht -- Chief Financial Officer

Yes. I agree with Thomas. I mean, we're clearly trending above where we thought we would be because there are expenses that we're not incurring for travel, for marketing and for other things. All things being equal, we would rather be incurring those expenses and being in front of customers, but that's the world that we're living in today.

As Thomas mentioned, third quarter usually does bring a bit higher power cost and a bit lower margin, so I wouldn't expect to see those Q2 margins continue into Q3. But we are trending above the midpoint. If we get to Q3 and see that we'll be trending above the range, then we'll look to adjust the range. But our philosophy on guidance is to try to set a realistic guidance range at the beginning of the year, unless we're trending significantly above or below either the high or low of that range to leave it alone.

And right now, we're comfortable with the range on EBITDA.

Erik Rasmussen -- Stifel Financial Corp. -- Analyst

OK. That's fair. And maybe then just my follow-up on Atlanta. Can you give us an update on that market? What does maybe the pipeline look like? Is it still maybe oriented toward either smaller or larger-type deals? And then maybe just sort of the competitive dynamics in that market.

Thomas Morton -- President

No, that's great. As is in all of our areas where we do business, there is a blend of smaller and larger deals, and that doesn't necessarily mean smaller and larger companies. We get very large companies that do start with smaller deployments because they need to be next to a couple of customers that they represent or they need to be next to on a particular piece of infrastructure that they need in terms of their business. So they will start small, and then they tend to land and expand, which is why 70-or-so percent of our growth tends to come from existing customer expansions and renewals.

So we expect that trend to continue. So there is a mix of large and small opportunities in Atlanta. We do continue to see a lot of interest in that facility, and we're working with some customers to settle down and do a significant deployment. Some of those customers are more impacted by the current state of the economy and the current state of COVID in terms of the timing of their signings.

But there is a healthy pipeline of interest and which we've mentioned, we continue to add customers to that facility.

Erik Rasmussen -- Stifel Financial Corp. -- Analyst

OK. Thank you very much.

Operator

Our next question will come from Aryeh Klein with BMO Capital Markets. Please go ahead.

Aryeh Klein -- BMO Capital Markets -- Analyst

Thank you. Maybe on that last note, you mentioned some customers have potentially delayed decisions in Atlanta. To what extent you see that elsewhere in the portfolio? Maybe you can talk to the linearity in the quarter, particularly with regards to deal signings.

Thomas Morton -- President

Yes. We continue to -- I mean, some -- every company has impacted slightly differently by this -- the current economy and current state of COVID. And we are not that impacted blessedly, but other companies are. So we have some companies where they're accelerating because they are growing faster, like telecommunications and cloud-based companies, etc., and we have other companies that are slowing down what they are doing.

So in the mix, the net impact is that we are able to maintain our growth because some are moving faster than they thought they would, and others are slowing down a little more. So in the mix, we're continuing on what we feel is a trajectory to meet the guidance that we put out to the market, and we believe that we will hit those -- that range toward the end of this year, both in terms of EBITDA and in top-line revenue.

Aryeh Klein -- BMO Capital Markets -- Analyst

Got it. OK. And then maybe just following up on the cloud node conversation. But to what extent are you having conversations with other cloud providers that you think may deploy in your data centers? And with the existing cloud customers that have deployed, is there an opportunity for them to deploy nodes in other markets outside of Vegas?

Thomas Morton -- President

Yes. We actually -- in Vegas and in Reno and in Grand Rapids, we have all the major cloud deployments. All the major clouds are available on that within our facilities. And in Atlanta, they are beginning to work with us to deploy there.

The -- we expect that to continue. And we expect, as the ecosystem draws more customers, the clouds will want to access those customers, and the customers will want to access the cloud. So I fully anticipate that we will continue to enhance and expand upon our cloud deployments within our facilities. But remember, we're not a wholesaler to the cloud.

We have business with the cloud, and we always have targeted around 20% of our revenues to be cloud. And the rest of it will be will be large-scale retail ecosystem deployments. So that allows us to maintain a certain margin profile, as well as a revenue profile that we enjoy. So they are a facilitator in the aspect of our data center, but they'll never be 90% or our target is not to make them even 90% or 100% of our data center deployment.

Gabe Nacht -- Chief Financial Officer

But, Aryeh, to your point, having the cloud nodes within our walls, as we said, is a great advantage. They see that, too. And I think there's the opportunity to replicate that model in our other PRIMEs, particularly within East Coast location. I think Atlanta is a market that would make a lot of sense for the clouds to deploy within to have both an East, West and -- an East Coast and a West Coast node within Switch.

Aryeh Klein -- BMO Capital Markets -- Analyst

Thank you.

Operator

[Operator instructions] Our next question will come from Michael Rollins with Citi. Please go ahead.

Michael Rollins -- Citi -- Analyst

Thanks, and good afternoon. I was wondering if you could speak a bit about where the bookings are coming from in terms of the sales channels today, the direct versus some of the indirect relationships, something that you've talked about in the past. But also what are the opportunities to get sales from these cloud partners or other firms that locate in your facilities that end up being magnetic for other tenants?

Thomas Morton -- President

All right. Well, first of all, Mike, welcome to the call. Thank you for joining. We have -- most of our sales right now are coming directly.

We do work with all the major brokerage houses to facilitate relationships with them and have their customers deploy inside of our facility, so it's a mix of the two. But some of the more recent deployments have been direct sales. The -- absolutely, we work with the cloud providers, just as we work with our existing customers to collaborate with the cloud providers. The cloud providers are also working with us to bring new customers in to deploy and be next to them inside of the facility.

And that's why it is a very symbiotic relationship between us as a provider and them as a customer. And because of -- as I mentioned before, when Aryeh was on the phone, the -- having a very robust market, if you will, of customers that's available to the cloud makes the facility and the campus more attractive to the cloud to deploy there. And having a multiplicity of clouds makes it more attractive to the customers. And so by having that balance and that ecosystem in harmony, you actually facilitate the growth of the whole, even better than if you didn't have a balance and you're too heavily levered one way or the other.

So we really strive to have an ecosystem that facilitates growth for everybody and all aspects of the need are there, whether it be cloud, be telecom, be vendors, that are providing services to our main customers or our main customers have access to those vendors. So there is a whole ecosystem concept, and we are constantly working with everybody to make sure that their needs are fulfilled by the other citizens, if you will, that sit inside of our ecosystem.

Michael Rollins -- Citi -- Analyst

Thanks.

Thomas Morton -- President

Yes.

Operator

[Operator signoff]

Duration: 55 minutes

Call participants:

Matt Heinz -- Vice President, Investor Relations

Thomas Morton -- President

Gabe Nacht -- Chief Financial Officer

Frank Louthan -- Raymond James -- Analyst

Brendan Lynch -- Barclays Investment Bank -- Analyst

Nate Crossett -- Berenberg -- Analyst

Erik Rasmussen -- Stifel Financial Corp. -- Analyst

Aryeh Klein -- BMO Capital Markets -- Analyst

Michael Rollins -- Citi -- Analyst

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