Switch Inc (SWCH) 2020 Q1 法說會逐字稿

Good day, and welcome to the Switch, Inc. First Quarter 2020 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.

Thank you, operator. Good afternoon, and welcome to Switch's First 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 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 first 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.

Thank you, Matt, and good morning, everyone. Thank you for joining us today for our first quarter 2020 earnings call.

First and foremost, I want to express my sincerest appreciation for the continued patience, dedication and resilience that our Switch team members have shown throughout the COVID-19 health crisis. Thank you for all you have done and continue to do during these unprecedented times.

On that note, I am pleased to report that Switch has maintained 100% continuity of our operations for our clients across all of our data centers in all 4 prime campus locations throughout the COVID-19 pandemic. Construction on our newest facilities has also continued unabated.

Since the shelter-in-place order was implemented in early March, our non-data center operation staff has made a seamless transition to remote work environments. We do not expect any reduction in employee head count as a result of COVID-19. Furthermore, we believe the cost to support remote IT requirements are immaterial to our full year financial guidance.

Moreover, we saw no disruptions to our mission-critical operations teams nor any other corporate functions. This was achieved while closely monitoring the well-being of our employees with strict adherence to state and federal protocols surrounding worker safety and social distancing. Importantly, we also continue to forge ahead on innovative future growth initiatives, which I will discuss in greater detail later in this call.

Our first quarter 2020 financial results reflect sustained business momentum and positive underlying demand trends across all of our prime campus locations. First quarter revenue increased 19% year-over-year to $128.1 million, and adjusted EBITDA of $61.5 million represents a 14% year-over-year growth. As identified on our prior earnings call, we incurred elevated SG&A costs in Q1 related to professional services as a result of our transition to a large accelerated filer in 2019. These elevated professional service costs were fully considered in our 2020 operating plan, and we expect quarterly adjusted EBITDA margins to normalize around the historical 50% level for the remainder of this year. As such, we are reaffirming our 2020 financial outlook and guidance, which Gabe will discuss in greater detail.

The first sector of the data center floor in ATLANTA 1 is now operational, and we currently have 15 customers signed and committed to deploy this year with 5 additional logos signing on in Q1 2020. Our team is extremely pleased with the market response to the opening of our Atlanta campus. We are seeing excellent opportunities from a balanced mix of new and existing customers. We are maintaining strong growth momentum across the entire Switch PRIME national footprint. Campus locations outside of Las Vegas now represent 15% of our consolidated revenue as of Q1 2020. This represents an increase from 10% in the prior year quarter.

During Q1 2020, revenue at the Citadel PRIME and the Pyramid PRIME grew at a combined rate of 75% year-over-year and accounted for 48% of our incremental revenue growth compared to the year ago period. We continue to experience favorable customer expansion trends toward our newer PRIMEs, which is well demonstrated by the growing proportion of multi-campus customer revenue.

As of Q1 2020, more than 140 customers have deployed in multiple Switch PRIMEs, representing 39% of total revenue. This compares to 110 customers and 23% of revenue in the year ago quarter, equating to a 92% year-over-year increase in multi-campus revenue.

First quarter sales activity remained steady as we executed 560 contracts, representing total contract value of $73 million, with a weighted average term of approximately 5 years. We signed approximately $10 million of incremental annualized revenue in Q1, including $4 million of incremental annualized revenue from new logos and an additional $6 million from existing customers. We added 22 new customer logos in the first quarter, including a Fortune 500 semiconductor components manufacturer in the Pyramid Campus, a Fortune 1000 financial institution in the Pyramid Campus, a nationwide health insurance provider in the Keep Campus and a leading construction goods retailer in the Core Campus. Several existing Switch customers either expanded or signed long-term renewals in Q1, including a multiyear $7 million renewal and expansion with a leading cloud security vendor in the Core Campus, expansions from 2 major semiconductor customers across 3 campus locations, totaling over $10 million in contract value and a 6-year extension with a multinational bank customer in the Core Campus.

As a leading innovator in technology infrastructure, we continually assess the anticipated future technology needs of our customers and keep a pulse on developing technology trends. One of the most rapidly evolving areas of the technology landscape involves the combination of AI, 5G and the cloud. We have identified 3 verticals where Switch can uniquely address customer technology utilization in a highly differentiated way as data management needs proliferate. These involve Class 4 edge computing, tempest-rated data storage and AI-driven robotic security. Under Rob Roy's leadership, Switch has identified these 3 areas as highly strategic and a natural complement to our exascale PRIME infrastructure platform strategy.

Enterprise technology requirements are moving rapidly toward a more distributed primary and edge infrastructure configuration. This road map involves the deployment of large mission-critical workloads in highly secure PRIME locations to maximize purchasing benefits at scale while minimizing total cost of ownership. At the same time, enterprises across a variety of industries are seeking edge solutions that can increase the number of low latency delivery nodes across their networks while offering the same robust level of resiliency and security that Switch is known for within our industry-leading Class 5 PRIMEs.

As we look to extend our reach from the PRIMEs to the edge, we believe Switch is positioned to deliver the most resilient and connected enterprise-class edge data center solution based on Rob Roy's unique and proprietary designs, including his newest Switch EDGE modular data center. We recently deployed our showcase modular edge design, representing the world's only Class 4, system + system, fully air transportable edge data center.

Switch EDGE data centers are fully customizable to meet a wide range of specific use cases. And in recent months, we have engaged in substantive dialogue with numerous enterprise partners that have identified various business needs for this highly resilient, secure Class 4 edge solution.

One of the identified concerns regarding edge deployments is physical security. Deploying 24x7x365 human guards at edge locations is not economically or physically practical. To address this issue, Rob Roy has developed a robotic AI human-in-the-loop security solution, which will be deployed at Switch EDGE facilities. In addition to the use at our own data center facilities, the excitement generated from these enterprise alpha test client partners has led to Switch offering the Switch century robot as a stand-alone security platform to the general market. Switch century robots utilize advanced AI-driven sensors and can be equipped with a range of options to protect assets and secure enterprise and industrial environments.

Additionally, as enterprises seek solutions for mission-critical data storage, we believe there is an industry-wide deficiency in the physical security environment supporting hybrid cloud storage offerings. We have designed the Switch VAULT data center sectors to be the only tempest-rated private and public cloud accessible storage rooms available as an advanced, yet complementary solution to cloud storage. We believe these highly secure environments will be flexible, cost-effective, lock-in-free and will be mandatory for some portion of evolving corporate data needs.

We continue to prepare to capitalize on the market opportunities addressed by 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.

Now turning to our data center construction milestones and project pipeline. During the first quarter of 2020, we delivered over 2,000 cabinet equivalents and 30 megawatts of new power capacity across our PRIME footprint. This includes the opening of LAS VEGAS 11 Sector 3 in mid-February and a new 530 cabinet sector in the Pyramid Campus, a 10-megawatt power system at the Citadel Campus, and lastly, the initial sector and 12-megawatt power system at our Atlanta Keep Campus. Each of these additions to our infrastructure are backed by customer demand and will provide substantial capacity for future growth.

As shown in our development milestones table in the Q1 investor presentation, we expect to deliver an additional 2,000-plus cabinet equivalents and over 30 megawatts of incremental power infrastructure during the remainder of 2020.

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

Thanks, Thomas. Today, I'm going to review our financial results for the first quarter of 2020 and discuss our outlook for the full year.

In the first quarter of 2020, we achieved quarterly revenue of $128.1 million, an increase of $20.7 million or 19.2% compared to the first quarter of 2019. This is primarily attributable to a $14.7 million increase in colocation revenue and a $6.2 million increase in connectivity revenue.

Our Q1 2020 revenue includes $4 million in nonrecurring fiber revenue related to a joint fiber build and IRU transaction with a strategic cloud customer. 56% of the year-over-year revenue growth in Q1 2020 resulted from new customers who initiated service during the past 12 months, while 44% of the revenue growth came from customers who have been with Switch longer than 1 year. More than 94% 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 first quarter of 2020 was $101.2 million compared to $86.5 million in Q1 of 2019, an increase of 17%. Connectivity revenue in Q1 of 2020 was $25.2 million, increasing 33% compared to $19 million in the same period in 2019. Excluding nonrecurring fiber revenue, year-over-year growth in Q1 connectivity revenue was approximately 11%. Other revenue, including professional services, accounted for $1.7 million in Q1 of 2020 compared to $2 million in the same period of 2019.

As of March 31, 2020, Switch had approximately 16,900 billing cabinet equivalents, generating approximately $2,400 per cabinet equivalent in monthly recurring revenue. We had more than 7,500 total cross-connects as of March 31, and cross-connects accounted for 3.7% of total revenue in Q1 of 2020, consistent with the year ago period.

Now turning to bookings. During Q1 of 2020, we executed 560 contracts comprising approximately 7 megawatts, representing total contract value of $73 million and annualized revenue of $18 million at full deployment, inclusive of both renewals and sales of incremental services.

In the first quarter, we signed $10 million of incremental annualized recurring revenue, inclusive of $6 million in incremental bookings from existing customers and approximately $4 million from new logos. As of March 31, 2020, our booked not billed backlog stood at $24 million in aggregate annualized revenue, including contractual ramps and contracts yet to commence billing. We expect our backlog to contribute approximately $7 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 Q1 of 2020 at 0.4% compared to 0.1% in 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 $9.5 million in Q1 of 2020 compared to the year ago quarter, primarily due to increases in depreciation and costs related to the aforementioned joint fiber project.

Excluding depreciation, amortization and equity-based compensation expenses, our Q1 2020 adjusted gross profit increased 19% year-over-year to $92.8 million. A reconciliation of gross profit to adjusted gross profit is provided in the appendix section of our investor presentation.

SG&A expenses in Q1 of 2020 were $40.1 million compared to $34.3 million in Q1 of 2019. The increase in SG&A was primarily attributable to professional fees and higher labor costs. We expect both of these to decline as a percentage of revenue in subsequent quarters of 2020.

Income from operations in Q1 of 2020 increased 34% to $21 million compared to $15.7 million in Q1 of 2019. The growth in operating income was primarily attributable to an $11.2 million increase in gross profit, offset by a $5.9 million increase in SG&A costs.

Interest expense increased by $0.3 million to $7.4 million in Q1 of 2020, primarily driven by higher debt balances on our revolver. As of March 31, 2020, we had $583.5 million outstanding on our term loan and $240 million drawn on our $500 million revolver.

We reported a Q1 net loss of $3.5 million compared to net income of $3.8 million in Q1 of 2019. Net loss in the first quarter of 2020 includes a $17.6 million loss on interest rate swaps, which had a $0.05 per diluted share impact on our reported net loss per diluted share of $0.01.

Adjusting for the loss on interest rate swaps, our net income per diluted share is $0.04. We provide a full reconciliation of GAAP net loss attributable to Switch, Inc. to adjusted net income attributable to Switch, Inc. in the financial tables of our Q1 2020 earnings release available on our Investor Relations website.

Adjusted EBITDA totaled $61.5 million for Q1 of 2020 compared to $53.8 million in Q1 of 2019, reflecting year-over-year growth of 14.2%. Adjusted EBITDA margin for Q1 of 2020 was 48%, decreasing from 50.1% in the year ago period, primarily due to the previously mentioned increases in fiber build expenses and SG&A. We anticipate that adjusted EBITDA margins will normalize toward the historical 50% range for the remainder of this year.

Capital expenditures in the first quarter of 2020 were $80.9 million compared to $45.9 million in the same quarter of 2019. Comparisons to the first quarter 2019 capital expenditures are skewed by the heavy rainfall that delayed construction early last year at the Keep Campus in Atlanta. Investment in the Core and Citadel Campus locations also increased compared to the year ago quarter, driven by accelerated demand in both of these PRIMEs, in addition to site work for LAS VEGAS 14, 15 and 16, as we continue expanding in the Core Campus. Investment in the Pyramid Campus declined year-over-year as we finalize tenant improvements for colocation space in Michigan.

Maintenance capital expenditures were $1.3 million for the first quarter of 2020 or just 1% of revenue compared to $2 million and 1.9% of revenue in the same quarter last year. Growth CapEx for data center construction and improvements was $79.6 million for the first quarter of 2020 compared to $43.9 million in the same period last year. As of March 31, 2020, the Switch PRIMEs had capacity for 23,300 cabinet equivalents within our open sectors. This reflects a sequential increase of approximately 1,900 cabinet equivalents due to the opening of new sectors in the Core, Pyramid and Keep Campus locations in Q1 of 2020.

At quarter end, 88% of our total cabinet inventory was committed under contracts compared to 91% in the prior quarter and 89% in the year ago quarter. The Q1 2020 utilization rates at these PRIMEs based on committed cabinets and currently available colocation space were approximately 93%, 84% and 71% at the Core Campus, the Citadel Campus and the Pyramid Campus, respectively, compared to 94%, 75% and 97% in the prior quarter. Committed utilization at the Keep Campus was 21% at March quarter end based on sellable cabinet inventory of 780 in Sector 1. The sequential decline in contracted utilization rates was driven by the previously mentioned 1,900 cabinet increase in new sellable inventory. At full build-out, including ATLANTA 1, our existing constructed facilities 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 March 31, 2020, the company's total debt outstanding net of cash and cash equivalents was $813 million, resulting in a net debt to last quarter annualized adjusted EBITDA ratio of 3.3x, down slightly from 3.4x in the prior quarter. As of March 31, 2020, we had liquidity of $324.7 million, including cash and cash equivalents and availability under our 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 first quarter of 2020, our members redeemed 4.6 million common units, resulting in the issuance of an equivalent number of Class A common shares. As of March 31, 2020, there were 241.4 million total shares outstanding, including 95 million Class A public float or 39% of the total shares outstanding. April redemptions of common units totaled $7.9 million and an additional $3.5 million were exchanged on May 7, 2020.

In total, during the second quarter, Class A shares increased by 11.4 million. In July, we expect an additional 2.5 million units to be redeemed, bringing our public float to approximately 109 million shares or 45% of total shares outstanding. Beyond July, we expect to have 3 additional redemption opportunities during 2020. We believe it is in shareholders' best interest to accelerate the conversion of private units to public float, creating greater liquidity in our stock and expanding our institutional investor base.

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 an adjusted EBITDA margin of 49.8% at the midpoint; and 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.

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, our customers, our partners and our shareholders for their continued support of Switch.

We would now like to open the line for questions.

(Operator Instructions) The first question comes from Richard Choe with JPMorgan.

It seems like you're having a nice continued pace of signings in -- for total contract value. Can you talk about the pipeline of deals? You said it was robust. But have you seen any change from the COVID-19 impact in recent weeks? And I have a follow-up.

Richard, this is Thomas. The answer is no. We have seen no change in our pipeline as a result of COVID-19. We continue to see a large number of customers that are looking to do substantial deployments with us. As you can see, we sold a number of 22 new logos this quarter, including 5 more in Atlanta. So we continue to see a lot of sales activity despite the COVID-19 pandemic. That has most largely affected smaller companies versus the larger companies that we tend to do most of our business with. So Gabe, if you have any additional comments, I'd love to hear them. But the most part, we are very confident in our pipeline for the balance of 2020.

And yes, Richard, I would say that, through April, we've seen our signings continue on pace through the month of April, and so we are not seeing any slowdown in our sales activity at this point.

And to follow up on that, it seems like your new logo momentum is actually gaining. Can you talk a little bit about how that's growing the new customer business? Is it the sales force? Is it the added campuses or something?

Well, a lot of it is the initiatives that we passed in the prior year, 2019 and before, bringing on our S3 sales force, our commissioned sales force. They have begun to yield results. In addition to that, we continue to be prolific in our website presence as well as we are now doing virtual tours as a way to pivot because people are not able to visit our facilities as easily as they were in the past. So we have moved with the dynamics of the market, and we have been able to leverage technologies in order to sustain our growth and increase our sales capacity.

Our next question come from Erik Rasmussen with Stifel.

We have a little bit of an echo here, but I'll get through that. It looked like you had accelerated some of the pacing of the new customer signings in Atlanta and added 5 new logos. Can you just talk about the dynamics in that market? We have seen some activity there. But how do you see your sort of competitive position evolving? And then just how that facility is shaping up in terms of deal flow that you see and line of sight throughout the year?

Yes. We already have -- we've just opened that facility. It has its grand opening coming up later this year, which has been postponed as a result of COVID. We have already sold 21% of the available space in that facility. We have 15 logos in that facility. We're very, very pleased with the momentum that's been going on there. Nobody else has a Tier IV certified data center there. Nobody else has a Class 5 data center there. So we are a distinct and unique deployment in that market, and we're able to offer a more resilient product at the similar price point that the peers are being offering -- are offering their products. So we have seen a lot of interest in that market. And unlike other markets where we have been market makers, in Atlanta, there is already some level of market. And so we are able to capitalize on that existing momentum to drive our products forward. And Gabe, is there any other thing you want to add to that?

I'll also add that of the 15 logos, a few are Atlanta-centric logos, but the majority are not. And that's exactly what we expected out of that market. We view Atlanta as a southeast regional hub for Switch, and we're seeing uptake from folks that are in the Atlanta market. We're also seeing it utilize from existing customers that are using Atlanta as a disaster recovery site for Michigan and elsewhere. So it's developing exactly as we expected, with both a mix of the existing customers and new logos, serving the entire Southeast region. It's not an Atlanta-centric market play. It really is a regional hub for us.

Great. And then just maybe my follow-up. Can you just talk about what you're seeing on the enterprise side? We did discussions with customers, how do you see the year shaping out in terms of activity? Are you seeing any potential for better leasing versus prior expectations? And then with that, has COVID-19 changed the discussion a little bit in terms of potentially seeing some pull-ins because of that?

So good question, Erik. The -- we have not seen any slowdown as a result of COVID. There has been some changes, as I stated, in the dynamics and the way we do tours. Though with our large enterprise customers, they know our product, they know what to expect and they are comfortable moving forward with us even if the ability to visit our centers directly has been impacted. So we have reaffirmed our guidance, as you heard earlier on this call, and we believe that we will hit our guidance. So we are not making any changes to the guidance. And therefore, I would take that away as some statement of how we feel we've been impacted by COVID, which is minimally.

I will also say that a couple of the larger RFPs that we've been working on are actually picking up speed because the COVID pandemic has brought to light infrastructure weaknesses amongst some of the enterprise clients, where they now have to deal with an entire workforce working remotely, and they're realizing that their infrastructure just isn't capable of supporting it. So these folks were in the process of adjusting their technology stack for the future as it was already in progress with RFPs that were in the market. But now they're suddenly exposed, and they're actually picking up speed and urgency on those RFPs. But there's also a lot of uncertainty, and no one knows how long this is going to last. And as we start coming out of the market shutdowns and start reopening, there really is uncertainty as to how quickly things are going to open up. And that's why we're keeping our guidance where it is despite our strong performance in Q1 because we simply don't know what the rest of the year is going to bring.

Our next question comes from Ari Klein with BMO Capital Markets.

Just following up on the Atlanta question. It looks like, if you look at the development schedule, you have quite a few cabinets coming on later this year and late next year. How much of that is based on what you're seeing in the pipeline and your expectations for that market?

We have a large number of customers in our pipeline, and we continue to close those customers. So we are building as fast as is prudent for the pipeline that we have in our queue. So we always try to marry our construction against actual customer demand and anticipated customer demand, so that we don't get too far ahead of a build in advance of the customer need. And we, over the last '19 years, have gotten pretty good at rightsizing our infrastructure to the growth of our customers. And so the builds that you are seeing are representative of what we feel is going to be the customer uptake in that facility, and we feel very strongly about that uptake. We see a lot of activity going on in Atlanta, and we see a lot of closings in Q1 continuing to go on in Atlanta. So we feel very bullish about that area or that region of the United States and the uptake that it's going to have in terms of customer usage.

And then just on the new logo front, you mentioned going to virtual tours. How much more challenging is it to attract new logos in the current environment? Is that one area that you expect to see maybe a slowdown related to COVID?

Actually, as Gabe said, we've seen an increase in requests for proposals, RFPs, and request for information, RFIs. So I haven't seen or we haven't seen a very significant impact to our customer movement as a result of COVID-19. If this thing sustains for another 6 months or so, who knows, there is some uncertainty in the market. But as we sit right now, we've been very fortunate and that we continue to see robust customer demand and a lot of customer activity.

Our next question comes from Nate Crossett with Berenberg.

Have you taken any debt reserves for nonpayment? Maybe you can just give us a sense for any tenant stress in the portfolio. Churn was a bit elevated, but still very low. Is there anything to note there?

I'll turn this one over to Gabe, but a couple of comments first is, we've had fewer than 5% of our customers inquire about any payment relief. And the formal request for payment flexibility has impacted less than 3% from MRC. So we -- Gabe, do you have any further color you want to provide on that?

Yes. We take our normal debt reserves. We look at those each quarter. There was a new accounting pronouncement that went into play in Q1 of 2020 that changed a bit of the way companies have to calculate their debt reserves, and that's fully baked into our financials. As Thomas said, we've had relatively few inquiries about any sort of financial relief. But our position is this. We have a strong balance sheet. We have liquidity. We want to work with our customers wherever possible to make sure that they come through this pandemic in a way that's healthy for the long-term for them, healthy in the long-term for us. We haven't asked any of our vendors for any sort of payment relief because we have liquidity, and we want to make sure the vendors are there for us after this pandemic subsides because we want our entire ecosystem to remain strong. Wherever possible, we have been working with customers to give them some short-term payment relief in exchange for additional commitments to Switch, and we've been successful in doing that. As Thomas said, it affects a very small portion of our monthly recurring revenue, and these are clients that we feel will be with us for the long term, and we'll come out of this in a healthy way.

Okay. That's helpful. And then I just wanted to ask about lease expirations. I don't think you guys gave a schedule, but maybe it would be helpful just to get a sense how much is up for renewal this year, and what the spreads kind of look like?

Yes. I'll take that. We really don't put out a schedule because we have 1,000 clients. Remember, we're a retail colocation company. We're not really doing large wholesale leases. We are a retail colocation company with average contract lengths of 3 to 5 years, typically 4 years on average. So in any given year, you can expect around 25% of our leases to come up for renewal, and they're actually licenses, not leases, to come up for renewal. And because of our low churn, you can see that essentially everyone does renew. I will make a comment on our churn this quarter because it is funny that it is -- it was remarked that it is elevated at 0.4%. It's still exceptionally low. The churn this quarter really consisted of 2 clients. One was an online dating service that was purchased by an international company, and they took their deployment in-house overseas. And the other was a technology company that decided to exit the private cloud business. So both were business decisions and really had nothing to do with our performance or any competitive issues.

Our next question will come from Frank Louthan with Raymond James.

On the nonrecurring revenue in the quarter, just want to check, was that contemplated in the guide? And then just to confirm that the guidance doesn't include any known -- rent roll downs or other pricing adjustments, things like that, coming up just later this year from customers that you're aware of?

Go ahead, Gabe. No. I'm just going to say that the $4 million of fiber revenue was baked into the FY '20 financial guidance, but we weren't certain of the timing. And previously assumed it would be more evenly distributed throughout the year, the reason for that assumption, I'll let Gabe talk to.

Yes. We did bake that in. And that really is simply a result of an accounting change. Prior to last year, any sort of an IRU was accounted for with the build cost being capitalized and then taking the revenue over the life of the IRU. Now with the new leasing standards under ASC 842, we were required to record that as a sales-type lease, which means as we build it and turn it over to the client, we record all of the revenue and all of the costs all at once. So it was baked into our guidance. We don't provide quarterly specific guidance, but it was baked into our annual guidance. And in this quarter, we were able to construct faster than we originally anticipated. So we booked the revenue, and we also booked the cost, which is part of the reason that our margins were a bit lower than our typical in Q1 because this really was a construction project.

Okay. Great. And then just as a follow-up. Talk to us a little bit more about the edge product. What do you see as the TAM for that product? And is that something you might consider licensing similar to how you've done licensing other technology?

So we're not putting off financials on the edge product yet. There is obviously a very large TAM for edge. It is something that we've identified as a significant market and a request that we received from a number of customers to have something that is more proximate to their locations or to their customer base. And it is partly our response to that demand and that request by customers that we are providing that. There are several use cases for the edge customer product. We have interest from the transportation, logistics industries, telecom, media, obviously, cloud and latency sensitive applications, such as e-commerce and electronic gaming, which is particularly hot right now, given everybody doing their social distancing.

So we're very excited about being able to bring a Class 4 offering because one of the things -- the 2 things that tend to come up when we talk to people about edge, one, is they're concerned about resiliency, that they don't have a container just sitting in -- on a very hot area in the middle of nowhere, but the -- versus resiliency. And then the second is concern about security. And we feel that we have addressed both of those items and concerns that customers have brought. And then of course, we will leverage Core to add connectivity to those facilities as well, which makes them a very unique offering and something that we feel is the next step in advancing the customer and what they can do on the edge.

And guys, I'll jump in. We're really excited about the edge product. Some of you, I think, on the call, may have seen it already if you've toured recently because it is part of our tour path at this point. And those of you that know us well, know that Switch builds data centers differently. Rob designs data centers differently. They operate differently. They have the best-in-class resiliency, best-in-class security, best-in-class ability for high-density compute. And he's taken all of that design and putting into a very, very unique edge design that is transportable in air cargo containers, fully modular, fully scalable, cost-effective, has system + system resiliency, security and the ability for high-density compute.

So there have been a lot of announcements about folks putting edge containers out there, but this is not like that. This is all of Switch's technology scaled down to an edge facility. It's unlike anything that's been announced or seen. And please go to our website because on our website, you'll see the information on our edge facility, videos of the actual facility, what it looks like, how it was built, how it can be scaled up. We're really excited about this opportunity. Also, you'll see information on the Switch Century security robot that we've designed, and we designed that really to solve a need that we had because it's tough getting security officers to work graveyard shifts at Switch and elsewhere. And so we designed this technology to solve the need that we had, and the folks that have seen it have said, "Hey, we could really use that as well." So we're really excited about that opportunity as well as we are about the Switch VAULT, which is a really unique storage concept that is complementary to cloud storage. So please visit our website. All of the information on those 3 new initiatives are on the website.

Yes. I will echo Gabe's sentiments that there are videos as well as text on the website for edge, Century and VAULT. Please do go visit those. The videos, as you've seen other Switch videos, are very well produced, very well put together and informational. So please go and learn more about these products on our website.

Our next question comes from Michael Rollins with Citi.

Two follow-ups, if I could. The first one is on the connectivity business. And would you expect a pickup in connectivity as customers are trying to respond and build capacity in the current climate? And on the edge data center concept, is there also a multi-tenant option versus a single-tenant option that you're working on? Because I think as people think about the edge, they're also thinking about how you can get multiple tenants closer to the eyeballs.

No. All right. So Mike, thank you. I'll take 2 of these questions, and then I'll let Gabe provide further illumination. On the connectivity. Yes, there are more people who see connectivity. That is impacting the telcos even more than it's impacting us. The end user connectivity, which is what we're seeing, is out at individuals and homes and various smaller deployment locations rather than offices. So that has some impact on us, but it hasn't been material.

The second thing is to edge. Everything that we do is targeted towards multi-tenant occupancy. We don't usually lease whole buildings to customers or even whole sectors to customers. So on the edge deployments, we have absolutely designed those so that they are set up for multi-tenant occupancy. There are multiple pods or groups of cabinets that you can deploy in. And as Gabe said, they are scalable. So we can build one that is, say, 24 cabinets, and we could build one, let's put another section on there, it becomes 48, and so on and so forth. So these are scalable data centers that as we have an initial deployment put down, we filled that with tenants and customers, which is usually more than one. And then we will build that -- building out and continue to add more capacity on that facility and add incremental number of tenants.

So it is not been designed or intended to be for a single tenant, though it can be used for that purpose. We plan to put multiple tenants in each location, which is part of the reason that the logistics, the security and maintenance, et cetera, were so complicated to figure out and why Rob Roy really put himself to the test and came up with a solution that combines VAULT, security and edge to build the best and most robust, most resilient data center, he possibly could on the edge that would deliver a good ROI for the investor base. And Gabe, I don't know if you have any more color you want to add to that?

On the connectivity side, Mike, I would add that the shutdown really didn't occur until mid-March. So there really wasn't a significant impact on connectivity usage that we saw in Q1. There is likely to be an uptick on usage in Q2, and we do charge connectivity customers based on usage, but we don't have a lot of data on that yet because the telecoms bill us in arrears, so we're just getting that information out.

And just a follow-up, are your customers giving you indications that they want to see a fifth PRIME location for you somewhere in the Americas?

No. The answer to that is really -- we haven't seen customers asking for a fifth PRIME location, and remember, as Gabe mentioned earlier in this call, the PRIME is sort of regions inside the United States rather than particular locations. And what we can do now is we can reach all the metropolitan hubs in less than 10 milliseconds, which is what customers are looking for in connection with their PRIME deployments. Their PRIME deployments can be anywhere. What they want to do is put their PRIME deployments in the place where there is the cheapest amount of power, the lowest cost of connectivity, the lowest amount of taxes and the lowest cost of operations. And we have chosen those locations to put our 4 PRIMEs in, while also making sure that they are 100% green and located in areas that are sub-10 milliseconds to all the metropolitan areas. So with those criteria being met, we haven't had customers ask us for an additional PRIME location. What they have been asking us for is an edge hub spoke-type deployment, and that is what we are addressing with our Switch facilities.

Our next question will come from Sami Badri of Crédit Suisse.

I know you already kind of discussed this a little bit earlier on the call. Given the average size of your customers, you generally work with larger, more established entities and not small and midsized businesses. But did any of your customers actually ask for payment forbearance or deferrals or anything like that? And if they did, do you have an idea on maybe quantifying what percentage of revenues, what percentage of your customers actually requesting something like that?

Yes. I'll take that. I had talked about earlier in the call, the folks that have asked for some sort of payment relief amount to less than 3% of our monthly revenue. We are here in Las Vegas. You guys know our business. Some of our business is casino and hospitality based, but that's less than 4% of our revenue. And wherever possible, we've provided some form of payment relief in the form of extended payment terms for 2 or 3 months until we see a reopening, in exchange for an extended commitment to Switch. But it's been minimal.

Got it. And then the -- my second question has to do with the robotics offering that you guys are discussing or you mentioned earlier in the call. Is this something that a data center operator or an edge company can just subscribe to like the robotics piece? Or do they have to actually deploy into your actual edge micro or smaller data center sites that come with the robotics capability?

No. Sami, that's a great question. And we tried to bring this up but this is a new product, which initially envisioned this robotics as being augment to the security systems for Switch EDGE. But we had so many customers asking us, "Hey, can we deploy this at our facilities or at our industrial locations?" That we said, absolutely. So that allows us to scale up the robotics and that will generate additional revenue and also drive down costs and allow for additional research and development, and Rob to do even more with these robots than he already has. So they are absolutely available to those who don't have colocation with us and can be deployed in non-colocation environments just as effectively as they can be deployed in colocation-type facilities.

(Operator Instructions) Our next question comes from James Breen with William Blair.

Just on the connectivity side, sort of the telecom side. Obviously, we saw a lot of internet traffic growth in the quarter and upticks from a lot of bandwidth-related companies. Can you just talk -- give us a little color on what you saw there, especially as you sort of came out of March into April in terms of need to some of your customers in connectivity?

Yes. I'll let Gabe talk to this. But one thing that -- just quickly. As Gabe mentioned, there is a lag in the connectivity billing. So customers will use and we'll get the invoices 30, 45 days after the usage has occurred. So there is some lag in us knowing how much more they have used. We expect that there will be some uptake in the connectivity. How much that will be, we will know once the invoices start coming in from the carriers. Anything to add there, Gabe?

And I'll add to that -- yes. In April, we actually -- I mentioned our April bookings have been on pace with our historical averages. We did see an uptick in telecommunications bookings in April. We're not sure how that will translate into May and beyond, but we definitely saw an uptick in April.

And anything from a cross-connect perspective inside the data centers that you saw change on a relative basis as things started to change in March?

Yes. If you look at our investor deck and what I mentioned in my remarks is we're up to over 7,500 billing cross-connects now. I think the last number that we provided to the market was 6,500. So that's a nice increase, and we're continuing to see that momentum.

This concludes our question-and-answer session, and the conference has also now concluded. Thank you for attending today's presentation. You may now disconnect.