Prospectus Summary
PROSPECTUS SUMMARY This summary highlights information incorporated by reference or contained elsewhere in this prospectus and may not contain all the information that is important to you. You should, therefore, read carefully all the information contained in or incorporated by reference in this prospectus, including that under “Risk Factors,” “Prospectus Summary—Summary Consolidated Financial Information,” “Selected Consolidated Financial Information” and our consolidated financial statements and the notes thereto in this prospectus for a more complete understanding of this offering and our business. Unless otherwise indicated, all information in this assumes that the underwriters will not exercise their overallotment option. In this prospectus, unless the context suggests otherwise, we use the terms “Switch & Data,” “Switch and Data,” “we,” “us,” and “our” to refer to the predecessor, prior to the merger, and we also use such references to mean the successor, including its predecessor and its consolidated subsidiaries, following the merger.Business Overview
We are a leading provider of network neutral interconnection and colocation services primarily to Internet dependent businesses including telecommunications carriers, Internet service providers (“ISPs”), online content providers and enterprises. We provide our services through 34 reliable and secure facilities in 23 markets, the broadest network neutral footprint in North America, including our facility in Palo Alto, one of the first commercial Internet exchanges in the world. Our high network densities, enabled by approximately 17,000 interconnections between our customers, have created a network effect. Combined with our broad geographic footprint, this network effect contributes to the growth of our customer base and revenue. As a result of the operating leverage inherent in our business model, we believe incremental revenue will increase operating cash flow.
Our network neutral business model is a primary differentiating factor in the market. We do not own or operate our own network, and as a result, our customers are able to connect directly to their choice of telecommunications service providers in an open and competitive marketplace. These service providers include tier 1 network service providers (“NSPs”), ISPs, tier 2 providers and international telecommunications carriers. We believe the ability to connect directly with telecommunications service providers and each other enables our customers to reduce network transit costs, to improve the performance of their services and to reduce their time to market.
We offer interconnection services, which include cross connect and Internet exchange services, and colocation services, which include space and power for our customers’ networking and computing equipment. Our diverse customer base includes some of the world’s largest NSPs, Metropolitan Service Operators (“MSOs”), ISPs, online content providers and enterprises. Our North America based telecommunications carrier and ISP customers include AboveNet Communications, AOL, and Qwest and our international carrier customers include BT, ChungHwa Telecom, Singapore Telecommunications, Telecom Italia and VSNL. Our online content provider customers include DirecTV, Electronic Arts, Google, LimeLight Networks, Yahoo! and YouTube. Our enterprise customers include Internet dependent businesses, including Amazon.com and Factset, and other enterprises such as GlaxoSmithKline, Hewlett Packard, Microsoft, and VeriSign.
We believe our broad geographic footprint represents a competitive advantage. This footprint includes facilities in 14 of the 15 largest Metropolitan Service Areas (“MSAs”) in the U.S., more than any of our network neutral competitors. Our presence in these markets enables us to serve customers in locations where Internet traffic is most concentrated and to serve customers who require a broader geographic footprint. As of June 30, 2006, of our top 100 customers as measured by revenue, 74 utilize our services in multiple markets.
Since our founding in 1998, we have increased our revenue through a combination of organic growth and acquisitions. Our customer base provides a platform for organic growth. Sales to existing customers in 2005 comprised approximately 80% of incremental sales of our interconnection and colocation services. Since March 2003, we have completed five acquisitions and integrated 12 facilities into our operations. These acquisitions have increased our network densities, expanded our customer base and broadened our geographic footprint.
Industry Overview
Monthly Internet traffic in the U.S. is projected to grow at a 34.4% compound annual growth rate (“CAGR”) from 2005 to 2008 according to the Telecommunications Industry Association. Growth in Internet traffic is being driven by increasing broadband penetration, the proliferation of bandwidth intensive services, including Voice-over-IP (“VoIP”), online gaming, streaming video and audio and Internet protocol television (“IPTV”), and the maturity of online business models.
The various networks that constitute the Internet initially connected with each other at public network access points, or NAPs. The inability of these NAPs to handle the increase in commercial Internet traffic led to the creation of network neutral Internet exchanges and network neutral interconnection and colocation facilities.
Interconnection Services
Interconnection services enable businesses to exchange network traffic through direct connections with each other or through peering connections with multiple businesses. Growth in Internet traffic is leading to increasing demand for interconnection services, as NSPs, ISPs and other Internet dependent businesses require additional connectivity to efficiently exchange increasing amounts of network traffic. Online content providers and providers of other bandwidth intensive services, in particular, require high densities of interconnections and scalability of a service provider’s interconnection infrastructure in order to optimize their services. For these businesses, direct interconnection with each other as well as with multiple NSPs within a facility reduces transit costs, increases the performance of their services and reduces their time to market.
Colocation Services
Growth in Internet traffic is also leading to increasing demand for colocation services. A colocation facility is typically located in close proximity to telecommunications service providers and houses networking and computing equipment such as switches, routers, fiber optic transmission gear and servers for businesses that need to connect with each other and the Internet. The highly controlled environment required for this equipment is characterized by redundant power infrastructure, reinforced floors, sophisticated security and monitoring, and reliable heating, ventilation and air-conditioning (“HVAC”) systems. Due to the high cost of building and maintaining colocation facilities, businesses often outsource these services to colocation service providers.
Industry Trends
Several favorable trends in our industry are driving demand for our network neutral interconnection and colocation services. These trends include the following:
Growth in Internet Traffic. Growth in Internet traffic is being driven by increasing broadband penetration, the proliferation of bandwidth intensive services and the maturity of online business models, among other factors.
Stabilizing Supply of Network Neutral Interconnection and Colocation Capacity. From 2001 to 2004, the network neutral interconnection and colocation industry underwent a period of consolidation and rationalization, which significantly reduced the amount of capacity in many markets. The reduced capacity, along with increasing demand for network neutral interconnection and colocation services is driving revenue growth for the providers of these services and has led to stabilization in the pricing environment.
Increasing Power and Cooling Requirements. While networking and computing equipment manufacturers are continuously reducing the size of the equipment they manufacture, the reduced size has generally not translated into reduced energy consumption or reduced heat generation. As a result, customers of colocation services are requiring more electricity to power, and additional infrastructure to cool, their networking and computing equipment.
Adoption of Advanced Networking Technology. As broadband penetration increases and telecommunications carriers upgrade to next generation digital networks, new Internet-based services are being developed for both consumers and businesses. These services typically require more bandwidth and feature networking technologies, such as 10 Gigabit switching, that enable more efficient interconnections through higher packet transfer rates.
Growing Awareness of Business Continuity and Disaster Recovery Planning. A growing awareness of business continuity and disaster recovery planning is leading businesses to store an increasing amount of data in secure, off-site facilities that enable them to access this data in real-time. Interconnection and colocation service providers address this need through the use of highly secure and redundant facilities.
Our Competitive Strengths
We believe that our key competitive strengths position us well to capitalize on the growing demand for interconnection and colocation services. These competitive strengths include the following:
Network Neutral Business Model. We do not own or operate our own network, and, as a result, our customers are able to connect directly to their choice of multiple NSPs and ISPs in an open and competitive marketplace. We believe this enables our customers to reduce network transit costs, improve the performance of their services and reduce their time to market.
High Network Densities. We have approximately 17,000 interconnections between our customers. Our high network densities create a network effect, which provides an incentive for existing customers to remain within our facilities and for new customers to join them.
Broadest Network Neutral Geographic Footprint. Our geographic footprint includes 34 facilities in 23 markets in North America, including 14 of the 15 largest MSAs in the U.S. Our presence in these markets enables us to serve customers in locations where Internet traffic is most concentrated and to serve customers who require a broader geographic footprint.
Robust Facilities and Operational Excellence. We believe our ability to meet high service levels is attributable primarily to the quality of our facilities and the capabilities of our operations personnel. We are able to provide a 99.999% uptime guarantee as part of our service level agreements with our customers.
Engineering and Networking Expertise. We have gained significant engineering and networking expertise throughout our history, including through our ownership and operation of PAIX, one of the first commercial Internet exchanges. This expertise enables us to design facilities which proactively address the evolving needs of our customers.
Our Strategy
Our objective is to be the leading provider of network neutral interconnection and colocation services in North America. The key elements of our strategy are to:
Focus on our Top 10 Markets. We derive the majority of our revenue from our top 10 markets, which are New York City, the Northern Virginia Area, the San Francisco Bay Area, Seattle, Dallas, Philadelphia, Toronto, Atlanta, Chicago and Los Angeles. Our top 10 markets are those markets which we believe to be most important strategically to our business. Since January 2005, we have increased our gross square footage in these markets by 29%, and have augmented the power and cooling infrastructure in many of our facilities. We intend to continue to expand capacity in our top 10 markets to meet the increasing needs of our existing customers and to serve new customers.
Leverage Network Densities. By increasing network densities within our facilities, we are able to further enhance our value proposition to our customers. We target bandwidth intensive customers who require facilities with high network densities to optimize their business models and improve the experiences of their end users. We believe that leveraging our network densities will enable us to continue to attract and retain customers who derive the greatest value from our interconnection services.
Strengthen Existing Customer Relationships and Reach New Customers. We are working to strengthen relationships with our existing customer base, develop relationships with customers in emerging, bandwidth intensive segments, and invest in new sales channels that incorporate our services as part of a broader communications solution. We are using a combination of our national account sales managers, an inside sales group and relationships with systems integrators to implement this strategy.
Pursue Selective Acquisitions. Our acquisitions have increased our network densities, expanded our customer base and broadened our geographic footprint. We believe that industry consolidation opportunities remain, and we intend to continue to pursue selective acquisitions.
Corporate Reorganization
In connection with this offering, Switch and Data, Inc., a Delaware corporation, the shares of which are being sold to the public in this offering, will be the successor to Switch & Data Facilities Company, Inc., our current holding company, following a reorganizational merger that will take place before the completion of this offering. As part of the merger, Switch and Data, Inc., will change its name to Switch & Data Facilities Company, Inc. The certificate of merger will be filed, and the merger and reorganization will become effective, immediately prior to the closing date for the sale of the shares in this offering. The reorganization will include the following:
See “Certain Relationships and Related Party Transactions—Corporate Reorganization.”
Company Information
We were incorporated on July 31, 2006 as a Delaware corporation. Our predecessor, Switch & Data Facilities Company, Inc., also a Delaware corporation, was incorporated on March 15, 2000. The original predecessor of Switch & Data Facilities Company, Inc. was organized in Delaware on March 10, 1998, as Switch & Data Facilities Company, LLC. We currently conduct certain operations through our wholly owned subsidiaries. Our principal executive offices are located at 1715 North Westshore Boulevard, Suite 650, Tampa, Florida 33607 and our telephone number is (813) 207-7700. We maintain a website at www.switchanddata.com where general information about our business is available. Information contained on our website or that can be accessed through our website is not part of this prospectus, and investors should not rely on any such information in making the decision whether to purchase our common stock.
The Offering
The number of shares of our common stock to be outstanding after this offering is based on the number of shares outstanding as of , 2006, after giving effect to completion of our corporate reorganization as described in “Certain Relationships and Related Party Transactions—Corporate Reorganization.” This information excludes shares of common stock reserved for issuance under our 2006 Stock Incentive Plan. Before we complete this offering, we will have outstanding options under our 2006 Stock Incentive Plan to purchase an aggregate of approximately shares of our common stock at an exercise price equal to the offering price set forth on the cover of this prospectus.
Assumptions Used in This Prospectus
Unless we otherwise indicate, all information contained in this prospectus assumes: