Prospectus Summary
PROSPECTUS SUMMARY This summary highlights selected information that is presented in greater detail elsewhere in this prospectus. This summary does not contain all of the information you should consider before deciding to invest in our Class A common stock. You should read this entire prospectus carefully, including “Risk Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our consolidated financial statements and the related notes included elsewhere in this prospectus, before making an investment decision.What We Are
Switch is a technology infrastructure company powering the sustainable growth of the connected world and the Internet of Everything.
Our mission is to enable the advancement of humanity by creating smart, resilient and sustainable infrastructure solutions that support the most innovative technology ecosystems.
Our Business
We believe the future of the connected world depends on the sustainable and cost-effective growth of the internet and the services it enables. Using our technology platform, we provide solutions to help enable that growth. We believe we are a pioneer in the design, construction and operation of some of the world’s most reliable, secure, resilient and sustainable data centers. Our advanced data centers are the center of our platform and provide power densities that exceed industry averages with efficient cooling, while being powered by 100% renewable energy. Two of our data centers are the only carrier-neutral colocation facilities in the world to be certified Tier IV Design, Tier IV Facility and Tier IV Gold in Operational Excellence. While these certifications have been the highest classifications available in the industry, we are building our current facilities to our proprietary Tier 5 Platinum standards, which exceed Tier IV standards. Our platform has powerful network effects and nurtures a rich technology ecosystem that benefits its participants. We further enhance these benefits as we innovate and expand our platform ecosystem. We currently have more than 800 customers, including some of the world’s largest technology and digital media companies, cloud and managed service providers, financial institutions and telecommunications providers.
Our patented data center designs have redefined traditional data center space and cooling, allowing our customers to achieve significantly higher power densities than may be available in traditional data centers. We build our facilities using Switch Modularly Optimized Designs, or Switch MODs. These designs allow us to rapidly deploy or replace infrastructure to meet our customers’ current and future data storage and compute requirements. We believe that the design of our data centers reduces our operational costs, minimizes investment risk and positions us to adapt as the Internet of Everything continues to evolve. Our technologies were all designed and invented by our founder, Rob Roy, and are protected by over 350 issued and pending patent claims. Since the opening of our first colocation facility, we have delivered 100% uptime across all of our facilities.
We presently own and operate three primary campus locations, called Primes, which encompass ten colocation facilities with an aggregate of up to 4.0 million gross square feet of space. These facilities have up to 415 megawatts of power available to them. Our Primes consist of The Core Campus in Las Vegas, Nevada; The Citadel Campus near Reno, Nevada; and The Pyramid Campus in Grand Rapids, Michigan. In addition, we recently purchased land to develop a fourth Prime, The Keep Campus, in Atlanta, Georgia. Our Primes are strategically located in geographies that combine a low risk of natural disaster, favorable tax policies for customers deploying computing infrastructure and low latency connectivity to major metropolitan markets, such as Los Angeles, San Francisco, Silicon Valley, Chicago, New York, Northern Virginia and Miami.
We believe our advanced platform, high level of service and competitive pricing create a disruptive platform with a powerful customer value proposition. Our data centers are designed for efficiency and allow our customers to achieve higher than industry-average power densities per cabinet with appropriate cooling, which we believe improves the performance and increases the life of our customers’ equipment. Our data centers are located in areas with tax benefits and access to competitively priced renewable power, both of which help further lower our customers’ total cost of ownership. Finally, our Combined Ordering Retail Ecosystem, or CORE, service aggregates our customers’ buying power, and can significantly lower many of our customers’ connectivity costs. We believe the power of our customer value proposition is evidenced by our customer loyalty and low annual churn rate. Moreover, we believe that our technologies, modular expansion and development approach allow us to earn attractive cash flow yields on our invested capital.
We have achieved significant growth in our business and have a track record of strong financial performance. On an annual basis, our revenue has grown from $166.8 million in 2013 to $318.4 million in 2016, representing a compounded annual growth rate, or CAGR, of 24.0%. We generated net income of $73.5 million and $31.4 million during the years ended December 31, 2015 and 2016, respectively, and $35.2 million and $35.3 million during the six months ended June 30, 2016 and 2017, respectively. Our net income for the year ended December 31, 2016 included a nonrecurring charge of $27.0 million related to our becoming an unbundled purchaser of energy in Nevada. In 2015 and 2016, we generated Adjusted EBITDA of $141.9 million and $153.2 million, respectively, representing an Adjusted EBITDA margin of 53.4% and 48.1%, respectively. During the six months ended June 30, 2016 and 2017, we generated Adjusted EBITDA of $77.6 million and $93.9 million, respectively, representing an Adjusted EBITDA margin of 50.1% and 51.8%, respectively. For a reconciliation of Adjusted EBITDA to net income, the most directly comparable GAAP financial measure, see “Selected Historical Consolidated Financial and Other Data—Key Metrics and Non-GAAP Financial Measures.”
Company Snapshot
The Network Effects Across our Technology Infrastructure Platform and Ecosystem
Our technology infrastructure platform supports a dynamic technology ecosystem bringing together enterprises and service providers, including cloud and managed services providers and telecommunications carriers. Participants benefit from the proximity to these service providers, customers and collaborators. Our platform and our ecosystem have independent but synergistic self-proliferating network effects that benefit participants as we continue to innovate, our platform evolves and our ecosystem grows. As our platform and customer base expands, we continue to realize growing efficiencies of scale, which allows us to provide higher value services to our customers.
Our Market Opportunity
Industry Background
Computational processing power continues to advance, and the amount of data that enterprises must manage, analyze and monitor is dramatically increasing. For example:
The rapid rise in data traffic and the world’s reliance on the internet to deliver services and information is making the collection, storage and transfer of data one of the largest challenges created by the internet. According to a white paper published by Cisco Systems, global internet traffic is expected to grow to 15.3 zettabytes in 2020, up from 4.7 zettabytes in 2015, representing a CAGR of 27%. Similarly, total data center storage installed capacity is expected to grow at a 35% CAGR to 1.8 zettabytes in 2020 from 0.4 zettabytes in 2015.
The power requirements and financial costs to support this growth in data, traffic and storage are massive and growing. Based on a 2016 U.S. Department of Energy report, U.S. data centers consumed approximately 70 billion kilowatt-hours of electricity in 2014, representing 1.8% of total energy consumption in the United States and equivalent to the amount consumed by 6.4 million average American homes. According to 451 Research, global data center colocation spending is expected to grow at a 12% CAGR from $29.7 billion in 2016 to $47.4 billion in 2020. At the same time, service provider data centers are only beginning to penetrate the data center market. International Data Corporation predicts that, by 2019, service provider data centers will account for only 28% of the worldwide data center capacity by square footage compared to 13% in 2016.
Industry Limitations
We believe that traditional data center infrastructure and the public cloud are not optimally suited to support the growing wave of mission critical enterprise data applications and increasingly powerful IT equipment due to the following beliefs:
in an environment that fosters communication, collaboration and innovation. We believe these elements will be difficult to find among traditional colocation data centers.
We believe a significant opportunity exists for data centers that can address the shortcomings of traditional colocation facilities, enterprise-built facilities and public cloud offerings.
Our Competitive Strengths
We believe we distinguish ourselves from typical colocation providers and other technology infrastructure companies through our competitive strengths, which include:
Purpose-Built, Highly-Resilient, Patented Solutions
Our critical infrastructure components are purpose-built to satisfy customers’ needs, drive efficiency and enable the deployment of highly advanced computing technologies, and our designs are protected by over 350 issued and pending patent claims. Our Switch MODs allow us to rapidly deploy or replace infrastructure as our customers’ needs evolve. We believe this reduces operational costs, minimizes investment risk and facilitates our ability to adapt as the Internet of Everything continues to evolve.
We have redefined data center space and cooling, allowing our customers to achieve higher power densities than they can in traditional data centers. Our power densities enable our customers to include more IT equipment per cabinet than in typical data center environments, which can reduce space requirements and the associated monthly costs and set-up costs and drive down in-cabinet latency. Additionally, we believe our ability to run more powerful cabinets at the appropriate temperature improves performance and extends the life of our customers’ equipment. This results in lower total cost of ownership for our customers.
Differentiated Technology Ecosystem Underscored by Powerful Network Effects
We operate a dynamic technology ecosystem that brings together a wide variety of parties. As we continue to innovate, we believe our customer value proposition strengthens, attracting new customers and encouraging existing customers to grow with us. This expanding, diverse mix of enterprise customers attracts cloud service providers, managed services providers and telecommunications carriers. This growing base of service providers, in turn, attracts other new enterprise customers seeking an environment with diverse, high-quality service providers and other innovative companies with which to collaborate.
Commitment to Sustainability
We were the only company recognized by Greenpeace in its 2017 Clicking Clean report as having a 100% clean energy index. We were also the only company in the report to receive an “A” grade in all five categories, and our energy index was higher than every other technology company identified in the report.
Through technological innovation, industry partnerships and public advocacy, we also support renewable energy production facilities. We believe our achievements in sustainability also drive customer demand. Deploying IT equipment within a Switch data center helps our customers achieve their green energy objectives and reduce their carbon footprint.
Our Strong and Trusted Brand
We operate under the slogan “Truth in Technology,” which embodies our belief that the product should be so amazing that nothing more than the truth is necessary to sell it.
Our reputation and track record of delivering 100% uptime across all of our facilities contribute to our efficient and robust organic growth. We have grown our customer base primarily through industry and customer referrals, and our customers tend to increase their spending with us over time, demonstrating the power of our brand and the quality of our solutions.
Visionary and Experienced Leadership Underscored by a Culture of Innovation and Execution
Our Founder, Chief Executive Officer and Chairman, Rob Roy, is a serial “inventrepreneur” who is a recognized expert in advanced end-to-end solutions for mission-critical facilities.
We have a deep and experienced senior management team comprised of 16 members, who collectively have over 135 years of experience at Switch, and 13 of whom have been with Switch for more than five years.
Our Growth Strategy
Our goal is to enable the current and future compute needs of our customers and to facilitate technological advancement through smart and sustainable infrastructure solutions designed to support the most innovative technology ecosystems in the world. To accomplish this, we plan to:
Our Technology
We design, construct and operate hyperscale data centers that address the growing challenges facing the data center industry. Key elements of our data centers include:
Modularly Optimized Design
The modular design of our data centers is enabled by our patented Switch MOD products. The Switch MOD architecture allows us to build colocation data centers of various sizes by combining multiple Switch MODs into a single structure. Combining Switch MODs allows for shared power sources and increased operational efficiency.
We can also build any of our Switch MODs in a single-user configuration. This provides an alternative to traditional colocation for customers with large, dedicated compute and data storage needs. Regardless of whether they are used for colocation or single-user purposes, we design, manufacture and operate our Switch MODs to meet our proprietary Tier 5 Platinum standard.
Power Density and Cooling Capacity
One of the most significant challenges faced by traditional colocation facilities is the need to increase their power density and cooling capacity to keep pace with the increases in IT equipment power requirements and heat exhaustion. We have developed patented technologies that have redefined data center space and cooling, allowing customers to deploy high density and scalable IT architectures to support demanding and mission critical workloads. Our data centers are designed to enable us to adapt to customers’ needs for increased power and densities without retrofitting our existing facilities.
Resiliency
Another challenge faced by all data centers is the ability to assure customers that their IT equipment remains operational despite utility power outages or other unplanned occurrences. Since the opening of our first colocation facility, we have delivered 100% uptime to our customers. To accomplish this, we have implemented a tri-redundant design, consisting of three separate power systems with no single points of failure. Additionally, each power system contains its own generators and uninterruptible power system. Effectively, one entire system can experience a failure without our customers experiencing any downtime.
Risks Affecting Us
We are subject to a number of risks, including risks that may prevent us from achieving our business objectives or that may adversely affect our business, financial condition, results of operations and prospects. You should carefully consider the risks described under the heading “Risk Factors” included elsewhere in this prospectus. These risks include, among others:
Summary of the Transactions
Prior to the completion of this offering and the organizational transactions described below, Switch, Ltd. was owned entirely by the Members and operated its business through itself and various wholly owned subsidiaries. Switch, Inc. was incorporated as a Nevada corporation on June 13, 2017 to serve as the issuer of the Class A common stock offered in this offering.
In connection with the completion of this offering, we will consummate the following organizational transactions:
Following this offering, Common Units will be redeemable at the election of such Members for newly issued shares of Class A common stock on a one-to-one basis (and their shares of Class B common stock or Class C common stock, as the case may be, will be cancelled on a one-to-one basis upon any such issuance). We will have the option to instead make a cash payment equal to a volume weighted average market price of one share of Class A common stock for each Common Unit redeemed (subject to customary adjustments, including for stock splits, stock dividends and reclassifications) in accordance with the terms of the Switch Operating Agreement. Our decision to make a cash payment upon a Member’s election will be made by our independent directors (within the meaning of the New York Stock Exchange, or the NYSE) who are disinterested.
Our corporate structure following this offering, as described above, is commonly referred to as an “Up-C” structure, which is often used by partnerships and limited liability companies when they undertake an initial public offering of their business. The Up-C structure will allow the Members to continue to realize tax benefits associated with owning interests in an entity that is treated as a partnership, or “passthrough” entity, for income tax purposes following the offering. One of these benefits is that future taxable income of Switch, Ltd. that is allocated to the Members will be taxed on a flow-through basis and therefore will not be subject to corporate taxes at the entity level. Additionally, because the Members may redeem their Common Units for shares of our Class A common stock or, at our option, for cash, the Up-C structure also provides the Members with potential liquidity that holders of non-publicly traded limited liability companies are not typically afforded. See “The Transactions” and “Description of Capital Stock.”
We will receive the same benefits as the Members on account of our ownership of Common Units in an entity treated as a partnership, or “passthrough” entity, for income tax purposes. As we redeem additional Common Units from the Members under the mechanism described above, we will obtain a step-up in tax basis in our share of Switch, Ltd.’s assets. This step-up in tax basis will provide us with certain tax benefits, such as future depreciation and amortization deductions that can reduce the taxable income allocable to us. We expect to enter into the Tax Receivable Agreement with Switch, Ltd. and each of the Members that will provide for the payment by us to the Members of 85% of the amount of tax benefits, if any, that we actually realize (or in some cases are deemed to realize) as a result of (i) increases in tax basis resulting from the redemption of Common Units and (ii) certain other tax benefits attributable to payments made under the Tax Receivable Agreement.
We refer to the foregoing distribution and organizational transactions collectively as the Transactions. For more information regarding our structure after the completion of the Transactions, including this offering, see “The Transactions.”
Immediately following this offering, we will be a holding company and our principal asset will be the Common Units we purchase from Switch, Ltd. As the manager of Switch, Ltd., we will operate and control all of the business and affairs of Switch, Ltd. and, through Switch, Ltd. and its subsidiaries, conduct our business. Accordingly, although we will have a minority economic interest in Switch, Ltd., we will have the sole voting interest in, and control the management of, Switch, Ltd. As a result, we expect we will consolidate Switch, Ltd. in our consolidated financial statements and will report a non-controlling interest related to the Common Units held by the Members on our consolidated financial statements.
See “Description of Capital Stock” for more information about our amended and restated articles of incorporation and the terms of the Class A common stock, Class B common stock and Class C common stock. See “Certain Relationships and Related Party Transactions” for more information about:
The following diagram shows our organizational structure after giving effect to the Transactions, including this offering, assuming no exercise by the underwriters of their option to purchase additional shares of Class A common stock:
Corporate Information
We were incorporated as a Nevada corporation on June 13, 2017 for the purpose of issuing the Class A common stock in this offering and acquiring Common Units in Switch, Ltd. Our corporate headquarters are located at 7135 S. Decatur Boulevard, Las Vegas, NV 89118. Our telephone number is (702) 444-4111. Our principal website address is www.switch.com. The information on any of our websites is deemed not to be incorporated in this prospectus or to be part of this prospectus.
Emerging Growth Company
We qualify as an “emerging growth company” as defined in the Jumpstart Our Business Startups Act of 2012. An emerging growth company may take advantage of specified reduced reporting requirements that are otherwise generally applicable to public companies. These reduced reporting requirements include:
We may take advantage of these exemptions until the last day of our fiscal year following the fifth anniversary of the completion of this offering or such earlier time that we are no longer an emerging growth company. We would cease to be an emerging growth company if we have more than $1.07 billion in annual revenue, we are deemed to be a large accelerated filer under the rules of the Securities and Exchange Commission or we issue more than $1.0 billion of non-convertible debt over a three-year period. We may choose to take advantage of some, but not all, of the available exemptions. We have taken advantage of certain reduced reporting burdens in this prospectus. Accordingly, the information contained herein may be different than the information you receive from other public companies in which you hold stock.
The JOBS Act permits an emerging growth company like us to take advantage of an extended transition period to comply with new or revised accounting standards applicable to public companies. We have elected not to opt out of such extended transition period, which means that when a standard is issued or revised and it has different application dates for public or private companies, we, as an emerging growth company, can adopt the new or revised standard at the time private companies adopt the new or revised standard.