10-K 1 swch12311710-k.htm 10-K Document
 

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark one)
x
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934  
   
For the fiscal year ended December 31, 2017
OR
o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from                    to     
Commission file number 001-38231
Switch, Inc.
(Exact name of registrant as specified in its charter)
Nevada
(State or other jurisdiction of
incorporation or organization)
82-1883953
(I.R.S. Employer
Identification No.)
7135 S. Decatur Boulevard
Las Vegas, NV
(Address of principal executive offices)
89118
(Zip Code)

(702) 444-4111
(Registrant's telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Name of each exchange on which registered
Class A common stock, par value $0.001
New York Stock Exchange

Securities registered pursuant to Section 12(g) of the Act: None

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.    Yes  o     No  þ
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.    Yes  o     No  þ
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  þ    No  o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  þ    No  o
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.    o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or emerging growth company. See the definitions of "large accelerated filer," "accelerated filer," "smaller reporting company," and "emerging growth company" in Rule 12b-2 of the Exchange Act.



Large accelerated filer o
Accelerated filer o
 
 
Non-accelerated filer þ (Do not check if a smaller reporting company)

Smaller reporting company o

 
Emerging growth company þ

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.     o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes o    No þ
As of June 30, 2017 (the last business day of the registrant's second fiscal quarter), the registrant was not a public company and, therefore, cannot calculate the aggregate market value of its voting and non-voting common equity held by non-affiliates as of such date.
As of March 12, 2018, the registrant had 36,066,544 shares of Class A common stock, 173,624,316 shares of Class B common stock, and 42,944,647 shares of Class C common stock outstanding.

Documents Incorporated by Reference
Portions of the registrant's definitive Proxy Statement for the 2018 annual meeting of the stockholders to be filed with the Securities and Exchange Commission within 120 days after the end of the fiscal year ended December 31, 2017 are incorporated by reference into Part III of this Annual Report on Form 10-K.





Switch, Inc.
Table of Contents

Part I.
 
 
Item 1.
Item 1A.
Item 1B.
Item 2.
Item 3.
Item 4.
 
 
 
Part II.
 
 
Item 5.
Item 6.
Item 7.
Item 7A.
Item 8.
Item 9.
Item 9A.
Item 9B.
 
 
 
Part III.
 
 
Item 10.
Item 11.
Item 12.
Item 13.
Item 14.
 
 
 
Part IV.
 
 
Item 15.
Item 16.





BASIS OF PRESENTATION

As used in this Annual Report on Form 10-K (this "Form 10-K"), unless the context otherwise requires, references to:
"we," "us," "our," the "Company," "Switch" and similar references refer to Switch, Inc., and, unless otherwise stated, all of its subsidiaries, including Switch, Ltd., and, unless otherwise stated, all of its subsidiaries.
"Members" refer to the Founder Members, Non-Founder Members and Former Incentive Unit Holders.
"Founder Members" refer to Rob Roy, our Founder, Chairman and Chief Executive Officer, and an affiliated entity of Mr. Roy, each of which own Common Units (as defined below) and who may exchange their Common Units for shares of our Class A common stock. As the context requires in this Form 10-K, "Founder Members" also refers to the respective successors, assigns and transferees of such Founder Members permitted under the Switch Operating Agreement and our amended and restated articles of incorporation.
"Non-Founder Members" refer to those direct and certain indirect owners of interest in Switch, Ltd., other than the Founder Members, each of which own Common Units and who may exchange their Common Units for shares of our Class A common stock. The Non-Founder Members include (i) each of our named executive officers, other than Mr. Roy and (ii) Tom Thomas and Donald D. Snyder, members of our board of directors. As the context requires in this Form 10-K, "Non-Founder Members" also refers to the respective successors, assigns and transferees of such Non-Founder Members permitted under the Switch Operating Agreement and our amended and restated articles of incorporation.
"Former Incentive Unit Holders" refer collectively to (i) our named executive officers; (ii) an affiliated entity of Mr. Roy, our Founder, Chief Executive Officer and Chairman; (iii) Mr. Snyder, a member of our board of directors; and (iv) certain other current and former non-executive employees, in each case, who held incentive units in Switch, Ltd. and whose incentive units converted into Common Units of Switch, Ltd. in connection with our initial public offering ("IPO").
"Common Units" refer to the single class of issued common membership interests of Switch, Ltd.
"Switch Operating Agreement" refers to the Fifth Amended and Restated Operating Agreement of Switch, Ltd.





CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

This Form 10-K contains forward-looking statements within the meaning of the federal securities laws, which statements involve substantial risks and uncertainties. Forward-looking statements generally relate to future events or our future financial or operating performance. In some cases, you can identify forward-looking statements because they contain word such as "may," "will," "should," "expects," "plans," "anticipates," "could," "intends," "target," "projects," "contemplates," "believes," "estimates," "predicts," "potential" or "continue" or the negative of these words or other similar terms or expressions that concern our expectations, strategy, plans or intentions. Forward-looking statements contained in this Form 10-K include, but are not limited to, statements about:

our goals and strategies;
our expansion plans;
our future business development, financial condition and results of operations;
the expected growth of the data center market;
our expectations regarding demand for, and market acceptance of, our services;
our expectations regarding our customer growth rate;
the network effects associated with our business;
our plans to further invest in and grow our business, and our ability to effectively manage our growth and associated investments;
our ability to timely and effectively scale and adapt our existing technology;
our ability to successfully enter new markets;
our ability to maintain, protect and enhance our intellectual property and not infringe upon others' intellectual property; and
our realization of any benefit from the Tax Receivable Agreement and our organizational structure.

We qualify all of our forward-looking statements by these cautionary statements. The forward-looking statements in this Form 10-K are only predictions. We have based these forward-looking statements largely on our current expectations and projections about future events and financial trends that we believe may affect our business, financial condition and results of operations. Because forward-looking statements are inherently subject to risks and uncertainties, some of which cannot be predicted or quantified, you should not rely on these forward-looking statements as predictions of future events. The events and circumstances reflected in our forward-looking statements may not be achieved or occur and actual results could differ materially from those projected in the forward-looking statements. Except as required by applicable law, we do not plan to publicly update or revise any forward-looking statements contained herein, whether as a result of any new information, future events, changed circumstances or otherwise. For a further discussion of the risks relating to our business, see "Item 1A—Risk Factors" in Part I of this Form 10-K.




Part I.

Item 1.
Business.

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.

Company Overview

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 reside at 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 and are more comprehensive than 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.

The growing nexus between internet connectivity, internet-based services, data and analytics, and the advancement of computational processing power is rapidly expanding the amount of data that enterprises can access and manage. At the same time, the Internet of Everything is exponentially expanding the available data sources, as utility grids, automobiles, aircraft, home appliances, wearable devices and numerous other sources are all connecting to the internet. The compute capacity necessary to manage and analyze this data is also advancing and demanding increasing amounts of power to operate. We believe that traditional technology infrastructure is not capable of supporting the growing wave of mission critical data and increasingly powerful IT equipment.

The vast majority of our data centers are greenfield construction, and our critical infrastructure components are purpose-built to satisfy customers' needs, drive efficiency and enable the deployment of highly advanced computing technologies. 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. Additionally, our patented designs have redefined traditional data center space and cooling, allowing our customers to achieve significantly higher power densities than are available in traditional data centers. We believe the combination of these design elements 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 400 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 operate three primary campus locations, called Primes, which encompass 10 colocation facilities with an aggregate of up to 4.0 million gross square feet, or GSF, of space. These facilities have up to 415 megawatts, or MW, 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 are currently constructing 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. As a result, customers in these metropolitan markets can access our advanced colocation facilities while reducing exposure to the higher taxes, higher cost of power and higher risk of natural disaster that might be prevalent in other markets. In addition to our Primes, SUPERNAP International, S.A., or SUPERNAP International, our international joint venture, has deployed facilities in Italy and Thailand that collectively provide up to 904,200 GSF of space, with up to 100 MW of power available to these facilities. We can also use our Switch MOD technology to build single-user facilities, and we are considering opportunities to deploy this technology in a build-to-suit offering for our enterprise customers.

We have fostered the development of a robust technology ecosystem around our platform that consists of enterprises and service providers that include cloud and managed services providers and telecommunications carriers. Both our platform

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and our ecosystem have self-reinforcing network effects that benefit participants as both our platform 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.

We believe our advanced platform, high level of service and competitive pricing create a disruptive offering with a powerful customer value proposition that differentiates us from many other existing solutions. Our advanced data centers are designed for efficiency and allow our customers to achieve higher than average power densities per cabinet with appropriate cooling, which we believe improves the performance and increases the life of our customers' equipment. We located our data centers in areas with tax benefits, such as low or no sales tax on equipment, 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, which we define as the reduction in recurring revenue attributed to customer terminations or non-renewal of expired contracts, divided by revenue at the beginning of the period. Our average annual churn rate was 0.9% over the three years ended December 31, 2017 and 0.6% for the year ended December 31, 2017.

We believe that our technologies enable attractive cash flow yields on invested capital. Our modular expansion and vertically integrated development approach allows us to deploy capital efficiently, which further increases our yields. Across our current facilities, we have generated on average a 19.1% cash flow yield on invested capital in 2017. We define cash flow yield on invested capital as Adjusted EBITDA less corporate taxes and maintenance capital expenditures, divided by total assets, less cash, construction in progress, and non-interest-bearing liabilities.

We have achieved significant organic growth in our business and have a track record of strong financial performance. Our revenue has grown from $166.8 million in 2013 to $378.3 million in 2017, representing a compound annual growth rate, or CAGR, of 22.7%. Our net income for the years ended December 31, 2013, 2014, 2015 and 2016 was $39.9 million, $56.5 million, $73.5 million and $31.4 million, respectively. Our net loss for the year ended December 31, 2017 was $8.6 million and included a nonrecurring charge of approximately $71.3 million in equity-based compensation expense related to the accelerated vesting of certain incentive units upon our IPO and fully vested awards granted under our 2017 Incentive Award Plan. From 2013 to 2017, our Adjusted EBITDA grew from $95.5 million to $194.7 million, representing a CAGR of 19.5%. For the definition and reconciliation of Adjusted EBITDA, a non-GAAP financial measure, to net income (loss), see "Management's Discussion and Analysis of Financial Condition and Results of Operations—Key Metrics and Non-GAAP Financial Measures."

Our Opportunity

Industry Background

Computational processing power continues to advance, and the amount of data that enterprises must manage, analyze and monitor is dramatically increasing. 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. The power requirements and financial costs to support this growth in data, traffic and storage are massive and growing. At the same time, service provider data centers are only beginning to penetrate the data center market.

Industry Limitations

Despite the continued growth of traditional data center infrastructure and the continued demand for the public cloud due to its cost-effectiveness and pay-as-you-go scalability, 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 for several reasons, including the following:

First, we believe that increases in server density are beginning to strain the current power and cooling capacity of traditional colocation data centers. As IT hardware advances, servers increase in power but decrease in size, generating more heat and requiring more cooling per cabinet. Chip feature sizes have been repeatedly scaled down to fit more transistors in smaller chips. The nodes on a chip shrank from 30,000 nanometers, or nm, in 1963 to 14 nm in 2016, and are expected to reach 5 nm by 2026. We expect these trends will require many traditional data center companies and enterprise-built data center facilities to attempt to retrofit their existing infrastructure to accommodate the additional weight of denser cabinets and the additional equipment necessary to power and cool those cabinets. Current designs typically include raised floors and cooling equipment installed on the ceiling or roof. Retrofitting these designs, even if possible, would be time-consuming, expensive and highly disruptive to existing customers, and may still not allow a data center to keep pace with technological advances.


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Second, we believe that the public cloud is not an ideal solution for certain business critical data storage and computing needs. Large or sophisticated workloads may be expensive to run in the public cloud or may require higher availability and reliability than the public cloud provides. Enterprises with sensitive or regulated data, such as financial institutions and healthcare companies, may be unwilling or unable to use the public cloud for security-related or compliance reasons. In addition, some workloads require an active-active environment, which necessitates two physical environments in close proximity to each other. Further, the public cloud's shared servers are not an efficient computing environment to run analytics such as advanced machine-learning algorithms, analyze sensitive medical device data or manage autonomous vehicle networks.

Third, given the limitations of both the public cloud and the enterprise-built facilities, we expect enterprises to increasingly deploy IT equipment across hybrid cloud and colocation environments, with mission critical data stored at a colocation facility. As a result, the resiliency and security of the colocation facilities will take on even greater importance. There are significant business risks and potential costs associated with running mission-critical applications in a physical environment that is not 100% resilient and secure. These costs include lost revenue, damage to mission critical data, damage to equipment, legal and regulatory impact, and decline in brand value and reputation. In some instances, the costs can be significantly higher.

Finally, we believe that enterprises are beginning to recognize significant value from environments that encourage and facilitate interaction among their various constituents. The deeper and broader the participation that occurs within the environment, the greater the value to the various participants. As a result, data centers can add significant additional value by bringing together enterprises, cloud and managed services providers and telecommunications carriers 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 400 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.

We have 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, all of which were among the highest classifications available in the industry at the time. This requires fully redundant systems and total fault tolerance. We utilize the most stringent operational protocols to ensure our customers' infrastructure is always on. As such, we have delivered 100% uptime across all of our facilities since the opening of our first colocation facility. In an effort to increase transparency and enhance the reliability of data center rating standards, we recently introduced a proprietary Tier 5 Platinum standard. This standard exceeds the Tier IV Gold certifications and incorporates more than 30 additional elements critical to data center design and constant operation. These elements include even more stringent parameters regarding long-term power system capabilities, the number of available carriers, zero roof penetrations, the location of cooling system lines in or above the data center, physical and network security and 100% use of renewable energy. We currently build our facilities to this Tier 5 Platinum standard.


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Differentiated Technology Ecosystem Underscored by Powerful Network Effects

We operate a dynamic technology ecosystem that brings together a wide variety of parties. Many of the participants in our ecosystem collaborate and engage in commerce with one another to enhance their own businesses. 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.

The powerful Switch technology ecosystem creates value for our enterprise customers in the form of telecommunications purchasing, robust service provider access, private interconnection alternatives among enterprise customers and the opportunity to collaborate with other participants in our ecosystem. For example, our CORE service aggregates our customers' buying power and can significantly lower customers' connectivity costs. The ecosystem yields intrinsic value for us by lowering our customer acquisition costs and enhancing our customer value proposition, which we believe drives further customer loyalty. In addition, because many of our customers choose to run mission-critical and advanced applications within our facilities, we gain exposure to emerging technologies. We believe this provides us with unique visibility into future trends and bolsters our ability to plan for evolving needs.

Commitment to Sustainability

We believe that while data runs the planet, it should not ruin the planet. We were the only company recognized by Greenpeace in its 2017 Clicking Clean report as having a 100% clean energy index. Our energy index was higher than every other technology company identified in the report, including Apple, Facebook, Google, Microsoft and Salesforce. Additionally, we were the only company in the report to receive an "A" grade in all five categories measured by Greenpeace, and our overall "A" grade outperformed all of the other data center operators, including Equinix, which received a clean energy index of 20% and a "B" grade, Digital Realty Trust, which received a clean energy index of 21% and a "C" grade, and DuPont Fabros, which received a clean energy index of 7% and an "F" grade. We believe that many technology and infrastructure companies, as well as their customers and clients, evaluate progress towards achieving clean energy goals by reference to the company scorecards included in the Greenpeace report.

Through technological innovation, industry partnerships and public advocacy, we also support renewable energy production facilities. While we are proud of our achievements in safeguarding the future of our planet, we believe our achievements in sustainability also drive customer demand. More than ever, enterprises are searching for solutions to address their own clean energy goals. 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

Trust, innovation and perfection are hallmarks of the Switch brand.

We recognize the level of trust customers place in us to house and protect their IT equipment. We operate under the slogan "Truth in Technology," which embodies the notion that the product should be so amazing that nothing more than the truth is necessary to sell it. We endeavor to further safeguard our customers' trust by striving to deliver perfection in all that we do, and we are proud to have delivered 100% uptime across all of our facilities. However, we are never satisfied, and we continually strive to innovate and deliver novel solutions for the emerging challenges our customers face as technology and business needs evolve.

Our reputation and track record 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. As a result, our sales and marketing spend for the year ended December 31, 2017 was 3.7% of revenue. We believe this is among the lowest in the industry.

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. Rob Roy first invented his design for the Switch MOD more than a decade ago and since then has added numerous inventions and corresponding patent claims to the Switch portfolio. The designs of our data center facilities are protected by over 400 issued and pending patent claims documenting inventions by Rob Roy.

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Rob Roy has instilled in us the practice of "Switchful Thinking"— the state of constant willingness to change and adapt and to produce the best solutions through innovation and invention. We were built and are led by a management team of technology futurists who believe that everything is possible through listening, intellectualizing, forming a plan and executing.

We have a deep and experienced senior management team comprised of 16 members, who collectively have over 150 years of experience at Switch, and 13 of whom have been with Switch for more than five years.
 
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:
Continue to Grow Our Existing Prime Campus Locations. We currently operate The Core Campus, The Citadel Campus and The Pyramid Campus in or near Las Vegas, Reno and Grand Rapids, respectively, and have begun development for The Keep Campus in Atlanta. These Primes currently encompass 10 data centers with an aggregate of up to 4.0 million GSF of space and up to 415 MW of power available to these facilities. We plan to continue to expand these Primes and actively pursue additional customers with strategic fit for our ecosystem, as well as sell additional solutions to existing customers. Each of our Primes has room for expansion, and we currently have designs to add up to approximately 5.9 million GSF of additional space to The Citadel Campus and approximately 940,000 GSF of additional space to The Pyramid Campus.
Expand into New Geographies in the United States. We intend to continue to evaluate geographic expansion opportunities for our data center facilities, focusing on areas within the United States with limited or no natural disaster risks, favorable business and tax climates, close proximity to major cities, robust telecommunications networks, and significant customer demand. For example, we recently secured land and began development for The Keep Campus to expand geographically into the southeast and mid-Atlantic United States. We believe this approach, combined with our ability to deploy capital efficiently through our modular design, reduces the risks associated with our geographic expansion and enhances the strategic value of our new locations.
Grow Our Single-User Line of Data Centers. Our Switch MOD design enables us to rapidly deploy new facilities in a single-user configuration. We believe this expands our addressable market opportunity in the United States and represents a potential new source of revenue. We may decide to pursue these single-user opportunities directly, or by licensing our intellectual property to third parties in U.S. markets that may not be strategic to us or that are not readily accessible.
Leverage Our Unique Technology Ecosystem to Drive Interconnection Growth. Our ecosystem connects more than 800 customers, including over 200 cloud and managed services providers and 80 telecommunications providers, which creates an important hub for the Internet of Everything. We plan to support our customers' interconnection needs by continuing to increase our cross connect and external broadband offerings.
Maintain and Extend Our Technological Leadership. We have a long history of innovation and, led by Rob Roy, we are a dynamically inventive organization. We plan to continue to invest in the development of new technologies in order to continue improving our standards for security, availability and scalability. Additionally, we intend to leverage our patented technologies and designs to strategically pursue new, adjacent market opportunities outside our core business. By leveraging our technology and leadership in data center design, we believe we can solve new problems created by the rapid expansion of the internet, data storage and analytics.
Pursue Strategic Partnerships. We may enter into strategic relationships with a variety of partners that contribute to our business. For example, rather than simply offering our customers connectivity to public cloud environments, frequently referred to as being an "on ramp" to the cloud, we may partner with public cloud providers to address that portion of their customers' needs that require higher density and reliability than is typically available from public cloud offerings. To facilitate these potential partnerships, we plan to expand in locations along side hyperscale cloud deployments enabling us to provide colocation for cloud customers' mission critical needs.


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Our Technology

Our Solution

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. For example, at The Core Campus, each of our LAS VEGAS 8 and LAS VEGAS 9 facilities were constructed by combining multiple Switch MODs. 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.

The Switch POWER SPINE is an innovative adaptation allowing increased modularity in data center architecture. The Switch POWER SPINE provides the structure and pathway to provision power from any power room to any cabinet within the data center. This allows for the delivery of additional circuits to any cabinet over many years in an efficient and organized fashion. The POWER SPINE also reduces construction costs by placing the overhead weight of the heavy power conduits on the concrete steel-reinforced slab on grade floor, reducing the roof load and infrastructure needed to support that load. Placing the POWER SPINE on the grade floor also increases the seismic integrity of the facility.

The Switch Power Distribution Units, or PDUs, are part of our system-plus-system color-coded power components, which provide modular power and allow the data center to deliver 100% power uptime.

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. Traditional data centers are designed with a raised floor and internal Computer Room Air Conditioner, or CRAC, units that take up valuable floor space. In these traditional environments, the hot air exhausted by IT equipment blends with the cold air provided by the CRAC units, which causes the temperature to rise. As customers add more equipment, the data center operator must install additional internal CRAC units. Customers in these traditional data centers are required to leave portions of the cabinets empty to reduce the amount of heat coming out of the cabinet, which forces the customer to buy additional space for their equipment to accommodate these cooling restrictions. We expect many traditional colocation facilities will be required to attempt to retrofit their infrastructure, if possible, to accommodate the additional weight of denser cabinets and the additional equipment necessary to power and cool those cabinets. Without these retrofitting changes, we believe these traditional colocation facilities will not be able to accommodate the newer servers or the higher densities required by customers who want to run them.

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. These technologies include:
100% Hot Aisle Containment Rows.    We refer to our patented 100% Hot Aisle Containment Row technology as the Switch T-SCIF, or Thermal Separate Compartment in Facility. As depicted in the figure below, the T-SCIF creates a fully contained hot aisle between parallel rows of cabinets. The heat from the customers' equipment exhausts into the hot aisle, where it vents up into a hot-air plenum and out of the data center via extraction fans. Simultaneously, cold air is released from the overhead vents in the cold room into the intakes of the IT equipment in the cabinets, which cools the equipment. The exhausted hot air is never allowed to blend back into the cold room, which helps ensure that our customers' IT equipment operates in the correct environmental conditions. Using this cooling method, we are able to cool power levels that significantly exceed those of traditional data centers. Our ability to support these increased densities enables our customers to use and buy less cabinet space to house their equipment, which reduces the cost of their deployment. Similarly, the ability to handle these increased densities allows us to deploy more power on less space, driving a higher return on capital.

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containmentrows.jpg
Exterior Wall Penetrating Multi-Mode HVAC Units.    We provide cooling to the T-SCIFs using our patented Exterior Wall Penetrating Multi-Mode heating, ventilation and air conditioning, or HVAC, units that we refer to as the TSC 500, TSC 600 and TSC 1000. The units are attached to the exterior wall of the Switch MOD, which alleviates the cost of reinforcing the data center floor or roof to support the weight of HVAC equipment, while also enabling complete segregation of hot and cold air in the data center. The exterior location of our TSC units eliminates the need to bring water into the data center, frees up valuable IT space for cabinet deployments and allows us to repair or replace any single TSC without disrupting the data center environment. Each of our TSC 500, TSC 600 and TSC 1000 units can take advantage of multiple modes of cooling depending on the environment, which enables us to construct facilities that can be cooled entirely without water. We believe this combination of cooling methods makes our facilities the most efficient and resilient large-scale commercial data centers ever constructed.
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Hot and Cold Containment Segregation Structure.    The Switch BLACK IRON FOREST is the framework that supports the weight of the 100% Hot Aisle Containment Rows within a T-SCIF, the ceiling for the heat containment chamber, and the power delivery pathways for each uninterruptible power system, or UPS, and cabinet system-plus-system PDU. This increases the stability and integrity of our facilities by distributing all overhead weight to a concrete steel-reinforced slab on grade floor. This structure is also connected horizontally across the facility which increases the physical stability of the facility. In addition, this structure's thermal qualities help efficiently maintain the temperature within the data center because all of this metal gets cold from all the cold air blowing on it all the time, and stays cold, radiating cold air through the room and helping to keep the room cold.

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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 UPSs. Effectively, one entire system can experience a failure without our customers experiencing any downtime. Other proprietary elements that contribute to our resiliency include:
Redundant Data Center Roofing System.    Switch SHIELD is a patented system consisting of an inner roof and outer roof that are separated by nine feet. Both roofs are solid steel, unpenetrated, watertight, airtight, and rated to withstand winds up to 200 miles per hour. If the outer roof is damaged, the inner roof still protects our customers' IT equipment. Switch SHIELD mitigates extreme weather conditions and, with its dual-roof architecture, allows the maintenance, repair or replacement of the roof components while protecting the critical system operations of the data center below, even during a full roof replacement.
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Multi-System Power Containers.    The Switch POD, or Power Optimized Delivery, consists of a separate, color-coded, tri-redundant system in a system-plus-system configuration. This tri-redundant design reinforces our mission-critical focus on delivering 100% power uptime.
powercontainers.jpg
Data Center Infrastructure Management System (DCIM).    The advanced infrastructure solutions that power, cool, connect and protect our data centers are monitored and optimized with our Living Data Center, or LDC, software. This Switch-developed and supported software monitors all the critical infrastructure of the data center macro-environment and the micro-environments for each customer. Our customers can securely access data pertaining to each of their deployments on a real-time basis as LDC dynamically updates and displays information synthesized from thousands of sensors deployed throughout each facility.


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Our Campus Locations

As of December 31, 2017, we had the following Prime Campuses operating or under development at strategic locations in the United States, encompassing 10 data centers and 4.0 million GSF of space: 
The Core Campus.    The Core Campus in Las Vegas, Nevada currently encompasses eight separate data centers with up to approximately 2.0 million GSF of space and up to 275 MW of 100% renewable power available to these facilities. We have one additional data center under construction at The Core Campus, which we expect will be operational in late 2018 to early 2019, which will provide approximately 340,000 GSF of additional space and have up to 40 MW of 100% renewable power available to the facility. The Core Campus location offers approximately 5- and 6-millisecond latencies to Southern California and Phoenix, respectively.
The Citadel Campus.    The Citadel Campus near Reno, Nevada is designed to be the world's largest data center campus. Our first data center in The Citadel Campus, which we believe will be the largest data center in the world upon completion, opened in November 2016. This data center is designed to include up to approximately 1.4 million GSF of space and have up to 130 MW of 100% renewable power available to the facility. We have plans to build seven additional data centers at The Citadel Campus that will provide up to approximately 5.9 million GSF of additional space and have up to 520 MW of 100% renewable power available to the facilities. We anticipate that the first of these data centers will become operational in 2019, with the remaining to be constructed as necessary to meet customer demand. The Citadel Campus location offers approximately 4-millisecond latency to Northern California.
The Pyramid Campus.    The Pyramid Campus is our Northeastern Prime and is located in Grand Rapids, Michigan. It was designed to be the largest data center campus in the eastern United States. The first data center space became available in the Switch Pyramid, an adaptive reuse of the former Steelcase Pyramid, in June 2016. The Switch Pyramid is designed to include up to 220,000 GSF of datacenter floorspace and have up to 10 MW of 100% renewable power available to the facility. The Pyramid Campus is planned to include up to two additional data centers that will provide up to approximately 940,000 GSF of additional space and have up to 100 MW of 100% renewable power available to the facilities. We expect to construct these facilities as necessary to meet customer demand. In addition to serving the Michigan market, The Pyramid Campus location offers approximately 4-millisecond latency to Chicago.
The Keep Campus.    The Keep Campus is our Southeastern Prime under development and located in Atlanta, Georgia. We began developing the campus in June 2017 and began construction in the fourth quarter of 2017, with data center space currently planned to be available in 2019.

The Core Campus and The Citadel Campus are connected through a fiber network known as the Switch SUPERLOOP. The Switch SUPERLOOP gives customers the advantages of a highly available yet low latency fiber network in close proximity to the major markets of California, but without the high taxes, the high cost of power or the high risk of natural disasters associated with California. The latency between The Core Campus and The Citadel Campus locations is approximately 7 milliseconds using the Nevada portion of the SUPERLOOP. This connectivity enables customers to deploy mission-critical infrastructure and workloads in a large active-active data center configuration. It also provides geographical redundancy of data center deployments while staying within Nevada's tax-advantaged business climate. Through our carrier partners, the Switch SUPERLOOP location also provides approximately 4-millisecond connectivity from The Citadel Campus to the Bay Area and approximately 5-millisecond connectivity from The Core Campus to Southern California (round trip).

We carefully chose the locations of our U.S. campuses based on characteristics that we believed would help drive resiliency, performance and cost efficiencies for our customers. Our Prime campus locations are located in areas with low natural disaster risk. For example, the State of Nevada boasts the lowest natural disaster rating in the Western United States. Additionally, each of these locations offers favorable tax and economic development policies that provide zero or low-tax environments for our customers to deploy IT equipment. While all of our locations offer a lower-cost source of 100% renewable power, there are additional efficiency advantages. For example, the Nevada climate is characterized by low humidity and relatively stable temperatures for most of the year. This improves cooling efficiencies and reduces power consumption. We own most of our facilities, and where the land and shell are not owned, we hold long-term leases on those assets.

In addition to our Primes, SUPERNAP International has deployed facilities in Italy and Thailand that collectively provide up to 904,200 GSF of space, with up to 100 MW of power available to the facilities.


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Our Platform Has Powerful Network Effects and Nurtures a Rich Technology 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 we continue to improve and enhance our technology, we believe our customer value proposition grows stronger. In turn, our ability to deliver increasing value to our customers attracts new customers and encourages existing customers to grow with us.

Our Technology Ecosystem Creates Significant Value and Has Powerful Network Effects

Our hyperscale data centers are akin to a large and dynamic digital city, which is home to a wide variety of technology citizens. These citizens engage in commerce with each other and collaborate to enhance their offerings to the world in general. All benefit from the density of our facilities, the proximity to each other and the opportunity to interact in a safe, secure and stable environment. Our ecosystem includes numerous enterprises from a wide variety of business segments, many of which are operating their most dense deployments and hosting mission-critical data and applications. These enterprises attract other participants within the ecosystem, such as cloud platform providers, managed services providers and telecommunications carriers that we refer to collectively as ecosystem service providers.

In turn, the presence of these ecosystem service providers attracts other new enterprise customers seeking to collaborate with our ecosystem service providers. This further differentiates our ecosystem by increasing customer diversity and the range of mission-critical applications run within a single campus. We proactively foster an environment where technology companies can connect and innovate on various projects, which further increases participation in the ecosystem.

The powerful Switch technology ecosystem envisioned by Rob Roy creates value for our enterprise customers, such as:
Telecommunications Purchasing.    The scale of our campuses attracts a robust network of telecommunications carriers to our facilities that is mutually beneficial to our customers and the carriers. The size and diversity of customers in our campuses generate significant demand for connectivity, while at the same time providing a cost effective entry point for carriers. Because of Rob Roy's inventions, Switch can fit a significantly larger amount of customers into each data center campus, therefore on-net telecommunications carriers can sell large quantities of services to this ecosystem of customers. Our CORE purchasing cooperative aggregates the buying power of our customers, enabling us to provide significant cost-savings on connectivity, while also maintaining a flexible and expansive carrier partner ecosystem from which our customers can choose. Customers can use CORE to acquire connectivity services outside of our campuses.
Service Provider Access.    Our Switch CLOUD ecosystem provides our customers with direct access to more than 200 cloud and managed services providers and the flexibility to leverage the right mix of on- and off-premise public and private cloud services. By establishing these connections within our facility, our customers enjoy low-latency, highly secure and flexible access to multiple cloud providers to meet their unique business requirements.
Interconnectivity.    Our ecosystem connects more than 800 customers, including over 200 cloud and managed services providers and more than 80 telecommunications providers, which enhances our customers' ability to inter- and cross-connect. The ability for customers to privately interconnect has many benefits including reducing costs, optimizing performance and satisfying regulatory requirements. Interconnecting within our data center allows customers to avoid the expense associated with long-haul dedicated connectivity and provides reduced latency and higher availability. By cross-connecting within our facilities, regulated entities can avoid the need to exchange traffic over the internet, thereby satisfying regulatory security requirements in a more cost-efficient manner.
Collaborative Innovation.    Our dedicated non-commissioned sales team is driven to help our customers connect, innovate and develop technologies of the future and actively works to foster collaboration amongst our ecosystem participants. Because our sales force is non-commissioned, they are enabled and encouraged to build positive relationships and foster interaction between our customers on a platform grounded in truth. This is part of our Truth in Technology commitment. For example, we connected a small Internet Protocol television, or IPTV, company in our ecosystem with a large hospitality company in our ecosystem that was frustrated with the performance of, and options available on, the televisions in its hotel rooms. We also assisted them with their technical collaboration. As a result, the IPTV company now provides services to over 5,000 hotel rooms operated

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by the hospitality company. We believe our ecosystem played a key role in initiating and developing this successful relationship.

Our technology ecosystem also creates intrinsic value for Switch, such as:
Visibility into Future Technologies.    Our customers run some of their most mission-critical and advanced applications in our hyperscale facilities and our exposure to that technology gives us unique visibility into future trends and allows us to plan for future needs.
Lower Customer Acquisition Costs.    Our ecosystem attracts customers. This natural and self-reinforcing phenomenon results in less time and money spent acquiring customers.
Customer Loyalty.    Our ecosystem helps support our strong customer value proposition, which in turn creates customer loyalty. We believe this loyalty is evidenced by our low annual churn rate, which averaged approximately 0.9% over the three years ended December 31, 2017 and 0.6% for the year ended December 31, 2017. Additionally, for the year ended December 31, 2017, approximately 54% of our revenue was derived from parties that had been our customer for more than five years. Moreover, our customers regularly expand their deployments within our facilities. For example, approximately 84% of the increase in revenue for the year ended December 31, 2017 was attributable to growth from existing customers, while the remaining 16% of the increase in revenue was attributable to new customers initiating service after December 31, 2016.

Our Customer Scale and Density allows us to offer Collaborative Services

As our platform and customer base continues to expand, we continue to realize growing efficiencies and benefits of scale at each of our Primes. Our large and growing customer base within each Prime has provided us with the economies of scale necessary to provide our customers valuable ancillary services, such as Switch CONNECT and Switch SAFE.
Switch CONNECT.    Switch CONNECT provides telecommunications audit and agency services that help our customers evaluate network needs and purchase substantially discounted telecommunications services through CORE, our purchasing cooperative. CORE aggregates the buying power of the over $6 trillion combined market capitalization of the customers in our ecosystem. Our Switch CONNECT team has achieved savings in excess of 50% for our customers compared with their previous telecommunications spend.
Switch SAFE.    Switch SAFE provides our customers with a large scale, always-on distributed denial of service (D/DoS) attack mitigation platform. We work with customers to understand attack profiles and configure networks to respond to the evolving threat landscape. Switch SAFE is capable of managing attacks of up to 300 gigabits-per-second and 220 million packets-per-second from a single device, allowing our customers to keep their mission critical services up and running.

Our customer density results in a multiplicity of technology enterprises in the same location which creates a powerful environment for both our enterprise customers and our ecosystem service providers. We believe these customer densities and volumes enable our ecosystem service providers to earn a desirable return on their capital investment, even with the discounted rates we negotiate on behalf of our customers.

These collaborative services create even greater value for our customers and ecosystem service providers alike, creating a self-reinforcing feedback loop.

Our Customers

We 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 customer base is meaningfully diversified across key industries, including approximately 24% in cloud, IT and software, 18% in digital media and entertainment, 18% in retail and consumer goods, 10% in financial and 10% in telecommunications as of December 31, 2017. In each of these industries we have marquee customers who have grown with us over time. We believe that we have a significant opportunity to both grow penetration of existing customers as well as attract new customers. For the years ended December 31, 2017 and 2016, our top 10 customers accounted for approximately 38.5% and 38.4% of revenue, respectively, and only one customer accounted for more than 10% of revenue during each period.

We provide our customers with a consistent experience and high level of service at low cost, which enables us to maintain one of the lowest churn rates in the industry and the lowest of any publicly reporting data center company that reports churn rate metrics. From 2015 to 2017, our annual churn rate averaged 0.9%. Our early customers remain loyal to us today. Our

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typical customer contract has a three-to-five-year term, and in the year ended December 31, 2017, 54% of our revenue came from customers that have been with us for more than five years. Moreover, we derive a significant amount of our growth from existing customers.

Sustainability

Since January 1, 2016, we have powered all of our U.S. data centers with 100% clean and renewable energy. We are the largest data center operator in the United States to be 100% renewably powered, and we support local and new renewable facilities. We have successfully accomplished this goal through a combination of technological innovation, capital investment, industry partnerships and public advocacy. Many of our customers and potential customers are looking for ways to achieve their "green" goals and reach desired levels of sustainability, which other colocation solutions cannot provide. By locating their IT equipment with us, they are able to advance on those goals and improve on their current level of sustainability. Elements of our sustainability efforts include the following:

Clicking Clean Scorecard.    In recognition of our efforts, Greenpeace awarded us "A" grades in all five categories measured by Greenpeace in its 2017 Clicking Clean Company Scorecard. We were the only company in the United States that received all "A" grades, and we were recognized as the leader among colocation data centers evaluated in the study. We believe that many technology and infrastructure companies, as well as their customers and clients, evaluate progress towards achieving "clean energy" goals by reference to the company scorecards included in this report.
Leading Power and Cooling Efficiency.    Our technology results in significant efficiencies enabling annual Power Usage Effectiveness, or PUE, of 1.28. We do not believe other colocation data center providers are able to maintain such a low PUE while simultaneously allowing customers to operate at very high power densities. We accomplish all of this without compromising our adherence to industry best standards. Our facilities are 100% green and operate at a level that exceeds the standards of IEEE, ANSI, ASHRAE, 24/7, ISO 9001, SAS 70/SSAE-16, BICSI, and the Green Grid Association.
Supporting New and Local Solar.    In 2016, we partnered with the local Nevada utility to construct Switch Station 1 and Switch Station 2, which are two solar power stations in Las Vegas, Nevada having a combined 179 MW of nameplate capacity.
Energy Market Direct Access.    We were the first entity since 2005 to seek the right to unbundle from the electric monopoly in Nevada. By leaving the monopoly and being able to purchase power from the broader electric market, we have greater freedom to control the energy we use, including the ability to lock in our commodity pricing for longer periods, purchase renewable energy from economical resources and effectuate broader national policy change. We received Nevada regulatory approval in December of 2016, and since June 1, 2017, we have been buying our power directly from the national market, as opposed to buying it from the incumbent electrical power utility. We have seen savings from this direct national energy market participation.

Our Values

Our core values govern how every Switch employee executes on our mission to power the sustainable growth of the connected world and include:
Truth in Technology.    Our customers place a significant level of trust in us to provide them the best technology solutions for their business. Our sales professionals are not paid on commission, and are not incentivized in any way to promote any particular configuration, product or business solutions pathway to our customers.
Sustainable by Design.    Sustainably running the internet has been a core value since our founding. Our commitment does not stop there. We thoughtfully pursue the advancement of new, innovative policies that expand access to smart water, clean energy and the technological advances that are changing the way the world is powered. We focus on sustainability on multiple levels and have adopted internal policies focused on reducing plastic bottle waste, utilizing biodegradable tableware and recycling.
Committing to Our Communities through Economic Development.    We believe in building strong communities wherever we operate. We drive and will continue to push economic development through the creation of Rob Roy's InNEVation Centers. The centers were created by Rob Roy to support the Governor's New Nevada Initiative. We like to say that we take the "no" out of innovation. These economic hubs support startups, growups and our customers in collaborating with non-profits, educators, community and thought leaders and "inNEVators" of all shapes and sizes to engage with each other and drive economic results in the communities in which we operate.

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Leading the Industry and beyond in Gender Equality and Veteran Placement.    We believe our workforce is richly diverse in its total composition at all levels and outpaces our industry in the number of women executives. Women hold high-level technical positions throughout our company, including chief responsibility for construction, sales, branding and customer operations. Veterans provide another critical backbone of our workforce. We honor their service and actively recruit veterans to our mission-critical environment. Through our Switch University, we have pioneered strategic partnerships with community colleges to develop a work force that is prepared for the careers that run the Internet of Everything in our data centers.
Supporting Interdisciplinary Education Blending Technology and the Arts.    We believe that combining education, technology and the arts creates a powerful platform for the future of our country and its market competitiveness. We have collaborated with universities to bring about improvements in research through our donations of supercomputers and connectivity to help accelerate their standing in the critical world of higher education research. We are also passionate about funding programs that build school gardens to connect youth to science through hands-on experiential learning. We bring financial commitment and thought leadership to preparing the next generation of whole-mind thinkers through an unwavering commitment to interdisciplinary Science, Technology, Engineering, the Arts and Mathematics (STEAM) education programs in Nevada and Michigan and in any state where we operate. Switch proudly supports First Robotics winning teams in Nevada and Michigan, the STEAM Education Village at Art Prize in Grand Rapids, the Nevada Museum of the Arts STEAM School, and the Smith Center for Performing Arts STEAM Programs. We believe that the best creative problem solvers who can integrate form and function with equal mastery through science, technology, engineering, arts and math education platforms will run the internet of absolutely everything with both form and function in mind.
Karma: Our culture is grounded in the philosophy of doing the right thing.    Innovation, detail and excellence drives everything from the interior architecture of our environments to our delivery of 100% uptime. We do it all with dedication to providing world-renowned facilities, superior service for our customers, the best working experience in the industry, true technology leadership and deep caring for the communities where we operate and the planet where we live. Our logo mark was personally designed by Rob Roy to put the power of karma at the center of our company. We believe that if you put good energy out, you will get good energy back.

Sales and Marketing

Our sales strategy is built around "Truth in Technology." Our team works closely with each customer to identify that customer's needs and to design a solution tailored to meet those needs. They also help to integrate each customer into our ecosystem, which provides access to Switch Connect and Switch Cloud and potentially the ability to connect directly with their existing and potential customers. Many of our customers encourage their customers, suppliers and business partners to place IT equipment in our data centers, which has created a network effect resulting in additional customer acquisitions. In addition, large network providers, cloud providers or managed services providers may refer customers to us as part of their total customer solution. These processes have resulted in significant customer growth with limited spend on sales and marketing. For the year ended December 31, 2017, we spent $13.9 million on selling and marketing expenses. Selling and marketing expenses include sales and marketing labor costs, direct branding and selling expenses, as well as administrative and travel and entertainment expenses for our marketing and sales departments. Selling and marketing expenses exclude sponsorships, contributions and lobbying expenses.

We use a direct sales force and selected partner relationships to market our offerings to global enterprises, content providers, financial companies and mobile and network service providers. As of December 31, 2017, our colocation sales team consisted of 15 employees, who collectively have more than 50 years of experience as members of our team. No member of our sales team receives commissions, which fosters a team environment and allows our representatives to offer the customer the solution they need without artificial sales pressure. We believe that the strength of our product and market reputation are the single biggest reasons for increased sales activity. We generally will take on incremental sales headcount only when expanding into new geographies.

To support our sales efforts and to promote our brand proactively, we have a branding team and a marketing team. As of December 31, 2017, our branding and marketing teams consisted of 15 employees. Our marketing strategies include active public relations and ongoing customer communications programs. We also regularly measure customer satisfaction levels and host key customer forums to identify and address customer needs. We believe our brand is one of our most valuable assets, and we strive to build recognition through our website, external blog and social media channels, by sponsoring or leading industry technical forums, by participating in internet industry standard-setting bodies and through advertising and online campaigns.


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Competition

We offer a broad range of data center services and, as a result, we may compete with a wide range of data center service providers for some or all of the services we offer. We face competition from numerous developers, owners and operators in the data center industry, including managed services providers and real estate investment trusts, or REITs, such as CoreSite Realty Corporation, CyrusOne Inc., Digital Realty Trust Inc., Equinix, Inc. and QTS Realty Trust, Inc., some of which own or lease data centers, or may do so in the future, in markets in which our properties are located. Additionally, we are aware of other smaller companies that may compete against us in various geographies or that may be developing additional data center capabilities to compete with us. Our current and future competitors may vary by size and service offerings and geographic presence.

Competition is primarily centered on reputation and track record, quality and availability of data center space, quality of service, technical expertise, security, reliability, functionality, geographic coverage, financial strength and price. Some of our current and future competitors may have greater brand recognition, longer operating histories, stronger marketing, technical and financial resources and access to less expensive power than we do. As a result, some of our competitors may be able to:
offer space at prices below current market rates or below the prices we currently charge our customers;
bundle colocation services with other services or equipment they provide at reduced prices;
develop superior products or services, gain greater market acceptance and expand their service offerings more efficiently or rapidly;
adapt to new or emerging technologies and changes in customer requirements more quickly;
take advantage of acquisition and other opportunities more readily; and
adopt more aggressive pricing policies and devote greater resources to the promotion, marketing and sales of their services.

We operate in a competitive market, and we face pricing pressure for our services. Prices for our services are affected by a variety of factors, including supply and demand conditions and pricing pressures from our competitors. We may be required to lower our prices to remain competitive, which may decrease our margins and adversely affect our business prospects, financial condition and results of operations.

Employees

As of December 31, 2017, we had 723 employees. We collaborate with the local unions where applicable, such as construction and the trades, however, none of our direct employees are represented by a labor union or covered by a collective bargaining agreement. We believe our employee relations are good, and we have not experienced any work stoppages.

Regulation

General
Data centers in our markets are subject to various laws, ordinances and regulations. We believe that each of our properties has the necessary permits and approvals for us to operate our business.

Americans with Disabilities Act
Our properties must comply with Title III of the Americans with Disabilities Act of 1990, or the ADA, to the extent that such properties are "public accommodations" or "commercial facilities" as defined by the ADA. The ADA may require, for example, removal of structural barriers to access by persons with disabilities in certain public areas of our properties where such removal is readily achievable. We believe that our properties are in substantial compliance with the ADA and that we will not be required to make substantial capital expenditures to address the requirements of the ADA. However, noncompliance with the ADA could result in imposition of fines or an award of damages to private litigants. The obligation to make readily achievable accommodations is an ongoing one, and we will continue to assess our properties and to make alterations as appropriate in this respect.


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Environmental Matters
We are required to obtain a number of permits from various government agencies to construct a data center facility, including the customary zoning, land use and related permits, and are also subject to laws and regulations relating to the protection of the environment, the storage, management and disposal of hazardous materials, emissions to air and discharges to water, the cleanup of contaminated sites and health and safety matters. These include various regulations promulgated by the Environmental Protection Agency and other federal, state, and local regulatory agencies and legislative bodies relating to our operations, including those involving power generators, batteries, and fuel storage to support colocation infrastructure. While we believe that our operations are in substantial compliance with environmental, health, and human safety laws and regulations, as an owner or operator of property and in connection with the current and historical use of hazardous materials and other operations at its sites, we could incur significant costs, including fines, penalties and other sanctions, cleanup costs and third-party claims for property damages or personal injuries, as a result of violations of or liabilities under environmental laws and regulations. Fuel storage tanks are present at many of our properties, and if releases were to occur, we may be liable for the costs of cleaning up resulting contamination. Some of our sites also have a history of previous commercial operations, including past underground storage tanks.

Some of the properties may contain asbestos-containing building materials. Environmental laws require that asbestos-containing building materials be properly managed and maintained, and may impose fines and penalties on building owners or operators for failure to comply with these requirements.

Environmental consultants have conducted, as appropriate, Phase I or similar non-intrusive environmental site assessments on recently acquired properties and if appropriate, additional environmental inquiries and assessments on recently acquired properties. Nonetheless, we may acquire or develop sites in the future with unknown environmental conditions from historical operations. Although we are not aware of any sites at which we currently have material remedial obligations, the imposition of remedial obligations as a result of spill or the discovery of contaminants in the future could result in significant additional costs to us.

Our operations also require us to obtain permits and/or other governmental approvals and to develop response plans in connection with the use of our generators or other operations. These requirements could restrict our operations or delay the development of data centers in the future. In addition, from time to time, federal, state or local government regulators enact new or revise existing legislation or regulations that could affect us, either beneficially or adversely. As a result, we could incur significant costs in complying with environmental laws or regulations that are promulgated in the future.

Intellectual Property

Intellectual property is an important aspect of our business, and we actively seek protection for our intellectual property. To establish and protect our proprietary rights, we rely upon a combination of patent, trade secret, trademark and copyright laws. We also utilize contractual means such as confidentiality agreements, licenses and intellectual property assignment agreements. We maintain a robust policy requiring our employees, contractors, consultants and other third parties to enter into confidentiality and proprietary rights agreements to control access to our proprietary information. These laws, procedures and restrictions provide only limited protection, and any of our intellectual property rights may be challenged, invalidated, circumvented, infringed or misappropriated. Furthermore, the laws of certain countries do not protect proprietary rights to the same extent as the laws of the United States, and we therefore may be unable to protect our proprietary technology in certain jurisdictions.

As of December 31, 2017, we have 13 granted or allowed U.S. patents and patent applications by the USPTO comprising 270 granted or allowed claims. We also have 12 pending U.S. patent applications comprising 177 patent pending claims. The first of our patents begin expiring on or around June 13, 2028 subject to our ability to extend the term under applicable law. In addition to capturing additional innovations and inventions generated by Switch and its founder Rob Roy, we continually review our development efforts to assess the existence and patentability of new intellectual property. We actively pursue the registration of our domain names, trademarks and service marks in the United States, including new generic top-level domains, and in certain locations outside the United States. To protect our brand, we file trademark registrations in some international jurisdictions, and actively monitor online activities of others. As of December 31, 2017, we also had over 125 trademark class registrations and pending applications for over 240 trademark class registrations in the United States and foreign countries. We have also registered over 500 domain names, including www.switch.com, www.switch.net, www.switch.org.

We have engaged in limited licensing of our intellectual property and there is the potential to further monetize our intellectual property in this manner in the future. Currently, we deploy our intellectual property for our own benefit and leverage our registrations to prevent mimicry by others.


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Our Portfolio
    
The following chart provides various metrics relative to our portfolio as of December 31, 2017:

Campus(1)
Year Operational
 
Gross Square Feet (up to)(2)
 
Utilization % - By Campus(3)
 
Utilization % - By Open Sector(3)
 
Power Capacity (up to)(4)
 
 
 
 
 
 
 
 
 
 
 The Core Campus(5)
 
 
 
 
 
 
 
 
 
Current: 8 Facilities(6)
2003-2017
 
2,000,000
 
86%
 
91%
 
275 MW
Future: 1 Facility
2018
 
340,000
 
 
 
 
 
40 MW
 
 
 
 
 
 
 
 
 
 
 The Citadel Campus
 
 
 
 
 
 
 
 
 
Current: TAHOE RENO 1
2016
 
1,360,000
 
18%
 
52%
 
130 MW
Future: 7 Facilities
2019+
 
5,890,000
 
 
 
 
 
520 MW
 
 
 
 
 
 
 
 
 
 
 The Pyramid Campus
 
 
 
 
 
 
 
 
 
Current: Switch PYRAMID
2016
 
430,000
 
 
 
 
 
 
 
 
 
(Office)
 
 
 
 
 
 
 
 
 
220,000
 
25%
 
50%
 
10 MW
 
 
 
(Data Center)
 
 
 
 
 
 
Future: 2 Facilities
2019+
 
940,000
 
 
 
 
 
100 MW
 
 
 
 
 
 
 
 
 
 
 The Keep Campus
 
 
 
 
 
 
 
 
 
Future
2018
 
1,100,000
 
 
 
 
 
110 MW
 
 
 
 
 
 
 
 
 
 
 U.S. Total (Current)
 
 
4,010,000
 
 
 
 
 
415 MW
 U.S. Total (Future)
 
 
8,270,000
 
 
 
 
 
770 MW
 ________________________________________
(1)
SUPERNAP International has also deployed two additional data centers in Milan, Italy and Bangkok, Thailand that collectively provide up to 904,200 GSF of space, with up to 100 MW of power available to these facilities. We hold a 50% ownership interest in SUPERNAP International.
(2)
Estimated square footage of all enclosed space at full build out.
(3)
Utilization numbers are based on available cabinets. The Citadel Campus and The Pyramid Campus opened in the second half of 2016 and are in the first phase of development. Additional capital investment will be required to reach full build out.
(4)
Defined as total power delivered to the data center at full build out.
(5)
We lease a data center building and the underlying land for three of our data centers at The Core Campus that have non-cancellable terms expiring through 2066.
(6)
Current facilities at The Core Campus include LAS VEGAS 2, LAS VEGAS 4, LAS VEGAS 5, LAS VEGAS 7, LAS VEGAS 8, LAS VEGAS 9, LAS VEGAS 10 and LAS VEGAS 12.
Organizational Structure and Corporate Information
Switch, Inc. is a Nevada corporation formed on June 13, 2017 in connection with our IPO. On October 11, 2017, we completed our IPO of 35,937,500 shares of Class A common stock at a public offering price of $17.00 per share, which includes 4,687,500 shares issued pursuant to the underwriters' option to purchase additional shares. We received approximately $577.3 million in proceeds, net of underwriting discounts and commissions and before offering expenses of $4.9 million, which we used to purchase newly issued Common Units from Switch, Ltd. at a price per Common Unit equal to the IPO price per share of our Class A common stock.

We are a holding company, and our principal asset is our equity interest in Switch, Ltd. In connection with the IPO, we completed a series of organizational transactions, including the following:

we amended and restated Switch, Ltd.'s existing operating agreement to, among other things, convert all of the Former Incentive Unit Holders' incentive units into Common Units and appoint Switch, Inc. as the manager of Switch, Ltd.;
we amended and restated our articles of incorporation to, among other things, provide for Class A common stock, Class B common stock and Class C common stock; and
we issued shares of Class B common stock to the Non-Founder Members on a one-to-one basis with the number of Common Units they owned, for nominal consideration, and shares of Class C common stock to the Founder Members on a one-to-one basis with the number of Common Units they owned, for nominal consideration.

Although we have a minority economic interest in Switch, Ltd., we have the sole voting interest in, and control the management of, Switch, Ltd. Accordingly, we consolidate the financial results of Switch, Ltd. and report a non-controlling

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interest on our consolidated statements of operations and comprehensive income (loss), representing the portion of net income or loss and comprehensive income or loss attributable to the other members of Switch, Ltd.

See Note 1 to the consolidated financial statements included in Part II, Item 8 for more information about the above-mentioned transactions as well as the other transactions completed in connection with the IPO. As of December 31, 2017, we owned 14.5% of Switch, Ltd. and the non-controlling interest holders owned the remaining 85.5% of Switch, Ltd.

Our principal executive offices are located at 7135 S. Decatur Boulevard, Las Vegas, Nevada 89118, and our telephone number is (702) 444-4111. Our website address is www.switch.com. Information contained on, or that can be access through, our website does not constitute part of this Form 10-K.
Additional Information
All reports we file with the SEC are available free of charge via EDGAR through the SEC website at www.sec.gov. In addition, the public may read and copy materials we file with the SEC at the SEC's public reference room located at 100 F Street, N.E., Washington, D.C. 20549. We also provide copies of our Forms 8‑K, 10‑K and 10‑Q, Proxy Statement, Annual Report and amendments to those documents at no charge to investors upon request and make electronic copies of such reports available through our website at investors.switch.com as soon as reasonably practicable after filing such material with the SEC. The information found on, or otherwise accessible through, our website is not incorporated by reference into, nor does it form a part of, this Form 10‑K, or any other document that we file with the SEC.

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Item 1A.
Risk Factors.
Investing in our Class A common stock involves a high degree of risk. You should carefully consider the risks and uncertainties described below, together with all of the other information included in this Form 10-K, including "Management's Discussion and Analysis of the Financial Condition and Results of Operations" and the consolidated financial statements and the related notes. We cannot assure you that any of the events discussed below will not occur. Our business, financial condition and results of operations could be materially and adversely affected by any of these risks or uncertainties. In that case, the trading price of our Class A common stock could decline, and you may lose all or part of your investment. All forward-looking statements made by us or on our behalf are qualified by the risks described below.
Risks Related to Our Business
A slowdown in the demand for data center resources and other market and economic conditions could have a material adverse effect on us.
Adverse developments in the data center market or in the industries in which our customers operate could lead to a decrease in the demand for data center resources, which could have a material adverse effect on us. We face risks including:
a decline in the technology industry, such as a decrease in the use of mobile or web-based commerce, business layoffs or downsizing, relocation of businesses, increased costs of complying with existing or new government regulations and other factors;
a slowdown in the growth of the Internet generally as a medium for commerce and communication;
a downturn in the market for data center space generally, which could be caused by an oversupply of or reduced demand for data center space;
any transition by our customers of data center storage from third-party providers like us to customer-owned and operated facilities;
the rapid development of new technologies or the adoption of new industry standards that render our or our customers' current products and services obsolete or unmarketable and, in the case of our customers, that contribute to a downturn in their businesses, increasing the likelihood of a default under their service agreements or that they become insolvent;
the migration from colocation data centers to the public cloud; and
technological advancements that result in less data center space being required.
To the extent that any of these or other adverse conditions occurs, they are likely to impact market demand and pricing for our services.
Additionally, we and our customers are affected by general business and economic conditions in the United States and globally. These conditions include short-term and long-term interest rates, inflation, money supply, political issues, legislative and regulatory changes, fluctuations in both debt and equity capital markets and broad trends in industry and finance, all of which are beyond our control. Macroeconomic conditions that affect the economy and the economic outlook of the United States and the rest of the world could adversely affect our customers and vendors, which could adversely affect our results of operations and financial condition.
Any inability to manage our growth could disrupt our business and reduce our profitability.
We have experienced significant growth in recent years. Our annual revenue grew from $166.8 million in 2013 to $378.3 million in 2017. Our rapid growth has placed, and will continue to place, significant demands on our management and our administrative, operational and financial systems. Continued expansion increases the challenges we face in:
managing a large and growing customer base;
obtaining suitable land to build new data centers;
establishing new operations at additional data centers and maintaining efficient use of the data center facilities we operate;
expanding our service portfolio to cover a wider range of services;
creating and capitalizing on economies of scale;
obtaining additional capital to meet our future capital needs;
recruiting, training and retaining a sufficient number of skilled technical, sales and management personnel;
maintaining effective oversight over personnel and multiple data center locations;

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coordinating work among sites and project teams; and
developing and improving our internal systems, particularly for managing our continually expanding business operations.
If we fail to manage the growth of our operations effectively, our businesses and prospects may be materially and adversely affected.
Our operating results may fluctuate.
We have experienced fluctuations in our results of operations on a quarterly and annual basis. The fluctuations in our operating results may cause the market price of our Class A common stock to be volatile. We may experience significant fluctuations in our operating results in the foreseeable future due to a variety of factors, including:
the timing and magnitude of depreciation and interest expense or other expenses related to the acquisition, purchase or construction of additional data centers or the upgrade of existing data centers;
demand for space, power and services at our data centers;
changes in general economic conditions, such as an economic downturn, or specific market conditions in the telecommunications and internet industries, both of which may have an impact on our customer base;
the duration of the sales cycle for our offerings;
acquisitions or dispositions we may make;
the financial condition and credit risk of our customers;
the provision of customer discounts and credits;
the mix of current and proposed products and offerings and the gross margins associated with our products and offerings;
the timing required for new and future data centers to open or become fully utilized;
competition in the markets in which we operate;
conditions related to international operations;
increasing repair and maintenance expenses in connection with our data centers;
lack of available capacity in our existing data centers to generate new revenue or delays in opening new or acquired data centers that delay our ability to generate new revenue in markets which have otherwise reached capacity;
the timing and magnitude of other operating expenses, including taxes, expenses related to the expansion of sales, marketing, operations and acquisitions, if any, of complementary businesses and assets;
the cost and availability of adequate public utilities, including power;
changes in employee stock-based compensation;
overall inflation;
increasing interest expense due to any increases in interest rates and/or potential additional debt financings;
changes in our tax planning strategies or failure to realize anticipated benefits from such strategies;
changes in income tax benefit or expense; and
changes in or new generally accepted accounting principles in the United States as periodically released by the Financial Accounting Standards Board.
Any of the foregoing factors, or other factors discussed elsewhere in this report, could have a material adverse effect on our business, results of operations and financial condition. Although we have experienced recent revenue growth, this growth rate is not necessarily indicative of future operating results. We may not be able to generate net income on a quarterly or annual basis in the future. In addition, a relatively large portion of our expenses is fixed in the short term, particularly with respect to lease and personnel expenses, depreciation and amortization and interest expenses. Therefore, our results of operations are particularly sensitive to fluctuations in revenue. As such, comparisons to prior reporting periods should not be relied upon as indications of our future performance, and our results of operations for any quarter may not be indicative of the results that may be achieved for a full fiscal year. In addition, our operating results in one or more reporting periods may fail to meet the expectations of securities analysts or investors.

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The data center business is capital-intensive, and our capacity to generate capital may be insufficient to meet our anticipated capital requirements. Failure to obtain the necessary capital when needed may force us to delay, limit or terminate our expansion efforts or other operations.
The costs of constructing, developing, operating and maintaining data centers and growing our operations are substantial. While we strive to match the growth of our facilities to the demand for services, we still must spend significant amounts before we receive any revenue. Moreover, the anticipated demand may not materialize and we could be left with over-capacity. In addition, we may encounter development delays, excess development costs, or delays in developing space for our customers. Moreover, the costs of constructing, developing, operating and maintaining data centers and growing our operations may increase in the future, which may make it more difficult for us to expand our business and to operate our data centers profitably. We are required to fund the costs of constructing, developing, operating and maintaining our data centers and growing our operations with cash. We may also need to raise additional funds through equity or debt financings in the future in order to meet our operating and capital needs. Additional debt or equity financing may not be available when needed or, if available, may not be available on satisfactory terms. Our inability to generate sufficient cash from operations or to obtain additional debt or equity financing may require us to prioritize projects or curtail capital expenditures and could adversely affect our results of operations. If we cannot generate sufficient capital to meet our anticipated capital requirements, our financial condition, business expansion and future prospects could be materially and adversely affected.
If we raise additional funds through further issuances of equity or equity-linked securities, our existing stockholders could suffer significant dilution in their percentage ownership of our company, and any new equity securities we issue could have rights, preferences and privileges senior to those of holders of our Class A common stock. In addition, any debt financing that we may obtain in the future could have restrictive covenants relating to our capital raising activities and other financial and operational matters, which may make it more difficult for us to obtain additional capital and to pursue business opportunities, including potential acquisitions.
Our success depends on our ability to license the space in our existing data centers. The failure to license the space in our data centers may harm our growth prospects, future business, financial condition and results of operations.
Our growth depends on our ability to license the space in our existing data centers. We may not be able to attract customers for the space in our data centers for a number of reasons, including if we:
fail to provide competitive pricing terms;
provide space that is deemed by existing and potential customers to be inferior to those of our competitors, based on factors, including available power, preferred design features, security considerations, location, and connectivity; or
are unable to provide services that our existing and potential customers desire.
If we are unable to license available space on a timely basis or at favorable pricing terms, it could have a material adverse effect on our business, results of operations and growth prospects.
We face risks associated with having a long selling and implementation cycle for our services that requires us to make significant time and resource commitments prior to recognizing revenue for those services.
We often have a long selling cycle for our largest transactions, which can range from a few months to up to a year or more. This can require our customers and us to invest significant capital, human resources and time prior to receiving any revenue. A customer's decision to utilize our colocation services or our other services often involves time-consuming contract negotiations and substantial due diligence on the part of the customer regarding the adequacy of our infrastructure and attractiveness of our resources and services. Furthermore, we may expend significant time and resources in pursuing a particular sale or customer, and we do not recognize revenue for our services until we provide the services under the terms of the applicable contract. Our efforts in pursuing a particular sale or customer may not be successful, and we may not always have sufficient capital on hand to satisfy our working capital needs between the date on which we sign an agreement with a new customer and when we first receive revenue for services delivered to the customer. If our efforts in pursuing sales and customers are unsuccessful, or our cash on hand is insufficient to cover our working capital needs over the course of our long selling cycle, our financial condition could be negatively affected.
We may not generate sufficient cash flow to meet our debt service and working capital requirements.
As of December 31, 2017, we had total indebtedness of $591.8 million under our credit facilities. While we used proceeds from our initial public offering to repay the $231.0 million in outstanding borrowings under our revolving credit facility in October 2017, we still maintain the $500.0 million revolving credit facility and can borrow additional amounts subject to the terms of the credit agreement. Our leveraged position could have important consequences, including:
impairing our ability to obtain additional financing for working capital, capital expenditures, acquisitions or general corporate purposes;

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requiring us to dedicate a substantial portion of our operating cash flow to paying principal and interest on our indebtedness, thereby reducing the funds available for operations;
limiting our ability to grow and make capital expenditures due to the financial covenants contained in our debt arrangements;
impairing our ability to adjust rapidly to changing market conditions, invest in new or developing technologies, or take advantage of significant business opportunities that may arise; and
making us more vulnerable if a general economic downturn occurs or if our business experiences difficulties.
Additionally, our credit facilities are secured by a first-priority security interest in substantially all of the assets of Switch, Ltd. and its wholly-owned material domestic subsidiaries. Our amended and restated credit agreement also contains a number of covenants that, among other things, restrict our ability to incur additional debt, incur additional liens or contingent liabilities, make investments in other persons or property, or sell or dispose of our assets.
We will need to implement our business strategy successfully on a timely basis to meet our debt service and working capital needs. We may not successfully implement our business strategy, and even if we do, we may not realize the anticipated results of our strategy and generate insufficient operating cash flow to meet our debt service obligations and working capital needs.
In the event our cash flow is inadequate to meet our debt service and working capital requirements, we may be required, to the extent permitted under our amended and restated credit agreement and any other credit facilities, to seek additional financing in the debt or equity markets, refinance or restructure all or a portion of our indebtedness, sell selected assets or reduce or delay planned capital or operating expenditures. However, any insufficient cash flow may make it more difficult for us to obtain financing on terms that are acceptable to us, or at all. We could also face substantial liquidity problems. If we are unable to generate sufficient cash flow or otherwise obtain funds needed to make required payments under our indebtedness, or if we breach any covenants under our indebtedness, we would be in default under its terms and the holders of such indebtedness may be able to accelerate the maturity of such indebtedness, which could cause defaults under our other indebtedness.
Increased power costs and limited availability of power resources may adversely affect our results of operations.
We are a large consumer of power and costs of power account for a significant portion of our cost of revenue. We require power supply to provide many services we offer, such as powering and cooling our customers' servers and network equipment and operating critical data center plant and equipment infrastructure.
The amount of power our customers require may increase as they adopt new technologies, such as virtualization of hardware resources. As a result, the average amount of power utilized per server is increasing, which in turn increases power consumption required to cool the data center facilities. Pursuant to our service agreements, we provide our customers with a committed level of power supply availability. Historically, our energy costs have been seasonal, with increased costs primarily in the summer months that have affected our results of operations. Additionally, we have also committed to operating our data centers with 100% clean and renewable energy. While we are currently able to obtain 100% clean and renewable energy at costs that we believe are reasonable, a significant increase in the cost of clean and renewable energy or a decrease in its availability could have materially adverse consequences. These consequences could include placing us at a cost disadvantage if we are forced to increase our fees for providing, or damaging our brand and reputation if we are unable to provide, 100% clean and renewable energy. Although we aim to improve the energy efficiency of the data center facilities that we operate, there can be no assurance such data center facilities will be able to deliver sufficient power to meet the growing needs of our customers. Moreover, we may not be able to address those customers' needs with 100% clean and renewable energy. We may lose customers or our customers may reduce the services purchased from us due to increased power costs and limited availability of power resources, including clean and renewable power resources, or we may incur costs for data center space which we cannot utilize, which would reduce our revenue and have a material and adverse effect on our cost of revenue and results of operations.
We attempt to manage our power resources and limit exposure to system downtime due to power outages from the electric grid by having redundant power feeds from the grid and by using backup generators and battery power. However, these protections may not limit our exposure to power shortages or outages entirely. Any system downtime resulting from insufficient power resources or power outages could damage our reputation and lead us to lose current and potential customers, which would harm our financial condition and results of operations.
We generate significant revenue from data centers located in one location and a significant disruption to this location could materially and adversely affect our operations.
We generate significant revenue from data centers located at The Core Campus in Las Vegas, and a significant disruption to this location could materially and adversely affect our operations. The Pyramid Campus in Grand Rapids and The Citadel Campus near Reno opened in June 2016 and November 2016, respectively. As of December 31, 2017, both locations are in the first phase of development and will require additional capital investment to reach full build out and the revenue contribution from these locations is relatively small in comparison to The Core Campus in Las Vegas. Our data centers located in Las Vegas

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comprised 93.9% of our revenue during the year ended December 31, 2017. The occurrence of a catastrophic event, or a prolonged disruption in this region could materially and adversely affect our operations.
Any failure in the critical systems of the data center facilities we operate or services we provide could lead to disruptions in our customers' businesses and could harm our reputation and result in financial penalty and legal liabilities, which would reduce our revenue and have a material adverse effect on our results of operation.
The critical systems of the data center facilities we operate and the services we provide are subject to failure. Any failure in the critical systems of any data center facility we operate or services that we provide, including a breakdown in critical plant, equipment or services, such as the cooling equipment, generators, backup batteries, routers, switches, or other equipment, power supplies, or network connectivity, whether or not within our control, could result in service interruptions and data losses for our customers as well as equipment damage, which could significantly disrupt the normal business operations of our customers and harm our reputation and reduce our revenue. Any failure or downtime in one of the data center facilities that we operate could affect many of our customers. The total destruction or severe impairment of any of the data center facilities we operate could result in significant downtime of our services and loss of customer data. Since our ability to attract and retain customers depends on our ability to provide highly reliable service, even minor interruptions in our service could harm our reputation and cause us to incur financial penalties. The services we provide are subject to failures resulting from numerous factors, including:
power loss;
equipment failure;
human error or accidents;
theft, sabotage and vandalism;
failure by us or our suppliers to provide adequate service or maintenance to our equipment;
network connectivity downtime and fiber cuts;
security breaches to our infrastructure;
improper building maintenance by us;
physical, electronic and cyber security breaches;
fire, earthquake, hurricane, tornado, flood and other natural disasters;
extreme temperatures;
water damage;
public health emergencies; and
terrorism.
We provide service level commitments to our customers. As a result, service interruptions or equipment damage in our data centers could result in credits to these customers. We cannot assure you that our customers will accept these credits as compensation. Service interruptions and equipment failures may also damage our brand image and reputation. Significant or frequent service interruptions could reduce the confidence of our customers and cause our customers to terminate or not renew their licenses. In addition, we may be unable to attract new customers if we have a reputation for significant or frequent service disruptions in our data centers.
Moreover, service interruptions and equipment failures may expose us to legal liability. As our services are critical to many of our customers' business operations, any disruption in our services could result in lost profits or other indirect or consequential damages to our customers. Although our customer contracts typically contain provisions that limit our liability for breach of the agreement, including failing to meet our service level commitments, there can be no assurance that a court would enforce any contractual limitations on our liability in the event that one of our customers brings a lawsuit against us as the result of a service interruption that they may ascribe to us. The outcome of any such lawsuit would depend on the specific facts of the case and any legal and policy considerations that we may not be able to mitigate. In such cases, we could be liable for substantial damage awards.
Delays in the expansion of existing data centers or the construction of new data centers could involve significant risks to our business.
In order to meet customer demand and the continued growth of our business, we need to expand existing data centers or obtain suitable land to build new data centers. Expansion of existing data centers and construction of new data centers are currently underway or being contemplated, and such expansion and construction requires us to carefully select and rely on the experience of one or more designers, general contractors and subcontractors during the design and construction process. If a designer or

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contractor experiences financial or other problems during the design or construction process, we could experience significant delays and incur increased costs to complete the projects, resulting in negative impacts on our results of operations.
In addition, we need to work closely with the local power suppliers, and sometimes local governments, where we propose to locate our data centers. Delays in actions that require the assistance of such third parties, or delays in receiving required permits and approvals from such parties, may also affect the speed with which we complete data center projects or result in their not being completed at all. We have experienced such delays in receiving approvals and permits or in actions to be taken by third parties in the past and may experience them again in the future.
If we experience significant delays in the supply of power required to support the data center expansion or new construction, either during the design or construction phases, the progress of the data center expansion and construction could deviate from our original plans, which could cause material and negative effects to our revenue growth, profitability and results of operations.
We are continuing to invest in our expansion efforts but may not have sufficient customer demand in the future to realize expected returns on these investments.
We expect to continue to expand our data center footprint. In connection with our expansion plans, we may be required to commit significant operational and financial resources, but there can be no guarantee we will have sufficient customer demand in those markets to support data centers once built. This risk may be greater in a market where we have not operated previously. Once development of a data center facility is complete, we incur certain operating expenses even if there are no customers occupying any space. Consequently, if any of our properties have significant vacancies for an extended period of time, our results of operations and business and financial condition will be affected adversely, the impact of which could be material. In addition, unanticipated technological changes could affect customer requirements for data centers, and we may not have built such requirements into our new data centers. If any of these developments or contingencies were to occur, it could make it difficult for us to realize expected or reasonable returns on our investments.
If we fail to protect our proprietary intellectual property rights adequately, our competitive position could be impaired, and we may lose valuable assets, generate reduced revenue and incur costly litigation to protect our rights.
Our success depends, in part, on our ability to protect our proprietary intellectual property rights, including certain methodologies, practices, tools, technologies and technical expertise we utilize in designing, developing, implementing and maintaining applications and processes used in providing our services. We rely on a combination of patent, trademark, trade secrets and other intellectual property laws, non-disclosure agreements with our employees, consultants, customers and other relevant persons and other measures to protect our intellectual property, including our brand identity. However, the steps we take to protect our intellectual property may be inadequate, and we may choose not to pursue or maintain protection for our intellectual property in the United States or foreign jurisdictions. We will not be able to protect our intellectual property if we are unable to enforce our rights or if we do not detect unauthorized use of our intellectual property. Despite our precautions, it may be possible for unauthorized third parties to copy our technology and use information that we regard as proprietary to create technology that competes with ours. In addition, the laws of some countries do not protect proprietary rights to the same extent as the laws of the United States, and mechanisms for enforcement of intellectual property rights in some foreign countries may be inadequate. To the extent we expand our international activities, our exposure to unauthorized copying and use of our technologies and proprietary information may increase. Accordingly, despite our efforts, we may be unable to prevent third parties from infringing upon or misappropriating our technology and intellectual property.
We rely in part on trade secrets, proprietary know-how and other confidential information to maintain our competitive position. Although we enter into non-disclosure and invention assignment agreements with our employees, enter into non-disclosure agreements with our customers, consultants and other parties with whom we have strategic relationships and business alliances and enter into intellectual property assignment agreements with our consultants and vendors, no assurance can be given that these agreements will be effective in controlling access to and distribution of our technology and proprietary information. In addition, these agreements do not prevent our competitors from independently developing technologies that are substantially equivalent or superior to our products.
To protect our intellectual property rights, we may be required to spend significant resources to monitor and protect these rights. Litigation may be necessary in the future to enforce our intellectual property rights and to protect our trade secrets. Such litigation could be costly, time consuming and distracting to management and could result in the impairment or loss of portions of our intellectual property. Furthermore, our efforts to enforce our intellectual property rights may be met with defenses, counterclaims and countersuits attacking the validity and enforceability of our intellectual property rights. Our inability to protect our proprietary technology, as well as any costly litigation or diversion of our management's attention and resources, could disrupt our business, as well as have a material adverse effect on our financial condition and results of operations.

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We may in the future be subject to intellectual property disputes, which are costly to defend and could harm our business and operating results.
We may from time to time face allegations that we have infringed the patents, copyrights, trademarks and other intellectual property rights of third parties, including from our competitors. We may be unaware of the intellectual property rights that others may claim cover some or all of our technology or services. Patent and other intellectual property litigation may be protracted and expensive, and the results are difficult to predict and may require us to stop using certain technologies or offering certain services or may result in significant damage awards or settlement costs.
Even if these matters do not result in litigation or are resolved in our favor or without significant cash settlements, these matters, and the time and resources necessary to litigate or resolve them, could divert the time and resources of our management team and harm our business, our operating results and our reputation.
We rely on the proper and efficient functioning of computer and data-processing systems, and a large-scale malfunction could have a material adverse effect on us.
Our ability to keep our data centers operating depends on the proper and efficient functioning of computer and data-processing systems. Since computer and data-processing systems are susceptible to malfunctions and interruptions, including those due to equipment damage, power outages, computer viruses and a range of other hardware, software and network problems, we cannot guarantee that our data centers will not experience such malfunctions or interruptions in the future. Additionally, expansions and developments in the products and services that we offer could increasingly add a measure of complexity that may overburden our data center and network resources and human capital, making service interruptions and failures more likely. A significant or large-scale malfunction or interruption of one or more of any of our data centers' computer or data-processing systems could adversely affect our ability to keep such data centers running efficiently. If a malfunction results in a wider or sustained disruption to business at a property, it could have a material adverse effect on us.
We may be vulnerable to security breaches, which could disrupt our operations and have a material adverse effect on our financial condition and results of operations.
We provide the infrastructure and physical security for our customers' IT equipment, which often contains highly confidential and mission critical data. A party who is able to compromise the physical security measures protecting our data center facilities could misappropriate our or our customers' proprietary information or cause interruptions or malfunctions in our operations. As we provide assurances to our customers that we provide the highest level of security, such a compromise could be particularly harmful to our brand and reputation. We may be required to expend significant capital and resources to protect against such threats or to alleviate problems caused by breaches in security. As techniques used to breach security change frequently and are often not recognized until launched against a target, we may not be able to implement new security measures in a timely manner or, if and when implemented, we may not be certain whether these measures could be circumvented. Any breaches that may occur could expose us to increased risk of lawsuits, regulatory penalties, loss of existing or potential customers, harm to our reputation and increases in our security costs, which could have a material adverse effect on our financial condition and results of operations.
In addition, any assertions of alleged security breaches or systems failure made against us, whether true or not, could harm our reputation, cause us to incur substantial legal fees and have a material adverse effect on our business, reputation, financial condition and results of operations. Whether or not any such assertion actually proceeds to litigation, we may be required to devote significant management time and attention to its resolution (through litigation, settlement or otherwise), which would detract from our management's ability to focus on our business. Any such resolution could involve the payment of damages or expenses by us, which may be significant. In addition, any such resolution could involve our agreement with terms that restrict the operation of our business.
A significant portion of our revenue is highly dependent on a limited number of customers, and the loss of, or any significant decrease in business from, these customers could adversely affect our financial condition and results of operations.
Our top 10 customers accounted for approximately 38.5% of our revenue for the year ended December 31, 2017.
A number of factors could cause us to lose customers. For instance, because many of our contracts involve services that are mission-critical to our customers, any failure by us to meet a customer's expectations could result in cancellation or non-renewal of the contract. Our service agreements usually allow our customers to terminate their agreements with us before the end of the contract period under certain specified circumstances, including our failure to deliver services as required under such agreements, and in some cases without cause as long as sufficient notice is given. In addition, our customers may decide to reduce spending on our services or demand price reductions due to a challenging economic environment or other factors, both internal and external, relating to their business such as corporate restructuring or changing their outsourcing strategy by moving more facilities in-house or outsourcing to other service providers. In addition, our reliance on any individual customer for a significant portion of our revenue may give that customer a degree of pricing leverage against us when negotiating contracts and terms of services with us.

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The loss of any of our major customers, or a significant decrease in the extent of the services that they outsource to us or the price at which we sell our services to them, could materially and adversely affect our financial condition and results of operations.
Our customer contract commitments are subject to reduction and potential cancellation.
Some of our customer contracts allow for early termination, subject to payment of specified costs and penalties, which may be less than the revenue we would expect to receive under such contracts. Our customer contract commitments could significantly decrease if any of the customer contracts are terminated either pursuant to, or in violation of, the terms of such contract. In addition, our customer contract commitments during a particular future period may be reduced for reasons outside of our customers' control, such as general current economic conditions. If our customer contract commitments are significantly reduced, our results of operations and the price of our Class A common stock could be materially and adversely affected.
Even if our current and future customers have entered into a binding contract with us, they may choose to terminate such contract prior to the expiration of its terms. Any penalty for early termination may not adequately compensate us for the time and resources we have expended in connection with such contract, or at all, which could have a material adverse effect on our results of operations and cash flows.
Our customer base may decline if our customers or potential customers develop their own data centers or expand their own existing data centers.
Some of our customers have in the past, and may in the future, develop their own data center facilities. Other customers with their own existing data centers may choose to expand their data center operations in the future. One of our business strategies is to sell or lease our single-user data centers. In the event that any of our key customers were to develop or expand their own data centers, we may lose business, fail to execute on our strategy of our single-user data centers or face pressure as to the pricing of our services. In addition, if we fail to offer services that are cost-competitive and operationally advantageous as compared with services provided in-house by our customers, we may lose customers or fail to attract new customers. If we lose a customer, there is no assurance that we would be able to replace that customer at the same or a higher rate, or at all, and our business and results of operations would suffer.
Our churn rate may increase or we may be unable to achieve high contract renewal rates.
We seek to renew customer contracts when those contracts are due for renewal. We endeavor to provide high levels of customer service, support and satisfaction to maintain long-term customer relationships and to secure high rates of contract renewals for our services. Nevertheless, we cannot assure you that we will be able to renew service contracts with our existing customers or re-commit space relating to expired service contracts to new customers if our current customers do not renew their contracts. In the event of a customer's termination or non-renewal of expired contracts, our ability to enter into service contracts so that new or other existing customers utilize the expired existing space in a timely manner will affect our results of operations.
If we do not succeed in attracting new customers for our services and growing revenue from existing customers, we may not achieve our anticipated revenue growth.
Our ability to attract new customers and grow revenue from existing customers depends on a number of factors, including our ability to offer high quality services at competitive prices, the strength of our competitors and the capabilities of our marketing and sales teams to attract new customers. If we fail to attract new customers or grow revenue from existing customers, we may not be able to grow our revenue as quickly as we anticipate or at all.
The migration from colocation data centers to the public cloud may have a material adverse effect on our results of operations.
Although the demand for public cloud solutions is growing rapidly, we anticipate that there will continue to be a strong demand for colocation data centers. If our assumptions prove to be incorrect, the migration from colocation data centers to the cloud could harm our financial condition and results of operations.
Unanticipated changes in the tax rates and policies of the states in which we operate could materially and adversely affect our results of operations.
We strategically choose the locations of our U.S. campuses. One of the factors we consider is the favorable tax rates and policies that provide zero or low-tax environments for our customers to deploy IT equipment. If the tax rates and policies of the states in which our data centers are located expose our customers to higher taxes, our data centers may become less attractive to certain of our existing and potential customers, which could materially and adversely affect our results of operations.
The loss of one or more of our key personnel, or our failure to attract and retain other highly qualified personnel in the future, could seriously harm our business.
We depend to a significant degree on the continuous service and performance of Rob Roy, our Founder, Chairman and Chief Executive Officer, and our experienced senior management team and other key personnel, any of whom could resign or be

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terminated for any reason at any time. Mr. Roy has been responsible for our company's strategic vision and the development of our technology and business. If he stopped working for us for any reason, it is unlikely that we would be able to find a suitable replacement immediately. The loss of Mr. Roy, a member of our senior management team or any other key employee could disrupt our business operations and create uncertainty as we search for and integrate a replacement. If any member of our senior management or key employee leaves us to join a competitor or to form a competing company, any resulting loss of existing or potential customers to any such competitor could have a material adverse effect on our business, financial condition and results of operations. In addition, we do not maintain key man life insurance for any of the senior members of our management team or our key personnel.
Future consolidation and competition in our customers' industries could reduce the number of our existing and potential customers and make us dependent on a more limited number of customers.
Mergers or consolidations in our customers' industries in the future could reduce the number of our existing and potential customers and make us dependent on a more limited number of customers. If our customers merge with or are acquired by other entities that are not our customers, they may discontinue or reduce the use of our data centers in the future. Additionally, some of our customers may compete with one another in various aspects of their businesses, which places additional competitive pressures on our customers. Any of these developments could have a material adverse effect on us.
We may not be able to compete effectively against our current and future competitors.
We offer a broad range of data center services and, as a result, we may compete with a wide range of data center service providers for some or all of the services we offer. We face competition from numerous developers, owners and operators in the data center industry, including managed service providers and REITs, some of which own or lease properties similar to ours, or may do so in the future, in the same submarkets in which our properties are located. In particular, cloud offerings may influence our customers to move workloads to cloud providers, which may reduce the services our customers obtain from us. Our current and future competitors may vary by size and service offerings and geographic presence. In addition, many data center companies are consolidating to create new companies with greater market power.
Competition is primarily centered on reputation and track record, quality and availability of data center space, quality of service, technical expertise, security, reliability, functionality, breadth and depth of services offered, geographic coverage, scale, financial strength and price. Some of our current and future competitors may have greater brand recognition, longer operating histories, stronger marketing, technical and financial resources and access to greater and less expensive power than we do. In addition, many companies in the industry are consolidating, which could further increase the market power of our competitors. As a result, some of our competitors may be able to:
offer space at pricing below current market rates or below the pricing we currently charge our customers;
bundle colocation services with other services or equipment they provide at reduced prices;
develop superior products or services, gain greater market acceptance and expand their service offerings more efficiently or rapidly;
adapt to new or emerging technologies and changes in customer requirements more quickly;
take advantage of acquisition and other opportunities more readily; and
adopt more aggressive pricing policies and devote greater resources to the promotion, marketing and sales of their services.
We operate in a competitive market, and we face pricing pressure for our services. Prices for our services are affected by a variety of factors, including supply and demand conditions and pricing pressures from our competitors. We may be required to lower our prices to remain competitive, which may decrease our margins and adversely affect our business prospects, financial condition and results of operations.
We have government customers, which subjects us to risks including early termination, audits, investigations, sanctions and penalties.
We derive some revenue from contracts with U.S., state and local governments. Some of these customers may terminate all or part of their contracts at any time, without cause. There is increased pressure for governments and their agencies to reduce spending. Some of our contracts at the state and local levels are subject to government funding authorizations.
Additionally, government contracts are generally subject to audits and investigations that could result in various civil and criminal penalties and administrative sanctions, including termination of contracts, refund of a portion of fees received, forfeiture of profits, suspension of payments, fines and suspensions or debarment from future government business.


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If we are unable to adapt to evolving technologies and customer demands in a timely and cost-effective manner, our ability to sustain and grow our business may suffer.
The markets for the data centers we own and operate, as well as certain of the industries in which our customers operate, are characterized by rapidly changing technology, evolving industry standards, frequent new service introductions, shifting distribution channels and changing customer demands. As a result, our data center infrastructure may become less marketable due to demand for new processes and technologies, including, without limitation: (i) new processes to deliver power to, or eliminate heat from, IT equipment; (ii) customer demand for additional redundancy capacity; (iii) new technology that permits higher levels of critical load and heat removal than our data centers are currently designed to provide; and (iv) an inability of the power supply to support new, updated or upgraded technology. In addition, the systems that connect our data centers to the Internet and other external networks may become insufficient, including with respect to latency, reliability and diversity of connectivity. We may not be able to adapt to changing technologies or meet customer demands for new processes or technologies in a timely and cost-effective manner, if at all, which would adversely impact our ability to sustain and grow our business.
In addition, new technologies have the potential to replace or provide lower cost alternatives to our services. The adoption of such new technologies could render some or all of our services obsolete or unmarketable. We cannot guarantee that we will be able to identify the emergence of all of these new service alternatives successfully, modify our services accordingly, or develop and bring new services to market in a timely and cost-effective manner to address these changes. If and when we do identify the emergence of new service alternatives and introduce new services to market, those new services may need to be made available at lower profit margins than our then-current services. Failure to provide services to compete with new technologies or the obsolescence of our services could lead us to lose current and potential customers or could cause us to incur substantial costs, which would harm our operating results and financial condition. Our introduction of new alternative services that have lower price points than our current offerings may also result in our existing customers switching to the lower cost products, which could reduce our revenue and have a material adverse effect on our results of operation.
Potential future regulations that apply to industries we serve may require customers in those industries to seek specific requirements from their data centers that we are unable to provide. These may include physical security requirements applicable to the defense industry and government contractors and privacy and security regulations applicable to the financial services and health care industries. If such regulations were adopted or such extra requirements demanded by certain customers, we could lose some customers or be unable to attract new customers in certain industries, which would have materially and adverse effect our operations.
We depend on third parties to provide Internet, telecommunication and fiber optic network connectivity to our customers, and any delays or disruptions in service could have a material adverse effect on us.
Our products and infrastructure rely on third-party service providers. In particular, we depend on third parties to provide Internet, telecommunication and fiber optic network connectivity to the customers in our data centers, and we have no control over the reliability of the services provided by these suppliers. Our customers may in the future experience difficulties due to service failures unrelated to our systems and services. Any Internet, telecommunication or fiber optic network failures may result in significant loss of connectivity to our data centers. A significant loss of connectivity to our data centers could reduce the confidence of our customers and impair our ability to retain existing customers or attract new customers, which could have a material adverse effect on us.
Similarly, we depend upon the presence of Internet, telecommunications and fiber optic networks serving the locations of our data centers in order to attract and retain customers. The construction required to connect multiple carrier facilities to our data centers is complex, requiring a sophisticated redundant fiber network, and involves matters outside of our control, including regulatory requirements and the availability of construction resources. Each new data center that we develop requires significant amounts of capital for the construction and operation of a sophisticated redundant fiber network. We believe that the availability of carrier capacity affects our business and future growth. We cannot assure you that any carrier will elect to offer its services within our data centers or that once a carrier has decided to provide connectivity to our data centers that it will continue to do so for any period of time. Furthermore, some carriers are experiencing business difficulties or have announced consolidations or mergers. As a result, some carriers may be forced to downsize or terminate connectivity within our data centers, which could adversely affect our customers and could have a material adverse effect on us.
The occurrence of a catastrophic event or a prolonged disruption may exceed our insurance coverage by significant amounts.
Our operations are subject to hazards and risks normally associated with the daily operations of our data center facilities. Currently, we maintain various insurance policies for business interruption for lost profits, property and casualty, public liability, commercial employee insurance, worker's compensation, personal property and auto liability. Our business interruption insurance for lost profits includes coverage for business interruptions, our property and casualty insurance includes coverage for equipment breakdowns and our commercial employee insurance includes employee group insurance. We are self-insured for medical insurance. We believe our insurance coverage adequately covers the risks of our daily business operations.

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However, our current insurance policies may be insufficient in the event of a prolonged or catastrophic event. The occurrence of any such event that is not entirely covered by our insurance policies may result in interruption of our operations and subject us to significant losses or liabilities and damage our reputation as a provider of business continuity services. In addition, any losses or liabilities that are not covered by our current insurance policies may have a material adverse effect on our business, financial condition and results of operations.
Environmental problems are possible and can be costly.
Environmental liabilities could arise on the land that we own and have a material adverse effect on our financial condition and performance. Federal, state and local laws and regulations relating to the protection of the environment may require a current or previous owner or operator of real estate to investigate and remediate hazardous or toxic substances or petroleum product releases at or from the property. In addition, we could incur costs to comply with such laws and regulations, the violation of which could lead to substantial fines and penalties.
We may have to pay governmental entities or third parties for property damage and for investigation and remediation costs that they incurred in connection with any contamination at our current and former properties without regard to whether we knew of or caused the presence of the contaminants. Even if more than one person may have been responsible for the contamination, each person covered by these environmental laws may be held responsible for all of the clean-up costs incurred.
Some of the properties may contain asbestos-containing building materials. Environmental laws require that asbestos-containing building materials be properly managed and maintained, and may impose fines and penalties on building owners or operators for failure to comply with these requirements.
Our leases for self-developed data centers could be terminated early and we may not be able to renew our existing leases and agreements on commercially acceptable terms or our rent or payment under the agreements could increase substantially in the future, which could materially and adversely affect our operations.
Two of our facilities and one of our facilities under development are located on properties for which we have long term operating and capital leases. In some instances, we may elect to exercise an option to purchase the leased premises and facilities, or in other instances, elect to extend the term of certain leases, in each case, according to the terms and conditions under the relevant lease agreements. However, upon the expiration of such leases (including any extension terms), we may not be able to renew these leases on commercially reasonable terms, if at all. Even though the lessors for most of our data centers generally do not have the right of unilateral early termination unless they provide the required notice and opportunity to cure (as applicable), the lease may nonetheless be terminated early if we are in material breach of the lease agreements.We may assert claims for compensation against the landlords if they elect to terminate a lease agreement early and without due cause. If the leases for our data centers were terminated early prior to their expiration date, notwithstanding any compensation we may receive for early termination of such leases, or if we are not able to renew such leases, we may have to incur significant cost related to relocation. Our leased facilities are located in properties that are subject to master ground leases. If the landlords under such master ground leases elect to terminate the respective master leases in case of default or breach by the master lessees thereunder or otherwise pursuant to the terms and conditions of the relevant master lease, we may not be able to protect our leasehold interest, and may be ordered to vacate the affected premises. Any relocation could also affect our ability to provide continuous uninterrupted services to our customers and harm our reputation. As a result, our business and results of operations could be materially and adversely affected.
Any difficulties in identifying and consummating future acquisitions, alliances or joint ventures may expose us to potential risks and have an adverse effect on our business, results of operations or financial condition.
We may seek to make strategic acquisitions and enter into alliances and joint ventures to further expand our business. If we are presented with appropriate opportunities, we may acquire additional businesses, services, resources, or assets, including data centers that are complementary to our primary business. Our integration of the acquired entities or assets into our business may not be successful and may not enable us to expand into new services, customer segments or operating locations as well as we expect. This would significantly affect the expected benefits of these acquisitions. Moreover, the integration of any acquired entities or assets into our operations could require significant attention from our management. The diversion of our management's attention and any difficulties encountered in any integration process could have an adverse effect on our ability to manage our business. In addition, we may face challenges trying to integrate new operations, services and personnel with our existing operations. Our possible future acquisitions may also expose us to other potential risks, including risks associated with unforeseen or hidden liabilities, the diversion of resources from our existing businesses and technologies, our inability to generate sufficient revenue to offset the costs, expenses of acquisitions and potential loss of, or harm to, relationships with employees and customers as a result of our integration of new businesses. The occurrence of any of these events could have a material and adverse effect on our ability to manage our business, our financial condition and our results of operations.

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If our or our customers' proprietary intellectual property or confidential information is misappropriated or disclosed by us or our employees in violation of applicable laws and contractual agreements, we could be exposed to protracted and costly legal proceedings, lose customers and our business could be seriously harmed.
Our employees could disclose or use our technical knowledge, practices or procedures without authorization. We have entered into confidentiality agreements with our employees that contain nondisclosure covenants that survive indefinitely as to our trade secrets. Pursuant to these confidentiality agreements, our employees are required to assign any of their inventions that are developed or reduced to practice during their employment with us that pertain to any of our lines of business activity, that are aided by the use of our time, materials or facilities, or that relate to any of their work with us. However, we may not be able to enforce the confidentiality agreements we have with our personnel.
Additionally, our customers occasionally provide us and our employees access to proprietary intellectual property and confidential information, including technology, software products, business policies and plans, trade secrets and personal data. Many of our customer contracts require us not to use or disclose such intellectual property or information and to indemnify our customers for any loss they may suffer as a result of any unauthorized use or disclosure. We use security technologies and other methods to prevent employees from making unauthorized copies, or using or disclosing such intellectual property and confidential information without authorization. The confidentiality agreements we enter into with our employees limit access to and distribution of our customers' intellectual property and other confidential information as well as our own. However, these steps may not be adequate to safeguard our and our customers' intellectual property and confidential information. Moreover, some of our customer contracts do not include any limitation on our liability with respect to breaches of our obligation to keep the intellectual property or confidential information we receive from them confidential. In addition, we may not always be aware of intellectual property registrations or applications relating to source codes, software products or other intellectual property belonging to our customers. As a result, if we or our employees misappropriate our customers' proprietary rights, our customers may consider us liable for such act and seek damages and compensation from us.
Assertions of infringement of intellectual property or misappropriation of confidential information against us, if successful, could have a material adverse effect on our business, financial condition and results of operations. Protracted litigation could also result in existing or potential customers deferring or limiting their purchase or use of our services until resolution of such litigation. Even if such assertions against us are unsuccessful, they may cause us to lose existing and future business and incur reputational harm and substantial legal fees.
Competition for employees is intense, and we may not be able to attract and retain the qualified and skilled employees needed to support our business.
We believe our success depends on the efforts and talent of our employees, including data center design, construction management, operations, engineering, IT, risk management, and sales and marketing personnel. Our future success depends on our continued ability to attract, develop, motivate and retain qualified and skilled employees. Competition for highly skilled personnel is frequently intense. We may not be able to hire and retain these personnel at compensation levels consistent with our existing compensation and salary structure. Some of the companies with which we compete for experienced employees have greater resources than we have and may be able to offer more attractive terms of employment.
In addition, we invest significant time and expenses in training our employees, which increases their value to competitors who may seek to recruit them. If we fail to retain our employees, we could incur significant expenses in hiring and training their replacements, and the quality of our services and our ability to serve our customers could diminish, resulting in a material adverse effect to our business.
We have entered, and expect to continue to enter, into joint venture, strategic collaborations and other similar arrangements, and these activities involve risks and uncertainties. A failure of any such relationship could have a material adverse effect on our business and results of operations.
We have entered, and expect to continue to enter, into joint venture, strategic collaborations and other similar arrangements. These activities involve risks and uncertainties, including the risk of the joint venture or applicable entity failing to satisfy its obligations, which may result in certain liabilities to us for guarantees and other commitments, the challenges in achieving strategic objectives and expected benefits of the business arrangement, the risk of conflicts arising between us and our partners and the difficulty of managing and resolving such conflicts, and the difficulty of managing or otherwise monitoring such business arrangements. A failure of our business relationships could have a material adverse effect on our business and results of operations.
The uncertain economic environment may have an adverse impact on our business and financial condition.
The uncertain economic environment could have an adverse effect on our liquidity. While we believe we have a strong customer base, if the current market conditions were to worsen, some of our customers may have difficulty paying us and we may experience increased churn in our customer base and reductions in their commitments to us. We may also be required to make allowances for doubtful accounts and our results would be negatively impacted. Our sales cycle could also be lengthened if customers reduce spending on, or delay decision-making with respect to, our services, which could adversely affect our

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revenue growth and our ability to recognize revenue. We could also experience pricing pressure as a result of economic conditions if our competitors lower prices and attempt to lure away our customers with lower cost solutions. Finally, our ability to access the capital markets may be severely restricted at a time when we would like, or need, to do so, which could have an impact on our flexibility to pursue additional expansion opportunities and maintain our desired level of revenue growth in the future.
Our international operations through our joint venture may expose us to certain operating, legal and other risks, which could adversely affect our business, results of operations and financial condition.
Our joint venture's international operations may expose us to risks that we have not generally faced in the United States. These risks include:
challenges caused by distance, language, cultural and ethical differences and the competitive environment;
heightened risks of unethical, unfair or corrupt business practices, actual or claimed, in certain geographies and of improper or fraudulent sales arrangements that may impact financial results and result in restatements of, and irregularities in, financial statements;
foreign exchange restrictions and fluctuations in currency exchange rates;
application of multiple and conflicting laws and regulations, including complications due to unexpected changes in foreign laws and regulatory requirements;
new and different sources of competition;
potentially different pricing environments, longer sales cycles and longer accounts receivable payment cycles and collections issues;
management communication and integration problems resulting from cultural differences and geographic dispersion;
potentially adverse tax consequences, including multiple and possibly overlapping tax structures, the complexities of foreign value-added tax systems, restrictions on the repatriation of earnings and changes in tax rates;
greater difficulty in enforcing contracts, accounts receivable collection and longer collection periods;
the uncertainty and limitation of protection for intellectual property rights in some countries;
increased financial accounting and reporting burdens and complexities;
lack of familiarity with local laws, customs and practices, and laws and business practices favoring local competitors or partners; and
political, social and economic instability abroad, terrorist attacks and security concerns in general.
The occurrence of any one of these risks could harm our international business and, consequently, our results of operations. Additionally, operating in international markets requires significant management attention and financial resources. We cannot be certain that the investment and additional resources required to operate in other countries will produce desired levels of revenue or profitability.
In addition, our agreement with our international joint venture partner limits our ability to engage in activities or transactions outside of the United States. Although we expressly retain the right to construct and license third parties to construct single-user data centers outside of the United States, we are required to grant our joint venture the reasonable opportunity to interact and reach an agreement with such customer to develop a colocation facility prior to concluding our agreement with such third party. Furthermore, in the event any such single-user data center outside the United Stated using our technology is made available to third parties as colocation space, such data center will be deemed a facility subject to our license agreement. We would then be required to make appropriate arrangements to acknowledge SUPERNAP International, S.A.'s license rights in, and to, the technology for the multitenant data center. These limitations may prevent us from pursuing otherwise attractive and potentially lucrative international expansion opportunities.
Future legislation and regulation, both domestic and abroad, governing the internet and other related communications services could have an adverse effect on our business operations.
Various laws and governmental regulations, both in the United States and abroad, governing internet related services, related communications services and information technologies remain largely unsettled, even in areas where there has been some legislative action. There may also be forthcoming regulation in the United States in the areas of cybersecurity, data privacy and data security, any of which could affect us and our customers. Similarly, data privacy regulations outside of the United States continue to evolve. Future legislation could impose additional costs on our business or require us to make changes in our operations, which could adversely affect our operations.

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Our facilities may not be suitable for uses other than as data centers, which could make it difficult to sell or reposition them and could materially adversely affect our business, results of operations and financial condition.
Our data centers are designed primarily to house and run IT equipment and, therefore, contain extensive electrical and mechanical systems and infrastructure. As a result, our facilities may not be suitable for uses other than as data centers, or may require major renovations and expenditures before they can be re-leased or sold for uses other than as data centers.
Risks Related to Our Organizational Structure
Our principal asset is our interest in Switch, Ltd., and, accordingly, we depend on distributions from Switch, Ltd. to pay our taxes and expenses, including payments under the Tax Receivable Agreement. Switch, Ltd.'s ability to make such distributions may be subject to various limitations and restrictions.
We are a holding company and have no material assets other than our ownership of Common Units. We have no independent means of generating revenue or cash flow. We have determined that Switch, Ltd. is a variable interest entity, or VIE, and that we are the primary beneficiary of Switch, Ltd. Accordingly, pursuant to the VIE accounting model, we have consolidated Switch, Ltd. in our consolidated financial statements. In the event of a change in accounting guidance or amendments to the Switch Operating Agreement resulting in us no longer having a controlling interest in Switch, Ltd., we may not be able to consolidate its results of operations with our own, which would have a material adverse effect on our results of operations. Moreover, our ability to pay our taxes and operating expenses or declare and pay dividends in the future, if any, is dependent upon the financial results and cash flows of Switch, Ltd. and its subsidiaries and distributions we receive from Switch, Ltd. There can be no assurance that Switch, Ltd. and its subsidiaries will generate sufficient cash flow to distribute funds to us or that applicable state law and contractual restrictions, including negative covenants in our debt instruments, will permit such distributions.
Switch, Ltd. is treated as a partnership for U.S. federal income tax purposes and, as such, is not subject to any entity-level U.S. federal income tax. Instead, taxable income is allocated to holders of Common Units, including us. Accordingly, we incur income taxes on our allocable share of any net taxable income of Switch, Ltd. Under the terms of the Switch Operating Agreement, Switch, Ltd. is obligated to make tax distributions to holders of Common Units, including us. In addition to tax expenses, we will also incur expenses related to our operations, including payments under the Tax Receivable Agreement, which we expect could be significant. As the manager of Switch, Ltd., we intend to cause Switch, Ltd. to make cash distributions to the owners of Common Units in an amount sufficient to (i) fund their tax obligations in respect of taxable income allocated to them and (ii) cover our operating expenses, including payments under the Tax Receivable Agreement. However, Switch, Ltd.'s ability to make such distributions may be subject to various limitations and restrictions, such as restrictions on distributions that would either violate any contract or agreement to which Switch, Ltd. is then a party, including debt agreements, or any applicable law, or that would have the effect of rendering Switch, Ltd. insolvent. If we do not have sufficient funds to pay tax or other liabilities or to fund our operations, we may have to borrow funds, which could materially adversely affect our liquidity and financial condition and subject us to various restrictions imposed by any such lenders. To the extent that we are unable to make payments under the Tax Receivable Agreement for any reason, such payments generally will be deferred and will accrue interest until paid; provided, however, that nonpayment for a specified period may constitute a material breach of a material obligation under the Tax Receivable Agreement and therefore accelerate payments due under the Tax Receivable Agreement. In addition, if Switch, Ltd. does not have sufficient funds to make distributions, our ability to declare and pay cash dividends will also be restricted or impaired. See "Risks Related to Ownership of Our Class A Common Stock".
The Tax Receivable Agreement with the Members requires us to make cash payments to them in respect of certain tax benefits to which we may become entitled, and we expect that the payments we are required to make will be substantial.
Under the Tax Receivable Agreement we have entered into with Switch, Ltd. and the Members, we are required to make cash payments to the Members equal to 85% of the tax benefits, if any, that we actually realize, or in certain circumstances are deemed to realize, as a result of (i) the increases in the tax basis of assets of Switch, Ltd. resulting from any redemptions or exchanges of Common Units from the Members and (ii) certain other tax benefits related to our making payments under the Tax Receivable Agreement. Although the actual timing and amount of any payments that we make to the Members under the Tax Receivable Agreement will vary, we expect those payments will be significant. Any payments made by us to the Members under the Tax Receivable Agreement will generally reduce the amount of overall cash flow that might have otherwise been available to us. Furthermore, our future obligation to make payments under the Tax Receivable Agreement could make us a less attractive target for an acquisition, particularly in the case of an acquirer that cannot use some or all of the tax benefits that are the subject of the Tax Receivable Agreement. Payments under the Tax Receivable Agreement are not conditioned on any Member's continued ownership of Common Units or our Class A common stock.
The actual amount and timing of any payments under the Tax Receivable Agreement will vary depending upon a number of factors, including the timing of redemptions or exchanges by the holders of Common Units, the amount of gain recognized by

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such holders of Common Units, the amount and timing of the taxable income we generate in the future, and the federal tax rates then applicable.
Our Founder, Chief Executive Officer and Chairman has control over all stockholder decisions because he controls a substantial majority of the combined voting power of our common stock. This will limit or preclude your ability to influence corporate matters, including the election of directors, amendments of our organizational documents and any merger, consolidation, sale of all or substantially all of our assets, or other major corporate transaction requiring stockholder approval.
As of March 12, 2018, Rob Roy, our Founder, Chief Executive Officer and Chairman, and an affiliated entity of Mr. Roy collectively controlled approximately 67.2% of the combined voting power of our common stock as a result of their ownership of our Class C common stock, each share of which is entitled to 10 votes on all matters submitted to a vote of our stockholders, and Mr. Roy's ownership of Class A common stock.
As a result, Mr. Roy has the ability to substantially control us, including the ability to control any action requiring the general approval of our stockholders, including the election of our board of directors, the adoption of amendments to our articles of incorporation and bylaws and the approval of any merger or sale of substantially all of our assets. This concentration of ownership and voting power may also delay, defer or even prevent an acquisition by a third party or other change of control of us and may make some transactions more difficult or impossible without his support, even if such events are in the best interests of minority stockholders. This concentration of voting power with Mr. Roy may have a negative impact on the price of our Class A common stock. In addition, because shares of our Class C common stock have 10 votes per share on matters submitted to a vote of our stockholders for so long as Mr. Roy beneficially owns at least 21,472,324 shares of Class C common stock, we expect that Mr. Roy will be able to control our company for the foreseeable future.
As our Chief Executive Officer, Mr. Roy has control over our day-to-day management and the implementation of major strategic investments of our company, subject to authorization and oversight by our board of directors. As a board member and officer, Mr. Roy owes us fiduciary duties, including those of care and loyalty, and must act in good faith and with a view to our interests. However, Nevada law provides that a director or officer is not personally liable to a corporation for a breach of fiduciary duty except for an act or omission constituting a breach and which involves intentional misconduct, fraud or a knowing violation of law. In addition, a director or officer is entitled to a presumption that he or she acted in good faith, on an informed basis and with a view to the interests of the corporation, and is not individually liable unless that presumption is found by a trier of fact to have been rebutted. As a stockholder, even a controlling stockholder, Mr. Roy is entitled to vote his shares, and shares over which he has voting control, in his own interests, which may not always be in the interests of our stockholders generally. Because Mr. Roy, personally and through an affiliated entity, holds substantially all of his economic interest in our business through Switch, Ltd., rather than through us, he may have conflicting interests with holders of shares of our Class A common stock. For example, Mr. Roy may have a different tax position from us, which could influence his decisions regarding whether and when we should dispose of assets or incur new or refinance existing indebtedness, especially in light of the existence of the Tax Receivable Agreement, and whether and when we should undergo certain changes of control within the meaning of the Tax Receivable Agreement or terminate the Tax Receivable Agreement. In addition, the structuring of future transactions may take into consideration these tax or other considerations even where no similar benefit would accrue to us. In addition, Mr. Roy's significant ownership in us and resulting ability to control us may discourage someone from making a significant equity investment in us, or could discourage transactions involving a change in control, including transactions in which holders of shares of our Class A common stock might otherwise receive a premium for their shares over the then-current market price.
Our organizational structure, including the Tax Receivable Agreement, confers certain benefits upon the Members that will not benefit holders of Class A common stock to the same extent as it will benefit the Members.
Our organizational structure, including the Tax Receivable Agreement, confers certain benefits upon the Members that will not benefit the holders of our Class A common stock to the same extent as it will benefit the Members. We have entered into the Tax Receivable Agreement with Switch, Ltd. and the Members and it 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 circumstances are deemed to realize, as a result of (i) the increases in the tax basis of assets of Switch, Ltd. resulting from any redemptions or exchanges of Common Units from the Members, and (ii) certain other tax benefits related to our making payments under the Tax Receivable Agreement. Although we will retain 15% of the amount of such tax benefits, this and other aspects of our organizational structure may adversely affect the future trading market for the Class A common stock.
In certain cases, payments under the Tax Receivable Agreement to the Members may be accelerated or significantly exceed the actual benefits we realize in respect of the tax attributes subject to the Tax Receivable Agreement.
The Tax Receivable Agreement provides that upon certain mergers, asset sales, other forms of business combinations or other changes of control or if, at any time, we elect an early termination of the Tax Receivable Agreement, then our obligations, or our successor's obligations, under the Tax Receivable Agreement to make payments thereunder would be based on certain

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assumptions, including an assumption that we would have sufficient taxable income to fully utilize all potential future tax benefits that are subject to the Tax Receivable Agreement.
As a result of the foregoing, (i) we could be required to make payments under the Tax Receivable Agreement that are greater than the specified percentage of the actual benefits we ultimately realize in respect of the tax benefits that are subject to the Tax Receivable Agreement, and (ii) if we elect to terminate the Tax Receivable Agreement early, we would be required to make an immediate cash payment equal to the present value of the anticipated future tax benefits that are the subject of the Tax Receivable Agreement, which payment may be made significantly in advance of the actual realization, if any, of such future tax benefits. In these situations, our obligations under the Tax Receivable Agreement could have a substantial negative impact on our liquidity and could have the effect of delaying, deferring or preventing certain mergers, asset sales, other forms of business combinations or other changes of control. There can be no assurance that we will be able to fund or finance our obligations under the Tax Receivable Agreement.
We will not be reimbursed for any payments made to the Members under the Tax Receivable Agreement in the event that any tax benefits are disallowed.
Payments under the Tax Receivable Agreement are based on the tax reporting positions that we determine. The Internal Revenue Service, or IRS, or another tax authority may challenge all or part of the tax basis increases, as well as other related tax positions we take, and a court could sustain such challenge. If the outcome of any such challenge would reasonably be expected to materially affect a recipient's payments under the Tax Receivable Agreement, then we will not be permitted to settle or fail to contest such challenge without the consent (not to be unreasonably withheld or delayed) of each Member that directly or indirectly owns at least 10% of the outstanding Common Units. We will not be reimbursed for any cash payments previously made to the Members under the Tax Receivable Agreement in the event that any tax benefits initially claimed by us and for which payment has been made to a Member are subsequently challenged by a taxing authority and are ultimately disallowed. Instead, any excess cash payments we make to a Member will be netted against any future cash payments that we might otherwise be required to make to such Member under the terms of the Tax Receivable Agreement. However, we might not determine that we have made an excess cash payment to a Member for a number of years following the initial time of such payment. If a taxing authority challenges any of our tax reporting positions, we will not be permitted to reduce future cash payments under the Tax Receivable Agreement until such challenge is finally settled or determined. As a result, we could make payments under the Tax Receivable Agreement in excess of the tax savings that we realize in respect of the tax attributes with respect to a Member that are the subject of the Tax Receivable Agreement.
Fluctuations in our tax obligations and effective tax rate and realization of our deferred tax assets may result in volatility of our operating results.
We are subject to taxes by the U.S. federal, state, local and foreign tax authorities, and our tax liabilities will be affected by the allocation of expenses to differing jurisdictions. We record tax expense based on our estimates of future payments, which may include reserves for uncertain tax positions in multiple tax jurisdictions, and valuation allowances related to certain net deferred tax assets. At any one time, multiple tax years may be subject to audit by various taxing jurisdictions. The results of these audits and negotiations with taxing authorities may affect the ultimate settlement of these matters. We expect that throughout the year there could be ongoing variability in our quarterly tax rates as events occur and exposures are evaluated. Our future effective tax rates could be subject to volatility or adversely affected by a number of factors, including:
changes in the valuation of our deferred tax assets and liabilities;
expected timing and amount of the release of any tax valuation allowances;
tax effects of stock-based compensation;
changes in tax laws, regulations or interpretations thereof; or
future earnings being lower than anticipated in countries where we have lower statutory tax rates and higher than anticipated earnings in countries where we have higher statutory tax rates.
In addition, a variety of factors could materially affect our effective tax rate in a given financial statement period, including changes in the mix and level of earnings, varying tax rates in the different jurisdictions in which we operate, fluctuations in valuation allowances, deductibility of certain items, or changes to existing accounting rules or regulations. In addition, tax legislation may be enacted in the future, which could negatively affect our current or future tax structure and effective tax rates. We may be subject to audits of our income, sales, and other transaction taxes by U.S. federal, state, local, and foreign taxing authorities. Outcomes from these audits could have an adverse effect on our operating results and financial condition.
Changes in tax law may have an adverse effect on our business, financial condition, and results of operations and may also affect the federal tax considerations of the purchase, ownership, and disposition of our Class A common stock.
On December 22, 2017, President Trump signed into law the Tax Cuts and Jobs Act, or TCJA, a comprehensive tax reform bill that significantly changes the U.S. federal income taxation of entities treated as corporations for U.S. federal income tax

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purposes, including by reducing the U.S. corporate income tax rate, limiting interest deductions, adopting elements of a territorial tax system, revising the rules governing net operating losses. Many of these changes are effective immediately, without any transition periods or grandfathering for existing transactions. The TCJA is unclear in many respects and could be subject to potential amendments and technical corrections, as well as interpretations and implementing regulations by the Treasury and IRS, any of which could lessen or increase certain adverse impacts of the legislation. In addition, it is unclear how these U.S. federal income tax changes will affect state and local taxation, which often uses federal taxable income as a starting point for computing state and local tax liabilities.
While our analysis and interpretation of this legislation is preliminary and ongoing, based on our current evaluation, we expect that the reduction of the U.S. corporate income tax rate will require further analysis, which may be subject to further adjustment in subsequent periods throughout 2018 in accordance with recent interpretive guidance issued by the SEC. There may be other material adverse effects resulting from the legislation that we have not yet identified.
If we were deemed to be an investment company under the Investment Company Act of 1940, as amended, or the 1940 Act, as a result of our ownership of Switch, Ltd., applicable restrictions could make it impractical for us to continue our business as contemplated and could have a material adverse effect on our business.
Under Sections 3(a)(1)(A) and (C) of the 1940 Act, a company generally will be deemed to be an "investment company" for purposes of the 1940 Act if (i) it is, or holds itself out as being, engaged primarily, or proposes to engage primarily, in the business of investing, reinvesting or trading in securities or (ii) it engages, or proposes to engage, in the business of investing, reinvesting, owning, holding or trading in securities and it owns or proposes to acquire investment securities having a value exceeding 40% of the value of its total assets (exclusive of U.S. government securities and cash items) on an unconsolidated basis. We do not believe that we are an "investment company," as such term is defined in either of those sections of the 1940 Act.
As the manager of Switch, Ltd., we will control and operate Switch, Ltd. On that basis, we believe that our interest in Switch, Ltd. is not an "investment security" as that term is used in the 1940 Act. However, if we were to cease participation in the management of Switch, Ltd., our interest in Switch, Ltd. could be deemed an "investment security" for purposes of the 1940 Act.
We and Switch, Ltd. intend to conduct our operations so that we will not be deemed an investment company. However, if we were to be deemed an investment company, restrictions imposed by the 1940 Act, including limitations on our capital structure and our ability to transact with affiliates, could make it impractical for us to continue our business as contemplated and could have a material adverse effect on our business.
We are a controlled company within the meaning of the NYSE rules, and, as a result, we qualify for and rely on exemptions from certain corporate governance requirements that provide protection to stockholders of other companies. Our stockholders do not have the same protections afforded to stockholders of companies that are subject to such requirements.
We are considered a "controlled company" for the purposes of NYSE rules and corporate governance standards because the Founder Members control more than 50% of our combined voting power. As a controlled company, we are exempt from certain NYSE corporate governance requirements, including requirements that our board of directors have a majority of independent directors and that we either establish Compensation and Nominating and Corporate Governance Committees comprised entirely of independent directors, or otherwise ensure that the compensation of our executive officers and nominees for directors are determined or recommended to the board of directors by the independent members of the board of directors. While we have a majority of independent directors, our Compensation and Nominating and Corporate Governance Committees do not consist entirely of independent directors. Accordingly, our stockholders do not have the same protections afforded to stockholders of companies that are subject to all of the NYSE corporate governance requirements.
Risks Related to Ownership of Our Class A Common Stock
The Members have the right to have their Common Units redeemed or exchanged into shares of Class A common stock, which may cause volatility in our stock price.
We have an aggregate of more than 700,000,000 shares of Class A common stock authorized but unissued, including 216,568,963 shares of Class A common stock issuable upon redemption or exchange of Common Units. Subject to the restrictions set forth in the Switch Operating Agreement, the Members may have their Common Units redeemed for shares of our Class A common stock. We have also entered into the Registration Rights Agreement pursuant to which the shares of Class A common stock issued to the Members upon redemption of Common Units are eligible for resale, subject to certain limitations set forth therein.
We cannot predict the timing or size of any future issuances of our Class A common stock resulting from the redemption or exchange of Common Units or the effect, if any, that future issuances and sales of shares of our Class A common stock may have on the market price of our Class A common stock. Sales or distributions of substantial amounts of our Class A common

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stock, including shares issued in connection with an acquisition, or the perception that such sales or distributions could occur, may cause the market price of our Class A common stock to decline.
An active trading market for our Class A common stock may not be sustained.
Our Class A common stock is listed on the NYSE under the symbol "SWCH." However, we cannot assure you that an active trading market for our Class A common stock will be sustained. In addition, we cannot assure you that the liquidity of any trading market will provide you the ability to sell shares of our Class A common stock when or at prices that you desire.
If our operating and financial performance in any given period does not meet the guidance that we provide to the public, our stock price may decline.
We provide public guidance on our expected operating and financial results for future periods. Such guidance is comprised of forward-looking statements subject to the risks and uncertainties described in this report and in our other public filings and public statements. Our actual results may not always be in line with or exceed the guidance we have provided, especially in times of economic uncertainty. If, in the future, our operating or financial results for a particular period do not meet the guidance we provide or the expectations of investment analysts or if we reduce our guidance for future periods, the market price of our Class A common stock may decline as well.
If securities analysts do not publish research or reports about our business or if they publish negative evaluations of our Class A common stock, the price of our Class A common stock could decline.
The trading market for our Class A common stock relies in part on the research and reports that industry or financial analysts publish about us or our business. If one or more of the analysts covering our business downgrades their evaluations of our stock, the price of our Class A common stock could decline. If one or more of these analysts ceases to cover our Class A common stock, we could lose visibility in the market for our stock, which in turn could cause our Class A common stock price to decline.
The trading price of our Class A common stock may be volatile or may decline regardless of our operating performance.
Volatility in the market price of our Class A common stock may prevent you from being able to sell your shares at or above the price you paid for such shares. The market price of our Class A common stock may fluctuate significantly in response to a number of factors, most of which we cannot control, including:
our operating performance and prospects and those of other similar companies;
actual or anticipated variations in our financial condition, liquidity or results of operations;
changes in financial projections we may provide to the public or our failure to meet these projections;
change in the estimates of securities analysts relating to our earnings or other operating metrics;
publication of research reports about us, our significant customers, our competition, data center companies generally or the technology industry;
recruitment or departure of key personnel;
new laws or regulations or new interpretations of existing laws or regulations applicable to our business;
changes in market valuations of similar companies;
announcements by us or our competitors of significant technological innovations, acquisitions, strategic partnerships, joint ventures, or capital commitments;
actual or anticipated developments in our business or our competitors' businesses or the competitive landscape generally;
developments or disputes concerning our intellectual property or our services, or third-party proprietary rights;
adverse market reaction to leverage we may incur or equity we may issue in the future;
actions by institutional stockholders;
actual or perceived accounting issues, including changes in accounting standards, policies, guidelines, interpretations or principles;
compliance with NYSE requirements;
speculation in the press or investment community about our company or industry or the economy in general;
adverse developments in the creditworthiness, business or prospects of one or more of our significant customers;
lawsuits threatened or filed against us;

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other events or factors, including those resulting from war, incidents of terrorism, or responses to these events;
the realization of any of the other risk factors presented in this report;
the overall performance of the equity markets; and
general market and economic conditions.
Our anti-takeover provisions could prevent or delay a change in control of our company, even if such change in control would be beneficial to our stockholders.
Provisions of our amended and restated articles of incorporation and amended and restated bylaws, as well as provisions of Nevada law, could discourage, delay or prevent a merger, acquisition or other change in control of our company, even if such change in control would be beneficial to our stockholders. These provisions include:
the 10 vote per share feature of our Class C common stock;
authorizing the issuance of "blank check" preferred stock that could be issued by our board of directors to increase the number of outstanding shares and thwart a takeover attempt;
prohibiting the use of cumulative voting for the election of directors;
removal of incumbent directors only by the vote of stockholders with not less than two-thirds of the voting power of our outstanding stock;
prohibiting stockholders from calling special meetings;
requiring that our board of directors adopt a resolution in order to propose any amendment to our articles of incorporation before it may be considered for approval by our stockholders;
limiting the ability of stockholders to amend our bylaws and approve certain amendments to our articles of incorporation, in each case by requiring the affirmative vote of holders of at least two-thirds of the votes that stockholders would be entitled to cast in any annual election of directors;
after the Founder Members no longer beneficially own, directly or indirectly, at least 50% of the Class C common stock beneficially owned by the Founder Members as of the completion of the IPO, or 21,472,324 shares of Class C common stock, requiring all stockholder actions to be taken at a meeting of our stockholders; and
establishing advance notice and duration of ownership requirements for nominations for election to the board of directors or for proposing matters that can be acted upon by stockholders at stockholder meetings.
These provisions could also discourage proxy contests and make it more difficult for our stockholders to elect directors of their choosing and cause us to take other corporate actions they desire. In addition, because our board of directors is responsible for appointing the members of our management team, these provisions could in turn affect any attempt by our stockholders to replace current members of our management team.
In addition, we are subject to Nevada's statute on combinations with interested stockholders (Sections 78.411-78.444 of the Nevada Revised Statutes), which prohibits us from entering into a "combination" with an "interested stockholder" for up to four years, unless certain conditions are met (such as, in some circumstances, approval by our board of directors before such person became an interested stockholder, or by both our board of directors and a supermajority of disinterested stockholders). Under the statute, an interested stockholder is a person who beneficially owns (or, if an affiliate or associate, did, within the prior two years, beneficially own) stock with 10% or more of the corporation's voting power. The inability of an interested stockholder to pursue the types of combinations restricted by the statute could discourage, delay or prevent a merger, acquisition or other change in control of our company.
Finally, a person acquiring a significant proportion of our voting stock could be precluded from voting all or a portion of such shares under Nevada's "control share" statute (Sections 78.378-78.3793 of the Nevada Revised Statutes), which prohibits an acquirer of stock, under certain circumstances, from voting its "control shares" of stock acquired up to 90 days prior to crossing certain ownership threshold percentages, unless the acquirer obtains approval of disinterested stockholders or unless the issuing corporation amends its articles of incorporation or bylaws within 10 days of the acquisition to provide that the "control share" statute does not apply to the corporation or the types of existing or future stockholders. If the voting rights are not approved, the statute would allow us to call all of such control shares for redemption at the average price paid for such shares.
Limitations on director and officer liability and our indemnification of our officers and directors may discourage stockholders from bringing suit against a director.
Our amended and restated articles of incorporation provide, pursuant to Nevada corporation law, that a director or officer shall not be personally liable to us or our stockholders for damages as a result of any breach of fiduciary duty as a director or officer, except for acts or omissions which involve intentional misconduct, fraud or knowing violation of law. In addition, a director or

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officer will not be liable unless presumptions in his or her favor are rebutted. These provisions may discourage stockholders from bringing suit against a director or officer for breach of fiduciary duty and may reduce the likelihood of derivative litigation brought by stockholders on our behalf against a director or officer. In addition, our amended and restated articles of incorporation and bylaws require indemnification of directors and officers to the fullest extent permitted by Nevada law.
We may issue shares of preferred stock in the future, which could make it difficult for another company to acquire us or could otherwise adversely affect holders of our Class A common stock, which could depress the price of our Class A common stock.
Our amended and restated articles of incorporation authorize us to issue one or more series of preferred stock. Our board of directors has the authority to determine the preferences, limitations and relative rights of the shares of preferred stock and to fix the number of shares constituting any series and the designation of such series, without any further vote or action by our stockholders. Our preferred stock could be issued with voting, liquidation, dividend and other rights superior to the rights of our Class A common stock. The potential issuance of preferred stock may delay or prevent a change in control of us, discourage bids for our Class A common stock at a premium to the market price, and materially and adversely affect the market price and the voting and other rights of the holders of our Class A common stock.
We may be subject to securities class action, which may harm our business and operating results.
Companies that have experienced volatility in the market price of their stock have been subject to securities class action litigation. We may be the target of this type of litigation in the future. Securities litigation against us could result in substantial costs and damages, and divert management's attention from other business concerns, which could seriously harm our business, results of operations, financial condition or cash flows.
We may also be called on to defend ourselves against lawsuits relating to our business operations. Some of these claims may seek significant damage amounts due to the nature of our business. Due to the inherent uncertainties of litigation, we cannot accurately predict the ultimate outcome of any such proceedings. A future unfavorable outcome in a legal proceeding could have an adverse impact on our business, financial condition and results of operations. In addition, current and future litigation, regardless of its merits, could result in substantial legal fees, settlement or judgment costs and a diversion of management's attention and resources that are needed to successfully run our business.
Substantial future sales of our Class A common stock, or the perception in the public markets that these sales may occur, may depress our stock price.
Sales of substantial amounts of our Class A common stock in the public market, or the perception that these sales could occur, could adversely affect the price of our Class A common stock and could impair our ability to raise capital through the sale of additional shares. As of March 12, 2018, we had 36,066,544 shares of Class A common stock outstanding and 216,568,963 authorized but unissued shares of Class A common stock that would be issuable upon redemption or exchange of Common Units.
We and each of our directors, executive officers and holders of substantially all of our outstanding common stock (including shares of Class A common stock issuable upon redemption or exchange of Common Units) have agreed with the underwriters of our IPO, subject to certain exceptions, not to dispose of or hedge any shares of common stock or securities convertible into or exchangeable for (including the Common Units), or that represent the right to receive, shares of common stock until April 3, 2018, except with the prior written consent of Goldman Sachs & Co. LLC and J.P. Morgan Securities LLC. All of our shares of Class A common stock (and shares of Class A common stock issuable upon redemption or exchange of Common Units) may be sold in the public market following the expiration of the applicable lock-up period, subject to applicable limitations imposed under federal securities laws. In addition, Goldman Sachs & Co. LLC and J.P. Morgan Securities LLC may, in their sole discretion, release all or some portion of the shares subject to lock-up agreements at any time and for any reason. Sales of a substantial number of such shares upon expiration of the lock-up and market stand-off agreements, the perception that such sales may occur, or early release of these agreements, could cause our market price to fall or make it more difficult for our stockholders to sell their Class A common stock at a time and price that they deem appropriate. We have entered into a Registration Rights Agreement pursuant to which the shares of Class A common stock issued upon redemption or exchange of Common Units held by the Members will be eligible for resale, subject to certain limitations set forth therein. We have also filed or intend to file registration statements on Form S-8 under the Securities Act to register all shares of Class A common stock issued or issuable under our 2017 Incentive Award Plan.
In the future, we may also issue additional shares of Class A common stock, or securities convertible or exchangeable for shares of Class A common stock, to raise capital, which could constitute a material portion of our then-outstanding shares of common stock.

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We are an emerging growth company, and any decision on our part to comply only with certain reduced reporting and disclosure requirements applicable to emerging growth companies could make our Class A common stock less attractive to investors.
We are an emerging growth company, and, for as long as we continue to be an emerging growth company, we may choose to take advantage of exemptions from various reporting requirements applicable to other public companies but not to "emerging growth companies," including:
not being required to have our independent registered public accounting firm audit our internal control over financial reporting under Section 404 of the Sarbanes-Oxley Act;
reduced disclosure obligations regarding executive compensation in our periodic reports and proxy statements; and
exemptions from the requirements of holding a nonbinding advisory vote on executive compensation or golden parachute payments not previously approved.
We could be an emerging growth company for up to five years following our IPO. Our status as an emerging growth company will end as soon as any of the following takes place:
the last day of the fiscal year in which we have more than $1.07 billion in annual revenue;
the date we qualify as a "large accelerated filer," with at least $700 million of equity securities held by non-affiliates;
the date on which we have issued, in any three-year period, more than $1.0 billion in non-convertible debt securities; or
the last day of the fiscal year ending after the fifth anniversary of our IPO.
We cannot predict if investors will find our Class A common stock less attractive if we choose to rely on any of the exemptions afforded emerging growth companies. If some investors find our Class A common stock less attractive because we rely on any of these exemptions, there may be a less active trading market for our Class A common stock and the market price of our Class A common stock may be more volatile.
In addition, the JOBS Act exempts emerging growth companies from being required to comply with new or revised financial accounting standards until private companies (that is, those that have not had a registration statement under the Securities Act declared effective or do not have a class of securities registered under the Exchange Act) are required to comply with the new or revised financial accounting standards. The JOBS Act provides that a company can elect to opt out of the extended transition period and comply with the requirements that apply to non-emerging growth companies but any such election to opt out is irrevocable. 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. This may make comparison of our consolidated financial statements with another public company, which is neither an emerging growth company nor a company that has opted out of using the extended transition period difficult because of the potential differences in accounting standards used.
We cannot predict the impact our capital structure may have on our stock price.
In July 2017, S&P Dow Jones, a provider of widely followed stock indices, announced that companies with multiple share classes, such as ours, will not be eligible for inclusion in certain of their indices. As a result, our Class A common stock will likely not be eligible for these stock indices. Additionally, FTSE Russell, another provider of widely followed stock indices, recently stated that it plans to require new constituents of its indices to have at least five percent of their voting rights in the hands of public stockholders. Many investment funds are precluded from investing in companies that are not included in such indices, and these funds would be unable to purchase our Class A common stock. We cannot assure you that other stock indices will not take a similar approach to S&P Dow Jones or FTSE Russell in the future. Exclusion from indices could make our Class A common stock less attractive to investors and, as a result, the market price of our Class A common stock could be adversely affected.
We incur costs as a result of being a public company and in the administration of our complex organizational structure.
As a public company, we incur significant legal, accounting, insurance and other expenses, including costs associated with public company reporting requirements. We also have incurred and will incur costs associated with the Sarbanes-Oxley Act and related rules implemented by the Securities and Exchange Commission, or the SEC, that have not been reflected in our historical consolidated financial statements for periods prior to the IPO. We also incur ongoing periodic expenses in connection with the administration of our organizational structure. The expenses incurred by public companies generally for reporting and corporate governance purposes have been increasing. We expect these rules and regulations to increase our legal and financial

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compliance costs and to make some activities more time-consuming and costly, although we are currently unable to estimate these costs with any degree of certainty. In assessing these costs, we will take into account expenses related to insurance, legal, accounting, and compliance activities, as well as other expenses not currently incurred. These laws and regulations could also make it more difficult or costly for us to obtain certain types of insurance, including director and officer liability insurance, and we may be forced to accept reduced policy limits and coverage or incur substantially higher costs to obtain the same or similar coverage. These laws and regulations could also make it more difficult for us to obtain certain types of insurance and to attract and retain qualified persons to serve on our board of directors, our board committees or as our executive officers. Furthermore, if we are unable to satisfy our obligations as a public company, we could be subject to delisting of our Class A common stock, fines, sanctions and other regulatory action and potentially civil litigation. Our organizational structure, including our Tax Receivable Agreement, is complex, and we require the expertise of various tax, legal and accounting advisers to ensure compliance with applicable laws and regulations. We have incurred and will continue to incur significant expenses in connection with the administration of our organizational structure. As a result, our expenses for legal, tax and accounting compliance may be significantly greater than other companies of our size that do not have a similar organizational structure or a tax receivable agreement in place.
We have identified material weaknesses in our internal control over financial reporting and may identify additional material weaknesses in the future or otherwise fail to maintain an effective system of internal controls, which may result in material misstatements of our consolidated financial statements or cause us to fail to meet our periodic reporting obligations.
As of December 31, 2017, we have two material weaknesses in our internal control over financial reporting. A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting such that there is a reasonable possibility that a material misstatement of our annual or interim financial statements will not be prevented or detected on a timely basis.
One of the material weaknesses was first identified in connection with the audit of our 2016 consolidated financial statements. This material weakness was due to a failure of the information and communication component of internal control to provide complete and accurate output because of deficiencies in the communication process. Contracts executed by various departments were not communicated, on a timely basis, to the accounting department, resulting in recording out-of-period adjustments that impacted the recognition and disclosure of amounts in the consolidated financial statements during the year ended December 31, 2016. We concluded this material weakness continues to exist as of December 31, 2017.
The other material weakness, which was identified in connection with the audit of our 2017 consolidated financial statements, relates to an insufficient complement of resources with an appropriate level of accounting expertise, knowledge, and training commensurate with the complexity of our financial reporting matters. This material weakness led to pervasive immaterial adjustments to our annual and interim consolidated financial statements and inadequate review over account reconciliations resulting in the lack of an effective control environment.
These material weaknesses could result in a misstatement that would result in a material misstatement to the annual or interim consolidated financial statements that would not be prevented or detected.
We are implementing measures designed to improve our internal control over financial reporting to remediate these material weaknesses, including hiring additional personnel with appropriate education, experience and certifications for key positions in the financial reporting and accounting function, implementing policies and procedures to improve our ability to communicate and share information in a timely manner, as well as designing and implementing improved processes and internal controls. In addition, we are formalizing our internal control documentation and strengthening supervisory reviews by our management.
While we believe that these efforts will improve our internal control over financial reporting, the implementation of these measures is ongoing and will require validation and testing of the design and operating effectiveness of internal controls over a sustained period of financial reporting cycles. We cannot assure you that the measures we have taken to date, and are continuing to implement, will be sufficient to remediate the material weaknesses we have identified or avoid potential future material weaknesses. If the steps we take do not correct the material weakness in a timely manner, we will be unable to conclude that we maintain effective internal control over financial reporting. Accordingly, there could continue to be a reasonable possibility that a material misstatement of our financial statements would not be prevented or detected on a timely basis.
Beginning with our annual report on Form 10-K for the year ending December 31, 2018, we will be required, pursuant to Section 404 of the Sarbanes-Oxley Act, to furnish a report by management on, among other things, the effectiveness of our internal control over financial reporting. This assessment will need to include disclosure of any material weaknesses identified by our management in our internal control over financial reporting. Our independent registered public accounting firm will not be required to attest to the effectiveness of our internal control over financial reporting until our first annual report required to be filed with the SEC following the date we are no longer an "emerging growth company," as defined in the JOBS Act. We will be required to disclose changes made in our internal control and procedures on a quarterly basis. To comply with the requirements of being a public company and to address our material weaknesses, we expect to undertake various actions, such as implementing new internal controls and procedures and hiring accounting or internal audit staff. We have begun the costly and challenging process of compiling the system and processing documentation necessary to perform the evaluation needed to

44


comply with Section 404, when applicable, and we may not be able to complete our evaluation, testing and any required remediation in a timely fashion.
Our ability to pay dividends on our Class A common stock is subject to the discretion of our board of directors and our amended and restated credit agreement as well as future agreements.
Although we intend to pay quarterly cash dividends on our Class A common stock, the declaration, amount and payment of any future dividends on shares of Class A common stock will be at the sole discretion of our board of directors, and will depend upon results of operations, financial condition, contractual restrictions, restrictions imposed by applicable law and other factors our board of directors deems relevant. The continued operation and expansion of our business will require substantial funding. We are a holding company, and substantially all of our operations are carried out by Switch, Ltd. and its subsidiaries. Under our amended and restated credit agreement, Switch, Ltd. is currently restricted from paying cash dividends or making certain other restricted payments, and we expect these restrictions to continue in the future, which may in turn limit our ability to pay dividends on our Class A common stock. Our ability to pay dividends may also be restricted by the terms of any future credit agreement or any future debt or preferred equity securities of ours or of our subsidiaries. Accordingly, realization of a gain on an investment in our Class A common stock may depend on the appreciation of the price of our Class A common stock, which may never occur.
The provision of our articles of incorporation requiring exclusive forum in the Eighth Judicial District Court of Clark County, Nevada for certain types of lawsuits may have the effect of discouraging lawsuits against our directors and officers.
Our amended and restated articles of incorporation require that (i) any derivative action or proceeding brought on our behalf, (ii) any action asserting a claim of breach of a fiduciary duty owed by any of our directors, officers or other employees to us or our stockholders, (iii) any action asserting a claim against us or our officers, directors or employees arising pursuant to any provision of Nevada law regarding corporations, mergers, conversions, exchanges or domestications, or our amended and restated articles of incorporation or amended and restated bylaws or (iv) any action asserting a claim against us or any of our directors, officers or other employees governed by the internal affairs doctrine, will have to be brought only in the Eighth Judicial District Court of Clark County, Nevada. Although we believe this provision benefits us by providing increased consistency in the application of Nevada law in the types of lawsuits to which it applies, the provision may have the effect of discouraging lawsuits against our directors and officers.

45


Item 1B.
Unresolved Staff Comments.
None.
Item 2.
Properties.
The information set forth under the caption "Our Portfolio" in Item 1 of this Form 10-K is incorporated by reference herein.
Item 3.
Legal Proceedings.

On August 7, 2017, Switch, Ltd. filed a lawsuit in the U.S. District Court for the Eastern District of Texas against Aligned Data Centers LLC, or Aligned, and MTechnology Inc. The lawsuit alleges, among other things, that Aligned has used and promoted technology at its data centers to attract clients to its facility, directly and indirectly infringing at least three of Switch, Ltd.'s patents and using Switch, Ltd.'s patented technology to attempt to unlawfully compete with Switch, Ltd. The complaint also alleges that Aligned hired a consultant to design their data centers; that this consultant had toured Switch, Ltd.'s data centers under non-disclosure agreement; and that this consultant breached his confidentiality agreements with Switch, Ltd. by using Switch, Ltd.'s designs to design the Aligned data centers. Switch, Ltd. is seeking an injunction to prevent the defendants in the lawsuit from infringing Switch, Ltd.'s patents, as well as other remedies. On August 16, 2017, Aligned filed an answer to the complaint and a motion to dismiss the lawsuit. Among other things, Aligned alleges in its answer that Switch, Ltd.'s patents in question should be declared invalid, and countersued for declaratory judgment of the non-infringement of certain of Switch, Ltd.'s patents, injunctive relief, and damages for alleged anti-competition practices involving Aligned's trademarks in violation of the Lanham Act, tortious interference with Aligned's business, and disparagement of Aligned's business. Switch, Ltd. has retained outside counsel to represent it and is vigorously defending its rights and interests. Given certain jurisdictional issues, Switch, Ltd. filed a separate complaint in the Eighth Judicial District of Nevada against the consultant, Stephen Fairfax, and his business, MTechnology, on September 12, 2017. Among other claims, Switch, Ltd. has raised allegations of breach of contract and misappropriation of trade secrets. The outcome of our legal proceedings is inherently unpredictable, subject to significant uncertainties, and could be material to our financial condition, results of operations, and cash flows for a particular period. For the pending matter described above, it is not possible to estimate the reasonably possible loss or range of loss.

On September 7, 2017, Switch, Ltd. and Switch, Inc. were named in a lawsuit filed in the U.S. District Court for the District of Nevada by V5 Technologies formerly d/b/a Cobalt Data Centers (now defunct). The lawsuit alleges, among other things, that we have monopolized the Las Vegas Metropolitan area of Southern Nevada's data center colocation market and have engaged in unfair business practices leading to the failure of Cobalt Data Centers in 2015 and seeks monetary damages in an amount yet to be disclosed. We have retained outside counsel and are vigorously pursuing our rights and interests. The outcome of our legal proceedings is inherently unpredictable, subject to significant uncertainties, and could be material to our financial condition, results of operations, and cash flows for a particular period. For the pending matter described above, it is not possible to estimate the reasonably possible loss or range of loss.

In the ordinary course of our business, from time to time we are subject to other claims and administrative proceedings. Currently there are no other claims outstanding that we believe would have, individually or in the aggregate, a material adverse effect on our business, financial condition and results of operations, liquidity and cash flows.
Item 4.
Mine Safety Disclosures.
Not applicable.


46


Part II.

Item 5.
Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.

Market information
Our Class A common stock has traded on the New York Stock Exchange, or NYSE, under the symbol "SWCH" since October 6, 2017. Prior to that date, there was no public market for our Class A common stock. The table below sets forth the high and low sales prices of our Class A common stock, as reported on the NYSE, since trading began, for the period indicated.
 
 
High
 
Low
2017
 
 
 
 
Fourth Quarter (from October 6, 2017)
 
$
20.84

 
$
16.25


Our Class B common stock and Class C common stock are neither listed nor traded on any stock exchange.

Holders of record
At March 12, 2018, there were five holders of record of our Class A common stock. The number of record holders does not include persons who held shares of our Class A common stock in nominee or "street name" accounts through brokers. As of March 12, 2018, there were 120 and three holders of record of our Class B common stock and Class C common stock, respectively.

Dividends
The declaration, amount and payment of any future dividends on shares of Class A common stock will be at the discretion of our board of directors and will depend upon many factors, including our results of operations, financial condition, capital requirements, restrictions in Switch, Ltd.'s debt agreements and other factors that our board of directors deems relevant. We are a holding company, and substantially all of our operations are carried out by Switch, Ltd. and its subsidiaries. Additionally, under our amended and restated credit agreement, Switch, Ltd. is currently restricted from paying cash dividends or making certain other restricted payments, and we expect these restrictions to continue in the future, which may in turn limit our ability to pay dividends on our Class A common stock. Our ability to pay dividends may also be restricted by the terms of any future credit agreement or any future debt or preferred equity securities of us or our subsidiaries. Holders of our Class B common stock and Class C common stock are not entitled to participate in any dividends declared by our board of directors.
In December 2017, the board of directors declared a dividend of $0.014 per share of Class A common stock to holders of record as of the close of business on December 18, 2017 and paid on December 29, 2017. Prior to the payment of the dividend, Switch, Ltd. made a cash distribution to all holders of record of common units of Switch, Ltd., including Switch, Inc., of $0.014 per common unit for a total distribution of $3.5 million, of which $503,000 was distributed to Switch and $3.0 million was distributed to the other holders of record of common units of Switch, Ltd.
In April 2018, the board of directors declared a dividend of $0.0147 per share of Class A common stock to holders of record as of the close of business on April 13, 2018 for the first quarter of 2018. The dividend will be payable on April 23, 2018. Prior to the payment of this dividend, Switch, Ltd. will make a cash distribution to all holders of record of common units of Switch, Ltd., including Switch, Inc., of $0.0147 per common unit.


47


Securities authorized for issuance under equity compensation plans
The table below provides information about our compensation plans under which our Class A common stock is authorized for issuance as of December 31, 2017:
 
 
Equity Compensation Plan Information
Plan category
 
Number of securities to be issued upon exercise of outstanding options, warrants and rights (a)
 
Weighted average exercise price of outstanding options, warrants and rights (b)(2)
 
Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in column (a)) (c)
Equity compensation plans approved by security holders(1)
 
5,775,534

 
$
17.00

 
19,224,466

________________________________________
(1)     Includes awards granted and available to be granted under our 2017 Incentive Award Plan.
(2)     The weighted average exercise price does not include restricted stock unit awards granted under our 2017 Incentive Award Plan.

Performance graph
The graph below compares the cumulative total stockholder return on our Class A common stock with the cumulative total return on the Standard and Poor's MidCap 400 Index, or the S&P 400, and the Standard and Poor's Technology Select Sector Index, or S&P Technology, for the period beginning on October 6, 2017 (the date our Class A common stock commenced trading on the NYSE) and ending on December 31, 2017, assuming an investment of $100 on October 6, 2017 and the reinvestment of dividends.
chart-82440b6d68d552ccd9b.jpg
 
 
October 6, 2017
 
December 31, 2017
SWCH
 
$
100.00

 
$
87.28

S&P 400
 
$
100.00

 
$
104.52

S&P Technology
 
$
100.00

 
$
106.68


Recent sales of unregistered securities
None.

Issuer purchases of equity securities
None.


48


Use of proceeds from initial public offering of Class A common stock
On October 11, 2017, we completed the initial public offering of our Class A common stock pursuant to a Registration Statement (File No. 333-220405), which was declared effective on October 5, 2017.
Under the Registration Statement, we issued and sold an aggregate of 35,937,500 shares of our Class A common stock, including 4,687,500 shares sold pursuant to an option granted to the underwriters, at a price of $17.00 per share. Goldman Sachs & Co. LLC, J.P. Morgan Securities LLC, BMO Capital Markets Corp. and Wells Fargo Securities, LLC acted as representatives of the underwriters for the offering. We received net proceeds of approximately $577.3 million, net of underwriting discounts and commissions and before offering expenses of $4.9 million, including the net proceeds received from the underwriters following exercise of their option to purchase additional shares of our Class A common stock. No offering expenses were paid or are payable, directly or indirectly, to any of our officers, directors or their associates, to any person owning 10% or more of any class of our equity securities or to any of our affiliates.
We used all of the net proceeds to make a capital contribution to Switch, Ltd. in exchange for 35,937,500 common units of Switch, Ltd. As its sole manager, we caused Switch, Ltd. to use the net proceeds it received from us to repay all $231.0 million in outstanding borrowings under the revolving credit facility and $4.9 million in expenses related to the IPO.
No payments from the net proceeds were made, directly or indirectly, to any of our officers, directors or their associates, to any persons owning 10% or more of any class of our equity securities or to any of our affiliates.
There has been no material change in the use of proceeds as described in our prospectus, dated October 5, 2017, filed with the SEC on October 10, 2017 pursuant to Rule 424(b) under the Securities Act.

49


Item 6.
Selected Financial Data.
The following selected financial data for the years ended December 31, 2017, 2016 and 2015 and the selected balance sheet data as of December 31, 2017 and 2016 are derived from our audited consolidated financial statements included elsewhere in this Form 10-K. The following selected financial data for the years ended December 31, 2014 and 2013 and the selected balance sheet data as of December 31, 2015 are derived from our audited consolidated financial statements not included in this Form 10-K. Our historical results are not necessarily indicative of the results to be expected in the future.
 
Years Ended December 31,
 
2017
 
2016
 
2015
 
2014
 
2013
 
(in thousands, except share/unit and per share/unit data)
Consolidated Statements of Operations Data(1):
 
 
 
 
 
 
 
 
 
Revenue
$
378,275

 
$
318,352

 
$
265,870

 
$
207,306

 
$
166,835

Cost of revenue
198,230

 
168,844

 
141,060

 
108,902

 
81,290

Gross profit
180,045

 
149,508

 
124,810

 
98,404

 
85,545

Selling, general and administrative expense
160,569

 
71,420

 
45,251

 
35,570

 
38,574

Impact fee expense
649

 
27,018

 

 

 

Income from operations
18,827

 
51,070

 
79,559

 
62,834

 
46,971

Other income (expense):
 
 
 
 
 
 
 
 
 
Interest expense, including amortization of debt issuance costs
(25,079
)
 
(10,836
)
 
(7,682
)
 
(6,772
)
 
(5,511
)
Equity in net (losses) earnings of investments
(1,077
)
 
(10,138
)
 
821

 
(1,053
)
 
(57
)
Loss on extinguishment of debt
(3,565
)
 

 
(212
)
 

 
(2,146
)
Gain on sale of asset

 

 
248

 

 

Impairment of notes receivable

 
(2,371
)
 

 

 

Gain on lease termination

 
2,801

 

 

 

Other
1,333

 
842

 
738

 
1,500

 
657

Total other expense
(28,388
)
 
(19,702
)
 
(6,087
)
 
(6,325
)
 
(7,057
)
(Loss) income before income taxes
(9,561
)
 
31,368

 
73,472

 
56,509

 
39,914

Income tax benefit
981

 

 

 

 

Net (loss) income
(8,580
)
 
31,368

 
73,472

 
56,509

 
39,914

Less: net income attributable to non-controlling interest
6,628

 

 

 

 

Net (loss) income attributable to Switch, Inc.
$
(15,208
)
 
$
31,368

 
$
73,472

 
$
56,509

 
$
39,914

Net (loss) income per share/unit:
 
 
 
 
 
 
 
 
 
Basic
$
(1.88
)
 
$
0.16

 
$
0.37

 
$
0.28

 
$
0.21

Diluted
$
(1.88
)
 
$
0.15

 
$
0.37

 
$
0.28

 
$
0.20

Weighted average shares/units outstanding:
 
 
 
 
 
 
 
 
 
Basic
8,073,908

 
199,047,070

 
196,773,458

 
198,431,693

 
188,322,897

Diluted
8,073,908

 
203,461,420

 
199,272,269

 
203,410,628

 
201,815,537

 
 
 
 
 
 
 
 
 
 
Cash dividends declared per share
$
0.014

 
$

 
$

 
$

 
$

________________________________________
(1)
Switch, Ltd. and its subsidiaries is our predecessor for accounting purposes and, accordingly, amounts for the period from January 1, 2017 through October 10, 2017, and for the years ended December 31, 2016 and December 31, 2015 represent the historical consolidated operations of Switch, Ltd. and its subsidiaries. Switch, Inc. had no business transactions or activities during this period from its incorporation on June 13, 2017 through October 10, 2017, with the exception of the issuance of one share at par value of $0.001 per share, which was canceled as of the closing date of our IPO. The amounts for the period from October 11, 2017 through December 31, 2017 reflect the consolidated operations of Switch, Inc.



50


 
December 31,
 
2017
 
2016
 
2015
 
(in thousands)
Consolidated Balance Sheet Data(1):
 
 
 
 
 
Cash and cash equivalents
$
264,666

 
$
22,713

 
$
14,192

Working capital (deficit)
$
222,905

 
$
(107,861
)
 
$
(23,476
)
Property and equipment, net
$
1,133,572

 
$
874,259

 
$
598,234

Total assets
$
1,434,759

 
$
921,015

 
$
647,578

Deferred revenue, current and noncurrent
$
30,864

 
$
24,858

 
$
14,253

Long-term debt, current and noncurrent
$
591,760

 
$
472,067

 
$
292,517

Capital lease obligations, current and noncurrent
$
21,775

 
$
23,466

 
$
19,466

Total stockholders'/members' equity
$
742,133

 
$
278,363

 
$
284,694

________________________________________
(1)
Switch, Ltd. and its subsidiaries is our predecessor for accounting purposes and, accordingly, amounts as of December 31, 2016 and December 31, 2015 represent the historical consolidated operations of Switch, Ltd. and its subsidiaries. The amounts as of December 31, 2017 reflect the consolidated operations of Switch, Inc. Switch, Inc. had no business transactions or activities and had no assets or liabilities during the period from its incorporation on June 13, 2017 through October 10, 2017, with the exception of the issuance of one share at par value of $0.001 per share, which was canceled as of the closing date of our IPO.


51


Item 7.
Management's Discussion and Analysis of Financial Condition and Results of Operations.
The following discussion and analysis of our financial condition and results of operations should be read in conjunction with the audited consolidated financial statements and related notes included elsewhere in this Form 10-K. This discussion contains forward-looking statements that involve risks and uncertainties. Our actual results could differ materially from those discussed below. Factors that could cause or contribute to such differences include, but are not limited to, those identified below and those discussed in "Risk Factors" included elsewhere in this Form 10-K.
Overview
We are a technology infrastructure company powering the sustainable growth of the connected world and the Internet of Everything. Using our technology platform, we provide solutions to help enable that growth. 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. These hyperscale data centers address the growing challenges facing the data center industry. Our critical infrastructure components in our data centers are purpose-built to satisfy customers' needs, drive efficiency and enable the deployment of highly advanced computing technologies.
We presently operate three primary campus locations, called Primes, which encompass 10 colocation facilities with an aggregate of up to 4.0 million gross square feet, or GSF, of space. 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 began developing a fourth Prime, The Keep Campus, in Atlanta, Georgia. In addition to our Primes, we hold a 50% ownership interest in SUPERNAP International, S.A., or SUPERNAP International, which has deployed facilities in Italy and Thailand. We have accounted for this ownership interest under the equity method of accounting.
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 business is based on a recurring revenue model comprised of (1) colocation, which includes the licensing of cabinet space and power; and (2) connectivity services. We consider these services recurring because our customers are generally billed on a fixed and recurring basis each month for the duration of their contract. We derive more than 95% of our revenue from recurring revenue streams and we expect to continue to do so for the foreseeable future. For the years ended December 31, 2015, 2016 and 2017, our largest customer, eBay, Inc., and its affiliates accounted for 14.1%, 13.3% and 10.9%, respectively, of our revenue.
Our non-recurring revenue is primarily comprised of installation services related to a customer's initial deployment. These services are non-recurring because they are billed typically once, upon completion of the installation.
We have achieved significant growth in our business and have a track record of strong financial performance. Due in part to a nonrecurring equity-based compensation expense related to the accelerated vesting of certain incentive units upon our IPO and fully vested awards granted under our 2017 Incentive Award Plan, we generated a net loss of $8.6 million for the year ended December 31, 2017. We generated net income of $31.4 million and $73.5 million during the years ended December 31, 2016 and 2015, respectively. During the years ended December 31, 2017, 2016 and 2015, we generated Adjusted EBITDA of $194.7 million, $153.2 million and $141.9 million, respectively, representing an Adjusted EBITDA margin of 51.5%, 48.1% and 53.4%, respectively.
Factors that May Influence Future Results of Operations
Market and Economic Conditions. We are affected by general business and economic conditions in the United States and globally. These conditions include short-term and long-term interest rates, inflation, money supply, political issues, legislative and regulatory changes, fluctuations in both debt and equity capital markets and broad trends in industry and finance, all of which are beyond our control. Macroeconomic conditions that affect the economy and the economic outlook of the United States and the rest of the world could adversely affect our customers and vendors, which could adversely affect our results of operations and financial condition.
Growth and Expansion Activities. Our future revenue growth will depend on our ability to maintain our existing revenue base while expanding and increasing utilization at our existing and developing Prime Campus locations. Our existing Prime Campus locations currently encompass 10 data centers with an aggregate of 4.0 million GSF of space and up to 415 MW of power. As of December 31, 2017, the utilization rates at these Prime Campuses, based on currently available cabinets, were approximately 91%, 52% and 50% at The Core Campus, The Citadel Campus and The Pyramid Campus, respectively. Additionally, each of our existing Primes has room for further expansion, and we have designs to add up to 5.9 million GSF of additional space to The Citadel Campus and 940,000 GSF of additional space to The Pyramid Campus. We may be unable to attract customers to our data centers or retain them for a number of reasons, including if we fail to provide competitive pricing terms, provide space that is deemed to be inferior to that of our competitors or are unable to provide services that our existing and potential customers desire.

52


Cost of Power. We are a large consumer of power, and power costs account for a significant portion of our cost of revenue. We require power supply to provide many services we offer, such as powering and cooling our customers' IT equipment and operating critical data center plant and equipment infrastructure. Pursuant to our service agreements, we provide our customers with a committed level of power supply availability, and we have committed to operating our data centers with 100% clean and renewable energy. Most of our customer agreements provide the ability to increase our cost of service in response to an increase in the cost of energy. However, our gross profit can be adversely affected by increases in our cost of energy if we choose not to pass along the increases to our customers. For instance, the seasonal increase in energy costs during the summer months has not historically resulted in an adjustment to our customer pricing, and therefore has resulted in a decrease in our gross profit in those periods. Nonetheless, since becoming an unbundled energy purchaser of energy in Nevada, we are able to purchase power in the open market through long-term power contracts and subsequently reduce variability of power costs. Additionally, our existing customers may not renew their contracts with us or may reduce the services purchased from us, or we may be unable to attract new customers, if we experience increased power costs or limited availability of power resources, including clean and renewable energy. Our brand or reputation could be adversely affected if we are unable to provide 100% clean and renewable energy.
Capital Expenditures. Our growth and expansion initiatives require significant capital. The costs of constructing, developing, operating and maintaining data centers and growing our operations are substantial. While we strive to match the growth of our facilities to the demand for services, we still must spend significant amounts before we receive any revenue. If we are unable to generate sufficient capital to meet our anticipated capital requirements, our growth could slow and operations could be adversely affected. Our maintenance capital expenditures were $4.6 million for the year ended December 31, 2017.
Growth in Customers. Our results of operations could be significantly affected by the growth or reduction of our customer base. We have over 800 customers, including some of the world's largest technology and digital media companies, cloud and managed service providers, financial institutions and telecommunications providers. We believe we have significant opportunity to both grow penetration of our existing customers as well as attract new customers. Our ability to attract new customers depends on a number of factors, including our ability to offer high quality services at competitive prices and the capability of our marketing and sales team to attract new customers. Additionally, a significant portion of our revenue is highly dependent on our top 10 customers and the loss of these customers or any significant decrease in their business could adversely affect our results of operations.
Key Metrics and Non-GAAP Financial Measures
We monitor the following unaudited key metrics and financial measures that are not calculated in accordance with generally accepted accounting principles in the United States of America, or GAAP, to help us evaluate our business, identify trends affecting our business, formulate business plans and make strategic decisions.
 
Years Ended
December 31,
 
2017
 
2016
 
2015
 
(in thousands, except percentages)
Recurring revenue
$
369,926

 
$
308,200

 
$
258,736

Capital expenditures
$
402,561

 
$
287,097

 
$
190,113

Adjusted EBITDA
$
194,720

 
$
153,173

 
$
141,936

Adjusted EBITDA margin
51.5
%
 
48.1
%
 
53.4
%
Recurring Revenue
We calculate recurring revenue as contractual revenue under signed contracts measured in accordance with GAAP for the applicable period. Recurring revenue does not include any installation or other one-time revenue, which would be classified as non-recurring revenue. Management uses recurring revenue as a supplemental performance measure because it provides a useful measure of increases in contractual revenue from our customers and provides a baseline revenue measure on which to plan expenses.

53



The following table sets forth a reconciliation of recurring revenue to total revenue for the periods presented.
 
Years Ended
December 31,
 
2017
 
2016
 
2015
 
(in thousands)
Recurring revenue
$
369,926

 
$
308,200

 
$
258,736

Non-recurring revenue
8,349

 
10,152

 
7,134

Revenue
$
378,275

 
$
318,352

 
$
265,870

Capital Expenditures
We define capital expenditures as cash purchases of property and equipment during a particular period. We believe that capital expenditures is a useful metric because it provides information regarding the growth of our technology infrastructure platform and the potential to expand our services and add new customers.
Adjusted EBITDA and Adjusted EBITDA Margin
We define Adjusted EBITDA as net (loss) income adjusted for interest expense, interest income, income taxes, depreciation and amortization and for specific and defined supplemental adjustments to exclude (i) non-cash equity-based compensation expense; (ii) equity in net earnings (losses) of investments; and (iii) certain other items that we believe are not indicative of our core operating performance. We define Adjusted EBITDA margin as Adjusted EBITDA divided by revenue.
Our Adjusted EBITDA and Adjusted EBITDA margin are not prepared in accordance with GAAP, and should not be considered in isolation of, or as an alternative to, measures used in accordance with GAAP. We present Adjusted EBITDA and Adjusted EBITDA margin because we believe certain investors use them as measures of a company's historical operating performance and its ability to service and incur debt. We believe that the inclusion of certain adjustments in presenting Adjusted EBITDA and Adjusted EBITDA margin is appropriate to provide additional information to investors because Adjusted EBITDA and Adjusted EBITDA margin exclude certain items that we believe are not indicative of our core operating performance and that are not excluded in the calculation of EBITDA. Adjusted EBITDA is also similar to the measures used under the debt covenants included in our credit facilities, except that the definition used in our credit facilities does not exclude cash gains. Accordingly, we believe that Adjusted EBITDA and Adjusted EBITDA margin provide useful information to investors and others in understanding and evaluating our operating results, enhancing the overall understanding of our past performance and future prospects, and allowing for greater transparency with respect to key financial metrics used by our management in its financial and operational-decision making.
Our non-GAAP financial measures have limitations as analytical tools and you should not consider them in isolation or as a substitute for an analysis of our results under GAAP. There are a number of limitations related to the use of these non-GAAP financial measures versus their nearest GAAP equivalents. Non-GAAP financial measures may not provide information directly comparable to measures provided by other companies in our industry, as those other companies may calculate their non-GAAP financial measures differently. In addition, the non-GAAP measures exclude certain recurring expenses that have been and will continue to be significant expenses of our business.

54


The following tables set forth reconciliations of our net (loss) income to Adjusted EBITDA for the periods presented:
 
Years Ended
December 31,
 
2017
 
2016
 
2015
 
2014
 
2013
 
(in thousands)
Adjusted EBITDA:
 
 
 
 
 
 
 
 
 
Net (loss) income
$
(8,580
)
 
$
31,368

 
$
73,472

 
$
56,509

 
$
39,914

Interest expense
25,079

 
10,836

 
7,682

 
6,772

 
5,511

Interest income(1)
(572
)
 
(332
)
 
(260
)
 
(1,024
)
 
(166
)
Income tax benefit
(981
)
 

 

 

 

Depreciation and amortization
89,124

 
66,591

 
55,355

 
43,918

 
34,601

Loss on disposal of property and equipment
569

 
1,994

 
1,307

 
695

 
235

Impact fee expense
649

 
27,018

 

 

 

Equity-based compensation
84,790

 
5,935

 
5,237

 
4,291

 
13,170

Equity in net losses (earnings) of investments
1,077

 
10,138

 
(821
)
 
1,053

 
57

Loss on extinguishment of debt
3,565

 

 
212

 

 
2,146

Gain on sale of asset

 

 
(248
)
 

 

Gain on lease termination

 
(2,801
)
 

 

 

Impairment of notes receivable and interest receivable(2)

 
2,426

 

 

 

Adjusted EBITDA
$
194,720

 
$
153,173

 
$
141,936

 
$
112,214

 
$
95,468

________________________________________
(1)
Interest income is included in the "Other" line of other income (expense) in our consolidated statements of operations and comprehensive income (loss).
(2)
The write-off of interest income receivable pertaining to our notes receivable with Planet3, Inc. is included in the selling, general and administrative expense line in our consolidated statements of operations and comprehensive income (loss).


Components of Results of Operations
Revenue
During each of the years ended December 31, 2017, 2016, and 2015, we derived more than 95% of our revenue from recurring revenue streams, consisting primarily of (1) colocation, which includes the licensing of cabinet space and power; and (2) connectivity services, which includes cross-connects, broadband services and external connectivity. The remainder of our revenue is from non-recurring revenue streams, which primarily includes installation and contract settlements. Based on the current growth stage of our business, we expect increases in revenue to be driven primarily by increases in volume, rather than changes in the prices we charge to our customers.
Revenue from recurring revenue streams is generally billed monthly and recognized ratably over the period to which the service relates. Contracts with our customers generally have terms of three to five years. Non-recurring installation fees, although generally paid in a lump sum upon installation, are deferred and recognized ratably over the expected life of the installation, which was 66 months and 73 months as of December 31, 2017 and 2016, respectively, for colocation contracts, 29 months and 34 months as of December 31, 2017 and 2016, respectively, for broadband services contracts, and 41 months and 35 months as of December 31, 2017 and 2016, respectively, for external connectivity contracts. Revenue from connectivity services is generally recognized on a gross basis, primarily because we generally act as the principal in the transactions, take title to services and bear credit risk. Revenue from contract settlements, which result when a customer wishes to terminate their contract early, is recognized when no remaining performance obligations exist, to the extent that the revenue has not previously been recognized.
Cost of Revenue
Cost of revenue consists primarily of depreciation and amortization expense, expenses associated with the operations of our facilities, including electricity and other utility costs and repairs and maintenance, data center employees' salaries and benefits, including equity-based compensation, connectivity costs, and rental payments related to our leased buildings and land used in data center operations. A substantial majority of our cost of revenue is fixed in nature and may not vary significantly from period to period, unless we expand our existing data centers or open new data centers. However, there are certain costs that are considered more variable in nature, including utilities and supplies that are directly related to growth in our existing and new customer base. We have seen the cost of our utilities, specifically electricity, decrease as we have become an unbundled

55


purchaser of energy in Nevada, and are able to purchase energy from the open market. The largest portion of our utility costs is fixed and a smaller portion is variable with market conditions.
Gross Profit and Gross Margin
Gross profit, or revenue less cost of revenue, and gross margin, or gross profit as a percentage of revenue, has been and will continue to be affected by various factors, including customer growth, the expansion of our existing data centers or opening of new data centers, and the cost of our utilities, specifically electricity. Our gross margin may fluctuate from period to period depending on the interplay of these factors.
Operating Expenses
Selling, General and Administrative Expense
Selling, general and administrative expenses consist primarily of salaries and related expenses, including equity-based compensation, accounting, legal and other professional service fees, real estate and personal property taxes, rental payments related to our corporate office lease, marketing and selling expenses, including sponsorships, commissions paid to partners, travel, depreciation and amortization expense for assets not used in data center operations, insurance, and other facility and employee related costs. This expense classification may not be comparable to those of other companies. We expect to incur additional selling, general and administrative expenses as we continue to scale our operations to invest in sales and marketing initiatives to further increase our revenue and support our growth. We also expect to incur additional general and administrative expenses as a result of operating as a public company, including expenses related to compliance with the rules and regulations of the Securities and Exchange Commission and those of the New York Stock Exchange, additional insurance expenses, investor relations activities and other administrative and professional services. As a result, we expect that our selling, general and administrative expense will continue to increase in absolute dollars but may fluctuate as a percentage of our revenue from period to period.
Impact Fee Expense
In September 2016, we filed an application with the Public Utilities Commission of Nevada, or PUCN, to become an unbundled purchaser of energy, capacity and ancillary services in Nevada from a new provider of electric resources. The application was approved in December 2016 and we paid the impact fee of $27.0 million in a lump sum in May 2017 to NV Energy, our former energy provider. As there is no future economic benefit to us from the impact fee, it was recognized as an expense in December 2016.
In November 2017, we also incurred an additional $649,000 in impact fee expense related to deferred energy adjustments representing the difference between actual costs and amounts collected by NV Energy for fuel and purchased power. Similarly, as no future economic benefit is realized by us from the deferred energy adjustments, it was recognized as an expense and subsequently paid in November 2017. We do not expect to incur similar fees in future periods.
Other Income (Expense) Items
Interest Expense
Interest expense consists primarily of interest on our credit facilities and amortization of debt issuance costs.
Equity in Net Earnings (Losses) of Investments
Equity in net earnings (losses) of investments primarily consists of our share of results of operations from our equity method investments, including foreign currency translation adjustments. We currently hold two investments, SUPERNAP International and Planet3, Inc., or Planet3. Our investments in SUPERNAP International and Planet3 were accounted for under the equity method of accounting through December 31, 2017 and December 31, 2016, respectively, and our share of their results of operations are included within equity in net losses of investments for each applicable period presented. As of December 31, 2017, the carrying value of our investment in SUPERNAP International was reduced to zero as a result of recording our share of its losses. Our losses will continue to include the foreign currency translation adjustments in our investment. As of December 31, 2016, we determined an other than temporary loss in the value of our investment in Planet3 had occurred, and we therefore fully impaired its carrying value. Accordingly, we discontinued the equity method of accounting for our investments in SUPERNAP International and Planet3 as of December 31, 2017 and December 31, 2016, respectively, and will not provide for additional losses until our share of future net income, if any, equals the share of net losses not recognized during the period the equity method was suspended.
Other
Other (expense) income items primarily consist of other items that have impacted our results of operations such as loss on extinguishment of debt resulting from termination and full repayment of previously held debt obligations, impairment of notes receivable and gains and losses resulting from other transactions.

56


Non-Controlling Interest
As the sole manager of Switch, Ltd., we operate and control all of the business and affairs of Switch, Ltd. and its subsidiaries. Although we have a minority economic interest in Switch, Ltd., we have the sole voting interest in, and control the management of, Switch, Ltd. Accordingly, we consolidate the financial results of Switch, Ltd. and report a non-controlling interest on our consolidated statements of operations and comprehensive income (loss), representing the portion of net income or loss and comprehensive income or loss attributable to the other members of Switch, Ltd. The weighted average ownership percentages during the period are used to calculate the net income or loss and other comprehensive income or loss attributable to Switch, Inc. and the non-controlling interest holders.
Results of Operations
The following table sets forth our results of operations for the periods indicated:
 
Years Ended December 31,
 
2017
 
2016
 
2015
 
(in thousands)
Consolidated Statements of Operations Data:
 
 
 
 
 
Revenue
$
378,275

 
$
318,352

 
$
265,870

Cost of revenue
198,230

 
168,844

 
141,060

Gross profit
180,045

 
149,508

 
124,810

Selling, general and administrative expense
160,569

 
71,420

 
45,251

Impact fee expense
649

 
27,018

 

Income from operations
18,827

 
51,070

 
79,559

Other income (expense):
 
 
 
 
 
Interest expense including amortization of debt issuance costs
(25,079
)
 
(10,836
)
 
(7,682
)
Equity in net earnings (losses) of investments
(1,077
)
 
(10,138
)
 
821

Loss on extinguishment of debt
(3,565
)
 

 
(212
)
Gain on sale of asset

 

 
248

Impairment of notes receivable

 
(2,371
)
 

Gain on lease termination

 
2,801

 

Other
1,333

 
842

 
738

Total other expense
(28,388
)
 
(19,702
)
 
(6,087
)
(Loss) income before income taxes
(9,561
)
 
31,368

 
73,472

Income tax benefit
981

 

 

Net (loss) income
(8,580
)
 
31,368

 
73,472

Less: net income attributable to non-controlling interest
6,628

 

 

Net (loss) income attributable to Switch, Inc.
$
(15,208
)
 
$
31,368

 
$
73,472


57


The following table sets forth the consolidated statements of operations data for each of the periods presented as a percentage of revenue. Amounts may not sum due to rounding.
 
Years Ended December 31,
 
2017
 
2016
 
2015
Consolidated Statements of Operations Data:
 
 
 
 
 
Revenue
100
 %
 
100
 %
 
100
 %
Cost of revenue
52

 
53

 
53

Gross profit
48

 
47

 
47

Selling, general and administrative expense
42

 
22

 
17

Impact fee expense

 
8

 

Income from operations
5

 
16

 
30

Other income (expense):
 
 
 
 
 
Interest expense including amortization of debt issuance costs

(7
)
 
(3
)
 
(3
)
Equity in net earnings (losses) of investments

 
(3
)
 

Loss on extinguishment of debt
(1
)
 

 

Gain on sale of asset

 

 

Impairment of notes receivable

 
(1
)
 

Gain on lease termination

 
1

 

Other

 

 

Total other expense
(8
)
 
(6
)
 
(2
)
(Loss) income before income taxes
(3
)
 
10

 
28

Income tax benefit

 

 

Net (loss) income
(2
)
 
10

 
28

Less: net income attributable to non-controlling interest
2

 

 

Net (loss) income attributable to Switch, Inc.
(4
)%
 
10
 %
 
28
 %
Comparison of the Years Ended December 31, 2017 and 2016
Revenue
 
Years Ended December 31,
 
Change
 
2017
 
2016
 
Amount
 
%
 
(in thousands, except percentage)
Colocation
$
304,720

 
$
259,046

 
$
45,674

 
18
%
Connectivity
67,690

 
53,715

 
13,975

 
26
%
Other
5,865

 
5,591

 
274

 
5
%
Revenue
$
378,275

 
$
318,352

 
$
59,923

 
19
%
Revenue increased by $59.9 million, or 19%, for the year ended December 31, 2017, compared to the year ended December 31, 2016. The increase in revenue for the year ended December 31, 2017 was primarily attributable to a $45.7 million increase in colocation revenue and a $14.0 million increase in connectivity revenue, which resulted from increased sales to existing customers along with the addition of new customers as we expanded the facilities in The Core Campus throughout 2016 and 2017 and opened the first facilities in The Pyramid Campus and The Citadel Campus in June 2016 and November 2016, respectively. Approximately 16% of the increase in sales for the year ended December 31, 2017 was attributable to new customers initiating service after December 31, 2016, and the remaining approximately 84% of the increase in sales was attributable to growth from existing customers. Our revenue churn rate was 0.6% and 1.1% during the years ended December 31, 2017 and 2016, respectively. The increase in revenue during the year ended December 31, 2017 was primarily related to increased volume, rather than an increase in the prices we charge our customers.

58


Cost of Revenue and Gross Margin
 
Years Ended December 31,
 
Change
 
2017
 
2016
 
Amount
 
%
 
(in thousands, except percentage)
Cost of revenue
$
198,230

 
$
168,844

 
$
29,386

 
17
%
Gross margin
47.6
%
 
47.0
%
 
 
 
 
Cost of revenue increased by $29.4 million, or 17%, for the year ended December 31, 2017, compared to the year ended December 31, 2016. The increase in the cost of revenue for the year ended December 31, 2017 was primarily attributable to a $20.9 million increase in depreciation and amortization costs, a $2.9 million increase in connectivity costs and a $1.4 million increase in facilities costs, such as maintenance costs, associated with increased occupancy from the buildout and expansion of The Core Campus, The Citadel Campus and The Pyramid Campus. In addition, salaries and related employee expenses increased by $4.6 million due to an increase in direct labor costs from an increase in headcount offset by a decrease in rent expense of $477,000. Gross margin improved by 60 basis points for the year ended December 31, 2017, compared to the year ended December 31, 2016.
Operating Expenses
 
Years Ended December 31,
 
Change
 
2017
 
2016
 
Amount
 
%
 
(in thousands, except percentage)
Selling, general and administrative expense
$
160,569

 
$
71,420

 
$
89,149

 
125
 %
Impact fee expense
649

 
27,018

 
(26,369
)
 
(98
)%
Total operating expenses
$
161,218

 
$
98,438

 
$
62,780

 
64
 %
Selling, General and Administrative Expense
Selling, general and administrative expense increased by $89.1 million, or 125%, for the year ended December 31, 2017, compared to the year ended December 31, 2016. The increase in selling, general and administrative expense for the year ended December 31, 2017 was primarily attributable to a $77.7 million increase in equity-based compensation expense resulting primarily from the accelerated vesting of certain incentive units upon our IPO and awards granted under the 2017 Incentive Award Plan, a $5.6 million increase in professional service fees for legal and accounting services and a $5.4 million increase in salaries and related expenses predominantly due to an increase in headcount.
Impact Fee Expense
During the year ended December 31, 2016, we filed an application with the PUCN to become an unbundled purchaser of energy, capacity and ancillary services from a new provider of electric resources in Nevada, which was approved in December 2016, and incurred an impact fee expense of $27.0 million. During the year ended December 31, 2017, we incurred $649,000 related to deferred energy adjustments representing the difference between actual costs and amounts collected by NV Energy for fuel and purchased power.

59


Other Income (Expense)
 
Years Ended December 31,
 
Change
 
2017
 
2016
 
Amount
 
%
 
(in thousands, except percentage)
Other income (expense):
 
 
 
 
 
 
 
Interest expense
$
(25,079
)
 
$
(10,836
)
 
$
(14,243
)
 
(131
)%
Equity in net losses of investments
(1,077
)
 
(10,138
)
 
9,061

 
89
 %
Loss on extinguishment of debt
(3,565
)
 

 
(3,565
)
 
NM

Impairment of notes receivable

 
(2,371
)
 
2,371

 
NM

Gain on lease termination

 
2,801

 
(2,801
)
 
NM

Other
1,333

 
842

 
491

 
58
 %
Total
(28,388
)
 
(19,702
)
 
(8,686
)
 
(44
)%
________________________________________
NM - Not meaningful
Interest Expense
Interest expense increased by $14.2 million to $25.1 million for the year ended December 31, 2017, compared to $10.8 million for the year ended December 31, 2016. The increase was primarily driven by an increase in our outstanding long-term debt from $472.1 million as of December 31, 2016 to $591.8 million as of December 31, 2017.
Equity in Net Losses of Investments
Equity in net losses of investments related to our equity method investments in SUPERNAP International and Planet3 was $1.1 million in net losses for the year ended December 31, 2017, compared to $10.1 million of net losses for the year ended December 31, 2016. The net losses for these periods are related to the financial performance of our equity method investment in Planet3 and SUPERNAP International. In addition, in 2016, we recorded an impairment for the full carrying value of our investment in Planet3 of $4.4 million.
Loss on Extinguishment of Debt
Loss on extinguishment of debt was $3.6 million for the year ended December 31, 2017 related to the refinancing of our original credit agreement and closing of our amended and restated credit agreement in June 2017. The loss consisted of the write-off of previously unamortized debt issuance costs of $2.1 million and lender fees of $1.5 million. There was no such extinguishment of debt during the year ended December 31, 2016.
Income Tax Benefit
 
Years Ended December 31,
 
Change
 
2017
 
2016
 
Amount
 
%
 
(in thousands, except percentage)
Income tax benefit
$
981

 
$

 
$
981

 
NM
________________________________________
NM - Not meaningful
As a result of the IPO and certain organizational transactions completed in connection with our IPO, we became the sole manager of Switch, Ltd., which is treated as a partnership for U.S. federal and most applicable state and local income tax purposes. As a partnership, Switch, Ltd. is not subject to U.S. federal and certain state and local income taxes. Any taxable income or loss generated by Switch, Ltd. is passed through to, and included in the taxable income or loss of, its members, including us, on a pro rata basis. We are subject to U.S. federal income taxes, in addition to state and local income taxes with respect to our allocable share of any taxable income or loss generated by Switch, Ltd.

60


Net Income Attributable to Non-controlling Interest
 
Years Ended December 31,
 
Change
 
2017
 
2016
 
Amount
 
%
 
(in thousands, except percentage)
Net income attributable to non-controlling interest
$
6,628

 
$

 
$
6,628

 
NM
________________________________________
NM - Not meaningful
As a result of the IPO and certain organizational transactions completed in connection with our IPO described within Note 1 "Organization" to our consolidated financial statements, the Members at December 31, 2017 became non-controlling interest holders of Switch, Ltd. and owned 85.5% of the outstanding Common Units, with the remaining 14.5% owned by Switch, Inc. Net loss for the year ended December 31, 2017 was therefore attributed to non-controlling interest holders based on the resulting ownership percentages. Further, as the IPO and certain organizational transactions completed in connection with our IPO occurred during the year ended December 31, 2017, there was no non-controlling interest during the year ended December 31, 2016.
Comparison of the Years Ended December 31, 2016 and 2015
Revenue
 
Years Ended December 31,
 
Change
 
2016
 
2015
 
Amount
 
%
 
(in thousands, except percentage)
Colocation
$
259,046

 
$
218,498

 
$
40,548

 
19
%
Connectivity
53,715

 
43,147

 
10,568

 
24
%
Other
5,591

 
4,225

 
1,366

 
32
%
Revenue
$
318,352

 
$
265,870

 
$
52,482

 
20
%
Revenue increased by $52.5 million, or 20%, for the year ended December 31, 2016, compared to the year ended December 31, 2015. The increase in revenue was primarily attributable to a $40.5 million increase in colocation revenue and a $10.6 million increase in connectivity revenue, which resulted from increased sales as we expanded The Core Campus throughout 2015 and 2016 and opened our first facilities in each of The Pyramid Campus and The Citadel Campus in 2016. Approximately 56% of the increase in sales was attributable to growth from existing customers, and the remaining approximately 44% of the increase in sales was attributable to new customers initiating service after December 31, 2015. The increase in revenue was primarily related to increased volume, rather than an increase in the prices we charge our customers.
Cost of Revenue and Gross Margin
 
Years Ended December 31,
 
Change
 
2016
 
2015
 
Amount
 
%
 
(in thousands, except percentage)
Cost of revenue
$
168,844

 
$
141,060

 
$
27,784

 
20
%
Gross margin
47.0
%
 
46.9
%
 
 
 
 
Cost of revenue increased by $27.8 million, or 20%, for the year ended December 31, 2016, compared to the year ended December 31, 2015. The increase resulted from a $10.5 million increase in depreciation and amortization costs attributable to the buildout and expansions of The Core Campus, The Pyramid Campus and The Citadel Campus, a $7.7 million increase in direct labor costs from an increase in headcount and a $7.0 million increase in connectivity costs resulting from our growth in operations. In addition, there was a $2.0 million increase in facilities costs and a $549,000 increase in rent expense primarily due to The Pyramid Campus data center going into service in June 2016. Gross margin remained relatively constant for the year ended December 31, 2016, compared to the year ended December 31, 2015.

61


Operating Expenses
 
Years Ended December 31,
 
Change
 
2016
 
2015
 
Amount
 
%
 
(in thousands, except percentage)
Selling, general and administrative expense
$
71,420

 
$
45,251

 
$
26,169

 
58
%
Impact fee expense
27,018

 

 
27,018

 
NM

Total operating expenses
$
98,438

 
$
45,251

 
$
53,187

 
118
%
________________________________________
NM - Not meaningful
Selling, General and Administrative Expense
Selling, general and administrative expense increased by $26.2 million, or 58%, for the year ended December 31, 2016, compared to the year ended December 31, 2015. The increase was primarily attributable to an $11.4 million increase in salaries and related expenses, primarily due to an increase in headcount. In addition, there were increases in costs due to the expansions of The Citadel Campus and The Pyramid Campus prior to their openings that are not attributable to cost of revenue, including a $3.8 million increase in rent expense and a $1.3 million increase in taxes. The increase in selling, general and administrative expense is also attributable to a $2.6 million increase in expenses relating to employee meals and training costs due to the increase in headcount, a $2.3 million increase in marketing and selling costs related to sponsorships at various events, a $1.3 million increase in commissions paid to partners due to increased customer referral activity, a $1.4 million increase in depreciation expense, a $1.1 million increase in legal and accounting services and a $1.0 million increase in travel expenses related to the construction projects for The Citadel Campus and The Pyramid Campus.
Impact Fee Expense
Impact fee expense was $27.0 million for the year ended December 31, 2016, compared to zero for the year ended December 31, 2015. We filed an application with the PUCN to become an unbundled purchaser of energy, capacity and ancillary services from a new provider of electric resources in Nevada, which was approved in December 2016. There was no such activity in 2015.
Other Income (Expense)
 
Years Ended December 31,
 
Change
 
2016
 
2015
 
Amount
 
%
 
(in thousands, except percentage)
Other income (expense):
 
 
 
 
 
 
 
Interest expense
$
(10,836
)
 
$
(7,682
)
 
$
(3,154
)
 
41
%
Equity in net (losses) earnings of investments
(10,138
)
 
821

 
(10,959<