10-Q 1 swch-20220331.htm 10-Q swch-20220331
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2022
or
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
swch-20220331_g1.gif
Switch, Inc.
(Exact name of registrant as specified in its charter)
Nevada
82-1883953
(State or other jurisdiction of incorporation or organization)
(I.R.S. Employer Identification No.)
7135 S. Decatur Boulevard
Las Vegas,
NV
89118
(Address of principal executive offices)
(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 classTrading SymbolName of each exchange on which registered
Class A common stock, par value $0.001SWCHNew York Stock Exchange

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  No      
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted 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 such files).    Yes      No 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an 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
Accelerated filer
Non-accelerated filer
Smaller reporting company
Emerging growth company

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.  
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes      No 
As of May 2, 2022, the registrant had 150,388,024 shares of Class A common stock, 94,231,279 shares of Class B common stock, and no shares of Class C common stock outstanding.



Switch, Inc.
Table of Contents


Part I.Financial Information.
Item 1.Financial Statements (Unaudited).

Switch, Inc. | Q1 2022 Form 10-Q | 1

Switch, Inc.
Consolidated Balance Sheets
(in thousands, except per share data)
March 31, 2022December 31, 2021
(unaudited)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents$27,493 $48,325 
Restricted cash1,890 1,890 
Accounts receivable, net of allowance for credit losses of $363 and $361, respectively
24,774 18,368 
Prepaid expenses11,457 10,265 
Other current assets, net of allowance for credit losses of $3
4,627 4,624 
Total current assets70,241 83,472 
Property and equipment, net2,317,408 2,237,059 
Long-term deposit15,222 13,504 
Deferred income taxes306,753 295,699 
Intangible assets, net124,354 125,758 
Goodwill106,350 106,350 
Other assets, net of allowance for credit losses of $94 and $91, respectively
59,097 56,776 
TOTAL ASSETS$2,999,425 $2,918,618 
LIABILITIES AND STOCKHOLDERS’ EQUITY
CURRENT LIABILITIES:
Long-term debt, current portion$4,000 $4,000 
Accounts payable21,813 55,262 
Accrued salaries and benefits8,316 6,786 
Accrued interest7,822 8,577 
Accrued expenses and other16,580 18,285 
Accrued construction payables32,580 31,093 
Deferred revenue, current portion21,163 16,905 
Customer deposits16,707 16,335 
Swap liability, current portion2,846 8,062 
Operating lease liability, current portion2,705 3,281 
Total current liabilities134,532 168,586 
Long-term debt, net1,711,433 1,611,962 
Operating lease liability31,467 32,157 
Finance lease liability57,346 57,376 
Deferred revenue25,507 25,921 
Liabilities under tax receivable agreement412,456 395,615 
Other long-term liabilities969 8,360 
TOTAL LIABILITIES2,373,710 2,299,977 
Commitments and contingencies (Note 6)
STOCKHOLDERS’ EQUITY:
Preferred stock, $0.001 par value per share, 10,000 shares authorized, none issued and outstanding
  
Class A common stock, $0.001 par value per share, 750,000 shares authorized, 148,846 and 145,187 shares issued and outstanding, respectively
149 145 
Class B common stock, $0.001 par value per share, 300,000 shares authorized, 95,773 and 98,331 shares issued and outstanding, respectively
96 98 
Class C common stock, $0.001 par value per share, 75,000 shares authorized, none issued and outstanding
  
Additional paid in capital357,286 352,984 
Accumulated deficit(18,188)(23,022)
Accumulated other comprehensive loss(568)(568)
Total Switch, Inc. stockholders’ equity338,775 329,637 
Noncontrolling interest286,940 289,004 
TOTAL STOCKHOLDERS’ EQUITY625,715 618,641 
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY$2,999,425 $2,918,618 

The accompanying condensed notes are an integral part of these consolidated financial statements.
Switch, Inc. | Q1 2022 Form 10-Q | 2

Switch, Inc.
Consolidated Statements of Comprehensive Income
(in thousands, except per share data)
(unaudited)
Three Months Ended
March 31,
20222021
Revenue$164,609 $130,866 
Cost of revenue94,491 71,693 
Gross profit70,118 59,173 
Selling, general and administrative expense42,871 34,998 
Income from operations27,247 24,175 
Other income (expense):
Interest expense, including $662 and $583, respectively, in amortization of debt issuance costs and original issue discount
(13,197)(8,757)
Gain on swaps13,649 3,205 
Equity in net losses of investments (220)
Gain on sale of equity method investment 5,374 
Other475 3,271 
Total other income927 2,873 
Income before income taxes28,174 27,048 
Income tax expense (4,240)(2,654)
Net income23,934 24,394 
Less: net income attributable to noncontrolling interest11,141 12,753 
Net income attributable to Switch, Inc.$12,793 $11,641 
Net income per share (Note 10):
Basic$0.09 $0.09 
Diluted$0.08 $0.09 
Weighted average shares used in computing net income per share (Note 10):
Basic147,745 126,641 
Diluted153,265 129,110 
Other comprehensive loss:
Foreign currency translation adjustment, net of reclassification adjustment and tax of $0
 (474)
Comprehensive income23,934 23,920 
Less: comprehensive income attributable to noncontrolling interest11,141 12,340 
Comprehensive income attributable to Switch, Inc.$12,793 $11,580 

The accompanying condensed notes are an integral part of these consolidated financial statements.

Switch, Inc. | Q1 2022 Form 10-Q | 3

Switch, Inc.
Consolidated Statements of Stockholders’ Equity
(in thousands)
(unaudited)
Switch, Inc. Stockholders’ Equity
Class A Common StockClass B Common Stock
SharesAmountSharesAmountAdditional Paid in CapitalAccumulated DeficitAccumulated Other Comprehensive LossNoncontrolling InterestTotal Stockholders’ Equity
Balances—December 31, 2021145,187 $145 98,331 $98 $352,984 $(23,022)$(568)$289,004 $618,641 
Net income— — — — — 12,793 — 11,141 23,934 
Equity-based compensation expense— — — — 6,681 — — — 6,681 
Issuance of Class A common stock upon settlement of restricted stock units, net of shares withheld for tax957 1 — — (11,209)— — (341)(11,549)
Issuance of Class A common stock upon exercise of stock options144 1 — — 2,611 — — (167)2,445 
Dividends declared ($0.0525 per share)
— — — — — (7,959)— — (7,959)
Distributions to noncontrolling interest— — — — — — — (4,931)(4,931)
Exchanges of noncontrolling interest for Class A common stock2,558 2 (2,558)(2)7,766 — — (7,766)— 
Recognition of tax receivable agreement liability resulting from exchanges of noncontrolling interest for Class A common stock— — — — (16,841)— — — (16,841)
Net deferred tax asset resulting from changes in outside basis difference on investment in Switch, Ltd.— — — — 15,294 — — — 15,294 
Balances—March 31, 2022148,846 $149 95,773 $96 $357,286 $(18,188)$(568)$286,940 $625,715 

Switch, Inc. | Q1 2022 Form 10-Q | 4

Switch, Inc.
Consolidated Statements of Stockholders’ Equity (Continued)
(in thousands)
(unaudited)
Switch, Inc. Stockholders’ Equity
Class A Common StockClass B Common Stock
SharesAmountSharesAmountAdditional Paid in CapitalAccumulated DeficitAccumulated Other Comprehensive LossNoncontrolling InterestTotal Stockholders’ Equity
Balances—December 31, 2020119,009 $119 121,640 $122 $266,129 $9 $79 $344,509 $610,967 
Net income— — — — — 11,641 — 12,753 24,394 
Equity-based compensation expense— — — — 6,359 — — 938 7,297 
Issuance of Class A common stock upon settlement of restricted stock units, net of shares withheld for tax812 1 — — (5,622)— — 147 (5,474)
Dividends declared ($0.05 per share)
— — — — — (6,562)— — (6,562)
Distributions to noncontrolling interest— — — — — — — (5,696)(5,696)
Exchanges of noncontrolling interest for Class A common stock7,725 8 (7,725)(8)22,364 — — (22,364)— 
Recognition of tax receivable agreement liability resulting from exchanges of noncontrolling interest for Class A common stock— — — — (32,477)— — — (32,477)
Net deferred tax asset resulting from changes in outside basis difference on investment in Switch, Ltd.— — — — 26,752 — — — 26,752 
Foreign currency translation adjustment— — — — — — (61)(413)(474)
Balances—March 31, 2021127,546 $128 113,915 $114 $283,505 $5,088 $18 $329,874 $618,727 

The accompanying condensed notes are an integral part of these consolidated financial statements.
Switch, Inc. | Q1 2022 Form 10-Q | 5

Switch, Inc.
Consolidated Statements of Cash Flows
(in thousands)
(unaudited)
Three Months Ended
March 31,
20222021
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income$23,934 $24,394 
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization of property and equipment47,833 38,791 
Amortization of customer relationships1,562  
Loss (gain) on disposal of property and equipment193 (193)
Deferred income taxes4,240 2,654 
Amortization of debt issuance costs and original issue discount662 583 
Credit loss expense (benefit) 157 (77)
Unrealized gain on swaps(15,994)(5,562)
Equity in net losses on investments 220 
Gain on sale of equity method investment (5,374)
Equity-based compensation6,681 7,297 
Amortization of portfolio energy credits384  
Cost of revenue for sales-type leases 149 
Changes in operating assets and liabilities:
Accounts receivable(6,603)169 
Prepaid expenses(1,192)(514)
Other current assets62 108 
Other assets872 (444)
Accounts payable(8,848)1,001 
Accrued salaries and benefits1,530 2,245 
Accrued interest(755)(5,581)
Accrued expenses and other(1,705)965 
Deferred revenue3,844 4,472 
Customer deposits372 456 
Operating lease liabilities(537)(1,141)
Other long-term liabilities(180)(121)
Net cash provided by operating activities56,512 64,497 
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of property and equipment(150,433)(100,424)
Purchase of portfolio energy credits(542)(1,500)
Purchase of equity method investment (2,200)
Proceeds from sale of equity method investment 4,900 
Proceeds from sale of property and equipment378  
Net cash used in investing activities(150,597)(99,224)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from borrowings, net of original issue discount100,000  
Repayment of borrowings, including finance lease liabilities(1,031)(46)
Change in long-term deposit(3,218)877 
Payment of tax withholdings upon settlement of restricted stock unit awards(12,104)(5,782)
Proceeds from exercise of stock options2,445  
Dividends paid to Class A common stockholders(7,811)(6,377)
Distributions paid to noncontrolling interest(5,028)(5,782)
Net cash provided by (used in) financing activities73,253 (17,110)
NET DECREASE IN CASH, CASH EQUIVALENTS, AND RESTRICTED CASH(20,832)(51,837)
CASH, CASH EQUIVALENTS, AND RESTRICTED CASHBeginning of period
50,215 90,719 
CASH, CASH EQUIVALENTS, AND RESTRICTED CASHEnd of period
$29,383 $38,882 

Switch, Inc. | Q1 2022 Form 10-Q | 6

Switch, Inc.
Consolidated Statements of Cash Flows (Continued)
(in thousands)
(unaudited)
Three Months Ended
March 31,
20222021
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid for interest, net of amounts capitalized$13,449 $13,852 
SUPPLEMENTAL DISCLOSURES OF NON-CASH INVESTING AND FINANCING INFORMATION:
(Decrease) increase in liabilities incurred to acquire property and equipment$(23,114)$3,141 
Decrease in accrued construction payables incurred related to long-term deposit$(1,500)$(41)
Increase in receivables due to sale of property and equipment$ $931 
Decrease in noncontrolling interest as a result of exchanges for Class A common stock$(7,766)$(22,364)
Recognition of liabilities under tax receivable agreement$16,841 $32,477 
Increase in deferred tax asset resulting from changes in outside basis difference on investment in Switch, Ltd.$15,294 $26,752 
Right-of-use assets obtained in exchange for new operating lease liabilities$ $3,434 
Decrease in distributions payable on unvested common units$(97)$(86)
Increase in dividends payable on unvested restricted stock units$148 $185 
Dividends payable settled with shares of Class A common stock$555 $308 
RECONCILIATION OF CASH, CASH EQUIVALENTS, AND RESTRICTED CASH:
Cash and cash equivalents$27,493 $38,882 
Restricted cash1,890  
Total cash, cash equivalents, and restricted cash$29,383 $38,882 

The accompanying condensed notes are an integral part of these consolidated financial statements.
Switch, Inc. | Q1 2022 Form 10-Q | 7

Switch, Inc.
Condensed Notes to Consolidated Financial Statements
(unaudited)

Switch, Inc. | Q1 2022 Form 10-Q | 8

1. Organization
Switch, Inc. was formed as a Nevada corporation in June 2017 for the purpose of completing an initial public offering (“IPO”) and related organizational transactions in order to carry on the business of Switch, Ltd. and its subsidiaries (collectively, “Switch,” and together with Switch, Inc., the “Company”). Switch is comprised of limited liability companies that provide colocation space and related services to global enterprises, financial companies, government agencies, and others that conduct critical business on the internet. Switch develops and operates data centers in Nevada, which are Tier IV Gold certified, Michigan, and Georgia, delivering redundant services with low latency and super capacity transport environments. In June 2021, Switch, Ltd. acquired all of the equity interests of Data Foundry, LLC (“Data Foundry”) and certain real property interests used in connection with Data Foundry’s operations, including operating data centers in Texas. As the manager of Switch, Ltd., Switch, Inc. operates and controls all of the business and affairs of Switch.
2. Summary of Significant Accounting Policies
Basis of Presentation
The accompanying consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) for interim financial information and with the rules and regulations of the Securities and Exchange Commission for quarterly reports on Form 10-Q and Article 10 of Regulation S-X. Accordingly, certain footnote disclosures normally included in annual financial statements prepared in accordance with GAAP have been condensed or omitted. These consolidated financial statements should be read in conjunction with the Company’s Annual Report on Form 10-K for the year ended December 31, 2021.
On June 7, 2021, Switch, Ltd. acquired all of the equity interests of Data Foundry and certain real property interests used in connection with Data Foundry’s operations. The Company has included the results of operations for Data Foundry in the consolidated financial statements from the date of acquisition. See Note 3 “Acquisition” for additional information.
Management believes that the accompanying consolidated financial statements reflect all adjustments, which include only normal recurring adjustments, necessary for the fair statement of these consolidated financial statements. The consolidated results of operations for the three months ended March 31, 2022 are not necessarily indicative of the results to be expected for the year ending December 31, 2022, or for any other future annual or interim period.
Principles of Consolidation
The accompanying consolidated financial statements include the accounts of the Company and all significant intercompany transactions and balances have been eliminated.
As the sole manager of Switch, Ltd., Switch, Inc. identified itself as the primary beneficiary of Switch and began consolidating Switch in its consolidated financial statements as of October 11, 2017, the closing date of the IPO, resulting in a noncontrolling interest related to the common units of Switch, Ltd. (“Common Units”) held by members other than Switch, Inc. on its consolidated financial statements. As of January 2021, Switch, Inc. owns a majority economic interest in Switch.
The Company periodically evaluates entities for consolidation either through ownership of a majority voting interest, or through means other than voting interest, in accordance with the Variable Interest Entity (“VIE”) accounting model. A VIE is an entity in which either (i) the equity investors as a group, if any, lack the power through voting or similar rights to direct the activities of such entity that most significantly impact such entity’s economic performance or (ii) the equity investment at risk is insufficient to finance that entity’s activities without additional subordinated financial support.
Use of Estimates
The preparation of consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenue and expenses during the reporting period. On an ongoing basis, the Company evaluates its estimates, including, but not limited to, those related to the allowance for credit losses, useful lives of property and equipment, impairment of intangible assets, deferred income taxes, liabilities under the tax receivable agreement, equity-based compensation, deferred revenue, incremental borrowing rate, fair value of performance obligations, fair value of assets acquired and liabilities assumed in business combinations, and probability assessments of exercising renewal options on leases. The Company bases its estimates on historical experience and on various other assumptions that are believed to be reasonable. Actual results could differ from these estimates.
Switch, Inc. | Q1 2022 Form 10-Q | 9

Significant Accounting Policies
A description of the Company’s significant accounting policies is included in the audited financial statements within its Annual Report on Form 10-K for the year ended December 31, 2021. No other changes to significant accounting policies have occurred since December 31, 2021, with the exception of those detailed below.
Concentration of Credit and Other Risks
Although the Company operates primarily in Nevada, realization of its receivables and its future operations and cash flows could be affected by adverse economic conditions, both regionally and elsewhere in the United States. During the three months ended March 31, 2022 and 2021, the Company’s largest customer and its affiliates comprised 14% and 16%, respectively, of the Company’s revenue. Two customers accounted for 10% or more of total receivables, including net investments in sales-type leases, as of March 31, 2022. One customer accounted for 10% or more of total receivables, including net investments in sales-type leases, as of December 31, 2021.
Revenue Recognition
Contract Balances
The opening and closing balances of the Company’s contract assets, net of allowance for credit losses, and deferred revenue are as follows:
Contract Assets, Current Portion(1)
Contract Assets(2)
Deferred Revenue, Current Portion(3)
Deferred Revenue(4)
(in thousands)
December 31, 2021$190 $4,262 $16,905 $25,921 
March 31, 2022190 4,296 21,163 25,507 
Change$ $34 $4,258 $(414)
________________________________________
(1)Amounts are included within other current assets on the Company’s consolidated balance sheets.
(2)Amounts are included within other assets on the Company’s consolidated balance sheets.
(3)Amounts include $1.5 million and $1.4 million of deferred revenue related to leases as of March 31, 2022 and December 31, 2021, respectively.
(4)Amounts include $2.5 million and $2.8 million of deferred revenue related to leases as of March 31, 2022 and December 31, 2021, respectively.
The differences between the opening and closing balances of the Company’s deferred revenue primarily result from timing differences between the Company’s satisfaction of performance obligations and the associated customer payments. Revenue recognized from the balance of deferred revenue as of December 31, 2021 was $2.2 million during the three months ended March 31, 2022. For the three months ended March 31, 2022, no impairment losses related to contract assets were recognized on the consolidated statement of comprehensive income.
Remaining Performance Obligations
Remaining performance obligations represent contracted revenue that has not yet been recognized, which includes deferred revenue and amounts that will be invoiced and recognized in future periods. These amounts totaled $875.0 million as of March 31, 2022, 45%, 44%, and 9% of which is expected to be recognized over the next year, one to three years, and three to five years, respectively, with the remainder recognized thereafter. The remaining performance obligations do not include estimates of variable consideration related to unsatisfied performance obligations, such as the usage of metered power, or any contracts that could be terminated without significant penalties.

Switch, Inc. | Q1 2022 Form 10-Q | 10

Fair Value Measurements
Information about the Company’s financial assets and liabilities measured at fair value on a recurring basis is presented below:
March 31, 2022
Balance Sheet ClassificationCarrying ValueLevel 1Level 2Level 3
(in thousands)
Assets:
Power swapsOther current assets$685 $— $685 $— 
Power swapsOther assets$1,270 $— $1,270 $— 
Interest rate swapsOther assets$2,116 $— $2,116 $— 
Liabilities:
Interest rate swapsSwap liability, current portion$2,846 $— $2,846 $— 
December 31, 2021
Balance Sheet ClassificationCarrying ValueLevel 1Level 2Level 3
(in thousands)
Assets:
Cash equivalentsCash and cash equivalents$17,959 $17,959 $— $— 
Liabilities:
Interest rate swapsSwap liability, current portion$8,062 $— $8,062 $— 
Interest rate swapsOther long-term liabilities$6,706 $— $6,706 $— 
There were no transfers between levels of fair value hierarchy during the periods presented.
The fair values of power swaps and interest rate swaps were measured using a present value of cash flow valuation technique based on forward pricing and yield curves for the same or similar financial instruments.
Derivative Financial Instruments
A derivative is a financial instrument whose value changes in response to an underlying variable, requires little or no initial net investment, and is settled at a future date. Derivatives are initially recognized on the consolidated balance sheets at fair value on the date on which the derivatives are entered into and subsequently re-measured at fair value. Derivatives are separated into their current and long-term components based on the timing of the estimated cash flows as of the end of each reporting period.
Embedded derivatives included in hybrid instruments are treated and disclosed as separate derivatives when their economic characteristics and risks are not closely related to those of the host contract, the terms of the embedded derivative are the same as those of a stand-alone derivative, and the combined contract is not measured at fair value through earnings. The financial host contracts are accounted for and measured using the applicable GAAP of the relevant financial instrument category.
The method of recognizing fair value gains and losses depends on whether the derivatives are designated as hedging instruments, and if so, the nature of the hedge relationship. All gains and losses from changes in the fair values of derivatives that do not qualify for hedge accounting are recognized immediately in earnings. Cash flows from derivatives not designated as hedging instruments are classified in accordance with the nature of the derivative instrument and how it is used in the context of the Company’s business.
The Company enters into interest rate swap agreements to manage its interest rate risk associated with variable-rate borrowings. In January and February 2019, Switch, Ltd. entered into four interest rate swap agreements; whereby, Switch, Ltd. will pay a weighted average fixed interest rate (excluding the applicable interest margin) of 2.48% on notional amounts corresponding to borrowings of $400.0 million in exchange for receipts on the same notional amount at a variable interest rate based on the applicable LIBOR at the time of payment. The interest rate swap agreements mature in June 2024 and are not designated as hedging instruments. Resulting gains and losses from these derivatives, inclusive of periodic net settlement amounts, were recorded in gain on swaps on the consolidated statements of comprehensive income. The Company recorded gains on interest rate swaps of $11.6 million and $3.2 million for the three months ended March 31, 2022 and 2021, respectively.
Switch, Inc. | Q1 2022 Form 10-Q | 11

The Company enters into power swap agreements to manage its exposure to adverse changes in the price of power. In March 2022, Switch, Ltd. entered into two power swap agreements comprising power paid at fixed prices in exchange for receipts on power sales based on the variable prices at the time of settlement. The power swap agreements mature in September 2022 and September 2024 and are not designated as hedging instruments. Resulting gains from these derivatives, inclusive of periodic net settlement amounts, were recorded in gain on swaps on the consolidated statements of comprehensive income. The Company recorded a gain on power swaps of $2.0 million for the three months ended March 31, 2022.
Recent Accounting Pronouncements
The Company’s management has evaluated all of the recently issued, but not yet effective, accounting standards that have been issued or proposed by the Financial Accounting Standards Board or other standards-setting bodies through the filing date of these financial statements and does not believe the future adoption of any such pronouncements will have a material effect on the Company’s financial position, results of operations, and cash flows.
3. Acquisition
On June 7, 2021, Switch, Ltd. acquired all of the equity interests of Data Foundry and certain real property interests used in connection with Data Foundry’s operations for total cash consideration of $420.0 million, which includes $3.7 million outstanding as of March 31, 2022 to be paid prior to June 7, 2022 upon the finalization of certain closing conditions and $4.6 million of acquired cash, cash equivalents, and restricted cash.
Supplemental pro forma results of operations for the Company, assuming the acquisition had occurred on January 1, 2020, are as follows (in thousands):
Three Months Ended
March 31, 2021
Revenue$142,445 
Net income attributable to Switch, Inc.$9,516 
The above supplemental pro forma results of operations include the following adjustments and related income tax and noncontrolling interest impacts after applying the Company’s accounting policies:
additional depreciation and amortization expense reflecting the fair value adjustments to property and equipment and intangible assets;
adjustment to interest expense to reflect the removal of Data Foundry’s debt and the issuance of Switch, Ltd.’s $500.0 million aggregate principal amount of its 4.125% senior unsecured notes due 2029 in conjunction with the acquisition; and
adjustment to reflect acquisition-related costs incurred during the three months ended March 31, 2021 as incurred during the three months ended March 31, 2020.
Switch, Inc. | Q1 2022 Form 10-Q | 12

4. Property and Equipment, Net
Property and equipment, net consists of the following:
March 31,December 31,
20222021
(in thousands)
Land and land improvements$322,974 $322,808 
Buildings, building improvements, and leasehold improvements699,055 695,378 
Substation equipment19,780 19,780 
Data center equipment1,589,574 1,559,241 
Vehicles2,105 2,045 
Core network equipment45,103 43,086 
Fiber facilities14,825 14,647 
Computer equipment, furniture and fixtures53,692 53,194 
Finance lease right-of-use assets75,933 75,933 
Construction in progress410,474 319,623 
Property and equipment, gross3,233,515 3,105,735 
Less: accumulated depreciation and amortization(916,107)(868,676)
Property and equipment, net$2,317,408 $2,237,059 
Accumulated amortization for finance lease right-of-use assets totaled $17.2 million and $16.7 million as of March 31, 2022 and December 31, 2021, respectively.
During the three months ended March 31, 2022 and 2021, capitalized interest was $2.7 million and $1.3 million, respectively.
Total depreciation and amortization of property and equipment recognized on the consolidated statements of comprehensive income was as follows:
Three Months Ended
March 31,
20222021
(in thousands)
Cost of revenue$46,438 $37,729 
Selling, general and administrative expense1,395 1,062 
Total depreciation and amortization of property and equipment$47,833 $38,791 
Switch, Inc. | Q1 2022 Form 10-Q | 13

5. Long-Term Debt
Long-term debt consists of the following:
March 31,December 31,
20222021
(in thousands)
3.75% senior unsecured notes, due September 2028
$600,000 $600,000 
4.125% senior unsecured notes, due June 2029
500,000 500,000 
Term loan facility, interest paid at the defined LIBOR rate plus applicable interest margin (2.46% and 2.10% at March 31, 2022 and December 31, 2021, respectively), due July 2028
398,000 399,000 
Revolving credit facility, interest paid at the defined LIBOR rate plus applicable interest margin (2.21% and 1.85% at March 31, 2022 and December 31, 2021, respectively), due July 2026
230,000 130,000 
Long-term debt, gross1,728,000 1,629,000 
Less: unamortized debt issuance costs and original issue discount(12,567)(13,038)
1,715,433 1,615,962 
Less: long-term debt, current(4,000)(4,000)
Long-term debt, net$1,711,433 $1,611,962 
As of March 31, 2022, the Company had $263.1 million of available borrowing capacity under its revolving credit facility, net of outstanding letters of credit.
The estimated fair value of the Company’s long-term debt as of March 31, 2022 and December 31, 2021 was approximately $1.71 billion and $1.65 billion, respectively, compared to its carrying value, excluding debt issuance costs and original issue discount, of $1.73 billion and $1.63 billion, respectively. The estimated fair value of the Company’s long-term debt was based on Level 2 inputs using quoted market prices on or about March 31, 2022 and December 31, 2021, respectively.
6. Commitments and Contingencies
Purchase Commitments
In March 2022, Switch, Ltd. entered into a power purchase and sale agreement to purchase an aggregate firm commitment of 474,650 megawatt-hours, or a purchase commitment of $25.7 million, inclusive of scheduling services, during a term of 19 months starting on May 1, 2022. Additional franchise tax amounts may be due based on the data center location where the purchased power is used.
Operating Leases
During the three months ended March 31, 2022 and 2021, lease costs related to operating leases were $1.9 million and $1.7 million, respectively. Related party lease costs included in these amounts were $1.2 million for each of the three months ended March 31, 2022 and 2021.
Legal Proceedings
The Company is party to legal proceedings arising in the ordinary course of business, but is not currently a party to any legal proceeding that management believes could have a material adverse effect on the Company’s consolidated financial position, results of operations, or cash flows.
7. Income Taxes
The Company recorded net increases in deferred tax assets of $15.3 million and $26.8 million during the three months ended March 31, 2022 and 2021, respectively, with a corresponding increase to additional paid in capital, resulting from changes in the outside basis difference on Switch, Inc.’s investment in Switch, Ltd. The Company has determined that it is more-likely-than-not that it will be able to realize this deferred tax asset in the future.
Tax Receivable Agreement
The Company has recorded a liability under the tax receivable agreement of $412.5 million and $395.6 million as of March 31, 2022 and December 31, 2021, respectively, of which $197.4 million and $190.7 million is owed to certain named executive officers of the Company, certain members of its Board of Directors, and certain beneficial owners of more than 5% of the Company’s Class A or Class B common stock (and immediate family members of the foregoing) as of March 31, 2022 and December 31, 2021, respectively. The tax receivable agreement provides for
Switch, Inc. | Q1 2022 Form 10-Q | 14

the payment of 85% of the amount of the tax benefits, if any, that Switch, Inc. is deemed to realize as a result of increases in the tax basis of its ownership in Switch, Ltd. related to exchanges of noncontrolling interest for Class A common stock. No amounts are expected to be paid within the next 12 months.
8. Equity-Based Compensation
Total equity-based compensation recognized on the consolidated statements of comprehensive income was as follows:
Three Months Ended
March 31,
20222021
(in thousands)
Cost of revenue$522 $590 
Selling, general and administrative expense6,159 6,707 
Total equity-based compensation$6,681 $7,297 
9. Noncontrolling Interest
Ownership
Switch, Inc. owns an economic interest in Switch, Ltd., where “economic interest” means the right to receive any distributions, whether cash, property, or securities of Switch, Ltd., in connection with Common Units. Switch, Inc. presents interest held by noncontrolling interest holders within noncontrolling interest in the consolidated financial statements. During the three months ended March 31, 2022 and 2021, Switch, Inc. issued an aggregate of 2.6 million shares and 7.7 million shares, respectively, of Class A common stock to members in connection with such members’ redemptions of an equivalent number of Common Units and corresponding cancellation and retirement of an equivalent number of Switch, Inc.’s Class B common stock. Such retired shares of Class B common stock may not be reissued. The redemptions occurred pursuant to the terms of the Switch operating agreement entered into in connection with the Company’s IPO.
The ownership of the Common Units is summarized as follows:
March 31, 2022December 31, 2021
Units (in thousands)Ownership %Units (in thousands)Ownership %
Switch, Inc.’s ownership of Common Units(1)
148,775 60.8 %145,116 59.6 %
Noncontrolling interest holders’ ownership of Common Units95,773 39.2 %98,331 40.4 %
Total Common Units244,548 100.0 %243,447 100.0 %
________________________________________
(1)Common Units held by Switch, Inc. exclude 71,000 Common Units underlying unvested restricted stock awards.
The Company uses the weighted average ownership percentages during the period to calculate the income or loss before income taxes attributable to Switch, Inc. and the noncontrolling interest holders of Switch, Ltd.
Switch, Inc. | Q1 2022 Form 10-Q | 15

10. Net Income Per Share
The following table sets forth the calculation of basic and diluted net income per share:
Three Months Ended
March 31,
20222021
(in thousands, except per share data)
Net income per share:
Numerator—basic:
Net income attributable to Switch, Inc.—basic$12,793 $11,641 
Numerator—diluted:
Net income attributable to Switch, Inc.—diluted$12,793 $11,641 
Denominator—basic:
Weighted average shares outstanding—basic147,745 126,641 
Net income per share—basic$0.09 $0.09 
Denominator—diluted:
Weighted average shares outstanding—basic147,745 126,641 
Weighted average effect of dilutive securities:
Stock options4,173 1,471 
Restricted stock units1,268 904 
Dividend equivalent units26 46 
Restricted stock awards52 48 
Weighted average shares outstanding—diluted153,265 129,110 
Net income per share—diluted$0.08 $0.09 
Shares of Class B and Class C common stock do not share in the earnings or losses of Switch, Inc. and are therefore not participating securities. As such, separate calculations of basic and diluted net income per share for each of Class B and Class C common stock under the two-class method have not been presented.
The following table presents potentially dilutive securities excluded from the computation of diluted net income per share for the periods presented because their effect would have been anti-dilutive.
Three Months Ended
March 31,
20222021
(in thousands)
Stock options(1)
 5,762 
Restricted stock units(1)
577 12 
Performance-vesting restricted stock units(1)
498 277 
Shares of Class B and Class C common stock(2)
95,773 113,915 
________________________________________
(1)Represents the number of instruments outstanding at the end of the period. Application of the treasury stock method would reduce this amount if they had a dilutive effect and were included in the computation of diluted net income per share.
(2)Shares of Class B and Class C common stock at the end of the period are considered potentially dilutive shares of Class A common stock under application of the if-converted method.
11. Segment Reporting
The Company’s chief operating decision maker is its Chief Executive Officer. The Company manages its operations as a single operating segment for the purposes of assessing performance and making operating decisions. All of the Company’s assets are maintained in the United States, although the Company holds an equity method investment in an entity with foreign operations. The Company derives almost all of its revenue from sales to customers in the United States, based upon the billing address of the customer. Revenue derived from customers outside the United States, based upon the billing address of the customer, was less than 2% of revenue for each of the three months ended March 31, 2022 and 2021.
Switch, Inc. | Q1 2022 Form 10-Q | 16

The Company’s revenue is comprised of the following:
Three Months Ended
March 31,
20222021
(in thousands)
Colocation$131,932 $107,301 
Connectivity29,957 21,886 
Other2,720 1,679 
Total revenue$164,609 $130,866 
12. Subsequent Events
In April and May 2022, Switch, Inc. issued an aggregate of 0.2 million and 1.4 million shares, respectively, of Class A common stock to members in connection with such members’ redemptions of an equivalent number of Common Units and corresponding cancellation and retirement of an equivalent number of shares of Class B common stock. Such retired shares of Class B common stock may not be reissued. The redemptions occurred pursuant to the terms of the Switch operating agreement entered into in connection with the Company’s IPO.
In May 2022, Switch, Inc.’s Board of Directors declared a dividend of $0.0525 per share of Class A common stock, for a total estimated to be $7.9 million, to be paid on June 6, 2022 to holders of record as of May 24, 2022. Prior to the payment of this dividend, Switch, Ltd. will make a cash distribution to all holders of record of Common Units, including Switch, Inc., of $0.0525 per Common Unit, for a total estimated to be $12.8 million.
Switch, Inc. | Q1 2022 Form 10-Q | 17

Item 2.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 consolidated financial statements and related condensed notes included in Part I, Item 1 of this Quarterly Report on Form 10-Q (this “Form 10-Q”), and with the audited consolidated financial statements and related notes included in our Annual Report on Form 10-K for the year ended December 31, 2021. 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 Part I, Item 1A—Risk Factors of our Annual Report on Form 10-K for the year ended December 31, 2021. 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.
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 exascale 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 own and operate five primary campus locations, called Primes, which encompass 16 colocation facilities with an aggregate of up to 5.1 million gross square feet (“GSF”) of space. Our Primes consist of The Core Campus in Las Vegas, Nevada; The Citadel Campus near Reno, Nevada; The Pyramid Campus in Grand Rapids, Michigan; The Keep Campus in Atlanta, Georgia; and The Rock Campus in Austin, Texas, which was launched with our acquisition in June 2021 of all of the equity interests of Data Foundry, LLC (“Data Foundry”) and certain real property interests used in connection with Data Foundry’s operations.
In addition to our Primes, we held a 50% ownership interest in SUPERNAP International, S.A. (“SUPERNAP International”), which had deployed facilities in Italy and Thailand, until February 2021, when we acquired SUPERNAP International’s 30% ownership interest in SUPERNAP (Thailand) Company Limited (“SUPERNAP Thailand”), the entity which has deployed the facility in Thailand, and sold our ownership interest in SUPERNAP International, thus disposing of our interest in the facility in Italy. We account for our ownership interest in SUPERNAP Thailand under the equity method of accounting.
We currently have more than 1,300 customers, including some of the world’s largest technology and digital media companies, cloud, IT and software providers, as well as financial institutions and network and telecommunications providers. Our ecosystem connects over 350 cloud, IT and software providers and more than 100 network and telecommunications providers. Our business is based on a recurring revenue model comprised of (1) colocation, which includes the licensing and leasing of cabinet space and power and (2) connectivity services, which include cross-connects, broadband services and external connectivity. 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 generally derive more than 95% of our revenue from recurring revenue and we expect to continue to do so for the foreseeable future.
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 typically billed once, upon completion of the installation.
In November 2021, our board of directors approved the pursuit of a real estate investment trust (“REIT”) conversion with a target of electing REIT status for the taxable year beginning January 1, 2023. We will report material developments and plans from time to time as the key steps for our conversion to a REIT are put in place and completed.
Switch, Inc. | Q1 2022 Form 10-Q | 18


Factors that May Influence Future Results of Operations
Impact of COVID-19. The global health crisis caused by the COVID-19 pandemic and its resurgences has and may continue to negatively impact global economic activity, which, despite progress in vaccination efforts, remains uncertain and cannot be predicted with confidence. In addition, new variants of COVID-19 continue to emerge, including the recent Omicron variant which appears to be the most transmissible variant to date. While we have not incurred significant disruptions thus far from COVID-19, the impact of the COVID-19 pandemic and its variants cannot be predicted at this time, and could depend on numerous factors, including vaccination rates among the population, the effectiveness of COVID-19 vaccines against variants, the response by governmental bodies and regulators, the severity of the disease or any variant, the duration of the outbreak, the future impact to the business of our customers, partners and vendors, and other facts identified in Part I, Item 1A—Risk Factors of our Annual Report on Form 10-K for the year ended December 31, 2021. Given the ongoing and dynamic nature of the circumstances, it is difficult to predict the impact of the COVID-19 pandemic on our business. We will continue to evaluate the nature and extent of the impact of COVID-19 and its variants on the global economy and to our business, consolidated results of operations, and financial condition.
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, inflationary pressures, supply chain issues, 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, including as a result of the COVID-19 pandemic and its variants, 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 16 colocation facilities with an aggregate of up to 5.1 million GSF of space and up to 508 megawatts of power. As of March 31, 2022, the utilization rates at these Prime Campuses, based on currently available cabinets, were approximately 94%, 100%, 99%, 97%, and 77% at The Core Campus, The Citadel Campus, The Pyramid Campus, The Keep Campus, and The Rock Campus, respectively. Each of our existing Primes has room for further expansion. 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.
Cost of Power. We are a large consumer of power, and the cost of energy accounts 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 prices 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, historically, we generally have intentionally not passed along the seasonal increase in energy costs during the summer months to the full extent permitted under our contracts in order to avoid seasonal adjustments to our customer pricing, and that practice has, therefore, resulted in a decrease in our gross profit in those periods. Beginning in July 2021, we increased certain customer pricing in response to an increase in the cost of energy. As an unbundled purchaser of energy in Nevada, we are able to purchase power in the open market through long-term power contracts, which we believe reduces variability of energy costs. Additionally, we enter into power swap agreements, which we believe manages our exposure to adverse changes in the price of power. 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 energy 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 operate our data centers with 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 $1.8 million for the three months ended March 31, 2022.
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Growth in Customers. Our results of operations could be significantly affected by the growth or reduction of our customer base. We have over 1,300 customers, including some of the world’s largest technology and digital media companies, cloud, IT and software providers, financial institutions, and network and telecommunications providers. We believe we have significant opportunities 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, some of which are not calculated in accordance with accounting principles generally accepted in the United States of America (“GAAP”) to help us evaluate our business, identify trends affecting our business, formulate business plans and make strategic decisions.
Three Months Ended
March 31,
20222021
(dollars in thousands)
Recurring revenue$161,085 $127,977 
Capital expenditures$150,433 $100,424 
Adjusted EBITDA$86,793 $73,442 
Adjusted EBITDA margin52.7 %56.1 %
Recurring Revenue
We calculate recurring revenue as contractual revenue under signed contracts calculated 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 or decreases in contractual revenue from our customers and provides a baseline revenue measure on which to plan expenses.
The following table sets forth a reconciliation of recurring revenue to total revenue:
Three Months Ended
March 31,
20222021
(in thousands)
Recurring revenue$161,085 $127,977 
Non-recurring revenue3,524 2,889 
Revenue$164,609 $130,866 
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 income or loss adjusted for interest expense, interest income, income taxes, depreciation and amortization of property and equipment, amortization of customer relationships, and for specific and defined supplemental adjustments to exclude (i) non-cash equity-based compensation expense; (ii) equity in net 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 prepared 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 and make capital expenditures. We believe that the inclusion of certain adjustments in presenting Adjusted EBITDA and Adjusted EBITDA margin is
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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 certain cash gains or costs for REIT and related restructuring/strategic initiatives. 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 financial measures exclude certain recurring expenses that have been and will continue to be significant expenses of our business.
The following table sets forth a reconciliation of our net income to Adjusted EBITDA:
Three Months Ended
March 31,
20222021
(in thousands)
Net income$23,934 $24,394 
Interest expense13,197 8,757 
Interest income(1)
(37)(39)
Income tax expense4,240 2,654 
Depreciation and amortization of property and equipment47,833 38,791 
Amortization of customer relationships1,562 — 
Loss (gain) on disposal of property and equipment193 (193)
Equity-based compensation6,681 7,297 
Gain on swaps(13,649)(3,205)
REIT and related restructuring/strategic initiatives(2)
2,839 — 
Equity in net losses of investments— 220 
Acquisition-related costs(2)
— 140 
Gain on sale of equity method investment— (5,374)
Adjusted EBITDA$86,793 $73,442 
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(1)Interest income is included in the “Other” line of other income (expense) in our consolidated statements of comprehensive income.
(2)REIT and related restructuring/strategic initiatives and acquisition-related costs are included in the “Selling, general and administrative expense” line in our consolidated statements of comprehensive income.
Components of Results of Operations
Revenue
During each of the three months ended March 31, 2022 and 2021, we derived more than 97% of our revenue from recurring revenue streams, consisting primarily of (1) colocation, which includes the licensing and leasing of cabinet space and power and (2) connectivity services, which include cross-connects, broadband services and external connectivity. The remainder of our revenue is from non-recurring revenue, which primarily includes installation services related to a customer’s initial deployment. The majority of our revenue contracts are classified as licenses, with the exception of certain contracts that contain lease components. 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.
We recognize revenue when control of these goods and services is transferred to our customers in an amount that reflects the consideration we expect to be entitled to in exchange for those goods and services. Revenue from recurring revenue streams is generally billed monthly and recognized using a time-based measurement of progress as customers receive service benefits evenly throughout the term of the contract. Contracts with our customers generally have terms of three to five years. Non-recurring installation fees, although generally paid in a lump sum
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upon installation, are deferred and recognized ratably over the contract term, which is determined using a portfolio approach. Revenue is generally recognized on a gross basis as a principal versus on a net basis as an agent, largely because we are primarily responsible for fulfilling the contract, take title to services, and bear credit risk.
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 portion 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. 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, have 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 expense consists 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, 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 continue to incur 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 (“SEC”) and those of the New York Stock Exchange, additional insurance expenses, investor relations activities, and other administrative and professional services. Further, we expect to continue to incur general and administrative expenses in the form of equity-based compensation as a result of the continued issuance and vesting of equity awards. 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.
Other Income (Expense)
Interest Expense
Interest expense consists primarily of interest on our credit facilities and senior unsecured notes and amortization of debt issuance costs and original issue discount, net of amounts capitalized.
Gain on Swaps
Gain on swaps consists of changes in the fair value of interest rate swaps used to mitigate our exposure to interest rate risk and power swaps used to mitigate our exposure to adverse changes in the price of power, inclusive of periodic net settlement amounts.
Equity in Net Losses of Investments
Equity in net losses of investments consists of our share of results of operations from our equity method investments, including foreign currency translation adjustments. We held a 50% ownership interest in SUPERNAP International until February 2021, when we acquired SUPERNAP International’s 30% ownership interest in SUPERNAP Thailand and sold our ownership interest in SUPERNAP International. We had discontinued the equity method of accounting for our investment in SUPERNAP International as the carrying value of our investment was reduced to zero as a result of recording our share of its losses. Our interest in SUPERNAP Thailand was accounted for under the equity method of accounting through December 31, 2021. As of December 31, 2021, the carrying value of our investment in SUPERNAP Thailand was reduced to zero as a result of recording our share of operating losses and foreign currency translation adjustments. Accordingly, we discontinued the equity method of accounting for our investment in SUPERNAP Thailand as of December 31, 2021 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
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method was suspended. Our losses will continue to include the foreign currency translation adjustments in our investment.
Gain on Sale of Equity Method Investment
Gain on sale of equity method investment consists of the gain resulting from the sale of our ownership interest in SUPERNAP International, inclusive of foreign currency translation gains realized.
Other
Other primarily consists of other items that have impacted our results of operations such as interest income on our cash equivalents and gains and losses resulting from other transactions.
Income Taxes
Switch, Ltd. 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.
Noncontrolling Interest
We consolidate the financial results of Switch, Ltd. and report a noncontrolling interest on our consolidated statements of comprehensive income, representing the portion of net income or loss and comprehensive income or loss attributable to the noncontrolling interest. 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 noncontrolling interest.
Results of Operations
The following table sets forth our results of operations:
Three Months Ended
March 31,
20222021
(in thousands)
Consolidated Statements of Income Data: