Q3 2019 Earnings Call
We might during this conference call is being recorded and it will be available for replay at double your W.W. that killed in code Dot Com I would now like to turn the call a they tend to stay Dave Shaffer, Chairman and Chief Executive Officer, Cogen communication Toby.
Oh, Thank you and good morning, everyone welcome to our third quarter 2019 earnings Conference call I'm, Dave Shaffer, Cogent CEO and with me on this morning's call is can we our chief financial Officer.
We are pleased by the results for the quarter and continuing to be optimistic about the underlying shrank the bar business and our outlook for the remainder of 2019 and beyond.
Our EBITDA margin and EBITDA margin as a trusted both increased or the greatest <unk> percentages of our 20 year corporate history, our EBITDA margin for the quarter increased by 200 basis points to 36.9% from the second quarter.
2019, and our EBITDA as adjusted margin increased 590 points.
To 37.8% or S.T.N. expense declined sequentially by $2 million or 6.1% from the second quarter of 2019.
Our gross margin for the quarter increased year over year by 170 basis points from the third quarter.
2018% to 59.9%.
On a constant currency basis, we achieved sequential revenue growth of 1.7% and year over here revenue growth or 6%.
Or year over year quarterly Tropic growth was up 32% and we achieved a sequential increase and traffic rights to 11%.
During the quarter, we've returned $28.6 million to our shareholders through our regular dividend program.
We did not purchase any stock in the quarter at quarter's end, we added a total of $34.9 million available for our buyback program, which our board has authorized to continue through December of 2020.
Our gross leverage ratio decreased 4.97 from five point O. Wayne.
Our net leverage remained essentially flat and declined slightly to 2.92 as compared to 2.93 and the last quarter Cana shouldered, our parent company Codeshare Holdings was 140.300 million.
End of quarter, there's cashes unrestricted and available for use for dividends and the worst stock buybacks. His shoulder operating company was 256 million and our combined cash held both at the holding company at the operating company level.
It was 396.3 million at quarter's end.
We continue to remain confident on our growth potential and cash flow generating capabilities more business as a result as indicated in our press release, we announced another two cents increase and our regular quarterly dividend from 62 cents to sit.
34 cents per share per quarter, representing art, one gene nine consecutive sequential increase our regular dividends.
Throughout this discussion we will highlight several operational statistics.
For a few in greater detail certain operational highlights and trends and total provide some additional details on our financial performance. Following these prepared remarks, well open up for questions and answers now I'd like to turn it over to Tad to reach Safe Harbor wine.
Thank you, Dave and good morning, everyone.
This earnings conference call includes forward looking statements. These forward looking statements are based upon our current content believe and expectations. These forward looking statements and all other statements that may be made on this call that are not historical facts are subject to a number of risks and uncertainties and actual results may differ materially please refer to our FCC.
Filings for more information on the factors that could cause actual results to differ.
Cogent undertakes no obligation to update or revise forward looking statements.
As any non-GAAP financial measures. During this call you will find these reconciled to GAAP measurement in our earnings release, which is posted on our website coding co dot com.
Now I'll turn the call back over to date.
Thanks, Ted hopefully you've had a chance to review our earnings press release, our press release includes a number of historical metrics.
Now for some.
Views on our expectation against our long term goals, our corporate business, which represents 69% of our revenues for the quarter has been growing above our targeted guidance of long term corporate growth of approximately 10% and grew in fact, 10.4%.
The third quarter of 2018.
However, our netcentric business has been underperforming 'cause pair to our historical average and declined 4.7% from the third quarter of 2018.
Impact of foreign exchange problem, primarily impacts our netcentric business on a constant currency business, our netcentric business declined by 2.3% from the third quarter of 2018, however on a constant currency basis, our netcentric business did well.
Turn to sequential growth and increased revenues by one half of 1% from the second quarter of 2019.
Our quarterly cash flow as defined by EBITDA minus capex minus principal payments on our capital leases.
Our quarterly cash flow for the first nine months of 2019 grew by 12.6% as compared to the same nine month period in 2018.
Due to the excellent operating leverage and our business, we expect our cash flow to continue to grow at similar rates.
Our long term EBITDA annual margin expansion guidance is to have an improvement of approximately 200 basis points per year or multi year constant currency revenue growth target is approximately 10%.
Our revenue and EBITDA guidance targets are intended to be multi year in nature and are not intended to be either quarterly or specific annual guidance for 2019.
Ted will now cover some additional details about the operation and financial results from our quarter.
Thank you, Dave and again, good morning to everyone I'd also like to thank and congratulate.
Our entire team for their results and continued hard work and efforts during another very productive quarter for cogent.
We analyze our revenues based upon network type, which is on net off that non core and we also analyze our revenues based upon customer type.
We classify all of our customers into two types netcentric customers and corporate costs.
Our netcentric customers by and large amounts of bandwidth from us and carrier neutral data centers, our corporate customers by bandwidth from us large multi tenant office building.
Revenue from our corporate customers for the quarter grew sequentially by 2.3%.
94.4 million and grew year over year by 10.4% as Dave mentioned.
We had 48179 corporate customer connections on our network at quarter end.
Which is an annual increase of 8.1% over the third quarter last year.
Quarterly revenue from our Netcentric customers increased sequentially by <unk>, 0.1% to 42.5 million and decline year over year by 4.7%.
On a constant currency basis, our quarterly revenue from our Netcentric customers increased by O, 0.5% sequentially and decline year over year by 2.3%.
We had 37513 netcentric customer connections on our network at quarter end, which was an increase of 10.9% over the third quarter last year.
Our netcentric revenue growth experienced significantly more volatility than our corporate revenues due to the impact of foreign exchange customer size and certain other seasonal factors.
Revenue by network type.
Our on net revenue was 99.4 million for the quarter, which was a sequential quarterly increase of 2% and the year over year increased 6%.
Our on net customer connections increased by 2% sequentially and by 9.6% year over year.
Ended the quarter was 73870 odd net customer connections on our network and our 2771 total on that multi tenant office buildings and carrier neutral data center buildings.
Our off net revenue was 37.4 million for the quarter, which was a sequential quarterly increase of 8.6% and a year over year increase of 3.4%.
Our off net customer connections increased sequentially by 1.6% and by seven in the accident year over year.
We ended the quarter, serving 11503, often end customer connections and over 6850 off net buildings and these buildings are primarily in North America.
Some comments on pricing consistent with historical trends the average price per megabit environment stalled based on our new customer contracts decreased for the quarter.
The average price per megabit for our installed base declined sequentially by 4% to 61 cents.
And declined by 22.2% from the third quarter last year.
The average price per megabit for our new customer contracts for the quarter declined sequentially by 13.8% to 33 cents and declined by 21% from the third quarter 2018.
Some comments on ARPU.
Our on net ARPU was flat for the quarter and our off net ARPU decreased sequentially for the quarter.
Our on net ARPU, which includes both corporate and Netcentric customers was $453 for this quarter, which was the same ARPU was last quarter.
Our off that ARPU, which is comprised of predominantly corporate customers was $1093 for the quarter, which was a decrease of 1% sequentially.
Some comments on churn and both our on net an off net churn unit churn rates. Both improved this quarter. Our on net unit churn rate was oh, 0.9% for the quarter, which was an improvement from 1.1% last quarter and our off net unit churn rate was 1.1% this quarter.
Which was an improvement from 1.2% last quarter.
We offer discounts related to contract term to all of our corporate and Netcentric customers.
We also offer volume commitment discounts to our netcentric customers.
During the quarter certain netcentric customers took advantage of our volume and contract term discounts and entered into long term contracts for over 2200 customer connections increasing their revenue commitment to cogent by almost $25 million.
EBITDA and EBITDA as adjusted.
Our EBITDA and EBITDA as adjusted our reconcile to our cash flow from operations and all of our quarterly earnings press releases.
Seasonal factors that typically impact our SG nay expenses, and consequently, our EBITDA and EBITDA as adjusted.
Include the resetting of payroll taxes in the United States to beginning of year annual cost of living or CPM increases seasonable vacation periods, the timing and level of our audit and tax services, the timing and amount of our gains on equipment transactions, our annual sales meeting costs and benefit plan annually.
Cost increases.
These seasonal factors typically increase our SGN expenses in our first quarter from our fourth quarter.
Our quarterly EBITDA increased by 7.2% sequentially to 50.5 million.
Our EBITDA increased year over year by 3.6 million or by 7.6%.
On an FX adjusted basis, our quarterly EBITDA increased by 3.8 million or by 8.2% sequentially and year over year by 4 million or by 8%.
Our quarterly EBITDA margin increased by 200 basis points sequentially to 36.9% and year over year by 80 basis points.
Our EBITDA as adjusted which is EBITDA and adding in gains on our equipment transactions.
Our equipment gains were only $87000 for this quarter a decrease from $416000 from the third quarter of last year and $185000 last quarter.
Our quarterly EBITDA as adjusted increased by 3.3 million or by 7% sequentially to 50.6 million and increased year over year by 3.3 million or by 6.9%.
Our quarterly EBITDA as adjusted margin increased sequentially by 190 basis points to 37% and increased by 60 basis points year over year.
Earnings per share our basic and diluted income per share was 30 cents for the quarter compared to 16 cents last quarter and 18 cents from third quarter of last year impacting our earnings per share. This quarter were unrealized gains on our 100 unrealized foreign exchange gains on our 100.
35 million Euro notes and that gain was $6.1 million this quarter and that represented 13 cents per basic and diluted income per share.
Some comments on foreign exchange.
Our revenue reported in us dollars and earned outside of the United States was about 22% of our total revenues consistent with prior quarters.
Approximately 16% of our revenues this quarter were based in Europe , and 6% of our revenues were related to our Canadian Mexican Asian Pacific and Latin American operations.
Continued volatility in foreign exchange rates can materially impact our quarterly revenue results in our overall financial results.
Foreign exchange impact on our reported quarterly sequential revenue.
Was negative 176000, a year over year foreign exchange impact on a reported quarterly revenue was a negative 1.1 million.
Our quarterly revenue growth rates on a constant currency basis were 1.7% sequentially and 6% year over year.
The impact of foreign exchange, primarily impacts our netcentric.
The average euro to us dollar rate. So far this quarter is about $1.10 an average Canadian dollar exchange rate to 76 cents.
Should these average rates remain at current levels for the remainder of our fourth quarter, we estimate that the FX conversion impact on our sequential quarterly revenues for the for fourth quarter will be about a negative 4.1 million and the year over year Foreign exchange conversion impact is estimated to be a negative 700.
Allison.
We believe that our revenue and customer base is not highly concentrated and our top 25 customers represented less than 6% of our revenues this quarter.
Our capital expenditures increased by 2.8% sequentially and were flat year over year.
Our capital expenditures were 12.1 million this quarter.
The same 12.1 million as the third quarter of last year, and 11.7 million for the second quarter of 2019.
Capital leases and capital lease payments.
Our capital lease IRU obligations are for long term dark fiber leases and typically have initial terms of 15 to 20 years or longer and these leases often incurred multiple renewal options. After the initial lease term.
Our capital lease are you fiber lease obligations totaled 168.1 million.
At quarter end and at quarter end, we had argue contracts with a total of 242 different dark fiber suppliers.
Our capital lease principal payments under our dark fiber argue agreements were flat sequentially and declined by 3.3% year over year.
Our capital lease principal payments were 2 million for the quarter compared to 2.1 million for the third quarter of last year and 2 million for last quarter.
Our capital lease principal payments combined with Capex.
Totaled four point 14, rather point $1 million this quarter compared to 13.7 million last quarter, and 14.2 million for third quarter of last year.
Cash and operating cash flow.
At quarter end, our cash and cash equivalents totaled 396.3 million.
For the quarter, our cash decreased by $13 million.
We returned 40.5 million of capital to our stakeholders this quarter.
During the quarter, we pay 28.6 million for our regular quarterly dividend payments and 12 million was spent on semiannual interest payment on our debt.
Our quarterly cash flow from operations to cuisinart decreased sequentially by 17.7% due to the sequential increase in interest paid this quarter.
However, our quarterly cash flow from operations increased 5.3% year over year.
Our cash flow from operations was 33.4 million for the quarter compared to 31.7 million for the third quarter of last year and 40.6 million for the second quarter. This year.
Debt ratios.
Our total gross debt at par, including our capital lease are you obligations was 962 and a half million at quarter end and our net debt was 566.2 million.
Our total gross debt to trailing last 12 months EBITDA as adjusted ratio was 4.97 at quarter end and our net debt ratio was 2.92.
Finally comments on bad debt and days sales outstanding on accounts receivable.
Our bad debt expense significantly improved from last quarter as expected and decreased by 404000 this quarter from last quarter, where the calendar impact in our customer collections with the last two days in the quarter being on the weekend.
Our bad debt expense was Oh, 0.7% of our revenues for the quarter, which was an improvement from 1% of our revenues last quarter and the same percentage Oh, 0.7% as the third quarter of last year.
Finally, our days sales outstanding or DSO for worldwide accounts receivable was the same as last quarter and was 23 days.
And as always I want to thank and recognize our worldwide billing and collections team members for continued to do a fantastic job, serving our customers and collecting from our customers.
And now with that I will turn the call back over to Dave Hey, Thanks Ted.
Now for a few comments on the scale and scope of our network.
We have over 954 million square feet of multi tenant office space in North America on that our definition of our net is literal meaning we have fiber into the building.
Up to rise or to each of our tenants or into a data center to a common meet point.
Our network consists of over 34980 metro fiber miles and to over 57400.
Intercity route miles so fiber our network remains the most interconnect did not work in the world that directly connects with 60 840 networks less than 30 of TV networks, our settlement free peers the remaining over 68.
Hundreds and 10 networks are cogent customers purchasing transfer service from us.
We are currently utilizing approximately 26% of the lit capacity in our network.
And we routinely augment segments of our network to maintain these low utilization rates.
For the quarter, we achieved accelerated quarterly traffic growth, although leather percent quarter over quarter and 32% year over year.
We now operate 54, cogent control data centers with 609000 square feet of raise for space and these facilities are operating at approximately 32% occupancy we've added two data centers to our network.
Mark this year and 2019.
Our sales rep up.
Turnover in the quarter was 5.3% better than our long term average rep monthly turnover of 5.7%.
Our quarterly Rep productivity. However was 4.4 units per full time equivalent per rep.
Good activity rate that is below our long term average of 5.1.
Full time equivalent.
Reps per month.
However, our rep tenure has decreased and approximately 55% of our reps have been with cogent for one year for less.
We ended the quarter with 530 sales were up selling or services a significant increase from the 519 at the end of second quarter 2019 at the most sales reps we've ever had.
We ended the quarter with 480, a full time equivalent sales reps. These reps that have been in seats for more than three months selling our services an increase from the 478 full time equivalent sales reps, we had at the end of Q2.
Coger remains to low cost provider of Internet access transport services, our value proposition remains unparalleled in the industry.
Our business remains completely focused on the Internet IP connectivity and data center co location services, we are providing a necessary utility to our customers.
On a multi year constant currency basis.
Our long term EBITDA margin expansion should be approximately 200 basis points and our revenue growth will be approximately 10%.
Our board of Directors has approved another increase our regular quarterly dividend of two cents per share, bringing that quarterly dividend to 64 cents per share per quarter, our dividend increases demonstrate our continued optimism and all.
Our business and the historical Amp perspective cash flow generating capabilities of our business, we will be opportunistic and the timing of purchase of our common stock in the open market.
At quarter's end, we had 34.9 million remaining under our current buyback program and that program is intended to continue through December 20, Twond we.
We are committed to returning increasing amounts of capital to our shareholders on a regular and consistent basis with that I'd like to now open the floor for questions.
Thank you ladies and gentlemen, you had a question at this time. Please press the star ended the number one.
Touchstone Calix, Alan again that started in the number one can you just touched on call. The fine. If your question has been until you wish to remove yourself from the Q. Please press the pound.
Mr. Shave for your first question comes from the line for net.
From Jpmorgan. Please proceed.
Hi, Good morning has read for Phil. Thanks for taking my question two if I may 1st within Netcentric, you've called out the mix shift is transitory, but can you talk about the actual visibility you may have especially in streaming with both new entrants emerging but also as the largest services get get larger and second could you talk about the step up.
And UNICEF rates.
While the benefit so much higher year over year in this quarter and if it benefits anyone part of the business disproportionately thanks very much.
Sure Thanks for both questions.
Let's start with the Netcentric business that business is a business that is usage base wall, we charge for a fixed commit on most of our netcentric ports the prices to terminal on a price per megabit and virtually all of those.
Ports have a usage component associated with them.
We expect to see traffic continue to grow on the Internet at historical rates driven in large part hi over the top streaming services most of the existing streaming services utilize cogen.
And many of the proposed new entrance in the market also intend to use cogent. We also supply bandwidth to virtually every content delivery network globally and in doing so we will be provide.
Adding indirectly bandwidth to many of those streaming services as they will both build out our own cdns and utilize existing third party cdns.
It is impossible frost or predict the success of each of these different offerings, there different and the quality of their product their pricing models are targeted markets.
But we do anticipate that should continue and drive most of our traffic growth.
And as Ted mentioned, our price per megabit rate of decline is very much in line with historical average shares with those two factors, we expect our netcentric business to continue to improve and return to.
More or less historical growth rates as opposed to the underperformance that we have been experiencing more recently and in fact, the half a percent sequential constant currency growth rate. This quarter is a good indication of that improving trend.
Starting to take hold.
Now to the Youssef question do you want to chef charge does not apply to our Internet service. So it does not apply to transcend.
For dedicated Internet it doesn't apply to VPN services, whether delivered over our SD Wan band or PPL less those products are primarily corporate products and almost all of that increase.
Was as a result of pass throughs to our corporate customers.
We do not set the rate for Hugh Assaf.
Other companies in the industry up also reported changes and increases in new Assaf. The way. Those charges are determined is con Congress dictates a level of broad band subsidies that it wants to have for schools hospitals.
Sales and other municipal organizations.
From that the FCC outsources, the calculation and collection of fat.
Thanks to USAC USEC quarterly.
Josh the rate charge on applicable services in order to meet the congressionally mandated target. So what we saw was an unusually low rate earlier this year and a bit of a catch up this year up but.
You know this applies to all non exempt services.
Thanks.
Thank you.
Thank you Sir your next question comes from the line of Nic does follow from Moffettnathanson. Please proceed.
Hi, Thanks for taking my questions first a follow up on the USS You said, it's mostly corporate can you quantify the exact split between corporate and Netcentric because from my math bye.
If I apply most of it to corporate there's a pretty meaningful step down in corporate growth Q over Q in year over year, So I want to better understand that.
Yeah and.
You did see a slow down and our off net corporate growth rate, Nick approximately 40% of our corporate revenues, 20% a bar connections our corporate and we did see.
Continued reduction and loop costs, which we passed on to customers. So the deceleration and corporate growth is almost exclusively as a result of the off net ARPU declines and terms.
Of.
The layer two services that are subject to U.S. half.
Over 90% of those services are to corporate customers not to netcentric customers on a limited basis, we do some comps have netcentric customers that buy VPN services to extend their own networks today's.
The centers that they are not president and because we have the largest footprint of carrier neutral data centers of any service provider globally with over 1200 unique data centers, sometimes some of our competitors event by.
Layer two services as a way to reach some of those smaller markets.
But it is a very small portion of our total layer two or VPN services.
Okay.
Regarding.
Sales productivity, if we were to look at that in dollar terms rather than unit terms with the trend lines look pretty similar.
That's what I'm trying to get AD is weather lower.
Lower unit priced installs like Npls are our disproportionally responsible for the change.
Yes, I think they would look relatively comparable with the exception of the decline and off net corporate ARPU serves as a result of lower loop costs. So the lower productivity on a dollar.
Basis would be slightly larger than on a unit basis, most of the step down and productivity has come as a result of our increased hiring great. So while we have an increase of 10.
Additional full time equivalents, we take a wrap and count them as a full time equivalent.
After three months of service yet our average rep tenure slightly decline, but probably the most important data point is the fact that 55% of our total quota bearing sales reps.
Those 530 habit tenure at cogent up less than 12 months and we have previously stated and remains true that rep productivity.
Based on maturity linearly improves till about month 30, and then plateaued. So with this decline in both the average and median Rep tenure. It did have a negative impact on rep productivity on year.
Nuts and.
On a dollar basis slightly worse for the corporate reps now through actually was one slight positive offsets and that is that this quarter for the first time, we actually sold more corporate gig.
And actions then hundred Meg connections.
Our primary product corporate customers has always been a fast Ethernet connection or 100, megabits some metrics surplus, but and this quarter, we actually saw more customers, taking a full gigabit connection as opposed to 100 Meg.
And actually our on net corporate ARPU actually ticked up slightly as a result of that.
That's interesting one quick accounting accounting one for Ted Ted can you confirm that there was a full.
800000 reversal of the calendar driven bad debt I mean over the last quarter.
The quarter to quarter change in bad debt was 400000.
Okay, if I remember correctly last quarter, you said that there that the.
The calendar effect was 770000.
Well that was the impact from Q1 to Q2, but Q2 Q3 it declined by 400000.
Okay. So we should think of 400 as being attributable to the calendar effect.
Essentially yeah, that's fine.
We reverted back to kind of our normal rate, which is about 0.6, 0.7% of revenues.
Okay.
All right. Thanks, guys.
Hey, thanks.
Thank you. Your next question comes from the line of Mike Mccormack from Guggenheim. Please proceed.
Hi, guys. Thanks, David just a quick comment on pricing environment out there for.
Potentially some of the bigger carriers are getting a little bit better on retention, what you're seeing as far as aggressiveness and some of those are fees.
And then secondly, I guess.
Yes couple these companies out there that are larger looking to divest assets I'm presuming that you have no interest.
Anything out there that the could spark I understood. Thanks.
Thanks for a two questions Mike So first of all let me answer the competitive question looking both at the corporate and Netcentric markets separately, because I think our competitors think of them differently on the Netcentric side.
We continue to say pricing declines for the industry inline with our rate or pricing decline and our willingness to undercut competitors by 50% has allowed us to continue to gain market share and virtually all of our competitors.
Have de emphasized transit as a product and are not incenting theres sales teams to focus on that product segment. So I think our netcentric competitive environment continues to improve and become.
More benign.
Now on the corporate side, it's very much competitor specific.
Our competitors.
Really have to challenges. The first is a large portion of their revenues come from 11 legacy services like Npls and voice and other managed services that are migrating to internet. So there is some internal product substitute.
And as well as the opportunity to switch to other carriers secondly on a pure DDIY offering.
We see different carriers reacting differently.
I think pricing has tended to be less aggressive 80, anti a little more aggressive I think the cable companies tend to focus more on very small customers and suburban environments, but tend not to be very aggressive campaign.
Operating on larger customers.
Particularly those that straddle multiple geographies. So in general I would say the corporate environment is similar to what it has spent I do think the Pat you know across the industry, we're going to continue to see multiple years of.
Headwinds to traditional wire line carriers now to the asset acquisition question.
You know cogent was a very active acquirer in building its networks and since 2005, we have actually looked at over 760 potential acquisition targets and if not done any.
That doesn't mean, we're not interested at means that most of those assets are either irrelevant to our business or are priced and appropriately.
At some point.
The markets well become rational and there may be assets that make sense for us. So it makes total logical sense for us to continue to along but there is no acquisitions on our horizon at this time.
Thanks, Dave appreciate it thanks, Mike.
Thank you. Your next question comes from the line of James Breen from William Blair. Sir. Please proceed.
Thanks for taking the question.
Just a couple one on the alternate side.
Given sort of the the impact of the lead costs as those come down.
How does that impact margin and assuming that those are lower margin revenue dollars viewed as it does actually help.
And some of that revenue comes out or you don't see as much of it a decline in EBITDA from that.
So.
We typically on a new deal double the cost of the loop. So as the loop comes down we just become more competitive the gross revenue number becomes smaller but the margin remains the same.
If we are able to negotiate loop discounts.
While a customer is still and term we capture that benefit and in fact that does improve margins until that customers term has matured and we will then re rate the customer.
Our belief is that we need to constantly offer value to customers, both on that and off debt and by being proactive and going out and lowering prices for existing customers. We typically when their trust and confidence as part of the reason why.
Our net promoter scores remain in the mid Sixtys, which is extremely high about five times higher than telecom service provider average is and.
You know, we think with the continued overbuilds of both cable and telco for different reasons cable to address a new market for telcos often times to lay the foundation for their small cell backhaul, we will see.
They continuously lower prices for those loops, but remember our off net ARPU is still over double what our corporate ARPU is for a comparable product. So much about 2.4 times more so theres still.
A lot more value that cogent delivers its customers on net that at all.
Great. Thanks, and then can you talk about where that you sit right now from a debt perspective, the balance sheet and how you think about leverage ratios.
Yes, so I mean, our net leverage declined only minimally from 2.93 to 2.92 were within the range that we have outlined we did raise some euro denominated debt this year.
We have adequate capital at the holding company and nearly 400 million of total capital on the balance sheet 140 at holdings to 56 at Opco.
Yeah.
We will be measured and returning that capital.
Our expectation is that we will probably not raise any more debt this year.
Early next year, some of our debt becomes callable with no premium.
We will evaluate that may elect to call some of that and then increase our total leverage.
We have about 58 million.
Salable and our builder basket at Opco today that will continue to increase and we will probably breached the four and a quarter turns of gross leverage discord chat additional builder basket from Opco to Holdco, and then look to add additional leverage.
And this is all contingent on the interest rate environment, but it does appear we are in.
Well when interest rate environment, and therefore strategically using our balance sheet to amplify equity returns makes logical sense.
Great. Thanks.
Hey, Thanks, Jim.
Thank you. Your next question comes from the line of Michael Rollins Some single Sir. Please proceed.
Thanks, Good morning.
Steve wondering if you could talk a little bit about how you see.
This strategic opportunities.
For your business the other entities just as we've seen the evolution of the cloud.
And just the way.
The Internet has has also will evolve where do you see cogent in a long run fitting in strategically.
So.
We are fortunate in that.
Our business does entirely focused on the internet.
Approximately 80% of revenues come from Internet access about 18% of revenues come from over the top VPN services and only about 2% from co location.
As computing and software move off site. The Internet is the primary input and output mechanism over 98%.
Of connectivity to public cloud occurs over the Internet as the World second largest internet carrier, we obviously have a strategic role to play in that.
Secondly.
Ends are increasingly migrating away from purpose built networks like npls to some form of over the top and cogent is uniquely positioned to help in that.
Finally, you know the 954 million square feet on net office space represents the third largest amount of office space on net in North America that is strategic now.
Could a cloud provider could a software company could someone else look at this asset and place of value greater than the cash flow potential as a business.
That's really their decision to make you know we have always been transparent with shareholders that comparable with our business and executing it generating increasing amounts of free cash flow, but if any strategic operator ever wanted to pay a premium to our DCF.
We would recommend to shareholders that makes logical sense, but at this point, we fully intend to just execute arpus as has as it currently exists.
Thanks.
It's Mike.
Thank you Kim next question comes from the line of Tim Horan from Oppenheimer. Sir. Please proceed.
Thanks, Dave.
Our net since you traffic is outside the United States do you do you think I wonder if you've ever given that number.
We have Tim Thanks for the question.
So roughly 47% last quarter was outside of US, 53%, well us in Canada, North America versus the rest of the world up.
That's been roughly about 50 50.
The traffic is slightly different any should the reasons. The us tends to have more application and content generation. So more of our traffic in North America tends to be outbound and with over 6800.
Access networks around the world buying upstream from US most of the rest of world tends to draw down North American content that doesn't mean, there's no non us content, but.
So it tends to be more access outside the lesson. We do have significant access network share in North America, as well, but up Netcentric is heavily and international business and increasingly becoming more bay global business as we expand in tomorrow.
Because we have.
Opened up in Brazil, both in Rio and in San Paulo, We're constructing metro networks in those markets by buying Tarek fiber.
We've recently.
We have launched and.
Hi, Penn and Taiwan, and we are in the process of actually turning up probably at the beginning of the air and Columbia South America. So we continue to look at international markets, which are primarily net.
Centric markets for us.
Well and it would seem like a lot of those markets are still adopting LTE I mean, something.
Fiveg, but it seems like on wireless has been a huge impact you historically, but it seems like it could be a larger impact going forward on the international basis.
That is correct. So remember over 80% of the people globally, who have ever use the internet have only used it why are Leslie and have no fixed line connections, yes wireless accounts for.
Only about two and a half a percent of global traffic and it's growing at about twice the pace of fixed line growth. So as we look at traffic growth going forward I think two things are true one more if at all come from outside of the.
Less than inside and then secondly, more if at all come from wireless 10 fixed line.
And I guess lastly, the traffic growth is the last two quarters is a bit below what we sold last year kind of more in line with 17 and any color on that what's causing that and what you think might change the trajectory.
Yes, I think theres.
Ben a little bit of a slowdown in the growth of current OTI t. operators had a bit of a.
Expectation of the next generation.
T T offerings that are today, mostly and test phase so kind of beta with limited.
Applicability, but I think there are a number of products that are set to launch right at the end the year I'll have a major impact.
Thank you.
Thanks, Tim.
Thank you.
Next question comes from the Lion, Brett Feldman from Goldman Sachs. Please proceed.
Hi, Thanks, So Dave you noted that your Salesforce is its highest ever been in it it's not merely growing it's growing at an accelerated rate I think your full time equivalents are up 17% over the last 12 months last year you only grew the workforce about 2% give the only way it can make any sense to make such a significant investment.
Workforce that as you noted can take up to 30 months to hit full productivity is if you feel like you just have great visibility into an absolute tsunami of new business opportunities in front of you and you obviously understand this business very well. So I was hoping you can maybe explain what do you see coming what's driving that and ultimately when should your shareholders.
We expect to see some type of improvement in your revenue trends to reflect the investment you've made in the salesforce. Thank you.
So cogent is a sales centric organization.
No.
We have 667 up people and the sales organization 530 of those are quota bearing we have only about a thousand 40 total employees.
We fully admit that.
You know probably in 2017 and 18, we were not hiring at the optimal rate and we looked to increase that hiring we've opened additional physical sales offices to get closer to customers Caf a greater source of talent.
We need at the higher end develop that management talent and our sales process is not meant for every new person who joins US we have turnover, we worked on trying to reduce that but it's still over 5% Salesforce a month so.
We expect to continue to see turnover, while we are constantly working on bringing it down.
It just the nature of an outbound telesales organization now to our addressable market.
We have sold 23 connections per multi tenant office building to about 15.2 customers out of the 51 potential we see more and more of those corporate customers needing our types of products as they move to.
The cloud and move to SAS. We also see those same customers needing our products as they turn off Npls and look at either SD Lan or vps less should we see a tremendous opportunity to continue to further penetrate our buildings.
And to selectively add other buildings on the Netcentric side. It's really this continued migration of video consumption and gaming moving to the Internet and that will drive growth, we have always been under staffed relative to our truck.
So bull market and we remain so but there is a limit to how quickly can hire train and incorporate new hires and to our culture and you saw a little bit of that that this quarter with our rep productivity dipping.
Dipped in large part because of this bold and hiring it's not that the market is changed it's rather that our salesforce as a little less mature and we are taking all of the steps are appropriate from management attention and training to make those people.
As productive as possible as quickly as possible, but need to be realistic sales as a process and building a funnel takes time and we feel very comfortable that we have plenty of market opportunity ahead of us.
Thats helpful. If you don't mind, if I guess a follow up question on what you just previously discussing about the forthcoming direct consumer video services. If you think back to the experience you had when the most recent generation you know Directv now, enabling you to win when they came to market what type of affected that end up having on your netcentric traffic growth just as a way maybe think.
Through what we could see play out over say the next 18 months or so as these new products come to market. Thank you.
Actually had a step function increase and while it did two things one.
Allowed us to replace the traffic off from shutdown of Mega offload in early 2012 within a couple of months. So we literally lost the largest website in the world that were sole source to cogent and.
No. It represented nearly 20% of our traffic in a rebound within a quarter.
Secondly, we saw a spike up in traffic growth for a short period of time to nearly 100% year over year, but that thing quickly became viewed it because of the net neutrality issues I don't believe we will see those types of violations.
With this next generation products. These are much better capitalized companies. So.
Yes, I think we will continue to benefit.
Great. Thanks.
Thanks.
Thank you next question comes from the line of blending Miss Paulson Keybanc capital Sir. Please proceed.
Great. Thanks for taking the question I missed the traffic growth numbers. So.
Dave or Ted could you. Please provide does and then maybe Dave just are you seeing any new applications.
Driving traffic growth.
Beyond video gaming et cetera.
And then maybe which markets are you seeing the greatest traffic growth.
Separately, then you mentioned seen a lot of customers shift to gigabit connections I was hoping you could help us.
I understand how fast you are senior customer by customer base migrate to gigabit services and what that means from an incremental ARPU perspective too. Thanks.
Sure so lot of traffic growth was 11% sequentially, 32% year over year.
I think the applications that are driving traffic growth on the content side, our OTI video and gaming I.
I think on they were sippy inside it's the continued decline in broadband mobile pricing and the improvements that come from LT and from Fiveg as it begins to be rolled out.
Now that will allow people to get much bigger.
Bucket plans, even though they are unlimited there are unlimited and name only typically carriers slowing down they are unlimited plans to unusable rates once customers had a certain cap at those caps are going up. So I think we will continue to see both radar.
Access and greater content driving accelerating growth now to the corporate business off you know we chose hundred may 20 years ago, as our interface because thats, what corporate lands could access.
Almost universally the wide aereo connection so payable on CP and.
Corporate plans are now gigabit, what's interesting is that while we saw more gigabit connection is being sold into quarter than fast a corporate on net cost drummers, our average corporate utilization rate actually fell from 18 per.
Sent down to about 13.5% double cohort and the reason is they weren't even using 100 and now they have a port that's 10 times bigger, but what it does is it allows them to future proof and allows them effectively unlimited first ability if there are searches and try.
Perfect. So since the cost differential is de Minimis I think we will see more more at gigabit interfaces.
Thanks.
Hi.
Thank you we have your next question coming from the line of Colby Synesael from Cowen and company. Please proceed.
Great. Thank you for taking my questions.
First one on pricing you noted it was down 21%.
Year over year, that's probably the better.
Improvement, we've seen probably like five quarters or so curious if you think that this.
Level is sustainable or do you think it will continue to bounce around.
With the levels, we've seen maybe the last more recent few quarters.
Secondly, as it relates to use staff.
Based on the tax increase in when it occurred.
Assuming that does do stay constant did we get a full quarter benefit or impact in threeq, you or is there more of a.
Incremental benefit if you will that we'll see on a full quarter basis in for Q and then lastly, just a housekeeping item I was curious and you may have said it just through all the different numbers, but can you give us the corporate on net connections and I think the comparable number in Twoq just as a reference was 40025. Thank you.
So I'll take the first one I'm going to give cat the second to on pricing the average rate of price decline over the past 15 years for cogent.
It's been about 22.2%.
I think the 21% is very much in line with historical averages.
No it's not a spreadsheet, it's a business bigger customers get lower pricing that can sometimes to sport even those averages and then it gets also based on the actual sales on a unit basis enough volume weighted so you've got a lot of variable.
So what happened, but I think the underlying rate price decline in the low twentys as what you should expect over the long run going forward now, let tad take the Youssef incorporate connect sure yes.
Yes F rate is set quarterly and at the calendar quarters that mirrors our quarters. So July 1st October Onest et cetera. So the impact is for a full quarter for us on the USS change up or down where however, it adjusts.
And the corporate on net connections at quarter end were 40469.
Great. Thank you so much.
Hey, Thanks Colby.
Thank you. Your next question comes from the line of Rob Palmisano from Raymond James Sir. Please proceed.
Hey, Thanks for the question. This is Rob one for Frank actually.
You had mentioned earlier in your prepared remarks that you guys have about $34.9 million still available for buybacks to continue through December of 2020, and I was wondering if you could provide some color on when specifically within that remaining timeframe you might heavily focused on the buybacks.
Thank you.
So.
We have had five buyback programs and I'm always exhausted them. We've also been opportunistic and taking advantage of market volatility.
Our view on buybacks is twofold, we must always buy discount to DCF, we've always done that and could do that today, but secondly, we should always be buying and the down market. So I can't answer the question 'cause fiber smart enough to know when the market would go up or down I probably wouldn't be on.
This call.
Yes, so I mean, all I can say as if the market becomes volatile will be more aggressive.
And lack of volatility will continue to just methodically grow our dividend and chances are will have the opportunity to do but.
Great. Thanks, Dave Thanks.
Thank you we have your next question comes from the line of Walter Piecyk from like small stay. Please proceed.
Hi, Dave has it gone.
Hi, Great welcome back Walt congratulations on your new firm.
Thanks, Paul as Shannay I know this is kind of continuing question, but it looks like it was going about it.
Even if you strip out the.
The.
The employee comp stuff looks like that came down this quarter abnormally. This is there anything going on merrell onetime in nature or is this kind of a new run rate for you.
No Tad will take it.
I think it's pretty much as I'm sure, there's a little bit of seasonality in the third quarter slots and give you some components of the reductions are a little bit.
More exaggerated this quarter I'm just wondering if you had any like any type employee costs or maybe one time credits that were helping you on the quarter.
I wouldn't necessarily characterize anything as one time, but theres a little seasonality. So I'll give you the.
Components for first there was bad debt as we mentioned which was 400000.
And it reverted back to more normal percentage of revenue when that was the change for the quarter we do.
Typically get a benefit in the third quarter when a lot of people take vacations. So you're charging leave the buildup of the vacation accrual as opposed to just regular compensation expense. That's seasonal that always happens that was about another 400000.
We do get.
As more employees hit their FICA limit the benefit rate comes down that's seasonal but that always happens each quarter that was about 300000, and then there's an adjustment that we need to me under the new accounting pronouncement to prepaid commissions, which is difficult to estimate some quarters, it's an increase.
Sequentially submits a decrease in that happened to be a decrease this quarter of about 400000. So.
Kind of a.
Warm will run rate with the exception of some here that there's some seasonality in the third quarter.
Hello.
Got it thanks, and Dave do you do you expect any revenue from Disney plus or Apple in 2020.
You have any indications from them.
Any traffic growth it, but it's going to occur in 2020, if you're going to benefit you heard netcentric business.
So.
A lot of my customers don't like me to be two explicit about our relationships, but we do have relationships with those companies and.
Hi believed their products are going to be very successful I also believe that some of my existing RTT customers will also be successful, but this should be additive as I think it will accelerate the cord cutting phenomena.
And the switch to more minutes over the top end.
Cogent is generally the preferred provider globally AFFO TT operators, just because it's it is the same material costs, we have the lowest price, but we also have more networks directly connected and more geographies, which ends up reducing.
Latency, so theres a lot of reasons why as a new entrant to OTI evaluate step from providers.
They choose cogent, we should never take that for ground. It but I think we will win a disproportionate share of that business.
I mean, it seems like you're pretty material event, a lot of times, when you're asking about the netcentric business over the past couple of years, you're like while I can't predict App and here, we have in front of us an entire industry responding to Netflix so even if you're kind of maintaining your share would seem like something that's material enough to help your netcentric revenue growth.
Listen I hope so I, just don't want to go out and predict get out what these guys are going to do I hope, they're all wildly successful and.
I think by up a couple more quarters of experience from several of these other operators I'll be more comfortable and making predictions.
Okay. Thanks.
Thanks.
Thank you we have a follow up question coming from the line as much gold from Moffettnathanson. Please proceed.
Hey, sorry for having back on and drag on the call that's okay.
I just wanted to follow up on your comment that the lower off net blue costs were responsible for the step down in.
In USLF adjusted corporate revenue growth.
My understanding has been at the lower off net costs have been an ongoing trend for many years. So is this something specific that happened this quarter on that front.
Because again, the breaking the corporate revenue growth trend was pretty meaningful if you just for you at that site I want to ensure that I fully understand what's going on there.
We were able to negotiate some pretty significant discounts from the two largest.
Suppliers of off net loops to us just flat actually earlier in the air that had the impact in the quarter. So it was a little more pronounced this quarter than normal.
Okay. So so your view is that absent absent that large than normal reduction your corporate growth trend would be consistent with recent history.
Thats right.
Okay.
Thank you.
And you saw that in the deceleration of off net corporate growth was only 3.4% year over year versus 10.4 for the entire corporate business.
Thank you.
Im showing no further questions at this time I would now like to turn the conference back to Mr. paper.
Well first of all I'd like to thank everyone apologize for go in a few minutes honker, but I think there were great questions and again, thank the entire cogent team and well talk soon take care Bye bye.
Ladies and gentlemen. This concludes today's conference. Thank you for your participation have a wonderful day you may now disconnect.