Q4 2019 Earnings Call
Good morning, ladies and gentlemen, and welcome to the Cogent Communications Holdings fourth quarter and full year 2019 earnings conference call.
At this time all participants are in a listen only mode. Later, we will conduct a question and answer session and instructions will follow at that time.
If anyone should require assistance during the conference. Please press Star then zero on your Touchtone telephone as a reminder, this conference is being recorded and will be available for replay at www dot coaching Coke dotcom.
I would now like to turn the conference over to your host Mr., Dave Shaffer, Chairman and Chief Executive Officer of Cogent Communications Holdings.
Thank you and good morning, everyone welcome to our fourth quarter 2019, and full year 2019 earnings conference call I'm, Dave Shaffer, Cogent CEO and with me on this morning's call as Tad wheat or Chief Financial Officer.
We're pleased with the results for the quarter and for the year and continued to be optimistic about the underlying strength of our business the outlook for 2020 and beyond.
Or quarterly gross margin reach a company record of 16.3% increasing sequentially by 40 basis points and increased by 230 basis points from the fourth quarter of last year.
Our gross margin for full year, 2019 increased 590 basis points from full year, 2018% to 39.9%.
Our EBITDA margin for the quarter.
Increased by 160 basis points from the fourth quarter of 2018% to 37.6% and increased by 70 basis points to 36.2% for the full year 2019.
Versus 18 on a constant currency basis, we achieved sequential quarterly revenue growth was 2.5% and year over year quarterly revenue growth of 6.8%.
Our year over year quarterly traffic growth was 30% now we achieved sequential traffic growth of 9% for full year 2019 traffic on our network through 535%.
During the quarter, we've returned $29.8 million to our shareholders for regular quarterly dividend.
That was posted on our website.
54% of our $112.6 million total 2019 dividends.
It should be treated as shave return of capital and 46% should be treated as taxable dividends for U.S. tax income purposes.
We did not purchase any common stock and the core I quarters than we have a total of 34.9 million available under our stock buyback authorization.
And that authorization will continue for December 2020.
Our gross leverage ratio in the quarter decreased.
4.86 from 4.97, the previous quarter and our net leverage also decreased 2.86 from 2.92.
Cash held at Cogent holdings at quarter end was $110.300 million. This cashes unrestricted and available to be used for dividends buybacks or about.
Cash held your operating company at quarter end was 289.1 million, giving cogent, a consolidated cash balance of $399.400 million at year end.
We continue to remain confident and our growth potential and cash generating capabilities from our business.
As a result as indicated in our press release, we announced yet another two cents sequential increase in our regular quarterly dividend from 64 cents a share per quarter, just 66 cents per share per quarter.
This represents our 13th consecutive sequential increase to our regular quarterly dividend.
Throughout todays discussion will highlight several operational statistics I will review in greater detail certain operational trends and Tom will provide some additional details on our financial performance. Following our prepared remarks, well open the floor for questions and answers.
Now I'd like to turn it over to Tad to read our Safe Harbor language.
Thank you, Dave and good morning to everyone.
This earnings conference call includes forward looking statements.
These forward looking statements are based on our current intent belief in our expectations.
These forward looking statements and all of their statements that we made maybe 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 our forward looking statements.
If we use non-GAAP financial measures during this call.
We'll find these reconciled the comparable GAAP measurement and our earnings release, which is posted on our website at cogent co dotcom.
Now I'd like to turn the call back over to Dave Hey, Thanks, Ted hopefully you've had a chance to review our earnings press release.
Press release includes a number of historical metrics.
Now for some comments about.
Our performance against expectations and targets.
Our corporate.
Business, which represents 69% of our total revenues for the fourth quarter, our corporate business has been growing above our targeted guidance long term full year range of 10% and in fact grew 10.1% from the.
Owner of 2018.
Our netcentric business, which represents 31% of our revenues has been underperforming compared to our historical averages and declined by 1.4% from the fourth quarter 2018.
Our corporate business grew sequentially by 2.5%.
Uh huh.
As compared to the previous quarter.
The impact of foreign exchange, primarily impacts our netcentric business on a constant currency does bases, our netcentric business increased on a year over year basis for the fourth quarter by 110th of a percent and Inc.
Creased bye.
2.6% from the third quarter of 2019.
Our quarterly cash flow as defined by EBITDA.
Minus Capex mine as principal payments on our capital leases.
Full year 2019, our cash flow grew by 14.1% from 2018 due to the excellent operating leverage of our business. We expect our cash flow to continue to grow as some order rates or what.
Long term EBITDA margin expansion Tara because guide to an annual improvement of approximately 200 basis points per year.
On a multiyear constant currency long term revenue growth target remains approximately 10%.
Our revenue and EBITDA guidance targets are intended to be multi year targets and are not intended to be specific quarterly guidance or even specific annual guidance.
Now I'd like to turn it back over to Ted to give you. Some additional details on some of our operating results.
Thanks, Dave and again, a good morning to everyone and I'd also like to thank and congratulate cogent team for their results in their continued hard work and their efforts to during another very productive quarter for the company and also very productive year for cogent.
Some comments on revenue by corporate and Netcentric and customer connections.
As a reminder, we analyze our revenues based upon network type, which includes on that off net and non core and we also analyze our revenues based on customer type.
Reclassify all of our customers two types netcentric customers and corporate customers.
Our netcentric customers by and large amounts of bandwidth from us and carrier neutral data centers.
Our corporate customers by bandwidth from us in the large multi tenant office buildings typically in North America.
Some comments on revenue and customer connections by customer type.
Revenue from our corporate customers for the quarter grew sequentially by 2.5% to 96.8 million and grew year over year as Dave mentioned earlier by 10.1%.
Revenue from our corporate customers was 373.7 million for the full year, which represented an increase of 10.6% over last year.
At the end of the year, we had 48486 corporate customer connections on our network and that was an annual increase of 7.3% over the fourth quarter of last year.
Quarterly revenue from our Netcentric customers increased sequentially by 2.4% to 43.5 million, but declined year over year by 1.4%.
Revenue from our Netcentric customers was 172 and a half million for full year, 2019, which was a decrease of 5.4% over last year.
On a constant currency basis.
Our quarterly revenue from our Netcentric customers increased however, by 2.6% sequentially and increased year over year slightly by O 0.1%.
We had 38053 netcentric customer connections on our net market at quarter end, which was an increase of 9% over the fourth quarter of last year.
Our netcentric revenue growth experience is significantly more volatility than our corporate revenues due to the impact of foreign exchange.
Larger customer sizes for the Netcentric customers and also certain seasonal factors.
Some comments on revenue and customer connection to buy network tight.
Our on net revenue was 102.7 million for the quarter, which was a sequential quarterly increase of 3.3% and a year over year increase of 7.7%.
Our on net revenue was 396.8 million for the full year, which represented an increase of 5.9% over last year.
Our on net customer connections increased by Oh, 0.9% sequentially and increased 8.4% year over year.
We ended the quarter was 74554 on net customer connections on our network and our 2801 total on net multi tenant office and carrier neutral data center buildings.
Our on net often that ramp in revenue rather was 37.5 million for the quarter.
That was a sequential quarterly increase of old 0.2% in a year over increase of 2.5%.
Our off net revenue was 148.9 million for the full year and that was an increase of 2.7% over last year.
Our off net customer connections increased sequentially by 1.4% and increased by 6.3% year over year.
We ended the year, serving 1660 60 off net customer connections and over 6870 off net buildings.
And these buildings are primarily located in North America.
Some comments on pricing.
Consistent with historical trends the average price per megabit of our installed base and our new customer contracts decreased again for the quarter.
The average price per megabit for our install base decline sequentially by 5.1% to 58 cents and declined by 20.5% from the fourth quarter of last year.
The average price per megabit for our new customer contracts for the quarter declined sequentially by 16.2% to 28 cents and declined by 31.6% from the fourth quarter of last year.
Comments on ARPU or average revenue per units.
Our on net ARPU actually increase for the quarter and our off net ARPU decreased.
Our on net ARPU, which includes both corporate and Netcentric customers was $461 for the quarter, which was an increase of 1.8% from $453 from last quarter.
Our off net ARPU, which is comprised predominantly of corporate customers was $1079 for the quarter and that was a decrease of 1.3% from last quarter.
Some comments on our churn rates our on net churn rate increased very slightly and our off net unit churn rate was flat quarter.
Our on net unit churn rate was 1.1% for the quarter and last quarter. It was Oh, 0.9%. These are unit churn rates.
Our off net unit churn rate was 1.1% for this quarter, which is that was the exact same amount as we incurred last quarter.
[noise] some comments on move and change orders.
As a reminder, we offer discounts related to contract term to all of our corporate and Netcentric customers and we also offer volume commitment discounts to our netcentric customers.
During the quarter certain netcentric customers took advantage of these volume in contract term discounts and entered into long term contracts with cogent for over 2100 customer connections and that increase their revenue commitments to cogent by almost $27 million.
[music].
Some comments about EBITDA and EBITDA as adjusted.
Our EBITDA and our EBITDA as adjusted are reconciled to our cash flow from operations and all of our quarterly earnings press releases.
Some seasonal factors that typically impact the amount of our ESG M&A expenses include the resetting of payroll taxes in the United States that occurs every year at the beginning beginning of the year in January resets.
Annual cost of living or CPI increases typically also incur at the beginning of the year.
Seasonal vacation periods.
Typically incurring in the summer periods.
The timing and level of our audit and tax services, which are larger typically right now in the first quarter as we're doing our.
Annual audit.
And the timing and amount and gains on our equipment transactions.
And lastly, our annual sales meeting costs, which typically occurs in our first quarter and this year occurred. This month in February and also annual benefit plan annual cost increases similar to CP VI.
So these seasonal factors typically increase our SDMA expenses in our first quarter from our fourth quarter and that has happened historically for many years.
Our quarterly EBITDA increased by 4.4% sequentially to 52.7 million.
Our quarterly EBITDA increased year over year by 5.1 million or by 10.8%.
Our quarterly EBITDA margin increased by 70 basis points sequentially to 37.6% and increased year over year by 160 basis points.
Our full year 2019, EBITDA increased by 7.3% to almost $198 million.
Our full year 2019, EBITDA margin increased by 70 basis points to 36.2%.
Our EBITDA as adjusted which is EBITDA, but also includes gains related to our equipment transactions, which had been declining over the past few years.
But these amounts were as follows our equipment gains were only 250000 for the quarter. They were 92000 for the fourth quarter of last year and they were $87000 last quarter.
Our quarterly EBITDA as adjusted increased by 2.4 million or by 4.7% sequentially that 53 million and increase year over year by 5.3 million or by 11.1%.
Our quarterly EBITDA as adjusted margin increased very similar to our EBITDA changes sequentially by 80 basis points to 37.8% and increased by 170 basis points year over year.
Finally, our full year 2019, EBITDA as adjusted again, including the asset gains increased by 7.3% to $199 million.
And our full year 2019, EBITDA as adjusted margin increased by 70 basis points to 36.4%.
Some comments on our earnings per share.
Our basic and diluted income per share was 16 cents for the quarter that was compared to 30 cents last quarter and 16 cents for the fourth quarter of last year.
Our 135 million dollar Euro notes that we issued in June of this year are reported in us dollars and they need to be converted at each month, then using the euro to us dollar exchange rate.
This unrealized foreign exchange loss or gain on our notes.
Happened to be a loss and it was $4 million this quarter and that reduced our basic and diluted income per share this quarter by nine cents per share.
The unrealized foreign exchange gain on our Euro notes was $6.1 million last quarter. The reason for the 30 cents per share that we incurred.
And that increased our basic and diluted income per share last quarter by 13 cents per share.
Finally, our unrealized foreign exchange gain cumulatively for the year. So since June was actually again and that was $2.3 million for full year and that increased our basic.
And diluted income per share by five cents per share.
Some further comments on foreign exchange.
Our revenue reported in us dollars and earn outside of the United States was approximately 22% of our total quarterly revenues in that percentage has been consistent over the past several years.
About 16% of our revenues this quarter were based in Europe.
And the remainder or about 6% of our revenues were related to our Canadian Mexican Asia Pacific and Latin American operations.
Continued volatility in foreign exchange rates can materially impact our quarterly revenue results and our overall financial results.
The foreign exchange impact on our reported quarterly sequential revenue was a negative $88000 in the year over year.
Foreign exchange impact on our reported quarterly revenues was.
A negative.
$700000.
Our quarterly revenue growth rates now measured on a constant currency basis actually accelerated from last quarter and were 2.5% sequentially and 6.8% year over year.
Finally for the year the foreign exchange impact on our reported annual revenue was material. It was a negative $5.3 million and our annual revenue growth rate when measured on a constant currency basis was 6%.
The impact of foreign exchange, primarily impacts our netcentric revenues.
Looking forward the average euro to U.S. dollar rate. So far has been about $1.11 in the average Canadian dollar exchange rate has been about 77 cents.
Should these average rates remain at the current levels for the remainder of the first quarter here 2020, we estimate that the FX conversion impact on our sequential quarterly revenues for our current quarter or will not be material.
However, the year over year.
Foreign eggs exchanged conversion impact is estimated to be approximately about $500000 on a negative basis.
Some comments on customer concentration.
We believe that our revenue in customer base is not highly concentrated.
These numbers have been consistent overtime recently, our top 25 customers represented less than 6% of our revenues for this quarter and also less than 6% of our revenues for the full year 2019.
Further comments capital expenditures.
Our quarterly capital expenditures decreased sequentially by almost 18%.
And decreased by 9.5% year over year.
Our capital expenditures were about $10 million this quarter that was compared to $10.9 million from fourth quarter last year, and 12.1 million for the third quarter of 2019.
For our full year, our Capex was $47 million and that was a decrease of 6% from the approximately $50 million of Capex, we incurred last year.
Some comments on our capital lease payments.
And our capital leases.
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 often include multiple renewal options. After the initial term.
Our capital lease higher you fiber lease obligations totaled 169.8 million at year end.
And at year end, we had to IRU contracts was a total of 245 different.
Suppliers of dark fiber.
Our quarterly capital lease principal payments under these.
Dark fiber are you grievance increased slightly by 1.3% sequentially, but declined 3.4% year over year.
Our capital lease principal payments were 2.1 million for the quarter. The same amount for the fourth quarter of last year and it was $2 million for the third quarter of 2019.
For the for full year, our capital lease principal payments declined by 11.6% year over year and were 9.1 million compared to 10.3 million last year.
When you combine our capital lease principal payments with our Capex.
Combined together the total was 12 million this quarter.
Compared to 14.1 million last quarter, and 13.1 million for the fourth quarter of last year.
Our capital lease principal payments combined with the Capex for the year in the aggregate were 56.1 million for this year compared to 60.2 million last year and that represented a reduction of approximately 7% year over year.
Some further comments on the balance sheet as Dave mentioned, our cash and cash equivalents at the end of the year totaled almost $400 million, we were at 399.4 million.
For the quarter, our cash actually increased by $3.2 million in the aggregate for the quarter that includes our dividend payments and all of our payment obligations or cash increased net net.
For the quarter by over $3 million.
We will return through 38.5 million of capital to our stakeholders this quarter through our $29.8 million of our regular quarterly dividend payment and the 8.7 million that was spent on a seven semiannual interest payment related to our debt.
Our quarterly cash flow from operations increased by almost 38% sequentially and increased by 13.2% year over year.
Our cash flow from operations was 46.1 million from the quarter compared to 40.7 million for the fourth quarter last year and 33.4 million for the third quarter of 2019.
For the full year, our cash flow from operations increased by 11.1% to almost 149 million from last year.
And this is due to the operating leverage of our business.
As Dave mentioned, our debt ratios, our total gross debt at par.
This is at par, including our capital lease obligations was $967.9 million at year end and our net debt was 568.5 million.
Our total gross debt to trailing last 12 months EBITDA as adjusted ratio was 4.86 at the end of the year and our net debt ratio was 2.86.
Finally, some comments on bad debt and day sales of accounts receivable.
Our bad debt expense was about Oh, 0.8% of our revenues for the quarter slight increase to the o., 0.7% of our revenues from the third quarter of 2019, and the O., 0.7% of the fourth quarter of from last year.
Our bad debt expense was Oh, 0.8% of our revenues for the full year and now it was.
Slight increase from the Oh, 0.6% that we incurred last year.
Our days sales outstanding or days Dia, so for worldwide accounts receivable.
Was exactly the same as last quarter and still an excellent number for us at 23 days.
And again I would always like to thank and recognize and appreciate our worldwide billing and collections team members.
We're continuing to do a fantastic job, serving our customers and collecting from our customers and providing outstanding customer service.
Now with that.
I will turn the call back over that hey, Thanks Tad.
Now for a couple of comments on the scale and scope of our network.
We have over 957 million square feet multi tenant office buildings, and North America directly connected to the coach has now for.
Our network consists of over 35520 metro fiber miles and over 57600 Intercity route miles.
The Cogent network remains the most interconnected network in the world with direct connectivity to 6900, 10, 15 networks less than 30 of these networks to connect to co Gen. Our settlement free peers with the remain.
And over 60, 920 networks being pain cogent handset customers.
We are currently utilizing approximately 29% also lit capacity in our network. We routinely augment this capacity this portions of our network.
Need those augmentations to maintain these low utilization rates for the quarter, we achieved sequential quarterly traffic growth of 9% and year over year traffic grows for the quarter of 30%.
We operate 54 corrosion control data centers with a total of 617000 square feet of raised floor space, which is operating at approximately 31% capacity in 2019.
We did add two additional data centers to our footprint. These are cogent control facilities, increasing from 52 to 54 head here at.
Our sales force turnover at 4.9% in the quarter was again better than our long term rep turnover rate of 5.6% Bruce and area that we will continue to focus on with training and Rep improvement.
Our quarterly sales rep productivity was 4.1%.
4.1 units per full time equivalent rep per month, the productivity of rate that's below our long term historical average of 5.1 units per ft per month, our sales rep productivity was end pack to buy the decline in our app.
Average rep tenure and significantly impacted by the fact that we've been selling a significantly larger number of large ports, allowing customers to aggregate traffic and not have as many lower capacity ports in a given.
In location.
We ended the quarter with 548 sales reps selling our service a significant increase from the 487 have we had at year end 2018.
This is the most sales reps, we've ever had selling our service.
We ended the quarter was 502 full time equivalent sales reps a significant increase from the 436 full time equivalent sales reps, we had as year end 2018.
So in summary, cogent is to low cost provider of Internet access transit services.
Value proposition remains unmatched in the industry our business remains completely focused on the Internet IP connectivity and data center co location services, all of which are necessary utilities to our customers.
Our multi year constant currency long term growth target rate of 10% and our long term expectation of EBITDA margin expansions of approximately 200 basis points or a demonstration of the strength of our business.
Model.
Our board convinced of the strength.
Approved to 30th consecutive increase and our regular quarterly dividend increasing at dividend quarterly by two cents a share to 66 cents per share.
Our consistent dividend increase demonstrates this confidence and the growth of our business and as cash flow generating capabilities. We will remain opportunistic about the repurchase of common stock at quarter's end, we had 34.9 million.
In dollars remaining on our current buyback authorization through year end 20 Twond.
We are committed to returning increasing amounts of cash to our shareholders on a regular basis.
With that I'd like to now turn before over to flush.
Ladies and gentlemen at this time, if you have a question.
Please press Star then the number one on your Touchtone telephone.
If your question has been answered any wish to remove yourself from the Q. Please press the pound Keith.
Your first question comes from Sami Ahmad tree from Credit Suisse.
Hi, Thank you.
Dave maybe could you just mold, perhaps maybe taking a step back at a high level question. As you have always referred to the big or the next big opt that could really come onto your network and I think we've been hearing about a couple of new apps that I've been coming into the broader global network would you say that next big App that can take coach into the next level is now here.
And beginning it set commencements through your network or would you say there is still something else that could come through that as much bigger.
So I think the internet, while approximately 30 years old and has grown at a compounded rate of 25% has been able to avoid the law of large numbers and slow down due to new applications over the past year.
We've seen a Polish operation of over the top direct to consumer products that is dramatically increasing.
Viewership on the Internet.
We think over the next several years the majority of minutes of video will be consumed by a streaming services.
Those streaming services are also becoming higher resolution. So we feel very comfortable that this single application will continue to try compounded growth for the internet and therefore, cogent as the low cost provider will disappear.
Fortunately capture that growth and grow even faster and in fact, our growth rate year over year at about 35% indicates that.
Finally, I think.
There are many new applications that are being developed different forms of video more interactive video video that wall have augmented or virtual reality embedded in it and as these higher resolutions that I think we'll provide.
Yet another next flag in Internet traffic growth. So we remain extremely positive on the long term prognosis for accelerating traffic growth and as we've seen competition deemphasize.
Transcend as a product we are increasingly gaining market share and I. Thank all of this is now reflected and the fact that on a sequential basis, our netcentric revenues improved materially.
Almost to our long term growth targets and then on a constant currency here every year basis, we returned to positive growth. After a period of negative growth. So we feel very confident that these trends will continue over the next several years.
Got it. Thank you for that color and then from my next question has to do with Salesforce productivity and maybe I was hoping you could expand that some of the comments you just made regarding the dynamics that were there. It's just that this salesforce productivity number they need US reported was probably one of the lowest and the company's history and at the same time Europe revenue.
Growth rate year on year actually accelerate and I know you mentioned a couple of factors, but can you just kind of expand on what's going on here just because you didn't has a new dynamic thats being introduced into the model in the dynamics that we may not necessarily be very well first into.
Yes fair Sami so there are two different things going on the first as across the entire Salesforce, where we accelerated hiring and therefore, the average tenure of a wrap declined and.
Yes, we think we'll we'll revert back to kind of a normal rate of hiring and 2020 up our goal is to higher between seven and 10% last year was a 13% increase which was outsized and therefore tenure came down but.
More significant factor and driving the diversions between unit productivity and revenue growth has actually been the sale of larger ports. The reason, we give the metric of unit productivity is it.
The only comment measure across the three different.
Groups within our Salesforce that being our Netcentric wraps.
Corporate reps to sell to larger multi site cost streamers and our reps sell to smaller single site cost structure should we try to come up with some kind of euro four metric, but what has happened and for the second quarter and a row the majority more than five.
50% of our corporate sales have been gig E interfaces and that is why our corporate ARPU is actually increased sequentially in the quarter.
Secondly on the Netcentric side, we're seeing a rapid adoption of 100 gig interfaces. This is actually the third time and Cogens history that we've seen grooming going on with Netcentric cost.
Summers.
So 15 years ago, most netcentric customers Chuck.
Again, our faces there was a migration and that kind of 2006 through 2008 period to 10-K interfaces where customers consolidated multiple.
One gig interfaces into fewer 10 gig interface.
Over the past year as the equipment vendors have brought down the pork prices on 100 gig interfaces. We are seeing most netcentric customers choose to use 100 gig interfaces. So on a unit basis they may be.
Selling fewer connections, but are in fact able to generate more revenue with higher committed bandwidth rates and a higher usage based bandwidth. So 100 gig connection may be replacing for five or six 10-K connections. This.
This is accelerated by the fact that most carrier neutral data centers charge recurring fee for cross connects and customers are constantly looking to reduce their cost basis and delivering services and if they can.
Room Cross connects they can and fact lower there are effective cost per megabit. So I think we've still got a ways to go when this trend I know equipment vendors are today testing 400 gig interfaces I think we are probably still several years.
As away from that being commercially available on a cost effective basis, but I do think for the next several quarters. We'll continue to say hey, proliferation of 100 gig interfaces with Netcentric customers and 10 and one gig.
Interfaces with our corporate customers.
Got it. Thank you for that clarification and then my last question has to do with the fact that your adjusted EBITDA margins are clearly delivering expansions. Your cash flow was clearly growing and then the one thing is that your dividend growth rate necessarily isn't necessarily growing its actually decelerating now is their scope at some point for you.
Consider increasing the step ups in the quarterly dividend from two cents something higher and can just give us maybe and I see on how you're thinking about capital allocation from there.
So that capital allocation discussion is probably the most important discussion as each of our quarterly board meetings, we had a meeting yesterday, where that was a measure topic of discussion just era thematically as the base gets larger and the unit.
Size is the increase is two cents go to refresh People's memory at one point, we're increasing at a penny a share.
And then we increased the rate of increased to two cents or share that well era thematically accelerate it is something the board is very cognizant of they took absolute note of the fact that our gross leverage and net leverage ratios declined in the call.
Order and are below the midpoint of our net leverage target. So it is something that is on to our active consideration, but I think for this quarter. The board felt staying the course due to a lot of the macro uncertainty made the most sense.
Got it thank you.
Thanks, Jamie.
Your next question comes from Philip Cusick from JP Morgan.
Hey, Dave Thanks, thinking about net centric again it seems like this is stabilizing at least.
We may be bottomed on the impact of customer concentration.
I think so Phil be costs, all we're seeing a number of new owed TT players compete for consumers eyeball time, and therefore at the base is starting to broaden.
I'm not trying to imply that any one service provider is necessarily suffering but I think the growth in the market is now being spread out among a half a dozen.
Different players as opposed to one or two major players and that means service less monopoly power on the part of that customer and therefore, we see the effective rate of decline on a volume weighted basis moderating even though the non.
Rental rate is continuing to decline pretty much in line with historical average as we are saying a lot of growth at a faster rate than the average from some of these new entrants.
Do you think that on a sequential basis currency. Adjusted this this could continue to grow in the next 12 months.
It appears to be the case.
To remind investors.
This is a usage based business.
And our customers don't have exact visibility into how many minutes a day each of their end users is going to be spending.
But when we look of our Netcentric sales funnels.
The roughly 180 Netcentric wraps they appear to drive port sales that will ensure a growth in revenue up we see on a customer by customer basis, very encouraging signs of try.
Perfect growth.
But again, we can't predict.
The consumer reaction that different products are series that are outlined by the various different providers. We think they'll all be successful I know theres been some providers. Our household names that have had more a linear model that now we're going to correct answer.
Summer and have had just tremendous uptake of we think thats going to continue so as long answer. Your question. We think we're going to see sequential improvement, but it is just not something thats totally and our control.
Okay and then following up again on the reps given the growth in that sales force should we expect as large or maybe even larger sequential pressure on margins and the first quarter.
So you will expect EBITDA margin pressure in the first quarter due to increased SGN, a on a seasonal basis, but not on a year over year basis, when looking at the quarter gross margins will continue to improve.
At kind of the similar pacing we've had.
SGN, a expenses ticked up and the first quarter for the reasons that Tad enumerated.
No we spent about $1.2 million on our sales kickoff meeting that may sound like a small number but to a company like cogent thats a meaningful extraordinary expense.
Bulk of our audit expense false and this quarter and we have the reset on our social benefits and our payroll reset employee employer taxes all of those have a bit of a drag on margin. So you should expect a step down in EBITDA.
Margins.
Q4 to Q1 as we have every year. The one compared Q1 of 20 versus Q1 of 19, we'll be doing better.
No bigger than typical seasonal step down.
That is correct sale.
Thanks very much to.
Thanks.
Your next question comes from Tobey Sunday, So from Cowen.
Great. Thank you just a few first off on.
The dividend you have a longer term goal for revenue plus 10%.
EBITDA margin of plus 200 basis points curious if it makes sense to have.
The longer term dividend.
Objective our goal maybe plus 10% as an example, and has you are the board considered that second.
Did I hear correctly, perhaps in response to Sami's question that you anticipate traffic growth.
Being above that 30%, we just saw here in the fourth quarter. When we look at back on 2020, and then I guess driven by the guide and then the last question tied to that can you remind us.
Hi, the contract structure works for these OTI deals that you're signing our these month to month or these year to year should we be thinking that there could be maybe a year from now some significant step down just trying to get a sense how to think about the the pricing negotiation. Thank you.
Sure Colby Thanks for all the questions. Let me start with the return of capital question and the dividend question.
We are very cognisant of our leverage we realize that are under levered balance sheet as an asset that we need to put to work for our equity holders and we're constantly evaluating the debt markets.
Which would give us additional flexibility and accelerating return of capital Secondly, as we have publicly commented in the past.
We are somewhat agnostic to dividend versus buyback as the mechanism of return looking at the relative efficiency at a given point in time.
We fully acknowledge that without adjusting either the rate of buybacks or the rate of increase in the dividend, we will fall below our leverage targets and not be returning the optimal amount of capital I think to kind of.
Target a specific rate of growth in dividend is probably not optimal I think we want to maintain the flexibility of using both tools on our tool box up but as I said in response to Sami's question was a vigorous debate at the board level.
And that will continue to be the primary focus of the board for each and every of our board meetings and we acknowledge chat we wall either have to step up the pace of buybacks or step up the pace of dividend growth.
Or arithmetically will fall below our targets.
Again. These are good problems to have compared to many companies that were often.
Compare Wes now with regard to traffic growth.
We believe that there is a long term secular trend of OTI today that is accelerating.
Cogent has relationships with almost about every major OTG provider and the vast majority of access networks globally that article recipients of this over the top traffic, we expect that to continue due to our you bet.
What has footprint and 45 countries and over 1200 carrier neutral data centers.
We also think that our pricing allows us to capture a disproportionate share of the market.
With that said, we're coming off of a larger base that continues to grow we think that we will achieve better than 30% traffic growth.
We can definitely understand what the port capacity installed is but the usage is highly dependent on how successful. These various launches are theres been a couple of high profile cogent customers that have had very successful.
Launches over the past few months and we think Thats going to continue we also thank the market's going abroad and the trends we see in the us than.
Circulate around the world.
But.
It's almost impossible for us to tell you whether any particular OTI product is going to be successful. All we can say is to we'll get the majority of that traffic growth.
Finally to the contract terms those terms have.
Three components typically a duration, mostly the most common it's actually a three year contract. The second is a fixed commitment, meaning theres a certain number of ports and a base commitment on those ports and then finally a usage component.
That is typically charged at a premium to the effects and commitment.
What commonly happens is customers.
In term come back to cogent increase their cmet increased the number of ports and reduce the price per megabit and fat that was the 2100 connections that tad referred to earlier and the increase commitment to co.
Urgent of $26 million of total contract revenue that is almost exclusively netcentric and that will happen on a routine basis, we do not anticipate any extra ordinary repricings there are non.
Scheduled there are no contracts that have built in.
Price reductions based on volume, but none of those we think will be material enough to impact our aggregate revenue results. Thanks, Dave.
Thanks Colby.
Your next question comes from.
Walter PPI tick from like.
Flight shed.
Hey, Dave has to go on.
Hey, good Walt.
What to talk about Netcentric I think on our mass it looks like this in the first time use returned.
Annual growth.
Slide nine quarters is that sound right.
Year over year growth right, yes that is correct wall.
And then if you look back like I don't know whatever X number of years have alarm oligos back there seems to be like an ebb and flow in the sequential decrementals were obviously, a little bit more interesting to us. So I'm. Just curious if you can give us a little bit more sense, though.
What drove that together, 2.5% Sequentials Netcentric this quarter was it whether its geographic color or type of customer call or anything.
And then also as part of those comments kind of wrap and.
Thoughts on sustainability and again, we have what four or five quarters of negative sequential but again, if you look back over six or seven years, it's like Europe, a couple of quarters, you're down a couple of quarters US just thought process around what drove this one and what you're thinking going forward.
Yes.
So I think the key driver on Netcentric remains OTI video there were a couple of very high profile launches.
And the past six months that have driven material acceleration and revenues for Netcentric and we win two way we win by carrying traffic for those OTG players, but we also win.
Because of the 60 920 access networks around the world that whose customers download more content from those players. So I think the broadening of the universe. So FFO TT players has done to thinks its excel.
A rated OTN Tan channel and it's allowed us to not be as depended on a few names and therefore at the very lowest price point.
We've seen multiple instances in the past where customers had a inflection point in their business, we benefit for several quarters and then there range of growth starts to mature so the netcentric revenues, which are.
Highly usage dependent.
We are very hard to predict.
Over the short term over the long term the site will say you referred to are actually pretty easy to predict and I think it's important for investors to step back and look at the bigger trends also on the corporate side, which tends.
To be this very granular business of small connections there, we see a much more linear progression of growth.
Yes earned corporate is obviously very predictable, but on this one.
I guess you could argue that word inflection point cord cutters or kind of you know that's this is the point right. So.
Is it possible that you can just sustained sequential growth in netcentric going forward to do you think we're still going to have some of these.
I'm kind of three quarters, all three quarters on type of situation.
Yes, it is really too hard to predict Walt I think.
No. We after you pointed out have had nine poor quarters and now positive quarter I think we're in for a period of better performance.
Will it be permanent.
Now.
We just don't have grown our ability into that what we can be very confident.
Is that if the market grows we will grow faster than the market, we will capture a disproportionate share and that disproportionate growth comes from the fact that weve price at a lower price point.
Got a one last question, Dave I mean people are looking for shelter on this one of the sell off based on Corona virus is there any have you seen any any increase uses in areas that have been effective in terms of traffic. I mean is this something that that could could stimulate traffic or people are not going outside new the internet more in any given market any any learnings there on the path.
Last couple of weeks.
So obviously logic says that if people are staying home, they're looking for things to do and OTI TV video as a low cost and virtually unlimited way to fell off so at that time.
You know.
Obviously, China has been the hardest hit we are the main provider to the three major state sanction networks in China, but are they the Chinese government kind of throttles, what goes in and out of the country. So it has been a little hard for us.
To determine exactly how much of the growth and traffic from those three providers is directly related to krona virus Corona virus I do think.
You know as.
The fear of contagion spreads, we will see some traffic benefit from that we wish for human derived from Spain. As an example in the last Cup, but did you haven't seen anything in Spain. As another example of the past couple of this.
You know, we've seen a slight pickup in traffic over the past weekend, but.
Again I.
I've seen pickups in the past and I'm not could take three days and attributed to a single cause I just don't have enough.
Predictive data.
Got it thank you.
Your next question comes from Frank and those then from Raymond James.
Great. Thank you.
One strategic question Albert more of a practical one on the strategic side from the peak the Netcentric business is down about 40%.
For change your revenue with from where it where it used to be.
And kind of given that that pretty consistent trend and then how well you've done in the corporate side should you adjust your strategy to become much more of a corporate focus business going forward.
Key drive growth and reflect the netcentric kind of knew what it's going to do and so hubs.
So provisioning and other other things impacting you.
How do you think about back from a strategic standpoint.
And then secondly, I apologize is addressing remarks, but.
The asset sales ticked up a bit are we back at dusting off some of the equipment from the supply room and selling that and how should we think about that as as housing saving revenue and cash flow for the remainder of 2020.
Okay. So two very different questions, let's start with.
Corporate versus Netcentric, there is kind of a natural skewing and other words, we go where the demand is at corporate demand is driven.
Heavily by the adoption of cloud SaaS and.
Other OTI t. applications to take US Bank SD Wan and MVP engines.
We are growing both parts of our sales organization.
Yes, Netcentric has always ABT in flowed as part of our business.
We remain committed to that market and continue to focus sales resources and Pat as it was pointed out earlier it is growing on a sequential basis and more importantly, we are gaining market share.
Both customers create a network effect for Cogen, where our corporate customers benefit from a number of netcentric customers and netcentric from corporate.
More of the growth in our headcount has spent on the corporate side, because theres quite honestly, just more addressable market and more marketing for us to do the Netcentric market is one where cogent is fairly well now we are the second.
Largest provider in the world and virtually all prospects no off us now often times, they still need sales support to help them do more with us.
We think both of these businesses can be meaningful contributors to free cash flow going forward.
Now our process always begins with an outbound telesales effort for both corporate and Netcentric. This is not a self provisioned product. So I don't see that materially impacting our growth and either business finally tier.
Of assets sales I'll, let tad touch on that.
Sure. So if we look back.
Looking back through the first quarter of 2018, but we have not had an asset sale amount more than $500000. So the amounts really have been.
The minutes de Minimis since.
Really since the beginning of 2018 the largest amount.
In that one quarter was 500000 in the first quarter of 2019, so that they have not been material as of late but.
It could change in the future, but currently that they really not material right. I mean, it's really dependent on the markets need for the equipment that we view as obsolete to Cogen, we have huge inventories of equipment and sometimes there's buyer sometimes or not.
And finally that revenue our that.
Cash that we receive as not booked as revenue because it is not cogens core business, We report service revenue, but the gain.
Is reflected in EBITDA, but and it is cash, but we don't actually booked at as revenue.
Okay, great. Thank you very much.
Hey, Thanks Ryan.
Your next question comes from Nick.
Bill deal from Moffett Nathanson.
Hey, Thanks, a question I'll just ask when given the given the time if I look at your total network operations expense ex us that it was down a little over percents full year 2019 versus full year 2018, despite the expansion in your network.
And what I'm talking dollars not present, a revenue how much that decline was a function of FX get where the other drivers we should be aware of and what should we expect going forward for that line item.
So.
Roughly.
25% to 30% of the network resides outside of the you last.
And are therefore, FX would impact that third of the expense to the extent. The dollar has strengthen therefore on reported basis would be a lower expense. The second big network expense area is actually.
The cost of off net circus, and we have been able to negotiate with all of the major loop providers in North America substantial discounts and large part because of the aggressive competition.
Between telco and cable for providing who sale point to point services for buildings that we have not broad on net so we have about one point sixmillion buildings and North America, we have 90 different vendors.
But the reality is five our material and we've seen an average decline and the price per loop for a comparable loop of about 8%.
So a big part of why the ARPU decline on off net has occurred as be costs. Those loop prices have come down and we're roughly at a 50% margin in that service.
Now thats, partially offset by the same trend that we're seeing an on net corporate which is a move towards larger connections. So for a long time, we were supporting sub 100, Meg Ethernet based off net services today, we will only do those on.
A special assemblage.
Most of our sales are still hundred Mag, but we expect the.
Trend like we're seeing and on net to bleed over an authentic eventually gigs will become more standard finally.
We've seen a number of new sub sea cables be constructed and those cables put pressure on that market and.
We concluded long ago that renting versus owning their made more sense. In fact, cogent did owned some cables earlier in its history through various acquisitions have we abandoned and today, we remain a effective leasesoft capacity.
Okay got it thanks Tony.
Hey, thanks snack.
Your next question comes from James Breen from William Blair.
Thanks for taking my question can you just talked about the the impact you're seeing the SD Lan market in the end market.
He has moved into a little bit more.
Thats sort of is progressing going forward. Thanks.
Sure Jim Thanks for question so.
Just to remind investors.
Roughly 25% of our corporate ports sold our for VPN purposes about 75% of corporate ports are for dedicated Internet access.
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We see a large number of npls customers begin the sales conversation around SD weighing in.
Most SD Lan sales have actually turned into FY Pls sales, we have and continue to sell SD Wan It becomes a critical part of the sales discussion, but when customers understand the.
The limitations of the current state of customer premise equipment. They typically choose to go for FY Pls to get higher throughput rates now we are seeing improvements and equipment I think the reality of.
Thats CP equipment ill catch up to the hype over the next year or two and we'll see a broader deployment of true SD Wan, but I think the key takeaway is customers are increasingly fed up with mpls and are willing to switch and I'll switch.
Either product today, most of it is PPL class and we think that the mpls market and aggregate has already declined about 20% from its peak.
Great. Thank you.
Hey, Thanks, Jim.
Your next question comes from Michael Rollins from Citi.
Hi, good morning.
Just two follow ups, if I could.
The first is just in terms of the USS.
Changes that have helped a little bit on the revenue line on is there an expectation that those rates could actually decreased in the future. Obviously, that's something that we should just keeping in mind as the government's always rebalancing those rate.
Periodically.
And then secondly.
In terms of some of the the pricing metrics that you disclosed on the.
The average price per new contract going to 28 and.
Meg how does that impact.
Kind of the flow of revenues as we look out over the next 12 to 18 months. Thanks.
Okay, I'm going to let tad take the U.S. tab and I'll take the pricing plush yes.
I guess similar to foreign exchange.
The rate of Usfour the tax rate is entirely outside of our control and it's.
It is.
Directed each quarter by the government.
Well recently it has increased however, it is going to decrease Internet is scheduled to decrease in the first quarter.
So it's kind of out of our control of recently for for example for the fourth quarter. It was about $4 million. It was about $4 million, but the same amount for the third quarter. It was about $3.5 million for the second quarter because the rate had increased.
But the rate.
Has been scheduled to decrease for the first quarter of 2020, it's established by the government and.
It's literally outside of our control yet and maybe just a.
A little back on how that works so our VPN services are subject to use Saf.
The government sets a target amount of money and wants to distribute through caf, two or be tap or E rate programs and then refer sanction enters the applicable base of services.
To target how much they want to raise and then projects a new rate at as adjusted quarterly.
Yes, we pass that through on a gross basis and actually negatively impacts margin, but it does obviously help revenue be cost revenues reported inclusive of that USS say.
Yes, I would suspect as to government really tries to accelerate broad band deployment in rural areas and aggregate. This rate is probably going to go up over time as the base is shrinking and the amount of money needs is going up but on a.
Quarterly basis, it's really impossible frost per deck now to the flow through of discounting.
You know customers consistently.
To optimize our spend this is really a netcentric phenomena as I mentioned earlier, the typical customer size, a three year contract up but because of outsized growth in their business during that term they'll come back and re negotiate and one day.
They do it's usually for a larger commitments at a later point in time and I will.
Re extend the contract for another up longer periods since our partial into their period. This phenomenon has been very consistent for the past 10 years or more.
Weve reported that number consistently and it hasn't materially changed so I think the decline in the rate of new sales. This quarter is pretty much in line with historical trends the installed base actually declined a little less rapidly than historic average.
The new sales declined a little faster, but if I.
Got you back to two or three quarters ago, those two parameters for almost completely inverted where new sales were declining less rapidly in the base was declining more rapidly. There's just some oscillation based on when customers renegotiate these contracts.
And as much like you give for FX commentary about the expectation like sequentially or year over year in the coming quarter.
There are some help in terms of the amount of change hit that use staff factor would impact revenue in the calendar first quarter.
Well first of all we only have visibility.
After the after USAC the fccs contract for establishes the new rate, which changes every quarter. So a annual projection would be.
Meaningless on our part and I think the materiality of this just from where we set to this quarter is not meaningful I mean, it will be down a little bit, but it's not a material number and that just as a reminder, again, it's a us based tax only.
Only us based and it's only based upon part of our services that that it's applicable to so but.
I mean, you might be talking I don't have markers have all I don't know $100000, maybe ambitious not a meaningful non what the fccs going to do with their UNICEF rate. It's just.
I guess I wasn't surprised when it increased but I was frankly surprised when it recently decrease so it's.
Thank you, but it's just not not meeting.
Your next question comes from Tim Horan from Oppenheimer.
Thanks, Dave you are adding a ton salespeople, obviously and I am assuming you think you can get a lot more market share in both your market segments can can you just talked about maybe where you think you are with market share on both sides and what thats kind of trending at and I guess, specifically on the Netcentric side. It seems like the Cdns grew a lot faster than this quarter than you did.
Do you think there hurting you at all in terms of your growth or market share there and delivering traffic or just how you think about it. Thanks.
So, we're adding salespeople to both corporate and Netcentric I would say that the rate of increase a slightly greater on the corporate side then netcentric.
Yeah.
So on the corporate side, we start with.
The buildings, we're in and the number of connections and number of unique customers we've sold per building.
And we've sold 23 connections per building to about 15.
And a half customers per building.
So out of 51 up potential customers were.
Roughly.
30% penetrated we are adding new buildings in the off net corporate market, we have less than 2% market share, but we also know that without an on NAV relationship the cost of sales are prohibitively high.
So we have no real desire to go after just off that only corporate customers.
I'll add increasingly as the remaining customers on our footprint to have not bought from us deploy new technologies like cloud and SaaS, they become ripe to switch to cogent and Thats why our rate of penetration per building continues to improve.
You've almost linearly even overbuilding sort of been on net for more than 10 years. So we feel that we have a long runway to grow on the netcentric side.
Our market share can be measured three ways, we have roughly 27.1 connections per data center.
Secondly, we have about 22% at the bids generated and we have about 13.5% of the dollar spent on transit services.
We are gaining share under all three of those metrics selling more customers per data center getting a bigger share of traffic and most importantly, it bigger share of revenue to your point about CDN.
Every major CDN is a cogent customer.
We sell bandwidth either directly to companies, who built around cdns or to third party Cdns that then incorporate our bandwidth into the service. They are selling show cdns are not competitors, but rather.
A portion of our ecosystem and a customer base for coach.
That's very helpful any update maybe just to flow on.
Buildings over 10 years can you maybe give some color on the penetration there ultimately where you can kind of get too and out do you think the cdns didn't grow faster new this quarter I mean, it seems like they were talking to the three or four that we know that seems like they did grow bit faster and clearly revenues accelerated a bit more for them.
Yeah, and I think some of that.
Acceleration and Cogens revenue growth came from those same CDN. Some of it came directly from end user customers and.
Cdns incorporate space power processing storage and bandwidth has a bundle product.
We think we will continue to win a disproportionate share of revenue from them in terms of penetration we think on the Netcentric side that we can eventually get to about a third of the market.
Particularly as a number of other historical players continue to deemphasize transit due to the rate of price decline and the Commoditization and I think is cogent has proven.
Over 15 years as a public company two things one the depth of the Internet has been greatly exaggerated and is not going away.
Secondly, even in a world where prices declined 23% per annum compound. It we have demonstrated our ability to continue to grow our revenues and most importantly, and grow our cash flow.
Against that so.
We feel very comfortable that we're committed to the transient market in our penetration is only going to increase thank you.
Hi, Thanks Stan.
Your next question comes from Bora Lee from RBC.
Hi, Dave Thanks, a couple of questions.
So following up on your comment about more than 50% of corporate sales being gig interfaces.
New sales versus swapping out of lower bandwidth existing connections and then secondly can you give a sense of the pricing differential between GEC ports and the most commonly taking lower bandwidth corporate connections.
Yes sure bar. So first of all a majority of those sales are brand new ports and as the customer commitment as capable of taking gimmicky inactions. Many of them are willing and want to do that all we do have some swap outs.
I would say that it's less than 10% of incremental sales in the quarter.
We're upgrades of existing corporate customers migrating from a fast eight connection to a gigabit connection.
Today, we sell that kinky interface had about a 20% premium to a fast E interface, we think that differential wall eventually disappear and at some point in the future when she.
CP of customers becomes ubiquitous fully able to take gig interfaces, we think cogent standard product will become the gig product today, not all customers can accept that.
So rather than seeing ARPU decline on the corporate side, we'll just see the connection size increase in fact, our average corporate utilization of a connection has fallen from about 18%, 12% in large part because of the.
This proliferation of the interfaces as of the final point, which is kind of a unique on tecogen, it's actually cheaper for us to sell a gig than it is an f. fee and the reason is we do not need to put a media converter and the customer suite.
To step down the fiber connection to our copper connection. So all of our connections are delivered to the customer sweet via fiber, but if the customers still running 100 med connection we have to step back connection down from a game.
To 100, Max and converted from optical to offer that's about a 300 dollar piece of SCPA, that's shipping fully charged and our customer install NRC and if the customer takes a gay that 300 dollar cost cogent peers. So.
It's kind of aware fact pattern that we want to actually sell more for the same price.
Got it.
Thanks, very much Dave.
Hey, thanks.
There are no further questions at this time.
Well I would like to thank everyone for their attention and support.
We're very pleased with our results I'll look forward to seeing a number of investors at upcoming conferences take care and talk sent thanks Bye bye.
Ladies and gentlemen. This concludes today's conference. Thank you for your participation and have a wonderful day you may now disconnect.
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