Q2 2020 Cogent Communications Holdings Inc Earnings Call
Plate at Www Dot Cogen Colo Colo.
A transcript of this conference call it will be posted on the same website when it becomes available.
I'd now like to turn the call over to Mr., Dave Shaffer, Chairman and Chief Executive Officer Cogent Communications.
Thank you and good morning, everyone.
Welcome to our second quarter 2020, <unk> earnings Conference call.
Dave Shaffer <unk> CEO and with me on this morning's call Ashar Wahler short Chief Financial Officer.
We continue to be optimistic about the underlying strength in our business through your portals and breadth of or not work and most importantly, the increasing profitability of our operations.
We remain confident in our outlook for 2020, M. beyond even went to continuing impact or uncertainty due to the cobot 19 pandemic.
On a constant currency basis.
Shapes sequential quarterly revenue growth to cancer <unk> percent and year over year revenue growth for the second quarter of 5.1% on a constant currency basis.
The reduction in Universal Schervish speech excise taxes.
And the rate associated with them this quarter reduce your sequential quarterly revenues by $450000 on a constant currency basis adjusting for the impact of this change in U.S. afraid or sequential quarterly revenue growth would have been one half of 1%.
We continue to take advantage of the operating leverage earn out where we manage olsher to moderate or strianese expense growth.
Our network scale helped our quarterly gross margins reach yet another company record of 62%.
That's for sure was sequentially 150 basis points, higher and 220 basis points higher than a year over year number for the quarter ending in June 2020.
Our EBITDA margin at 37.8% also improved was sequentially 200 basis points higher and 290 basis points higher on a year over year basis.
Our cash flow from operations grew sequentially by 45%.
Our customer warm it should metrics continued to be strong.
In spite of the impact of convert 19.
Sure sure bad debt and gauge how sand sales outstanding all performed within historical norms that our cash collections and the balance of June were an all time record.
We believe that these statistics indicate a strong credit quality of our customer base and do you weren't sure coaching service to these organisations we continue to showing strong growth in traffic across our network has quarterly traffic from accelerated from 36.
<unk> percent year over year.
In the first quarter, 249%.
This quarter and sequentially traffic growth from the first quarter of 2020 to the second quarter by 10%.
The rapid growth some traffic was driven by increased streaming applications for Warner to work from home phenomenal and gaming and other applications that have chain an increase in usage due to the pandemic.
During the quarter, we've returned $31.7 million to our shareholders through our regular quarterly dividend.
We did not purchase any common shocked turned the corner.
Order and we have a total of $34.9 million available under our stock buyback authorization program, which has been authorized to continue fruity ended the year by or board.
In June.
We demonstrated aren't continue ability to access the capital markets, where we are surely tack on offering true.
Oh, it's 215 million euros, toric shifting whatever 35 million euro denominated unsecured notes.
The net proceeds from this offering were $240.3 million.
Portion of those proceeds were used to redeem at par.
Our $189.2 million of such outstanding unsecured 2021.
This also provided us additional cash as a result of these transactions our average interest rate fell we extended the duration of our indebtedness and we were able to transfer $117 million on our builder basket from our off.
Operating company to a holding company.
Our cash at Cogent holdings propose 166.5 million at quarter end, this cash unrestricted and available for dividends and start the stock buybacks Cashel and operating companies. In addition to that held at the holding company was 200.
$50.5 million doing cogent, a combined cash balance of all $417 million at quarter end.
Our gross leverage ratio increased to 5.0 wait from 4.78 from last quarter.
Our net leverage ratio increased to 3.7 from 2.92 or call consolidated leverage as calculated under the note in dentures was 4.92 quarters huh.
After careful consideration our board of directors.
Evaluated the strength and growth in our business as well its its cash generating capabilities and investment opportunities for the company, we decided to increase our quarterly dividend at the rate of two and a half sense this quarter therefore regime.
Our debit down from 68 cents per share last quarter to 70.5 shines and the third quarter. This increase represents the 32nd consecutive sequential increase in our growth of our quarterly dividends.
And this increase is larger than the roughly two cents increase in Q2 of 20 Twond.
Well I turn the call over the short Wallace welcoming Sean as our CFO and Shawgo read both our safe Harbor language and give some overview of our response to cope at 19.
Thank you David and good morning, everybody.
This earnings conference call includes forward looking statements.
These forward looking statements are based on our current intent belief 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 from work.
Information on the factors that could cause actual results to differ.
Okay and undertakes no obligation to update or revise our forward looking statements. If we use non-GAAP financial measures. During this call you will find these reconciled to the GAAP measurement and our earnings release, which is posted on our website at www Cogent codes dotcom.
Few words on the Cobot 19 update.
Like many other companies cogent continues to be impacted by the cobot 19 pandemic and the accompany responses by governments around the world.
Our entire workforce continues to work remotely I want to affect the entire cogent workforce and in particular Alrighty department for their hard work. During these challenging times I also want to thank our field engineers and other employees, who continue to work on the frontline installing new customers and maintaining in upgrading our network. So that we can can.
Tenure to serve our customers.
During the second quarter 2020, the impact of the Cobot 19 pandemic Oncogen was somewhat limited.
We did experience a decrease in our sales productivity, particularly in sales to corporate customers traffic on our network continues to grow at an accelerated rate compared to our historical growth rates. However, the traffic growth rate for the quarter was slower than the traffic growth rate at the end of the first quarter.
The ultimate impact of the pandemic on Cogent is unknown as a significant amount of uncertainty and volatility remains.
We do not know the scope and duration of the pandemic what actions governments may take in the future in response to the pandemic and how the pandemic will impact the economies of the world well Cogent is working remotely we have no assurance that this will be sufficient to protect our workforce and our key employees. Moreover, our result.
Most of operations may be adversely affected in the future as the pandemic and the related government restrictions continue.
We may see slowdowns in new customer orders find it difficult to collect from customers, we're experiencing financial distress and counter difficulties accessing the buildings in locations, where we install new customers and serve existing customers or have difficulties procuring shipping for installing necessary equipment owners.
At work.
We may also find that our largest customer base, which has served primarily in our multi tenant office buildings may be adversely affected by falling demand for commercial office space in central business districts as companies located in these buildings elect not to return to their office space either on a temporary or even on a permanent basis.
The global economic impact to the Cobot 19 pandemic may have a prolonged effects that impact our business well into the future.
These and other risks are described in more detail in our quarterly report on form 10-Q, the quarter that will be filed shortly after this call and in our annual report on form 10-K for the year ended December 30, Onest 29 team and in our quarterly report on form 10-Q for the quarter ended March 30, Onest 2020.
Throughout this discussion we will highlight several operational statistics.
I will review in greater detail certain operational highlights and trends.
Dave will provide additional details on the network and following our remarks, we will open the call up for acuity.
Now I'd like to turn it back today.
Thanks, Sean hopefully you've had a chance to review our earnings press release.
Our press release includes a number of historical quarterly metrics help investors understand trends and Arpus.
Our corporate business, which represents 69% of our revenues this quarter grew on a year over year basis by 5.1% from the second quarter of 2019.
Our Netcentric best Nash, which has been underperforming compared to our long term historical averages.
Turning to accelerated growth and grew 3.6% from the second quarter of 2019.
For the quarter or corporate business grew sequentially, 1% and our Netcentric business was essentially flat.
Production and Universal Service fund tax rates again negatively impacted net.
Not for revenues, both on a sequential and year over year basis.
Do you must have tax rate changes quarterly and we cannot predict the future impact. If you are suffering in changes on our revenue.
Well <unk> volatility and foreign exchange, primarily impacts our netcentric business.
On a constant currency basis, our netcentric business grew.
5.1% from the second quarter of 2019 and on a sequential basis from the first quarter of 2020, our netcentric business on a constant currency basis grew one half of 1%.
Our long term EBITDA margin expansion guidance, there's an annual improvement of 200 basis points are multiyear constant currency long term revenue growth.
Targets our 10%.
Our revenue and EBITDA guidance are meant to be multiyear and hot intended to be specific quarterly or even annual guidance no. Sean will give you. Some additional color on our operating results for the corner and then I'll.
Return to give you some additional network call. Thanks it.
Let's talk about corporate and Netcentric revenue and customer connections.
We analyze our revenues based upon network type off net off net noncore and we also analyze our revenues based upon customer type we classify all of our customers in two types netcentric customers and corporate customers, our corporate customers by bandwidth from us in large multi tenant office building as well as carrier news.
Real data centers, our netcentric customers by significant amounts of bandwidth from us in carrier neutral data centers.
Revenue in customer connections by customer type.
Revenue from our corporate customers for the quarter grew sequentially by 0.1% to 97.0 million and grew year over year by 5.1%. We believed that the slowdown in the growth rate of our corporate connections was impacted by the continuing concerns raised by the cold in 19.
While we continue to have significant dialogue with our existing and potential customers. Some customers are delaying buying decisions due to economic uncertainty.
We had 48305 customer connections corporate customer connections on our network at quarter end, which has a decline of 0.4% versus the first quarter and an increase of 1.4% over the second quarter of 29 team.
In addition to the impact of Cobot 19, our corporate revenue and connections were adversely affected by the lower USLF tax rate lower off net local loop pricing and the reduction of VPN sales due to the pandemic certain corporate customers are reducing their aggregate number of locations.
Quarterly revenue from our Netcentric customers was flat at 44.0 million and increased by 3.6% year over year.
We had 39807 netcentric customer connections on our network at quarter end, an increase of 9.3% over the second quarter.
Our netcentric revenue growth experience is significantly more volatility than our corporate revenues due to the impact of foreign exchange larger customer size and other seasonal factors while traffic grew in our network by 49% annually, primarily result of increased Netcentric traffic. This increase in traffic only partially created.
Corresponding increase in revenues as volume discounts and traffic mix, particularly some for some of our largest customers offset a great deal of this traffic growth.
Sorry about revenue and customer connections by network type.
Our on net revenue was 103.8 million for the quarter sequential quarterly increase of 0.3% and a year over year increase of 6.5% are on that customer connections increased by 1% sequentially and increased by 4.8% year over year.
We ended the quarter with 75927 on that customer connections on our network in our 2854 total on that multiple multi tenant office and carrier neutral data center buildings.
Our off net revenue was 37.0 million for the quarter, a sequential quarterly decrease of 0.7% and a year over year decrease of 0.4%.
Our off net revenues were adversely affected by the reduction in USLF taxes, and a reduction in our off net ARPU, which primarily was due to lower loop local loop prices from our off net vendors are off net customers connections increased sequentially by 1.1% and increased by 4.6% year over year.
We ended the quarter, serving 11846 off that customer connections in over 6820 buildings off that buildings. He's office buildings are primarily located in North America.
Talking about pricing on a per megabit basis, consistent with historical trends, our average price per megabit of our installed customer base decreased however, the average price per megabit of our new customer contracts actually increased for the quarter.
The average price per megabit for our installed base declined sequentially by 10.2% to 47 cents per megabit and declined by 25.1% from the second quarter of 29 team.
The average price per megabit for our new customer contracts for the quarter increased sequentially by 17.2% to 23 cents per megabit and declined by close to 40% from the second quarter of 29 team.
ARPU.
Our on net and offset ARPU, both decreased sequentially for the quarter, however year over year off net ARPU decreased but our on that ARPU increased this year over year increase in our on that ARPU reflects the growing importance over one gigabit product versus our 100 megabit product are one.
One gigabit product has outsold are 100 megabit product for the third straight quarter.
Our on that ARPU, which includes both corporate and Netcentric customers was $458 for the quarter, a decrease of 0.6% from last quarter, our on that ARPU increased by 1.1% from the second quarter of 2019.
Our offset ARPU, which is comprised of predominantly corporate customers was $1048 for the quarter a decrease of 1.5% from last quarter, our off net ARPU decreased by 5.1% from the second quarter of 29 team.
Churn rates.
Our on net and off net churn rates, both improved sequentially for the quarter are on the chart unit turn rate was 1.7% for this quarter and improvement from 1.1% last quarter and our off net unit churn rate was 1.1% for this quarter and improvement from 1.2%.
Last quarter.
Netcentric Mac orders in in order to reduce our customer turnover, we employ a dedicated sales group, which works primarily to retain customers with indicated that they are considering terminating their services. We typically offer pricing discounts. These customers in order to induce them to purchase more services and or to extend.
The terms of their contracts.
Due to the commodity nature of Netcentric services. The vast majority of these move add or change orders are related to our netcentric customers during the quarter certain of our Netcentric customers took advantage of our volume and contract term discounts and entered into long term contracts with us for over 2600 customer connections.
Increasing their total revenue come into cogent by close to $25 million.
EBITDA.
Our EBITDA is reconciled to our cash flow from operations in all of our quarterly earnings press releases seasonal factors that typically impact our SGN. A expenses include the resetting a payroll taxes and the United States at the beginning of each year annual cost of living or CPI increases seasonal vacation periods the time.
And level of our audit and tax services, our annual sales meeting costs and our benefit plan annual cost increases. These seasonal factors typically increase our SGN expenses in our first quarter from our fourth quarter. Our EBITDA improved sequentially, primarily result of a $2.1 million reduction in our cost of network operations and a point 8 million.
Dollar reduction in our Sta expenses.
Our quarterly EBITDA increased by 5.9% sequentially to $53.3 million, our quarterly EBITDA increased year over year by $6.2 million or by 13.3%.
Our quarterly EBITDA margin increased by 200 basis points sequentially to 37.8% and increased at a higher rate year over year by 290 basis points.
Earnings per share.
Our basic income per share was 19 cents for the quarter compared to 20 cents last quarter and 16 cents per quarter to 2019, our diluted income per share was 18 cents for the quarter compared to 20 cents last quarter and 16 cents per quarter to 2019.
Unrealized gains and losses on the translation of our 2024 Euro notes into us dollars contribute to variability in our net income and consequently, our income per share.
Talk about foreign currency.
Our revenue earned outside the United States is reported in us dollars and with approximately 23% of our total quarterly revenues approximately 17% of our revenues. This quarter were based in Europe at about 6% of our revenues related to our Canadian Mexican Asia Pacific and Latin American operations, we do not.
Hedge our foreign currency obligations, including our payments on our Euro notes, our foreign operations generate sufficient cash to fund their obligations, which we believe provides a natural hedge for these liabilities.
Continued volatility in foreign currency exchange rates can materially impact our quarterly revenue results and our overall financial results. The foreign exchange impact on a reported quarterly sequential revenue was a negative 0.2 million and the year over foreign exchange impact on our reported quarterly revenue was a negative 0.7 billion dollar.
Yes.
Our quarterly revenue growth rate on a constant currency basis was 0.2% sequentially and 5.1% year over year variability in foreign exchange rates, primarily impacts our netcentric revenues.
The average euro to us D rates so far for this quarter is 1.15 and the average Canadian dollar exchange rate is 0.74 should these average foreign exchange rates remain at the current average levels for the remainder of the third quarter, we estimate that the FX conversion impact our sequential quarterly revenues for our third.
Third quarter will be a positive 1.1 million and the year over year FX conversion impact on a quarterly revenues will be a positive 0.6 million.
Customer concentration, we believed that our revenue and customer base is not highly concentrated our top 25 customers represent less than 6%. Our revenues this quarter Capex, our quarterly capital expenditures increased by 1.1 million sequentially and increased by 2.2 million year over.
Over year, our capital expenditures were 13.9 this quarter million dollars this quarter compared to 11.7 million per quarter to 2019, and 12.9 million for the first quarter of 2020.
Sorry about financial leases in our essentially payments, our finance lease IRU obligations are for long term dark fiber leases and typically have initial terms, a 15% 20 years for longer.
And often include multiple renewal options. After the initial term our finance lease IRU fiber lease obligations totaled $203.8 million as of June 32020 renewed we renewed a major regional segment higher you agreement this quarter, resulting in an increase to our finance.
Lease obligations of $30.4 million and a sequential reduction to our network operation expense of $1.2 million. There were no payments required to be made in connection with its renewal under us GAAP the future monthly payments under this are you associated with operations and maintenance required to be reclassified as a finance lease.
Obligation at the renewal date, there was no change in level or amount of cash payments to be made on this contract. A result, as a result of the renewal and reclassification at the quarter end, we had higher you contracts with a total of 256 different dark fiber suppliers are financed.
Lease principal payments were 3.27 million for the quarter compared to $2 billion for quarter, 220, 19, and 6.2 million for quarter. One 2020, our finance lease principal payments combined with our capital expenditures were $17.6 million this quarter compared to $19 million last quarter.
We will decline of 7.3% and were 13.7 million for the second quarter of 29 team.
Cash and operating cash flow as of June 30, 20, Tony our cash and cash equivalents totaled $417 million for the quarter, our cash increased by 41.2, not $41.9 million from increase in our operating cash flow and a net cash increase from our financing activities.
Our quarterly cash flow from operations increased sequentially by over 45% due to an improvement of $8.4 million and working capital, including five and a half million dollars from an improvement in our days sales outstanding and our accounts receivable, our quarterly cash flow from operations increased by 1.7% year over year our year.
Over your cash flow from operations increased increase was impacted by 10.2 million year over year increase interest paid on our note obligations our cash flow from operations was 41.3 million for the quarter compared to 40.6 million for quarter, 220, 19, and 28.5 million for quarter one 2020.
Sorry about debt and our debt ratios, our total gross debt at par, including our finance lease IRU obligations was $1.1 billion at the end of the quarter and our net debt was 636 $37.6 million. Our total gross debt to trailing last 12 months EBITDA as adjusted ROE.
Ratio was 5.85 0.08 at June 32020, and our net debt ratio was 3.0 so.
Our consolidated leverage ratio as calculated under our debt and Denture agreement was 4.92 at the end of the quarter.
Our 350 million Euro notes are reported in us dollars and converted to us dollars at each month, ending using the month and euro to us the exchange rate.
The unrealized foreign exchange unrealized loss on our Euro notes was $3.4 million this quarter compared to an unrealized gain of 2.9 million last quarter unrealized gain of 0.2 million for the quarter second quarter of 29 team, we issued our 215 million Euro.
2024, senior secured Euro notes on June Threerd 2020 at a euro to U.S. dollar rate of 1.12, and we contracted to receive our cash in US dollars on June nine at 1.133 euros to the U.S. dollars.
The results of this transaction, we realized a 2.5 million dollar foreign exchange gain in June 2020.
Bad debt and day sales outstanding our bad debt expense as a percentage of revenues improved year over year, but increased slightly from last quarter. Our bad debt expense was 0.9% of our revenues for the quarter compared to 0.8% of our revenues for quarter, one 2021% in quarter two.
Many 19.
Our days sales outstanding or DSO for worldwide accounts receivable was was 22 days for the quarter a two day improvement from 24 days outstanding last quarter I want to thank and recognize our worldwide billing and collections team for continuing to do a fantastic job in serving our customers and collecting our cussed.
Mers.
Builds during very challenging times and with that let me turn it back over to date hi, Thanks, Sean.
But hard to highlight a few of our operational strength concerning our network, our customer base and our sales force.
The size and scope and scale of our network continues to grow.
We recently added Johannesburg, South Africa to the Cogent network just last week.
This means that cogent has a physical presence and 47 countries globally.
We believe this will further increase our position as a leading provider of internet connectivity and the African continent, an increasingly important market that is growing rapidly.
We're showing internet connectivity and multiple locations across Asia, Latin America, and we're beginning to see meaningful growth in these markets.
And our traffic is growing faster outside the United States than within the United stage, and we are positioned to benefit from that growth.
In North America, we have 962 million square feet of multi tenant office space directly attached to the Cogen network with full distribution in those buildings.
We operate 54 cogent data centers with a total range for footprint of 606000 square feet and we're operating those facilities at approximately 32% utilization.
Our network consists of over 36400 fiber miles in Metro markets and 58000 route miles of intercity fiber.
We continue to be focused on developing our level of and our connection and cogent remains the most interconnected network on the world today, we connect to over 70 130 networks directly.
Peer to 6700 62 connected network at the same time last year.
Collection of telephone companies Internet service providers cable companies mobile operators and the other carriers give us access to the vast majority of the world's broadband subscribers mobile phone users. This large collection of eyeballs positions Cogent has to go.
[music] network for new Internet applications.
Sean increased level of traffic as screaming continues to grow and consumers continue to cut and shades accord and choose over the top video solutions as opposed to linear solutions.
For the quarter, we achieved sequential traffic growth of 10% and on a year over year basis, our traffic growth was 49% up from 36% year over year growth number that we reported in the first quarter.
This traffic growth rate that's above our long term average that we've seen over the past five years, we are pleased Sean how well Cogens network handle this unprecedented surge and traffic in March in early April without any interruptions disruptions latency issues.
Use or any requirements to increase capital spending.
Our sales force continues to grow we ended the quarter with 572 reps selling our service an all time high an increase of 5.5% from the 542 reps that we had at the end of Q1 2020.
We ended the quarter with 533 full time equivalent cheese reps that have been on the job for three more months and therefore carry a full quota.
And our.
This represents a 2.1% increase sequentially from the 522 full time equivalent reps that we had at the end of last quarter.
Our sales force turnover rate declined to 3.5% for the quarter. This was significantly better than our long term average rate of salesforce turnover of 5.6%.
Our quarterly sales Rep productivity did decline before units per full time equivalent rep per month below our long term averaged 5.1 units per full time equivalent per month, and our 4.1 units reported last.
Water.
Our sales rep productivity was absolutely adversely affected by a modest slowdown in corporate sales.
So of lengthening sales cycles, and most significantly over adoption and our fee Pls and VPN products.
Due to the fact that many of our customers shopper remote offices and the number of locations as some of our customers are operating in has been reduced as a result of the pandemic.
Our netcentric sales productivity.
Impacted by an increasing tendency of customers to buy larger ports and minimize their cross connect expense.
We continue to see a significant uptick in the sale of 100 gig interfaces as opposed to the 10 gig interfaces, which should make up the majority of our netcentric connections.
And finally for sales rep productivity.
It was impacted by the fact that our reps.
Were trained on a new CRM system, which will improve our productivity going forward, but did have a slight negative impact.
Warner.
We're seeing great candidates in the marketplace, who want to sell Cogent services and we are quite confident that we will meet our hiring goals for 2020.
We are remotely supporting all of our employees and customers continue to monitor our customers network quality and our salesforce productivity utilizing a number of the historic metrics that we track sales productivity Rep foreign facts and then.
Yes.
Some additional comments about our customer performance in the quarter, our churn bad debt and Dsos were all within historical norms.
Fat showed improvement.
On an annual and sequential basis, we saw an acceleration in a number of customers who elected to pay us electronically versus paper checks, which indicates our customers have a very strong desire to remain current with cogent and understood.
And that our services or a necessary utility for the operation to their business.
We believe that these statistics indicate the credit quality of our customer base in these challenging times and the most important factors how important internet access is to the continued operation of their business.
Function is so low cost provider of Internet access tranches services and our value proposition remains unmatched in the industry.
Our business remains completely focused on Internet IP connectivity data center co locations, all flash our utilities to our customers. We remain optimistic about our unique position and serving small and medium sized businesses are multi tenant buildings and essential.
Businesses tricks of major said.
These businesses are increasingly integrating their IP infrastructure into data center architectures needing greater connectivity higher reliability and quicker install times. All of these are things that are cogens.
Thanks and winning.
We have quantified by how strong our customer reaction has been to our superior levels of customer service network quality.
We consistently measure our customers on a net promoter sharpei system Cogens net promoter scores are 60 for some of the highest in the industry and much higher than industries across many other segments.
Doctors carefully considered.
A growth extra track free of the best Ness, and authorized I'm, 32nd consecutive increase or a regular quarterly dividend sequentially.
They increase the right and which we are growing this dividends two and a half cents per share, bringing our dividend for the third quarter to 75 cents.
Are consistent dividend inquiries demonstrates our confidence and optimism and the increasing cash capabilities of our business. We believe describes management to be highly disciplined and the choices, we make and how we allocated capital how we grow.
Our top on how we view the M&A market and how we manage our operating expenses, we will continue to be opportunistic about the purchases of common stock in the open market quarters, and we have 34 point.
Remaining on our current buyback authorization, which is in place through December 2020.
Hope everyone remains safe and healthy during these challenging times, we valued the safety of all of our employees, we shifted to a work from home policy and continue to have virtually all of our employees working remotely we're taking all of the necessary.
Protection and precautions to make sure that our workforce remains healthy.
We believe that we are a net beneficiary of stay at home models quarantine in place and they need.
Greater access to the Internet for screaming gaming and other applications.
Our growth and profitability targets remain intact.
Even in light of the current economic volatility and we are committed to return are growing amount of capital to our shareholders on a regular and methodical basis now I'd like to open the floor for questions.
If you would like to ask a question at this time. Please Crestar then one on your telephone withdraw your question press the pound or Heskey.
Please standby, while we compiled a Q&A roster.
And our first question comes from Sammy battery of Credit Suisse.
He didn't on this is George on for Sammy actually.
So I guess.
In light of some of your previous commentary now that you intend to increase the quarterly.
Two and a half sense next order should we expect to be your target going forward.
So George Board.
Deliberated very carefully and decided that.
Growth and free cash flow.
Was accelerating and at eight two cent sequential right.
Just because of the arithmetic of our dividend getting larger the growth rate in our dividend was T celebrating.
So the decision was made even in light of economic volatility to increase that right of growth to two and a half cents.
<unk>, we'll evaluate that each and every quarter, but.
Didn't take this seriously and believes that this is an appropriate right of growth and returning cash flow to shareholders.
Okay.
And can you provide a little bit more color on the impact of Cove. It on corporate customer cells I, just want to understand if the issues something that might improve despite the ongoing covid issues.
Yeah. So that they are really been three impact because of Cove.
The first is the need for greater bandwidth at your major location.
Most of our customers have the majority of their workforce working remotely they are running AD hoc vpns as people <unk>.
Tunnel and to those office locations, we have seen a significant acceleration N. One gigabit sales both to new customers, whereas Sean measure for three quarters in a row more new shelves worth gigabit in hundred May I a.
10 times, the band wet and higher <unk> and then secondly.
Existing customers have increasingly been increasing their connections seasonal positive for us.
The second trend is a negative trend.
Roughly half of our corporate customers take a second product a virtual private network to connect offices running either S D whan or fee pls over that connection.
Because many of our customers have shuttered the remote locations those offices set empty and there's no need for VPN concentration in those offices, we've seen a reduction in the sale of our VPN services now.
Is still a very large base of mpls space Vpns that will be replaced and will migrate to these lower cost more flexible technologies.
But I think in this environment, we are selling less vpns then we did six months ago. We think that is a temporary trend not a permanent change as we think overtime. These remote offices will be re opened.
And a V Pls R. S. T. One solution will be a far better solution than the mpls that many of these companies have in place today.
And then finally.
Corporate customers are like all consumers, they're concerned about.
Sure health there on Saturday, they're viability and because of these concerns we have Shane sales cycles, a all engaged it's not that we're not talking it costs commercial actually having more customer conversations more opportunities than we ever had.
Partially because we have more salespeople, partially because the customers are willing to engage as they realize how important to surface is.
But we also have seen a higher level of caution on the part of customers to make new by decisions. So we have seen our sales cycles Langton, we think that as a transitory phenomenon and we think that the greater number of salespeople.
Will coupled with the greater number of conversations that those people are having with potential customers will result, and accelerating sales.
Got it that's helpful. I guess, there's one quick follow up so.
In reference to the lengthening sales cycles.
So what drove that new customer contracts average price for megabit up quarter over quarter is that something that's replicable or.
What happened there.
Yeah. So I think there are two things that are driving.
Net.
Customer.
Connection cost shop on the corporate side, we're selling far more.
Gigabit, then hundred megabyte connections, which are typically a couple of $100 more per connection that is pulling our co op and then on the Netcentric on net <unk>, they're going up because customers are taking more hundred kick interfaces.
10 gig interfaces, but once they take that interface. They do pay on a usage basis and we did see an increase in usage a lot of it from some very large customers, but the fact that are in new netcentric sales on a P.
Her megabit basis increase as a strong indication on.
Widening of our customer base and the sale to a lot of smaller.
Netcentric customers some of which are experiencing very rapid growth.
Thank you.
Thanks George.
Our next question comes from Colby's tennis out of Cowan.
Okay. Thank you wanted to focus first off on the commentary on I R. U as in the one contract I think in particular that you mentioned you renewed that I hear Ya correct me that that benefited your palms and I guess consequently gross profit in EBIT down can you remind me with that number wise.
And then is that an indication of others like that that we should expect over the next few quarters I mean, when you think about the.
How old's cogent is they're going to a company in the term of these IR use being 15 to 20 years and kind of where we are over the next few years should we start to see more upbeat and what do you think that the net impact as as it relates to both leverage.
And I guess times like we May have seen this quarter and then secondly, just wanted to go back to that question on.
Commercial I think Sean and you're prepared remarks you.
You mentioned a variety of different risks one of them was risk of large commercial buildings and people, perhaps not using those as much and then obviously we saw that in this particular quarter you saw a reduction in some of your P. P M type services.
I appreciate what you just had Dave as it relates to trying to fix that with just adding to the sales force, but is that also a trend.
That you are concerned about her one where we could start to see that become a bigger risk perhaps over the next few orders. Thank you.
Okay.
Three or four questions here are Colby I'm going to start and Sean All helped me out on some of these finance questions, but let's start with the <unk>.
So the IR use used to be classified as capital leashes under the new accounting pronouncements, there now re classified as finance leashes.
As part of Fat reclassification.
New <unk>.
Wood K, the operation and maintenance expanse and treat that as a finance. Please the same way O as of what the underlying fiber.
In the case of this one large inner city agreement, we were able to Reno at at no charge. So.
New all of the underlying IR you was a unique assertion by US was unilaterally by us to take another five years and we have one more five year option at no cost available to us in the future.
But because we made a decision to do that we know our incurring five years.
Operation and maintenance expense on that that five years ended up.
Creating a.
Capital leash or financially.
<unk>.
And of about $34 million and a.
Duction of about $1.2 million and.
That we're in the corner I'm going to law, Sean take a little more on kind of a few try R U.
More color on the account, let's just let's go through the numbers for the quarter.
R O&M and co location cash expense of one $2 million moved from the Cogs line down below the line is it became sort of an interest expense versus an operating expenses going forward, we will benefit one $8 million per quarter going forward that $34 million, which you talk about that as the net present value.
Of those payments on a monthly basis O&M.
$600000 to the next five years discounted around 5%.
We have a portfolio of thousands of circuits that we have put together over the last 20 years as we built this network we will consistently have.
A portfolio of them come out we don't believe we have any particular part of our network that is coming due at any particular time, we have hundreds well over 250, dark fiber and circuit providers that we can turn too. So this is just part of a normal b a U and we expect that we will we not only renewed.
Five year, but will renew this one of them at the end of the five years coming up as well and again. This was a sorry. If this was a non-cash there was no change we didn't have to pay anything up it's just a simple little bit of that from the costs of goods sold line to the logo.
And as Sean said, those 256 providers have over 2500 unique agreements with cogent all with different terms.
We have commented that are average remaining life of these agreements is about 17 years.
As particular agreements mature. They are then subject to this new accounting treat and that is different than it was previously where as.
Gap required us to treat to Capitol leashes only for the fiber in the maintenance as an expense now it's all treated as a finance.
[noise] now to your question about <unk> services is sales efficacy and building occupancy.
To our kind of three different questions there.
Let's start with Vps.
And the intermediate charm companies will need less office to office connectivity as many branch offices are completely fake.
They will still need some DPM connectivity from headquarters offices to data centers.
There is a large base of vpns that are deployed over.
M P. L S. As those mpls contract mature customers are going to migrate to these lower cost more modern more flexible technologies of S. D Y and <unk> Pls, So we will be a beneficiary, but it's something that's not.
On top of mind to customers at this point what is important to corporate customers is making sure that where their work from home VPN to aggregate that port is large enough to support all of those concurrent work from home users.
And that's why we're selling so many more one gigabit connection.
Now for our sales force, we had a plan to grow our sales force, 7% to 10%. This year. We're on track to do that we're actually right at the high end of that range. We're doing a very good job of pivoting on her.
Hiring salespeople and training those people remotely.
We had already developed a very full set of online training tools that people were using in the office <unk> quickly pivot those two training from home.
I will admit that one of the areas we need to improve on is actually remote fire Rey.
Our sales force turnover rate decline from an average of five 6%.
Two 3.5% part of its the younger Salesforce part of it is.
Difficulty, making that decision without having a face to face conversation with the party that is underperforming.
Now we're working on that but we think that we will both grow the size of the Salesforce and we will be able to compensate for the lack of fee pn sales by having more salespeople and better productivity out of those individuals and then.
Final point about will people ever returned to their offices I know that a vigorous debate and the public forum well our economy permanently shift to work from home or will we go back into offices.
I believe for the next year or to the office was different.
There will be a slow return offices.
But I do not believe that large buildings in the center city are going to go dark and people will never returned to them now how quickly that happens is really dependent on how quickly people feel safe and getting back to those offices.
Hold on let me just add one thing we don't have perfect visibility as to what's going to happen without what we do know.
Tracking very closely is are bad that expense. Our church are days sales outstanding of our cash collections, which were all within historical norms and in fact <unk> was a record month for cash collection. So.
In spite of all the uncertainty, it's very clear that our customers view their location, they're still going to be there and maybe just some most importantly for us is that having internet connectivity is a very important part of their doing business.
Great. Thank you very much and thanks for this.
Our next question comes from Michael Rollins City.
Hi, good morning, and thanks for taking the questions.
Curious if you could unpack a bit more in the corporate market.
How you're seeing the opportunity to upgrade to those higher one gig speeds penetration.
Incremental revenues, you're able to get from those customers and how you see that evolving as you look forward based on the sales data that you have.
And then secondly.
Just taking a step back to the capital allocation discussion.
Can you frame needed a little bit more.
Just how the board is thinking about the cash position on the balance sheet today and.
I recognize that.
The board.
Macy's decisions, but if you keep sure any maybe.
Observations or insights that drove the boards decision this quarter on the dividend. Thanks.
Yeah, Let me start with the one gig trend for on net locations for the past three quarters. We have seen more gigabit sales then fast Ethernet in fact that trend accelerated materially and.
Mid March and continues where today.
Charged a.
Significant majority of new sales approximately 85% of sales are on gig interfaces.
Secondly, we've been able to go back to the existing base and for those locations that are their main location, where they're work from home employees are tunneling into there's been a great deal of receptivity to increasing those location.
Sigh support from 100, Meg to gig and that's the reason why are <unk> have actually gone pop.
Now for the branch offices, which tend to be a mix of on net and off that there has been much less interest and either buying new locations, who are upgrading those locations. So we've not.
Seen a pet cop.
Sizes off Nat.
And in fact, <unk> seen are off net revenues to con 40% of our corporate revenues are off net 20% of our corporate connections are off net.
And those branch office locations are a result of us delivering superior service at the on that location and then the customer walking for that similar service in those locations, they're just not as interested that in this environment.
With that said there are some customers, who do have more expensive mpls networks to those remote locations.
And even though those locations may temporarily not be using a lot of bandwidth as those contracts for sure. We are able to sell some of those connections.
I'm going to switch out to your capital allocation question and.
I would say debate at our last board meeting in this board meeting was probably more vigorous then it's been in past in large part because of the macro uncertainty not because of anything related to cogent, but related.
To the world around US Board members are humans too they have friends setup soffer, there quarantining are shelter in place, they're not able to get out and travel in fact, our last two board meetings have been completely telephonic.
So.
They look at a world in which there is a great deal of economic on certainty that says hold on the cash be more conservative and maybe have more cash on your balance sheet, then you would and other times.
They also looked at the unprecedented central bank actions and said, we as a company should take advantage of that that's why we went ahead and called or 189 $2 million of unsecured U S. Emanated note and replace them.
With a large or $215 million euro issuance at a lower interest rate effectively saving about 130 basis points and our cost of capital that's a real cash cost with no real immediate use for that cash, but it did seem.
To make sense to bulk up.
And then with regard to the dividend session.
It is probably the most important.
Debate at every board meeting.
Board takes at capital allocation strategy as as primary objective.
And I think they have looked at the growth rate and free cash flow and the erythematous declined and the growth right at the dividend and felt that.
Increasing the dividend growth rate Ethernet light up all this on certainty made some sense on Sean if you want to add any color.
I just think it's.
From a relatively new member of the management team.
One of the things that cogent has.
And you heard in days remarks is that there was a real strong discipline of evaluating where you're going to put the money either into the business or back to shareholders and there was great discipline around that and that allocation with a capital.
The conclusion came based on.
Particularly the strong EBITDA growth and the last quarter made it a pretty.
Although difficult decision the right decision increase the dividend.
Thanks very much.
Thanks, Mike.
Our next question concerns.
Frank Lucerne of Raymond James.
Great. Thank you so I wanted to unpack a little bit can you give us a little bit of a idea of sort of the the amount of new sales that come from vpns, and so forth and have you and to what extent of you had the corporate customers.
Downgrade service and so forth and then lastly, you're talking about the sales cycle elongated thing when do you think that sort of normalizes out do we see another couple of quarters of weakness on the sales side before that starts to catch up or or how long do you think it'll be before we see that sort of that sort of get any baseline.
Alright, so I'm going to take the Middle question first we have seen very few downgrade, so I'm not going to say we've seen non.
There's always some church and in fact are churn numbers declined sequentially and year over year.
Customers are taking larger connections. So it's not like we're losing connections or of losing customers did we grew some corporate costumers sure. We serve multi tenant office buildings basically skyscrapers the average.
Building has 51 opportunities usually three or four of those opportunities are located on the first four of those buildings and they tend to be retail establishments that can be bank branches. They can be food establishments and some of those have.
Turned off service have worked definitely not selling to that market. If you just walk down any street in any major city you see very little retail activity now the good news is there's probably 40 office businesses sitting on top of those retail business as those 45.
So office businesses have thousands of employees at home that need to get to able to work from home and get into their corporate networks, we're seeing an uptick in gigabit sales.
All at all we think that our corporate on net business is very durable and we continue to sheet growth and demand.
Now with respect to vpns as a.
Roughly half of our corporate customers take both products.
We have seen a material T celebration and customers taking it in second pork for <unk>.
I can't tell you when they're going to reopen those branch offices I just don't have that visibility what I do have visibility too is how many conversations we're having with the roughly 75% of the businesses in those buildings that are not cogent customers.
The receptivity and the amount of time from initiation of discussions to water and we feel pretty comfortable that our corporate sales are going to continue to perform.
Primarily driven by <unk> and over time, the VPN product will actually accelerate simply be costly alternative if you need a private network.
So unpalatable MPL ashes Richard.
It's expensive.
And it provides.
Virtually no monitoring capabilities, all of which are surfaces deliver a significant benefit too and then in terms of one will sales cycles returned to normal.
That's hard to say.
Buyers are humans, they have psyche and they see the news when you have a thousand people a day dying people are nervous yes, I would just give you some anecdotal.
Stories about what the Salesforce is telling us.
I think the question.
Fundamental change in.
And that are value proposition and I think the answer is what we're hearing from the sales forces. They are spending time at the <unk> people, it's taking longer but we are winning the the the decision making folks were looking at technology and the service where delivery, where we are having challenges on getting the decision made when it goes up to the CFO and Lara.
<unk> and they're just deciding that they want to slow down the cost increase in in their business and this is just one of the things that they're deleted off the list. So we remain a very very important.
Business with fast speeds.
Superior reliability fast installation, but we're in an environment, where people are having an abundance of caution.
Okay, great. Thank you very much.
Our next question is from Nick.
Oh of Moffett Nathan Watson.
Hi, Thanks for taking my questions.
The first did the voluntary reduction some of the big OTT and content players introduced in Europe have much of an effect on your traffic or revenue growth in Q too.
And we will Q3 be affected.
The other way as those dark to roll off.
So it was impactful all of the companies that had agreed to those voluntary reductions are cogent customers and most of the European access networks are also cogent customers.
So with a lower.
Per second rate as a result of lower.
Frame count.
We did say a slower growth rate and traffic from some of those European customers on both sides.
Little hard to tell what the reversal of that is going to look like in Q3.
Quite honestly.
Don't ask our customers on a regular basis, what they're going in terms of their resolution quality I think most of them are still adhering to those strategies.
But I think the T trend is we saw a material shift and a very short period of time and cord cutting in court shaving ended displacement of linear video with over the top we're not going back to question is.
How long will it take for the over the top players to return to a bit of an arms race, where resolution quality as well as quality of content is one of the tools I used when subscribers.
We haven't seen that return, yet, but we think that well.
Okay. That's helpful.
And maybe turning back to the dividend.
I'm sorry, a big picture do you think you can sustain a low team Daniel growth rate in the dividend over a multi year period.
And acceleration in revenue growth from current levels were.
Differently is the current dividend trajectory.
Kind of predicated on improving revenue growth, where do you think there's a cushion there that you could sustain that pays even if growth underperforms.
Look we think we continue to maintain a long term album three to five year basis that will have double digit growth and the top line that will have improvement of 100 basis points on the network based upon so that's J to get 200 basis points and EBITDA.
I think as we look out as we think about the numbers, we think about that even with a moderation in growth.
Think we have a lot of levers to pull in the business. We are scaling the network we think we're.
Have the ability to continue to improve the costs of goods.
Hold line.
Think we have opportunities on the SGA line to continue to improve the margin and you also if you look at Capex.
Over the past decade, it's moderators per cent of revenue continue continues to go down generically overtime. So we've we've looked at the numbers we've looked at our opportunities to invest a capital and we think the best use of that capitalist increase the dividend and we we will revisit this the next quarter based on.
Performance.
And I think it at the board did have a stress tests that in a variety of growth scenarios that are more pessimistic, then or long term outlook.
And worse than our historical averages.
Secondly, yes.
We looked at a world, where GDP was down 33% here over a year.
And cogent was up 5% year over year topline growth and is Shaun pointed out we had the operating leverage we also arithmetically have two big cushions, one thing before hundred $17 million cash which is far.
More than we need to operate business and then secondly, the rapid expansion.
Borrowing capacity due to the fact that we are under laugher, so even with more moderate growth.
We can do quite well and growing are returns of capital N. As hard shed repeatedly I go to the board and if I saw inorganic opportunities that I was convinced would produce better returns I'm going to ask for the allocation of capital to that.
And.
We have looked at literally hundreds of potential transactions.
And is Shawn sent to highest the best use just give the money to the shareholders.
Okay. Thank you guys.
Alright.
Our next question is from Walter Pie sick of light shed.
Thanks.
When you guys talk about corporate connections.
The customer subscriber connections I assume that if there's a guy that has the central office in a branch office.
The connection is the branch offices is that reduction don't have that description of what our corporate connection or customer means.
Yeah, So a customer Kim bye.
Two products from us they come by connection for Internet access our our connection for VPN.
If they're buying both same location, they're buying two connections gotcha, Okay I understood.
I understood. So you describe this is the connections that'd be pms.
So when we're looking at that subscriber the connection lost during the second quarter.
Is it entirely.
Remote locations or if you lost any core offices and did you see that as a risk and the second half of the year given the fact that the economy is getting crushed right now.
So I commented on we did lose some retail customers, we have very small retail exposure, but it's not that we have zero.
If you go to any of the building set were in.
You can go to our website and see what buildings ran you walk down the street you see if there's usually somebody's not retail Dave I just I just went back to my we work last week to pick up some monitors and there's no retail companies there and most of the people I'd moved out of the floor that we were on.
So it's not just a retail risk that'd be economy has in terms of people vacating our office space.
So we do soda reworks at.
Probably over 100, Okay I was using that as representative not to say, we work specifically, but just representative of the top of it's not just a retail cable modem type of risk, There's obviously corporation moving out of our offices.
And.
We have not seen an uptick in corporate churn.
We have not lost any significant corporate customer because they have went out of business and shuddered their main location.
Maine.
I can't predict whether people three years from now will be back in offices.
Three years Tomorrow and this time.
Near term. So for example on May 12th when you were speaking of markets Conference you said.
There's a lot of moving parts here, but I think corporate business will return to growth similar to historical averages in Q too, which I think in most people's minds.
Double digit growth rate, obviously, you came in far below that during the quarter that was halfway during the quarter did all of these remote office disconnections occur in the last 45 days of the quarter.
So Ah corporate forthright was about half of our historic average.
It was a combination of less VPN sales and historically average disconnect. We did not see an uptick in char or desk can ask.
And it's not why did you say on why did you say on may 12th them that you thought that you would return to growth similar to historical averages.
Well for a couple of reasons, one we had a historically average number of salespeople we looked at their sales bottles.
And if you go back to May 12th you saw most local governments.
Lifting they're shell term place waters, and an expectation that we would be.
A.
Much lower infection rate and many fewer.
Stage would effectively being the condition area.
I have no visibility to predicting the viruses transmission right and the infection rate I do believe that our corporate customers will continue to buy and a three quarters of the businesses in the buildings have we have on net that don't.
From Cogent R as likely to continue to buy from us in the future as they happen in the past.
Got it thank you.
Thanks, Paul.
Our next question is Brandon Misspell of Keybank capital market.
Great. Thanks for taking the question I have one question and one follow up Dave I was hoping you could talk about demand from somebody a larger media customers are you seeing these customers.
Continuing to have active discussions with them, where you've seen them really doing that beyond capabilities in terms of content distributions second for Sean can you help us understand what percentage of you all our user accounted for as a finance capital lease.
And how should we think about this changing the gross margins going forward and really does it warranty.
<unk> from you guys similar to you gain on an asset sales as these happen. So we can compare the model's apples to apples basis. Thanks.
Yeah. So let me I'll take the over the top piece of it.
We are saying and continue to see many new over the top applications being large.
Two virtually all of those applications are cogent customers, because we have more access networks connected to us and more locations and anyone in the world and we provide that connectivity at the lowest price point.
With that said most of the new applications do not have the technical acumen to build their own distribution networks for the scale that they are trying to achieve initially so many of them use C.
<unk> as they are intermediate distribution method.
<unk> are also cogent customers.
But as they build out their own infrastructure.
I will increasingly in so learners.
Meaning they will have their own CDN and they will become direct purchasers of bandwidth.
So we typically C as a.
Application matures, a greater percentage of their business comes directly to their trans are providers and through the intermediaries like AWS for hosting companies or CD yeah.
I'm going to let Sean now take the capital leash clash Thanks, Dave.
So.
For the quarter, our costs of goods sold went down by one $2 million as a result of reclassification and this went from being an operating leaf to finance sleep in a financially issues to be called are capitalized.
So it is is going if you will below the line and going forward that will reduce our cost of goods sold by $148 million a quarter. Those are cash payments for up O&M and co location services. If you try to to confirm this number but if you try to.
Look at the difference between R capital or finance leases as a percentage releases versus operating lease about 95% R capital or finance places of 5% of operating please for that answer your question.
Yeah, great. Thank you.
Hi, Thank France.
Our next question is from.
Leave RBC capital markets.
Hi, Thanks for taking the questions. So.
Switching to international he'd been adding markets over the last year. So can you just talk a bit more about your international expansion strategy and perhaps relatedly. There was an increasing capex. This quarter. Just wondering if that was the one time increase related to Johannesburg launch and shall we end the longhair bank basically expect.
Capex to return to it.
Much trajectory.
So first of all start with the downward Detractory you should expect.
Our capex as a percentage of for Avenue, and an absolute Charles to continue to decline.
Two we continued to evaluate markets around the world Most international markets that we are not and have one of two reasons, we're not there either a very hostile regulatory environment or a lack of accurate <unk>.
<unk>.
We do have additional markets R&R radar to expand and our country Count will go off traffic growth is substantially faster outside of the U S. Then inside of the U S.
Now.
In last quarter Q1, we actually had a significant uptick and a capital expenditure was a cash expenditure.
Dark fiber internationally.
Some of the Capex is now for equipment to light that fiber.
<unk>.
Expansion was not that material what was much more material was our terrestrial expansion in Latin America. So we have purchased and went long haul fiber in Brazil and we.
Are substantially expanding our Mexican network.
We did also expand into Bogota Columbia last quarter.
We continued will evaluate additional markets.
But many of the countries just don't have a.
Regulatory structure that welcomes a foreign ownership of an open internet and are kind of too.
Immutable criteria are one we're not going to go into jv's or partnerships, we need to be the complete owner at two we will not succumb to censorship or restrictions on the Internet. We are a major provider of internet connectivity in Turkey.
And and.
China actually, but we do that outside of China.
We have a significant presence in Hong Kong for example, we have been closely monitoring to changes and the security Hall in Hong Kong to date, it has not negatively impacted our ability to sell to Chinese customers.
But you know going forward, we will continue to evaluate other markets, where we can.
When customers.
Alright, and just for a quick follow up last quarter. You mentioned there are difficulties accessing corporate thanks for installation and just get an update on how that's been going during second quarter relative to first quarter and S to you and.
The orders are style staying in the pipeline and they're just getting pushed out based on timing.
Yeah, I can see building access your shoes have basically gone away.
Out of 2800, 54 buildings or maybe a half a dozen globally data center and delorme multi tenant buildings, where there are still challenges.
We've done a pretty good job of clearing out the backlog.
Our provisioning times are about what they were pre pandemic on that they are still elongated off net because we're dependent on that off net provider, but in general we've done a pretty good job.
Of getting things and install.
Great. Thanks, very much days thanks for.
Our next question is Phil Cusick of J P. Morgan.
Hi, Thanks for taking so much ton.
I wanted to follow up first on Sean's comments on Dsos is that 22 days sustainable or could that'd be improved.
As fewer people pay by check.
It it may improve it proved somewhat by paying by check but at the end of the day I think we're trying to be our target is is actually around 25. So we're actually global or target I think the reason why we repeated I'd want to show that is this is the best.
Statistics.
Sure. Okay sells outstanding are the best thing to tell you about the reliability and strength of our customer base and it all is within a historical norms and we're pleased with where we are right now.
Yep, Yeah, it sounds like.
Everybody's for most of our current.
And then Dave thinking about that <unk> renewal as we see fiber construction from a number of telcos in a big effort from Horizon I'm curious what you see in the pace of buildings being lit up by other carriers, either the first connection or maybe second or third.
With that could mean for your own pace of on net buildings and maybe cost reduction on leashes from here.
So there's two parts to the answer that question fill first of all 415 or we can.
Tenure to buy from more diverse sources.
We ended the quarter at 256 different suppliers.
We keep identifying new constructors and markets around the world that we have never done business, what we do buy some dark fiber from incumbents generally not all off most of it is from alternate providers, whether it be small.
Sell constructors or just competitive carriers, and we think that will continue.
The second thing is that for our 90 different off net vendors in North America, we have seen a significant uptick in the number of buildings that they have built fiber into that number is over 2 million.
Buildings that we can buy fiber.
Bye, let services that they have built in that are delivered on fiber.
Third point is maybe the most significant we have contractual commitments from multiple.
<unk> to build into near Nap buildings that they pray identified if we secure in order.
So we have nearly another 2 million buildings that had been identified with our 90 different suppliers as near net they aren't guaranteeing to build in at a French fries at pricing identical on a monthly recurring basis.
That to their on net buildings and they're guaranteed to do that within 120 days that is.
Longer than are typical.
Off at guarantee of 90 days from our vendors, but it does show that there is a huge posh by both cable companies and telcos to expand their footprint, which gives us a big are off that footprint both on our on that footprint.
Continue to find new suppliers and can get into virtually every building we want to go laughter and to sean's comment about tapping at all.
Allocation.
We have capital we can build in the thousands more buildings, if we choose but we have concluded that they don't generate a good enough for return so for that reason, we're comfortable and using these off Ness solutions and those more more internal buildings and the fact that nearly double.
Hold the addressable Barquette really shows one how many.
Buildings, there are still to serve two how aggressive providers are of wanting a bill.
And I think third number when I'm not trying to speak ill off my suppliers, how they're deploying capital at range of return better suboptimal.
More than happy to buy services from someone who deploys capital at a rate of return below their cost.
Our board would fire may if I did that.
Sure I would just add to the point, we added two multi tenet buildings this quarter and I've I've spent time with the real estate team, we have a pretty sophisticated algorithm and it looks at number of customers that are available the distance of that building and really because it looks at the Roy it's very disciplined on how we're going to do it or not.
Benefit as if we have fewer empty obese, that's going to bring our capex numbers down over time, but we still have a lot of penetration to go with our existing portfolio.
Of the.
800 buildings, we have on that and for Netcentric, We continue to see data center proliferation and.
Added nearly 30.
Neutral Datacenters last quarter and it looks like we'll add a similar number this which are less expensive to get into because.
Designed to bring in multiple carrier, so, they're they're easier faster cheaper to get into that they usually have conduit already out to a manhole yes.
Do you see any changes to the positive just to take the other side's once I can do you see any changes to positive in the return on capital on some of those those construction efforts either in terms of of more potential tenants or what tenants are willing to pay for those companies that are deploying capital for fiber.
Let me put it this way.
Past is prologue and this is an industry that has destroyed capital for 20 plus years, there's actually a high level of competition.
Driven by.
The pandemic.
<unk> since to capital and new applications, such as pure broadband businesses and backhaul businesses.
With heightened competition and low cost a capital I think returns on capital in telecom or decline.
And they were all rubbish negative.
Thanks.
No that was not people wanted to hear I mean.
And it's not surprising them from historical perspective.
20 years ago, we a lot of investment was on competitive Felix which we're going after.
Customers small medium sized customer selling voice of data services. It's now construction bins, where we see dozens and dozens of fiber optic operators building fiber round cities and we have a large sophisticated salesforce, we have our own tenants in our own buildings and those.
Hopefully 4 million buildings, we're going to have only increases the number of locations. We can service and gives us into the ability to go not just a small medium sized because the larger customers, who got more locations, it's a big opportunity for us.
Thank you.
And we have no further questions at this time I would know like to turn the call back to Mister days Schaefer.
I just want to thank everyone hope everyone stays well in these challenging times and again, thanks for your questions and support take care of them will talk.
Bye bye.
Ladies and gentlemen, this concludes today's conference call. Thank you for participating in you may know disconnect.
[noise].