Q4 2020 Cogent Communications Holdings Inc Earnings Call
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Good morning, and welcome to the Cogent Communications Holdings fourth quarter, 'twenty, 'twenty and full year 'twenty 'twenty earnings earnings Conference call.
As a reminder of this conference call is being recorded and it will be available for replay at Www Dot Cogent C. O dot com a transcript of this conference call will be posted only St website, when it becomes available cogent summary of financial and operational results attached.
The press release can be downloaded from the Cogent website I would now like to turn the call of Ritchie, Mr. Dave Shaper cheaper Chairman and Chief Executive Officer of Cogent Communications Holdings.
Oh, Thank you in the morning, Catherine one welcome to our fourth quarter 2020, and full year of 2020 earnings Conference call I'm, Dave Shaffer of Cogent CEO and with me on this morning's call the Sean Walsh, our Chief Financial Officer.
We continue to believe in all term strength of our business the growing importance and breadth of our network and the increasing profitability of operations. We remain confident in the importance of our products and services for our client base, which continues to utilize cogent for Internet service.
As for mission critical products for their operations fundamentally the interconnectivity and volume of traffic among businesses service providers carriers data centers continues to grow at an extremely high rate and we are an important part of the infrastructure at the.
It tastes that growth, we believe that our investment in expanding our network to the international markets combined with our leadership in connectivity. The carrier neutral data centers continues to position coach Inc. Uniquely for the globalization of the Internet.
As discussed in previous earnings calls our churn levels for me within historical averages.
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Spirit is just a modest decline in both our on net and off net customer churn during the fourth quarter, which is encouraging considering the environment in which we are operating despite the improvement we continue to see new and existing corporate customers take a corp.
A cautious approach to new configurations.
Also continuing a reduction of demand for services to some of their smaller satellite offices.
We see these challenge for says the uncertainties related to incremental sales is a direct for salt of the COVID-19 pandemic. Despite.
Despite the pandemic related challenges our fourth quarter revenues grew sequentially by 1.1% two of 143.9 millions of dollars and increased two 6% on a year over year basis, our full year 'twenty 'twenty.
Revenue increased by 4% to $568 $1 million from full year 2019 on a constant currency basis, we experienced quarterly revenue increased sequentially of 0.7% achieved a year over year.
The quarterly revenue growth rate of 1.2 per cent.
We continue to operate and extremely efficient at work for serves a growing number of markets of buildings and is able to handle a continuous growth in traffic at a fixed cost basis.
We experienced year over year and sequential growth there on gross profit gross profit margin EBITDA and EBITDA margin.
Most profit group of one 4% sequentially.
And grew by five 6% year over year.
Our gross profit grew by 7% from full year 2019 to full year 'twenty 'twenty.
Our crews for us from percentage improved by 20 basis points sequentially to $62 one per cent and grew by 180 basis points on a full year over year basis.
Our gross borsch of percentage improved by 170 basis points on a year over year excuse me and 180 on a quarterly basis.
Our EBITDA quarterly margin increased by 110 basis points from the fourth quarter of 2019.
238.7%. This is also an increase of 30 basis points sequentially and an increase of 150 basis points for full year 2019.
Our quarterly EBITDA grew by 2% sequentially and grew by five six per cent year over year or.
Our full year 2020, EBITDA was $214 million, an increase of eight 1% from full year 2019.
The performance of our existing customer base continued to be strong. Despite the impact of COVID-19 customer churn bad debt. The days of sales outstanding on our of cash collections on all perform within historical norms in the quarter.
And as I noted earlier, our churn slightly declined from the third quarter and Additionally, our bad debt improve we believe the statistics indicate the strong credit quality of our customer base.
On the fundamental importance of coach and services to their organizations.
We continue to see positive trends in network traffic.
We believe that the growth of network traffic is being driven by a variety of factors, including the continued internationalization of the internet of.
Which we are and the outstanding beneficiary, we continue to see success and distributing streaming products consumers are purchasing a greater number of streaming subscriptions than was previously expected and this is driving a quota share.
The increase in demand for bandwidth from streaming operators.
This growth in demand for streaming subscriptions, it's also requiring our access not where our customers to increase their capacity purchases from cogent in order to meet the needs of their end users.
Operators and publishers, all seem to be enhancing capacity to improve the speed and quality of their services and differentiate their products. All of these factors require more bandwidth for the fourth quarter our traffic was.
<unk> up 14% on a sequential basis.
And on a year over year basis in the fourth quarter, our traffic was up 41 per cent.
For full year, 'twenty 'twenty versus 2019, our traffic increased by 39%.
The annual rate for <unk>.
The rate of traffic increase increased from 35% in 2019, which of the 39% in 2020 and this increasing volume of traffic on our network actually exceeded the total amount of traffic the care coach on carry only.
Five short years ago and 2015.
During the quarter, we returned 34 point for millions of dollars to our shareholders through our regular quarterly dividend and.
Our dividends for the full year were $129 $4 million during the quarter. We also purchased for point to millions of dollars of common stock as of the end of January 'twenty 'twenty. One we have a total of 30.
30 point for millions of dollars still available and our stock buyback program, which is authorized to continue through the end of December 2021.
For full year 2020, we purchased for $5 million of common stock for approximately 79000 shares of stock.
Our cash held at Cogent holdings was $94 million at quarter at this cash is unrestricted and available to be used for dividends and or stock buybacks.
Cash held at our operating companies was $277.3 million and our total cash on a consolidated basis is $371.3 million at the end of the quarter on.
Gross leverage ratio increased from.
5.1 of <unk> to 5.1 for last quarter, and our net leverage increased to three point for Oh from three point to for our consolidated leverage ratio as calculated under our debt indentures was 5.06 at quarters on.
The leverage ratio increase is primarily as a result of the $18 9 million dollar increase in the cost of our European denominated debt.
Due to the U S dollar to Euro translation.
This was more than offset by our increasing consolidated cash flow.
Our board of directors.
Which reflects on our business the strong cash flow of generating capabilities and investment opportunities has again decided to increase of our quarterly dividend by another two and a half cents per share sequentially racing our dividend from 73 cents per share.
In the third quarter to 75 five cents for the fourth quarter. This increase represents the 34th consecutive sequential quarter.
We have increased our regularly quarter dividend the dividend is growing at a compounded growth rate of 14.4% now of like Sean to spend a moment of screenings for safe Harbor language, and giving a little more color on the impact of the pandemic.
Thank you, Dave and good morning, everyone.
This earnings conference call includes forward looking statements. These forward looking statements are based upon 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.
The fifth differ differ materially.
Please refer to our SEC filings for more information on the factors that could cause actual results to differ.
<unk> 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 measurements in our earnings release, which is posted on our website at Ww Dot Cogent co dot com.
An update on COVID-19.
Like many other companies cogent continues to be impacted by the COVID-19, pandemic and the accompanying responses by governments around the world virtually our entire workforce continues to work remotely I wont affect the entire cogent workforce and in particular, our I T Department for their continued hard work.
During these very challenging times I also want to thank our field engineers contractors billing and collection staff and other cogent employees, who continue to work on the front lines, installing our new customers and maintaining and upgrading our network. So that we can continue to serve our customers.
The ultimate impact of the pandemic on Cogent is unknown and 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. While most cogent employees are working remotely we are.
No assurance that this will be sufficient to protect our workforce and our key employees. Moreover, our results 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 flight of difficult to collect from customers, who are experiencing financial distress encountered difficulties accessing the buildings and locations, where we installed new customers and serve existing customers or have difficulty procuring shipping or installing equipment on our network.
We may also find that our corporate customers, our largest customer base, which has served primarily in our on net multi tenant office buildings may be adversely affected by falling demand for commercial office space in central business districts companies located in these buildings may elect not to return to their office space either on a temporary.
Or even on a permanent basis.
We have also seen customer additions of a satellite office locations decline as customers either disconnects certain offices or elect not to purchase direct internet access or virtual private network connections for smaller offices the global.
Economic impact of the COVID-19, pandemic may have prolonged effects that impact our business well into the future.
These and other risks are described in more detail on our annual report on form 10-K for 2020 that will be filed shortly after this call and on our quarterly reports on form 10-Q for the quarters ended September 32020 June 32020, and March 31 2020.
Throughout this discussion we will highlight several operational statistics I will review in greater detail certain operational highlights and trends. Following our remarks, we'll open up for Q&A now I'd like to turn it over back to Dave Hey, Thanks, Sean hopefully you've had a chance to review our earnings press release.
The press release includes a number of historical metrics, which for you.
The reported consistently.
Our targeted long term EBITDA annual margin expansion guidance is for an improvement of approximately 200 basis points per year.
Our targeted multiyear of constant currency long term revenue growth just for approximately 10% growth per year.
Our revenue and EBITDA guidance targets are intended to be multiyear goals and are on intent to be either quarterly or annual specific guy.
Our corporate business, which represents 65% of our revenues declined on a year over year of basis by three 1% from the fourth quarter of 2000 of 19.
And sequentially from the third quarter of 2020, it declined by 2.1%.
An increase in the USF tax rate at a $200000 positive impact on our quarterly sequential revenues and for full year 2020 full for 2019.
It had a negative impact of $200000 USF tax rates change quarterly and cannot be predicted and we are expecting additional volatility in those rates as the government.
Yours, it's broadband rural strategy.
Our netcentric business, which represents 35% of our revenues had a strong quarter with growth accelerating on a quarter over quarter basis to 7.7%.
It grew.
For the fourth quarter of 2020 versus the fourth quarter of 2019 by 15.3 per cent.
Until the day in foreign exchange rates impacts, our netcentric business on a constant currency basis.
Our.
Net centric business grew in the fourth quarter of 2020 over the fourth quarter of 2019 by 10.9%.
And it grew by 6.4% from the previous quarter and grew for the full year 2020 over 2019 by six 2%.
Sean will now give you some additional color on some of our operational statistics, thanks, Dave and again good morning to everybody.
Let's talk about how we.
Analyze our revenues corporate and Netcentric revenue and customer connections, we analyze our revenue is based upon the network type three types of on net off net of non core and we also analyze our revenues based upon customer type, we classify all of our customers into two types netcentric customers and corporate customers.
Our corporate customers buy bandwidth from us in large multi tenant office buildings or in carrier neutral data centers. These customers are typically professional service firms financial service firms and educational institutions located in multi tenant office buildings or connecting to our network through our C. N D C footprint, our netcentric customers buy.
<unk> amounts of bandwidth from us in carrier neutral data centers and include the streaming companies and content distribution service providers as well as access networks, who serve the.
Consumers of content.
Revenue and customer connections by customer type.
Revenue from our corporate customers for the quarter fell sequentially by two 1% to $93 $7 million and fell year over year by three 1% revenue from our corporate customers was $383 4 million for full year 2020, an increase of two 6%.
Over full year 212, 2019, we believe that the growth rate of our corporate revenues was directly impacted by reduced building occupancy and central business districts of major cities as a result of the COVID-19 pandemic, while we continue to have significant dialogue with our existing and potential customers.
Some customers are delaying the upgrade of services or purchases of new services due to the uncertainty regarding COVID-19, mostly in off net office buildings recently.
Recently corporate customers are reducing their aggregate number of locations and this has resulted in lower sales to satellite offices. The slowdown in sales come out with normal historical levels of churn has contributed to a modest reduction in corporate revenue for this period on a positive note most of this churn in our.
Corporate base is derived from our older 100, Megabits virtual private network and direct Internet access products and we continue to see very low levels of churn and stronger sales for our larger one gigabit per second product existing corporate customers continue to upgrade and new corporate <unk>.
Customers prefer the ability to increase their capacity by 10 times with only a modest pricing premium the.
USF rate, which only applies to corporate VPN connections increased corporate revenues by point of $2 million for the quarter, while the continuing trend of lower local loop pricing contributed to the reduction in our off net corporate revenue as we continue to bass pass on these savings to new off net.
Customers.
We had 47175 corporate customer connections on our network at year end, which was the decline of one 1% versus the third quarter and the decrease of two 7% from the fourth quarter of 2019.
As Dave mentioned earlier continued growth in international traffic and streaming services helped our netcentric business accelerated growth in our second quarter.
And indeed for the entire second half.
Quarterly revenue from our Netcentric customers increased sequentially by seven 7% to $52 million, an increase year over year by an impressive 15, 3% rare.
Revenue from our Netcentric customers was $184 7 million for the full year 2020, an increase of seven 1% over full year 2019, we.
We had 42425 netcentric customer connections on our network as the year and an increase of 11, 5% over the fourth quarter of 2019.
Our netcentric business benefited from continued strong demand for our larger 10 gigabits per second and even our 100 gigabit per second ports, our netcentric revenue growth experiences significantly more volatility than our corporate revenues due to the impact of foreign exchange larger customer size and certain seasonal factors.
Primarily weighted to usage, while traffic grew on our network by 14% sequentially and by 41% year over year, primarily result of increased Netcentric traffic. This increase in traffic did not create an equivalent increase in revenues as volume discounts and traffic mix, particularly related to some of our largest customers.
Partially offset this traffic growth.
Revenue and customer connections by network type of.
Our on net revenue was $107 1 million for the quarter, a sequential quarterly increase of one 9% and of year over year increase of four 3%. Our on net revenue was $419.5 million for full year 2020, an increase of five 7% for full year 2019.
Our on net customer connections increased by one 3% sequentially and increased by three 7% year over year. We ended the quarter with 77305 on net customer connections on our network.
For 2914 total on net multi tenant office and carrier neutral data center buildings.
Our off net revenue was $36 $7 million for the quarter, the sequential quarterly decrease of one 1% kind.
For the year over year decrease of two 2%.
Our off net revenue was $148 1 million for full year 2020, a decrease of 5% over full year 2019.
When we sell new off net circuits, we incorporate the cost of savings from the lower local loop prices into our pricing and the introduction of these customers into our base lowers our overall off net ARPA are on.
Net customers connections increased sequentially by 1% and increased by two 7% year over year.
We ended the year of serving 11970 off net customer connections and over 7270 off net buildings. The is off net buildings are primarily in North America pricing per megabit.
Consistent with the historical trends, our average price per megabit of both our installed customer base and new customer contracts decreased for the quarter. The average price per megabit for our installed base declined sequentially by eight 8% to 41.
And declined by 29, 4% for the fourth quarter of 2019.
The average price per megabit for new customer contracts for the fourth quarter was unchanged at 19 from the third quarter and declined by 31, 8% from the fourth quarter of 2019 as we continue to succeed in selling larger 10, Gigabits per second and 100 gigabit per section of connections to cut.
<unk> the change in our connection mix will have the effect of lowering our price per megabit of greater rate that our changes in price per connection.
<unk>.
Our on net <unk> increased and our off net <unk> decreased sequentially and decreased year over year.
The year over year and sequential increases in our on net <unk> reflects the growing importance and change in our mix of our larger bandwidth products for the corporate and Netcentric markets.
During 2020, our one gigabit product surpassed our fast Ethernet, which is 100 megabit product as our most popular product in terms of count and in terms of revenues and its continued growth is contributing to our higher on net ARPA.
Other product that is contributing to our higher on that Arb, who is our 100 gigabit the product, which is sold primarily to our netcentric customers the growth in units and the size of their perspective, <unk> is having a positive impact on our on net <unk>.
Our on net ARPA, which includes both corporate and Netcentric customers was $465 for the quarter, an increase of 1% from last quarter and an increase of <unk>, 8% from the fourth quarter of 2019.
Our off net <unk>, which is predominantly comprised of corporate customers was $1026 for the quarter a decrease of one 6% from last quarter and a decrease of four 8% for the fourth quarter of 2019, we expect that our off net <unk> will continue to decline as we take.
Advantage of volume and time based discounts in order to lower the cost of our local loops. These reductions in costs are passed on to our corporate customers and are making us more competitive in this market.
Turn rates.
Our sequential quarterly on net and off net connection churn rates both improved our on net unit churn rate was 1% for this quarter a decrease from one 1% last quarter. Our off net unit churn rate was one 4% for this quarter of decreased from one 5% last quarter.
Netcentric Mac orders.
In order to reduce our customer turnover, we employ a dedicated sales group, which works primarily to retain customers who have indicated that they are considering terminating their service with us we may offer pricing discounts for these customers order to induce them to purchase additional services in order to extend the term of their contract with us.
Due to the commodity nature of Netcentric customers services. The vast majority of our 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 2400 customer connections increasing their total revenue commitment to cogent by over $23 million.
Can you talk about EBITDA.
Our EBITDA is reconciled to our cash flow for operations in all of our quarterly earnings press releases seasonal factors that typically impact of our SG&A expenses include the resetting of payroll taxes and the other states at the beginning of each year annual cost of living or CPI increases seasonal vacation periods, the timing and level of our audit and tax.
Services, our annual sales meeting costs and our benefit plan annual cost increases our EBITDA improved sequentially by $1 $1 billion, primarily a result of a $2 million increase in our on net revenue.
Our quarterly EBITDA increased by 2% sequentially to $55 $7 million, our quarterly EBITDA increased year over year by $3 million or by five 6% our quarterly EBITDA margin increased by 30 basis points sequentially to 38, 7% increase over year over year.
<unk> 110 basis points, our full year 2020, EBITDA increased by eight 1% to $214 million, our full year EBITDA margin increased by 150 basis points to 37, 7%.
Earnings per share.
Our basic and diluted loss per share was <unk> 14 for the quarter compared to a loss per share of <unk> 11 last quarter. Our income per share was <unk> 16 cents for quarter for 2019.
Unrealized gains and losses on the translation of our 2020 for your nodes into U S. Dollars are the primary contributor to the variability in our net income and consequently, our income or loss per share in particular last quarter and this quarter is the euro continued to appreciate versus the U S. Dollar.
Foreign currency impact.
Our revenue earned outside the United States as reported in U S dollars and was approximately 24% of our total quarterly revenues of approximately 18% of our revenue this quarter for base in Europe, and about 6% of our revenues related to our Canadian Mexican Asian Pacific South American and African operations, we have not hedged are.
Foreign currency obligations, including our payments on our euro notes.
Continued volatility in foreign currency 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 positive $6 million in the year over year of foreign exchange impact on our reported quarterly revenue was a positive one.
$9 million.
Our quarterly revenue growth rate on a constant currency basis was <unk>, 7% sequentially and one 2% year over year. The foreign exchange impact on our reported annual revenue was a positive $1 $5 million and our annual revenue growth rate on a constant currency basis was three 7%.
The variability in foreign exchange rates, primarily impacts our netcentric revenues.
The average euro to U S day rate. So far this quarter is one to one and the average Canadian dollar exchange rate is <unk> 79 should these average foreign exchange rates remain at the current average levels for the remainder of our first quarter of 2021, we estimate that the FX conversion impact on our sequential quarterly revenues.
For our first quarter would be of positive <unk> 6 million in the year over year FX conversion impact on quarterly revenues would be of positive $2 7 million.
Customer concentration.
We believe that our revenues and customer base is not highly concentrated our top 25 customers represented less than five 5% of our revenues both this quarter and for the full year.
Capital expenditures, our quarterly capital expenditures increased by $2 6 million sequentially and increased by $6 million year over year.
Our capital expenditures were $15 9 million this quarter compared to $99 9 million for quarter, 419, and $13 3 million for third quarter 2020, our full year 2020 capital expenditures for $56 million, an increase of 19, 2% from 40 <unk> 47.
Of capital expenditures from last year.
This increase reflects our network expansion activities to support our growing addressable market.
We anticipate a reduction in our capital expenditures for fiscal 'twenty one.
Finance leases and finance lease payments are finance lease <unk> 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 of our finance lease <unk> fiber lease obligations totaled.
$219 one.
$1 million at <unk>.
12, 31 2020.
At year end, we had <unk> contracts with a total of 269 different dark fiber suppliers.
Due to a for $5 million increase in working capital.
Our quarterly cash flow from operations decreased by eight $5 million year over year, our cash flow from operations was 37 $6 million for the quarter compared to $46 $1 million for the fourth quarter of 2019 and $33 million for the third quarter of 2020.
And that ratios are total gross debt at par, including our finance lease IOU obligations was $1.1 billion at December 31, 2020, and our net debt was $729 $8 million are total gross debt to trailing last 12 months EBITDA as adjusted.
Ratio was five one for at December 31, 2020, and our net debt ratio with 340 are consolidated leverage ratio as calculated under our debt indenture agreements was 506 at December 31 2020.
Or 350 million Euro Euro notes Ah reported in the U S dollars and converted to U S dollars at each month and using the month and euro to use dollar exchange rate.
The unrealized foreign exchange unrealized loss on our Euro notes was 19 $19 $2 million this quarter or 42 per share compared to an unrealized loss of $17 $3 million last quarter and the unrealized loss of for $1 million for the fourth quarter of 2019.
Bad debt and day sales outstanding.
Our bad debt expense as a percentage of our revenues improved sequentially and improved year over year are bad debt expense was 0.5% of our revenues for the quarter of an improvement from 6% of our revenues for the third quarter of 2020 and 0.8% in the quarter for 2019 are bad debt X.
<unk> was 0.7 per cent of revenues full year 2020, an improvement for 8% of our revenues last year or day sales outstanding or DSO for worldwide accounts receivable was 24 days for the quarter of a slight increase of two days from last quarter on what to think and recognize our worldwide billing and collections T.
Members for continuing to do a fantastic job and serving our customers and collecting from our customers during very challenging times I will now turn the call back over to day.
Hey, Thanks, again, Sean I'd like to highlight a few of the strength of our network, our customer base and our sales force.
Cushions network operates and 47 countries globally.
As we enter dues are surfaces and new markets, we believe that the breath of our network the <unk>.
Size of our sales force and the competitive pricing that we offer are a catalyst for growing demand of band plants and these marquez for Ya.
Also believe that our continued success in Asia, South America and Africa in the Cage simply can profitably extend our network and on our business model two additional countries and even continents.
We have over 976 million square feet of multi tenant and an office space in North America on our network. We offer a 50 for cogent owned data centers was 606000 square feet or for.
Race for space, which is operating at approximately 33% capacity. Our network consists of over 37500 Metro fiber miles and Ofer 58200 inner city route miles of <unk>.
Fever as.
As I stated earlier, we saw on acceleration and revenue growth and our Netcentric business on the second half of 2020 and mid teens double dare true growth on a year over year basis for the fourth quarter 2020.
I would like to hide some of the important trends the statistics that we believe for flex the growing trying of our business as free to felt the.
Most interconnected highest capacity internet global backbone.
At year end 2020, we connected to more than 1200, 50 carrier neutral data centers more than any other carrier in the world as measured by independent third parties. This breath of cough ordination enables of our netcentric customers.
Competitor optimized share of network and reduce latency.
We expect that we will widen our lead in this market as we project that we will connect to an additional 100 carrier neutral datacenters per year over the next several years based on construction pipelines.
At year end 2020, we directly connected to over 70 330.
Networks, which represents a for 8% increase from the 6900 50 for connected networks per year earlier.
This collection of telephone companies cable companies Internet service providers and mobile operators provides us access to the majority of the world's broadband and mobile use our subscribers.
This large collection of end users uniquely concessions cogent as the go to network for new applications and content providers at year end 2020, where the sales force of 236 professional solely focused on our of Netcentric bar.
Okay.
We believe that this group of professionals is the largest and most sophisticated sales teams focusing on this industry segments. As we have demonstrated there is continued growth and demand for 10 gigabit end of 100 gigabit ports in this market segment.
And finally, I would like to highlight some important trends in our of Netcentric traffic growth.
In addition to our traffic growing between 30 on 40% per year over the past few years, our share of traffic that are rich in age and terminates on our network has increased over the past two years from justo for 50% of traffic to over 67 per.
Percent of traffic.
For this traffic trend, we trough too strong conclusions.
One in in the Cage, we have a very balance network.
And where services.
Share content from around the world with access networks. The represent the majority of the world's and used our subscribers secondly, the increasing amount of clients traffic that remains on our network materially.
<unk> the speed and reliability of our service. This also results in increasing profitability as we get compensated in these instances by both customers being paid by both sides for the same traffic.
We believe that our net.
Traffic growth as well as the increasing reach apart network of.
Rouse us to increase the profitability of cogent on.
On the corporate side to spite our customers caution related to COVID-19, we're seeing some attractive long term trends in our customer base.
This year for the first time or one gigabit of product surpassed on 100 megabit product for a number of connections and revenues on a full year basis.
Is working from home and.
Environments become more established as part of People's work schedules, we believe that our corporate customers will continue to work to upgrade their internet access to larger connections as employees remain outside of their main offices corporations will require high capacity.
The circus for both inside and outside employees cogent robust bi directional fully symmetric one gigabyte of product has.
Forgetting the advantage over most of our competitors and provides a key differentiation in symmetric traffic versus asymmetric downstream services that our competitor or software.
Now for a few comments around our sales force we experienced some improvements on our sales force productivity as a result of our continuing training effort and our acceleration and managing out underperforming sales reps.
As a result on our sequential basis, our sales force head count did declined slightly to 516 on reps and are full time equivalent reps declined to for 542 as year and.
Here for here. However, our sales force increased by 21 wraps for for percent and a full time equivalent sales reps grew by 48% on a year over year basis.
Our sales force turnover was 6.9% per month for the fourth quarter, an increase from the for 0.6% per month, we experienced in third quarter 2020, primarily as the result of arm more disciplined approach to managing out under per.
Formers for the year or monthly sales rep turnover average five per cent, which is directly and on with our on term historical average shows the.
These factors resulted in of rebound and our sales productivity to for <unk> to install the orders pro full time equivalent rap per month a for.
10% increase over the third quarter of 2020, where we experience three seven orders installed per full time equivalent of rap per month. Overall, we believe our sales force has accomplished for great deal of over the past few quarters.
This is included the adaptation to a new CRM systems, the transition to working from home and despite these challenges our sales team and on the fourth quarter had the best quarter of the year of.
One of the thank her entire sales force in our entire cogent support team all day of done and we look forward to improve performance in 2021.
Our customer churn bad debt and day sales outstanding we're all within historic norms are bad debt expense showed improvement on an annual and sequential basis on our customer churn improve.
We believe the statistics represent the strong credit quality of our customer base and the importance of coaches services to those customers.
Show on summary, Cogent is still low cost provider of the internet access and transfer the services that is unmatched in the industry.
Demonstrating the slow cost possession since 2016, we of lower our cost of goods sold per byte transmitted at a compound mid range of 22.5%.
Our business remains completely focus on the Internet IP connectivity and data center of co locations, all of which are a necessary utility to our customers to do the internet architecture, the reliability and cemetery of our services.
Laos dedicated Internet access services to be a mission critical of component for of corporate Hi, T departments, we remain optimistic about our unique position and serving small and medium sized businesses.
Located in the central business districts of of major North American Studies, we are in 17 of 192 multi tenant office buildings. Despite the recent drop in new Tennessee rates and the major cities, we were beginning to see land awards agree.
Rest of the league lower rents and our footprint short of lease terms and provide new tenants with improvements and additional inducements all designed to keep the occupancy rates of the class a buildings we serve.
Elevated as cough in fact scenes increase their as of growing likelihood that are tenants will begin to return true are multi 10 on office footprint, we believe that our corporate business cameras assume as long term historical average growth rates.
Are targeted multiyear constant currency revenue growth for the entire business is 10%.
Long term expectations are that EBITDA marsh is for expand at 200 basis, but once a year.
Our board of directors is approved or 34th consecutive sequential increase on a regular quarterly dividend of two and a half sense of share to 75 five cents. This 1% say 14 for percent compounded annual growth rate and are of.
Dividend.
Are consistent dividend increases demonstrate our continued optimism regarding the increasing cash flow production capabilities of our business, we believe that.
This will drive the management team to be highly disciplined around capital allocation top line growth and managing of operating expenses we.
We did purchase for $2 million of stock in the quarter.
As of the end of January we had $34 million for remaining NR of buyback program through 2021.
We hope everyone remains safe and healthy during these challenging times, we value of the safety of our team and hope they are all taking the necessary precautions as we begin to look forward to returning to the office are long term growth from profitability targets for Maine.
In tact and we are committing to increasing the amount of capital rubric turn on to our shareholders on a regular basis with that I would like to open the for for flesh.
At this time, if you would like to ask the question. Please press the scar than the number one of your time with them keypad again for the scars on the number one will pass for just a moment of compile the Q&A Ross Karen.
You are the first question comes from the line of Walter Paiseh with like the shed.
Hi, Thanks for <unk> comprehensive opening remarks.
I just wanted to go back to the same basically the same two questions I've been asking for the last couple of quarters, which is on.
On the corporate side when do you expect to return the growth. Obviously this is the first decline I think I'm on my model only goes back to 2009, I haven't seen of declining and.
Corporate revenue growth I think somewhere in those comments you said something about.
Being better and that's optimistic but at the end of the day. If you are declining incorporate that's obviously not.
Not good so can you give us a sense of when that can return of growth and then much more importantly, I mean, the last call we talked about for.
Three five times leverage.
At the top end of the range of that a few of the hit that leverage that you'd have to reconsider your capital return policy I don't I think on the call again somewhere in the afternoon I was quite the comments you mention of three four times leverage I think I can't get it is free too but in any event. It looks like it's heading towards three five fairly quickly. So can you give us some sense on.
On what that means for the dividend and why you're buying stock back if you're leverages hitting the top end of the range.
Yeah sure on wall. Thanks for both questions of first of all with regard to our core print business.
We actually did have corporate revenue declines in 2008, and early 2000 of nine on a corner of the basis and the great financial recession. Those declines last 10, a couple of quarters, and then quickly reverted back to growth and our corporate busy.
Has have range about 11.3% growth compound in for over a 16 year period organically.
We think we still have a large across the board market ahead of us.
We are only about 25% penetrated and our footprint.
The customers continuing to increase of five shutdown connections and need the type of surface. Thanks Cogent offers the pandemic impact has been pumped more should the air and wall art lasting on the corporate base than the grain financial risk.
Fashion of 2008, 2009, but we are seeing signs of improvement our sales force productivity is increasing.
We are saying the need for more of the one gig append harnesses. The downside has been that corporate customers, who have multiple locations are leaving the secondary inc. Locations pay 10%. This time that means they do.
Not in the dedicated Internet access for VPN surfaces for those locations you saw that in the absolute decline in the off net portion of our business.
But we are seeing increased activity from corporate customers as they expect to return to the office over the next six to nine months, we're getting encouraging news on vaccinated stations and many.
Companies are going through the planning processes to start to welcome those employees back to the office, we believe that our corporate business has cough, we have seen improvements throughout the corner in farnell and.
Customer of engagement activities with corporate customers and we think we will see a steady improvement as employees for tarn to the office, albeit probably in a slightly different manner than they were in the office pre pan.
As I commented on a call we are seeing landlords take very across of actions to make sure that they're beltings for Maine fall. They are all rang ranch day are increasing tenant inducements, we have not seen the faint consume range and our footprint materially.
Spike up now.
Now I'm sure of question on life Orange most of the day.
Increase in Latin Orange was any of resolve of the narrowing 19 million dollar non cash increase in the U S. Dollar reported value of our of 350 million Euro notes.
We are naturally hedged on that the cost about 24% of our revenues come from outside of the U S with 18% of them being in Europe.
We also anticipate that are tash interest expense will decline as we walk to refinance or 445 in U S. Dollar secure nones, which are currently.
At five and three as it is.
<unk>, we will be able to refinance those at a lower and crush frame, reducing cash interest expense finally to the Alcorn Kent coverage ratio of.
Not only did the F X translation of the urine notes impact that as we mentioned two calls the cow the change in accounting that had us capitalize the maintenance expense.
Increase on capital lease obligations also had an impact on average. This again was non cash was an accounting change.
And then finally as we've commented multiple times the board has a guidance range, but well of how you wait that range and of Chast appropriate way to remind in cash jurors are a natural leveraged honiton was two and a half times we were on.
None of that and when we breached at the board decided to rain increase that to a range of two and a half to three and a half times. While it is not a guarantee that we will I. Just spent once we hit friend of half if we have our heads fran of half times on the net things.
Is something the board will look at it is weighted against the relative cost of GAAP vs equity and that really of trust is the final part of your question why did we buy back stock.
Simple arithmetic the yield on our staff was substantially higher than our incremental cost of debt capital. So if we can rent capital of less expensive volume retire of permanent capital. It makes economic sense, we have taken a very balanced approach.
True returning capital too and pastures, returning nearly $900 million schwind fasteners over the past decade, and we are committed to growing that return on capital as we commented we've return nearly of $135 million that for the last year.
Okay, even if your adjusted for the $19 million your leverage still went up and it's on the trajectory to have three five so basically what you're saying it sounds like is that the board had of range, even if it hits the range. So just kind of subjectively keep approving dividend increases in share repurchases and the share repurchase.
As effectively accelerate your past to hitting that top end of the range, which obviously is not a top end on the range then.
So it will be measured each corner by the Bill Ward, which will work at a number of factors the cost of debt capital of the availability of that capital as well as the growth rate in the business and the growth frame in EBITDA.
And the capital of intensity of the business.
If the board is comfortable that the growth in free cash flow of the business is sufficient to allow us to return the.
Capital at an increasing amount to share holders they will most likely make those adjustments, but there is no commitment we're going to walk on all of those factors each corner.
I understood day can you just also go by just one follow up on the on your first response in terms of uhm, claiming that the gorge, saying that the corporate business of trough.
Does that mean that we return to sequential growth and then more importantly, the corporate as you recall with a steady two per cent sequential grower for years, that's what made the business so attractive.
So when can we really get back to that type of nice two per cent sequential growth and the corporate business is this of 2021 event is it of 22 event.
What's your outlook on that thank you I see improvement, but I also do not see improvement in the first quarter of 2021, 282% sequential ranked we will do pattern than we did in fourth quarter.
We do not give specific quarterly or annual guidance, but we are seeing an improvement and ultimately the growth in that business is highly dependent on the return to the central business district of employees.
Peers that with nearly $1.7 million vaccinations being done daily that.
Companies are beginning the process of planning for employees to be back in the office late summer early fall I think until we reached that level of of normality the corporate business, while improving will not return to that 2% growth rate.
Great. Thank you great. Thank you very much.
Your next question comes from the line of Frank loaded with Raymond James.
Great. Thank you can you can you quantify the the impact to EBITDA with the with the sales force growth and then you mentioned.
Lower churn on the on the one gig product what percentage of of your corporate customers are on that product versus your legacy products. Thanks.
So.
Today over half of our corporate customers are on the one gig product versus the 100 Meg of bent.
And then secondly, what we have seen are most of the churn being from two product segments.
Meg of bit Gia and hundreds of Magnum P. P.
VPN solution of the products that of had the most significant churn and when we look at the locations where that term is occurring it really falls into two categories. One secondary offices of Marshall.
Oregon is haitians that remain on occupied secondly, if it is heard of that a primary location the size of those tenants the substantially smaller than on average customer so it's smaller customers and secondary globe.
Patients that are accounting for the churn and what is churning on at the smaller products.
Now with regard to the EBITDA portion of the question and sales force there.
We have seen a consistent improvement in EBITDA, we were off of 150 basis points year over year are of.
Full time, Equivalently sales force growth year over year was 8%.
And on a growth patients was for per cent, meaning we were managing out some underperformers more quickly but are EBITDA margin improvement is coming primarily from the operating line for.
<unk> of the business as Sean mentioned revenues were up to the alien EBITDA 1.1 million kind of back in the ambulance showing of 55% contribution margin, it's actually even a little better than that as we've been averaging over the past couple of years EBITDA Con for.
Buescher margins of about 62%.
Now as we have guide to this multiyear 10% top line growth and 200 basis points of March and expansion.
We were able to achieve of 150 basis points of EBITDA of March and expansion on a growth rate that was slightly less than half of foreign park at a growth rate of for percent now some of that was benefited by the fact that are on net sales.
Improve relative to our off net the mix of net sentra first of corporate actually helps in that arena, the cost and our netcentric business over 90% of sales for on that whereas in corporate only 60% of sales for on that so there is some.
Mix benefit here that is allowing us to do better in the short term, but we do expect over time are mix of corporate in that song track on that on off net to be within horse for Ike ranges and the allow us to deliver that 200 basis points even.
With an 8% growth in the sales force.
So you don't see any near term uptick in costs before those sales people will become more productive.
And you don't see any material degradation to the off net revenue as we kind of go through these trends or is there a is there of.
But.
Bottom of revenue or percentage of off net revenue. The think that this is going to hit of these trends kind of continue with the smaller offices with the choose the close them et cetera.
So first of all for our sales force efficacy.
Tenure is the greatest indicator of how efficient the sales force is our sales force efficiency improve 14% sequentially from 3742 are average sales force tenure increase for over 29 months.
Now, we did increase turnover, but most of that turnover.
The newer wraps that actually had never set foot in a cogent office and we're being trained remotely we of put systems and tools in place to quickly detect those underperforming reps and mannish on the out of the business more quickly while we help every sales rep.
<unk> succeeds, we understand how difficult it is to work on a remote environment and be solely a telemarketer.
So I think there's a fair amount of improvement scale as the average of the sales force productivity today is below the long term have ratios remember for two was still below our historical out for.
For age of just around five.
Orders install program per month now tier off net question, that's really dependent on the locations are off net sales are tied to on net as companies think about the secondary offices will see a rebound and off net business over the long run.
Our unit growth and on and off net have been highly correlated almost identical now we do see Steve for our Pooh declines off net the costs of lower costs.
But.
That trend will continue but I do think total corporate business should end up improving.
Alright, great. Thank you.
Your next question comes from the line of Jeans, Breen with William Blurry.
Thanks for taking the question just a couple of.
On you gave statistic about customer concentration, which is good doesn't seem like you have any extremely large customers given some of the contracts that you <unk>.
Renegotiated of extended in the fourth quarter.
As you look through 21 should we see sort of of greater translation between traffic and revenue growth.
Given some of the projects in place and then just the second question day just wondering.
From a high level with California, looking the past the net neutrality rules and.
The Democrats back in charge of the FCC.
Any impact on the business there.
From where we were for you.
For years ago now.
Then neutrality sort of went by the wayside. Thanks.
Yeah, Let me take the contract one first off.
Our customer base is actually improving it's becoming more diversified we're seeing more screaming publishers, which helps us diversify our content base and we are seeing a greater percentage of of <unk>.
Traffic sang on nap, and calling to a greater number of access networks. Historically on the price per megabit has declined at about 23% year over year for pretty much on that historical trend line on.
And traffic has generally grown in the low thirty's, we're above that trend line today.
We were obviously very encouraged by the 15%.
Year over year fourth quarter of growth in Netcentric revenue. Some of the was helped by far in exchange the cost half of that business is outside of the U S.
But I think throughout the year, we expect to see this broader base of customers allow us to tribe better than the average netcentric revenue growth again of reminded fast for a while there is a lot of volatility on our Netcentric business. The 16 year average for.
Right has been nine per cent, we're above that for actually the first time in about seven years and that actually is a good segue to your second question around net neutrality. If you remember one of the major impediments to our Netcentric business.
Was an attempt by many last file access networks to impeach streaming applications to protect the linear video of products we.
Been a strong proponent of that of trial today, we actually had the opportunity to testify in front of of the California State Senate, we actually had a fairly like the app of David as part of the court ruling in California that came out to day.
Is ago.
A firm in California's right towards the force net neutrality and we.
We believe that the current administration will probably were first the attempt to the gate and.
<unk> that was implemented several years ago never successfully and as schumer's become more accustomed assuming video by of screaming I think it becomes harder and harder for the last file networks to either construe.
Traffic or even usage caps in place and we saw that recently, where one measure of provider in the northeast had attempted to implement usage caps and then under a consumer of pressure was force to reverse that possession.
We want our access network customers to make money, we do not want them to exploit the monopoly possession.
And in some way hurt and use our consumers we sell bandwidth the companies allow us to get to more of them 50 per cent of the world's access network customers over 3 million customers globally half of upstream cannot.
Activity the code.
And I guess, just one follow up on the balance sheet side in conjunction with walls question around leverage.
I think you said recently a couple of comments is that you believe sort of the the businesses truck.
For the revenue perspective through the four quarters of the first quarter.
So as as things marginally improve maybe over the next couple of quarters, and then a little bit more of the back half hopefully.
Is it likely or is it reasonable to assume that the sort of net leverage ratios, while they may kick up a little bit from here will pick up on the lower right.
Based on an improvement in the top line in EBITDA growth. Thanks.
I think that's right Jim and.
What we're doing is looking at our balance sheet and the cost of capital figuring out how we can optimize.
Two we understand the importance of the dividend and the growth and dividend.
And of something that I think is off to investors was the fact that oh for 63% of this dividend the street address from our term of capital in the airforce completely tax deferred for the investor.
We pulling out of all of the factors when we.
The Si to add the lab for age and increase the rate of growth in the dividend. We did that a couple of quarters ago, we're very comfortable with our rate of dividend to expansion going forward and things of that we will be within the leverage guidance for.
Range is that we are comfortable with.
Great. Thank you Hey, Thanks channel.
Your next question comes from the line of Mike sunk with the Bank of America.
Yeah, Hi, good morning day, and how are Ya, okay, great. Michael it's good to hear from you.
Yeah, you too Uhm, a couple of if I could so.
The first few of commercial real estate brokers firm lead ones now expect.
Back for about 85% occupancy post pandemic, so wondering how 'bout expects the corporate business with having of 15% fewer people in the opposite of at most.
Even after reopening the maybe the Netcentric piece of you could add some more detail around the regional trend you've seen as the region of opened up the been sharp back down for.
Resuming if the instructor and you're seeing better traffic trends you know more more homeschooling more of of the top of video.
Just to give us a sense of kind of it might trend during the year, if things open back up.
Yes, let me touch on on the real estate one first.
We shell or corporate connection on a fixed basis that means you pay the same thing whether you have one you share for 50 users in the office.
<unk> way as long as you're employee base for maintenance the same whether they are in the office or at home you need the bandwidth a course most of our corporate costs for merce use their firewall to concentrate those for boat work from home employee.
And the need for some metric band with is greater than it had been prepared databank.
Also I think as some businesses shrink there are footprint that could be a positive for cogent and that the size of the building is effects, but if the for play per average tenants shrinks, there will be more of tenants of the building and therefore more.
Across the bull market for coach and finally, I think the types of the buildings. So we have chosen tend to be the.
Susceptible to fake and say.
If you look at any of the major brokerage reports on I know you cover of that sector.
They predict much higher pay can see and the B and C buildings than in the buildings now friends for fall tenant concessions for inquiries.
Typically <unk> terms for short these for all bad for landlords and as the landlord I understand that but at the same time, it's better to the have the ability to keep your building fall then if you're in the suburban office Park, where they can say is going up for.
I would just out of a little bit more color on we spent a bunch of time with the commercial brokers is very clear the net absorption rates are down there mostly down in New York and San Francisco when you parse backaches in the Sun belt, it's pretty good. So it's a much lower rate it's much more concentrated in New York and San Francisco. The second pieces, we have seen the model.
We'll prove that of David points out the the landlords in class a buildings are aggressively reducing rental rates, increasing their tenant investments and reducing terms. They are already aggressively trying to figure out how to fill these buildings as we've been signaling and of those buildings hopefully get.
Filled up as we begin to see people returning that will be an opportunity for us.
And then let me touch on your Netcentric growth by region the.
Fitness trend that we have experienced or for the past couple of the year's the sudden acceleration and the internationalization of the Internet.
The rest of of the World has caught off to the U S. In terms of Internet usage. They are not there yet but they are growing rapidly. We are seeing an increase in demand from those international markets. That's why our footprint has expanded so aggressively.
With regard to the pandemic, particularly in Europe, and the first wave of of Gals, we saw a request by governments for degradation of streaming bit braids.
And this way of of Lockdowns, it's a bit different we haven't seen that type of intentional quality degradation secondly, the locked out of taken of different form and there are typically now not in the form of of off down for rather a extended curfew, which day.
Does mean that people are home earlier in the evening and as we commented on earlier post pandemic of.
We have seen pq's periods broad now quite a bit so pray pandemic seven to 10 PM was peak usage post Pan dammit.
We've seen that window go from three o'clock in the afternoon of all time to nearly midnight and that broadening of the base is part of what's contributing to the increase a bit volume growth.
Alright, you have to ask the different way gave me how do you anticipate.
Traffic being impacted in 2021 ask people returned to work maybe moving back the peak rate more of a more of a normal time zone and then his kid the move back into the school.
Streaming all of the other classroom activity, how do you expect that the impact with rapid growth in 21.
Yeah.
Of user of generated video is the minimum compared to of professional video. So on the big quality is R. R and the upstream capabilities of their broadband connections tend to be the eliminating factor.
Do you think that the.
The transition to over the top versus lightning here was accelerated by the pandemic, but we will not refer back I also think that many customers are now electing to two three of reason for concurrent streaming pack and chairs and.
I think the growth in traffic will continue access for a credit yes, I've had a little bit in March little color in March a lot of the record days, we solve for during the week day, which.
Elective Dave point about work from home environment and the whole change as we've been seeing in November December and January the record days for on the weekend, which reflect the people watching more television and it is clearly the number of streaming services Disney plus of somebody getting 95 million. Some suggests this is going to triple This is clearly profess.
Shall videos not people work from home is increasing the traffic on our network. So we're very encouraged by of being over the top growth not people work from home as much as driving the traffic on our network.
Yeah, that's great color of thank you, David Sean Hey, Thanks, Michael.
Your next question comes from the line of Nick <unk> with Moffett Nathan.
Hey, this is Michael <unk> on for Nick Thanks for taking my question could you give us some more detail regarding what you're seeing them on corporate customers from of speed upgrade perspective, you noted that you're one gig products. The past year of 100, Meg product of 2020 could you share with us the rate of which customers upgrading whether they're signing <unk>.
Contact the expenses when the upgrade and so on.
Yeah sure Michael So a couple of points of first of all the average new contract for corporate customers is three years.
It's helped substantially from say five years ago.
So they are taking longer term commitments.
Secondly, all of.
Our typical corporate cost for more.
Does not even use the 100 Meg connection to full peak utilization. However, they want to have that surge capacity of available to them and the typical of $200 a month premium for.
For that product over the 100 Meg is a day minimus of course, so there.
As an insurance policy.
What is hurdles on the corporate side has really been the.
Secondary locations, where our customers are either allowing circuits to turn off of the end of the charm for not wanting to buy new ones and not by CPN surfaces, We again view that as a transitory friend until employee.
Start to go back to those offices I think those secondary location purchases of remain anemic, but then as employees first go back to the primary office EBIT, maybe with Michael's comment at 85% those connections will be one.
Gigabit and then we'll start to see some of our terms of the secondary offices.
It'd have a little bit on colors for a little bit of of matrix. We hope we felt a VPN of the da service, we sell of fast Ethernet on a gigabit of if you look at the two by two matrix.
On the VPN as clearly as we flagged for quite a while and the salad offices of flat to down what's happening on the basis of the FTE customers, which used to be the majority of those connections and da have male fall and we are now close too.
As we mentioned more than more than 50% of our da da connections are geeky. So <unk> is trailing off into the mix issue and give us growing and we're getting close to an inflection point, where the customer base is going to be smaller and smaller and the <unk> will continue to grow our existing customers of new cut.
<unk> love the idea of of getting 10 times the speed for a small premium price.
Got it thank you.
Your next question comes from the line of Brandon Miscount with Keybanc capital markets.
Thanks, guys since I've been on for Brandon.
How old are you guys doing it's computing as an opportunity for your business and are you guys seen any other new passive types of other than the video or any kind of new applications surrounding data.
You know I think the key trend for a company is to take more of more of their computing and move it off site.
The system migration to of cloud was of private or public.
Secondly, virtually all of the software and almost every for the call is now offer as a sales product versus a voices product, meaning uni connectivity to the software of rather than having of on premise and I think.
Those funds comfortable with the.
From home flexibility that the pandemic has generated are all causing corporate of.
Apartments to reevaluate their infrastructure and increase the amount of bandwidth that day.
Are looking to purchase these are all positives for us.
Thank you.
Okay.
Your next question comes from the line of Michael <unk> with the T L as capital.
Good morning, Uhm, Dave unsure on you and.
<unk> communications, probably one of the most accessible and open book management team zone.
Come across in in my career over 30 years in the business.
To understand to understand your business is not straightforward and would you be kind enough to just help us.
I understand the mix change.
And the mixture range I'm, referring to is the.
Dave.
Spelled out in terms of the next century volume being 90% of the salesman corporate being 60% on net that mix change what is the effect of the change on your cash flow.
Because clearly the market is not clear.
How and why the board of directors Uhm.
Uhm continues to.
The so uhm.
Uhm specific as it relates to growth on the dividends versus the leverage because of it appears to me the between the traffic growth on the mix change your care for you it should be quite strong.
But please explain it a little bit more if you count thanks, Yeah, absolutely Michael So thanks for the question of first of all when we sell to a corporate customer.
We will typically sell them the primary location and then they will buy secondary locations at.
<unk>, that's about double but the.
Gross margin on the on net sales is 100% the gross margin on the alternate sale is only 50% so much lower contribution.
As we have seen the secondary location sales.
K on off in fact the negative.
That has a positive effect on margins secondly, as we've seen the acceleration on our Netcentric business in the 1200 52 data centers around the world. The were connected to that is purely on net.
The only key scheme of we sell Netcentric off net is typically two of subsea landing station that we will not allow us access show with 90% of Netcentric being on net carrying of 100% gross margin.
That is additive to margin expansion. So it is the reason why even with our top line growth.
At about half of our long term average we still don't other in of 150 basis points of EBITDA margin of expansion.
I would just repeat one of the things that they've talked about in our in our.
Discussion earlier is that we're seeing two trends one traffic growth is accelerating of particularly do that on the second half, but also and this is of subtle point is that the amount of traffic that is remaining on network has gone from 50% to two thirds and that means that the content providers of the.
Streamers are meeting directly with the access networks, that's great for them because it provides for liability and lower late in the latency, but for us for basically getting paid for the for setting the same traffic twice in the in terms of your suggestion on profitability hopefully as we gain more and more of that netcentric traffic on the market.
And it remains of on that on both sides, we will increase of our profitability.
And I'll have to spend on as much money on the network.
Thank you both very much it's exactly what I was looking for thank you.
Your next question comes from the line of it still acoustic with J P. Morgan.
Hi day. This is a mirror for so could you go into the on the verses off net performance specifically within the corporate segment could you expand specifically on like the growth of for off net and on net for the corporate segment and what we should expect and the first half of this year in the second half.
Yeah sure. So let's first of all start with the entire corporate business year over year was down 3.1% sequentially, 2.1% and for full year of the song.
Up about 2.6%.
The off net component was down both sequentially and year over year. The off net is always a branch location, but also a portion of that off net are that corporate business.
Secondary location is on that so what we are saying.
Two key trends one we're not selling to secondary offices, but we do think that is going to reverse over the next several corners as people return offices for all of this discussion of we've had previously second way.
We so vps.
Vpns on a replacement for Mpls the pill us market peak in North America is about $45 billion about for years ago. Today, It's about $32 billion companies are leaning on.
Off of that booking two usually they're asking land of pls, but with the secondary offices shuttered.
Sickly, they're putting those programs on hold there doing nothing so we're settling much class off knack for either.
<unk> <unk>.
Companies come back to the office three things will happen, we will see a reacceleration of prior.
Primary office sales as people reevaluate their needs and those offices too we will see a reacceleration in the examination of secondary of officers, while some of those officers may never return on the side comment.
On the last thrown in the call. If the office is in the same MSA as the primary of office, it's most likely never going to be reopened as they will go to a flexible works control and there'll be some work from home on now, but if it's in the.
A different metropolitan market.
Sure those offices will for Ya.
And then third those companies that are frustrated with mpls and are working to migrate to one of the newer technologies of GPL ash or a SG land solution will begin to implement that should we actually think as companies return.
For them to the office, we will actually see an acceleration and decision making on non core for it costs and I would just out of the date of comments were we have a little of disclosure that in the.
We'll see tomorrow.
We have positioned ourselves for the.
We we reintegrated of new CRM system in the.
The summer it's rolled out of database that enables of to sell send out leads systematically to our potassic sales force.
Of of credit relationships with carriers that gives us access to go to 4 million buildings off net and we are optimistic that we will be able to take our sales force using the systematic nature of our CRM system and these relationships to increase the.
The amount of a gigabit Ethernet off note of indeed for this last quarter. Despite all the challenges in corporate side, we did have growth in the in the TIAA business off note and the.
In the fourth quarter.
I know the call went wrong I want to thank every one.
I think.
Hopefully we the answer all of the questions shown on myself of handheld.
Both people need to chat with us and again I want to thank the entire cogent team for the great efforts and of tough environment on one of the tank our customers.
For their faith, and cogent and our ability to grow with those customers don't Wanna think investors for their attention sort of take care of everyone and please stay safe.
This concludes Skinniest conference call you may now disconnect.
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