Q2 2021 Cogent Communications Holdings Inc Earnings Call
Good morning, and welcome to the Cogent Communications Holdings second quarter 2021 earnings conference call.
As a reminder, this conference call is being recorded and will be available for replay of Ww Cogent code that come on.
Transcript of this conference call will be posted on the same website when it becomes available.
Cogent summary of financial and operational operational results attached to the press release can be downloaded from the cogent website.
I would now like to turn nickel over to Mr. Dave Schaeffer, Chairman and Chief Executive Officer of Cogent Communications Holdings.
Oh, Thank you and good morning to everyone welcome to our second quarter 2020 of them on earnings conference call I'm, taking share from Cogent as Chief Executive Officer, and with me on this morning's call, Sean Walsh, our chief financial for sure.
As a result of the pandemic related efforts have shifted.
Towards a broad reopening of the U S economy, and there's many large businesses have developed plans of deadlines to reopen their offices, we've seen some signs of improvement in the business climate for our corporate segment.
Our netcentric business continues to benefit from the greater the unexpected growth in screaming of subscribers and the continued internationalization of the internet and the streaming phenomenon, where on a global footprint positions Cogent has the best network to deliver traffic.
Inc.
Quarter and the turnover rate on our sales force our sales rep churn rate declined from 6.6% of them up to 5.6 per cent per month on a sequential basis.
We continue to operate an extremely efficient network our network services.
[noise] are able to be perceived and a growing number of markets.
Additional carrier neutral data centers, and multi kind of office buildings.
Able to handle a continuing growth in traffic volume at a fixed cost basis. This operating leverage allows us to achieve year over year and sequential growth and our EBITDA and EBITDA margin or quarterly EBITDA grew.
By 2.9% and grew by 7.2% on a year over year basis or quarterly EBITDA margin was 38.7%, which is an increase of 90 basis points, both on a sequential and on a year.
For a year basis.
The performance of our existing customer base continues to be strong throughout the pandemic customer churn day sales outstanding a cash collections of all our within the historical norms bad debt as a percentage of of our revenue improved Sequoia.
Sure and also improved on a year or for a year basis. We believe that these are strong indicators of the credit quality of of our customer base and the seminal importance of our services to these organizations.
During the quarter, we return.
$37 million true our shareholders through our regular quarterly dividend, we did not repurchase and a stock during the first quarter and have a total of $30.4 million available for buybacks under our stock repurchase program.
Which has been authorized for December 31, 2021.
Our cash held a coach on holdings was 148.
$2 million at quarter at this task is unrestricted and available to use for dividends and or stock buybacks cash.
Shoulder are operating company was $225.7 million in our total cash and the both operating and holding companies were $374 million at quarter and of.
First leverage ratio was 513 and our net leverage ratio was 3 point for 5 at the end of second quarter 2021 for.
For a consolidated leverage ratio is calculated under our indentures were slightly lower at 5.1 out in the second quarter, we successfully issue of $500 million of 3.5% senior secured notes due in 2020.
Sex.
The proceeds from this offering we're primarily used to retire or $445 million of 5 and 3.8 senior secured notes that were due in 2022 and provide us additional liquidity.
The couple of thanks to the note regarding this finance.
We are gratified to receive a ratings upgrade by standard and poors and now have a senior secure rating B E..3 baby, which we believe reflects the strength of the company's operational excellence and financial conditions.
This 500 million dollar fund ration of which the largest and the companies test right from the 3.5% interest rate the way achieve was the lowest interest rate. The company has paid on debt, we expect to say approximately 6.5 million.
Interest expense is the result of this transaction.
<unk> true receiving $55 million of the incremental liquidity.
Yeah.
Now with regard to dividends are board of directors, which reflected on the strength and the cash flow generating capabilities 1 business day.
Instrument of opportunities that we remain disciplined and executing.
And the ability to deploy capital internally to grow our sales force the.
Decided to increase our quarterly dividend, yet again by another 2 and a half cents a share therefore, raising our quarterly dividend from 78 cents per share to 80.5 cents per share in the second quarter to be pay.
In the third quarter. This increase represents the 36 consecutive sequential increase in our regular quarterly dividend and are given and grew at a rate of 14.2% year over year.
Now I'd like to current things over the Sean re are safe Harbor language give a little more color on our COVID-19 policies and challenges and review some of our operating performance for the quarter.
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 on all other statements that may be made on this call that are not historical facts are subject to of <unk>.
Number of risks and uncertainties and actual results may differ materially. Please refer to our SEC filings for more information on the factors that could cause actual results to differ cogent undertakes no obligation to update or revise are forward looking statements if.
If we use non-GAAP financial measures. During this call you will find these reconciled to the gap measurements in our earnings release, which is posted on our website at www 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 want to thank the entire cogent workforce and in particular, our I T Department for their continued hard.
Work during the very challenging times I also want to thank our field engineers contractors billing and collection staff and many other cogent employees, who continue to work on the front lines installing our new customers, maintaining and upgrading our network and providing outstanding services to our customers.
<unk> and other risks are described in more detail on our end of report on form 10-K for 2020 and in our quarterly reports on the form 10-Q for the quarters ended June 32021 March 31, 2021 and September 30th 2020 throughout this discussion we will highlight several operational statistics.
I will review in greater detail certain operational highlights and trends following our remarks will open up the call for Q&A now I would like to turn it back over to day, Hey, Thanks, Sean.
Hopefully you've had a chance to review our earnings press release from our press release includes a number of historical quarterly metrics reported on a consistent basis.
Are targeted long term EBITDA annual origin expansion guidance is for an improvement of 200 basis points per year.
Our target is multi year constant currency revenue growth target.
Is still of approximately 10%.
Our revenue and EBITDA guidance targets are intended to be multiyear goals and are not intended to be used as quarterly or annual of guidance for any specific year.
For a quarter of business at the end of the quarter of represented 61.2% of our revenues in the second quarter.
For a corporate business declined by 1.6% from the first quarter of 2021 and declined by 6.7% from the second quarter of 2020.
Due to the impact of the pandemic.
Netcentric business, which represents 38.8% of our revenues had another strong of water and show continued growth of 4.8 per cent on a sequential basis quarter over quarter and grew out of historically high rate of <unk>.
30.5% on a year over year basis from the second quarter of 2020.
Volatility of foreign exchange rates, primarily impacts are netcentric business as approximately 50% of this business is the outside of the U S. On.
On a constant currency basis are netcentric business increased by 23.8% on a year over year basis from the second quarter of 2020 and grew by 4.5% on a sequential basis from.
The first quarter of 2021 now.
Now Sean will provides from additional details on our performance for the second quarter, Thanks, Dave and again, good morning to everyone.
Talking about corporate and death centric revenue in customer connections, we analyze our revenue based upon network type on net off net of non court and we also analyze our revenues based on customer type, we classify all of our customers into 2 types of either netcentric customers or corporate customers are corporate customers buy bandwidth from us.
And the large multitenant office buildings or in carrier neutral data centers. These customers are typically professional services firms financial services firms in the educational institutions located in Multitenant office buildings or connecting to our network through R. C. M. D. C footprint are net central customers by significant amounts of of band.
From us and carrier neutral data centers and includes streaming companies and content distribution service providers as well as access networks, who serve the customers of content the consumers of content.
Revenue from our corporate customers for the quarter fell sequentially by 1.6% to $95 million and fell year over year by 6.7 per cent.
Corporate revenues from the quarter when you exclude USF taxes fell by $1.8 million, which is an improvement from the decline in the first quarter of $2.1 million and the decline of $2.4 million in the fourth quarter.
An increase in the USAF tax rates, which only applies for our corporate VPN connections had a point 3 million sequential positive impact on our quarterly corporate revenues and had a $1.5 million positive impact year over year, the USF tax rate changes quarterly and we cannot predict the impact of future.
U S F rate changes on our revenues.
As the focus of the pandemic has evolved towards the reopening of offices, we have begun to see some indications that our corporate business is beginning to return to a more normal level of activity.
Gross sales on the corporate side, however have not rebounded to prepandemic levels in terms of aggregate churn of our corporate base. We continue to see the majority of churn coming from our older 100, megabits or fast using the product and we continue to see net unit growth and our 1.
The per second product.
The continuing trend of lower local loop pricing contributed to the reduction in our year over year off net corporate revenue as we continued to pass a portion of those savings to new off net customers. We had 45803 corporate customer connections on our network at <unk>.
Quarter, and which was the decline of 2% versus the quarter and a decrease of 5.2% from the second quarter of 2020 or.
Our netcentric business continues to benefit from the strong growth and streaming subscriptions and continued faster growth in traffic overseas quarterly revenue from our net central customers increase sequentially by for 8% to $57 for a million and increased year over year by 35%.
We had 46065 netcentric customer connections on our network at quarter, and an increase of for 2% sequentially and an increase of 15.7% over the second quarter of 2020.
Our netcentric business benefited from continued strong demand for our larger 10 gigabytes per second and 100 gigabytes per second ports the demand from the outside of the United States was particularly strong on.
Our netcentric revenue growth experiences significantly more volatility that our corporate revenues due to the impact of foreign exchange larger customer size and certain seasonal factors, primarily rated related to usage traffic grew sequentially by 1% for the quarter and by 25%.
<unk> on a year on year basis, we typically experience a seasonal slowdown in traffic growth and our second quarter versus our first quarter.
Are on net revenue was $111.0 million for the quarter, a sequential quarterly increase of 1% a year over year increase of 7 per cent are on net customer connections increased by 1% sequentially and increased by for 2% year over year.
Year over year are on net revenue grew at a faster rate than are on the customer connections primarily due to the 2.6% increase in our on net <unk>. We ended the quarter with 79146 on net customer of connections on our network and our 2975 total.
<unk> on net Multitenant office and carry neutral data center and Cogent data center buildings are off net revenue was $36.7 million for the quarter, a sequential quarterly decrease of 0.1% and of year over year decrease of 0.9%.
When we sell new off net circuits, we incorporate the cost savings from the lower local loop prices into our pricing and the introduction of these new and existing customers into our base lowers are off net arco.
Are off net customer connections increase sequentially by 1.4% and increased by for 6% year over year.
On a year over year basis are off net revenue results were moderately moderated primarily due to a 5.
1% decrease in our off net <unk>. This <unk> decreases driven primarily by the continued falling costs of local loops necessary to sell the service. We ended the quarter, serving 12386 of net customer of connections and over 7379 off net buildings. These often.
Net buildings are primarily located in North America for.
Pricing per megabit, consistent with our historical trends are average price per megabit of both of our installed customer base and new customer contracts decreased for the quarter. The average price per megabit for our installed base declined sequentially by 6.1% to 36 cents and declined by 24, 8%.
From the second quarter of 2020.
The average price per megabit for our new customer contracts for the quarter decreased by 18.
From 2000.
From the first quarter and decreased 21, 9% from the second quarter of 2020.
<unk> are.
Are on net <unk> slightly decreased sequentially, but increased year over year.
Are off net <unk> decrease sequentially and year over year.
The increase in our year over year on net <unk> reflect the growing importance and change in the mix of our larger bandwidth products for the corporate and net centric markets growth and 1 gigabit per second connections to corporate customers continues to contribute to a higher on net or another.
Another product for this contributing to our higher on net <unk> is our 100 gigabytes per second product, which is sold primarily to our netcentric customers.
The growth in units and the size of their respective <unk> is having a positive effect on our on net arco of.
Our on net ARPA, which includes both corporate and the central customers was $470 for the quarter and a slight decrease of 2% from last quarter, but an increase of 2.6% from the second quarter of 2020.
Are off net <unk>, which is predominantly comprised of corporate customers was $994 for the quarter a decrease of 1.8% from last quarter of an increase of $5, 1% from the second quarter of 2020, we expect that our off net <unk> will continue to decline as we take advantage of the lower cost of local loops.
A portion of these reductions in costs are passed on to our corporate customers true.
Other than rates.
Or sequential quarterly on net connection churn rate was stable and are off and are off net connection churn rate slightly increased our on net unit churn rate was 1.0% for this quarter. The same true terminated the last quarter are off net unit churn rate was 1.2% for this quarter as compared to 1.1%.
The last quarter.
Net centric Mac quarters in order to reduce customer turnover, we employ of dedicated sales group, which works primarily to retain customers with indicated they are considering terminating the services with US we may offer pricing discounts for these customers in order to induce them to purchase additional services and or to extend the term.
Of their contracts with us.
Due to the commodity nature of Netcentric services, the vast majority of our move add or change contracts are related to our net center customers during the quarter certain of our net central customers took advantage of our volume in contract term discounts and energy into longterm contracts with us for over 2700 customer of connections increasing their total.
Revenue commitment of cogent by over $24.8 million.
EBITDA on EBITDA margin.
Our EBITDA is reconciled to our cash flow from operations in each of our quarterly earnings press releases seasonal factors that typically impact our SG&A expenses include the resetting of payroll taxes in the United States at the beginning of of each year annual cost of living or CPI increases seasonal vacation periods, the timing and level of of.
The audit and Tech services are annual sales meeting costs and our benefit plan annual cost increases are EBITDA increased sequentially, primarily due to increase in revenue and the seasonal increases in the first quarter on our SG&A costs that do not continue in our second quarter, our EBITDA increased year over year primary.
Only due to the $7.2 million increase in our on net revenue are EBITDA increased by $1.6 million sequentially and increased by $3.8 million on a year over year basis or quarterly EBITDA margin was 38, 7%, which was an increase of 90 basis points on a sequential and year on the.
Of your basis earnings per share, our basic and diluted loss per share was 5 loss for the quarter compared to an income per share of 41 <unk>.
The last quarter and income per share of 19 cents for the second quarter of 2020 on.
Unrealized gains and losses on the translation of 2020 for Euro notes in the U S dollars of the primary contributor to the variability in our net income and consequently, our income and loss per share.
Foreign currency impact.
Our revenue outside of the United States is reported in U S dollars and increased to approximately 25, 6% of our total quarterly revenues from 25, 3% of our total quarterly revenues in the first quarter of 2021, approximately 18% of our revenues. This quarter were based on Europe and about 7 per cent of our revenues related to.
Canadian Mexican Asia Pacific specific South American and African operations, we have not hedged our foreign currency revenues or obligations, including our payments on our Euronotes continued.
Continued volatility and foreign of currency exchange rates can materially impact of our quarterly reported revenue results and our overall financial results. The foreign exchange impact on our quarterly sequential revenue was a positive for $2 million in the year over year Foreign exchange impact was of positive $3 million or quarterly revenue growth.
Both right on a constant currently currency basis was 0.6% sequentially and 2.8% year over year variability in foreign exchange rates, primarily impacts are netcentric revenues. The average euro to use tolerate so far for this quarter is 118 and the average Canadian dollar rate is zero point.
8 zero.
Should these average foreign exchange rates remainder of these current average levels for the remainder of our third quarter of 2021, we estimate that the FX conversion impact on our sequential quarterly revenues for our second quarter would be of negative point $6 million in the year over year FX conversion impact on a quarterly revenues would be a positive for $7 million.
Customer concentration, we do not believe that a revenue customer base is highly concentrated our top 25 customers represent less than 6% of our revenues for this quarter of.
For the Capex, our quarterly capital expenditures increased by $1.8 million sequentially and increased by $3.3 million a year over year, our capital expenditures were $17.2 million this quarter compared to $15 for a million dollars for the first quarter of 2021 and $13.9 for the second quarter of 2020.
Finance leases and finance lease payments are finances, IR you 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 are financed lease ARU fiber lease obligations totaled 220.
For $6 million as of June 32021 at quarter, and we had au contracts for the total of 282 different dark fiber suppliers are financially the principal of payments for $6.2 million for the quarter, primarily due to purchases of dark fiber international markets compared to.
$3.7 million per quarter for the second quarter of 2020, and $5.7 million for the first quarter of 2021.
Our finance lease principal payments combined with our capital expenditures or $23.4 million this quarter compared to $21.2 million last quarter and $35.5 million for the second quarter of 2020, a 34% reduction.
As of June 32021, or cash and cash equivalents totaled $374.0 million for the quarter. Our cash increased by 136.0 million primarily from the issuance of our $500 million notes, which offset.
Which was offset by the redemption of our remaining $329.1 million of our 22.
2022 notes, an increase of our quarterly dividend payment or quarterly cash flow from operations decreased sequentially by 15.6% to 39.7 million, primarily due to a level of 1 of 11 and a half million dollars prepayment of interest on our 2022 notes through December 1st 2021.
The first date that are 2022 notes may be redeemed at part.
Our quarterly cash flow from operations decreased by $1.6 million year over year debt.
And debt ratios are total gross debt at par, including our finance lease obligations was $1.1 billion at June 32021, and our net debt was $769.7 million are total gross debt to trailing last 12 months EBITDA as adjusted.
Ratio was 5133 times at June 32021, and our net debt ratio was 3.45 times are consolidated leverage ratio as calculate the under our note indenture agreements was 5.1.
1 zero at June 32021, or $350 million Euro notes are reported in the U S dollars and converted to U S dollars at each month and using the month and Euro 2 of US dollar exchange rate.
The unrealized foreign exchange Unreal, the unrealized foreign exchange unrealized loss on our Euro notes was $5.3 million this quarter or a loss of 11 per share compared to the unrealized gain of $18.9 million last quarter or 41 cents per share and an unrealized loss of point $9 million.
For the second quarter of 2020.
As a result of the change in the value of the Euro since June 32020 are consolidated leverage ratio increased by 10 basis points on a constant current currency basis are consolidated leverage ratio under our indentures would of been 500 versus 510 at quarter end.
Bad debt and day sales outstanding are bad debt expense as a percentage of of revenues improved year on year year over year and sequentially are bad debt expense improved 2.0.5% of revenues for the quarter compared to 0.6% of our revenues last quarter and 0.9% in the second quarter of 2020.
Our days sales outstanding or DSO for worldwide accounts receivables was 22 days for the quarter, a slight increase from 21 days last quarter, but better than our historical rates I want to thank and recognize our worldwide billing and collections team members for continuing to do a fantastic job in serving our customers and collecting.
From our customers during very challenging times, and now I will turn it back over to Dave Hey, Thanks, Sean I would like to highlight a couple of shrinks about our network, our customer base and our sales force.
As a standard earlier, we continue to see strength in our Netcentric business with our revenues and that segment of our business, increasing 30.5% year over year.
The streaming service providers are aggressively targeting overseas markets and we are a beneficiary of the credit.
We are positioned of our network and on our capabilities to support streaming on a global basis and I'd like to highlight some of these important characteristics.
At quarter end, we connected to 1300 and 9 carrier neutral of data centers in 48 countries around the World. In addition, we connected to 50 for Cogent owned data centers more data centers connected.
To our network than any other carrier as measured by third party free sharp.
The breath of this coverage enables our netcentric customers to better optimize their networks and reduce latency and the delivery of their content.
Expect that we will continue to widen this lead in the market as we continue to add approximately 100 carrier neutral data centers to our network each year for the next several years.
At quarter end.
Right click connected to over 70, 530 access networks, which represent a 5.6% increase from a year earlier. This collection of the Internet service providers telephone companies cable network operators.
And mobile phone companies provide us access to the vast majority of the world's broadband subscribers in mobile phone users.
This critical mass of end users makes us attractive to streaming service providers, who are looking to directly connect with our customers improving quality of service and speeds of download.
A quarter of Shan.
The sales force of 231 professionals, who focus exclusively on the net centric market.
We believe that this group of professionals focusing on this market segment is the largest and most sophisticated sales team of its type in the industry.
Our corporate customers.
Have been seeing an increase in activity due to their planning for the eventual return to office of their workforces.
We believe had north American.
Cities will continue to get back to a more normal prepandemic level of activity as corporate businesses will have their employees will return to offices and our corporate business will return to historical average.
Levels of sales.
We're also optimistic that there will be of pet cough, and a number of upgrades from corporate customers as they've deferred many of the investments to reconfigure their and turn on that work.
We're experiencing an improvement in our sales force productivity due to our continuing training efforts and the continued aggressive managing out of underperforming grabs.
This has been challenging in a remote environment and we're looking forward to having a portion of our sales force begin to return to the office.
On a sequential basis are total sales rep head count increased to 565 and the number of full time equivalents within the sales force just kind slightly to 511 at quarters and yeah.
Year over year are total sales rep.
Rep head count decreased by 7 or 1.2%.
And the number of full time equivalents decreased by 22 for for 1 per cent.
Our sales force turnover at 5.6% per month in the quarter was a significant drop from the average of 6.6% per month, we experienced in the first quarter.
And.
Is consistent with our long term average shares the.
These factors have resulted in the continued rebound and our sales force productivity with for 5 orders install per rap per month a for.
For 7% inquiries from the for 3 orders install per rap per month in the first quarter of 2021 root for.
For all we believe had on our sales force continues to deliver industry, leading the results of 1.
To think of the entire sales force the cushions for team for all of the worth taped on and the difficult conditions they've operated on through the pandemic and I look forward to a strong second half of the year for cogent.
And the return of many of our employees.
2 are cogent offices on of going forward.
Basis.
Cogent and summary is the low cost provider of the Internet access and transfer the service our value proposition remains unmatched in the industry the.
Demonstrating this flow costs position is the fact that our cost of goods sold per byte mile transmitted has fail at a compounded range since 2016 of 22.5%.
We will remain optimistic a pat on our unique position and serving small and medium sized businesses located in the central business District of major North American cities. We have over 18 of 100 large multi 10 on office buildings on net comprising now.
180 million square feet.
In response to rising vacancies in major cities, we have seen in the land awards aggressively lower ranch shortened lease terms and provide significant tenant improvement allowances all designed to attract new tenants into class.
Office space the footprint that we serve we are optimistic that on a corporate business can resume its historical average growth phrase is corporate employees continue to return to offices in the buildings our customer.
<unk> are bad debt and day sales outstanding.
Are all either improved or within the.
Historical norms, we believe that the statistics represent the strong credit quality of on our customer base and the seminal importance of cushions services to those businesses are targeting of multiyear constant currency growth rate of approximately 10%.
And our long term targeted EBITDA margin expansion of about 200 basis points remains in tact as we begin to emerge from the pandemic of.
Our board of Directors has improved are 36 consecutive increase on on a regular quarterly dividend grueling that dividend sequentially slide 2 and a half cents to 85 cents per share for the quarter. This represents a 14.2%.
Sure it's right in our quarterly dividend.
Are consistent deppen increases demonstrate the optimism regarding the increased cash flow of capabilities of our business. Upon the payment of this dividend kerchoo more for churn through a combination of dividends and share repurchases Oh for.
$1 billion to our equity stakeholders. This is the significant accomplishment, which includes the purchase of of for 10.4 million shares of our of common stock over the past 15 years.
We have.
Repurchased any stock.
In the second quarter, and we have <unk>.
Over $34 million for the remaining in our current buyback authorization, which is in place through the end of this year are operating cash flow for the first 6 months of 2021 crew at 24.5 per.
Percentage for.
Versus the first 6 months of 2020.
And our dividend growth rate for this period was 17.3 per cent.
Thank you and I would know of like most of the for for flight.
You will now begin the question and answer the question. If you would like to ask the question. Please do so the pressing for 1 on your phone once again, that's a star 1 on your phone to ask the question.
Your first question is from semi Daddy with the credit Suisse. Your line is open.
Hi, David on this is George anger off on for saying actually.
Thanks for the question so days in the past.
Give out on the composition of Netcentric customer base.
It's changing.
And the driven by a variety of the new providers I guess, if you can walk us through how that's progressing and impacting the business that would be great.
Yeah sure so.
Our netcentric customers fall into 2 primary categories. The 70.530 access networks distributed around the world in fact, while we have network in 48 countries we have come.
Customer bases that actually purchase transport to reach the Cogent network and our reach spans over 170 countries around the world.
Their customer base is downloading content from the energy there is a significant a cemetery in the way of which different user groups use the internet and users primarily download much more than the upload.
And we provide access to more content directly than any other provider on.
On the other side, we have about 5000 content <unk>.
General rating Netcentric customers, they are pushing applications and content out to those customers. What they are looking to do is get towards closer to those customers could be as efficient impossible and using the network and itchy.
The total wireless price points for the transmission of their content they tend to be a more concentrated base with very large service providers dominating that segment.
Today over 71% of.
Traffic stays on the coach and network, meaning it goes from a pain cogent content channel Rayner to a pain cogent access network operator that number has consistently increased.
Over the past several years and it is part of what's driving our decision to continue to internationalize our footprint.
96% of our of traffic comes from these 2 netcentric segments.
And the remaining 29% of the cases in either direction either of receiver or sender that traffic is exchange with 1 of our peers, we have less than 20 for peers globally and of those since since the.
As we are all like getting paid on 1 side of the transaction, meaning we get paid by our customer but exchange at traffic at no revenue with that per week.
We continue to say the 2 sided.
Traffic patterns increase for cogent, helping drive the profitability of our of Netcentric segment.
No. Thank you for that and then I guess maybe of 2 parter on refinancing can you help us on the sandwich is driving the difference between a $10 million in interest rate things that you earn interest savings of you previously noted and the 6.5 million new noted today.
And then secondarily given the credit rating increase is there any opportunity to refinance your 2020 for Euro notes.
So 2 different comments first of all the differential that I had noted included.
2 tanks 1.
We raised an incremental $55 million of capital show the savings was partially offset by the interest on that incremental capital.
The second is that we are planning to enter into a fixed versus variable swap that will allow us to further reduce our interest rate taking advantage of the low variable.
Paul I interest rate market and result in debt incremental savings. So it's kind of a 2 step process. We've completed the first portion of that.
Now with regard to the Euro notes interest rates have continued to decline.
We are continuing to monitor that we do have a significant may cole on those euro notes that would be about a 10 million euro cost to us.
I think we are monitoring that and as fat breakage cost declines over the next 1 to 2 years, we will probably look to refinance schnauzers.
And then 1 last 1 if I could.
Day of you mentioned the continued return the office on this call in on I guess, the spike some of the Corona virus headlines that we've been seeing lately I would be interested to understand how the commentary on on your corporate customers differs from last quarter.
So I think many corporate customers remain cautious due to the emergence of the Delta variant.
There has been for on file.
Iced CVC guidance, there have been indoor mask requirements placed in a number of markets.
And there are a number of employees who have expanded their view of work and are looking for.
Work life balance that includes a high per at work model, while that is not a direct result of the pandemic of was clearly accelerated by that.
Offsetting that is the comments by many corporate executives that employees are more productive and offices and.
In a recent survey 45% of Fortune 500 companies responded, saying that employees are more productive in an office environment than in the home environment. These forces are being kind of way by different companies I think we've seen.
<unk> most businesses targeting after labor day, as an inflection point I think there will be variability based on geography and faction is Asian range, but we are seeing a slow increase and.
Employee return the office and an increase in traffic on those corporate networks.
Thank you.
Thanks.
Operator.
The next question is from sales Q sick with JP Morgan your line of Hilton.
Yeah.
My date of thank you.
Maybe expand on the corporate environment improvement can you talk about just what the conversations with customers looked like it sounds like the some early so the sales indications.
Let's let's sort of start there.
Yeah sure felt so.
Our sales force is trying to reach out to about 100 prospect per sales person per day now they don't have that many conversations but that's what they are target as from that we have seen an increase and customer's willingness.
Joined Gage to begin planning for the have return the office, we've seen an actual perk up with some of the early adopters and.
Rep productivity, considering the majority of our sales force over 70% of it as corporate we're seeing heightened activity levels. We're also seeing companies realize that in a hybrid model having a <unk>.
Our connection gives them more flexibility Sean comment on is.
Around the 1 gigabit overtaking the 100 megabit product several quarters ago and continuing to outpace.
The growth and most of the churn has been from the smaller our customers who had the older 100 Meg product.
I think of cute asked me this question.
5 or 6 weeks ago, the received much clear her path to return to office I think the lack.
<unk> of ubiquity of action is Asian, and the emergence of the Delta variant has caused many companies to either temporarily pause or re evaluate the reopening plans I think there is a general consensus that.
After of Labor day, there'll be kind of a watershed event and we've even seen some companies be more aggressive and moving to mandatory vaccinization, which then I think give sam greater of confidence around those employees.
Back in the office and therefore reaccelerating corporate growth.
It's a bumpy road I wish I had perfect visibility, but it does appear that the 3 sequential quarters, where we've seen the dollar value of decline in corporate revenues is improving.
And we hope that you know.
That rate of improvements going to accelerate over the next quarter or 2 and we should return back to that historic corporate growth rate.
Kind of follow up of 1 thing there.
The slowdown are sort of.
Backing off on return to office is that is that mostly east coast West coast or is that refunding that in the center of the country as well.
I would say, it's coastal for sure East Coast and West Coast.
Law was the first major jurisdiction to go to an indoor Max mass mandate.
We've seen San Francisco adopt similar type policies.
And then the east coast was more cautious Ironically, Texas, Florida.
Which are significant markets for us have been much more aggressive about reopening yet now they have the highest case volumes and highest hospitalization rates.
Does seem to be a.
So that they will get that under control as vaccinization rates in those 2 states for starting arise.
As president of buying indicated those 2 states and decay are responsible for.
Over a third of all cases in the United States. So.
It is very share graphically desk of breath.
Yes.
Phil just to add to what day of said, we've also seen of bifurcation between tech companies financial services.
It's very clear of the financial services firms or whatever the look of.
100 per cent to go back tech companies are much more flexible, including some that are that are doing that so obviously, the San Francisco is a little bit more hybrid.
New York City, DC, Boston, we're seeing a lot more of 100%. The other thing I might add on sort of what we're seeing there it's very clear that the the.
These firms are focusing on getting people back the office and getting thing they are not getting things back to normal they're not focusing on upgrading their networks. I would also indicate we had a conversation with a broker in may of 12, Kpis, where the looking at people and companies coming back to work in the worst indicator of the 1 of these have the.
Lowest amount of of of take up is the releasing of the subletting of space and so that really hasn't come back and obviously the big opportunity for us as new entities come into some of that space from giving up.
Think of our sales force will be very successful there, but we haven't seen those yet.
Thanks for us.
Your next question is from Frank allow them with Raymond James Your line is open.
Great. Thank you can you come on the little bit on you mentioned the streaming services, you're getting 1 of the terms you're getting on those type of those contracting and how is the pricing relative to your base. Thanks.
Yeah sure Frank show.
Are most common contract remains 3 years.
The majority of our Netcentric customers do renegotiate those contracts in Tom.
That was the 2700 connections that.
Sean referred to in his remarks, and the approximately $28 million of incremental revenue commitment to cogent going forward.
Yeah, most of that actually does come from streamers.
We have a pretty transparent pricing model, which is the auger you commit for and the greater the volume to lower your pricing.
I had a call just last week with an international streaming company that was looking to get the exact same price is 1 of the major U S streaming companies and I offered the identical price if they could commit to the volume of nature will work too far behind.
On the curve in terms of volume to make that kind of commitment today, so I sort of what you're going to pay a higher price.
Our average price continues to fall on about 23% you saw that in this most recent quarter of where we commented on both on the install base falling at about 24 of the average new sale on about 21%, yes that differential.
Balance is around a few points quarter to quarter, but overall the long term trend of 23 per cent price decline per bet is continuing and screamers to drive at the.
The final point I'd make is.
Our ability to expand gross margins and maintain low capital of intensity is really a good indication of the architecture that we have chosen versus our competitors and how we are so much more effective at capturing those advances in technology.
Then on our competitors, which allows us to both price slower and the market, but also concurrently expand margins. Many of the companies we compete with half declining revenues and compressing margins, where on the exact opposite side of that.
The cost of the architecture that we've deployed.
Okay, great. Thank you.
Strength.
Your next question is from called the Sydney with Colin Your line is open.
Great. Thank you I'll just ask them all at once.
The first off on corporate revenue on net it was down about 3% sequentially, a little bit better than what we saw on the first quarter.
I'm curious if you have visibility as to when you think that that could actually start to turn positive or for just too difficult to get the with that the delta berrien still on merging.
As it relates to leverage targets.
Just what are your thoughts there in terms of may be bumping him up and how that might impact your ability to continue to trace the dividend going forward.
And then third.
You spend I think you said $6.2 million purchasing fiber.
In the quarter, where do you think of that metric.
Friends over the next several quarters. The it has many I think inching up a little bit of versus.
Versus maybe what we saw in previous quarters. Thank you.
Yeah sure of <unk> 3 very good questions of first of all of flesh regard for corporate on net growth. You are correct. It is improving sequentially. We think that trend of improvement is going to continue we also know that if we return.
To kind of a full occupancy environment kind of like an environment that existed pre pandemics, we won't be back to being kind of a 2 per cent grower sequentially.
In our corporate on net.
Yes.
When that will exactly happened I am not sure I think we are on a path to return to office, but that path is not the perfectly the linear and not perfectly visible the corporations.
Sean mentioned tech companies are taking a slightly different approach than say law firms, but I think businesses are anxious to get employees back into the office and the Delta variant has injected yet another layer of uncertainty of it suspect will continue to see.
The improvement or for the next couple of quarters.
But I just don't have the facility to predict whether it's 2 quarters 3 quarters till we term positive net growth rate in that business.
Now, let me touch on the leverage target portion of your questions.
There.
A big portion of the increase in our reported of leverage has come from currency distortion. The fact that we do not hedge our obligations oil revenues outside of the U S..25% of revenues are outside the us 17.
10% of those revenues are in Europe, when we decided to utilize European debt. We understood that were very interesting a level of volatility into our earnings per share due to the rail unrealized gains and losses as well as.
Volatility into our leverage numbers.
We feel comfortable with the leverage ratios that the board has authorize we have 36 sequential quarters of growing the dividend and at this point, we think the underlying strength of the business, even with the pandemic should allow us to continue to grow.
Into the foreseeable future the dividend at a similar of pace.
The total of kind of just add 1 more thing I mean.
We're really happy with the execution, we we we issued of $500 million note as Dave mentioned of 3.5%.
We will evaluate of that it's just the math.
Calculation of FC on the on the euros.
But we are going to the probably right be.
Be around the 5 times gross leverage if we get really phenomenal execution, maybe we might consider that in the future of of for now we're going to target 5 times.
And then for your last question call the on fiber purchases.
We do not control where data centers are being built we have seen a proliferation of data center construction and in some newer markets and even more extensively in international markets now when.
We look to light a data center, we have a series of criteria is it carrier neutral as of multi talented and.
Is it close to fiber that we already have.
So we have about 975 rings and about 212 markets around the world, We map out those new data centers against those rings, but occasionally there are of data center center or turn off or significant.
The enough or are run by a credible on of operator that way.
To expand and.
What's been driving these incremental fiber purchases, we often use newer vendors show our vendor supply chain has increased too.
282 different fiber suppliers up from 178, Slash 278 last quarter and that drove the incremental spending.
I think as we look at what's on the drawing board, we're pretty comfortable that that fiber expenditure should start to come down in the back in the more historical range from a couple of million dollars per quarter.
Great. Thank you.
Hey, Thanks Hall.
Your next question is from Walter Piecyk with light shed your line is open.
Thanks, Dave I wanted to go back to Phil's question I think you mentioned like if you were to gotten the asked.
Kind of that question of 5 or 6 weeks ago. Your answer would of been different in terms of of the sequential growth.
I think Phil did ask you that it is conference and at the time you talked about.
I think to.
To be specific you said within a few quarters you expected to get to 2.
2% of 2.5 per cent sequential growth on the corporate business. So now it sounds like you are saying.
Within a couple of quarters, you hope to get just positive on my understanding that properly.
So first of all new are accurate and my 2 comments and what I said is over the past 6 weeks the entered check Shin of the.
The Delta very and has caused many corporate.
Customers and prospects to delay their process of returning to office I don't have perfect visibility to each of those companies decision making process.
Based on the rate of change in People's decisions, I am more cautious and sang Pat rather than getting back to normal ie to the to 5% sequential growth.
Positive growth now that's kind of based on the Delta variant continuing to get worse.
Now.
I've seen some government officials predict that the case volume will go from 100000 of 200000 per day.
And.
The death rate in the U S is already about Triple where Ed had trough that show again, I'm not an epidemiologist I can't make exact predictions, but I know that the injection of this additional concern.
Turn has slowed people returning of the office and that's why I am as confident as ever and the business that we had operated for 15 years prior to the pandemic with corporate growth being consistent and sequentially strong and now.
We have this short to the system and I can't tell you if it's going to be a glint of your recovery from that or bumpy recovery. The delta variance kind of told me. It's bumpy share for that reason I am trying to be a little more cautious.
Understood. So why reference labor day of the.
I think your quote was inflection point from earlier on this call that's a month away and the the daily numbers on Delta the.
The least the ones that I seem to be getting worse.
So many companies when surveyed have indicated that that is a significant gate for them and they are planning sorry, the rescue but like.
We just we just talked about how the fact that things are changing very quickly. So I'm not sure of survey dime. That's on period in time, maybe a week or 2 ago as hell someone might look at it today.
Right.
I am just repeating the most current data that's available and companies may end up still having some employees come back to the office and again the pick up on Phil's question. There is a great deal of geographic variability.
Here, So I think for those portions of the country that have very high Vaccinization range, and therefore, lower infection and death rates. The plans for were put in place will be more closely followed those parts of the country that it may be been more aggressive.
In reopening may be pulling back the cost of their higher of flack infection.
Infection rates, so again I'm responding to 3.
3 things what the sales for CS and their funnel, that's very specific cogent data to third party survey data that we look at and look at.
Sean mentioned broker studies from nationally recognized public brokers.
2 surveys on by a number of trade organizations and then finally, we looked the governmental data we put all of that together at make our best protection.
I am not going to get pinned down in the quarterly revenue guidance or sub sector guidance.
But I can comment on the strength of of the underlying business and I feel good that the corporate market opportunity.
Is scale large on off and our footprint for us to resume the growth rate on those businesses come back to the office kind of if you think you are never going to come back to the office cogent, probably not the good investment and you should be shorting every office read.
The cost they're all kind of go bankrupt I just don't believe that's the reversal of a multi hundred year of trend of urbanization that has occurred around the developed world.
Got a day so some of the unit growth of you had on those offices was already slowing and some of the revenue growth was supported by upgrading customers to higher revenue. So that obviously also helped your historic 2% revenue growth and I think you're probably running of theirs.
There's only so much upgrading you can do but I want to move on to what Tom Rutledge said on his call in terms of SCM and.
Fibre could you say that you have seen no impact from charter at all up to this point in terms of any competitive impacting your business I know historically, they've kind of been S. M b, but they seem to be talking up they're moving the enterprise have you seen them at all.
So we purchase off net boobs from spectrum.
And from other cable companies and telco so.
As they expand their of fiber footprint. They are a supplier and are on net corporate footprint. They are not a significant competitor. They generally do not pay building license fees, a generally do not expand the money to pre wire of the rice or.
Went fiber and therefore are not competitive based on install times and on.
The cost of install.
To your question to your comment on your question around upgrades, there's kind of tutor from points that you conflated of wall..1 is we do have customers upgrading from 100, Meg to gig and as Sean mentioned the event now some 10 gig on.
Among some small segment of the corporate market place, but secondly, what has really been negatively impact of for cogent is that VPN business, you've mentioned SD Wan that is 1 of the 2 technologies. The other is the Pls we <unk>.
Pork most of those technologies.
Both are replacing mpls.
Replacement cycle was well underway prepandemic the pandemic pause that replacement cycle. It is now beginning to Reaccelerate that allows cogent to sell a second connection at the same location.
And based on our network architecture of versus charters I feel very confident that our ability to offer a free pn alternate based on on our footprint based on on our non Oversubscription on our cemetery would absolutely make our product.
Vastly superior to what any cable provider kind of offer.
Got it and then just the last question on the.
That leverage at 3 point for whatever times, which is up from other.
Q1 of last year, you were under 3.
I asked this before I guess is there a limit to how how you're going to take leverage.
And continue to expand the balance sheet in order to pay the dividend growth.
So again, we've been very clear that we have a range and that range will be reevaluated by the Borg if appropriate we are basing it on our of growth in for a cash flow finally, a big portion of that leverage increase came from the.
I realized reported off due to the appreciation of the euro.
Yeah, we don't control currency fluctuations, but we know that we have sufficient cash flow of sufficient asset face to avail ourselves of lower cost capital in Europe, and we think our job as stewards of capital is always to get the lowest cost of the.
Oriented capital for the benefit of our equity holders.
Will we raise the target.
I don't know the answer to that and we will look at the cause of an error.
Just to refresh my memory on what the target is it like 5 times of or where where's the.
The upper end of where you'll go at this point.
So we have a net leverage Clark at of 2 and a half to strain of half times net we're at the <unk>.
We're above the medium we were below and I remember you commenting when when when we get to the higher and the cost free room, not being efficient utilization of our balance sheet. We take a measured long term approach and we also look at the cause of that increase in leverage on if it's coming from current sheets of <unk>.
<unk>, it's different than if it's coming from under performance in the business.
Understood.
Hey, Thanks wall.
Your next question is from it and make the deal with Murphy.
Nathan and the line is open.
Hey, good morning, guys.
I guess regarding.
On the corporate side is there anything you have your sales people doing different than normal to stay, especially close to customers and prospects such that there'll be ready to catch them. When those when those businesses are ready to buy rather the 1 of them lay on his opportunity slip.
Just the sheer volume of calls you talk about that that does the trick on that front.
Yes of Nick I have to admit running the sales force in a remote environment was a necessary thing to protect the health of that sales force, but it has been challenging to keep people doing the activity levels and it was really challenging because the <unk>.
<unk> on the other side for remote as well so as we see the apartments of companies starting to each of partially or completely returned to office in preparation to support the work staff of nose offices. There is a lot more engagements so.
1 of the questions that sales people are trying to gauge from our customers has the I T Department actually come back to the off the ship the cause such a good leading indicator of the general workforce returning.
You know, there's kind of no substitute for how it reaches our goal is to talk to every potential prospect.
On net building once a month to just touch base and see if anything is changing with their IP requirements and therefore do they need more bandwidth. That's a that's a very laudable goal, we don't achieve it for a couple of of reasons for 1 we don't have enough.
Sales people too.
Some of the customers or potential customers have not been willing to take the calls we have seen over the last couple of quarters and increase in net call activity per cap, which is now translate into higher installs per capita it's not a star.
Function of gradual ramp and yes to the question of Walter as he was trying to get me the nail down the exact pacing of return office I, just don't have that for his ability.
Okay got it that's helpful and maybe 1 on net centric.
When I look at.
Overseas markets were you don't yet have an on net presence India kind of stands out and then it's the big country. It's early in the stream and adoption.
Presumably wouldn't be hostile to of foreign carrier like cogent.
Is that something on your radar screen or are there other hurdles such that serving of Indian customers.
By of Europe will remain preferable to actually having the presence there.
So.
India is definitely on our radar screen.
Today, we are at the primary upstream provider to Geo, which is the largest operator and Andy of remember the vast majority of the Indian population is purely mobile not fixed line.
The Indian license process is very bureaucratic and very in line fee, we have actually applied for that license a little over a year ago. We're still in 1 of the review phases.
I believe we will get a license.
But I think it's probably still at least for here away.
Based on talking to our lawyers in India.
You know I.
We tried the same thing in Russia, a few years ago, and eventually gave up because of it was clear that without violating the foreign corrupt practices Act, we could not get a license to serve Russia. So we serve most of the Russian carriers, but we do it in Helsinki or stock.
For Frankfurt.
Today for the most of our Indian customers were serving them in Marseille, we've identified cable capacity, but we're just waiting on that license approval and we do expect it but I don't think it's eminent.
Okay, Alright, well thank you Dave.
Hey, thanks.
Yeah.
And that concludes the <unk> session for today I will turn on the conference call back to Missouri day safer for closing.
Thank you very much like to thank everyone. Hopefully we answer all your questions. We appreciate the support and I want to thank the entire cogent team for delivering in these difficult times and hope everyone stays safe and we can actually see each other soon take care of.
Ladies and gentlemen. This concludes today's conference call. Thank you for your participation you may now disconnect Stacey angler.
How the kidding.
[music].