Q3 2021 Cogent Communications Holdings Inc Earnings Call
Good morning, and welcome to the Cogent Communications Holdings third quarter 2021 earnings Conference call.
As a reminder, this conference call is being recorded and it will be available for replay at Www Dot Cogent co dot com.
A transcript of this conference call will be posted on the same website when it becomes available cogent summary of financial and operational results attached to its press release can be downloaded from the cogent website.
I would now like to turn the call over to Mr. Dave Schaeffer, Chairman and Chief Executive Officer of Cogent Communications Holdings.
Hey, Thank you and good morning, everyone welcome to our third quarter 2021 earnings Conference call.
Dave Shaffer Cogent CEO and with me on this morning's call is Sean Walsh, our Chief Financial Officer.
Now for a few comments on our results.
As the focus of the pandemic related efforts of companies have shifted to a broad reopening of the U S and global economy, and as most orange businesses have developed plans and deadlines to reopen their offices, we've seen signs of improvement.
Our corporate business climate.
However, despite this improvement the Delta variant has delayed a large portion of these back to work plans.
Too early next year and many key indicators of office activity remains significantly below normal levels and many U S northern cities and in Canada.
We see that.
Rates of employees working in offices and the leasing of commercial office space in central business districts remained significantly below historical levels.
Our netcentric business continues to benefit from the greater than expected growth in streaming subscribers and the continued internationalization of the internet, where our global footprint positions cogent as the best network to deliver end to end on a global basis.
As for our customers for the third quarter.
Our traffic growth moderated somewhat from the fast pace.
Previous periods, but was up 1% sequentially and 25% on a year over year basis. Despite these improvements.
Remain cautious in our near term outlook now the uncertainty economic environment and the challenges that are continuing because of the pandemic on U S. GAAP basis, our revenue was up slightly to 147 9 million in.
In the quarter and increased by 4% on a year over year basis on a constant currency basis, we experienced sequential quarterly revenue growth of one half of a percent and an improvement in our year over year growth rate.
Two 3.6% from the 2.8% constant currency growth rate in Q2.
We continue to make progress with our Salesforce, our Salesforce Rep productivity was 4.3.
Orders installed per full time equivalent rep in the quarter.
We continue to operate is extremely efficient network our network services.
Continue to be expanded into new markets additional carrier neutral data centers and multi tenant office buildings and is able to handle the continued increase in traffic volume and a relatively fixed cost basis, the operating leverage because of our <unk>.
<unk> has achieved that allowed us to achieve both year over year and sequential growth in EBITDA and EBITDA margins, our quarterly EBITDA grew 1% sequentially and grew by five 8% year over year or quarterly EBITDA margin was 39.
9%.
The best in the company's history, which is an increase of 30 basis points on a sequential basis and 60 basis points on a year over year basis.
Performance of our existing customer base continues to be strong throughout the entire pandemic.
Bad debt expense and our customer cash collections remain within historical levels. Our days of sales outstanding improved to 21 days equine the best Dsos in the company's history churn rates continue to decline in particular in our corporate segment.
Sure.
We believe these statistics demonstrate the strong credit quality of our customer base and maybe most importantly, the importance of the internet and coach and services to these organizations.
As our business continues to expand we let our 3000th building in the quarter and now have 3008 buildings directly connected to the Cogent network that now serves 50 countries around the world.
During the quarter, we returned 37 $7 million show our shareholders through our regular dividend we.
We did not purchase any stock during the quarter and have a total of $34 million available for stock buybacks and volatile situations.
As our board has authorized us to continue through December 2022.
Our cash held at Cogent holdings is $111 million at quarter end cash held at our operating companies.
$244 million at quarters end and therefore, our total consolidated cash is $355 million at the end of the third quarter.
Including cash at holdings, we have a total of $226 million that is permitted under our adventures to be available to be returned to shareholders either for dividends or stock buybacks.
Our gross leverage ratio was five point O seven.
In the quarter and our net leverage was 3.50, our consolidated leverage as calculated under our adventure. However was slightly lower with a gross leverage of 5.02 and a net leverage of 3.47.
Our board of directors reflected on the strong cash flow generating capabilities of our business and the investment opportunities that we have and decided and increase in our quarterly dividend of two and a half cents.
Was appropriate raising our dividend sequentially by three 1%.
From 85 cents per share in the second quarter to 83 cents per share and this quarter. The dividend increase represents our 37th consecutive sequential increase in our regular dividend and our annual dividend growth rate.
<unk> is 13, 7%.
Now I'd like to turn it over to Sean to read our Safe Harbor language and provide some updated information on our responses to the COVID-19 pandemic.
And review some of the 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 and all other statements that may be made on this call.
That are not historical facts are subject to a number of risks and uncertainties and actual results may differ materially. Please refer to our SEC filings for more information on the factors that could cause actual results to differ cogent undertakes no obligation to update or revise our forward looking statements.
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 www Dot Cogent co dot com.
Quick update on COVID-19.
Like many companies Cogent continues to be impacted by the lingering effects of the COVID-19 pandemic and the accompanying responses by governments around the world.
Tober this year, our entire U S workforce returned to our offices. After 18 months of working remotely a majority of our offices and the rest of the world continue to work remotely, although our employees outside the United States are scheduled to return to their cogent offices by the end of the year I want to thank the entire cogent workforce.
And in particular, our it and finance departments for their continued hard work. During these 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 out.
Standing customer service the COVID-19 risks and other risks are described in more detail in our annual report on Form 10-K for 2020 and in our quarterly reports on Form 10-Q for the quarters ended September 32021 June 32021, and March 31 2021.
Throughout this discussion we will highlight several operational statistics I will review in greater detail certain operational highlights and trends. Following our remarks, we will open up the call for questions and answers now I'd like to turn it back over to Dave Hey, Thanks, Sean Hopefully you had a chance to review our earnings press release, our press release <unk>.
<unk> a number of historical quarterly metrics that we report on a consistent basis.
Our targeted long term EBITDA margin expansion guidance is for an annual improvement of 200 basis point or.
Our targeted multi year constant currency growth rate targets remain approximately 10%.
Our revenue and EBITDA guidance are intended to be multiyear goals and are not meant to be used as either quarterly or specific annual guidance target.
Our corporate business, which represents 62% of our revenues our corporate business declined by one 5% from the second quarter of 2021 and a decline of six 9% from the third quarter.
Of 'twenty 'twenty, primarily due to the impact in the pandemic and some reductions in <unk>.
Due to lower lube cost for off net customers.
Our netcentric business, which represents 39, 8% of revenues had another strong quarter and we achieved it.
10 years growth rate of two 5% quarter over quarter and grew on a year over year basis by 26, 3% from the third quarter of 2020.
Volatility in foreign exchange rates, primarily impacts our netcentric business.
Slightly over 50% of that Netcentric business is outside of the United States on a constant currency basis, our netcentric business increased by 25, 1% in the third quarter from the third quarter of 2020 and three eight.
<unk>.
Q2 of 2021, now Sean will give some additional detail on our financial performance for the quarter. Thanks, Dave and again good morning to everyone.
Let's talk about corporate and Netcentric revenue and customer connections.
We analyze our revenues based upon network type on net off net and noncore and we also analyze our revenues based upon customer type we classify all of our customers into two types netcentric customers and corporate customers. These customers are typically professional service firms financial service firms and educational institutions located in multi.
Office buildings or connecting to our network through our CNBC footprint, our netcentric customers buy significant amounts of bandwidth from us in carrier neutral data centers and includes streaming companies and content distribution service providers as well as access networks, who serve the consumers of content via fixed line and mobile networks.
Revenue and customer concentrations by customer type.
Revenue from our corporate customers for the quarter declined sequentially by one 5% to $89 1 million and declined year over year by six 9% corporate revenues in the quarter, excluding the impact of USF taxes declined by one 4 million. This is the fourth quarter.
Of consecutive smaller declines in our corporate business, which peaked at a decline of $2 2 million in the fourth quarter of 2020.
An increase in the USF tax rate, which only applies to our corporate VPN connections had no material impact on a sequential basis and had a <unk> 9 million positive impact on our year over year quarterly corporate revenues, the USF tax rate changes quarterly and we cannot predict the impact of future USF rate changes.
On our revenues.
Phil the Delta variance slowed down the level of corporate customer activity, we continue to see indications that our corporate business is trending towards pre pandemic levels, but at a slower pace than expected. We are encouraged by the continued decline in the churn of our 100 Megabits per second.
One gigabit per second products.
Which is now lower than the pre <unk> pre pandemic levels, but we have not seen our additions to these product categories returned to pre pandemic levels.
Overall, the majority of our churn is in our older 100, Megabits per second product and we are encouraged that our net unit growth in our one gigabit per second product was positive for every month during the pandemic.
The continuing trend of lower local loop prices pricing contributed to the reduction in our year over year off net corporate revenue as we continue to pass a portion of these savings to our off net customers our off net <unk> declined by one 2% sequentially and declined by five 9% year over year.
Here, we had 45559 corporate customer connections on our network at quarter end, which was a decline of <unk>, 5% versus the second quarter and a decline of four 5% from the third quarter of 2020.
Our Netcentric business continues to benefit from the strong growth in streaming subscriptions and continued growth in our international network traffic.
Quarterly revenue from our Netcentric customers increased sequentially by two 5% to $58 8 million and increased year over year by 26, 3% on a constant currency basis, our netcentric revenues increased by 25, 1% from the third quarter.
Of 2020 and grew by three 8% from last quarter.
We had 47432 netcentric customer connections on our network at quarter end, an increase of 3% sequentially and an increase of 16, 3% over the third quarter of 2020, our Netcentric business benefited from continued strong demand for our larger.
10 gigabit per second and 100 gigabit per second products the demand from outside of the United States for these products was particularly strong our netcentric revenue growth historically has experienced significantly more volatility than our corporate revenues due to the impact of foreign exchange larger customer size and certain seasonal.
<unk> primarily related related to usage traffic on our network grew sequentially by 1% for the quarter and grew by 25% on a year on year basis, consistent with our prior quarter growth rates.
Revenue and customer connections by network type.
Our on net revenue was $111 1 million for the quarter, a sequential quarterly increase of 0.1% in a year over year increase of five 7%.
Our on net customer connections increased by one 3% sequentially and increased by 5.0% year over year.
Year over year, our on net revenue grew at a faster rate than our on net customer connections, primarily due to a 1% year over year increase in our on net ARPA.
This increase in our on net ARPA was primarily due to customers increasing the interface speeds that they purchase from cogent. We ended the quarter with 80162 on net customer connections on our network in our 3008 total on net multi tenant office and carrier neutral data center and co.
Data center buildings.
Our off net revenue was $36 7 million for the quarter, a sequential quarterly decrease of 0.1% in a year over year decrease of one 2%.
When we sell off net circuits, we incorporate the cost savings from our lower local loop prices into our pricing and the effect of the introduction of these customers into our off net customer base lowers our off net <unk> our off net customer connections increased sequentially by 0.9% and increased by five 5%.
Year over year.
Our off net revenue results were impacted primarily due to a decrease in our off net <unk>.
This off net <unk> decrease is driven primarily by the continued falling cost of local loops that are an input and an incentive to selling the service.
We ended the quarter, serving 12495 off net customer connections in 7492 off net buildings. These off net buildings are primarily located in North America.
Pricing per megabit <unk>.
Consistent with our historical trends, our average price per megabit for our installed customer base decreased for the quarter. However, our average price per megabit for our new contracts increased.
Average price per megabit for our installed base rate of decline diminished from last quarter, our average price per megabit for our installed base declined sequentially by three 9% to 34.
<unk> declined by 23, 3% from the third quarter of 2020, our year over year price per megabit decline was six 1% sequentially and 24, 8% last quarter, our average price per megabit for our new customer contracts for the third quarter increased by 11, 4% to <unk>.
<unk>.
From the second quarter and increased by eight 2% from the third quarter of 2020 ARPA.
Our on net <unk> decreased sequentially, but increased year over year, our off net <unk> decreased sequentially and decreased year over year the.
The increase in our year over year on net ARPA reflects the growing importance and change in mix of our larger bandwidth products from our corporate and Netcentric markets growth in our one gigabits per section connections sold to our corporate customers continues to contribute to an increase in our on net ARPA Enel.
Another product that is contributing to our higher on that our food.
As our 100 gigabit per second product, which is sold primarily to our netcentric customers the growth in unit sales and the RFP for this product is having a positive effect on our total on net ARPA.
Our on net <unk>, which includes both corporate and Netcentric customers was $465 for the quarter a decrease of one 1% from last quarter, but an increase of 1% from the third quarter of 2020, we expect that our on net <unk> will continue to increase due to changes in our product mix our off net <unk>.
ARPA, which is predominantly comprised of corporate customers was $982 for the quarter a decrease of one 2% from last quarter and a decrease of five 9% from the third 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 local loop costs are passed on to our corporate customers.
Churn rates.
Our on net and off net connection churn rates both improved this quarter. Our on net unit churn rate was 9% for the quarter as compared to 1% last quarter. Our off net unit churn was one 1% for this quarter as compared to one 2% last quarter.
Netcentric Mac orders in order to reduce customer turnover, we employ a dedicated sales group, which works primarily to retain customers who have indicated they are considering terminating their service with us due to the commodity nature of Netcentric services. The vast majority of our move add or change or Mac contracts.
Our 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 2500 customer connections increasing their total revenue commitment to cogent by over $24 2 million.
EBITDA and EBITDA margins.
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, including the reset of payroll taxes in United 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 service.
<unk>, our annual sales meeting costs and our benefit plan annual cost increases.
Our EBITDA increased by zero point $6 million.
Sequentially and increased by $3 $2 million year over year.
Our EBITDA increased sequentially, primarily due to a reduction in our SG&A expenses as a result of lower head count and the impact of our cost reduction programs. Our EBITDA increased year over year, primarily due to the 6.0 million increase in our on net revenue and the impact of our cost reduction.
<unk> in particular related to circuit cost savings.
Our quarterly EBITDA margin was 39.0%, which was an increase of 30 basis points on a sequential basis and a 60 basis point increase on a year over year basis.
Earnings per share our basic and diluted income per share for the quarter was 29, and 28, respectively compared to a loss per share of 0.5 last quarter and zero point 11 for the third quarter of 2020 unrealized gains and losses on the translation of our <unk>.
24 euro notes into USD or the primary contributor to the variability in our net income and consequently, our income loss or loss per share.
Foreign currency impact our revenue earned outside of the United States as reported in U S. Dollars was 25, 5% of our total quarterly revenues approximately 17, 6% of our revenues. This quarter were based in Europe, and seven 9% of our revenues related to our Canadian Mexican Asia Pacific South.
<unk> and African operations, we have not hedged our foreign currency revenues or obligations, including our payments on our euro notes continued.
Volatility in foreign currency exchange rates can materially impact our quarterly reported revenue results and our overall financial results. The foreign exchange impact on our quarterly sequential revenue was a negative $7 million in the year over year Foreign exchange impact was a positive zero point $6 million or quarterly.
Revenue growth rate on a constant currently currency basis was 0.5% sequentially and three 6% year over year variability in foreign exchange rates, primarily impacts our netcentric revenues.
The average euro to U S dollar rate so far this quarter is one $1 six.
Dollars and the average Canadian dollar exchange rate is zero zero point 80.
Should these average foreign exchange rates remain at the current average levels for the remainder of the fourth quarter, we estimate that the FX conversion impact on our sequential quarterly revenues for the fourth quarter would be a negative <unk> 4 million and the year over year FX conversion impact on quarterly revenues would be a negative $5 million cut.
Customer concentration.
We believe that our revenue and customer base is not highly concentrated consistent with prior quarters with our top 25 customers represented less than 6% of our revenues for this quarter capital expenditures, our capital our quarterly capital expenditures increased by $4 $7 million sequentially and increased by <unk> <unk>.
$7 million year over year, primarily due to accepting accelerated shipments of network equipment in order to attempt to alleviate supply chain issues. Our capital expenditures were $22 million this quarter compared to $17 million 2 million for quarter two 2021.
And $13 3 million for quarter, three 2020 finance lease and finance lease payments are finance lease <unk> obligations are for the long term dark fiber leases and are typically have initial firms a 15 to 20 years or longer and often include multiple renewal options. After the initial term or.
Finance lease <unk> fiber lease obligations totaled $239 5 million at September 32021 at quarter end, we had IU contracts with a total of 286 different dark fiber suppliers.
Police Iron obligations was 1.1 billion at September 32021, and our net debt with $792.1 million are total gross debt to trailing last 12 months EBITDA as adjusted ratio was 5.07 at September 32021, and our net.
That ratio was 350 are consolidated leverage ratio as calculated under our note indenture agreements was 502 in our net leverage ratio was 347.
R. A 350 million Euro notes are reported in U S dollars and converted to U S dollars at each month and using the month and euro to USD exchange rates.
The unrealized foreign exchange.
Unrealized gain on our Euro notes was 10.2 million this quarter.
U S dollars or 22 cents per share compared to an unrealized loss of $5.3 million U S last quarter or five.
For sure loss and an unrealized loss of $17.3 million or 11, a loss of 11 cents per share for the third quarter of 2020.
As a result of the change in the value of the Euro since June 32020, when the euro to use tolerate was 112 are consolidated leverage ratio increased by six basis points on a constant currency basis are the constant consolidated leverage ratio under our indentures would have been $4 97 vs.
52002 at quarter end I will now turn it back to Dave Hey, Thanks, Sean.
Riley a few the operational strengths and our business our network, our customer base and our Salesforce.
Netcentric performance as I stated earlier, we continue GC strengthen our netcentric business as revenues increased by 26.3% year over year streaming service providers are aggressively targeting overseas markets and we are incorrect and a fish.
Area is correct.
Position, our network on our capabilities to support the growth and screaming on a global basis and I'd like to highlight some of these important characteristics at quarters, and we connected to 1332 carrier neutral data centers as well as.
Is 54 cogent.
[noise] operated data centers we.
We connect to more data centers than any other carrier globally as measured by independent third parties.
Breath of this coverage enables our netcentric customers better optimized our networks and reduce latency.
We expect that we will widen our lead in this market as we are planning to add approximately an additional 100 carrier neutral data centers per year to our network each year over the next several years at.
Headquarters and we directly connected to 7590 networks.
Was an increase of 5.2% from a year earlier this collection of Isps telephone companies cable networks mobile telephone operators and other carriers.
Loss to provide access to a significant majority of the world's broadband and mobile phone users.
This critical mass of eyeballs makes us an extremely attractive service provider just screaming providers looking to directly connect their customers improving video quality and download speeds.
Quarters and we.
We had a salesforce of 218 professionals focused primarily on the Netcentric market.
We believe this group of professionals is the largest and most sophisticated enough such sales teams in the industry.
Now for some of our corporate trends, we are seeing some improvement in our corporate office environment as a number of employees were turning off his has increased and sub leasing activity and directly sink activity begin to rebound from the gap.
Of the pandemic and 2020 and early 20th 21, However, the end of the.
Third quarter.
Many important office kpis, especially in the northern markets remains substantially below historical levels, while we believe that many north American cities will continue to get back to more normal levels of office activity.
We will then C. R corporate sales improve this pace of returning to office is slower than than was initially anticipated.
For a few additional details on the Salesforce in his performance.
Described earlier, our entire Salesforce had been working remotely since March of 2020.
In October of 2021, we completed the transition of our entire U S. Salesforce to a required work an office environment.
The result of this back to office transaction, we strove to identify and exit underperforming reps during.
During the transaction backed office, a modest number of performing rap decided due to lifestyle reasons or their beliefs and not being vaccinated to not return the office and leave the company due to the combination of these two factors we experienced.
A higher level of salesforce turnover in the quarter.
On a sequential basis are rep head count decreased to 516 quota bearing reps.
Year over year.
A rep head count decreased by 81, or 13.6% are salesforce turnover was 8.7% per month for the quarter and inquiries from the 5.6% per month in the second quarter of 2000.
21.
We believe this increased turnover and a quarter was primarily due to the transition of our U S workforce.
Migrating from working remotely.
They require returning office and our implementation of a mandatory factions Asian policy.
Yes, and then Greece level of scrutiny on the part of sales management helped us identify underperforming sales reps.
The decline in sales professionals was primarily in the corporate side, where we lost 36 net wraps versus a much smaller decline in our Netcentric salesforce of only 13 reps.
This reflects a greater uncertainty around or corporate segment.
And the additional focusing of resources on our Netcentric business as that continues to grow at above historic rates. Overall, we are encouraged by the opportunity to build and manage our salesforce in an office environment, where we have a greater opportunity.
Needed to train and mentor our team.
For a breath productivity declined to 4.3 install orders per <unk> per month for.
For the third quarter from four point font installed orders per rep per month in the last quarter, but this was however, a significant improvement from the 3.7 installed orders we experienced in Q3 2020.
Overall, we continue to be encouraged by the professionalism and performance Ribar Salesforce.
What has been a particularly difficult environment, we are optimistic that with the transition of our salesforce in the U S back to the office behind US, we will have the opportunity to better manage and drive productivity with the salesforce.
In summary, we remain optimistic about our unique position and serving small and medium sized businesses that are located in the central business District of major North American cities with 1800, and 16 Multitenant office building.
Directly attached to our network comprising over 984 million square feet of rentable space.
Currently Kansas caters of office activity, including workplace reentry and leasing activity do remain significantly below prepandemic levels. However, we are encouraged that many tenants are indicating a return office.
In early 2022 and leasing activities more commercial office space has improved over the past six months, we were optimistic that the combination of an off the sales teams and a more normalized office environment, we will benefit.
From our ability to solve a corporate customers who have long delayed many of their network transformation decisions. We also believe that we will benefit from the opportunity.
To show our services to new tenants as they are backfilling vacant space and many of the buildings that are directly connected to the coach network.
Our board of directors has improved our 37th consecutive sequential increase in our regular dividend.
Creases, our dividend two and a half cents to share data three censor share for the quarter.
This is from represents an increase of 13.7% in our quarterly dividend on a year over year basis.
Consistent increase and give it half confirms the optimism we have around the ability of our business to continuously generate increasing amounts of cash flow for the benefit of our shareholders with that I'd like now open the floor for questions.
Thank you to ask a question. Please press star one on your telephone keypad to withdraw your question pressed dependent.
Our first question comes from the line of Steamy Badger with credit Suisse. Your line is open.
Yeah, I live in Charlotte George on Christianity, two questions.
So can you provide any additional color auto returned office timelines for your customers and how that may impact the timing of cogent return to sequential growth and the corporate segment, obviously in light of the slower than anticipated Central business District leasing and then my second question is in <unk>.
To the ongoing labor shortage and how if at all that May impact. Your previously stated Salesforce salesforce growth aspirations.
Given the large quarterly headcount decline thanks.
Yeah sure George So with regard to return office, a number of commercial real estate firms.
Survey the market consistently they provide third party data around 15 key K P is measuring the health of the commercial office market.
Probably the two that are most relevant to coach and our badge entries your security entries per day, and the pace of leasing activity, both primary and sub leasing.
What we have seen is that in the northern cities.
We're still running at around 35% employee entrenches per day versus Prepandemic levels, and Q1 of 2019 in the southern cities those numbers are up too but.
Between 60, and 70% a badge entries per day versus Prepandemic levels.
Those numbers are continuing to inquiries and we think this is maybe the most important indicator. It's also important to remember that.
We shell or corporate product on an an metered basis. So whether there's 10 employees should in the office or 100, the customer pays us the same and the majority of our corporate customers have historically had vpns.
That are aggregated through their fire wall in their corporate office, a positive trend that we have begun to notice as companies define a hybrid work schedule for their employees, we have seen some corporate customers take.
An additional port from Cogent and a carry her neutral data center shortly for that VPN aggregation function. This should percent an additional opportunity for us to sell more ports to those corporate customers.
Offsetting the decline and office to office Vpns as companies reduce the number of offices. When we put these various puts and takes together we believe that our corporate business is still probably several quarters.
So away from returning to its historic sequential growth rate again to remind investors. This is a business over 16 years.
Average better than 2% sequential growth the only other period of negative growth was two quarters and the great financial recession, we're now dealing with sick quarters of negative growth and the pandemic and based on the Delta variant and the pacing of return office, where she.
Still probably a couple of quarters away from reverting back to a consistent positive growth rate sequentially in our corporate business, but we remain underpenetrated in our footprint.
And our footprint is actually benefiting from office footprint reductions, giving us more addressable market per building as we have more tenants to sell to.
I better now pivot to your other question, which is may.
Maybe the great resignation and the current state of the employment market.
Cogent remains a very competitive place for new market entrants and we have no shortage of candidates for interviews at Khodzhent.
We continue to say about 13 applicants for each offer that is extended.
Are starting base salary, which is base salary plus target a commission is about $80000 per year and four are targeted universe of candidates. This isn't a very attractive position for them.
What we have seen though are really two headwinds to that one employees, making lifestyle decisions, where they don't want to work in an office environment.
We are a firm believer that we better mentor train and grow our Salesforce and an office and it should result of that many of the employees that we hired during the pandemic working remotely who had.
Committed to returning the office when required to do so decided not to in fact.
Over two thirds of the reps that we hired since the beginning of the pandemic are no longer with coach.
The second point is that we prior to the federal government requiring companies of over 100 people implemented a mandatory vaccine program in early August we received.
A significant amount of pushback from some of our existing employees and other employees. As a result, you know we did lose some employees who worry that are politically are morally opposed to being vaccinated, but we felt that was critical.
<unk> to maintaining a healthy and safe work environment.
Great.
Have a great color. Thank you hey.
Hey, Thanks George.
Our next question comes from the line is still Cusack with J P. Morgan Your line is open.
Hey, guys. Thanks, So can we dig into the the.
Corporate gross adds funnel sort of customers picking up the phone.
And as you think about your head count turnover should we think of smaller salesforce is slowing sales for a decent period here as those new reps train up or is that not an issue. Thank you.
Hey, Thanks for the questions I'll take those in reverse order.
The reps that we have been management Gal have been the less productive wraps actually are average rep tenure at coach and had the or just increase sequentially quarter over quarter going from about 31 months.
To 33 months, so we've been able to retain good wraps.
And our model, while it sounds easy to just pick up the phone and sell Internet is very hard and it requires.
Certain amount of organizational and discipline among our App accursed, we've always experienced high salesforce turnover at over 5% of the base per month, the elevated turnover at age seven I think is a transitory event.
Due to the mandatory faxed initiations and the return to office requirement, while some employees had acknowledged they were willing to do so.
They were required to chose not to.
And then we became much more disciplined about looking get under performance.
Realize the <unk>.
Status of the underlying market and for that reason for corporate.
Salesforce declined by about 9% it just did not pay to carry marginal reps. We however, do expect to continue to grow the salesforce coming out of the pandemic.
With regard to the Netcentric Salesforce the decline was much smaller at about 5% and again many of the same reasons, but much less under performance and quite honestly, a healthier underlying market demand now I'm going to pivot to your first.
Question, which is what we're seeing from corporate customers and.
I have to admit.
As a CEO of an operating business I believe the impact of the pandemic was going to both be shower and shorter than what turned out we saw virtually all of our customers mirror our behavior on remote work and they initially had anticipated return.
The office some time in 2020.
That got pushed out due to multiple waves of infection and.
I think with the deployment of widespread available vaccines. We started she companies aggressively planned to return to the office only to see those plans further delayed by the surge in the Delta variant.
The federal government's decision to require under Osha companies of greater than 100 employees to require Vaccinization has I think given most employers comfort and putting in those mandatory vaccine programs and is it.
Resolved I think we're seeing an expectation of our customers that what they had originally anticipated to be opposed labor day return office is now a post new year's return office, and we really are saying a significant uptick in.
<unk> proposals being issued and companies, making these network changes that they have been putting off for years. We also now have seen vacancy rates increase. So therefore, there are less tenants in our buildings, if we walk across our footprint.
Can see which normally had hovered around 4% are about triple that.
Point.
And as.
Those vacant spaces get Backfilled, we think that the typical four plate of a business will be smaller to support a hybrid workforce, therefore, allowing us to see an increase in our total addressable market from the 51 business in a building maybe.
Be to 55 to 60, giving us ultimately a greater number of connections to sell and then finally these two additional trends of migrating to gigabit connection over 100, Megabits and Eh I think change and.
Corporate network architectures to know kind of prepare for a hybrid world, putting some VPN concentration in data centers gives us the ability to sell more connections to each business Sean.
Just add some color to Dave's comments, if we look at the three quarters before.
The pandemic and then three quarters of this year quarter 123, and look at the components gross adds churn and <unk> <unk> has been right, where we thought it would be it's been very consistent.
Churn is actually improve that is that's where the better levels than where we were prepandemic and it has davis mentioned because of deferred.
Openings of offices and deferred.
Filling of vacancies are gross adds are still below where we were on the pandemic basis. So we're optimistic that as the world opens up.
In offices corporate to go back into offices and begin to wreak reconfigure their networks and his new tenants go into buildings will get back to a more historical level.
Okay. Thanks so.
Excellent.
Thank you. Our next question comes from Kobe since since L. With Cohen Your line is open.
Great to modeling questions SMA, one on cash flow from operations CFO.
You flag it it was particularly strong in the quarter anything worth.
Flagging and whether or not we should see it will step down in the fourth quarter.
And then secondly, similarly on Capex.
You mentioned you pulled forward some.
[noise] purchases should we see a corresponding reduction.
In the fourth quarter should fourthquarter looked like a more normalised level and if fourthquarter looks like a more normalised level should we expect then.
More notable reduction as we go into 2022. Thank you.
So let me take those on the cash flow I think we expect it to be consistent although the dsos at 21 days are the best in the company's history, we see no indication that is going to deteriorate, but that does have an <unk>.
Impact on our cash flow.
Statistics that we report, but we do expect kind of a similar type of elevated level of cash flow from operations for the fourth quarter in terms of equipment purchases.
I'll be honest I don't have perfect visibility to that answer.
And reason is.
As the chip shortage has continued and I think more and become more widespread.
We are dependent on a single vendor susko, we have daily conversations with them about equipment availability typically we would be able to order equipment and expect delivery within a month now we're going to.
Two six month forecast for delivery.
With virtually all products experiencing.
Daily volatility and expected ship days, so it's very common for the items that we have on in order to get daily reports, saying they are being pulled in then they are being pushed out.
We tried to get ahead of this we did pull in.
Several million dollars of orders, we did pull the additional orders and but I can't tell you when that equipment is actually going to arrive in our warehouse is.
Based on the inability of our vendor to do that.
When we look at the base level of capital, it's about flat with where we were last year, but the elevated level is due to these accelerated orders.
Now rather than having orders pending for 30 days Cogent has six months of orders outstanding with its Fender and could they show up early and therefore elevate capex in the fourth quarter, possibly could they be delayed even further than the six months.
And therefore, capex will be substantially below.
I just don't want to represent to invest for something that's out of our control. So Dave I guess just to be clear you not only made orders, but you actually received in your warehouse in the third quarter.
Some of those shipments it presumably were made I guess a quarter or two ago.
That resulted in the higher Capex this specific quarter and I guess to your point, you've also made incremental elevated orders, which could result, potentially an elevated capex, whether it's in the fourth quarter some future quarter, you're not sure is that my hearing that correctly.
You are hearing that absolutely correctly Colby because we record the capex upon receipt of the equipment.
Got it and then just one quick one if I may on leverage you're not the high end your target to that five to $3 five.
Well could that potentially have any limiting factor on dividend growth going forward.
We do not anticipate that we also note that about six or seven basis points of that is due to foreign exchange distortion.
<unk>.
Show under the indenture at 347, if we took the effects out we'd be at about three four yes, that's above the mid point, but still below the high end.
That high end as an internally set goal by coach it and if something is reviewed with the board as we did a sensitivity analysis for the board earlier. This week, we feel very comfortable that we're gonna be in a position that continue to grow our dividends for the foreseeable future.
Well thank you.
Our next question comes from Thanks, I'll deal with Moffat Nathan Your line is open.
Hi, Thanks for taking my questions.
First since the since the returned to office trend has been a bit different in you call at coastal cities or northern cities versus some of the south are are they're trained you can observe for metros with higher impersonal off into <unk> office attendance versus those with lower rates.
Okay that might give us a sense for how the corporate business should recover as we start to see the cities that are that are behind start to look more like the cities that are further along.
Yeah sure Great question.
So our salesforce sells nationally so we can't look at where the sale originated to be cost a salesperson in New York May actually sell a customer in Phoenix or a salesperson in Houston may solid customer in Seattle.
But we can look at where the orders are installed and we have seen a better performance lower church and higher installs in those southern cities.
Is that enough to really give us confidence that that's where new York and Toronto and Chicago are going.
Not sure. These are smaller markets they tend to have.
A different type of business. So for example, freak look at our footprint in the Texas market wants a broadly diverse economy, it's much more heavily dependent on energy.
New York is heavily dependent on financial services that tends to be a positive for us because of financial services tends to be an industry vertical that is more prone to aggressive return office than some of the consulting and service businesses.
Legal however tends to be an industry. That's a laggard in return office. So I think we look at the data both by and point geography, and buy sic code the customer when we put all of that data together you know.
We're pretty encouraged that as badge wipes increase and leasing activity increase our corporate sales rate in those buildings will inquiries.
Okay. Okay. That's helpful. And then a couple a couple of questions or clarifications on the Salesforce front.
It looks like your full time equivalent reps went up in the quarter. Despite the total number going down quite a bit his mathematically how does that work.
And then second Oh, sorry go ahead.
I was laughing I actually I want to key show, who does our financial modeling and asked the same question and the reason is the F T. As a weighted number over the mom and the number of reps reported as an egg.
Ending number shall we had a significant amount of terms on.
The last couple of days time 30 of the month. So we ended up with an ending number that was actually below the FTE number.
Okay. So the two numbers are calculated.
Okay that makes sense and then the last last one.
As your overseas Salesforce goes back to the office by the end of the year should we expect another step down in the sales.
Sales head count or is that a sufficiently small portion of the total salesforce that it won't be as as noticeable.
So first of all it's a small portion of the Salesforce seconds.
All netcentric.
Third.
Wall there is some anti vax sentiment and some of the countries. The acceptance of vaccines one available in Europe seems to be higher than the U S and we when we implemented voluntary return office, we actually got a.
Much higher take right.
Literally across each of our European markets now we have not yet tested the Singapore sales office as the government does not allow voluntary return yet.
And then we.
We had a bit of a shut back yesterday, another ones, where we want to voluntary we actually had a 100% participation and people returning to the office only to have an order by the Dutch government requiring companies not to allow people to work in the office till the end of the year.
More than 50% of the time, so we're going to be in compliance with every local regulation.
Europe is not monolithic.
Spanish rules are different in Swedish rules, and we're going to comply.
I actually had a call Friday with the UK teams and talk to them about just our sentiment and there is a real increase in reported case volumes again in the U K and while there is not any.
Governmental mandate against coming to the office.
It may happen. So again, we've literally monitor each of these jurisdictions daily.
Okay. That's great. Thank you Dave.
Hey, Thanks, Dan.
Our next question comes from Walter Piecyk with slight Chad Your line is open.
Thanks, Hey, Dave stack.
Pretty incredible to two thirds of your hires leaving I'm, just curious I might be misremembering, this but I felt during the pandemic.
You had talked about how people were as productive you had some software.
Working out of the office, then and maybe you said something differently see you're quite correct me on that but.
Why not just let them work from home.
And do their sales there why do you need to enforce them.
Back on the office in order to maintain their jobs.
So what I had said previously all remote work as we quickly pivoted we quickly.
Quickly modified our hiring and training and we were as effective and hiring people.
Remotely as we were in the office second way.
Later in the pandemic. If you remember it was August of 2020, we implemented a more disciplined approach of managing out the underperformers and we had several quarters of additional elevated.
Salesforce turnover and then it began to revert to normal.
I think.
Yes, there are really three parts to answering your last question around <unk>.
Remote work some employees.
Left because they refused to be vaccinated and the Osha requirements does it gives you a dispensation for people who work at home. If your company has a 100 employees you're supposed to require people to be vaccinated absent religious or medical exemptions.
Two.
There are a number of employees who.
Have I think rethought their lifestyle and prefer to work remotely.
That does not fit the cogent model, well again to remind investors our U S. Salesforce is compensated how early we concluded that they are not exempt employees under the federal Fair Labor Standards Act and is highly.
Unusual to have remote workers hourly.
And then the third point is that we have seen a difference in rep productivity in the office versus remote due to the ability to mentor those less mature reps by March.
Sure reps and managers physically in the same environment, while our reps quit do their job remotely their productivity was lower during the pandemic now some of that was as a result of the market, but some of that.
As a result of those reps not accelerating in their training as quickly as they would in the office.
So most of our elevated turnover has spin off the very newest wraps in fact, most of the turnover where reps that never had set foot in a cogent office and we.
Believe that they will see more effective we do have a program for tenured reps that do allow them to work remotely if they meet their sales objectives.
Got it.
<unk> into.
My next question, which is.
If that's somewhat reflective of the fed.
Note that this is not.
Relatable to 2008, meaning that it's changed how people work.
And when your own employees two thirds of them are leaving.
Whether they're antivaxxer it sounds like more of a lifestyle choice then.
And as you know I know that this is difficult to predict.
<unk> been engaging a miss on past calls, but when you talk about a couple of quarters away to get back to a consistent positive growth.
Do you think this business ever gets back to 2% sequential growth because that could you comment from the prepared comments was or maybe it was in the Q&A.
A couple of quarters to get back to consistent positive growth, but does it get to a 2% sequential growth if ever.
I think the answer is yes, Walt and the reason is we have 16 years of history, and we know that we still have a significant amount of addressable market in our footprint that way or not serving.
The value proposition that we deliver.
Increasingly differentiated from our competitors due to the fact that we're offering a symmetric service that is non oversubscribed in non block if companies are more dependent on the internet. They are more likely to buy from cogent than a cable company or a phone call.
<unk> or a competitive provider due to the fact, our services install faster and are three times more reliable with 60 times the throughput should the value proposition is there. The issue that we are facing is two fold one there are less business.
As in the buildings now.
I can see is almost three times higher than it was pre pandemic and secondly companies are struggling with the exact timeline of their new normal, but as long as the buildings return too.
At least equal or better occupancy or growth rate can easily achieve the 2% sequential that we've historically delivered.
Got it and Dave One last question you know in the past when we talked about gig service I remember years ago, we used to joke about the fact that there was maybe some hedge funds that would buy gig service and they would only use 12 megs right. They were just over purchasing but you were benefiting but clearly people understand the importance of connectivity now and I totally understand.
All new customers are coming on a gig, but how about your revenue have been helped by the fact that over the past two to three years, you've had people that were 100, Meg service effectively upgrading to gig service and does that tailwind kind of Peter out in the years ahead. So that <unk> benefit that you may have been.
Getting from someone's shifting from 100, Meg or 200, Meg up to a gig is no longer there.
So the answer is yes, we did have a tailwind and that tailwind will diminish as the installed base increases, but there are two I think more important offsetting factors Ironically, we're actually starting to see an uptick.
Corporate customers wanting 10 gigabit connections such as your former employer.
<unk>, who is a cogent customer taking all of their one gig connections and upgrading them to 10 gig again, recognizing the importance of bandwidth in trading operations and then secondly, we have faced a two year headwind too.
VPN growth.
Roughly 25% of corporate revenues, 17% of total revenues come from VPN sales those sales.
Sickly stopped and churn increased as companies pruned their office footprint, but existing mpls networks were not migrating to vpns. We are now seeing a reacceleration of that deep.
<unk> growth, which becomes I think even a bigger tailwind in terms of aggregate revenue than the 100 Meg to gig upgrade cycles. So we end up I think net positive as people return or not office, Sean can I, just add a little bit to that Walt I mean.
And atomic basis of how Youre looking at how we're selling for a small premium.
We're going to sell contracted service that has bi directional one gig service to our customers. These are customers that have on average 8000 square feet theyre paying close to $50 a square foot so they might be paying $400000 a year in rent.
The idea that they're gonna have service from a cable company or others that is that is not contractually committed to provide that 100. Meg service. We are beginning to see that one gig is a big differentiator for a very small price. We can really dominate that service and that is that is where the business is going.
Got it thank you.
Thanks, Paul.
Our next question comes from Michael Rollins with Citi. Your line is open.
Hi, Dave Hi, Sal and good morning.
Hey, good morning, Mike Good morning.
So.
Two questions to follow up the first is if you look at the Netcentric growth constant currency year over year is there a way to unpack what's happening domestically, what's happening internationally as you've been expanding your reach in your network.
Maybe the impact whether it's in revenue or profitability from doing more on net and I realize maybe it's hard to do because some of these things might overlap with one another but just trying to appreciate.
You know how to unpack the growth and think about maybe some of those factors in the future.
And then just secondly.
You mentioned that the gross adds are down.
Corporate you know relative to pre pandemic levels just curious.
How much of it do you.
The pandemic and is there a risk that some of that erosion of gross ads could be competitive just as other companies could be using this opportunity to invest or try to get more aggressive at the market that you focus on thank you.
Yeah sure. So let me take the Netcentric one first.
Yeah.
We have benefited from multiple underlying trends.
Growth in Netcentric revenue is driven by.
Increase in traffic increase or decrease in price per megabit.
And the percentage of traffic that is two side.
We have seen outsized netcentric growth after a period of underperformance in Netcentric due to the.
The factors of smaller customers growing faster than the bigger customers, giving us a more diversified customer base.
Two two percentage of traffic that is both originating and terminating on the Cogent network. So that's why.
Our revenue growth to 25%.
Was equal to our traffic growth, whereas in a completely normalized world where these other trends are not taking place and there is a 23% year over year price for at auction.
We would actually see flat revenue. So we have benefited in terms of internationalization.
There's a couple of parts to answer that content is still predominantly a.
U S <unk>.
Just export it to the rest of the world that's not totally true, but it's more heavily.
Heavily U S centric.
And then on the access side you asked has more access networks that are global peers.
And.
Less paying customers as a percentage of the access space, we have many access customers in the U S. But.
Globally, most of the international markets.
By tranches, so we get a higher percentage of two sided traffic.
Now the traffic may actually the content may originate in the U S and terminate in Asia.
Or it may actually be European.
Hosted but then terminating in South American and so it's really dependent on language again, we think of the Internet is an English language phenomena, but you have to remember the vast majority of people that use the internet don't speak English and I get internet traffic.
Growth is growing so you know.
For example, we do very well, we're the number two provider and a porch in Brazil all of that traffic is Portuguese and it's there because most of the people in Brazil don't speak English.
You know so I think we benefit but it's extremely hard to kind of further granular look at that what we do look at though on.
On a regular basis is for every customer where that traffic enters our network, where physically exits the network and to what.
Customer basis is going we actually share that information with our netcentric customers, which they view as a valuable engineering tool to help them design their network, but it's a little hard because it's a usage based service to make exact predictions of traffic.
Then to the gross adds competition versus.
Market conditions well.
When we look at our decline in corporate connections the percentage decline is actually much lower than the percentage increase in vacancy in the buildings. So that's kind of indicating that yes.
We're maintaining our market share.
When we look at <unk>.
Number of connections that are declining it's usually the second connection so going into the pandemic 50% of our.
Corporate customers took a VPN service that number has declined through.
The pandemic, we do think that will return, but short term that has hurt us and to the point to Sean made earlier about the quality differentiator I think our network architecture. The fact that we prewired the buildings.
And we can both quickly install and then deliver services over a ring.
That gives us three times <unk> ability of our competitors, who have linear networks for single points of failure is a huge differentiator is the internet is become more important.
You never want to be complacent about competition, but I don't think our gross adds issue is comp competitive issue I really do believe it is a underlying demand issue as businesses kind of figure out what the new normal is yes, let me just add a little bit to what Dave thing.
We were nervous about.
Had elevated churn during the pandemic. So we went and looked at a series of buildings, which had higher levels of churn in the Gray market building for example, in Europe, which we saw a.
Circuits leave they were they were for the most part all FTE that is a 100 megabits per second.
And we have some for questions as we do.
Did you move to close the office as you go out of business or did you go to a competitor and the great Mark building all of them were one of those answers except for going to a competitor and I think anecdotally, we do see on the 100 Meg side I think there was it was a retailer that did donuts that was.
That was competing with us we're competing with the cable operator and the price got so low I think Dave didn't approve the pricing that's in the low end, we do see that where it's very price competitive on the one gig side. We think we're in very very very very fine shape.
That's helpful. Thanks.
Hey, Thanks, Mike.
Our next question comes from Frank Louthan with Raymond James Your line is open.
Hey, guys, it's Rob on for Frank.
Just a quick one for me so when do you guys see the bottom in the off net disconnects are you seeing any new pockets of off net demand that could potentially offset that as population that work shifts have sort of rebounded. Thank you.
Yes so.
A positive for the off net business is the fact that over 55% of the square footage in North America of office space is now available with fiber provided surfaces from one of our 90 different vendors. So we have over 4 million.
Square feet that we can sell into.
That's the positive the negative is that it's very expensive to sell just off net the competitive differentiation is not large enough. So our off net sales are almost always catalyzed by an on net relationship.
We also note that because there are often times multiple off net choices per endpoint and no 7500 buildings, where we sell those 12500 connections.
Sure.
We have.
The ability to compete them against one another and drive down prices. So rfps have gone down I think as we look at off net it's almost exclusively corporate as a corporate on net rebounds, the corporate off net will rebound and companies will take secondary <unk>.
Actions and therefore, we'll get back to growth that more or less mirrors unit wise the on net growth and the only true.
<unk> will be <unk>, so rather than kind of being a 2% grower, it's kind of like a one to one 5% sequential growth.
I would just add in to that and again this is the geeky theme, but.
We rolled out compass, which is our CRM system last year, we created an ability for salespeople, particularly new salespeople to get between 30% and 50 leave every morning. This is this would be a potential customer and a building that we service through the.
Unfortunately, we do not have much exposure to manufacturing as a sector.
Virtually all of our customers are white collar in an office building by definition and there I think there's been much less supply chain issues and is Shaun pointed out with the average customer spending 400.
House of dollars on rent for a location spending.
<unk>.
$6000 a year on Internet is a trivial expense.
And Ah.
While they may experience.
<unk> in other areas technology has always been deflationary and I think customers expect that and we deliver on that by delivering bigger pipes at a much lower cost per megabit, whether it be the migration from 100 to gig gig to 10.
So I just don't see a lot of supply chain issues really impacting us in terms of the VPN question.
There.
I think companies have kick the can down the road on Mpls replacement they know a chant quaid it but they are waiting for two things one better VPN solutions, which may or may not come from the vendors, but to exactly what locations they want.
<unk> to work in as they figure out how many branch offices. They will close I do think we're starting to see a re acceleration an interest in vpns and most of those are either <unk> or V Pls and there's really not.
Not a lot of alternatives and as I stated earlier, we've seen the additional benefit of companies now, adding an extra note that didn't exist previously for their remote work VPN concentration in data centers. So at all we think.
At.
We will see VPN business reaccelerate to growth rate similar to die.
Great. Thank you.
I am showing no further questions at this time I would now like to turn the conference back to Mister Dave cheaper.
Well I'd like to thank everyone for their interest I noticed on call, but a lot of excellent questions take care, everyone stays safe. Thanks bye-bye.
This concludes today's conference call. Thank you for participating you may now disconnect.
Uh-huh.
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