Q2 2019 Earnings Call
As a reminder, this conference call is being recorded and will be available for replay at www Dot cogent cone dot com.
I would now like to turn the call over to Mr., Dave Shaffer, Chairman Chief Executive Officer of Cogent Communications Holdings, Sir you may begin.
Thank you and good morning, everyone welcome to our second quarter 2019 earnings call I'm, Dave Shaffer, Coach's, Chief Executive Officer, and with me on this morning's call is Tad weed, our chief financial Officer.
Now for some highlights from our second quarter 2019, we continue to be optimistic about the underlying strength of our business.
Well for the remainder of 2019 and beyond.
Gross margin for the quarter increased by 170 basis points from the second quarter of 2018% to 59.8%.
Our cash flow from operations increased by 41.9% from the first quarter of 2019, and an increase of 29.9% from the second quarter of 2018 to a total of $40.600 million for the quarter on a constant currency basis, we achieved sequential revenue growth of seven tenths of 1% and year over year revenue growth of 5.4%.
Quarterly sales rep productivity at 4.9 units installed per full time equivalent rep per month.
Was a productive productivity rate slightly below our long term historical average of 5.1 units per rep per month for full time equivalents.
Our year over year.
Traffic growth was up 31% and we achieved sequential traffic growth of 1% and what is traditionally a slower traffic period of the year.
During the quarter, we returned $27.7 million to our shareholders through our regular dividend, we did not purchase any stock during the quarter at quarter end, we had a total of $34.9 million available for stock buybacks under our stock buyback program, which our board has authorized to continue through December of 2019.
In June of this year, we issued a 135 million euros for 153.7.
A million dollars of senior secured notes with net proceeds of.
$152 million.
These notes accrue interest at the rate of 4.375% and mature in June of 2024.
Our gross leverage ratio increased to five point weight, but is in fact 4.92 as measured under our indenture. This is an increase from the 4.2 way we had at the end of the previous quarter.
Our net leverage ratio remained essentially flat and was 2.93 at the end of Q.
Two versus 2.92 at the end of Q1.
Our consolidated leverage ratio as defined under our indenture is 4.9 too and it was 4.18 last quarter cash held at our parent company Cogent holdings is $167.7 million at quarter end.
This cash is unrestricted and available to use for dividends hand or stock buybacks cash held at our operating company.
Is.
241.600 million and our combined cash holdings, both at the holding and the operating company level, our 409.300 million at quarter end.
We continue to remain confident in the growth potential and cash generating capabilities of our business as a result as indicated in our press release, we have announced yet another sequential two cent increase on our regular quarterly dividend from 60 cents per quarter per share to 62 cents per share per quarter, representing our 20 eightth consecutive sequential quarterly increase on our regular dividend.
Throughout this discussion we will highlight several operational statistics I will review in greater detail some of the operational highlights and trends in the business a tad will provide some additional details on our financial performance. Following these prepared remarks, we'll open the floor for questions and answers now I'd like to turn it over to tend to re safe Harbor.
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 forward looking statements and if we use any non-GAAP financial measures. During this call you will find these reconciled the GAAP measurement in our earnings release, which is posted on our website at coding co dot com.
I'll turn the call back over to Dave Hey, Thanks Tad.
Hopefully you've had a chance to review our earnings press release, our press release includes a number of historical quarterly metrics. They are reported on a consistent basis for a number of years.
Our corporate business, which represents 68% of our revenues in this quarter has been growing above our targeted long term guidance for full.
Total revenue growth of 10% in fact, it grew 10.8% from the second quarter of 2018, However, our netcentric business has been under performing compared to historical averages and declined 7.7% from the second quarter of 2018.
The impact of foreign exchange, primarily impacts our netcentric business on a constant currency basis, our netcentric business did however decline at 4.4% from the second quarter of 2018.
Our quarterly cash flow as defined by EBITDA minus Capex minus principal payments on our capital leases for the first six months of 2019 grew by 13.3% from the first six months of 2018.
Due to the excellent operating leverage in our business, we expect our cash flow growth to continue at similar rates.
Our long term EBITDA annual margin expansion guidelines are for a annual improvement of approximately 200 basis points.
Our multi year constant currency revenue growth target is approximately 10%.
Our revenue and EBITDA guidance targets are intended to be multi year goals and are not intended to be specific quarterly guidance.
No Ted will handle some additional operational and financial details for the quarter.
Thank you, Dave and again good morning, everyone.
I would also like to thank and congratulate our entire cogent team for the results for their continued hard work and efforts during another productive quarter for the company.
On corporate and Netcentric revenue and customer connections.
We analyze our revenues based upon network type, which is on that off net and non core and we also analyze our revenues based upon customer type.
And we classify all of our customers into two types netcentric customers and corporate customers.
Our netcentric customers buy large amounts of bandwidth from us and carrier neutral data centers.
In our corporate customers buy bandwidth from us in large multi tenant office buildings.
Revenue from our corporate customers for the quarter grew sequentially by 2.4% to $92.3 million.
And grew year over year, as Dave said by 10.8%.
We had 47650 corporate customer connections on our network at quarter end.
Which was an annual increase of 11.7% over the second quarter of last year.
A reduction in the USGIF rate reduced our corporate revenue sequentially by about $200000.
Quarterly revenue from our Netcentric customers declined sequentially by 3.4% to $42.5 million and declined year over year by 7.7%.
FX, primarily impacts netcentric customers, so on a constant currency basis, our quarterly revenue from our netcentric customers declined by 2.8% sequentially instead of the 3.4.
And declined year over year by 4.4% instead of the 7.7%.
We had 36404 netcentric customer connections on our network at quarter end, an increase of 8.6% over the second quarter of last year.
Our netcentric revenue growth experiences significant more volatility volatility than our corporate revenues due to the impact of foreign exchange customer size and other seasonal factors.
On revenue connections by customer type.
Our on net revenue was 97 and a half a million dollars for the quarter, a sequential quarterly increase of 8.3% and year over year increase of 4.8%.
Our on net customer connections increased by 1.9% sequentially and by 10.7% year over year.
We ended the quarter with 72415 on net customer connections on our network and our 2737 total on net multi tenant office buildings and carrier neutral data center build.
Our off net revenue was $37.2 million for the quarter.
Which is a sequential quarterly increase of 8.9% and a year over year increase of 3%.
Our off net customer connections increased sequentially by 1.6% and by 8% year over year.
We ended the quarter, serving 11321 off net customer connections and over 6716 off net buildings and these off that buildings are primarily in North America.
Some comments on pricing.
Consistent with historical trends the average price per megabit of our installed base decreased for the quarter. However, the average price per megabit for our new customer contracts was again relatively stable with a modest decline.
The average price per megabit for our installed base declined sequentially by 6.2% to 63 cents and declined by 27.1% from the second quarter of 2018.
The average price per megabit for our new customer contracts from the quarter was relatively flat sequentially and year over year.
And declined by 2.1% from 39 cents to 38 cents.
And declined by 1.4% from the second quarter of 2018.
Comments on ARPU.
Our on net ARPU and off net ARPU boast to decrease sequentially for the quarter.
Our on net ARPU, which includes both corporate and Netcentric customers was $453 for the quarter, which was a decline of 2.3% sequentially.
Our off net ARPU, which is comprised of predominantly corporate customers was $1104 for the quarter, which was a decrease of 0.6% from last quarter.
Churn rates.
Our on net churn and off net churn rates increased slightly during the quarter. Our on net churn rate was 1.1% for the quarter, that's a unit churn rate.
And was Oh, 0.9% last quarter and our off net unit churn rate was 1.2% this quarter and was 1.1% last quarter.
Comments on Netcentric change orders.
We offer discounts related to contract term to all of our corporate and Netcentric customers.
We also offer volume commitment discounts to our netcentric customers.
During this quarter certain netcentric customers took advantage of our volume and contract term discounts.
Entered into long term contracts for over 2400 customer connections increasing their revenue commitment to cogent by over $25 million.
Comments on EBITDA and EBITDA as adjusted.
Our EBITDA and EBITDA as adjusted are reconciled to our cash flow from operations in all of our quarterly earnings press releases.
Seasonal factors that typically impact our SG M&A expenses, and consequently, our EBITDA and EBITDA as adjusted to include the resetting of payroll taxes in the United States at the beginning of each year.
Annual cost of living or CPI increases.
The timing and level of our audit and tax services.
And the timing and amount of our gains on equipment transactions.
Our annual sales meeting costs and also benefit plan annual cost increases.
These seasonal factors typically increase our estimating expenses in our first quarter from our fourth quarter.
Our SGN a expense increased from the first quarter.
In this quarter, primarily to an increase in our head count of 29 employees, primarily in our Salesforce and a 770000 increase in our bad debt expense.
The bad debt increase was primarily due to the last two days of the quarter falling on a weekend, which reduced our customer cash collections and impacted our cash to billings ratio, which we use in determining our general accounts receivable reserve.
Our quarterly EBITDA declined by 1% sequentially and was $47.1 million.
Our EBITDA increased year over year by $1.2 million or by 2.6%.
On an FX adjusted basis, our quarterly EBITDA increased by 8.3% sequentially and increased year over year by $1.8 million or 3.9%.
Our quarterly EBITDA margin decreased by 60 basis points sequentially to 34.9% and declined year over year by 60 basis points.
Our EBITDA as adjusted.
Includes gains related to our equipment transactions.
Our equipment gains were only a 185000 for the quarter, which was a decrease from $357000 for the second quarter of last year and 536000 for the first quarter.
Our quarterly EBITDA as adjusted decreased by $807000 or by 1.7% sequentially to $47.3 million and increased year over year by $1 million or by 2.2%.
Our quarterly EBITDA as adjusted margin decreased sequentially by 80 basis points.
35.1%.
And decreased by 70 basis points year over year.
EPS, our basic income per share was 16 cents for the quarter compared to 20 cents last quarter and 15 cents for the second quarter of last year.
Some comments on foreign exchange.
Our revenue reported in us dollars and earned outside of the United States was about 22% of our total revenues.
About 16% of our revenues this quarter were based in Europe .
At about 6% of our revenues were related to our Canadian Mexican Asia Pacific and Latin American operations.
Continued volatility in foreign currency exchange rates can materially impact our quarterly revenue results on our overall financial results.
The foreign exchange impact on our reported quarterly sequential revenue was a negative $260000 in the year over year foreign impact on our reported quarterly revenue was a negative $1.5 million.
Our quarterly revenue growth rates on a constant currency basis, we're opening 7% sequentially and 5.4% year over year.
The impact of foreign exchange again, primarily impacts our netcentric revenues.
The average euro to us dollar rate so far this quarter was about $1.12.
The average Canadian dollar exchange rate is about 76 cents.
Should these average foreign exchange rates remain at the current average levels for the remainder of our third quarter of this year.
We estimate that the foreign exchange conversion impact on our sequential revenues.
We will not be material.
However, the year over year conversion impact on our revenues is estimated to be negative 800000.
Customer concentration.
We believe that our revenue and customer base is not highly concentrated our top 25 customers represented less than 6% of our revenues this quarter.
Capital expenditures.
Our capital expenditures declined by 11.8% sequentially and by 2.2% decline year over year.
Our capital expenditures were $11.7 million this quarter compared to $12 million for the second quarter of last year.
$13.3 million for the first quarter.
I'm 2019.
Comments on capital leases and capital lease payments.
Our capital lease higher you obligations are for long term dark fiber leases and typically have initial terms of 15 to 20 years or even longer and often include multiple renewal options. After the initial term.
Our capital lease IRU fiber lease obligations totaled $168.2 million at quarter end.
And at quarter end, we had the IRU contracts, a total of 240 different fiber suppliers.
Our capital lease principal payments principal payments under our dark fiber are you agreements declined by 34.8% sequentially and declined by 47.4% year over year.
Our capital lease principal payments were $2 million for the quarter compared to $3.8 million from the second quarter of last year and $3 million for last quarter.
Our expenditures on capital lease principal payments combined with our capital expenditures improved both sequentially and year over year.
Our capital lease principal payments combined with our capital expenditures were 13.7 million this quarter compared to $16.3 million for the first quarter and $15.7 million for the second quarter of 2018.
Comments on cash and operating cash flow at quarter end, our cash and cash equivalents, including the $152 million net proceeds from the issuance of our 2024 notes totaled $409.3 million.
For the quarter, our cash increased by $150.1 million.
We returned 33.1 million of capital to our stakeholders this quarter, which included a $27.7 million for our regular quarterly dividend payment and $5.3 million was spent on our semi annual interest payment on our debt.
Our quarterly cash flow from operations improved materially and increased by 41.9% sequentially and increased by 29.9% year over year.
Our cash flow from operations was $40.6 million for the quarter.
Compared to $31.3 million for the second quarter of last year and $28.6 million for last quarter.
Debt ratios.
Our total gross debt at par, including capital lease obligations was $967.9 million at quarter end and our net debt was $558.6 million.
Our total gross debt to trailing last trailing last month.
EBITDA as adjusted ratio was 5.8.
At quarter end and our net debt ratio was 2.93.
Finally, some comments again on bad debt and day sales outstanding.
Our bad debt expense increased by 770000 this quarter from last quarter and was 1% of our revenues from the quarter, an increase from 5.5% of our revenues for the first quarter and old 0.6% of our revenues for the second quarter of last year.
Our day sales outstanding or Dsos, though was the same at last quarter Thats a worldwide ratio and that was 23 days.
And again I want to thank and recognize our billing and collections team for continuing to do a fantastic job of serving our customers and collecting from our customers.
And I will turn the call back over to Dave.
Hey, Thanks, Tad now for a few comments on cogent scale and network expansion the size and scale of our network continues to grow.
We have over 951 million square feet of multi tenant office space in North America on net.
Our network consists of over 34100 miles of Metro fiber connected to over 57400 Intercity route miles of fiber.
The Cogent network is the most interconnected network and the world and we aren't directly connected to over 60 760 networks at quarter end of wish less than 30 are settlement free peers. The remaining 60 730 networks are paying cogent transit customers.
We are currently utilizing approximately 27% of the lit capacity in our network.
We routinely augment capacity in parts of our network to maintain these low utilization rates for the quarter, we achieved sequential traffic growth of 1% year over year traffic growth of 31%.
We added another new Cogent controlled data center and sales office to our network and Charlotte North Carolina. We now operate 53 cogent controlled data centers with 592000 square feet of raised floor space and these facilities are operating at approximately 32% of capacity.
Our sales rep turnover for the quarter was 5% again better than our long term average rep turnover of 5.7% per quarter.
Our quarterly Rep productivity at 4.9 units per full time equivalent per month, so productivity rates slightly below our long term average of 5.1 units per full time equivalent rep per month.
But this is partially due to the increased rate in hiring in our sales force. We ended the quarter with 100 519 sales reps selling our services, which is a significant increase from the 501 sales reps. We had at the end of Q1 2019.
And most of the sales reps. We have had this is the largest number we have ever had in our history.
We ended the quarter with 478 full time equivalent sales were up selling our services, which again is a significant increase from the 400 and.
64 full time equivalent reps, we had at the end of Q1 2019.
So in summary, Cogens remains the low cost provider of Internet access transit services and our value proposition remains unmatched in the industry.
Our business remains completely focused on the Internet IP connectivity and data center co location services and these are necessary utilities for our customers.
Our multi year constant currency long term revenue growth target is approximately 10% and our long term EBITDA margin expansion rate is expected to be approximately 200 basis points per year.
Our board of directors approved yet another sequential increase in our regular quarterly dividend increasing that dividend by two cents a share to 62 cents per share per quarter.
Our dividend increase demonstrates our continued optimism regarding the increasing cash flow generating capabilities of our business.
We will be opportunistic about the timing of purchase for our common stock in the open market at quarter's end, we had a total of 34.9 million remaining under our current buyback authorization.
Which remains in place through year end.
We are committed to returning increasing amounts of capital to our shareholders on a regular basis with that I'd like to now open the floor for questions.
Thank you.
Ladies and gentlemen, if you have a question at this time. Please press Star then the one key on your desktop telephone. If your question has been answered or you wish to remove yourself from the queue. Please press the pound key.
Again, if you have a question. Please press Star then the one key on your Touchtone telephone.
Our first question is going to come from Philip Cusick from JP Morgan. Your line is now open.
Hi, Good morning. This is read on for Phil Thanks for taking my question.
We've seen two consecutive quarters of really strong growth in sales head count naturally, there's there's going to be tradeoff with less tenured sales folks, but can you talk about again, the rep productivity trend and maybe some of the progress seen from the investment in training and then and then was to Q a full quarter of sales opportunities. Thanks very much.
Yes sure. Thanks for both questions. So we are significantly ahead of last year's pace of Rep hires.
Last year, we did most of the additions to the sales force in the latter part of the year. This year, we were really focused on getting ahead of the curve and continuing our hiring at the same rate we exited last year in the first half of this year.
Our average Rep tenure has declined as a result of this increased hiring and we have a large increase and the number of reps in the six to 12 month maturity category, which has negatively impacted rep productivity as we have mentioned in the past a rep is counted as a full time equivalent after being on the job for three months. However, rep productivity linearly continues to increase for approximately the first 30 months of a reps career at Cogent shows this increase in the percentage of our reps in this formative part of their career at six to 12 months has had a slightly depressing effect on our rep productivity, but it's fairly benign at taking rep productive.
MPD from an operational 5.1 to 4.9.
These investments and the Salesforce.
Recognized the increased demand from customers in our buildings in fact, our increase in penetration rates and our corporate buildings has accelerated over the past year due to heightened levels of use of cloud and SaaS software and we feel it's necessary to have the reps available to meet those customers require.
We have significantly infested in training over the past several years that investment strategy continues it did have an impact on our SGN aim of water, but we do think that the 200 basis points of margin expansion that we will deliver we will continue to come from about half operating leverage on the network side I see gross margin improvement and about half assed DNA efficiency.
In this most recent quarter as you saw.
Virtually all of our operating leverage was coming from our network efficiency being up 190 basis points and in fact, we saw some negative leverage due to this increase in hiring but the investment in our sales force is going to continue to pay dividends for many years as our cost of revenue acquisition remains the lowest in the industry.
Thanks very much.
Thanks.
Thank you and our next question comes from Colby, So Nissl from Cowen and company. Your line is now open.
Thank you.
Maybe just following up on that a bit as you guys mentioned in your prepared remarks SG name was up.
Quarter over quarter were typically down and you mentioned bad debt expenses being part of that.
Would you expect that to reverse.
In the third quarter, and then as it relates to that 200 basis point long term goal, where do you think you'll be as it relates to margin expansion.
In 2019 now that we have just two quarters left and then secondly on Capex, it's been a while since you've just refresh us on that where do you see capex going longer term for the business. Thank you.
Sure. Thanks for the three questions Colby I am going to let Tad take the bad debt one first and then I'll grant the other question.
Yes, Hey, Colby.
Unfortunately, this hasn't happened in a while but the last few days of the quarter were on the weekend and we had a material reduction in cash collections from our us customers for the quarter for the month of June that reversed in July in fact, we collected 9 million more in cash in July than we did in in June and one of our calculations to determine our bad debt expense is a general reserve for ratio of cash collections to billings or so of cash collections are lower that results and are required to increase that reserve under the just the mechanics of the math and that really resulted in.
Abnormal increase in SGN aimed to directly answer your question I do expect that to revert in the third quarter since the cash came in kind of that following week in July .
Yes, and you know our.
Bad debt expense and Dsos remain much better than the rest of the industry and while there can be some fluctuations has had pointed out due to the calendar, we feel pretty comfortable that the bad debt experience a cogen will remain in line with historical averages.
Now for your question around margin, we will probably be below 200 basis points of expansion full year, just because we have two quarters in.
At this point and have not achieved 200 and it would require I think an extraordinary amount of margin expansion in the latter half of the year with that said, we do expect to see substantial improvement in our margin expansion in the second half of the year. However, arithmetically it will probably not be enough to take us to that full 200 basis points for the year, but again thats, a multi year trend and we've delivered that now over a 17 year period and expect to continue to have another.
Seven or eight years off roughly 200 basis points, a year over that seven or eight year period, having all our long term EBITDA margins.
Continue to expand from about 35% today up to about 50%.
Now to your Capex question.
So our capex shows up to different places on our cash flow statement as both Capex and principal payments on capital leases.
We will be down from last year, where that combined number was about $16 million.
This year, we were down for the first half of the year and we will continue to be down probably three or $4 million from that combined number for the full year. We do expect that continued adoption and absolute capital both principal payments of capital leases to extend beyond.
This year into next year and the next several years and expect that total number to continue to go down.
Thank you.
Thanks Colby.
Thank you.
And our next question comes from Nick del Deo from Moffett Nathanson Nathanson. Your line is now open.
Hey, Thanks for taking my questions.
Yes, the netcentric growth both year over year and sequentially was the lowest I think at least a dozen years. If we if we forget about mega upload.
What are you seeing in the market.
No were there any large customers that hit pricing break points in the quarter and I guess more general sense, how long does this have to persist before we.
Ill conclude that something fundamentally different about the market today versus versus.
Historically.
Yes, so a couple points Nick.
Clearly our Netcentric revenues have underperformed now for six years against long term trends beginning with the loss of Mega, but think continuing through net neutrality and then continuing on as we've seen accelerated price declines from some of our largest customers with a mix shift going to growth from our largest customers versus our more broadly.
<unk> represented smaller customer base.
We think that it will stabilize and improve as we have said on previous calls we do not view this as a straight line to improve or rather a.
Lumpy road, where the Netcentric revenues will bottom, we think we are either at or near that bottoming of the rate of decline now and we will gradually improve.
Transcend remains the primary method for companies, who either have a regional network, who distribute internet to connect and get access to the greater Internet. We have 60 730 networks in fact doing that and then secondly for companies that generate content, while they may look at using cdns for direct connections.
Those alternatives are typically more expensive and may be more difficult to manage and fat many of the cdns and turn our just intermediaries buying transcend from us.
Now clearly they get aggregated buying power because our aggregating multiple customers.
But whether you're a content producers pushing an application out or an access network, allowing your customers to pull applications down trend set is the easiest to use most ubiquitous and lowest cost way to access the public internet and the depth of the internet. The substitution of alternative technologies have been predicted multiple times clearly the volatility and low performance of the Netcentric business is not what we expect long term or we wouldnt comment on a permanent change in the market and we are seeing signs that the market is slowly.
Bottoming out and beginning to heal.
Did any large customers hit pricing break points in the quarter or was this with the performance more broad based.
It was more broad based Nick.
There were some price breaks for several large customers, but none that were material enough that we could point to that would say that was the underperformance. This quarter. There were some price breaks and as Ted mentioned in our prepared remarks.
We had approximately 2400 netcentric customers count lower prices, having existing contracts and repriced a few of those were orange customers, but again not a specific customer this quarter.
Okay and then the network on network expense has been a bright spot.
To what degree has that been attributed to falling off that excess costs and to what degree.
It has been a drill to other factors because I'm trying to get a sense for what it might look like if pricing for off net circuits starts to stabilize.
Yes, so our off net pricing model is typically to get the very best price. We can in the roughly 1000 or 1 billion 30000 locations, where we can sell off net services delivered via fiber from one of our 90 vendors and then double that we have been able to use the competitive tension between cable companies and telcos to drive down that pricing and we capture some of that benefit short term and then when contracts come up for renewal we pass those on and obviously, we pass those on immediately for new customers, but we're also getting operating leverage out of the fixed network and the rate at which we have been expanding the network whether it be incremental multi tenant office buildings we.
Go on from a long term average of adding over 8% to gear down to only about 2.5% to year.
Whether it be data centers or new markets have all slowed so that slowdown in the rate of expansion has also helped us improve gross margins with the on net business and then finally in a low inflation world, where our fixed maintenance payments half CPR buys in some cases weve been able to pay less than the capped CPR high and that has also helped us in terms of improving gross margins. So we think all of these factors are likely to continue going forward and again, we expect the 200 basis points of EBITDA margin to come from a roughly equal split of SGN, a efficiency and network efficiency over the long term clearly the quarter specifics of increasing the rate of.
Salesforce hiring and the mechanics of the increase in bad debt. The Tattered Trust did hurt our SGN a this quarter, but we don't view that as a long term trend, but rather more as a single quarter anomaly.
Okay. Thanks for all that detail Dave.
Hey, thanks.
Thank you and our next question comes from Frank Lucent from Raymond James Your line is now open.
Great. Thank you.
So what is the current churn with with your reps.
And I'd be curious what the what the trend has been both in the Netcentric and in the corporate and then how long do you expect.
The netcentric sales sales people to get up to kind of full productivity.
Yes, so multiple questions there Frank so first of all as we commented on our long term average turnover of the entire Salesforce is 5.7% of the force per month.
This quarter it was five point.
So significant almost 20% below long term averages and we have been bending that curve lower due to better training and some of the management tools, we have put in place.
Almost all of that turnover is on the corporate side.
Over half of our Netcentric reps are outside of the us where there is usually a greater cost for turnover secondly.
Those wraps all netcentric reps tend to have substantially more tenure they make more money. Some have been internally promoted some have come from the outside.
But most of all our effort has been on the corporate side, we're roughly 72% corporate wraps approximately 28% netcentric.
And it the bold and reps that have tenure between six and 12 months is almost exclusively on the corporate side and as I commented in answering a previous question. It's really this up tick in the demand environment that has us encouraged on the corporate side, where were seeing increasing rates of cloud adoption and increasing utilization of SaaS software and it is those two catalysts that are the greatest.
Catalyst for a customer switching to cogent.
We have about 14.3 customers per multi tenant office building buying about 23, and a half circuits from us in total per building or excuse.
Yes circuits per building.
And we are seeing an increase in penetration rates in our buildings, even though the rate of building additions to the network has slowed and it said increased penetration that has us optimistic about the heightened level of investment we're making in the sales force and as I said last year, we got behind on where we were a little slow in the first half of the year and pretty aggressive in the last half. This year, we were committed to making sure that we did not fall behind in fact, we're at about a 12% growth rate today year over year that is higher than our stated goal of 7% to 10%. So I suspect, we'll see a slight slowing of the growth rate in the corporate salesforce in the latter part of the year to meet our year target.
Okay, great. Thank you.
Thanks Frank.
Thank you and our next question comes from Michael Rollins from Citi.
Your line is now open.
Hi, Thanks, and good morning, two questions if I could.
Your first David if you look at the.
In selling the services, because you get such a value proposition.
What are the biggest barriers to adoption.
Hi customers, especially on the net centric side, but also maybe you could touch on the corporate side. As you are just referencing some of the progress we're making in the buildings and then secondly, just to.
Follow up on.
Some of the disclosures around the installment payments.
Hi to a vendor is that considered capex at the time it can fees or should that be something that gets considered in the free cash flow calculation. Thanks.
Sure Let me I'll take the first one and part of the second one and tattle finish up because he is a much better account than I am.
So in terms of our value proposition is very different for each of our customer bases.
On the Netcentric side we.
Guaranteed potential customers to undercut competitors by 50% that value proposition has been consistent for a number of years. We also have to standard rate cards, which wed joss usually on an annual basis that are volume and term driven.
Now virtually all netcentric customers will multi home, meaning they use multiple networks as we have stated more network's buy from us than anyone else in the world, but because were number two in traffic is showing us that we don't have the majority of traffic from the majority of our customers and for that reason we offer. These additional inducements to help them shift traffic, we will never have a 100% of that market, but our market share continues to increase while our competitors continue to lose market share and we feel that the value proposition that we deliver to a netcentric customer is superior to alternate ways to connect whether it be a CDN or through a direct connect we hear that from multiple customers.
And multiple locations and as witnessed by the fact that our traffic growth rates are higher than industry.
Models for Internet traffic growth showing that we are in fact, gaining market share with our transfer product now shifting to our corporate customers.
The impediment to sales as typically the inertia of not having a problem.
The three quarters of the potential customers in a on net multi tenant office building.
All have internet connectivity today from some other provider other than cogent.
It is typically inferior lower throughput longer install time and less reliability.
That surface, however is not able to keep up with the requirements when the I. key infrastructure moves to SaaS and to the cloud and what is our sales challenge is to be in front of that customer when that change occurs and for that reason.
We continue to grow our sales force and make sure that we have enough corporate wraps. That's why our penetration rate continues to increase at an increasing rate.
And we feel that there are still a lot of addressable market there for us to capture in that three quarters of the tenants in the building that are not buying from US and then secondly, with the deployment of SD Wan Npls. We also have the ability to add a second connection to those corporate customers.
Now for the I'll give a little of the history of the installment program and then tattle will touch on.
No how it's accounted for that program was implemented when.
We were required to implement new software from our primary vendor that was outside of our previous contract and in order to support that the vendor allowed us to purchase that on this installment sale program that was zero interest.
And that has continued in place for a portion of our infrastructure requirements. Ted you want to touch on the accounting sure. Now I think you were also wanted to know basically the installment costs associated either with adding new customers or expanding the network and there is really three main buckets, there and they are accounted for differently. So.
When we add a new capital lease and we have an upfront payment that upfront payment is included with the monthly payments. If there are and Thats recorded as principal payments on capital lease in the amortization table. So that goes in the financing section of the cash flow statement.
If we are paying a third party to install a new customer and the amount has over our threshold to do that that is recorded as capex and that's amortized to depreciation expense.
If we are installing an off net customer and there is a nonrecurring charge upfront.
That is recorded as reported as a prepaid asset and amortized to cost of goods sold under circuit costs. So those three components are actually wind up in three different areas on the financial statements.
Does that help.
It does and then specifically now that the this installment amount.
That Dave was talking about.
On the balance sheet.
Yes for the for the software upgrade and the equipment is that.
We've got included in Capex or is that treat you more like capital lease and it it.
We've not included in the initial capex at the time that was incurred.
Now that is not included in Capex and then the payments on the.
Amarin on the amortization of the associated notes is in the financing section the principal payments under the installment agreement.
That's very helpful. Thank you very much.
Yes, hi, Thanks, Mike.
Thank you.
And our next question comes from Brandon Bounce from Keybanc Capital. Your line is now open.
Hey, guys. Thank you for taking the question, Dave I guess on the Netcentric business should we be embedding any expectation.
For some the new streaming launches that are coming from Disney and.
You know 18 to you next year.
Into our assumptions for traffic growth and do you think those those products could ultimately.
Accelerate net Netcentric trap group, then I guess I'm curious I'm not sure I might have missed this but you some bonds European bonds hearings, but the thought process in terms of issuing European that I'm, assuming that's just lower cotton cost of financing, but what are your also your intended.
Use of the proceeds thanks.
Sure. Thanks for both questions, Brian and I will take them in reverse order on the euro bonds roughly 22% of our revenues are outside of the U. last we have about equal profitability outside of the us. So there is a natural hedge in our business.
European base interest rates are substantially lower than north American rates spreads are slightly wider but the all in cost of debt was lower in Europe than it is here in the us So our two north American bonds, which have very short duration.
Trade at about a 4.9% if we added a new north American instrument. It would probably have been in the low fives, because who would have had longer duration.
We look to in Europe , and were able to save about a 100 basis points by issuing in Europe . So it was truly just a cost of capital question and then we have repatriated that cash immediately to the us.
Gave us some additional balance sheet flexibility, but also broaden our bondholder investor base.
That I think as we continue to grow our revenues and continued to naturally de lever through margin expansion will continue to look at the debt markets as a low cost of capital to supplement our returns to equity through buybacks and dividends now to the operating question.
Over 90% of our Netcentric business is somehow tied to streaming video.
The market has been dominated for the last few years by one major player I think some of these new launches broaden the content choices are an acknowledgment that screaming has gone mainstream and in fact some of these companies are already cogent customers and we anticipate they will continue to take advantage of our quality and value and expand their relationship as their products become successful.
So as we've said in the past, we're not here to pick winners and losers in the streaming more we're here to support all of the streaming providers the more they buy the lower their price gaps and.
We want them all to grow rapidly and today with only about 16% of video delivered via streaming in the developed world. We think there is a long way to go over the next several years and we view Disney and eight TNT as.
A step towards a world, where eventually 80 or 90% of video is streamed as opposed to in some kind of broadcaster stored media. So all of these are encouraging trends for our netcentric business and to layer on what was asked earlier listen if they could get to their customers and a cheaper easier way than transit they should do that and in fact.
All of the major streaming companies use transit and increasingly uses so we remain encouraged about the long term trend submarket plus and we're not happy about the short term underperformance, but long term we feel the transit is here to stay and will improve.
Thanks spending questions.
Thanks.
Thank you and our next question comes from James Breen from William Blair.
Your line is now open.
Thanks for taking the question Dave can you just talk about the balance sheet and given.
The notes you just raised in the cash you have how youre thinking about leverage levels and and im assuming that returning capital to shareholders hasn't changed thanks.
It has not changed and thanks for the question Jim So first of all the fact that we raised our dividend again, two cents sequentially a quarter for the 20 eightth consecutive quarter is I think an indication that.
Priests in the dividend to an through buybacks opportunistically, we have a leverage target range of two and a half to three and half times EBITDA on a net basis, we effectively remain flat, even though we've raised the dividend and increased our interest expense with these additional bonds.
We were at 2.93 this quarter 2.92 last quarter slightly below the midpoint of the range.
I think we remain in a low interest rate environment and for that reason the company remains committed to supplementing free cash from operations with borrowed capital for our equity holders benefit now as we get volatility on our stock will be more aggressive in buying back stock, but the $409 million of cash is far more than the company needs to carry on its balance sheet and we are committed to slowly to scorching cash to shareholders.
Great. Thanks.
Thanks, Jim.
Thank you and Im showing no further questions I would now like to turn the call back over to Dave Shaffer, Chairman and Chief Executive Officer Officer of Cogent Communications Holdings for further remarks.
Well I just want to thank everyone. Thanks for the support and we'll see you soon at a couple of conferences take care everyone. Thanks Bye bye.
Ladies and gentlemen, thank you participating in today's conference. This concludes today's program may all disconnect everyone have a great day.