Cogent Communications Holdings, Inc.

Welcome to the CodeGen Communications Holdings Incorporated first quarter 2022 earnings conference call and webcast. My name is Hilda and I will be your operator for today's call. At this time, all participants are in a listen-only mode. Later, we will conduct a question and answer session. During the question and answer session, if you have a question, please press 01 on your touchstone phone. As a reminder, this conference call is being recorded and will be available for replay at www.cogencode.com. A transcript of this conference call will be posted on the same website when it becomes available. Cogen's summary of financial and operational results attached to its press release can be downloaded from the Cogen website. I will now turn the call over to Mr. Dave Schaefer, Chairman and Chief Executive Officer of Cogen Communications Holdings.

Thank you and good morning. Welcome to our first quarter 2022 earnings conference call. I'm Dave Schaefer, Cochran's Chief Executive Officer. With me on this call this morning is Sean Wallace, our former Chief Financial Officer, and Tad Weed, our returning Chief Financial Officer. I want to personally thank Sean, a longtime friend, for his willingness to step in and act as our Chief Financial Officer while Tad was on medical leave. And now that Tad has fully recovered, and after a brief transition period with Sean, Tad will be resuming his CFO duties. I'm excited to welcome Tad back as our CFO. Hopefully, you've had a chance to review our earnings press release. Our press release includes a number of historical quarterly metrics, which are presented on a consistent basis. Our corporate business continues to be influenced by real estate activity in central business districts. Two key statistics, including the level of card swipes for security entrance into buildings and leasing activity, indicate that during the first quarter, the real estate market and leasing activity in central business districts in which we operate continue to see improvement. During the quarter, leasing activity across major markets continued to increase and workers' return to offices continued to accelerate. In the first quarter, our corporate business experienced the smallest decline since the beginning of the pandemic as gross additions improved and net churn continued to decline. Adjusting for the negative effect of changes in the Universal Service Fund revenue, our corporate business was essentially flat in the quarter. While these improvements in our corporate business are encouraging, we continue to remain cautious in our outlook given the uncertain economic environment and the continuing challenges of the endemic. Our net-centric business continues to benefit from continued growth in video traffic and streaming. For the first quarter, our traffic was up 8% sequentially and increased by 17% on a year-over-year basis. Our net-centric business grew by 4.4% sequentially quarter-over-quarter and by 15.1% on a year-over-year basis. On a constant currency basis, our net-centric business increased by 18.6% from the first quarter of 2021 and grew by 5.3% from the fourth quarter of 2021. Despite facing significant revenue headwinds this quarter from the negative impact of foreign exchange and the reduction in USF revenue, our first quarter total revenues increased sequentially by 1.3% to $149.2 million and increased by 1.6% on a year-over-year basis. On a constant currency basis, our revenue increased sequentially by 1.7% and 2.9% on a year-over-year basis. On a constant currency basis and adjusting for the negative impact of the decline in USF revenues, from the change in USF tax rate, we experienced a sequential growth in revenue from the fourth quarter of 2021 of 2.1%, and a year-over-year growth rate of 3.5%. We continue to operate an extremely efficient network. Our network serves a growing number of markets, carrier-neutral data centers, and multi-tenant office buildings, and is able to support dramatic increases in traffic and revenue with a relatively fixed cost base. Our performance of our existing customer base continues to be strong despite the impact of COVID-19. Customer term, bad debt expense, and day sales outstanding for the quarter for our corporate customers all fell for the second quarter in a row. Our DSOs outstanding of 21 days equals the best in Cochran's history. Our bad debt expense as a percentage of revenues was the best since the first quarter of 2016. Both our on-net and off-net churn rates improved for the quarter. We believe these statistics demonstrate the strong credit quality of our customer base and the importance of coaching services to these businesses. During the quarter, we returned $41.3 million to our shareholders through our regular dividend. We did not purchase any stock in the quarter and have a total of $30.4 million authorized under our buyback program, which is authorized to continue through December 31st, 2022. Our cash at Cujun Holdings is $107.6 million at quarter end. This cash is unrestricted and available to be used for both dividends and buybacks. Cash hold at our operating company is $204.2 million. And our total consolidated cash and restricted cash is $311.8 million at quarters end. Our gross leverage ratio declined to 4.94 from 5.02 in the last quarter, and our net leverage ratio remained unchanged at 3.58. Our consolidated leverage ratios, as calculated under our indentures, is 4.91 at quarters end. Our board of directors reflected on the strong cash generating capabilities and investment opportunities in Cochran's business. As previously announced, we decided to increase our dividends sequentially by another two and a half cents per share this quarter, raising our quarterly dividend from 88.5 cents per share to 88 cents per share per quarter. This increase represents the 39th consecutive sequential increase in our quarterly dividend, and our annual dividend growth rate is approximately 12.8%. Now for some expectations against our long-term objectives. Our targeted long-term EBITDA annual margin expansion guidance calls for an improvement of 200 basis points per year. Our targeted multi-year constant currency revenue growth rate is approximately 10%. Our revenue and EBITDA guidance are meant to be multi-year goals and are not intended to be used as specific quarterly or annual guidance. Not like TASCAD to read safe harbor language and give an update on COVID-19 and review some of our operating performance. Sean will provide some additional performance details later in the call. Okay.

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. If we use non-GAAP financial measures during the call, you'll find these reconciled to the GAAP measurement in our earnings release, which is posted on our website at CogentCo.com. brief update on COVID-19. Like many other companies, we continue to be impacted by the pandemic and the accompanying response by governments around the world. Our entire workforce returned to an in-office environment this quarter in March. We want to thank our entire workforce and in particular our IT department for their continued hard work during these very challenging times. We also want to thank our field engineers, contractors, billing and collection staff, and many other COGEN employees who continue to work on the front lines, installing our new customers, maintaining and upgrading our network, and providing outstanding service to our customers. Our risks related to COVID-19 and other risks are described in more detail in our annual report on Form 10-K for 2021 and in our quarterly reports on Form 10-Q. Our 10-Q for this quarter will be filed shortly after this call. Throughout this discussion, we'll highlight several operational statistics. Sean and I will review in greater detail some highlights and trends, and then following our remarks, Dave will close, and then, as always, we'll open it up for Q&A. Some comments on corporate and net-centric revenue and customer connections. As a reminder, we analyze our revenues based on network connection type, which is on-net, off-net, and non-core, and we also analyze our revenues based upon customer type. We classify all of our customers into two types, net-centric customers and corporate customers. Our corporate customers buy bandwidth from us in large multi-tenant office buildings or in carrier-neutral data centers. These customers are typically professional service firms, financial services firms, educational institutions that are located in multi-tenant office buildings or connected to our network through our carrier-neutral data center footprint. On-net customers buy significant amounts of bandwidth from us in carrier-neutral data centers and include streaming companies and content distribution service providers, as well as access networks who serve consumers of content. Our corporate business represented 57.7% of our revenues this quarter. Our corporate business declined year over year by 6.4% to 86.1 million from the first quarter of last year and declined sequentially, but only by 0.8%. This was an improvement in our corporate business from last quarter when our corporate revenue declined year-over-year by 7.4% and declined sequentially by 2.5%. As Dave mentioned, a decrease in the USF rate, which only applies to our corporate VPN customer connections, had a $500 million negative impact on our sequential quarterly corporate revenues and an $800,000 negative impact on our year-over-year corporate revenues. The USF tax rate changes quarterly, and we cannot predict the impact of future USF rate changes on our revenues, although it has been declining. The USF rate for the second quarter of 2022, so the current quarter we're in, has already been established and will reduce yet again to 23.8% from 25.2%. As we have discussed in previous earnings calls, we believe that the growth rate of our corporate revenues was directly impacted by reduced building occupancy in central business districts of major cities as a result of the pandemic. We also found that as a result of the work-from-home environment and general challenges related to the pandemic, many of our corporate customers delayed decisions about system upgrades and making new network investments. This slowdown in corporate sales combined with normal historic levels of churn contributed to a reduction in our corporate revenue for the past two years. We are seeing some continuing positive signs that indicate that corporate buying patterns are beginning to return to a more normal level and our sequential rate of corporate revenue decline has just about ceased. Sales of our largest product by revenue and connections are one gigabit DIA product experienced its fourth quarter in a row of rising sales. We are also seeing some of our larger corporate customers begin to expand and reconfigure their networks. In terms of churn in our corporate base, we are also encouraged that the churn has fallen, and most of our corporate churn is derived from our older products, 100 megabit DIA and 100 megabit VPN products. We continue to see very low levels of churn for our one gigabit connections. The number of connections, we had 45,393 corporate connections on our network at quarter end, which was a decline, but only a decline of 0.1% from the first quarter versus the fourth quarter of 2021. Our corporate connections decreased by 2.8% from the first quarter of last year. Like the revenue improvement, these corporate connection declines were an improvement in our corporate business from last quarter when the connections declined year over year by 0.3% and sequentially by 3.7%. Our net-centric business. Our net-centric business, which represented 42.3% of our revenues despite material FX headwinds, had another strong quarter and grew by 4.4%. to 63.1 million quarter-over-quarter and grew by 15.1% on a year-over-year basis. Volatility in foreign exchange rates primarily impacts our net-centric business, and that impact was materially negative both sequentially and year-over-year. On a constant currency basis, our net-centric business increased by 18.6% from the first quarter of last year by 5.3% from last quarter. Connections, we had 49,491 net-centric customer connections on our network at quarter end, which was a sequential increase of 2.5% and 12% year over year. Our net-centric business benefited from the continued strong demand of our larger ports, 10 gig, 100 gig, and now 400 gig ports in selected locations. and the demand from outside of the U.S. was particularly strong. Now, revenue and customer connections by type. Our on-net revenue was 112.6 million for the quarter, which was a sequential increase of 1.7 percent and a year-over-year increase of 2.4 percent. Our on-net customer connections increased by 1.1 percent sequentially to 81,000, 627 on-net connections and increased by 4.1% year over year. We serve these on-net customer connections on our network and our 3,065 total on-net multi-tenant office buildings and carrier-neutral data center buildings. Off-net revenue was $36.4 million for the quarter. That was a sequential quarterly increase of 0.2%. but a year-over-year decrease of 0.9%. Our off-net revenues are impacted by incorporating the cost savings that we obtain from lower local loop prices that we combine into our pricing to our customers. The introduction of these customers into our off-net revenue base lowers our combined off-net ARPU. Our off-net customer connections increase sequentially by 2%, to 12,922 off-net connections and increased by 5.8% year-over-year. And we ended the quarter serving these off-net customer connections in about 7,800 off-net buildings. These off-net buildings are primarily located in North America. Some comments on pricing. Consistent with our long-term historical trends, our average price per megabit of our installed customer base decreased for the quarter, but the decrease was at a lower year-over-year rate of decline. Our average price per megabit for our new customer contracts actually increased sequentially. The numbers. The average price per megabit for our installed base declined sequentially by 5.8% to 31 cents, and declined by 18.6% from the first quarter of last year. The average price per megabit of our new customer contracts for the quarter increased 18 cents from 17 cents last quarter and 20 cents in the first quarter of last year. We continue to succeed in selling larger 10 gig and 100 gig connections and now 400 gig connections in selected locations to our customers And selling more of these larger connections results in a change in our connection mix and has the effect of lowering our average price per megabit at a greater rate than the changes we experience in our ARPU or our average price per connection. So speaking of ARPU, our on-net ARPU increased sequentially but decreased year over year primarily from the negative impact of foreign exchange and USF revenues. Our off-net ARPU continued to decline and decrease sequentially and year-over-year. Our on-net ARPU, which includes both corporate and net sector customers, was $463 for the quarter. That was an increase of 0.8% from last quarter and a decrease of 1.8% from last year. Our off-net ARPU, which is predominantly comprised of corporate customers, was $948 for the quarter. That was a sequential decrease of 1.4% and 6.4% from last year. We do expect that our off-net ARPU will continue to decline as we take advantage of volume and time-based discounts in order to lower the cost of our local loops. And these reductions in our local loop costs are passed on to our off-net corporate customers and thereby lowering our ARPU. Our sequential quarterly churn rates For both on-net and off-net, both improved for the quarter. Our on-net unit churn rate was 0.9%. It was 1% last quarter. And our off-net unit churn rate was 1%. It was 1.1% last quarter. In order to reduce our customer turnover, we employ a dedicated sales group that works to retain customers who have indicated that they are considering terminating their service with us. We may offer pricing discounts to these customers in order to induce them to reverse their termination decision, purchase additional service from us, and or extend the term of their contract with us. Due to the commoditized nature of our net-centric services, the vast majority of these move, add, or change contracts are related to our net-centric customers. And during the quarter, certain of our Net Center customers took advantage of our volume and contract term discounts and entered into long-term contracts for us. That represented over 2,400 customer connections and increased their revenue commitment to Cogent by over $21.3 million. Some comments on EBITDA. And we reconcile EBITDA to our cash flow from operations in each of our quarterly press releases. We do have some seasonal factors, and the seasonal factors that impact our EBITDA and our SG&A expenses include the resetting of payroll taxes in the United States at the beginning of each year, annual cost of living or CPI increases, seasonal vacation periods, and the timing and level of our audit and tax services, and finally our annual benefit plan cost increases. Our EBITDA decreased sequentially by 0.3 million which was primarily due to the impact of these recurring seasonal increases that we experienced in our SG&A. However, our EBITDA increased year over year by 1.6 million. Our quarterly EBITDA margin decreased by 70 basis points and was 38.3%. However, our EBITDA margin increased year over year by 50 basis points. Earnings per share. Our basic and diluted income per share was two cents for the quarter. There's some material items that impact that. Unrealized gains and losses on the translation of our 2024 notes into USD and recently the non-cash interest expense on our interest rate swap agreement have been the primary contributors to the variability in our net income and consequently our earnings per share. We have an unrealized foreign exchange gain of 24 million on our 2024 Euro notes from the difference between the Euro rate at the end of April of this year, which was $1.05, and the Euro to USD rate of $1.12 when we issued the notes in June 2020. Our total unrealized gains in our Euro notes for the quarter was 8 million. It was 8.8 million last quarter. and $18.9 million the first quarter of last year. During the quarter, we incurred $21.3 million of non-cash interest expense this quarter related to the increase in the estimated fair value of our interest rate swap agreement, which we achieved a cash savings, but the accounting requires us to record the fair value. Comments on foreign currency, more details. Our revenue earned outside of the United States is reported in US dollars and it was about 25% of our revenues for the quarter. 17% of those revenues were from Europe and the remaining 8% related to Canada, Mexico, Asia Pacific, South America, and our African operations. Continued volatility in foreign exchange can materially impact our quarterly reported revenue results. valuation in our Euro notes and our overall financial results. The revenue impact from the variability in foreign exchange rates primarily impacts our net-centric revenues. The foreign exchange impact on our revenue for the quarter was material and is expected to again be material this quarter. The foreign exchange impact on our quarterly sequential revenues this quarter was negative 0.5 million, and the year-over-year negative foreign exchange impact was 1.9 million. The average Euro to USD rate so far this quarter is $1.08 and currently trading at about $1.05, $1.06, and the average Canadian dollar exchange rate is 79 cents. If those averages remain at their current levels for this quarter, second quarter of 2022, We estimate that the negative FX impact will be $900,000 year over year and almost $3 million year over year. We believe that our revenue and customer base continues to not be highly concentrated. Our top 25 customers represent about 6% of our revenues for the quarter. And with that, I will turn the call over to Sean to go over some additional details related to our performance.