Cogent Communications Holdings, Inc. (NASDAQ:CCOI) Q2 2021 Earnings Conference Call August 5, 2021 8:30 AM ET Company Participants David Schaeffer - Chairman and CEO Sean Wallace - CFO Conference Call Participants George Engroff - Credit Suisse Philip Cusick - JPMorgan Frank Louthan - Raymond James Colby Synesael - Cowen Walter Piecyk - LightShed Nick Del Deo - MoffettNathanson Operator Good morning, and welcome to the Cogent Communications Holdings Second Quarter 2021 Earnings Conference Call. As a reminde ...

[PART I FINANCIAL INFORMATION](index=2&type=section&id=PART%20I%20FINANCIAL%20INFORMATION) This section provides the unaudited condensed consolidated financial statements, management's discussion and analysis, market risk disclosures, and controls and procedures [ITEM 1. FINANCIAL STATEMENTS](index=3&type=section&id=ITEM%201.%20FINANCIAL%20STATEMENTS) This section presents unaudited condensed consolidated financial statements and detailed notes on business, accounting, debt, and other financial aspects [Condensed Consolidated Balance Sheets](index=3&type=section&id=Condensed%20Consolidated%20Balance%20Sheets) This statement provides a snapshot of the company's assets, liabilities, and equity at specific points in time | Metric (in thousands) | June 30, 2021 (Unaudited) | December 31, 2020 | | :-------------------- | :------------------------ | :------------------ | | Cash and cash equivalents | $373,963 | $371,301 | | Total current assets | $454,555 | $456,337 | | Total assets | $1,010,747 | $1,000,477 | | Total current liabilities | $93,726 | $94,443 | | Total liabilities | $1,346,888 | $1,293,643 | | Total stockholders' deficit | $(336,141) | $(293,166) | - Total assets increased by **$10.27 million** from December 31, 2020, to June 30, 2021, reaching **$1,010,747 thousand**[8](index=8&type=chunk) - Total liabilities increased by **$53.245 million**, leading to an increased stockholders' deficit of **$(336,141) thousand** as of June 30, 2021[8](index=8&type=chunk) [Condensed Consolidated Statements of Comprehensive (Loss) Income (Three Months)](index=4&type=section&id=Condensed%20Consolidated%20Statements%20of%20Comprehensive%20(Loss)%20Income%20(Three%20Months)) This statement details the company's financial performance, including revenues, expenses, and net loss or income, over a three-month period | Metric (in thousands, except per share) | Three Months Ended June 30, 2021 (Unaudited) | Three Months Ended June 30, 2020 (Unaudited) | Change (%) | | :-------------------------------------- | :------------------------------------------- | :------------------------------------------- | :--------- | | Service revenue | $147,879 | $140,990 | 4.9% | | Total operating expenses | $119,668 | $113,621 | 5.3% | | Operating income | $28,211 | $27,574 | 2.3% | | Net (loss) income | $(2,493) | $8,564 | -129.1% | | Basic net (loss) income per common share | $(0.05) | $0.19 | -126.3% | | Diluted net (loss) income per common share | $(0.05) | $0.18 | -127.8% | | Dividends declared per common share | $0.78 | $0.68 | 14.7% | - The company reported a **net loss of $2.493 million** for the three months ended June 30, 2021, a significant decline from a **net income of $8.564 million** in the prior-year period, primarily due to a **$10.830 million loss** on debt extinguishment and redemption of 2022 Notes[12](index=12&type=chunk) - Service revenue increased by **4.9%** year-over-year, reaching **$147.879 million**[12](index=12&type=chunk) [Condensed Consolidated Statements of Comprehensive Income (Six Months)](index=5&type=section&id=Condensed%20Consolidated%20Statements%20of%20Comprehensive%20Income%20(Six%20Months)) This statement details the company's financial performance, including revenues, expenses, and net income, over a six-month period | Metric (in thousands, except per share) | Six Months Ended June 30, 2021 (Unaudited) | Six Months Ended June 30, 2020 (Unaudited) | Change (%) | | :-------------------------------------- | :----------------------------------------- | :----------------------------------------- | :--------- | | Service revenue | $294,656 | $281,904 | 4.5% | | Total operating expenses | $240,171 | $228,721 | 5.0% | | Operating income | $54,503 | $53,427 | 2.0% | | Net income | $16,358 | $17,791 | -8.1% | | Basic net income per common share | $0.35 | $0.39 | -10.3% | | Diluted net income per common share | $0.35 | $0.38 | -7.9% | | Dividends declared per common share | $1.535 | $1.340 | 14.6% | - Net income for the six months ended June 30, 2021, decreased by **8.1%** to **$16.358 million**, primarily impacted by a **$14.698 million loss** on debt extinguishment and redemption of 2022 Notes[15](index=15&type=chunk) - Service revenue for the six-month period increased by **4.5%** to **$294.656 million**[15](index=15&type=chunk) [Condensed Consolidated Statements of Cash Flows](index=6&type=section&id=Condensed%20Consolidated%20Statements%20of%20Cash%20Flows) This statement summarizes the cash inflows and outflows from operating, investing, and financing activities over a period | Cash Flow Activity (in thousands) | Six Months Ended June 30, 2021 (Unaudited) | Six Months Ended June 30, 2020 (Unaudited) | Change (%) | | :-------------------------------- | :----------------------------------------- | :----------------------------------------- | :--------- | | Net cash provided by operating activities | $86,855 | $69,769 | 24.5% | | Net cash used in investing activities | $(32,661) | $(26,796) | 21.9% | | Net cash used in financing activities | $(50,874) | $(25,257) | 101.4% | | Net increase in cash and cash equivalents | $2,662 | $17,604 | -84.9% | - Net cash provided by operating activities increased by **24.5%** to **$86.855 million** for the six months ended June 30, 2021[19](index=19&type=chunk) - Net cash used in financing activities more than doubled to **$50.874 million**, primarily due to significant debt redemption activities (**$459.317 million** for 2022 Notes) offset by new debt issuance (**$496.933 million** for 2026 Notes)[19](index=19&type=chunk)[163](index=163&type=chunk) [1. Description of the business and recent developments](index=7&type=section&id=1.%20Description%20of%20the%20business%20and%20recent%20developments) This section outlines the company's core business as a high-speed internet provider and recent accounting standard adoptions - Cogent Communications Holdings, Inc. is a facilities-based provider of low-cost, high-speed Internet access, private network services, and data center colocation, serving businesses and communication service providers in 48 countries[22](index=22&type=chunk) - The company offers 'on-net' services through its own facilities and 'off-net' services using other carriers' 'last mile' circuits, with non-core services also supported from acquisitions[23](index=23&type=chunk)[25](index=25&type=chunk) - The company adopted ASU 2016-13 (ASC 326) for credit losses on January 1, 2020, which did not materially impact its consolidated financial statements[51](index=51&type=chunk) [2. Property and equipment](index=16&type=section&id=2.%20Property%20and%20equipment) This section details the company's property and equipment, including depreciation expenses and financing arrangements | Expense (in thousands) | Three Months Ended June 30, 2021 | Three Months Ended June 30, 2020 | Six Months Ended June 30, 2021 | Six Months Ended June 30, 2020 | | :--------------------- | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | Depreciation and amortization | $22,100 | $19,900 | $44,100 | $39,400 | | Capitalized salaries and benefits | $4,200 | $3,000 | $7,400 | $5,900 | - Depreciation and amortization expense increased by **11.1%** for the three months and **11.8%** for the six months ended June 30, 2021, compared to the prior year, reflecting increased deployed fixed assets[53](index=53&type=chunk) - The company has an installment payment agreement (IPA) for network equipment, with **$3.4 million** outstanding as of June 30, 2021, down from **$7.7 million** at December 31, 2020[54](index=54&type=chunk) [3. Long-term debt](index=16&type=section&id=3.%20Long-term%20debt) This section outlines the company's long-term debt instruments, including new issuances, redemptions, and foreign exchange impacts | Debt Instrument | Principal Amount | Interest Rate | Maturity Date | | :-------------- | :--------------- | :------------ | :------------ | | Senior Secured Notes | $500.0 million | 3.50% | May 1, 2026 | | Senior Unsecured Euro Notes | €350.0 million ($415.8 million USD) | 4.375% | June 30, 2024 | - In May 2021, the company issued **$500.0 million** of 3.50% Senior Secured Notes due 2026, with net proceeds of **$496.9 million**[57](index=57&type=chunk)[58](index=58&type=chunk) - The proceeds from the 2026 Notes were used to redeem and extinguish all outstanding 2022 Notes, resulting in a total loss on debt extinguishment and redemption of **$14.7 million** for the six months ended June 30, 2021[58](index=58&type=chunk)[63](index=63&type=chunk)[64](index=64&type=chunk) - The 2024 Euro Notes are subject to foreign exchange fluctuations, resulting in an unrealized gain of **$13.6 million** for the six months ended June 30, 2021, compared to a loss of **$0.5 million** in the prior year[66](index=66&type=chunk) [4. Commitments and contingencies](index=21&type=section&id=4.%20Commitments%20and%20contingencies) This section details potential financial obligations and legal disputes, including estimated losses from leased circuits and arbitration - The company estimates a reasonably possible loss of up to **$3.5 million** in excess of accrued amounts related to obligations for leased circuits[70](index=70&type=chunk) - An arbitration proceeding in Spain involves a former optical fiber provider seeking approximately **$9 million** for early termination of leases, which the company is contesting[71](index=71&type=chunk) [5. Income taxes](index=21&type=section&id=5.%20Income%20taxes) This section provides an overview of the company's income tax provisions and the factors influencing them | (Loss) Income Before Income Taxes (in thousands) | Three Months Ended June 30, 2021 | Three Months Ended June 30, 2020 | Six Months Ended June 30, 2021 | Six Months Ended June 30, 2020 | | :----------------------------------------------- | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | Domestic | $828 | $14,113 | $29,330 | $31,902 | | Foreign | $(2,899) | $(2,814) | $(5,199) | $(7,770) | | Total | $(2,071) | $11,299 | $24,131 | $24,132 | - The income tax provision decreased significantly for the three months ended June 30, 2021, to **$0.4 million** from **$2.7 million**, primarily due to a decrease in income before income taxes[126](index=126&type=chunk) - For the six months ended June 30, 2021, the income tax provision increased to **$7.8 million** from **$6.3 million**, mainly due to an increase in certain non-deductible expenses[148](index=148&type=chunk) [6. Common stock buyback program](index=23&type=section&id=6.%20Common%20stock%20buyback%20program) This section details the company's common stock buyback program, including remaining authorization and recent activity - As of June 30, 2021, approximately **$30.4 million** remained authorized for purchases under the Buyback Program, which extends through December 31, 2021[75](index=75&type=chunk) - No common stock was purchased during the three or six months ended June 30, 2021, or the corresponding periods in 2020[75](index=75&type=chunk) [7. Dividends on common stock](index=23&type=section&id=7.%20Dividends%20on%20common%20stock) This section outlines recent dividend declarations and the factors influencing future dividend payments - The Board of Directors approved a quarterly dividend of **$0.805 per common share** on August 4, 2021, estimated at **$37.2 million**, payable on September 3, 2021[76](index=76&type=chunk) - Future dividend payments are at the Board's discretion and subject to financial position, cash flow, capital requirements, and limitations under debt indentures and Delaware law[77](index=77&type=chunk) [8. Related party transactions](index=23&type=section&id=8.%20Related%20party%20transactions) This section discloses transactions with related parties, specifically the lease of the company's headquarters - The company leases its headquarters from Sodium LLC, an entity owned by its CEO, with an annual rent of **$1.0 million** plus taxes and utilities[78](index=78&type=chunk) | Rent and Related Costs (in millions) | Three Months Ended June 30, 2021 | Three Months Ended June 30, 2020 | Six Months Ended June 30, 2021 | Six Months Ended June 30, 2020 | | :----------------------------------- | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | Paid to Sodium LLC | $0.5 | $0.5 | $0.8 | $0.8 | [9. Segment information](index=24&type=section&id=9.%20Segment%20information) This section provides details on the company's single operating segment and revenue breakdown by geographic region and product class - The company operates as a single operating segment[80](index=80&type=chunk) | Revenue by Geographic Region (in thousands) | Three Months Ended June 30, 2021 | Three Months Ended June 30, 2020 | Six Months Ended June 30, 2021 | Six Months Ended June 30, 2020 | | :---------------------------------------- | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | North America | $117,140 | $115,131 | $233,537 | $230,745 | | Europe | $26,880 | $23,573 | $53,910 | $46,847 | | Latin America | $1,054 | $436 | $1,882 | $766 | | Asia Pacific | $2,712 | $1,850 | $5,156 | $3,546 | | Africa | $93 | N/A | $171 | N/A | | Total | $147,879 | $140,990 | $294,656 | $281,904 | | Revenue by Product Class (in thousands) | Three Months Ended June 30, 2021 | Three Months Ended June 30, 2020 | Six Months Ended June 30, 2021 | Six Months Ended June 30, 2020 | | :-------------------------------------- | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | On-net | $111,041 | $103,800 | $220,989 | $207,256 | | Off-net | $36,699 | $37,044 | $73,422 | $74,364 | | Non-core | $139 | $146 | $245 | $284 | [ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of Operations](index=25&type=section&id=ITEM%202.%20Management's%20Discussion%20and%20Analysis%20of%20Financial%20Condition%20and%20Results%20of%20Operations) This section discusses the company's financial condition, operational results, competitive landscape, strategic initiatives, and liquidity, including COVID-19 impacts [General Overview](index=25&type=section&id=General%20Overview) This section provides an overview of the company's business model as a high-speed internet provider and its revenue composition - The company is a facilities-based provider of low-cost, high-speed Internet access, private network services, and data center colocation, serving small and medium-sized businesses and communication service providers globally[83](index=83&type=chunk) | Revenue Type | Q2 2021 Revenue Share | Q2 2020 Revenue Share | H1 2021 Revenue Share | H1 2020 Revenue Share | | :----------- | :-------------------- | :-------------------- | :-------------------- | :-------------------- | | On-net | 75.1% | 73.6% | 75.0% | 73.5% | | Off-net | 24.8% | 26.3% | 24.9% | 26.4% | | Non-core | ~0.1% | ~0.1% | ~0.1% | ~0.1% | - On-net services, delivered through the company's own facilities, constitute the majority of revenue, while off-net services, relying on third-party 'last mile' connections, represent a significant portion[85](index=85&type=chunk)[87](index=87&type=chunk) [Competitive Advantages](index=27&type=section&id=Competitive%20Advantages) This section highlights the company's operational efficiencies, network design, market reach, and experienced management team - The company maintains a low cost of operation through a single Ethernet network protocol, broad access to dark fiber leases, a narrow and focused product set, and scalable network equipment and hub configurations[89](index=89&type=chunk)[90](index=90&type=chunk)[91](index=91&type=chunk)[93](index=93&type=chunk) - Key advantages include greater control over service delivery, high-quality and reliable service due to optimized network design, a large addressable market with **2,975 on-net buildings** in **210 metropolitan markets**, and a balanced, high-traffic network enabling settlement-free interconnection[94](index=94&type=chunk)[95](index=95&type=chunk)[96](index=96&type=chunk)[97](index=97&type=chunk) - The senior management team possesses extensive experience in the telecommunications industry, with many members working together at the company since 2000[98](index=98&type=chunk) [Our Strategy](index=31&type=section&id=Our%20Strategy) This section outlines the company's strategic goals, including customer base expansion, market share growth, and new product introductions - The company aims to grow its corporate customer base by leveraging superior speeds and rapid installation times, especially for dedicated internet access and private network services[100](index=100&type=chunk) - It plans to increase its share of the net-centric market by offering attractive features like geographic breadth (**48 countries, 1,309 CNDCs**), high capacity (**100 Mbps to 100 Gbps**), a balanced customer base, a large salesforce, and competitive pricing[101](index=101&type=chunk) - A new product, Global Peer Connect (GPC), was introduced in late 2020 to allow net-centric customers to dynamically peer traffic anywhere on its global platform, offering ubiquity, attractive economics (usage-based, no fixed port charges), and greater customer control[102](index=102&type=chunk) - Other strategic elements include pursuing on-net customer growth in existing and new buildings, expanding and improving sales efforts (**30% increase in salesforce over five years**), and growing the off-net corporate business through agreements with national carriers[104](index=104&type=chunk)[105](index=105&type=chunk)[106](index=106&type=chunk) [Results of Operations (Three Months Ended June 30, 2021 Compared to the Three Months Ended June 30, 2020)](index=33&type=section&id=Results%20of%20Operations%20(Three%20Months%20Ended%20June%2030,%202021%20Compared%20to%20the%20Three%20Months%20Ended%20June%2030,%202020)) This section analyzes the company's financial performance for the three months ended June 30, 2021, compared to the prior-year period | Metric (in thousands) | Q2 2021 | Q2 2020 | % Change | | :-------------------- | :---------- | :---------- | :------- | | Service revenue | $147,879 | $140,990 | 4.9% | | On-net revenue | $111,041 | $103,800 | 7.0% | | Off-net revenue | $36,699 | $37,044 | (0.9)% | | Network operations expenses | $56,180 | $53,886 | 4.3% | | SG&A expenses | $41,392 | $39,839 | 3.9% | | Depreciation and amortization | $22,096 | $19,896 | 11.1% | | Interest expense | $14,236 | $15,499 | (8.1)% | | Loss on debt extinguishment – 2022 Notes | $10,830 | — | NM | | Income tax provision | $422 | $2,735 | (84.6)% | | Operating Data | Q2 2021 | Q2 2020 | % Change | | :------------- | :------ | :------ | :------- | | ARPU—on-net | $470 | $458 | 2.6% | | ARPU—off-net | $994 | $1,048 | (5.1)% | | Average Price per Megabit | $0.36 | $0.47 | (24.8)% | | On-net Customer Connections | 79,146 | 75,927 | 4.2% | | Off-net Customer Connections | 12,386 | 11,846 | 4.6% | - Service revenue increased by **4.9%**, positively impacted by **$3.0 million** from exchange rates and **$1.5 million** from gross receipts taxes and Universal Service Fund fees[112](index=112&type=chunk)[113](index=113&type=chunk) - Corporate customer revenue decreased by **6.7%** due to COVID-19 related caution and a deteriorating real estate market, while net-centric customer revenue increased by **30.5%** despite a **24.8% decline** in average price per megabit[114](index=114&type=chunk)[115](index=115&type=chunk)[117](index=117&type=chunk) - Interest expense decreased by **8.1%** due to lower interest rates on the newly issued 2026 Notes compared to the extinguished 2022 Notes, but a significant loss on debt extinguishment of **$10.830 million** was incurred[123](index=123&type=chunk) [Results of Operations (Six Months Ended June 30, 2021 Compared to the Six Months Ended June 30, 2020)](index=38&type=section&id=Results%20of%20Operations%20(Six%20Months%20Ended%20June%2030,%202021%20Compared%20to%20the%20Six%20Months%20Ended%20June%2030,%202020)) This section analyzes the company's financial performance for the six months ended June 30, 2021, compared to the prior-year period | Metric (in thousands) | H1 2021 | H1 2020 | % Change | | :-------------------- | :---------- | :---------- | :------- | | Service revenue | $294,656 | $281,904 | 4.5% | | On-net revenue | $220,989 | $207,256 | 6.6% | | Off-net revenue | $73,422 | $74,364 | (1.3)% | | Network operations expenses | $113,272 | $109,806 | 3.2% | | SG&A expenses | $82,834 | $79,513 | 4.2% | | Depreciation and amortization | $44,065 | $39,402 | 11.8% | | Interest expense | $30,071 | $30,720 | (2.1)% | | Loss on debt extinguishment – 2022 Notes | $14,698 | — | NM | | Income tax provision | $7,773 | $6,341 | 22.6% | | Operating Data | H1 2021 | H1 2020 | % Change | | :------------- | :------ | :------ | :------- | | ARPU—on-net | $479 | $459 | 4.4% | | ARPU—off-net | $1,018 | $1,055 | (3.5)% | | Average Price per Megabit | $0.37 | $0.50 | (26.5)% | | On-net Customer Connections | 79,146 | 75,927 | 4.2% | | Off-net Customer Connections | 12,386 | 11,846 | 4.6% | - Service revenue increased by **4.5%**, with foreign exchange rates contributing **$5.6 million** and taxes/surcharges adding **$2.3 million**[134](index=134&type=chunk)[135](index=135&type=chunk) - Corporate customer revenue decreased by **5.9%** to **$182.5 million**, while net-centric customer revenue increased by **27.6%** to **$112.2 million**, despite a **26.5% decline** in average price per megabit[136](index=136&type=chunk)[138](index=138&type=chunk) - Network operations expenses increased by **3.2%**, driven by network expansion and equity-based compensation, partially offset by leased circuit price reductions[142](index=142&type=chunk) [Liquidity and Capital Resources](index=44&type=section&id=Liquidity%20and%20Capital%20Resources) This section discusses the company's ability to meet short-term and long-term financial obligations and its capital management strategies - Management assesses liquidity by reviewing cash balances, receivables, payables, capital expenditure commitments, and debt payments[150](index=150&type=chunk) - Significant contractual cash outlays include expected quarterly dividend payments of approximately **$330 million** over the next two years and annual interest payments of **$17.5 million** on 2026 Notes and **€15.3 million** on 2024 Notes[151](index=151&type=chunk)[152](index=152&type=chunk) - The company may need to refinance debt at or before maturity and may seek additional capital for liquidity, acquisitions, or general corporate purposes, with potential for dilution if equity is issued[153](index=153&type=chunk)[155](index=155&type=chunk)[156](index=156&type=chunk) [Cash Flows](index=46&type=section&id=Cash%20Flows) This section analyzes the company's cash flow activities from operations, investing, and financing for the six-month period | Cash Flow Activity (in thousands) | Six Months Ended June 30, 2021 | Six Months Ended June 30, 2020 | | :-------------------------------- | :------------------------------- | :------------------------------- | | Net cash provided by operating activities | $86,855 | $69,769 | | Net cash used in investing activities | $(32,661) | $(26,796) | | Net cash used in financing activities | $(50,874) | $(25,257) | | Net increase in cash and cash equivalents | $2,662 | $17,604 | - Operating cash flow increased due to changes in operating profit and interest payments, with **$32.9 million** in interest payments on note obligations in H1 2021[160](index=160&type=chunk) - Investing activities primarily involved property and equipment purchases, increasing to **$32.7 million** in H1 2021 due to network expansion[161](index=161&type=chunk) - Financing activities included **$73.1 million** in dividend payments and **$459.3 million** for 2022 Notes redemption, offset by **$496.9 million** from 2026 Notes issuance[162](index=162&type=chunk)[163](index=163&type=chunk) [Cash Position and Indebtedness](index=46&type=section&id=Cash%20Position%20and%20Indebtedness) This section summarizes the company's cash and cash equivalents and total indebtedness as of June 30, 2021 | Metric (in millions) | June 30, 2021 | | :------------------- | :------------ | | Total indebtedness (at par) | $1.1 | | Cash and cash equivalents | $374.0 | - Total indebtedness includes **$224.6 million** of finance lease obligations for dark fiber under long-term IRU agreements[164](index=164&type=chunk) [Summarized Financial Information of Holdings](index=48&type=section&id=Summarized%20Financial%20Information%20of%20Holdings) This section provides a summary of the financial position and performance of the Holdings entity | Metric (in thousands) | June 30, 2021 (Unaudited) | | :-------------------- | :------------------------ | | Cash and cash equivalents | $148,217 | | Total assets | $148,219 | | Total equity | $148,219 | | Net loss (Six Months Ended June 30, 2021) | $(16,252) | - Holdings, as a guarantor under the 2024 and 2026 Notes, reported a net loss of **$16.252 million** for the six months ended June 30, 2021[166](index=166&type=chunk)[167](index=167&type=chunk) [Common Stock Buyback Program](index=48&type=section&id=Common%20Stock%20Buyback%20Program) This section details the common stock buyback program, including remaining authorization and recent activity - The Board of Directors authorized a common stock buyback program through December 31, 2021, with **$30.4 million** remaining as of June 30, 2021[168](index=168&type=chunk) - No shares were repurchased during the three or six months ended June 30, 2021, or the corresponding periods in 2020[168](index=168&type=chunk) [Dividends on Common Stock and Return of Capital Program](index=48&type=section&id=Dividends%20on%20Common%20Stock%20and%20Return%20of%20Capital%20Program) This section outlines recent dividend declarations and the factors influencing future capital return decisions - A quarterly dividend of **$0.805 per common share** was approved on August 4, 2021, for an estimated **$37.2 million** payment[169](index=169&type=chunk) - Future dividends and capital returns are subject to Board discretion, financial performance, cash flow, capital needs, and debt indenture limitations[170](index=170&type=chunk) [Future Capital Requirements](index=48&type=section&id=Future%20Capital%20Requirements) This section discusses the company's anticipated capital needs and potential financing strategies for future operations and growth - Management believes current cash and operating cash flows will be sufficient for working capital, capital expenditures, debt service, and dividends for the next twelve months[171](index=171&type=chunk) - Future acquisitions or significant unplanned costs may necessitate additional debt or equity financing, which could lead to substantial dilution for existing stockholders[173](index=173&type=chunk) - The company may refinance existing indebtedness or seek additional capital to improve liquidity or fund strategic initiatives, evaluating transactions based on market conditions[174](index=174&type=chunk) [Off-Balance Sheet Arrangements](index=49&type=section&id=Off-Balance%20Sheet%20Arrangements) This section confirms the absence of material off-balance sheet arrangements and related financial risks - The company does not have relationships with unconsolidated entities or financial partnerships for off-balance sheet arrangements[175](index=175&type=chunk) - It is not materially exposed to financing, liquidity, market, or credit risks from such arrangements[175](index=175&type=chunk) [Impact of COVID-19 on Our Liquidity and Operating Performance](index=49&type=section&id=Impact%20of%20COVID-19%20on%20Our%20Liquidity%20and%20Operating%20Performance) This section assesses the impact of the COVID-19 pandemic on the company's liquidity, operational adjustments, and sales performance - As of June 30, 2021, the company maintained a high level of liquidity with **$374.0 million** in cash and cash equivalents, with no material impact on its credit rating or cost of capital from COVID-19[176](index=176&type=chunk) - Operational adjustments included mandatory work-from-home policies, curtailed business travel, and new safety procedures, which allowed effective continued operation[177](index=177&type=chunk) - The pandemic led to a slowdown in new sales to corporate customers due to cautious approaches to new configurations, reduced demand for satellite offices, and a deteriorating real estate market[181](index=181&type=chunk) - The company cannot predict the full impact of new COVID-19 variants on the global economy or its operations[182](index=182&type=chunk) [Critical Accounting Policies and Significant Estimates](index=50&type=section&id=Critical%20Accounting%20Policies%20and%20Significant%20Estimates) This section confirms that there have been no material changes to the company's critical accounting policies and estimates - Management believes there have been no material changes to critical accounting policies and significant estimates as of June 30, 2021, compared to the annual report on Form 10-K for December 31, 2020[184](index=184&type=chunk) [ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK](index=50&type=section&id=ITEM%203.%20QUANTITATIVE%20AND%20QUALITATIVE%20DISCLOSURES%20ABOUT%20MARKET%20RISK) This section confirms no material changes to the company's market risk exposures since the last annual report - Management believes there have been no material changes to the company's exposures to market risk as of June 30, 2021, from those disclosed in its annual report on Form 10-K for December 31, 2020[185](index=185&type=chunk) [ITEM 4. CONTROLS AND PROCEDURES](index=50&type=section&id=ITEM%204.%20CONTROLS%20AND%20PROCEDURES) This section confirms the effectiveness of disclosure controls and reports no material changes in internal control over financial reporting - The company's disclosure controls and procedures were evaluated and deemed effective at a reasonable assurance level as of the end of the reporting period[187](index=187&type=chunk) - There has been no material change in the company's internal control over financial reporting during the most recent fiscal quarter[188](index=188&type=chunk) [PART II OTHER INFORMATION](index=51&type=section&id=PART%20II%20OTHER%20INFORMATION) This section covers legal proceedings, risk factors, equity sales, and a list of exhibits filed with the report [ITEM 1. LEGAL PROCEEDINGS](index=51&type=section&id=ITEM%201.%20LEGAL%20PROCEEDINGS) This section confirms the company's involvement in ordinary course legal proceedings not expected to materially impact operations - The company is involved in legal proceedings in the ordinary course of business, which are not expected to have a material impact on its operations or results[191](index=191&type=chunk) - Further information on these proceedings is included in Note 4 of the interim condensed consolidated financial statements[191](index=191&type=chunk) [ITEM 1A. RISK FACTORS](index=51&type=section&id=ITEM%201A.%20RISK%20FACTORS) This section indicates no material changes to the company's risk factors since its last annual report - Management believes there have been no material changes to the company's risk factors as of June 30, 2021, from those disclosed in its annual report on Form 10-K for December 31, 2020[192](index=192&type=chunk) [ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS](index=51&type=section&id=ITEM%202.%20UNREGISTERED%20SALES%20OF%20EQUITY%20SECURITIES%20AND%20USE%20OF%20PROCEEDS) This section details the common stock buyback program and confirms no purchases were made during the second quarter of 2021 - The Board of Directors authorized a plan for common stock repurchases in negotiated and open market transactions through December 31, 2021[193](index=193&type=chunk) - No common stock purchases were made during the second quarter of 2021[193](index=193&type=chunk) [ITEM 6. EXHIBITS.](index=52&type=section&id=ITEM%206.%20EXHIBITS.) This section lists the exhibits filed with the Form 10-Q, including indentures, forms of notes, incentive plans, and certifications - Exhibits include the Indenture related to the 3.500% Senior Secured Notes due 2026, the Form of 3.500% Senior Secured Notes due 2026, and the Amended and Restated Cogent Communications Holdings, Inc. 2017 Incentive Award Plan[195](index=195&type=chunk) - Certifications from the Chief Executive Officer and Chief Financial Officer are also filed as exhibits[195](index=195&type=chunk) [SIGNATURES](index=53&type=section&id=SIGNATURES) This section contains the duly authorized signatures of the registrant's Chief Executive Officer and Chief Financial Officer [SIGNATURES](index=53&type=section&id=SIGNATURES) This section contains the duly authorized signatures of the registrant's Chief Executive Officer and Chief Financial Officer - The report is signed by David Schaeffer, Chief Executive Officer, and Sean Wallace, Chief Financial Officer, on August 5, 2021[199](index=199&type=chunk)[200](index=200&type=chunk)

Financial Data and Key Metrics Changes - Revenues grew sequentially by 2% to $146.8 million, an increase of 4.2% year-over-year [7] - Non-GAAP gross profit increased by 2.7% sequentially and 7.6% year-over-year [9] - Non-GAAP gross margin improved by 40 basis points sequentially to 62.5% and by 200 basis points year-over-year [10] - Quarterly EBITDA grew by 10.2% year-over-year, with a margin increase of 200 basis points to 37.8% [10][49] - Cash flow from operations increased sequentially by 25.4% to $47.1 million, representing the largest amount in the company's history [59] Business Line Data and Key Metrics Changes - Corporate business, representing 62.7% of revenues, declined by 5.1% year-over-year and 1.8% sequentially [25] - NetCentric business, accounting for 37.3% of revenues, grew by 24.6% year-over-year and 9.2% sequentially [26] - Corporate customer connections decreased by 1% sequentially and 3.7% year-over-year, totaling 46,719 connections [35] - NetCentric customer connections increased by 4.2% sequentially and 14.2% year-over-year, totaling 44,206 connections [36] Market Data and Key Metrics Changes - Revenue from international markets increased to approximately 25% of total quarterly revenues, up from 24% in the previous quarter [51] - The average price per megabit for the installed base declined by 6.8% sequentially and 28.1% year-over-year, while the price for new customer contracts increased to $0.20 [41] Company Strategy and Development Direction - The company aims for a long-term EBITDA margin expansion of approximately 200 basis points per year and a constant currency revenue growth rate of about 10% [24] - The focus remains on increasing corporate customer connection sizes to larger and symmetric connections, adapting to the work-from-home environment [68] - The company plans to optimize its balance sheet and take advantage of the current interest rate environment, anticipating a reduction in cash interest expense by over $10 million annually [78] Management's Comments on Operating Environment and Future Outlook - Management noted improving business conditions as COVID-19 cases decline and businesses reopen, leading to lower churn rates in the corporate segment [5] - There is cautious optimism regarding the NetCentric business, driven by increased streaming subscriptions and international demand [6][64] - Management expects continued improvement in corporate revenues as companies adapt to hybrid work models [94] Other Important Information - The Board of Directors increased the quarterly dividend to $0.78 per share, marking the 35th consecutive increase [16] - The company repurchased $115.9 million of senior secured notes due in March 2022, optimizing its capital structure [78] Q&A Session Summary Question: Were there any one-time items in the quarter, particularly within the NetCentric business? - Management confirmed there were no extraordinary items in the NetCentric business, with broad customer utilization increasing [85] Question: How should we think about the sustainability of the momentum and growth in the NetCentric business? - Management believes the growth reflects a shift from linear video to streaming video, which is expected to continue benefiting the NetCentric business [88] Question: What improvements are seen in the corporate sales funnel? - Management noted a decline in churn rates and increased activity levels in the sales force, indicating a positive trend in corporate sales [93] Question: Can the corporate business maintain flat revenue in the June quarter? - Management anticipates continued improvement, with a potential for reduced revenue decline, but visibility on achieving flat revenue is still uncertain [96] Question: Can you provide the corporate customer connection total this quarter and last? - Corporate connections totaled 46,719 this quarter, down from 47,175 last quarter, reflecting a 1% decline [111]

Table of Contents UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q ☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Quarterly Period Ended March 31, 2021 OR ☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 Commission File No. 000-51829 COGENT COMMUNICATIONS HOLDINGS, INC. (Exact Name of Registrant as Specified in Its Charter) Delaware 46-5706863 (State of Incorporation) (I.R.S. Employe ...

Cogent Communications Holdings, Inc. (NASDAQ:CCOI) Q4 2020 Results Earnings Conference Call February 25, 2021 8:30 AM ET Company Participants Dave Schaeffer - Chairman and CEO Sean Wallace - Chief Financial Officer Conference Call Participants Walter Piecyk - LightShed Frank Louthan - Raymond James James Breen - William Blair Mike Funk - Bank of America Michael Srour - MoffettNathanson Evan Young - KeyBanc Capital Markets Michael Bunyaner - Tlf Capital Amir Razban - JPMorgan Operator Good morning. And welco ...

Table of Contents UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K (Mark One) ☒ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934. For the fiscal year ended December 31, 2020 OR ☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934. For the transition period from to Commission file number 000-51829 COGENT COMMUNICATIONS HOLDINGS, INC. (Exact Name of Registrant as Specified in Its Charter) Delaware (State ...

Start Time: 08:00 January 1, 0000 9:24 AM ET Cogent Communications Holdings, Inc. (NASDAQ:CCOI) Q3 2020 Earnings Conference Call November 05, 2020, 08:30 AM ET Company Participants Dave Schaeffer - Founder and CEO Sean Wallace - CFO Conference Call Participants Philip Cusick - JPMorgan Frank Louthan - Raymond James Colby Synesael - Cowen & Company Walter Piecyk - LightShed Partners Michael Rollins - Citi Nick Del Deo - MoffettNathanson Timothy Horan - Oppenheimer Operator Good morning, and welcome to the C ...

Table of Contents UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q ☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Quarterly Period Ended September 30, 2020 OR ☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 Commission File No. 000-51829 COGENT COMMUNICATIONS HOLDINGS, INC. (Exact Name of Registrant as Specified in Its Charter) Delaware 46-5706863 (State of Incorporation) (I.R.S. Emp ...

Financial Data and Key Metrics Changes - The company achieved sequential quarterly revenue growth of 0.2% and year-over-year revenue growth of 5.1% on a constant currency basis [4][45] - Gross margins reached a record 62%, improving by 150 basis points sequentially and 220 basis points year-over-year [6] - EBITDA margin improved to 37.8%, up 200 basis points sequentially and 290 basis points year-over-year [6][41] - Cash flow from operations grew sequentially by 45% and increased by 1.7% year-over-year, totaling $41.3 million for the quarter [7][50] Business Line Data and Key Metrics Changes - Corporate business, representing 69% of revenues, grew year-over-year by 5.1% and sequentially by 1% [22][27] - NetCentric business grew 3.6% year-over-year but was flat sequentially [22][29] - On-net revenue increased by 6.5% year-over-year, while off-net revenue decreased by 0.4% year-over-year [31][32] Market Data and Key Metrics Changes - The company experienced a 49% year-over-year growth in network traffic, driven by increased streaming applications and remote work [8][59] - Customer connections for corporate customers decreased by 0.4% sequentially but increased by 1.4% year-over-year [28] - NetCentric customer connections increased by 9.3% year-over-year [29] Company Strategy and Development Direction - The company remains focused on Internet connectivity and data center co-locations, targeting small and medium-sized businesses [68] - The company is optimistic about its position in emerging markets, particularly in Africa, and continues to expand its network globally [55][68] - The Board authorized a 32nd consecutive increase in the quarterly dividend, reflecting confidence in cash-generating capabilities [12][71] Management's Comments on Operating Environment and Future Outlook - Management expressed optimism about the underlying strength of the business despite uncertainties from the COVID-19 pandemic [4][17] - The company noted that while sales cycles have lengthened, there is an increase in customer conversations and opportunities [80][94] - Management believes that the demand for Internet connectivity will remain strong as businesses adapt to new operational models [68][98] Other Important Information - The company returned $31.7 million to shareholders through dividends and has $34.9 million remaining in its stock buyback authorization [9][72] - The company’s cash balance at quarter-end was $417 million, with gross leverage ratio increasing to 5.08 [11][51] - The average price per megabit for the installed customer base decreased by 10.2% sequentially, while new customer contracts saw an increase of 17.2% [34] Q&A Session Summary Question: Should the increase in quarterly dividend be expected as a target going forward? - The Board decided to increase the dividend growth rate to $0.025 due to accelerating free cash flow, and this will be evaluated each quarter [75] Question: What is the impact of COVID on corporate customer sales? - COVID has led to increased bandwidth needs for remote work, but also a reduction in VPN sales due to shuttered offices, resulting in longer sales cycles [76][80] Question: What drove the increase in new customer contracts' average price per megabit? - The increase is attributed to a higher proportion of gigabit connections being sold compared to lower bandwidth options, which raises ARPU [82] Question: What is the outlook for IRUs and their impact on costs? - The renewal of a significant IRU agreement resulted in a reduction of COGS and is expected to benefit EBITDA going forward [87][88] Question: Concerns about the trend of large commercial buildings and VPN services? - There is a concern about reduced office connectivity needs, but management believes this is a temporary trend as offices will eventually reopen [86][92]

PART I FINANCIAL INFORMATION [ITEM 1. FINANCIAL STATEMENTS](index=3&type=section&id=Item%201.%20Financial%20Statements) This section presents the unaudited condensed consolidated financial statements, including balance sheets, statements of comprehensive income, and cash flows, along with detailed notes explaining the company's business, accounting policies, debt, commitments, and segment information for the periods ended June 30, 2020 and December 31, 2019 [Condensed Consolidated Balance Sheets](index=3&type=section&id=Condensed%20Consolidated%20Balance%20Sheets) The condensed consolidated balance sheets provide a snapshot of the company's financial position as of June 30, 2020, and December 31, 2019, detailing assets, liabilities, and stockholders' equity (deficit) | Metric | June 30, 2020 (Unaudited) (in thousands) | December 31, 2019 (in thousands) | | :--- | :--- | :--- | | Total Assets | $1,005,401 | $932,124 | | Total Liabilities | $1,240,951 | $1,135,803 | | Total Stockholders' Deficit | $(235,550) | $(203,679) | - Total assets increased by **$73.277 million (7.86%)** from December 31, 2019, to June 30, 2020, primarily driven by increases in cash and cash equivalents, property and equipment, and right-of-use leased assets[8](index=8&type=chunk) - Total liabilities increased by **$105.148 million (9.26%)** over the same period, largely due to increases in senior unsecured 2024 Euro notes and finance lease obligations[8](index=8&type=chunk) [Condensed Consolidated Statements of Comprehensive Income (Three Months)](index=4&type=section&id=Condensed%20Consolidated%20Statements%20of%20Comprehensive%20Income%20(Three%20Months)) This statement details the company's financial performance for the three months ended June 30, 2020, compared to the same period in 2019, showing revenue, expenses, net income, and comprehensive income | Metric | Three Months Ended June 30, 2020 (in thousands) | Three Months Ended June 30, 2019 (in thousands) | Change (%) | | :--- | :--- | :--- | :--- | | Service revenue | $140,990 | $134,789 | 4.6% | | Operating income | $27,574 | $22,022 | 25.2% | | Net income | $8,564 | $7,136 | 20.0% | | Basic net income per common share | $0.19 | $0.16 | 18.8% | | Diluted net income per common share | $0.18 | $0.16 | 12.5% | | Dividends declared per common share | $0.68 | $0.60 | 13.3% | - Operating income increased significantly by **25.2%** year-over-year, driven by revenue growth and relatively stable operating expenses[12](index=12&type=chunk) - Interest expense increased by **14.0% to $15.499 million**, partly offset by a realized foreign exchange gain of **$2.547 million** on the issuance of 2024 Euro Notes[12](index=12&type=chunk) [Condensed Consolidated Statements of Comprehensive Income (Six Months)](index=5&type=section&id=Condensed%20Consolidated%20Statements%20of%20Comprehensive%20Income%20(Six%20Months)) This statement provides a cumulative view of the company's financial performance for the six months ended June 30, 2020, compared to the same period in 2019, highlighting revenue, expenses, net income, and comprehensive income trends | Metric | Six Months Ended June 30, 2020 (in thousands) | Six Months Ended June 30, 2019 (in thousands) | Change (%) | | :--- | :--- | :--- | :--- | | Service revenue | $281,904 | $268,930 | 4.8% | | Operating income | $53,427 | $46,427 | 15.1% | | Net income | $17,791 | $16,353 | 8.8% | | Basic net income per common share | $0.39 | $0.36 | 8.3% | | Diluted net income per common share | $0.38 | $0.36 | 5.6% | | Dividends declared per common share | $1.34 | $1.18 | 13.6% | - Service revenue increased by **4.8%** for the six months ended June 30, 2020, compared to the prior year, contributing to an **8.8%** increase in net income[15](index=15&type=chunk) - Interest expense rose by **13.6% to $30.720 million**, influenced by increased finance lease obligations and the issuance of 2024 Notes[15](index=15&type=chunk) [Condensed Consolidated Statements of Cash Flows](index=6&type=section&id=Condensed%20Consolidated%20Statements%20of%20Cash%20Flows) This statement outlines the cash inflows and outflows from operating, investing, and financing activities for the six months ended June 30, 2020, and 2019, showing the overall change in cash and cash equivalents | Cash Flow Activity | Six Months Ended June 30, 2020 (in thousands) | Six Months Ended June 30, 2019 (in thousands) | Change (YoY) | | :--- | :--- | :--- | :--- | | Net cash provided by operating activities | $69,769 | $69,269 | +$500 | | Net cash used in investing activities | $(26,796) | $(25,008) | -$(1,788) | | Net cash (used in) provided by financing activities | $(25,257) | $88,961 | -$(114,218) | | Net increase in cash and cash equivalents | $17,604 | $133,186 | -$(115,582) | | Cash and cash equivalents, end of period | $417,026 | $409,279 | +$7,747 | - Net cash provided by operating activities remained stable, increasing slightly by **$0.5 million** year-over-year[18](index=18&type=chunk) - Net cash used in financing activities shifted from a significant inflow in 2019 to an outflow in 2020, primarily due to the redemption of 2021 Notes (**$189.225 million**) and higher dividend payments (**$62.295 million**), partially offset by proceeds from 2024 Euro Notes issuance (**$240.285 million**)[18](index=18&type=chunk) [Notes to Interim Condensed Consolidated Financial Statements](index=7&type=section&id=Notes%20to%20Interim%20Condensed%20Consolidated%20Financial%20Statements) This section provides detailed explanations and disclosures for the interim condensed consolidated financial statements, covering business description, accounting policies, debt, commitments, and segment information - The Company is a facilities-based provider of low-cost, high-speed Internet access, private network services, and data center colocation space, serving businesses and communications service providers in **46 countries**[21](index=21&type=chunk) - On-net services are delivered through the company's own facilities, providing greater control over service quality and pricing, and are offered at speeds from **100 Mbps to 100 Gbps**[22](index=22&type=chunk) - The company adopted ASU 2016-02 (Leases) and ASU 2016-13 (Credit Losses) effective January 1, 2019, and January 1, 2020, respectively, with no material impact from the latter[45](index=45&type=chunk)[53](index=53&type=chunk) [1. Description of the business and recent developments](index=7&type=section&id=1.%20Description%20of%20the%20business%20and%20recent%20developments) This note describes the company's business as a facilities-based provider of high-speed Internet access, private network services, and data center colocation, operating in 46 countries. It also details the basis of financial statement presentation, use of estimates, financial instruments, revenue recognition policies, and recent accounting pronouncements adopted [Reorganization and merger](index=7&type=section&id=Reorganization%20and%20merger) On May 15, 2014, Cogent Communications Group, Inc. adopted a new holding company structure, becoming a wholly-owned subsidiary of Cogent Communications Holdings, Inc., which is now the 'successor issuer' - Cogent Communications Holdings, Inc. became the successor issuer to Cogent Communications Group, Inc. on **May 15, 2014**, following a reorganization into a new holding company structure[20](index=20&type=chunk) [Description of business](index=7&type=section&id=Description%20of%20business) The company is a facilities-based provider of low-cost, high-speed Internet access, private network services, and data center colocation, primarily serving small and medium-sized businesses and bandwidth-intensive organizations across 46 countries - The company provides on-net Internet access and private network services through its own facilities, reducing dependence on third-party carriers for the 'last mile'[22](index=22&type=chunk) - Customers include corporate clients in multi-tenant office buildings and net-centric clients (e.g., OTT media, web hosting, other ISPs) in carrier-neutral colocation facilities and the company's own data centers[23](index=23&type=chunk) - Off-net services are provided to corporate customers using other carriers' circuits for the 'last mile', and certain non-core services from acquisitions are supported but not actively sold[24](index=24&type=chunk) [Basis of presentation](index=8&type=section&id=Basis%20of%20presentation) The unaudited condensed consolidated financial statements are prepared in accordance with SEC rules, reflecting normal recurring adjustments, and should be read in conjunction with the annual Form 10-K - Interim financial statements are unaudited and include all wholly-owned subsidiaries, with inter-company accounts eliminated[26](index=26&type=chunk)[27](index=27&type=chunk) [Use of estimates](index=8&type=section&id=Use%20of%20estimates) The preparation of financial statements requires management to make estimates and assumptions that affect reported amounts, and actual results may differ - Management's estimates and assumptions are crucial for reported asset, liability, revenue, and expense amounts, with actual results potentially varying[28](index=28&type=chunk) [Financial instruments](index=8&type=section&id=Financial%20instruments) The carrying amounts of short-term financial instruments approximate fair value. Long-term debt instruments, such as senior secured and unsecured notes, are measured at fair value based on trading prices | Financial Instrument | Carrying Amount (June 30, 2020, in millions) | Fair Value (June 30, 2020, in millions) | | :--- | :--- | :--- | | Senior secured notes | $445.0 | $456.1 | | Senior unsecured 2024 Euro notes | $393.0 | $393.5 | [Gross receipts taxes, universal service fund and other surcharges](index=8&type=section&id=Gross%20receipts%20taxes,%20universal%20service%20fund%20and%20other%20surcharges) The company records certain excise taxes and surcharges, such as Universal Service Fund fees, on a gross basis, including them in both revenues and network operations expenses | Period | Excise Taxes and Surcharges (in millions) | | :--- | :--- | | Three months ended June 30, 2020 | $3.3 | | Three months ended June 30, 2019 | $3.2 | | Six months ended June 30, 2020 | $7.0 | | Six months ended June 30, 2019 | $6.6 | [Basic and diluted net income per common share](index=8&type=section&id=Basic%20and%20diluted%20net%20income%20per%20common%20share) Basic EPS excludes common stock equivalents and is computed by dividing net income by weighted-average common shares outstanding. Diluted EPS adjusts for the dilutive effect of common stock equivalents, including restricted stock and stock options, using the treasury stock method | Metric | Three Months Ended June 30, 2020 | Three Months Ended June 30, 2019 | Six Months Ended June 30, 2020 | Six Months Ended June 30, 2019 | | :--- | :--- | :--- | :--- | :--- | | Weighted average common shares - basic | 45,754,880 | 45,354,327 | 45,760,302 | 45,349,397 | | Dilutive effect of stock options | 205,823 | 35,895 | 128,477 | 30,972 | | Dilutive effect of restricted stock | 725,962 | 522,069 | 703,666 | 458,549 | | Weighted average common shares - diluted | 46,686,665 | 45,912,291 | 46,592,445 | 45,838,918 | - Dilutive effects from stock options and restricted stock increased significantly in **2020** compared to **2019** for both three and six-month periods, indicating more potential dilution[33](index=33&type=chunk) [Stockholder's Deficit](index=10&type=section&id=Stockholder's%20Deficit) This section details the changes in stockholder's deficit, including common stock, additional paid-in capital, accumulated other comprehensive income, and accumulated deficit, for the three and six months ended June 30, 2020 and 2019 | Metric (in thousands) | Balance at Dec 31, 2019 | Balance at June 30, 2020 | | :--- | :--- | :--- | | Common Stock Amount | $47 | $47 | | Additional Paid-in Capital | $493,178 | $506,391 | | Accumulated Other Comprehensive Income (Loss) | $(12,326) | $(12,906) | | Accumulated Deficit | $(684,578) | $(729,082) | | Total Stockholder's Equity (Deficit) | $(203,679) | $(235,550) | - Total stockholder's deficit increased from **$(203.679) million** at December 31, 2019, to **$(235.550) million** at June 30, 2020, primarily due to dividends paid (**$62.295 million**) and an increase in accumulated deficit, partially offset by equity-based compensation and net income[36](index=36&type=chunk) [Revenue recognition](index=11&type=section&id=Revenue%20recognition) The company recognizes revenue under ASC 606, deferring installation fees over the contract term or estimated customer life, and capitalizing certain contract acquisition costs - Service revenue recognized from deferred revenue (contract liabilities) was **$1.8 million** for Q2 2020 (vs. **$1.7 million** in Q2 2019) and **$3.0 million** for H1 2020 (vs. **$3.4 million** in H1 2019)[41](index=41&type=chunk) - Amortization expense for contract costs was **$4.2 million** for Q2 2020 (vs. **$4.3 million** in Q2 2019) and **$8.4 million** for H1 2020 (vs. **$8.7 million** in H1 2019)[41](index=41&type=chunk) [Recent Accounting Pronouncements— Adopted](index=14&type=section&id=Recent%20Accounting%20Pronouncements%E2%80%94%20Adopted) The company adopted ASU 2016-02 (Leases) effective January 1, 2019, recording right-of-use assets and lease liabilities, and ASU 2016-13 (Credit Losses) effective January 1, 2020, with no material impact - ASU 2016-02 (Leases) resulted in a cumulative-effect adjustment on **January 1, 2019**, recording **$97.3 million** in right-of-use assets and operating lease liabilities[45](index=45&type=chunk) | Lease Cost (in thousands) | Three Months Ended June 30, 2020 | Three Months Ended June 30, 2019 | Six Months Ended June 30, 2020 | Six Months Ended June 30, 2019 | | :--- | :--- | :--- | :--- | :--- | | Finance lease cost (Amortization of ROU assets) | $4,973 | $4,917 | $9,735 | $9,888 | | Finance lease cost (Interest expense) | $4,517 | $4,415 | $8,990 | $8,816 | | Operating lease cost | $4,405 | $3,486 | $8,592 | $6,780 | | Total lease costs | $13,895 | $12,818 | $27,317 | $25,484 | - Net bad debt expense for the three months ended June 30, 2020, was **$1.3 million** (net of **$0.2 million** recoveries), and for the six months, it was **$2.3 million** (net of **$0.4 million** recoveries)[54](index=54&type=chunk) [Finance leases—fiber lease agreements](index=15&type=section&id=Finance%20leases%E2%80%94fiber%20lease%20agreements) The company has finance lease agreements for dark fiber under indefeasible-right-of-use (IRU) agreements, typically with 15-20 year terms, recorded as finance lease obligations and IRU assets | Future Minimum Finance Lease Payments (in thousands) | Amount | | :--- | :--- | | For the twelve months ending June 30, 2021 | $32,568 | | 2022 | $31,800 | | 2023 | $30,772 | | 2024 | $30,051 | | 2025 | $29,710 | | Thereafter | $214,604 | | Total minimum finance lease obligations | $369,505 | | Less—amounts representing interest | $(165,727) | | Present value of minimum finance lease obligations | $203,778 | | Current maturities | $(14,734) | | Finance lease obligations, net of current maturities | $189,044 | - As of June 30, 2020, the company committed to an additional **$17.6 million** in dark fiber IRU lease agreements[48](index=48&type=chunk) [Operating leases](index=15&type=section&id=Operating%20leases) The company leases office space, data center facilities, and short-term dark fiber under operating leases, recognizing right-of-use assets and liabilities based on the present value of lease payments | Future Minimum Operating Lease Payments (in thousands) | Amount | | :--- | :--- | | For the twelve months ending June 30, 2021 | $16,725 | | 2022 | $16,108 | | 2023 | $14,918 | | 2024 | $13,833 | | 2025 | $12,097 | | Thereafter | $101,672 | | Total minimum operating lease obligations | $175,353 | | Less—amounts representing interest | $(64,910) | | Present value of minimum operating lease obligations | $110,443 | | Current maturities | $(11,292) | | Operating lease liabilities, net of current maturities | $99,151 | - The weighted-average remaining lease term for operating leases is **20.4 years**, with a weighted-average discount rate of **5.4%** as of June 30, 2020[46](index=46&type=chunk) [2. Property and equipment](index=16&type=section&id=2.%20Property%20and%20equipment) This note details depreciation and amortization expenses related to property and equipment, capitalized salaries for network construction, and information on equipment exchange agreements, installment payment agreements, and future purchase commitments | Expense (in millions) | Three Months Ended June 30, 2020 | Three Months Ended June 30, 2019 | Six Months Ended June 30, 2020 | Six Months Ended June 30, 2019 | | :--- | :--- | :--- | :--- | :--- | | Depreciation and amortization | $19.9 | $20.0 | $39.4 | $40.2 | | Capitalized salaries and benefits | $3.0 | $2.7 | $5.9 | $5.3 | [Exchange agreement](index=18&type=section&id=Exchange%20agreement) The company exchanged used network equipment and cash for new equipment, resulting in gains of $0.2 million for the three months and $0.2 million for the six months ended June 30, 2020 | Period | Gain on Equipment Transactions (in millions) | | :--- | :--- | | Three months ended June 30, 2020 | $0.2 | | Three months ended June 30, 2019 | $0.1 | | Six months ended June 30, 2020 | $0.2 | | Six months ended June 30, 2019 | $0.7 | [Installment payment agreement](index=18&type=section&id=Installment%20payment%20agreement) The company has an installment payment agreement (IPA) with a vendor for network equipment, with $12.8 million in note obligations outstanding as of June 30, 2020, secured by the related equipment - Outstanding note obligations under the IPA were **$12.8 million** at June 30, 2020, and **$12.5 million** at December 31, 2019[58](index=58&type=chunk) [Purchase agreement](index=18&type=section&id=Purchase%20agreement) In July 2020, the company entered an agreement to purchase $35.0 million of network equipment annually from a vendor for three years, with $20.0 million already ordered and $6.8 million shipped [3. Long-term debt](index=18&type=section&id=3.%20Long-term%20debt) This note details the company's long-term debt, including senior secured 2022 Notes and senior unsecured 2024 Euro Notes, their issuances, redemption of 2021 Notes, and limitations imposed by debt indentures | Debt Instrument | Principal Amount | Interest Rate | Maturity Date | | :--- | :--- | :--- | :--- | | Senior Secured 2022 Notes | $445.0 million | 5.375% | March 1, 2022 | | Senior Unsecured 2024 Euro Notes | €350.0 million ($393.0 million USD) | 4.375% | June 30, 2024 | [2024 Notes issuances](index=18&type=section&id=2024%20Notes%20issuances) In June 2020, the company issued €215.0 million of 2024 Euro Notes, generating $240.3 million in net proceeds, following a €135.0 million issuance in June 2019. These notes bear 4.375% interest and mature on June 30, 2024 - A realized foreign exchange gain of **$2.5 million** resulted from the June 2020 issuance of **€215.0 million** 2024 Notes due to favorable Euro to USD exchange rate changes between issuance and receipt of proceeds[62](index=62&type=chunk) - Unrealized foreign exchange loss on 2024 Euro Notes was **$(3.4) million** for the three months ended June 30, 2020, compared to a gain of **$0.2 million** in the prior year[62](index=62&type=chunk) - The 2024 Notes are senior unsecured obligations, guaranteed by the company's material domestic subsidiaries, and are effectively subordinated to secured indebtedness[67](index=67&type=chunk) [Debt extinguishment and redemption 2021 Notes](index=22&type=section&id=Debt%20extinguishment%20and%20redemption%202021%20Notes) In June 2020, the company redeemed its entire $189.2 million principal amount of 5.625% senior unsecured 2021 Notes using proceeds from the 2024 Notes issuance, incurring a $0.6 million loss on debt extinguishment - The redemption of 2021 Notes at par value plus accrued interest resulted in a **$0.6 million** loss on debt extinguishment and redemption[71](index=71&type=chunk) [Limitations under the indentures](index=22&type=section&id=Limitations%20under%20the%20indentures) The indentures for the 2022 and 2024 Notes impose restrictions on incurring indebtedness, paying dividends, making investments, and creating liens. Dividend payments are restricted if the consolidated leverage ratio exceeds 4.25 - As of June 30, 2020, the company's consolidated leverage ratio was above **4.25**, limiting certain payments like dividends and stock purchases, though **$165.5 million** was permitted for investment payments[72](index=72&type=chunk) [4. Commitments and contingencies](index=22&type=section&id=4.%20Commitments%20and%20contingencies) This note outlines the company's current and potential legal proceedings, including an arbitration in Spain for early termination of optical fiber leases, and other routine claims - The company is involved in an arbitration in Spain, where a former fiber provider seeks approximately **$9.0 million** for early lease termination, an amount accrued in **2015**[74](index=74&type=chunk) - It is reasonably possible that the company could incur a loss of up to **$3.2 million** in excess of accrued amounts for certain leased circuit obligations[73](index=73&type=chunk) [Current and potential litigation](index=22&type=section&id=Current%20and%20potential%20litigation) The company accrues contingent liabilities when probable and estimable, reviewing accruals quarterly. Management believes other routine legal actions will not materially impact financial condition - The company accrues contingent liabilities at the low end of the estimated range when no single amount is more likely[73](index=73&type=chunk) [5. Income taxes](index=23&type=section&id=5.%20Income%20taxes) This note presents the components of income before income taxes, broken down by domestic and foreign sources, for the three and six months ended June 30, 2020 and 2019 | Component (in thousands) | Three Months Ended June 30, 2020 | Three Months Ended June 30, 2019 | Six Months Ended June 30, 2020 | Six Months Ended June 30, 2019 | | :--- | :--- | :--- | :--- | :--- | | Domestic | $14,113 | $16,332 | $31,902 | $35,084 | | Foreign | $(2,814) | $(6,152) | $(7,770) | $(12,136) | | Total Income before Income Taxes | $11,299 | $10,180 | $24,132 | $22,948 | - Foreign income before income taxes showed a larger loss in the six months ended June 30, 2020, compared to the prior year, while domestic income also decreased[77](index=77&type=chunk) [6. Common stock buyback program stock option and award plan](index=23&type=section&id=6.%20Common%20stock%20buyback%20program%20stock%20option%20and%20award%20plan) The company's Board of Directors approved a common stock buyback program with $34.9 million remaining as of June 30, 2020. The company also granted 455,030 shares of common stock to employees and directors in the first two quarters of 2020 - No common stock purchases were made under the buyback program during the three and six months ended June 30, 2020 and 2019[78](index=78&type=chunk) - In Q1 2020, **319,750 shares ($23.7 million)** were granted, including performance shares. In Q2 2020, **135,280 shares ($10.6 million)** were granted[79](index=79&type=chunk) [7. Dividends on common stock](index=23&type=section&id=7.%20Dividends%20on%20common%20stock) The Board approved a quarterly dividend of $0.705 per common share, payable September 4, 2020. Future dividends are discretionary and subject to financial position, cash flow, and debt indenture limitations - A quarterly dividend of **$0.705 per common share ($32.2 million estimated)** was approved on **August 5, 2020**[80](index=80&type=chunk) - Debt indentures and Delaware General Corporate Law restrict the company's ability to return cash to stockholders, including dividends and stock buybacks[81](index=81&type=chunk) [8. Related party transactions](index=23&type=section&id=8.%20Related%20party%20transactions) The company leases its headquarters from Sodium LLC, owned by its CEO. The lease was extended to May 2025, with annual rent of $1.0 million plus taxes and utilities | Period | Rent and Related Costs Paid to Sodium LLC (in millions) | | :--- | :--- | | Three months ended June 30, 2020 | $0.5 | | Three months ended June 30, 2019 | $0.5 | | Six months ended June 30, 2020 | $0.8 | | Six months ended June 30, 2019 | $0.9 | [9. Segment information](index=24&type=section&id=9.%20Segment%20information) The company operates as a single segment, with service revenue broken down by geographic region (North America, Europe, Latin America, Asia Pacific) and product class (on-net, off-net, non-core) | Service Revenue (in thousands) | Three Months Ended June 30, 2020 | Three Months Ended June 30, 2019 | Six Months Ended June 30, 2020 | Six Months Ended June 30, 2019 | | :--- | :--- | :--- | :--- | :--- | | North America | $115,131 | $111,459 | $230,745 | $222,158 | | Europe | $23,573 | $21,917 | $46,847 | $44,149 | | Latin America | $436 | $74 | $766 | $109 | | Asia Pacific | $1,850 | $1,339 | $3,546 | $2,514 | | Total | $140,990 | $134,789 | $281,904 | $268,930 | | Long Lived Assets, net (in thousands) | June 30, 2020 | December 31, 2019 | | :--- | :--- | :--- | | North America | $301,187 | $269,364 | | Europe and other | $105,576 | $99,582 | | Total | $406,763 | $368,946 | - North America remains the largest revenue contributor and holds the majority of long-lived assets, showing growth across all regions[84](index=84&type=chunk) [ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS](index=25&type=section&id=Item%202.%20Management's%20Discussion%20and%20Analysis%20of%20Financial%20Condition%20and%20Results%20of%20Operations) This section provides management's perspective on the company's financial condition, results of operations, and liquidity, including a general overview of the business, competitive advantages, strategic initiatives, and a detailed analysis of financial performance for the three and six months ended June 30, 2020, compared to the prior year - The discussion includes forward-looking statements and highlights risks such as the COVID-19 pandemic, foreign exchange rate impacts, competition, and debt obligations[86](index=86&type=chunk) [General Overview](index=25&type=section&id=General%20Overview) The company is a facilities-based provider of low-cost, high-speed Internet access, private network services, and data center colocation, serving businesses and bandwidth-intensive organizations across 46 countries - On-net services are delivered through the company's own facilities, providing high-speed Internet access and private network services from **100 Mbps to 100 Gbps**[88](index=88&type=chunk) - Corporate customers are typically in multi-tenant office buildings, while net-centric customers (e.g., OTT media, web hosting, other ISPs) in carrier-neutral colocation facilities leverage the network for content delivery or access[89](index=89&type=chunk) - Off-net services are provided to corporate customers using third-party circuits for the 'last mile', and non-core services from acquisitions are supported but not actively sold[90](index=90&type=chunk) [Competitive Advantages](index=27&type=section&id=Competitive%20Advantages) The company leverages its network design, operating strategy, and product offerings to maintain a low cost of operation, offering high-quality, reliable, and fast services. Its extensive network and customer base enable it to be a Tier One network with settlement-free peering - Competitive advantages include low cost of operation due to single network design and acquired optical fiber, greater control over service delivery for on-net services, and high-quality, reliable service optimized for packet-switched traffic[92](index=92&type=chunk)[93](index=93&type=chunk)[94](index=94&type=chunk) - The company's network connects to **2,854 buildings**, including **1,771 multi-tenant office buildings** and **1,029 carrier-neutral colocation/data center buildings**, strategically positioning it for high Internet traffic[95](index=95&type=chunk) - Serving over **7,100 access networks** and **48,300 corporate customers**, the company's balanced, high-traffic network enables settlement-free peering as a Tier One network, reducing costs and enhancing delivery[96](index=96&type=chunk) [Low Cost of Operation](index=27&type=section&id=Low%20Cost%20of%20Operation) The company's network design, operating strategy, and product offerings are optimized for low operational costs, benefiting from a single network protocol, acquired optical fiber, and streamlined product sets - Utilizing a single network protocol and acquiring optical fiber from excess inventory reduces capital intensity and operating costs[92](index=92&type=chunk) [Greater Control and Superior Delivery](index=27&type=section&id=Greater%20Control%20and%20Superior%20Delivery) On-net services provide the company with full control over the network, including the 'last mile' and in-building wiring, enabling faster and more efficient service provisioning - The on-net service structure provides more control over service quality and pricing, allowing quicker and more efficient provisioning than third-party carrier networks[93](index=93&type=chunk) [High Quality, Reliable Service](index=27&type=section&id=High%20Quality,%20Reliable%20Service) The network's design is optimized for packet-switched traffic, ensuring high technical performance, increased speed, and reduced data packet loss compared to traditional circuit-switched networks - The network's optimization for packet-switched traffic results in high technical performance, increased speed, and reduced data packet loss[94](index=94&type=chunk) [Large Addressable Market](index=27&type=section&id=Large%20Addressable%20Market) The company's network strategically connects to 2,854 buildings, including multi-tenant office buildings and carrier-neutral data centers, maximizing revenue opportunities and profitability - The network connects to **2,854 buildings**, including **1,771 multi-tenant office buildings** and **1,029 carrier-neutral colocation/data center buildings**, with **54 data centers** operated by the company[95](index=95&type=chunk) [Balanced, High Traffic Network](index=27&type=section&id=Balanced,%20High%20Traffic%20Network) The network serves over 7,100 access networks and 48,300 corporate customers, with the majority of traffic originating and terminating on its network, enhancing reliability, speed, and margins - The extensive customer base and traffic volume enable the company to be a Tier One network, interconnected on a settlement-free basis, which broadens geographic delivery and reduces network costs[96](index=96&type=chunk) [Proven and Experienced Management Team](index=29&type=section&id=Proven%20and%20Experienced%20Management%20Team) The senior management team possesses over 20 years of telecommunications industry experience, having designed and built the network, integrated acquisitions, and managed business expansion - The senior management team has an average of over **20 years** of experience, with many members working together since **2000**, leading network design, integration of **13 acquisitions**, and business growth[98](index=98&type=chunk) [Our Strategy](index=29&type=section&id=Our%20Strategy) The company aims to be a leading provider of high-quality, high-speed Internet access and private network services by growing its corporate and net-centric customer bases, expanding its on-net footprint, enhancing sales efforts, and pursuing selective acquisition opportunities - Strategy focuses on growing corporate customers in multi-tenant office buildings and carrier-neutral data centers by offering dedicated internet access and private network services with faster speeds and rapid installation[99](index=99&type=chunk) - The company plans to increase its share of the net-centric market by leveraging its high-capacity network to meet demand from bandwidth-intensive applications such as OTT media, online gaming, and IoT[100](index=100&type=chunk) - On-net customer growth is emphasized due to higher profit margins, greater control over service levels, and faster provisioning, achieved by adding customers in existing buildings and expanding network connections[101](index=101&type=chunk) [Grow our Corporate Customer Base](index=29&type=section&id=Grow%20our%20Corporate%20Customer%20Base) The company aims to expand its corporate customer base by providing dedicated internet access and private network services to businesses in multi-tenant office buildings and data centers, capitalizing on the increasing integration of data centers into IT infrastructure - Corporate customers benefit from significantly faster speeds and rapid installation times compared to competitors, driving growth in this segment[99](index=99&type=chunk) [Increase our Share of the Net-centric Market](index=29&type=section&id=Increase%20our%20Share%20of%20the%20Net-centric%20Market) The company intends to increase its share of the net-centric market by loading its high-capacity network to meet growing demand for high-speed internet access from bandwidth-intensive applications, expanding geographic reach, and offering competitive pricing - The company plans to broaden its geographic reach and continue offering competitive pricing to grow its share in the net-centric market[100](index=100&type=chunk) [Pursue On-Net Customer Growth](index=29&type=section&id=Pursue%20On-Net%20Customer%20Growth) The company prioritizes on-net customer growth to leverage its high-capacity network with minimal incremental costs, focusing on increasing penetration in existing buildings and connecting more multi-tenant office buildings and carrier-neutral data centers - On-net services generate greater profit margins and offer more control over service levels, quality, and pricing, with faster provisioning times[101](index=101&type=chunk) [Grow and Improve our Sales Efforts](index=29&type=section&id=Grow%20and%20Improve%20our%20Sales%20Efforts) The company plans to continue increasing its sales efforts by expanding its sales force, optimizing sales productivity, and broadening its on-net addressable market to gain market share - The quota-bearing salesforce increased by **37%** over the past five years to **572**, with efforts to maintain productivity[102](index=102&type=chunk) [Selectively Pursue Acquisition Opportunities](index=29&type=section&id=Selectively%20Pursue%20Acquisition%20Opportunities) The company will selectively pursue acquisitions that expand its customer base, footprint, and generate positive cash flow, including off-net and on-net customers, complementary businesses, or network assets - The company has not completed an acquisition in over a decade, indicating a highly selective approach to M&A[103](index=103&type=chunk) [Results of Operations](index=31&type=section&id=Results%20of%20Operations) This section provides a detailed comparison of the company's financial performance for the three and six months ended June 30, 2020, versus the same periods in 2019, analyzing service revenue, operating expenses, interest expense, and income tax provision [Three Months Ended June 30, 2020 Compared to the Three Months Ended June 30, 2019](index=31&type=section&id=Three%20Months%20Ended%20June%2030,%202020%20Compared%20to%20the%20Three%20Months%20Ended%20June%2030,%202019) For the three months ended June 30, 2020, service revenue increased by 4.6%, driven by growth in corporate customers and on-net connections, despite a decline in average price per megabit for net-centric services. Operating expenses remained relatively stable, leading to a significant increase in operating income | Metric | Q2 2020 (in thousands) | Q2 2019 (in thousands) | Change (%) | | :--- | :--- | :--- | :--- | | Service revenue | $140,990 | $134,789 | 4.6% | | On-net revenue | $103,800 | $97,472 | 6.5% | | Off-net revenue | $37,044 | $37,191 | (0.4)% | | Network operations expenses | $53,886 | $54,407 | (1.0)% | | Selling, general, and administrative expenses | $39,839 | $38,566 | 3.3% | | Depreciation and amortization expenses | $19,896 | $19,979 | (0.4)% | | Interest expense | $15,499 | $13,595 | 14.0% | | Realized gain on foreign exchange – 2024 Notes | $2,547 | — | NM | | Unrealized (loss) gain on 2024 Notes | $(3,420) | $177 | NM | | Income tax provision | $2,735 | $3,044 | (10.2)% | | Other Operating Data | Q2 2020 | Q2 2019 | Change (%) | | :--- | :--- | :--- | :--- | | ARPU—on net | $458 | $453 | 1.1% | | ARPU—off-net | $1,048 | $1,104 | (5.1)% | | Average Price per Megabit — installed base | $0.47 | $0.63 | (25.1)% | | Customer Connections—end of period (On-net) | 75,927 | 72,415 | 4.8% | | Customer Connections—end of period (Off-net) | 11,846 | 11,321 | 4.6% | | Buildings On-net | 2,854 | 2,737 | 4.3% | [Service Revenue](index=31&type=section&id=Service%20Revenue_Q2) Service revenue increased by 4.6% to $140.990 million, primarily due to growth in corporate customers and on-net connections, despite a $0.7 million negative impact from exchange rates. Corporate revenue increased by 5.1% to $97.0 million, while net-centric revenue grew 3.6% to $44.0 million, impacted by a 25.1% decline in average price per megabit for net-centric services - The impact of exchange rates resulted in a **$0.7 million** decrease in revenues for Q2 2020[107](index=107&type=chunk) - Corporate customers represented **68.8%** of total service revenue in Q2 2020, up from **68.5%** in Q2 2019, reflecting a shift in revenue mix[110](index=110&type=chunk) - On-net revenues increased **6.5%** with a **4.8%** increase in on-net customer connections, while off-net revenues decreased **0.4%** despite a **4.6%** increase in off-net customer connections, due to a **5.1%** decrease in off-net ARPU[112](index=112&type=chunk)[113](index=113&type=chunk) [Network Operations Expenses](index=33&type=section&id=Network%20Operations%20Expenses_Q2) Network operations expenses decreased by 1.0% to $53.886 million, despite an increase in customer connections and on-net buildings. This decrease was primarily due to price reductions in circuit costs and the capitalization of an IRU fiber lease agreement - The decrease in network operations expense was primarily due to price reductions in circuit costs, fewer operating leases for fiber, and the capitalization of a **$34.0 million** IRU fiber lease renewal as a finance lease[114](index=114&type=chunk)[115](index=115&type=chunk) [Selling, General, and Administrative ("SG&A") Expenses](index=35&type=section&id=Selling,%20General,%20and%20Administrative%20(%22SG%26A%22)%20Expenses_Q2) SG&A expenses increased by 3.3% to $39.839 million, driven by higher salaries and related costs to support expansion and increased sales efforts, including a larger sales force - Sales force headcount increased from **656 to 716**, and quota-bearing sales force increased from **519 to 572**, contributing to higher SG&A expenses[117](index=117&type=chunk) [Depreciation and Amortization Expenses](index=35&type=section&id=Depreciation%20and%20Amortization%20Expenses_Q2) Depreciation and amortization expense decreased slightly by 0.4% to $19.896 million, mainly due to certain fixed assets becoming fully depreciated - The decrease is primarily attributed to certain deployed fixed assets reaching full depreciation[118](index=118&type=chunk) [Interest Expense and Loss on Debt Extinguishment & Redemption](index=35&type=section&id=Interest%20Expense%20and%20Loss%20on%20Debt%20Extinguishment%20%26%20Redemption_Q2) Interest expense increased by 14.0% to $15.499 million, primarily due to increased finance lease obligations and the issuance of 2024 Notes. A $0.6 million loss on debt extinguishment was incurred from redeeming the 2021 Notes - The redemption of **$189.2 million** of 2021 Notes in June 2020 resulted in a **$0.6 million** loss on debt extinguishment[119](index=119&type=chunk) [Realized gain and unrealized (loss) gain on foreign exchange – 2024 Notes](index=35&type=section&id=Realized%20gain%20and%20unrealized%20(loss)%20gain%20on%20foreign%20exchange%20%E2%80%93%202024%20Notes_Q2) The company recognized a $2.5 million realized foreign exchange gain from the June 2020 issuance of 2024 Euro Notes. However, an unrealized foreign exchange loss of $(3.4) million was recorded for the three months ended June 30, 2020 - The realized gain was due to the Euro to USD rate changing from **$1.112** at issuance to **$1.133** at receipt of proceeds[120](index=120&type=chunk) - The company does not hedge its foreign currency obligations[120](index=120&type=chunk) [Income Tax Provision](index=35&type=section&id=Income%20Tax%20Provision_Q2) The income tax provision decreased by 10.2% to $2.735 million, primarily due to changes in taxable income - The change in income tax provision is primarily related to changes in taxable income[121](index=121&type=chunk) [Buildings On-net](index=35&type=section&id=Buildings%20On-net_Q2) The number of on-net buildings connected to the network increased by 117 (4.3%) to 2,854 as of June 30, 2020, reflecting the company's disciplined network expansion program - The company anticipates adding a similar number of buildings to its network in the coming years[122](index=122&type=chunk) [Six Months Ended June 30, 2020 Compared to the Six Months Ended June 30, 2019](index=36&type=section&id=Six%20Months%20Ended%20June%2030,%202020%20Compared%20to%20the%20Six%20Months%20Ended%20June%2030,%202019) For the six months ended June 30, 2020, service revenue increased by 4.8%, driven by corporate customer growth and on-net connections. Operating expenses saw moderate increases, while interest expense rose due to new debt and finance leases. Net income increased by 8.8% | Metric | H1 2020 (in thousands) | H1 2019 (in thousands) | Change (%) | | :--- | :--- | :--- | :--- | | Service revenue | $281,904 | $268,930 | 4.8% | | On-net revenue | $207,256 | $194,656 | 6.5% | | Off-net revenue | $74,364 | $74,036 | 0.4% | | Network operations expenses | $109,806 | $108,557 | 1.2% | | Selling, general, and administrative expenses | $79,513 | $74,427 | 6.8% | | Depreciation and amortization expenses | $39,402 | $40,240 | (2.1)% | | Interest expense | $30,720 | $27,051 | 13.6% | | Realized gain on foreign exchange – 2024 Notes | $2,547 | — | NM | | Unrealized (loss) gain on 2024 Notes | $(512) | $177 | NM | | Income tax provision | $6,341 | $6,595 | (3.9)% | | Other Operating Data | H1 2020 | H1 2019 | Change (%) | | :--- | :--- | :--- | :--- | | ARPU—on net | $459 | $460 | (0.1)% | | ARPU—off-net | $1,055 | $1,107 | (4.7)% | | Average Price per Megabit — installed base | $0.50 | $0.65 | (23.4)% | | Customer Connections—end of period (On-net) | 75,927 | 72,415 | 4.8% | | Customer Connections—end of period (Off-net) | 11,846 | 11,321 | 4.6% | | Buildings On-net | 2,854 | 2,737 | 4.3% | [Service Revenue](index=36&type=section&id=Service%20Revenue_H1) Service revenue increased by 4.8% to $281.904 million for the six months ended June 30, 2020. Corporate customer revenue grew by 6.3% to $194.0 million, while net-centric revenue increased by 1.7% to $87.9 million, impacted by a 23.4% decline in average price per megabit and a $1.4 million negative impact from exchange rates - The impact of exchange rates resulted in a **$1.4 million** decrease in revenues for H1 2020[126](index=126&type=chunk) - Corporate customers represented **68.8%** of total service revenue in H1 2020, up from **67.9%** in H1 2019, indicating a continued shift towards corporate services[128](index=128&type=chunk) - On-net ARPU decreased by **0.1%**, partly due to volume and term-based pricing discounts and new customers having lower ARPU than canceling customers[129](index=129&type=chunk) [Network Operations Expenses](index=37&type=section&id=Network%20Operations%20Expenses_H1) Network operations expenses increased by 1.2% to $109.806 million, driven by more customer connections and on-net buildings, partially offset by circuit cost reductions and the capitalization of an IRU fiber lease agreement - The increase in expenses was partially offset by price reductions in certain circuit costs and the capitalization of a **$34.0 million** IRU fiber lease renewal as a finance lease[131](index=131&type=chunk) [Selling, General, and Administrative ("SG&A") Expenses](index=37&type=section&id=Selling,%20General,%20and%20Administrative%20(%22SG%26A%22)%20Expenses_H1) SG&A expenses increased by 6.8% to $79.513 million, primarily due to higher salaries and related costs supporting expansion and increased sales efforts, with total headcount rising to 1,083 - Equity-based compensation expense included in SG&A was **$10.6 million** for H1 2020, up from **$8.3 million** in H1 2019[132](index=132&type=chunk) [Depreciation and Amortization Expenses](index=39&type=section&id=Depreciation%20and%20Amortization%20Expenses_H1) Depreciation and amortization expense decreased by 2.1% to $39.402 million, mainly due to certain fixed assets becoming fully depreciated - The decrease is primarily due to certain deployed fixed assets becoming fully depreciated[134](index=134&type=chunk) [Interest Expense and Loss on Debt Extinguishment & Redemption](index=39&type=section&id=Interest%20Expense%20and%20Loss%20on%20Debt%20Extinguishment%20%26%20Redemption_H1) Interest expense increased by 13.6% to $30.720 million, driven by higher finance lease obligations and the issuance of 2024 Notes. A $0.6 million loss on debt extinguishment was recorded from the redemption of 2021 Notes - The redemption of 2021 Notes in June 2020 at par value resulted in a **$0.6 million** loss on debt extinguishment[135](index=135&type=chunk) [Realized gain and unrealized gain (loss) on foreign exchange – 2024 Notes](index=39&type=section&id=Realized%20gain%20and%20unrealized%20gain%20(loss)%20on%20foreign%20exchange%20%E2%80%93%202024%20Notes_H1) The company recorded a $2.5 million realized foreign exchange gain from the June 2020 issuance of 2024 Euro Notes. An unrealized foreign exchange loss of $(0.5) million was recorded for the six months ended June 30, 2020 - The realized gain was due to the Euro to USD rate changing from **$1.112** at issuance to **$1.133** at receipt of proceeds[136](index=136&type=chunk) - The company does not enter into hedges for its foreign currency obligations[136](index=136&type=chunk) [Income Tax Provision](index=39&type=section&id=Income%20Tax%20Provision_H1) The income tax provision decreased by 3.9% to $6.341 million, primarily due to changes in taxable income - The change in income tax provision is primarily related to changes in taxable income[137](index=137&type=chunk) [Buildings On-net](index=39&type=section&id=Buildings%20On-net_H1) The number of on-net buildings connected to the network increased by 117 (4.3%) to 2,854 as of June 30, 2020, as part of the company's network expansion program - The company anticipates adding a similar number of buildings to its network for the next several years[138](index=138&type=chunk) [Liquidity and Capital Resources](index=39&type=section&id=Liquidity%20and%20Capital%20Resources) The company maintains strong liquidity with growing operating cash flow and access to capital markets, enabling distributions to shareholders. Management actively monitors cash balances, receivables, payables, and debt obligations, while also assessing the impact of the COVID-19 pandemic on its financial position - The company has returned over **$820 million** to shareholders through share repurchases and dividends since its IPO[139](index=139&type=chunk) - Management continuously reviews cash balances, accounts receivable, accounts payable, accrued liabilities, capital expenditure commitments, and debt payments to assess liquidity[140](index=140&type=chunk) - The company may retire or purchase outstanding debt through various transactions, which could be material[141](index=141&type=chunk) [Impact of COVID-19 on Our Liquidity and Operating Performance](index=41&type=section&id=Impact%20of%20COVID-19%20on%20Our%20Liquidity%20and%20Operating%20Performance) The COVID-19 pandemic had a limited impact on the company's business in Q2 2020, with effective remote work policies and mitigated building access disruptions. While sales productivity decreased, network traffic grew. The company maintained high liquidity and repaid a PPP loan - The company adopted a mandatory work-from-home policy and implemented safety procedures for on-site personnel, mitigating operational disruptions[145](index=145&type=chunk) - Despite some delays in new service installations and decreased sales representative productivity, network traffic continued to grow at an accelerated rate[146](index=146&type=chunk)[148](index=148&type=chunk) - The company maintained **$417.0 million** in cash and cash equivalents as of June 30, 2020, and repaid a Paycheck Protection Program (PPP) loan received in April 2020[149](index=149&type=chunk) [Cash Flows](index=41&type=section&id=Cash%20Flows) Operating cash flows remained stable, while investing activities increased due to property and equipment purchases. Financing activities shifted to a net cash outflow, primarily due to debt redemption and dividend payments, partially offset by new debt issuance | Cash Flow Activity (in thousands) | Six Months Ended June 30, 2020 | Six Months Ended June 30, 2019 | | :--- | :--- | :--- | | Net cash provided by operating activities | $69,769 | $69,269 | | Net cash used in investing activities | $(26,796) | $(25,008) | | Net cash (used in) provided by financing activities | $(25,257) | $88,961 | | Net increase in cash and cash equivalents | $17,604 | $133,186 | - Interest payments on note obligations were **$27.5 million** in H1 2020, up from **$17.3 million** in H1 2019[153](index=153&type=chunk) - Financing activities included **$62.3 million** in dividends paid, **$189.2 million** for 2021 Notes redemption, and **$240.3 million** net proceeds from 2024 Euro Notes issuance in H1 2020[155](index=155&type=chunk) [Cash Position and Indebtedness](index=43&type=section&id=Cash%20Position%20and%20Indebtedness) As of June 30, 2020, the company held $417.0 million in cash and cash equivalents and had total indebtedness of $1.1 billion, including $203.8 million in finance lease obligations - The company's liquidity position of **$417.0 million** in cash and cash equivalents reduces refinancing risk and enhances its ability to pursue acquisitions or operating opportunities[156](index=156&type=chunk) - Total indebtedness at par value was **$1.1 billion** as of June 30, 2020[157](index=157&type=chunk) [Summarized Financial Information of Holdings](index=43&type=section&id=Summarized%20Financial%20Information%20of%20Holdings) Holdings, as a guarantor under the 2022 and 2024 Notes, reported $166.510 million in total assets and total equity as of June 30, 2020, with a net loss of $(11.766) million for the six months ended June 30, 2020 | Metric (in thousands) | June 30, 2020 (Unaudited) | | :--- | :--- | | Cash and cash equivalents | $166,497 | | Total assets | $166,510 | | Total equity | $166,510 | | Equity-based compensation expense (H1 2020) | $12,224 | | Net loss (H1 2020) | $(11,766) | [Common Stock Buyback Program](index=45&type=section&id=Common%20Stock%20Buyback%20Program) The Board of Directors authorized a common stock buyback program, with $34.9 million remaining available as of June 30, 2020. No shares were repurchased during the three and six months ended June 30, 2020 or 2019 - The buyback program is authorized through **December 31, 2020**[161](index=161&type=chunk) [Dividends on Common Stock and Return of Capital Program](index=45&type=section&id=Dividends%20on%20Common%20Stock%20and%20Return%20of%20Capital%20Program) The Board approved a quarterly dividend of $0.705 per common share, payable September 4, 2020. Future dividends and capital returns are discretionary and subject to financial performance, cash flow, and debt indenture limitations - The estimated dividend payment is **$32.2 million**[162](index=162&type=chunk) - Debt indentures limit the company's ability to return cash to stockholders[163](index=163&type=chunk) [Contractual Obligations and Commitments](index=45&type=section&id=Contractual%20Obligations%20and%20Commitments) Material changes to contractual obligations include the June 2020 issuance of €215.0 million 2024 Notes, the redemption of $189.2 million 2021 Notes, and a new agreement to purchase $35.0 million of network equipment annually for three years - Net proceeds from the June 2020 2024 Notes offering were **$240.3 million**, used to repay 2021 Notes and for general corporate purposes[165](index=165&type=chunk) - The redemption of 2021 Notes resulted in a **$0.6 million** loss on debt extinguishment[166](index=166&type=chunk) - A new agreement requires purchasing **$35.0 million** of network equipment annually from a vendor for three years, starting July 2020[167](index=167&type=chunk) [Future Capital Requirements](index=45&type=section&id=Future%20Capital%20Requirements) The company believes that its cash on hand and cash generated from operating activities will be adequate to meet its working capital, capital expenditure, debt service, dividend payments, and other cash requirements for the next twelve months. However, future acquisitions or unplanned costs may necessitate additional debt or equity financing, which could lead to dilution or impact business plans - Insufficient funds could lead to delays in network expansion, reduced sales and marketing efforts, or other adverse effects on the business[169](index=169&type=chunk) - The company may refinance existing debt or seek additional capital for liquidity, acquisitions, or general corporate purposes, potentially through new debt or open market purchases of outstanding debt[171](index=171&type=chunk) [Off-Balance Sheet Arrangements](index=47&type=section&id=Off-Balance%20Sheet%20Arrangements) The company does not have relationships with unconsolidated entities or financial partnerships for off-balance sheet arrangements and is not materially exposed to related financing, liquidity, market, or credit risks - The company does not engage in trading activities involving non-exchange traded contracts[172](index=172&type=chunk) [Critical Accounting Policies and Significant Estimates](index=47&type=section&id=Critical%20Accounting%20Policies%20and%20Significant%20Estimates) Management confirms no material changes to critical accounting policies and significant estimates from those disclosed in the annual report on Form 10-K for the year ended December 31, 2019 - No material changes to critical accounting policies and significant estimates as of June 30, 2020[173](index=173&type=chunk) [ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK](index=47&type=section&id=Item%203.%20Quantitative%20and%20Qualitative%20Disclosures%20About%20Market%20Risk) Management states that there have been no material changes to the company's exposures to market risk as of June 30, 2020, compared to those disclosed in the annual report on Form 10-K for the year ended December 31, 2019 - No material changes to market risk exposures as of June 30, 2020[174](index=174&type=chunk) [ITEM 4. CONTROLS AND PROCEDURES](index=47&type=section&id=Item%204.%20Controls%20and%20Procedures) The company's management, including the CEO and CFO, concluded that disclosure controls and procedures were effective at a reasonable assurance level as of June 30, 2020. No material changes to internal control over financial reporting occurred during the quarter - Disclosure controls and procedures were effective at the reasonable assurance level as of June 30, 2020[176](index=176&type=chunk) - No material changes in internal control over financial reporting occurred during the most recent fiscal quarter[177](index=177&type=chunk) PART II OTHER INFORMATION [ITEM 1. LEGAL PROCEEDINGS](index=48&type=section&id=Item%201.%20Legal%20Proceedings) The company is involved in routine legal proceedings that are not expected to have a material impact on its operations or financial results. Further details are provided in Note 4 of the financial statements - Legal proceedings in the ordinary course of business are not expected to have a material impact[180](index=180&type=chunk) [ITEM 1A. RISK FACTORS](index=48&type=section&id=Item%201A.%20Risk%20Factors) This section supplements previously disclosed risk factors, emphasizing the significant and unpredictable uncertainties posed by the COVID-19 pandemic on the company's business, financial condition, and results of operations, including potential impacts on demand, customer payments, supply chain, and operational plans - The COVID-19 pandemic creates significant uncertainty, impacting demand for services, customer payment ability, third-party reliance, and operational plans across **46 countries**[181](index=181&type=chunk)[183](index=183&type=chunk) - Uncertainties include the pandemic's duration and scope, governmental responses (e.g., travel bans, lockdowns, re-opening policies), and impacts on global economic conditions[184](index=184&type=chunk)[185](index=185&type=chunk)[186](index=186&type=chunk) [The impact of the spread of COVID-19 continues to create significant uncertainty for our business, financial condition and results of operations.](index=48&type=section&id=The%20impact%20of%20the%20spread%20of%20COVID-19%20continues%20to%20create%20significant%20uncertainty%20for%20our%20business,%20financial%20condition%20and%20results%20of%20operations.) The COVID-19 pandemic's impact on the company's business, financial results, and operations remains highly uncertain and unpredictable, depending on factors like the pandemic's duration, governmental actions, and global economic conditions - The pandemic's impact varies by market and could affect demand, customer payments, supplier capabilities, network expansion, and the implementation of strategic plans[182](index=182&type=chunk)[186](index=186&type=chunk) [Protective measures we have implemented to protect for our workforce from the COVID-19 virus may not be effective and may expose us to additional risks.](index=50&type=section&id=Protective%20measures%20we%20have%20implemented%20to%20protect%20for%20our%20workforce%20from%20the%20COVID-19%20virus%20may%20not%20be%20effective%20and%20may%20expose%20us%20to%20additional%20risks.) Measures like remote work and safety procedures have led to increased costs and amplified risks, including strain on IT resources, increased cybersecurity threats, and potential operational impacts if a significant portion of the workforce is unable to work - Increased costs incurred due to COVID-19 include one-time expenses for laptops and recurring costs for sanitizing equipment[189](index=189&type=chunk) - Remote work amplifies risks such as increased demand on IT resources, higher cybersecurity attack vulnerability, and potential operational disruption from workforce illness or restrictions[191](index=191&type=chunk) [ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS](index=50&type=section&id=Item%202.%20Unregistered%20Sales%20of%20Equity%20Securities%20and%20Use%20of%20Proceeds) The Board of Directors authorized a common stock repurchase plan through December 31, 2020. No common stock was purchased during the second quarter of 2020 - No common stock purchases were made during the second quarter of 2020 under the authorized buyback plan[192](index=192&type=chunk) [ITEM 6. EXHIBITS.](index=51&type=section&id=Item%206.%20Exhibits.) This section lists the exhibits filed with the Form 10-Q, including various indentures related to senior notes, certifications from the CEO and CFO, and XBRL formatted financial statements - Exhibits include indentures for **4.375% Senior Notes due 2024**, certifications (**31.1, 31.2, 32.1, 32.2**), and financial statements in iXBRL format[194](index=194&type=chunk) [SIGNATURES](index=52&type=section&id=Signatures) The report is duly signed on behalf of Cogent Communications Holdings, Inc. by its Chief Executive Officer, David Schaeffer, and Chief Financial Officer, Sean Wallace, on August 6, 2020 - The report was signed by David Schaeffer (CEO) and Sean Wallace (CFO) on **August 6, 2020**[197](index=197&type=chunk)[198](index=198&type=chunk)