Cogent(US:CCOI)2019-11-11 16:01Financial Data and Key Metrics Changes - The EBITDA margin increased by 200 basis points to 36.9% from the second quarter of 2019, marking the highest margin in the company's 20-year history [4] - The adjusted EBITDA margin increased by 190 basis points to 37.0% [4] - SG&A expenses declined sequentially by $2 million or 6.1% from the second quarter of 2019 [4] - Gross margin for the quarter increased year-over-year by 170 basis points to 59.9% [4] - Year-over-year revenue growth was 6%, with a sequential revenue growth of 1.7% on a constant currency basis [4][22] - Quarterly cash flow from operations increased 5.3% year-over-year, but decreased sequentially by 17.7% due to increased interest payments [25] Business Line Data and Key Metrics Changes - Corporate customer revenue grew sequentially by 2.3% to $94.4 million and year-over-year by 10.4% [13] - NetCentric customer revenue increased sequentially by 0.1% to $42.5 million but declined year-over-year by 4.7% [13] - On-net revenue was $99.4 million, a sequential increase of 2% and a year-over-year increase of 6% [14] - Off-net revenue was $37.4 million, with a sequential increase of 0.6% and a year-over-year increase of 3.4% [14] - The average price per megabit for the installed base declined sequentially by 4% to $0.61 and by 22.2% year-over-year [16] Market Data and Key Metrics Changes - Approximately 22% of total revenues were reported in U.S. dollars and earned outside the United States, with 16% based in Europe [21] - The foreign exchange impact on reported quarterly revenue was negative $1.1 million year-over-year [22] - The company operates in over 954 million square feet of multi-tenant office space in North America [29] Company Strategy and Development Direction - The company remains focused on Internet access, IP connectivity, and data center co-location services, with a long-term revenue growth target of approximately 10% [31] - The company plans to continue returning capital to shareholders through dividends and stock buybacks, with a recent increase in the quarterly dividend to $0.64 per share [32] - The company is committed to maintaining its position as a low-cost provider in the industry [31] Management's Comments on Operating Environment and Future Outlook - Management expressed optimism about the underlying strength of the business and the outlook for the remainder of 2019 and beyond [3] - The company anticipates continued traffic growth driven by over-the-top streaming services and expects the NetCentric business to return to historical growth rates [35] - Management noted that the competitive environment for NetCentric services is improving, while the corporate side remains mixed depending on specific competitors [47] Other Important Information - The company returned $28.6 million to shareholders through dividends during the quarter [4] - The total gross debt at par, including capital lease obligations, was $962.5 million at quarter end [26] - The company has a total of $34.9 million available for its buyback program, which is authorized to continue through December 2020 [32] Q&A Session All Questions and Answers Question: Visibility in NetCentric business and USF rates impact - Management indicated that traffic is expected to grow driven by over-the-top streaming services, with a mix shift in the NetCentric business being transitory [35] - The increase in USF rates primarily affects corporate products, with the charge not applying to Internet services [36] Question: Split between corporate and NetCentric revenues - Approximately 40% of corporate revenues are affected by the slowdown in off-net growth, with over 90% of layer two services subject to USF being to corporate customers [40] Question: Sales productivity and pricing environment - Management noted that lower productivity is largely due to increased hiring and a less mature sales force, with pricing declines in line with historical averages [41][47] Question: Impact of loop costs on margins - Management explained that while gross revenue may decrease with lower loop costs, margins remain stable as they capture benefits from negotiated discounts [50] Question: Strategic opportunities and market positioning - The company sees itself as strategically positioned in the evolving cloud and Internet landscape, focusing on Internet access and VPN services [53] Question: Traffic growth and international markets - Management reported that approximately 47% of NetCentric traffic is outside the U.S., with ongoing expansion into international markets [55]