Cogent Communications Holdings Inc (CCOI) 2017 Q2 法說會逐字稿

Good morning, and welcome to the Cogent Communications Holdings Second Quarter 2017 Earnings Conference Call.

As a reminder, this conference is being recorded and will be available for replay at www.cogentco.com.

I would now like to turn the call over to Mr. Dave Schaeffer, Chairman and Chief Executive Officer of Cogent Communications Holdings.

Sir?

Thank you, and good morning.

Welcome to our second quarter 2017 earnings conference call.

I'm Dave Schaeffer, Cogent's CEO, and with me on today's call is Tad Weed, our Chief Financial Officer.

We're pleased and encouraged by our results for the quarter and continued to be optimistic in the strength of our business and the outlook for the remainder of 2017.

We achieved year-over-year quarterly revenue growth on a constant-currency basis of 9.6%.

Our sales rep productivity at 6.5 units per full-time equivalent rep per month, a productivity rate that is, again, significantly higher than our long-term average of 5 units per full-time sales rep per month and, actually, the highest productivity rate of our sales force in Cogent's history.

Our EBITDA increased by $2.4 million or by 6.3% sequentially quarter-over-quarter and increased by $5.1 million or 14.7% from Q2 of 2016.

Our EBITDA and gross margins both increased sequentially and on a year-over-year basis.

Our EBITDA margins increased by 130 basis points sequentially to 33.5% and by 170 basis points from Q2 of 2016.

Our GAAP gross margin improved sequentially by 50 basis points and improved year-over-year by 200 basis points.

During the quarter, we returned $19.9 million to our shareholders through our regular dividend, and we spent $1.8 million on stock buybacks.

At quarter's end, we had a total of $41.5 million available on our stock buyback program, and our board authorized the continuation of this program through December of 2018.

Our gross leverage ratio was 4.62, and our net leverage ratio was 2.98 at the end of the quarter.

We ended the quarter with $256.5 million of cash on our balance sheet.

Of this cash, $104.6 million is held at the holding company, Cogent Holdings, and this cash is unrestricted and available for use for both dividends and stock buybacks.

We continue to remain confident in our growth potential and cash-generating capabilities of our business.

As a result, as indicated in our press release, we announced yet another $0.02 increase in our regular quarterly dividends from $0.44 per quarter to $0.46 per quarter per share.

This is our 20th consecutive quarter in which we've increased our regular dividend.

Throughout this discussion, we will highlight several operational statistics.

I will review in greater detail some operational trends and highlights, and Tad will provide some additional details on our financial performance.

Following our remarks, we'll open it up for questions and answers.

Now I'd like to turn it over to Tad to read our safe harbor language.

Thank you, Dave, and good morning, everyone.

This earnings conference call includes forward-looking statements.

These forward-looking statements are based upon our current intent, belief and expectations.

These forward-looking statements and all other statements that may be made on this call that are not historical facts are subject to a number of risks and uncertainties, and actual results may differ materially.

Please refer to our SEC filings for more information on the factors that could cause actual results to differ.

Cogent undertakes no obligation to update or revise forward-looking statements.

If we use any non-GAAP financial measures during this call, you'll find these reconciled to the GAAP measurement in our earnings release, which is posted on our website at cogentco.com.

I'll turn the call back over to Dave.

Okay, thanks, Tad.

Hopefully, you've had a chance to review our earnings press release.

Our press release includes a number of historical quarterly metrics.

Our targeted guidance for long-term full year revenue growth on a constant currency basis continues to be 10% to 20%.

Our long-term EBITDA as adjusted annual margin expansion guidance is targeted to be an annual improvement of 200 basis points.

Our revenue and EBITDA guidance targets are meant to be long-term goals and are not intended to be used as quarterly guidance.

Our EBITDA as adjusted is impacted by the amount of equipment gains we get and the seasonality of certain SG&A expenses.

Tad will now cover some additional details related to our financial results.

Thanks, Dave, and again, good morning to everyone.

I'd also like to thank and congratulate the entire Cogent team for their results achieved this quarter and continued hard work during another very busy and productive quarter for Cogent.

We analyze our revenues based upon product class, which is on-net, off-net and noncore, and also analyzed our revenues based upon customer type.

We classified all of our customers into 2 types, NetCentric customers and Corporate customers.

Our NetCentric customers buy large amounts of bandwidth from us and carrier neutral data centers, and our Corporate customers buy bandwidth from us in large multi-tenant office buildings.

Revenue from our Corporate customers grew sequentially by 2.9% to $74.4 million and year-over-year, grew by 11.9%.

We had 35,720 Corporate customer connections on our network at quarter-end.

Revenue from our NetCentric customers grew sequentially by 1.1% and year-over-year grew by 4.4%.

NetCentric revenue growth year-over-year on a constant currency basis was 6.1%, and that was a significant improvement from the 3.8% constant currency increase we achieved last quarter.

We had 31,262 NetCentric customer connections on our network at quarter-end.

Our NetCentric revenue growth experiences more volatility than our Corporate revenues due to the impact of foreign exchange and certain seasonal factors.

Revenue and customer connections by product class.

Our on-net revenue was $85.6 million for the quarter, which was a sequential increase of 2.4% and a year-over-year increase of 7.6%.

Our on-net customer connections increased by 4.6% sequentially and increased by 16.4% year-over-year.

We ended the quarter with over 57,300 on-net customer connections on our network and our 2,438 on-net multi-tenant office buildings and carrier neutral data center billings.

Our off-net revenue was $34 million for the quarter, which was a sequential quarterly increase of 1.8% and a year-over-year increase of 12.7%.

Our off-net customer connections increased sequentially by 3.1% and increased by 17.1% year-over-year.

We ended the quarter serving over 9,300 off-net customer connections in over 5,900 off-net buildings, and these buildings are primarily in North America.

Some results on pricing.

Consistent with historical trends, the average price per megabit of our installed base and for our new customer contracts decreased for the quarter.

The average price per megabit for our installed base declined sequentially by 2.4% from the first quarter to $1.17, and that decline was 14.3% on a year-over-year basis.

The average price per megabit for our new customer contracts during the quarter was $0.54.

That was a 26.2% sequential decrease from the first quarter and a 30.1% decline from new customer contracts that were sold in the second quarter of last year.

Some results regarding ARPU.

Our ARPU has decreased sequentially for the first quarter.

Our on-net ARPU, which includes both Corporate and NetCentric customers, was $509 for the quarter, which was a decrease of 1.7% from the first quarter.

Our off-net ARPU, which is comprised predominantly of Corporate customers, was $1,232 for the quarter, and that was a decrease of 2.3% from the first quarter.

Some comments on churn.

Our unit churn rates for our on-net and off-net customers were stable during the quarter.

Our on-net unit churn rate was 1.2% for the quarter, which was the same rate as the first quarter.

And our off-net churn rate was 1.1%, which was a slight increase from 1% last quarter.

We offer discounts related to contract term to all of our Corporate and NetCentric customers, and we also offer volume commitment discounts to our NetCentric customers.

During the quarter, certain NetCentric customers took advantage of our volume and contract term discounts and entered into long-term contracts for over 2,900 customer connections, increasing their revenue commitment to Cogent by over $22 million.

Some comments on gross margin.

Our gross margin, excluding depreciation, increased sequentially by 50 basis points year-over-year -- by 50 basis points and year-over-year, by 80 basis points.

Our gross margin was 57.4% for the quarter.

And excise taxes that are included in our cost of network operations expense, thus impacting gross margin, were $2.7 million for the quarter.

Some comments on EBITDA and EBITDA as adjusted.

Our EBITDA and EBITDA as adjusted are reconciled to our cash flow from operations in all of our press releases in a table.

Our EBITDA as adjusted includes gains related to our equipment transactions.

Our EBITDA as adjusted increased by $1.3 million or 3.2% sequentially to $41.1 million and year-over-year, increased by $1.7 million or 4.4%.

Our EBITDA as adjusted margin increased sequentially by 30 basis points to 40 -- 34.3% and decreased 150 basis points from the second quarter of last year.

The year-over-year EBITDA as adjusted margin decreased on a year-over-year basis.

It was attributed to a $3.4 million decline in our gains related to our equipment transactions from the second quarter of last year to this quarter.

Our equipment gains included in our EBITDA as adjusted were $1 million for this quarter, again, compared to $4.4 million for the second quarter of last year and $2.1 million for the first quarter of 2017.

Our EBITDA increased by $2.4 million or 6.3% sequentially to $40.1 million and increased year-over-year by $5.1 million or 14.7%.

Our EBITDA margin increased sequentially by 130 basis points to 33.5% and increased by 170 basis points from the second quarter of 2016.

Seasonal factors that typically impact our SG&A expenses and, consequently, our EBITDA and EBITDA as adjusted results include the resetting of payroll taxes in the United States at the beginning of each year in the first quarter, annual cost of living or CPI increases and also the timing and level of our audit and tax services and benefit plan annual cost increases.

Our EPS -- our basic and diluted income per share was $0.10 for this quarter, a $0.01 increase from the $0.09 for the first quarter and also the $0.09 from the second quarter of last year.

Some comments regarding foreign currency FX impact.

The impact of foreign currencies has reduced the proportion of our business reported in U.S. dollars outside of the United States to about 22%.

About 16% of our second quarter revenues were based in Europe, and about 6% of our revenues were related to our Canadian, Mexican and Asian operations.

Continued volatility in foreign exchange rates can materially impact our quarterly revenue results and our financial results.

The foreign exchange impact on our sequential revenue resulted in a $500,000 increase to our reported revenues.

However, from the second quarter of last year to the current quarter, the year-over-year FX impact was a negative $700,000.

Changes in foreign exchange rates primarily impact our NetCentric business.

The average euro to USD rate, so far, this quarter is about $1.15.

That's the average.

And the average Canadian dollar exchange rate is $0.79.

Should these average foreign exchange rates remain at the current levels for our third quarter of this year, we estimate that the positive FX conversion on our sequential revenues will be about $1.2 million, and the positive FX conversion impact on a year-over-year basis will be about $700,000.

Some comments on customer concentration.

We believe that our revenue and customer base is not highly concentrated.

Our top 25 customers represented less than 6% of our revenues this quarter.

CapEx.

Our capital expenditures for the quarter were $12 million compared to $14.3 million in the second quarter of 2016 and $12.2 million for the first quarter of this year.

Capital lease payments.

Our capital lease principal payments are for long-term dark fiber IRU agreements.

These payments were $2.2 million for the quarter.

Capital lease principal payments, if you combine that with our CapEx, declined sequentially and also declined year-over-year, and those amounts, if you combine them, were $14.2 million this quarter, $18.2 million in the second quarter of last year and $16.1 million for the first quarter of 2017.

Cash and operating cash flow.

At quarter-end, our cash and cash equivalents totaled $256.5 million.

For the quarter, our cash decreased in the aggregate by $6.7 million as we returned $27.1 million of capital to our stakeholders.

During the quarter, we paid our $19.9 million second quarter dividend.

We paid $5.3 million for a semiannual interest payment on our debt.

And we also spent $1.8 million on the stock buybacks.

Capital leases, our capital lease IRU obligations are for long-term dark fiber leases and typically have initial terms of 15 to 20 years or longer.

And there's often multiple renewal options after the initial term.

Our long-term and short-term capital lease IRU obligations were $149.8 million at quarter-end, and we have 222 different dark fiber suppliers that we utilize.

Some debt ratios.

Our total gross debt, which includes the capital lease IRUs, was $723.5 million at quarter-end, and our net debt was $467 million.

Our total gross debt to trailing last 12 months EBITDA as adjusted ratio was 4.62 for the quarter, and net debt ratio was 2.98.

Bad debt and day sales.

Our bad debt expense continued to achieve results better than planned and was less than 1% of our revenues.

And bad debt expense was only 0.8% of our revenues for the quarter.

And our day sales outstanding for worldwide accounts receivable was, again, at a historically low level and was only 22 days at quarter-end, tying a corporate record.

And as always, I want to thank and recognize our worldwide billing and collections team members for continuing to do just a fantastic job on customer service and collections.

I will turn the call back over to Dave.

Hey, thanks a lot, Tad.

Now for a couple of comments on the scale and scope of our network.

The size of our network continues to expand.

We have over 872 million square feet of multi-tenant office space in North America directly on-net.

Our network consists of over 30,500 miles of metro fiber and over 57,400 miles of intercity fiber.

Our network remains one of the most interconnected networks in the world, where today we directly connect to over 5,980 networks, of which less than 30 of these are settlement-free peers.

The remaining networks we connect to our Cogent customers purchasing transit from us.

We currently are utilizing approximately 27% of our [WIP] capacity.

We routinely augment this capacity in parts of our network to maintain global utilization rates.

For the quarter, we achieved sequential traffic growth of 3%.

This is typically a slow growth period of the year.

And on a year-over-year basis, our traffic growth was 26%.

We operate 53 Cogent Data Centers with a total of 603,000 square feet of raised floor space operating at approximately 30% utilization.

Our rep turnover rate in the quarter was 5.3%, which is better than our long-term average of 5.9%.

We ended the quarter with 434 reps selling our service.

This is actually the highest number of salespeople we've had in the -- in Cogent's history.

So in summary, Cogent is a low-cost provider of Internet, access services, transit services and VPN services.

Our value proposition remains unparalleled in the industry.

Our business remains completely focused on the Internet and IP connectivity and data center co-locations, all necessary utilities for our customers.

We expect our annualized long-term revenue growth to be consistent with our historical pattern of 10% to 20% top line growth and our long-term EBITDA as adjusted margins to continue to expand at 200 basis points per year.

We have incurred legal and economic expenses related to net neutrality, although these fees have continued to decline and were relatively minimal in the quarter at $188,000.

We do expect to continue to incur some fees in 2017 but at a substantially lower level than 2016.

Our Board of Directors has approved yet another increase in our regular dividend of $0.02 a share, bringing our quarterly dividend to $0.46 a share.

Our dividend increases demonstrate our continued optimism regarding the cash flow capabilities of our business and the growth prospects.

We continue to be up opportunistic in the timing of purchase of our common stock.

At quarter's end, we had a total of $41.5 million remaining in our current authorization, and our board elected to extend that authorization through the end of the December 2018.

We are committed to returning increasing amounts of capital to our shareholders on a regular basis.

Now I'd like to turn it over for questions and answers.

(Operator Instructions) The first question comes from the line of Colby Synesael.

First of all, I want to talk about traffic.

Dave, not just for yourself, but I think for others as well that talk about traffic.

So Akamai being one of the companies that we cover that discusses traffic.

And even just looking at the Cisco Visual Networking Index and then the 26% year-over-year that you just put up.

If that continues to be the pacing of traffic growth, and we're at lower levels than we've been seeing the last few years, does that prevent or limit you from being able to achieve your greater than 10% growth?

Otherwise or said differently, does that have to accelerate for you to be able to hit your goal?

Or can you still get there somewhere, somehow?

And then secondly, you just mentioned the 434 reps.

It's the highest number you've seen.

As those become full-time equivalents, assuming that the productivity also remains high, which is something you also talked about earlier today that it's at record levels, shouldn't that also lead to an acceleration in growth?

And I'm trying to break that from the traffic.

And then just one last one as it relates to the sales force.

As you do ramp and add all these different people, what's going to be the impact of margins?

How do you still get to that 200 basis point margin improvement, even when you're adding so many different people?

Sure, Colby.

Well, let me try to take the 3 questions and the sub-questions included in them.

I'll start with the traffic question.

We did see a slight increase in year-over-year traffic this quarter.

And what was also encouraging is, typically this time of the year traffic growth on a sequential basis is lower than it is earlier in the year.

And we experienced the same rate of sequential improvement.

Traffic growth continues to be driven by 3 factors: the number of people connected to the Internet, the amount of time they spend online and the bandwidth intensity of their applications.

We feel very comfortable that traffic growth will continue to reaccelerate, and we will continue to gain market share.

In terms of our ability to hit our 10% to 20% revenue growth.

We saw a material improvement in our growth on a constant currency basis from last quarter increasing to 9.6% on a year-over-year basis.

That was driven in large part by the rebound in NetCentric revenue that improved from 3.8% on a year-over-year constant currency basis to 6.1%.

That is still below the 10% long-term average.

But we do think we'll continue to see improvement in the NetCentric business.

In order to hit our revenue growth targets, we need both a well performing Corporate business and NetCentric business.

And really, the rep productivity question leads me into the Corporate side of our business.

The Corporate business grew sequentially at 2.9% and 11.9% year-over-year, very much in line with our long-term trends and allowing us to achieve at least the midpoint or within our range of growth in our Corporate business.

The bulk of our sales force, in fact, approximately 71% of our sales force, are Corporate reps.

Those reps continue to increase as well as we're adding reps to our NetCentric sales force.

And we're seeing across the board both Corporate and NetCentric reps continuing to increase their productivity.

So the combination of more reps and more productivity helps.

But what ultimately helps on the Corporate business is the underlying demand for our services are actually accelerating, our typical Corporate customers utilizing over 15% of their [WIP] capacity.

They buy services on a fixed basis, and the value that we deliver to the customer is being driven by the increase in applications that those customers use as they continue to migrate their computing into a cloud environment and they continue to migrate their software necessary to run their businesses from a server-based solution to a SaaS-based solution.

That has helped us increase our multi-tenant penetration to 18.5 connections per building.

That, again, is a significant all-time high and an acceleration in a rate at which we've seen penetration improve.

And we're selling those services to about 12.1 unique businesses.

We continue to see businesses that previously had maybe not needed Cogent's 100 megabit service and our Corporate footprint, increasingly need that product.

So we feel very good about the improvements in both our Corporate and NetCentric businesses that will get us to our 10% to 20% revenue growth.

Now to our 200 basis points of margin expansion.

Over time, that margin expansion has come roughly equally from improvements in gross margin and in sales force and SG&A efficiency.

In the last year, we saw 200 basis points on a year-over-year gross margin improvement.

That's actually the highest gross margin improvement that we've seen in several years.

We will continue to get operating leverage in our business.

We actually saw our on-net revenue growth outpace our off-net revenue growth, and that carries higher contribution margins.

We also know that our contribution margins remain significantly above our embedded margins, and that should also allow us to continue to demonstrate operating leverage and have our margins improve.

So in total, we expect both our revenue growth to be within our range and our margin expansion to continue at 200 basis points.

And 170 basis points, that we demonstrated on an EBITDA as adjusted basis year-over-year and the 200 basis points of gross margin improvement on a year-over-year basis should give investors confidence that we're able to do that.

And our next question comes from the line of Nick Del Deo.

First, regarding sales productivity.

Is there anything you want to call out as to why it was high this quarter?

Was there a particular segment or product that was responsible, or was it something mechanical like (inaudible) being strong or 110 gig conversions slowing down, anything like that?

Yes.

Sure, Nick.

Thanks for the question.

I think our sales force productivity improvements are actually coming from 3 discrete causes.

One, I think the training programs that we have put in place continue to show results and have resulted in both lower turnover and higher productivity.

Productivity is also driven by rep tenure, and we have continued to see our reps' tenure on average increase.

And then third, we have seen a continued improvement in our VPN services, (inaudible) private line service that's increasingly being used as a replacement for MPLS, or multi-packet label switching, private virtual network services.

That market is actually much larger than the Corporate dedicated Internet access market.

Our VPN services have increased to a total of 17% of total revenues and over 25% of our Corporate revenues.

That also helps our rep productivity because, by definition, those services require multiple locations, both on-net and off-net.

In fact, the largest population in our Corporate sales force are our national account managers, who are focused on multisite opportunities.

They represent roughly 62% of the Corporate sales force.

So they continue to be the largest single group in our sales organization, and that is helping drive our rep productivity.

Okay.

That's helpful.

Also your comments, you mentioned that your data centers were at roughly 30% capacity.

And, if I'm not mistaken, that's about where it was a couple of years ago.

But that may have been diluted by the addition of new space.

Can you talk a bit, maybe update us on how those data centers have been filling up if you look at a stable cohort?

And maybe talk about what portion of your customer is buying data center space from you and how that is changed.

Yes.

Sure, Nick.

So first of all, rack and power in our data centers is a relatively small part of Cogent's business.

It represents about 2.9% of revenues and 4.5% of units sold.

It is sold primarily to our Corporate customers.

We have continued to add data centers.

In the past 12 months, we've added 3 additional data centers.

We're at 53 data centers now.

We've increased our square footage by nearly 9.5%, growing from 558,000 square feet to about 603,000 square feet.

Now each of these new data centers is completely vacant when we take it over.

So that then dilutes our occupancy, and we have been filling up some of the more tenured data centers.

And quite honestly, there's mixed results on the data centers.

We have some markets where data centers are completely fall.

We have other markets where data centers are at low single-digit occupancy.

It is a very local business.

And it varies dramatically between facilities.

We have in the past shut down underperforming data centers, and we will continue to evaluate those that are located in markets where there just does not appear to be sufficient demand.

On average, our data centers are somewhere between 125 and 150 watts per square foot.

That generally meets the requirements of most Corporate users.

There are some more NetCentric type users who will look for greater power density.

And we typically do not focus on that market segment with data centers.

And our next question comes from the line of Matthew Niknam from Deutsche Bank.

Just 2, if I could.

One, on shareholder returns.

So leverage right now sitting at about the midpoint of your target range.

Just trying to figure out maybe what would make you think about potentially accelerating the pace of returns given maybe some of the slowdown in terms of expansion to multi-tenant office buildings that you've talked about in the past?

And then just secondly, just going back to NetCentric, can you maybe shed some more light on the bigger decrease we saw on price per meg for new customers?

And were there any bigger volume-related reprices you saw for larger customers?

Hey, thanks for the 2 questions, Matt.

So first of all, with regard to shareholder return, we have a stated policy of consistently increasing our returns to shareholders.

20 consecutive quarterly increases in our quarterly dividends is probably almost unparalleled.

I know of no other public company with that consistency of increase in dividends.

We anticipate dividend increases for the foreseeable future on a regular basis.

The fact that we took advantage of some volatility in our stock in the last quarter and did buybacks after not doing any the previous quarter also should convince investors that we are committed to using incremental capital when appropriate.

And if we go back and look at our buyback history, we've returned about $225 million through buybacks, generating about an 18% return to our current share price, if we time adjust those buybacks.

So we try to be thoughtful about that.

In terms of ratcheting up leverage, Cogent, when it started to take on debt, had no debt other than the outstanding capital lease obligations.

It was about 1.6x on a net basis.

Over the past 5 years, we have ratcheted that up from 1.6 to 2.98 or just under 3. And we've done that while returning a total of $500 million to shareholders through both the dividends, $275 million, and the buybacks.

We will continue to take advantage of markets.

We will continue to grow our dividend.

And if appropriate, we will address our leverage targets.

We've actually raised the target once in the past, and if we reached the higher end of our leverage target, we would go back to the board and determine whether (inaudible) differential cost of capital between equity and debt would justify an additional leverage target increase.

I think it's premature at this point.

Now to your second question, the operational question about NetCentric pricing.

(inaudible) pricing in our installed base is actually more moderate than our long-term trend.

It was 14.3% versus the 21% long-term average.

I've tried to caution investors and make sure they understand that, that long-term average is the right way to think about the business.

So I wouldn't get excited that the year-over-year change in the installed base was more moderate.

In terms of the new sales, yes, the declines in the most recent quarter were more pronounced than they normally are at about 30%.

On a year-over-year basis, they're actually about 17%.

In fact, in Q1, they were much more moderate, and we cautioned investors to not be overly optimistic about that.

In any given quarter, there can be volatility, and it really just depends on which customers increase their traffic.

If our very largest customers experience more increases than smaller customers, they will tend to pull the incremental price down.

If in a given quarter, more of the growth comes from a more diverse space of smaller customers, in fact, we've seen situations where the new sale can actually go up on a sequential basis.

But I think the long-term trend of low 20s decline in both new sales and embedded base, are the right way to think about the business.

And I would not get focused on either better or worse numbers in a given quarter, whether it's the embedded base or new sales.

And our next question comes from the line of James Breen from William Blair.

Just a couple.

One, Dave, on the sales force side.

Of the, I think you said 134 sales reps, how many of those have been added new sort of in the next -- in the last 2 to 3 quarters?

And then on the Corporate side, with respect to the opportunity, I think you had traditionally said there is -- the average building is 50 stories with 50 tenants.

Are you seeing that sort of addressable market grow as those tenants are taking a both primary and secondary Internet access provider versus what they did 5 or 6 years ago?

Yes.

Sure, Jim.

So 2 different questions.

In terms of the sales force, we continue to add reps.

In fact, roughly 46% of our sales force has been at Cogent less than 6 months.

So it's a combination of growth and replacement of churn.

We have dramatically increased our on-boarding and training program, which has helped, I think, our sales force get productive quicker in their career and stay longer.

We also continue to see hiring, both on the Corporate and NetCentric side.

So all of these things are helping us continue to see improved revenue growth.

And again, the improvement in the quarter from 8.7% on a constant-currency basis to 9.6% is a material improvement on a quarter-to-quarter basis.

In terms of addressable market on the Corporate side, our average building is, in fact, 41 stories tall and has 51 discrete tenants.

We have been very successful in selling about 1.5 connections to each customer.

So we are selling dedicated Internet access, and that is a product that every customer in the building needs.

And then a subset of customers also run private networks.

And the continued decline of MPLS and the advent of both SD-WAN and VPLS is improving our market demand in those buildings for second connections.

We also have the opportunity in some cases to provide redundancy to customers.

We've even had situations where on-net buildings, we provide both an on-net and off-net circuit to the customer, because they want effectively 3 levels of redundancy.

Even though our network has 2 levels, it's ring protected, customers sometimes want additional protection as backup.

And as customers continue to migrate those applications to a cloud, it means they need more bandwidth.

All of those things are catalysts for more demand.

So if anything, we're seeing more demand for our Corporate services, not less as buildings get older.

Great.

And then just one follow-up on the dividend.

As you're increasing the dividend $0.02 a quarter, I think it works out to $8 million to $9 million a year of incremental dividends over the previous year, which coincidentally or not, equals about the same as 200 basis points improvement in EBITDA in terms of the cash flow to the business.

Are you trying to sort of match those 2 up?

And as we see the business grow over time, there's the potential for that dividend increase to increase again from that $0.02 level up?

So in fact, our cash flow growth is faster than our increase in dividend for 3 reasons.

One, top line is growing; two, as you accurately pointed out, Jim, there's incremental margin, which generates more cash; and then third, as Tad commented on, our combined capital intensity, that is, principal payments on capital leases and CapEx, is declining.

These are all positives for equity-free cash flow generation.

Now we previously had a pace of $0.01 of a share per quarter.

Several quarters ago, we elected to accelerate that pace, doubling it to $0.02 a quarter.

We have a leverage target.

We will use both buybacks and dividends.

And we may at some point in the future, realize that, that program needs to be increased again.

We're not in a position today to commit to an increase, but what we are in a position to do is commit to growing revenues, expanding margins, growing cash flow and returning that capital.

The exact mechanism and split between buybacks and dividends will be something that the board will address every quarter.

And our next question comes from the line of Philip Cusick from JPMorgan.

This is actually Sebastiano on for Phil.

Just a quick follow-up on the traffic for the quarter.

Are you increasingly seeing clients potentially taking different routes to the customer rather than over your own network?

And in terms of some of the trends that you saw in the first quarter in terms of Title II, et cetera, and some of the providers, some hesitancy there, are you still seeing some of that?

And then I also had a follow-up just regarding just the off-net strength again in the quarter relative to on-net, and how should we think about that trending forward and some of the SD-WAN VPN trends you kind of have touched on?

Are you -- what kind of momentum do we see there for the, I guess, the remainder of the year and go forward?

Yes.

So a handful of questions there.

Let me start with, actually, the Title II question.

There is still a lot of noise and uncertainty around net neutrality.

There is almost certainly going to be both political and legal challenges to -- attempts to weaken the FCC's ability to enforce net neutrality.

And it is that anxiety that I think has continued to depress the whole market.

And while we have seen some slight improvement, it is still not growing at historical rates.

And we will continue to outpace any of our competitors based on our pricing model, but the market remains concerned and apprehensive about net neutrality.

So while there is some improvement, we have not returned to a state of normality.

To the question of alternate routes, we've commented this on the past, that many of the larger content providers were forced to sign direct connect agreements that they are, quite honestly, unhappy with.

They were looking to novate or get out of those agreements.

And they were hoping the FCC would give them a venue to do that.

They have been unable to do that.

And I think that has also, somewhat, dampened traffic growth from those customers.

They are economic animals who would like to get a better product at a lower price.

But if they were forced into an uneconomic contract due to an abuse of market power and no longer have a regulator allowing them to use a regulatory mechanism to exit that contract, they're kind of stuck with it.

And I think you've seen some of the larger content companies be very vocal in their continued support for Title II and clear regulatory oversight.

Now with regard to the Corporate customers.

We're seeing an increasing demand for dedicated Internet access services as businesses increasingly use SaaS and cloud as a service and need more bandwidth.

And we see our Corporate customers continue to increase the amount of their connections they use.

While that does not result in direct incremental revenue to Cogent, it does result in greater demand for our services.

And it's, in part, why our penetration rates continue to improve in our buildings and, actually, at an accelerating rate.

The second thing that is happening is that companies that have multiple locations and have a virtual private network that was based on MPLS are increasingly willing to migrate to new technologies: the Internet, SD-WAN or VPLS.

And that has accelerated our revenue growth and increased our market opportunity.

Now in terms of on-net versus off-net, we expect our Corporate growth for both segments of our business to be relatively equal.

In fact, in this last quarter, our on-net Corporate growth substantially outpaced our off-net.

That's actually a reversal from the previous quarter.

There's just some lumpiness in the actual deployment of these large multisite networks, but in general, you should expect the on-net and off-net Corporate businesses to grow at comparable rates.

And our next question comes from Brandon Nispel from KeyBanc Capital Markets.

Maybe a quick housekeeping one.

Can you -- and, Dave, you just sort of alluded to it.

But could you provide the splits between NetCenteric and Corporate revenue in both the on-net and off-net segments?

And maybe on a percentage of revenue or as an absolute dollar would be great.

Yes.

Sure.

So when we report our revenue, we report both ways.

Every dollar of revenue at Cogent is classified as on-net or off-net, Corporate or NetCentric, North American -- or U.S. and rest of the world and then finally, by product class.

I'll let Tad give you the exact breakdowns.

So your -- Corporate and NetCenteric in the aggregate, Corporate was $74.4 million for the quarter, and NetCentric was $45.3 million.

Are you looking for more granularity than that?

Yes.

If you can give the Corporate split within NetCentric and same within the NetCenteric within the on-net, and then vice -- the same thing with the off-net segment, that would be helpful.

Yes.

I'll give those by percentage.

So Corporate on-net represents 24% of revenues.

Corporate -- or NetCentric is predominantly on-net.

NetCentric is 38% of revenues.

This is total revs on-net.

Off-net NetCenteric is about 5% of revenues, and I think that's all of them.

And we can take the difference between for the last one.

And then, when do you expect to start to see some accretion related to when you reprice some of your largest customer contracts?

If you just look at percentage of revenue generated from your top customers, and maybe look at it on a trailing 12-month basis, it's definitely lower growth than it has been historically.

So I guess, how do you get back to growing that customer base at nearer the company type of average?

Sure.

First of all, as Tad commented, we routinely reprice NetCentric customers.

In fact, we had 2,900 ports in the quarter that were repriced and represent over $20 million of committed increased revenue to us over the contract term.

We routinely offer discounts for volume as well as term.

We also are trying to broaden and diversify our base.

So there are a finite number of large customers, and for those customers, we ultimately are limited by their growth rates.

Now we do have the opportunity to get a bigger share of their revenue, since virtually all of these customers, multi-home or use multiple providers.

But we understand that the Internet is dynamic and the NetCentric base is broad.

It is why we continue to sell to more and more networks, with nearly 6,000 networks now buying transit from us.

So I think we can get our NetCentric revenue growth back to the 10% norm, up from the 6.1% and obviously, up from the 3.8% we did in Q1, just by broadening the base as well as continuing with our existing customers.

The fact that our average price per megabit this quarter, actually fell as steeply as it did is as a result of some larger customers taking more traffic than some of the smaller ones.

But again, that just moves around quarter-to-quarter.

And our next question comes from Matthew Heinz from Stifel.

Dave, of the 3 main drivers of Internet traffic that you highlighted earlier and have talked about in the past, what single factor or perhaps multiple factors do you believe is dragging on traffic growth currently?

I'm just trying to understand if the decel in NetCentric is something structural or Cogent-specific.

And as a follow-up, it would be great if you could speak to Cogent's share of mobile data traffic versus traditional wirelines and whether that mix shift in the market is impacting you at all.

Sure.

So of the 3 drivers, the fastest-growing of those 3 drivers is actually the bit intensity per minute, as the applications tend to have more video content and greater resolution on them.

The vast majority of users globally, over 75% of Internet users globally, only access the Internet via mobile.

Mobile, though, represents only about 2% of global traffic, even though it is over 75% of the user base.

Cogent is actually growing faster than the market.

We heard Cisco Visual Network referred to in an earlier question.

We also heard references to other companies that report traffic having much more anemic traffic growth than Cogent.

So we continue to grow faster than the market, but the market is growing slower than historic norms.

In terms of mobile exposure, Cogent actually serves and sells to the largest mobile providers in the world, whether it's China Mobile or Reliance Jio in India, those are probably the 2 largest single mobile operators and the world.

It's pretty interesting that China Mobile's customer base is actually larger than the combined populations of the United States and the EU, and we are the primary upstream provider.

Now it is true that the Chinese government does limit the traffic those customers can get outside of China, and that does have an impact on growth.

We are, I think well exposed to mobile and, in fact, probably provide upstream to more mobile customers than any other provider in the world.

Our 80% market share in Africa, which is almost exclusively a mobile market, is another example of how we are exposed to that market segment.

So I think the slowdown in traffic growth has really been as a result, again, of this anxiety and apprehension in net neutrality, rules and regulations.

Uncertainty confounds markets.

And I think as time has passed, even in this most recent quarter, I think the fears of an immediate reversal and cancellation of net neutrality have subsided, and the market has come to realize that we'll probably live with something very close to what we have today going forward.

So I don't believe there's any structural challenges, long-term, to the market.

And more importantly, I think we're exposed to all of the correct segments in the market.

And our final question comes from the line of Timothy Horan from Oppenheimer.

Dave, competitive intensity in the, basically, the Corporate side of things.

Is that increasing, decreasing at this point?

Just your opinion.

And then, obviously, on the NetCentric side of things, you have a lot, a lot of different levers you can pull on pricing and volumes and your really, really low utilization.

I guess, the point you're trying to make is, price is lower this quarter, but we should see a pretty big pickup in volumes and -- to get back to that 10%-type revenue that you are trying to hit, not to put words in your mouth, but I think that's what you're trying to say.

Hey, thanks, Tim.

So 2 very different questions.

Let's start with the NetCentric one.

What we're saying is, over time, traffic growth and unit volumes for Cogent are substantially better than the market.

Two, price declines average in the low 20s.

They were in fact 14.3% in the most recent quarter.

That's actually lower than they have been for some time.

The new sales, at 30%, were more extreme, but that was after the last quarter actually saw a price decline of a couple of percent and, actually, I think the quarter before that was up.

So there's just some volatility in the customer mix.

We continue to gain share and are growing at double the rate of the market.

I think that's going to continue going forward.

The fact that our Corporate business is growing as fast as it is, is for a different reason.

It's the Corporate customer, is continuing to need more bandwidth than they have previously used as they move to cloud and SaaS.

We don't control that.

That's a change in business behavior.

But our network is better suited to delivering that service.

Also the huge opportunity for us on the Corporate side is this migration from MPLS VPNs to either over-the-top SD-WAN or VPLS, that all represents a significant opportunity for Cogent.

So we anticipate our Corporate business continuing to grow in that 11%, 12% -- 11.9% just most recently, call it 12%, 13% rate that we've historically grown, even though we're adding less square footage and less buildings to the network because of this increase in demand.

Whereas on the NetCentric side, we did see a pretty material pickup in our growth rate on a constant-currency year-over-year basis, which is the way you need to look at that business because of seasonality and foreign exchange volatility, from 3.8% to 6.1%.

6.1% is still below the long-term average of 10% revenue growth.

The levers we'll pull are better service, more data centers connected and more networks directly using Cogent.

All of those things continue, and it's why our traffic growth is still outpacing that of the market and why that business is improving in its growth rate.

So our total growth rate at 9.6% year-over-year in a wireline sector where virtually everyone is experiencing negative growth is, I think, a great example of the value we deliver to our customers.

And then to the earlier questions, we've demonstrated clearly our ability to convert that growth into tremendous margin expansion that is stronger than any of our competitors.

And I guess on the Corporate side, I was trying to ask is the secular shift to these new technologies.

Are the incumbents being -- are they less likely to adopt these new technologies and be aggressive on the adopting them pricing or more likely, do you see any change in behavior from them, I guess?

I think the incumbent providers have a real challenge in that they have built their businesses on VPN technology based on MPLS.

That MPLS complexity results in a much higher cost per bit.

In fact, studies have shown somewhere between 15 and 20x as much for the cost of an MPLS bit as an Internet bit.

And these open architectures of VPLS and SD-WAN are replacing them.

So for the legacy providers, they're kind of stuck.

They got a high cost structure, and they have a customer base that needs lower prices and more flexibility.

And because we have no embedded MPLS business, we've been able to capture share.

It's why our VPN business is now 25% of our Corporate business, and 17% of total revenues in a few short years, because incumbents can't compete.

And it's why 10 out of 10 incumbent enterprise wireline companies globally are experiencing negative revenue growth.

For a decade, they were pummeled by voice revenue declines.

Now they're getting a second blow to their businesses as MPLS revenue migrates to over-the-top revenue, which is where Cogent is uniquely positioned to take advantage of it and why we have, in fact, as many connections sold per building as we do and continue to see an accelerating rate of market share gain.

Thank you, and I'm showing no further questions in the queue.

I would like to turn the call back over to Mr. Dave Schaeffer for any closing remarks.

Hey, well, thank you all very much.

We are very pleased with our results for the quarter, the acceleration in our revenue growth and a substantial increase in our margins.

We look forward to talking to folks and reporting next quarter where we should continue to see these trends improve.

Thank you, all, very much.

Take care.

Ladies and gentlemen, thank you for participating in today's conference.

This does conclude the program, and you may all disconnect.

Everybody, have a great day.