Good morning, and welcome to the Cogent Communications Holdings Fourth Quarter 2021 and Full Year 2021 Earnings Conference Call. As a reminder, this conference call is being recorded, and it will be available for replay at www.cogentco.com. A transcript of this conference call will be posted on Cogent's website when it becomes available. Cogent's summary of financial and operational results attached to its press release can be downloaded from the Cogent website. I would now like to turn the call over to Mr. Dave Schaeffer, Chairman and Chief Executive Officer of Cogent Communications Holdings, Inc. Please go ahead.

Thank you, and good morning to everyone. Welcome to our fourth quarter 2021 and full year 2021 earnings conference call. I'm Dave Schaeffer, Cogent's Chief Executive Officer. And with me on this morning's call is Sean Wallace, our Chief Financial Officer. First of all, I'd like to start with our thoughts go out to our Ukrainian colleagues and we hope that they remain safe and are able to continue their efforts. Now for some comments on our results. For the focus of the pandemic-related efforts has continued to shift a broad reopening of the US and global economies and most large businesses have developed plans to reopen their offices. We've seen signs of an improvement in our corporate business climate. This includes greater leasing activity and subleasing activity, increased back office activity as indicated by building use data and an improved sales funnel, which indicates that Cogent's corporate customers and prospects are beginning to consider new services and upgrades. Despite these improvements and as a result of the introduction of the Omicron variant, we did notice another delay in many companies back to work plans in the fourth quarter and our overall corporate business remains below historical averages. Our NetCentric business continue to benefit from greater-than-expected growth in streaming subscribers and the continued internationalization of the Internet and streaming where our global footprint positions Cogent as the best network in order to deliver services on an end-to-end basis globally. For the fourth quarter, traffic grew sequentially on our network and accelerated to 7% sequential growth from the 1% sequential growth in the previous quarter and increased by 17% on a year-over-year basis. For full year 2021, traffic grew on the Cogent network by 25%. On a US GAAP basis our annual revenues increased by 3.8% year-over-year to $589.8 million. In…

Thank you, Dave and good morning everyone. This earnings conference call includes forward-looking statements. These forward-looking statements are based upon our current intent, belief and expectations. These forward-looking statements and all other statements that may be made on this call that are not historical facts are subject to a number of risks and uncertainties and actual results may differ materially. Please refer to our SEC filings for more information on the factors that could cause actual results to differ. Cogent undertakes no obligation to update or revise our forward-looking statements. If we use non-GAAP financial measures during this call, you will find these reconciled to the GAAP measurements in our earnings release, which is posted on our website at www.cogentco.com. Quick update on COVID-19. Like many other companies, Cogent continues to be impacted by the COVID-19 pandemic and the accompanying responses by governments around the world. The majority of our workforce continues to work remotely. Effective March 1, our US and Canadian employees will be returning to their offices. I want to thank the entire Cogent workforce and in particular our IT department for their continued hard work during these very challenging times. I also want to thank our field engineers, contractors, billing and collection staff and other Cogent employees, who continue to work on the front lines, installing our new customers and maintaining and upgrading our network, so that we can continue to grow our business and serve our customers. The ultimate impact of the pandemic on Cogent is unknown, and a significant amount of uncertainty and volatility remains. We do not know the scope and duration of the pandemic with what actions governments may take in the future in response to the pandemic and how the pandemic will impact the economies of the world. We believe it is…

Hey. Thanks, Sean. Hopefully, you've had a chance to review our earnings press release. Our press release includes a number of historical metrics that hopefully you find helpful in understanding the performance of our business. Now, for a little bit of overview of our expectations against our long-term guidance targets. Our targeted long-term multiyear EBITDA annual margin expansion guidance is for an additional 200 basis points per year of margin improvement. Our long-term multiyear constant currency revenue growth rate was approximately a 10% target. Our long-term revenue and EBITDA targets are intended to be multiyear goals and are not intended to be used for specific quarterly or annual guidance. Our recent results are below these long-term rates, largely due to the impact of COVID-19 on our corporate business. Our corporate business, which represents 59% of our revenues at the end of the quarter. Our corporate revenues declined year-over-year by 7.4% from the fourth quarter of 2020 and declined by 2.5% from the third quarter of 2021, a decrease in the Universal Service Fund tax rate for the quarter had a negative impact of $500000 on our sequential corporate revenues. The US tax rate -- USF tax rate changes quarterly and we cannot predict the impact of future USF changes on our revenues. The USF rate for the first quarter of 2022 will be reduced to 25.2% from the fourth quarter rate of 29.1%. These taxes are applied primarily to our VPN services. Our on-net or NetCentric business which represents 41% of our revenues experienced another strong quarter and grew 2.6% sequentially and 20.3% on a year-over-year basis from the fourth quarter of 2020. Volatility in foreign exchange rates primarily impacts our NetCentric business is over half of that business is outside of the US. On a constant currency basis our NetCentric business increased by 22.2% from the fourth quarter of 2020 and by 4% sequentially from the third quarter of 2021. And for the full year grew by 22.4% from the full year 2020. Our NetCentric business grew by 25.3%. And Sean can now provide some additional details on our quarter.

Thanks Dave. Good morning again everybody. Let's talk about corporate and NetCentric revenue and customer connections. We analyze our revenues based upon network type off-net, on-net and noncore and we also analyze our revenues based upon customer type. We classify all of our customers into two types NetCentric customers; and corporate customers. Our corporate customers use our bandwidth to support their businesses but do not incorporate bandwidth into the products or services that they sell. Our corporate customers buy bandwidth from us in large multi-tenant office buildings or in carrier-neutral data centers. These corporate customers are typically professional service firms financial services firms and educational institutions located in multi-tenant office buildings or connecting to our network through our CNDC footprint. Our NetCentric customers buy significant amounts of bandwidth from us in carrier-neutral data centers and include streaming companies and content distribution service providers as well as ISPs who serve the consumers of content. Revenue and customer connections by type. Our two types of customers and businesses experienced vastly different results. For full year 2021, our corporate business declined by 6.5%. However, our NetCentric business increased by 25.3% to $358.4 million our best growth rate for this business in over a decade. Revenue from our corporate customers for the quarter declined sequentially by 2.5% to $86.8 million and declined year-over-year by 7.4%. We had 45,423 corporate customer connections on our network at year-end which was a decline of 0.3% versus the third quarter of 2021 and a decrease of 3.0% -- 3.7% from the fourth quarter of 2020. On a sequential basis our corporate business experienced a reduction in customer turnover and continued gross sales lower than our historical average. This performance correlates with the activity of the central business district commercial real estate market which has seen a decline in…

Okay. Thanks, Sean. I'd like to now provide some additional details on the strength of our NetCentric business, the performance of our sales force and some trends that have been impacting our corporate business. In our NetCentric business, as I had stated earlier, we continue to see strength in that business with full year NetCentric revenues increasing 25.3%. Streaming service providers are aggressively targeting overseas markets, and we are a continued beneficiary of this trend. We are positioned with our network and our capabilities to support growth in streaming on a global basis, and I'd like to highlight some of these key characteristics. At year-end, we connected to 1,359 carrier-neutral data centers and 54 Cogent data centers for a total of 1,413 data centers globally connected to our network. We are connected to more data centers than any other carrier as measured by independent third-party research. This breadth of coverage allows our NetCentric customers to better optimize our networks improve the quality of their service and reduce latency in delivering those services. We expect that, we will widen our gap and lead with other providers as we are anticipating adding approximately 100 carrier-neutral data centers per year to our network over the next several years. At year-end, we directly connected to over 7,560 networks. This is a 3.1% increase from a year earlier. This collection of Internet service provider's telephone companies, cable companies, mobile phone operators, and other carriers allow Cogent to directly access the vast majority of the world's broadband subscribers and mobile phone users. Our connectivity to mobile operators is an advantage for us in this industry as experts predict that more and more programming will be consumed on mobile phones particularly in the Asia Pacific region and in Africa. At year-end, we had a sales force of…

Thank you, sir. I show our first question comes from the line of Frank Louthan from Raymond James. Please go ahead.

Great. Thank you. Can you give us an idea of – are you seeing any cannibalization within and then where do you think you are from an average 10-year standpoint with your reps now with the hiring you've done and some of the dislocation you had at the end of the year versus 12 months ago? And how long do you think it will take you to get back to a more standard level of tenure within your sales force. Thanks.

Yes, Frank, you cut out on cannibalization. If you could repeat that part of your question and then I'll answer.

Yes, you mentioned earlier on the call about moving up some larger ports. Are you seeing any cannibalization as folks take larger ports taking fewer of them and change that is out having any impact with it?

Yes. So our corporate product is sold on an all-you-can-eat basis in a location. Companies realize that in a hybrid work environment having better connectivity is critical to making those employees productive. So we have seen a trend of customers having 100 megabit services trade those out for 1 gigabit or 10 gigabit services increasing their payments for those locations. We also see new customers coming on electing to take these larger services. And we have actually end-of-life the sale of our 100-megabit product to corporate customers unless there is a special request to do so, we will consider those on an individual case basis. As a result of this, there is no real cannibalization occurring in our corporate segment. Now pivoting over to the NetCentric trend towards larger ports. The larger the port size, the more capacity the customer can use. And since that service is predominantly sold on a metered basis. Having greater capacity available then gives customers the ability to burst to that level and Cogent to generate revenue. Remember our revenues are based on their peak utilization over the course of the month. And having these larger ports 100-gig and now 400-gig ports is helpful to our NetCentric revenue growth meaning the customers have big enough capacity to meet their surge requirements. Now to your tenure question. Virtually all of the turnover in our sales force has been among new hires, typically hired during the pandemic and had actually never set foot in a Cogent office. On the third quarter earnings call, I commented on this trend. And many of those remotely hired reps did not transition well into Cogent offices. As a result of this, our tenured reps who had been productive in a remote environment and continue to be productive and increase our productivity coming back to the office have remained with Cogent. And our average rep tenure has increased by over 10% year-over-year going up from just under 28 months to over 31 months of tenure.

Also how we're going to get back up to normal?

And in terms of growing the sales force, we continue to see an adequate flow of candidates and we had record hiring even during the great resignation and through the turbulence of working from home. That record hiring is continuing. But what we firmly believe is that now we're coming back to the office again on March 1 in North America those reps that have been hired over the past several months will get the added benefit of in-office training and that will allow us to better equip these reps to be successful and reduce our turnover in sales force. So we think our sales force turnover has peaked and should continue to decline to historic levels or even below.

Great. Thank you very much.

Thanks, Frank.

Thank you. I show our next question comes from the line of Phil Cusick from JPMorgan. Please go ahead.

Thanks, Dave. You talked about this a little bit already, but can you dig more into the indications of interest from customers coming in, sort of, return-to-office? Does that include New York and San Francisco? What's the sort of funnel look like in terms of ordering? How should we think about that?

Yes. So when we look at where we've lost customers it is highly correlated to increases in vacancy rate. In fact, across our footprint there is 84% correlation with increases in vacancy and declines in Cogent customers. What we have seen is in the South and Southwest the very best performance where we've continued to increase our penetration and growth rates in places like San Francisco and New York have definitely performed the worst. I think that many companies in both of those markets have now made the decision to firmly return to office as we transition from a pandemic environment to an endemic environment. Companies are solidifying their hybrid work strategy, but they know that they are going to have employees in offices. So we've seen increased leasing activity and subleasing activity in markets like San Francisco and New York. And that should result in increased corporate growth rates, because as new businesses come into the building that is our best opportunity to win those customers. And I think we should see that our corporate rate of decline peaked in the fourth quarter with the Omicron surge and we would see an increase in growth allowing us to get to positive growth in 2022. We're not prepared to say it's going to be positive in the first quarter, but we are comfortable in saying that the rate of decline will be less than it is in the fourth quarter of last year.

Okay. Thank you. And then one more if I can. Leverage running at this point above target, you raised the dividend regardless and you said you're comfortable slightly above. What should we be thinking here on what the company does going forward?

Yeah. So we have been very clear with investors that we have the intention over time of discouraging the excess cash that we maintain on our balance sheet. In a low interest rate environment, the negative carry of keeping that cash was relatively benign, we took steps to further mitigate that with our fixed to floating swap that we talked about on the third quarter earnings call. Going forward, we anticipate a growth in free cash flow, a reacceleration in revenue growth and continued margin expansion. As we look at what was probably the toughest year in Cogent's history in 2021 because of the pandemic, we were disappointed in top line growth. 4.4% on a constant currency basis is less than half of our historical average. But we had these extraordinary circumstances impacting our corporate business as we return to a more normalized environment, we think our growth rate will accelerate. We are comfortable in returning incremental capital and having slightly higher leverage in the short-term as our corporate business rebound.

Yeah. I'll just add to what Dave said is that at the end of year 2020, we had $371 million of cash. We finished up this last year with $329 million. So we reduced our number of about $42 million. That's a pretty significant cushion and gives us a lot of breathing room over the next several quarters to see the business particularly on the corporate side begin to re-grow and perform. And as that grows, we hopefully will continue to grow EBITDA et cetera and get back into the leverage levels that we are more comfortable with.

And I understand that this is a Board decision, but it sounds like 3.5 turns is something that you're not inclined to raise going forward. Is that the right read, or is that taking it too far?

I think Phil, arithmetically we're going to be above that for a couple of quarters. The Board is comfortable with that. They actually consider raising the range, but felt that that was premature at this point because they felt that the under performance of the corporate segment was temporary and we would end up going below the range just through natural growth and margin expansion.

Thank you.

Thank you. I show our next question comes from the line of Brandon Nispel from KeyBanc Capital. Please go ahead.

Hi. Thanks for taking the call. This is Evan Young on for Brandon. First, are you guys seeing or foresee any negative impacts from any geopolitical risks in the NetCentric business? And then with the speed upgrades, are you -- how much runway do you see of your 100-megabyte customers upgrading to higher speeds? And are you seeing any of the older one gig clients bumping up to a 10 gig speed? Thank you.

Yes. So three different questions there. Let's start with the geopolitical question. While we do have network inside of the Ukraine and our network extends all the way to the Russian border and KIRK off, it is a relatively small market for Cogent. We do sell to most of the Russian carriers including the national incumbent. We do sell to them outside of Russia, in part because of political tensions, if sanctions were put in place we would no longer sell to those customers honoring those sanctions. They also represent a very small portion of Cogent's total traffic and NetCentric revenues. We have virtually no Corporate business in either of those markets. So I don't think there's going to be any real direct impact that's material to Cogent. We do have two sales reps based in Kyiv those reps have asked to relocate into the EU or at least one of them has and we're assisting with that. But we don't see any major impact from the geopolitical uncertainty as it exists today. Pivoting now to the port question, I really need to answer that differently for Corporate and NetCentric. On the Corporate side, customers are paying an incremental on average $200 to get a larger port. In many cases, they do not need that incremental capacity but feel it is a good insurance policy particularly as they are recognizing, they will have some permanent hybrid work strategy. We've also seen many Corporate customers look to add second ports at their primary location or at another location just to be able to support that hybrid work environment. So virtually, all of the new sales having one gigabit. We have seen some customers go directly from 100 gigabit to 10 gigabit and we've seen some one gigabit customers go to 10 gigabit. There are virtually no Corporate customers, that need that much bandwidth but we do offer the service. And some of our customers are not particularly price-sensitive and are really focused on the quality that our network delivers and are willing to pay that incremental fee to go to a 10 gigabit connection, even though they don't today need it. On the NetCentric side, the port capacity upgrades have really been an anticipation of increased traffic flows and an attempt to reduce cross-connect fees. The bigger the port size, the more you can put through it and therefore, the less cross connects for the same amount of traffic. So just as we saw several years ago, a grooming exercise of taking multiple 10-gig interfaces and converting the 100. We're now starting to see some of our largest customers groom multiple hundreds into 400 gig interfaces. And we think that trend will continue.

I would also add just on the NetCentric side. 10-gig and 100-gig circuits across the board in 2021 given the massive growth -- unprecedented growth, we had in that business all grew pretty robustly.

Thank you.

I show our next question comes from the line of Nick Del Deo from MoffettNathanson. Please go ahead.

Hey, this is Michael Srour on for Nick. Thanks for taking the questions. Sean, you noted a shift in your CapEx purchasing schedule. Could you discuss whether you had any issues securing here at this point? And do you feel like your inventories provide you with a sufficient buffer at this point? And how much worse would things have to get before they impacted the business?

There's no doubt that the supply chain is more difficult than it was. We have been I think a little bit smart, maybe a little bit lucky in that we have gone out and increased our purchases in order to get the stuff that we need. There are -- it used to be -- we could get equipment in a matter of weeks. Sometimes it's a little bit longer now, but we feel pretty comfortable given our inventory and given our constant dialogue with our vendor that we're going to be in good shape. I don't know if you want to add.

Yes. I think, Mike, two things. One, we reactivated some additional warehouse space to accommodate incremental equipment. We did spend $13 million more in 2021 and in order to book up that inventory in anticipation of challenges with equipment supplies. We feel very comfortable that we have an appropriate cushion. There are still items that we're looking to increase warehouse inventory just because of the uncertainty of availability, but we do not anticipate any equipment challenges to our ability to deliver service. Our backbone is only 27% utilized. We have ample metro transport capacity, but there are incremental buildings that we're adding and we do need equipment to support those and then for the pluggable optics to support incremental customers, we've done a good job of building up a big enough inventory that we feel we can meet any of our growth projections.

Got it. Thanks. And one more, Dave, could you update us on your thinking regarding share repurchases. In the past you've said that you launched your stock down and the market down. Are we getting closer to levels that are appetizing?

So, we are absolutely getting closer by the day. Mr. Putin seems to be helping us in that regard in terms of the market. We are committed to returning capital. As we commented, we crossed the $1 billion return of capital threshold, which we think is meaningful for a company our size. We're very cognizant of tax efficiency. The fact that we went from 63% to 79% being characterized as return of capital, kind of skews us more towards dividends, because that gives the recipient, the ability to defer those taxes much in the same way a buyback does. We'll continue to evaluate it. We have an authorization. As Sean said, we have excess liquidity on the balance sheet and we have access to incremental capital. So as markets are volatile, we will be observing that volatility and trying to monetize it.

Our last purchase as disclosed is around $57 a share we're somewhere around close to $60. We'll see what happens.

Got it. Thanks.

Thank you. I show our next question comes from the line of Michael Rollins from Citi. Please go ahead.

Thanks and good morning. A couple of follow-ups if I could. First, as your corporate customers begin returning to the office, they were turning into an environment that has some macro inflation factors. I'm just curious if you're looking at trying to incorporate some of those issues into your pricing, I realize over time, Dave, you've been very consistent about this being a deflationary business, but curious given the environment if there's an opportunity to adjust pricing? And then just secondly, also on the corporate segment, if you could just give us an update on the competitive landscape, and how you're seeing different companies potentially change their focus as we're hearing a little bit more rumblings of SMB focus and leveraging fiber that's passing existing buildings? Thanks.

Yes. Mike first of all, thanks for the questions. Telecom like many technologies is long-term deflationary on a per bit basis. And that trend will continue. However, our Corporate customers do not buy the service on a per bit basis. They buy it on a per connection basis. And we do experience increased ARPU when the customer moves to a one gig or 10 gig connection. So we are effectively raising prices by giving customers bigger ports and creating the perception that that bigger port gives them more flexibility in a hybrid environment. It's also important to note to your competitive question, we are uniquely positioned in two respects. One, we have already prewired the riser with fiber. So, it makes the ability to deliver one gig and 10 gig services much easier for Cogent than our competitors. Secondly, many of our competitors have not entered into building license agreements such as we have and invested the capital to prewire. So even if they have fiber passing in front of building, the $50,000, $60,000 expense for riser work, coupled with the need to secure a license agreement, disincents them from prewiring the building and our ability to quickly turn up one gig and 10 gig services is a true competitive differentiator. We've seen most broadband competition from cable and that tends to be in our suburban off-net locations. In fact, we buy a lot of services from cable, where their plant is strong. But in the central business districts, cable has been not very aggressive in pre-wire buildings and converting the fiber, they are still trying to get additional returns out of their HFC plant and that coax is just not conducive to one gig and 10 gig services even with DOCSIS 3.1. And of course, it's an asymmetric service and usually metered. And cable companies don't generally have the best reputation for customer service. We pride ourselves in the fact that we have a Net Promoter Score from our customers in the mid-60s. We answer phones with a domestic engineer in less than 20 seconds. These are key differentiators. As fiber overbuilds occur from some of the phone companies they have been more focused on the residential market. So we just have not seen the level of competition in our corporate footprint that concerns us. Our biggest concern is just getting businesses back to their offices. Thanks.

Thanks.

Thank you. I'm showing no further questions in the queue. At this time, I would like to turn the call back to Mr. Dave Schaeffer, Chairman and Chief Executive Officer for closing remarks. Please go ahead.

First of all, I want to thank everyone for their time. I hope everyone continues to stay safe. And we look forward to being able to give you better results on our Corporate business, as businesses begin to have their teams return to the office. Take care everyone and stay safe. Bye-bye.

Thank you. This concludes today's conference call. Thank you for participating. You may now disconnect.