Welcome to the Cogent Communications Holdings Second Quarter 2022 Earnings Conference Call. As a reminder, this conference is being recorded and it will be available for replay at www. cogentco.com. A transcript of this conference call will be posted on the same 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. And now I would like to turn the call over to Mr. Dave Schaeffer, Chairman and Chief Executive Officer of Cogent Communications Holdings.

Thank you very much, and good afternoon to everyone. Welcome to our second quarter 2022 earnings conference call. I'm Dave Schaeffer, Cogent's CEO. And with me on this afternoon's call is Tad Weed, our Chief Financial Officer. Hopefully, you've had a chance to review our earnings press release. Our press release includes a number of historical quarterly metrics that we present in a consistent manner each quarter. Now for a quick overview of our results. In June, we issued a $450 million unsecured 2027 note, and we used a portion of that proceeds to redeem our €350 million unsecured notes that were due in 2024. We received net proceeds from this offering of $71 million, and we extended the average maturity of our debt by extinguishing our 2024 euro notes. We obtained an economic gain of $26 million from the difference between the euro to dollar rate at the date of issuance as compared to the euro to dollar rate at the date of settlement. We also eliminated a restrictive covenant provision in our euro-denominated notes that was 4.25 to one times EBITDA. This restrictive covenant limited our ability to transfer funds from our operating company to a holding company, and therefore, be available for both dividends and share buybacks. As of June 30, our cash held at Cogent Holdings was $66.6 million, and we had an additional $219.9 million that can now be transferred to holdings for a total of $286.5 million of unrestricted cash that's available for either dividends and/or buybacks. Cash held at our operating companies was $283.3 million, and our total consolidated cash and restricted cash was $349.8 million at end of quarter. Our gross leverage ratio was 5.22, and our net leverage ratio was 3.70. Our consolidated leverage ratio as calculated under our notes indenture…

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 the 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. And if we use non-GAAP financial measures during this call, you'll find these reconciled to the corresponding GAAP measurement in our earnings releases, which are posted on our website at cogentco.com. Like many companies, we continue to be impacted by the COVID-19 pandemic and the accompanying responses by governments around the world. Our risk related to COVID-19 and other risks are described in more detail in our annual report on Form 10-K for 2021 and on our quarterly reports on Form 10-Q. Some discussion on corporate and NetCentric revenue and customer connections. As a reminder, we analyze our revenues based upon network connection type, which is on-net, off-net and noncore, and we also analyze our revenues based upon customer type. We classify all of our customers into two types: NetCentric and corporate customers. Our corporate customers buy bandwidth from us in large multi-tenant office buildings or in carrier neutral data centers, and these customers are typically professional service firms, financial service firms and educational institutions located in multi-tenant office buildings or they connect to our network through our carrier-neutral data center 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 access…

Thanks, Tad. I'd like to highlight some of the strengths of our network, our customer base and our sales force. We achieved excellent revenue growth in our NetCentric business. On a year-over-year, NetCentric revenue growth was 10.2% and 16.2% on a constant currency basis. We continued to be a direct beneficiary of the increase in over-the-top video and streaming traffic, particularly in international markets. At quarter's end, we were connected to 1,409 carrier-neutral data centers and 53 Cogent data centers, more than any other carrier as measured by third-party research. The breadth of our coverage enables our NetCentric customers to optimize our networks and reduce latency. We expect to continue to widen our lead in this market as we plan to connect an additional 100 carrier-neutral data centers to our network each year for the next several years. At quarter's end, we were connected directly to 7,685 autonomous systems or unique networks that comprise the Internet. This collection of ISPs, telephone companies, cable companies, mobile operators and regional carriers provide us access to the vast majority of the world's broadband subscribers and mobile phone users. At quarter's end, we had a dedicated sales force of 197 professionals focused solely on the NetCentric market. We believe this group of professionals is the largest group of salespeople focused on this market segment. Now for a few comments on our corporate business. We are seeing positive trends in our corporate business. But in a work-from-home environment that is becoming established as part of people's normal work routine, we believe corporate customers will continue to upgrade their Internet infrastructure, particularly supporting larger connections to improve the user experience of their remote workers Our corporate customers are aggressively integrating some of these new applications to become part of their working environment, such as including video…

Great. Thank you very much. Our first question comes from the line of Gregory Williams with Cowen. Gregory, go ahead.

Great. Thanks for taking my questions. First one is just on corporate. Dave, you've noted in the past that you'd want to get to the 2%, 2.5% sequential growth target, the historical target in the next few quarters. Has that changed since you're now noting a little bit of concern about office leasing trends? And the second question is just on your appetite for debt and increasing that. So I understand with this debt raise you did here, while it's nice to be paying in euros, and you now re-fied it at a much higher rate. I understand that you're lifting some of those restrictive debt covenants. With those debt covenants removed or at least a lot more flexible, I was hoping you'd give us sort of a new range or a new target of how high you'd be comfortable taking your debt levels up now that you're at 2.7 times? Thanks. A – Dave Schaeffer: Yeah. So first of all, let me touch on the corporate growth rate. We have seen, I think, three factors impact corporate activity in central business district. At the beginning of the pandemic, we saw many businesses shutter and just go out of business. And that increased the vacancy rate in those buildings and had a material negative impact on our corporate growth rate. The second thing that then occurred is for the remaining tenants in those buildings, they were unwilling to make architectural decisions around what their networks would look like post-pandemic in part because they had no visibility to the end of the pandemic. The third factor, which has been probably the most difficult to fully understand, has been the fact that some tenants and customers at the end of their leases are electing to continue to vacate properties. So while the…

Thanks, Dave. A – Dave Schaeffer: Thanks, Greg.

Thank you. We will queue up our next question. Our next question is by Frank Louthan with Raymond James.

Hey, guys. It's Rob on for Frank. So obviously, Dave, you just talked to the outlook for corporate with respect to the rate of vacancies and then re-absorption beyond that. Just pivoting to Internet traffic growth, what did traffic growth look like during the quarter? You might have addressed this earlier. And is there any reason that Internet traffic volumes might potentially be able to return to where they were like about a year or two ago? Like what's the outlook on traffic growth going forward? Thanks. A – Dave Schaeffer: We're actually very encouraged by the traffic growth that we saw. Traditionally, the summer months on a sequential basis are slower than the winter months. We grew sequentially in the second quarter by 3%, and our year-over-year growth actually accelerated to 19%. These are very positive signs. We're seeing that growth come mostly from international markets. We saw our NetCentric revenues were a direct result of this growth, grew at 10.2% year-over-year on a stated basis and 16.2% on a constant currency basis, so far above the long-term average growth rate of 9%. I know that many investors were concerned because some of our content delivery customers had called out slower traffic growth as part of the reason why their businesses were not performing as well as investors expected. We have over 200 content delivery networks and thousands of proprietary networks continuing to use our network. So we feel pretty good and have been actually pleasantly surprised to the upside for the past several quarters on how well our NetCentric business has performed and we actually expect this outperformance to continue at least for the foreseeable future.

Got it. Very helpful. Thanks, Dave. A – Dave Schaeffer: Thanks, Rob.

Thank you. Our next speaker - our next question and answer is from Nic Del Deo with MoffettNathanson. Go ahead, Nic.

Hey. Afternoon, guys. Thanks for taking my questions. Tad, a couple of questions ago, you noted that you think you need to see vacancy rates decline to get corporate growth back to normal. If I think back to when your corporate unit was growing at much faster rates, vacancy rates bounced around and I don't think that was ever really thought of as a key driver of the business. I think the driver was improving your share of connections in the building you serve. So the way you tied corporate growth to vacancy trends almost makes it sound like share gains aren't part of the story. I mean, shouldn't you be able to grow the corporate business even if vacancy rates stay flat via share gains? And maybe just help me understand that disconnect or if I'm interpreting something incorrectly? A – Dave Schaeffer: So share gains are our primary way of growing our corporate business. You are absolutely correct. However, our addressable market shrank by over 10% when the average vacancy rate went from 6% to 18%, where it is today nationwide in CBDs. Some cities actually have CBD vacancy rates of nearly 40%. Those are probably the most extreme. Downtown San Francisco is probably the worst example. But I think with that level of vacancy in the building, many tenants are just reluctant to make a switch. They don't know if they're going to stay or not, are they're going to move to a different building, are they going to downsize. And I think we just need to see a stable environment and one that's maybe a little more normal than what we've historically seen. I do believe that most of Cogent's growth will come from capturing incremental customers in the building. But we've always stated that there…

Okay, okay. That's helpful. On the NetCentric side, obviously, you've talked about NetCentric returning to a more normal pace for some time. So it's not surprising that it's tapering off. If I look at the sequential constant currency growth rate, it did step down quite a bit from what we've seen over last 1.5 years. Obviously, that's volatile. It's hard to forecast. Should we think of this as a more normal sequential growth rate going forward? Or is this an anomaly and you think it could still kind of bounce up and down and take longer to taper to your target growth rate? A – Dave Schaeffer: Well, I think it will definitely have some sequential volatility. And typically, we see a pickup in traffic, and therefore, corresponding NetCentric revenue in the latter part of the third quarter, throughout the fourth quarter and throughout the first quarter and then slowing down again in the second quarter. And that's been a historic trend both pre-pandemic and during the pandemic. We've said that over time, we expect our NetCentric growth to converge to about a 9% annualized rate. We're obviously at least 50% above that today. It's a little hard for us to tell how much more of the internationalization of streaming will continue because many of the markets are still relatively nascent. We've seen, I think, a level of maturity in the U.S. and Canada for streaming. That doesn't mean it's not growing. It just means the growth rate has slowed materially. That same trend has not happened in the developing world. And if it continues to follow the same trajectory as the U.S. and Canada did, we'd probably have three or four years of elevated growth. But again, we just don't have enough data to be comfortable to tell investors expect 15%, not 9% growth for the next three to four years.

Okay. Thank you.

Thank you. Our next question comes from the line of Timothy Horan with Oppenheimer.

Thanks, guys. So Dave, customers are kind of frozen. They're not really upgrading or changing their networks if they might move. But they're not really moving yet. So churn is relatively low. And new tenants aren't really coming in yet. Do you think that recession kind of extends out this frozen period, maybe this will last two or three years more or another 12, 18 months? Or what gives you the confidence with the dividend increase that this will reverse in a few more quarters? A – Dave Schaeffer: Yeah. So two different points. So the first one is, in previous recessions, with the exception of the financial crisis of '08, '09, we were not materially impacted in terms of our corporate growth rate. What we typically see is tenants use recessions to upgrade their offices at the same or lower rent by migrating from B and C buildings into A buildings. And we've experienced that in our customer base. If you look at third-party data, whether it's JLL, CoStar, Cushman & Wakefield, for previous recessions, that's always been the case. Now if we have a recession, it is most likely not going to be as impactful as 2008, 2009. And for that reason, we don't believe that the rate of economic growth is really material to our corporate growth rate. It's really the aggressiveness of the landlords to lower the rents in the most expensive buildings to reduce the vacancy rates. And they typically have had more flexibility in doing that in previous recessions. We think that will continue. We also think that at the lower end of the market, we're continuing to see supply be converted to residential. So I think part of the reason why, even though the world has migrated mostly to a hybrid work environment,…

Very good. Just two other maybe brief. Are you seeing any change in pricing in the corporate side? Inflation has ticked up a lot and the prices have been down a lot. Have you seen any change in trajectory there? A – Dave Schaeffer: So we live in the industry that inflation forgot. We are in the business of selling a deflationary service. As Tad mentioned, the rate of decline in the average price per megabit actually did moderate some. I think part of that is the fact that more of those megabits sold have tended to be in more expensive markets outside of the developed world, which I think has distorted that a little bit. We are a huge beneficiary of substantial improvements in technology, both wave division multiplexing and optically interfaced routers. We think those trend lines will continue for the foreseeable future. Our equipment vendors support that prognosis. So we feel pretty good. On the operation side, clearly, our expenses are rising just like all other businesses. We have been able to expand margins even though we have passed on some of those inflationary pressures and been able to increase our employee salaries, remain competitive in the market, and obviously, take advantage of market conditions for office rents, for other services that we buy. We are also fortunate that most of our power purchases are fixed and are not susceptible to wild market fluctuations. We have had some increases in power, and we've been able to pass those on to our customers. So all in all, we think that inflation will not impact our ability to grow our EBITDA. Thank you.

Thanks.

Thank you. Our next question comes from the line of Walter Piecyk with LightShed Partners.

Thanks. Hey, Dave. You mentioned in the prepared comments - you mentioned in the prepared comments about some long-term deals on NetCentric. Typically, when those companies enter into long-term deals, they're asking for price reductions. But that also gives you some good visibility in terms of the growth of that line. Can you give us some kind of qualitative content -- or comments, excuse me, on the kind of puts and takes of those long-term deals? A – Dave Schaeffer: Yeah. Sure, Walt. And by the way, you can go back to transcripts for the past decade, and we have that same section in every one of them and we quantitatively give how many customers and what their contract value increase was. So a NetCentric customer is accustomed to buying services on a metered basis. We offer discounts for fixed commitment and fixed term. So what a customer will typically do is buy a number of ports. They will typically commit to 50%, 60% total port capacity, and they will be running at a approximately same level. As time goes on, they may either add additional ports or they may start to run over their committed capacity, in which case they then pay a premium, a higher price per megabit. Customers understand that market prices have declined at about 23% per year for like volumes. Because most NetCentric customers enter into a three year contract to get the lowest initial price, usually about halfway through that contract the customer is experiencing two things. One, they haven't gotten a reduction in price, and two, they're utilizing more than their committed capacity and are paying the penalty rate on that first traffic. What they will typically do at that point is come back to us, say, we'll sign a new three year contract, recast the 18 months that are left to 36 months, will take more ports, more total commitment and a lower price. We expect that to happen routinely with NetCentric customers, and we then factor that into their next three year contract commitment. That is the most common pattern for these re-pricings.

I would just add. For us to accept that new commitment, so a customer is pricing - asking for a change in term, the total contract value for the new contract must be greater than the remainder on the original contract for us to accept that. A – Dave Schaeffer: And there's a second governor, which is the salesperson only gets a commission if there is an increase in the monthly spend. So there's kind of both an internal control mechanism and a customer control mechanism.

Thank you for that. I want to also go back to Nick Del Deo's question because I think your response to that was a bit more cautious than the kind of outlook that you provided really since this pandemic started. And then I want to kind of, I guess, put that in the context of long term, you're expecting EBITDA growth and - well, not long term. You said at some point. I don't know what the time frame is, but I think you were non-specific about it. But you're going to converge the EBITDA growth rate with the dividend growth rate, which obviously is under pacing at the moment, as you already highlighted. I think you've gotten some stuff wrong in the past. Obviously, everyone gets stuff wrong in terms of understanding when things don't go as we expect them to. But given how cautious you were to Nick, if we don't really know the time frame of when those can converge, then it seems like there's a possibility that you can't get leverage down below 3.5. So let's put that aside. You're willing to stick this out. At what point do you not stick it out? Like is 4.0 the benchmark? Or the bogey is 4.5? At what point does the Board say, you know what, we're tired of waiting for this convergence. And 4.0 or 4.2 or 4.5 or 5, like 7, like there's got to be a number. Are you willing to take leverage to 9 times? A – Dave Schaeffer: So three parts to your question, three answers. First of all, I do not have a crystal ball for return to normality. When the pandemic started, if you would ask me -- I thought everybody was going to go home for three or four weeks…

The last part of that question, Dave, was is there a point where your leverage ratio gets to where it -- where you slow it substantially or just don't grow the dividend. Everything you said I understand is -- as you voice in your confidence and what you think the signposts are on the turn, but we know -- like we've got greater uncertainties than ever right now in terms of the economy, inflation, among a host of different things. I mean, I could argue also that the conversions of office to residential are going to be more than just small market, but I see what my kid has to pay for rentals and the cost of construction to put new residential in New York City and a lot of these cities. So there's an uncertain future. And the core question is, at what point does the Board say 4 times leverage is enough, 4.5 -- and there might be -- we can agree that 10 times leverage is probably too high a leverage. So we can agree that there's a number. I'm just trying to get a sense of what is the number. A – Dave Schaeffer: Okay. Well, I can definitely tell you that...

Is it 5? Is it 6? A – Dave Schaeffer: Well, our indentures actually have limits. We cannot have more than 6 times gross leverage and 4 times secured leverage. Those are contractual terms that are built into our indentures. We are very far from both of those limits. In terms of the business' ability to maintain elevated levels of leverage, it really is a question of the cost of rented capital of debt. Our debt capital costs remain substantially below our competitors and substantially below historic averages. So I don't think the Board has a hard number saying, the day we hit a specific number, we're going to slow the dividend growth down. But it is something that we think about every single Board meeting, we consider it, and we look at the totality. We also know, as Tad pointed out, there's $350 million on our balance sheet. And we've been pretty clear: we only need to keep $60 million or $70 million to run the business. So we have a lot of cash to eventually return. It's now unencumbered through the modification of our covenants. And for the foreseeable future, we continue to expect to return excess cash. That's as much -- I can't give you a hard number because one doesn't exist.

Yeah, that’s fine. All right, Dave. Thank you. A – Dave Schaeffer: Thanks, Wal.

Thank you. We will queue in our next question. Our next question comes from David Barden with Bank of America.

Hey, guys. Thanks so much. Walts been giving me a lot of crap on Twitter, but that was a good question. So I guess I've got a couple. Number one would be on the kind of sales force hiring and sales force productivity. I guess, Dave, are we looking at -- are we redlining productivity from what sales force we have left? And how is your success rate in recruitment? I remember when you guys went fully back into the office, you actually cited coming back into the office as being one of the problems that you had with retention. And so I'd like to kind of talk about that a little bit. The second question would be, Lucent or not Lucent, Lumen and AT&T have both kind of cited that wholesale prices have been rising for them, and it's been a problem for them. And people have been kind of hunting for who the potential beneficiary of that has been? And maybe that's Cogent. I don't know. But I would love to hear your view on that. And then the last, if I could, would be - at the risk of extending this call for a while, would be: there's a prominent short seller investor who's come out with a short thesis on the data center industry, which by the transit of property would have negative implications for Cogent and its connectivity prospects in the data center industry. I'm confident you're aware of what that is, and I'd love to hear your thoughts on the likelihood of the near-term disintermediation of the data center industry by the cloud providers. Thanks. A – Dave Schaeffer: Yeah. And listen, I'm here to answer the questions. I really appreciate everyone staying late and listening to our answers. And I feel that it's…

That’s great. Thanks, Dave. A – Dave Schaeffer: Thanks, Dave.

Thank you. Our next speaker – our next question comes from the line of Michael Rollins with Citi.

Hi. Thanks for taking the question. One follow-up and one question. So the follow-up would be, Dave, you did mention the goal to build 100 data centers annually for the next few years. What's the implications for CapEx on that type of a build plan? And then secondly, on the subject of tax. Where are you today in terms of the tax position and when you start paying material cash taxes? And does the proposed tax changes in D.C. have any influence on that timing or your expectations? Thanks. A – Dave Schaeffer: Yeah. So let me take the data center one first. We have a pretty robust funnel of actual building addresses and facilities that are under construction, both by existing operators and new operators and feel that the 100 a year is very realistic. It's about the pace we did last year. We are probably going to do less multi-tenant office buildings, not because the market is not recovering quickly enough, but because even before the pandemic, our MTOB expansion had materially slowed as we had reached the targeted buildings that we wanted to. Now there are several new buildings coming on in major markets, and we will go to them. But that MTOB footprint expansion has slowed over the past year from about 7% to about 2% a year as measured by square footage. The data center number has been pretty consistent. With that, we think that our total CapEx will be in line with last year. It came down on a sequential basis, both in terms of straight CapEx and principal payments on capital leases. We think that in our CapEx guidance, the 100 data centers a year are very achievable without a change in CapEx. Now to your tax question. Cogent still has slightly over $1 billion of NOLs. However, only about $40 million of those NOLs are in the U.S. The majority of those NOLs are in international markets with the largest concentration in our holding company in Luxembourg that holds many of our European subsidiaries. We believe we will be subject to a 15% minimum tax due to the BD calculation independent of a new statutory 15% minimum. So over the next year or two, we will become a cash taxpayer, but we believe we will be able to utilize our international NOLs not paying taxes outside of the U.S. but then being effectively caught by the foreign indirect tax capture at 15%. So I think as investors kind of model Cogent in out years, I think that's a pretty good outcome. It's not perfect, but it's surely better than paying at a 21% or a higher rate.

Thanks.

Thanks, Mike.

Thank you. And now for our final question. Our final question comes from the line of Brandon Nispel from KBCM. Your line is now open.

Hey, thanks. It's Evan on for Brandon. Do you think you could talk a little bit about your thoughts around the share buybacks and maybe what conditions would need to exist for you to start thinking about starting that? Thanks.

Yeah. Sure. So it first starts with our return to - return of capital question. And I think that's the question that Walt was focused on. He phrased it as a dividend question. But it's really a question about are we committed to continuing to return increasing amounts of capital to shareholders. The answer is unequivocally yes. The rate of growth of that is something that we will evaluate, but we are absolutely committed to returning increasing amounts. Now the mechanism of return today is mostly dividends, in part because we have not seen the level of volatility that told us suspending the dividend and using a buyback was more effective. We have been able to classify the majority of our dividend as a return of capital, therefore, getting a tax advantageous result for the dividend recipient. As a result of that, we have decided to use dividends more than buybacks. We consider that every quarter. We've returned $1.1 billion in total. Roughly $230 million of that has been through buybacks and about $850 million of that has been through dividends. I think at this point, it will probably remain dividend focused. But again, we'll evaluate each and every quarter based on market conditions.

Okay. Thanks.

Thanks.

Thank you. No more questions. I would like to turn it back over to Dave for closing remarks.

Well, thank you all very much for staying late. We normally do this in the mornings, but we needed to accommodate some schedules. So hopefully, this was not too inconvenient. We thank everyone for their attention, and we're available to do any follow-up calls. Take care. Talk to you soon. Bye-bye.

Thank you for your participation in today's conference. This does conclude the program. You may now disconnect.