Earnings Call Transcript - CCOI Q2 2021

Operator, Operator

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

David Schaeffer, Chairman and Chief Executive Officer

Thank you, and good morning to everyone. Welcome to our second quarter 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. As a result of pandemic-related efforts that have shifted toward a broad reopening of the U.S. economy and as many large businesses have developed plans and deadlines to reopen their offices, we've seen some signs of improvement in the business climate for our Corporate segment. Our NetCentric business continues to benefit from the greater-than-expected growth in streaming subscribers and the continued internationalization of the Internet and the streaming phenomenon, where our global footprint positions Cogent as the best network to deliver traffic on an end-to-end basis globally. For the second quarter, our traffic growth moderated somewhat from the fast pace of growth in previous periods, but was up 1% sequentially in what is traditionally a seasonally slow period and increased 25% on a year-over-year basis. Despite these improvements, we remain cautious in our outlook, given the uncertain economic climate and the challenges that have resulted from the continuation of the pandemic and the emergence of the Delta variant. Our second quarter revenues grew sequentially by 0.8% to $117.9 million, an increase of 4.9% on a year-over-year basis. On a constant currency basis, we experienced sequential revenue growth of 0.6% and a year-over-year constant currency growth rate of 2.8%. We've made progress with our sales force as our sales rep productivity improved to 4.5 installed orders per month per full-time equivalent, up from 4.3 in the previous quarter. And the turnover rate in our sales force, our sales rep churn rate, declined from 6.6% a month to 5.6% per month on a sequential basis. We continue to operate an extremely efficient network. Our network services are able to be provided in a growing number of markets, in additional carrier-neutral data centers and multi-tenant office buildings, and are able to handle a continuing growth in traffic volume on a largely fixed cost basis. This operating leverage allows us to achieve year-over-year and sequential growth in our EBITDA and EBITDA margin. Our quarterly EBITDA grew by 2.9% sequentially and grew by 7.2% on a year-over-year basis. Our quarterly EBITDA margin was 38.7%, which is an increase of 90 basis points both on a sequential and on a year-over-year basis. The performance of our existing customer base continues to be strong throughout the pandemic. Customer churn, days sales outstanding and cash collections all are within historical norms. Bad debt as a percentage of our revenue improved sequentially and also improved on a year-over-year basis. We believe that these are strong indicators of the credit quality of our customer base and the seminal importance of our services to these organizations. During the quarter, we returned $37 million to our shareholders through our regular quarterly dividend. We did not repurchase any stock during the first quarter, and have a total of $30.4 million available for buybacks under our stock repurchase program, which has been authorized through December 31, 2021. Our cash held at Cogent Holdings was $148.2 million at quarter end. This cash is unrestricted and available to use for dividends and/or stock buybacks. Cash held at our operating company was $225.7 million, and our total cash in both operating and holding companies was $374 million at quarter end. Our gross leverage ratio was 5.13 and our net leverage ratio was 3.45 at the end of second quarter 2021. Our consolidated leverage ratio as calculated under our indentures was slightly lower at 5.10. In the second quarter, we successfully issued $500 million of 3.5% senior secured notes due in 2026. The proceeds from this offering were primarily used to retire our $445 million of 5 3/8% senior secured notes that were due in 2022 and to provide us additional liquidity. A couple of things to note regarding this financing: we're gratified to receive a ratings upgrade by Standard & Poor's and now have a senior secured rating of Ba3/BB, which we believe reflects the strength of the company's operational excellence and financial condition. This $500 million fundraising was the largest in the company's history, and the 3.5% interest rate that we achieved was the lowest interest rate the company has paid on debt. We expect to save approximately $6.5 million in interest expense as a result of this transaction, in addition to receiving $55 million of incremental liquidity. Now with regard to dividends, our Board of Directors, reflecting the strength in the cash flow generating capabilities of our business, the investment opportunities that we remain disciplined in executing, and the ability to deploy capital internally to grow our sales force, decided to increase our quarterly dividend yet again by another $0.025 per share, thereby raising our quarterly dividend from $0.78 per share to $0.805 per share in the second quarter to be paid in the third quarter. This increase represents the 36th consecutive sequential increase in our regular quarterly dividend, and our dividend grew at a rate of 14.2% year-over-year. Now I'd like to turn things over to Sean to read our Safe Harbor language, give a little more color on our COVID-19 policies and challenges, and review some of our operating performance for the quarter.

Sean Wallace, Chief Financial Officer

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. An 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. Virtually our entire workforce continues to work remotely. 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 collections staff and many other Cogent employees who continue to work on the front lines installing our new customers, maintaining and upgrading our network and providing outstanding services to our customers. These and other risks are described in more detail in our annual report on Form 10-K for 2020 and in our quarterly reports on Form 10-Q for the quarters ended June 30, 2021, March 31, 2021 and September 30, 2020. Throughout this discussion, we will highlight several operational statistics. I will review in greater detail certain operational highlights and trends. Following our remarks, we'll open up the call for Q&A. Now I'd like to turn it back over to Dave.

David Schaeffer, Chairman and Chief Executive Officer

Okay. Thanks, Sean. Hopefully you've had a chance to review our earnings press release. Our press release includes a number of historical quarterly metrics which we reported on a consistent basis. Our targeted long-term EBITDA annual margin expansion guidance is for an improvement of 200 basis points per year. Our targeted multiyear constant currency revenue growth target is still approximately 10%. Our revenue and EBITDA guidance targets are intended to be multiyear goals, and are not intended to be used as quarterly or annual guidance for any specific year. Our Corporate business at the end of the quarter represented 61.2% of our revenues in the second quarter. Our Corporate business declined by 1.6% from the first quarter of 2021 and declined by 6.7% from the second quarter of 2020 due to the impact of the pandemic. Our NetCentric business, which represents 38.8% of our revenues, had another strong quarter and showed continued growth of 4.8% on a sequential basis quarter-over-quarter and grew at a historically high rate of 30.5% on a year-over-year basis from the second quarter of 2020. Volatility in foreign exchange rates primarily impacts our NetCentric business as approximately 50% of this business is outside of the U.S. On a constant currency basis, our NetCentric business increased by 23.8% on a year-over-year basis from the second quarter of 2020, and grew by 4.5% on a sequential basis from the first quarter of 2021. Now Sean will provide some additional details on our performance for the second quarter.

Sean Wallace, Chief Financial Officer

Thanks, Dave, and again, good morning to everyone. I'll talk about Corporate and NetCentric revenue and customer connections. We analyze our revenues based upon network types: on-net, off-net and noncore, and we also analyze our revenues based on customer type. We classify all of our customers into two types, either NetCentric customers or Corporate customers. Our Corporate customers buy bandwidth from us in large multi-tenant office buildings or in carrier-neutral data centers. These customers are typically professional services 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 access networks who serve the customers of content. Revenue from our Corporate customers for the quarter fell sequentially by 1.6% to $90.5 million and fell year-over-year by 6.7%. Corporate revenues in the quarter, when you exclude USF taxes, fell by $1.8 million which is an improvement from the decline in the first quarter of $2.1 million and a decline of $2.4 million in the fourth quarter. An increase in the USF tax rate, which only applies to our Corporate VPN connections, had a $0.3 million sequential positive impact on our quarterly Corporate revenues and had a $1.5 million positive impact year-over-year. The USF tax rate changes quarterly, and we cannot predict the impact of future USF rate changes on our revenues. As the focus of the pandemic has evolved toward the reopening of offices, we have begun to see some indications that our Corporate business is beginning to return to a more normal level of activity. Gross sales on the Corporate side, however, have not rebounded to pre-pandemic levels. In terms of aggregate churn in our Corporate base, we continue to see the majority of churn coming from our older 100-megabit or Fast Ethernet product, and we continue to see net unit growth in our 1-gigabit-per-second product. The continuing trend of lower local loop pricing contributed to the reduction in our year-over-year off-net Corporate revenue as we continue to pass a portion of those savings to new off-net customers. We had 45,803 Corporate customer connections on our network at quarter end, which was a decline of 2% versus last quarter and a decrease of 5.2% from the second quarter of 2020. Our NetCentric business continues to benefit from the strong growth in streaming subscriptions and continued faster growth in traffic overseas. Quarterly revenue from our NetCentric customers increased sequentially by 4.8% to $57.4 million and increased year-over-year by 30.5%. We had 46,065 NetCentric customer connections on our network at quarter end, an increase of 4.2% sequentially and an increase of 15.7% over the second quarter of 2020. Our NetCentric business benefited from continued strong demand for our larger 10-gigabit-per-second and 100-gigabit-per-second ports. The demand from outside of the United States was particularly strong. Our NetCentric revenue growth experiences significantly more volatility than our Corporate revenues due to the impact of foreign exchange, larger customer size and certain seasonal factors, primarily related to usage. Traffic grew sequentially by 1% for the quarter and by 25% on a year-over-year basis. We typically experience a seasonal slowdown in traffic growth in our second quarter versus our first quarter. Our on-net revenue was $111.0 million for the quarter, a sequential quarterly increase of 1% and a year-over-year increase of 7%. Our on-net customer connections increased by 1% sequentially and increased by 4.2% year-over-year. Year-over-year, our on-net revenue grew at a faster rate than our on-net customer connections primarily due to a 2.6% increase in our on-net ARPU. We ended the quarter with 79,146 on-net customer connections on our network in our 2,975 total on-net multi-tenant office and carrier-neutral data center and Cogent data center buildings. Our off-net revenue was $36.7 million for the quarter, a sequential quarterly decrease of 0.1% and a year-over-year decrease of 0.9%. When we sell new off-net circuits, we incorporate the cost savings from the lower local loop prices into our pricing, and the introduction of these new and existing customers into our base lowers our off-net ARPU. Our off-net customer connections increased sequentially by 1.4% and increased by 4.6% year-over-year. On a year-over-year basis, our off-net revenue results were moderated primarily due to a 5.1% decrease in our off-net ARPU. This ARPU decrease is driven primarily by the continued falling cost of local loops necessary to sell this service. We ended the quarter serving 12,386 off-net customer connections in over 7,379 off-net buildings. These off-net buildings are primarily located in North America. Pricing per megabit: consistent with our historical trends, our average price per megabit of both our installed customer base and new customer contracts decreased for the quarter. The average price per megabit for our installed base declined sequentially by 6.1% to $0.36 and declined by 24.8% from the second quarter of 2020. The average price per megabit for our new customer contracts for the quarter decreased to $0.18 from $0.20 in the first quarter and decreased 21.9% from the second quarter of 2020. ARPU: our on-net ARPU slightly decreased sequentially but increased year-over-year. Our off-net ARPU decreased sequentially and year-over-year. The increase in our year-over-year on-net ARPU reflects the growing importance and change in the mix of our larger bandwidth products for the Corporate and NetCentric markets. Growth in 1-gigabit-per-second connections to Corporate customers continues to contribute to a higher on-net ARPU. Another product that is contributing to our higher on-net ARPU is our 100-gigabit-per-second product, which is sold primarily to our NetCentric customers. The growth in units and the size of their respective ARPU is having a positive effect on our on-net ARPU. Our on-net ARPU, which includes both Corporate and NetCentric customers, was $470 for the quarter, a slight decrease of 0.2% from last quarter, but an increase of 2.6% from the second quarter of 2020. Our off-net ARPU, which is predominantly comprised of Corporate customers, was $994 for the quarter, a decrease of 1.8% from last quarter, and an increase of 5.1% from the second quarter of 2020. We expect that our off-net ARPU will continue to decline as we take advantage of the lower cost of local loops. A portion of these reductions in costs are passed on to our Corporate customers. Churn rates: our sequential quarterly on-net connection churn rate was stable and our off-net connection churn rate slightly increased. Our on-net unit churn rate was 1% for this quarter, the same churn rate as last quarter. Our off-net unit churn rate was 1.2% for this quarter as compared to 1.1% last quarter. NetCentric MAC orders: in order to reduce customer turnover, we employ a dedicated sales group which works primarily to retain customers who have indicated that they are considering terminating their services with us. We may offer pricing discounts to these customers in order to induce them to purchase additional services and/or to extend the term of their contracts with us. Due to the commodity nature of NetCentric services, the vast majority of our move, add or change contracts are related to our NetCentric customers. During the quarter, certain of our NetCentric customers took advantage of our volume and contract term discounts and entered into long-term contracts with us for over 2,700 customer connections, increasing their total revenue commitment to Cogent by over $24.8 million. EBITDA and EBITDA margin: our EBITDA is reconciled to our cash flow from operations in each of our quarterly earnings press releases. Seasonal factors that typically impact our SG&A expenses include the resetting of payroll taxes in the United States at the beginning of each year, annual cost-of-living or CPI increases, seasonal vacation periods, the timing and level of audit and tax services, our annual sales meeting costs and our benefit plan annual cost increases. Our EBITDA increased sequentially primarily due to our increase in revenue and the seasonal increases in the first quarter in our SG&A costs that do not continue in our second quarter. Our EBITDA increased year-over-year primarily due to the $7.2 million increase in our on-net revenue. Our EBITDA increased by $1.6 million sequentially and increased by $3.8 million on a year-over-year basis. Our quarterly EBITDA margin was 38.7%, which was an increase of 90 basis points on a sequential and year-on-year basis. Earnings per share: our basic and diluted loss per share was a $0.05 loss for the quarter compared to income per share of $0.41 last quarter and income per share of $0.19 for the second quarter of 2020. Unrealized gains and losses on the translation of our 2024 euro notes into U.S. dollars are the primary contributor to the variability in our net income and consequently our income and loss per share. Foreign currency impact: our revenue outside the United States is reported in U.S. dollars and increased to approximately 25.6% of our total quarterly revenues from 25.3% of our total quarterly revenues in the first quarter of 2021. Approximately 18% of our revenues this quarter were based in Europe; and about 7% of our revenues related to our Canadian, Mexican, Asia Pacific, South American and African operations. We have not hedged our foreign currency revenues or obligations including our payments on our euro notes. Continued volatility in foreign currency exchange rates can materially impact our quarterly reported revenue results and our overall financial results. The foreign exchange impact on our quarterly sequential revenue was a positive $0.2 million, and the year-over-year foreign exchange impact was a positive $3 million. Our quarterly revenue growth rate on a constant currency basis was 0.6% sequentially and 2.8% year-over-year. Variability in foreign exchange rates primarily impacts our NetCentric revenues. The average euro to U.S. dollar rate so far for this quarter is 1.18 and the average Canadian dollar rate is 0.80. Should these average foreign exchange rates remain at these current average levels for the remainder of our third quarter of 2021, we estimate that the FX conversion impact on our sequential quarterly revenues for our second quarter would be a negative $0.6 million, and the year-over-year FX conversion impact on our quarterly revenues would be a positive $0.7 million. Customer concentration: we do not believe that our revenue and customer base is highly concentrated. Our top 25 customers represent less than 6% of our revenues for this quarter. On capex, our quarterly capital expenditures increased by $1.8 million sequentially and increased by $3.3 million year-over-year. Our capital expenditures were $17.2 million this quarter compared to $15.4 million for the first quarter of 2021 and $13.9 million for the second quarter of 2020. Finance leases and finance lease payments: our finance lease IRU obligations are for long-term dark fiber leases and typically have initial terms of 15 to 20 years or longer, and often include multiple renewal options after the initial term. Our finance lease IRU fiber lease obligations totaled $224.6 million as of June 30, 2021. At quarter end, we had IRU contracts with a total of 282 different dark fiber suppliers. Our finance lease principal payments were $6.2 million for the quarter, primarily due to purchases of dark fiber in international markets, compared to $3.7 million for the second quarter of 2020 and $5.7 million for the first quarter of 2021. Our finance lease principal payments combined with our capital expenditures were $23.4 million this quarter compared to $21.2 million last quarter and $35.5 million for the second quarter of 2020, a 34% reduction. As of June 30, 2021, our cash and cash equivalents totaled $374.0 million. For the quarter, our cash increased by $136.0 million primarily from the issuance of our $500 million notes, which was offset by the redemption of our remaining $329.1 million of our 2022 notes and an increase in our quarterly dividend payment. Our quarterly cash flow from operations decreased sequentially by 15.6% to $39.7 million, primarily due to an $11.5 million prepayment of interest on our 2022 notes through December 1, 2021, the earliest date that our 2022 notes may be redeemed at par. Our quarterly cash flow from operations decreased by $1.6 million year-over-year. Debt and debt ratios: our total gross debt at par, including our finance lease IRU obligations, was $1.1 billion at June 30, 2021, and our net debt was $769.7 million. Our total gross debt to trailing last 12 months EBITDA, as adjusted, ratio was 5.13 times at June 30, 2021, and our net debt ratio was 3.45 times. Our consolidated leverage ratio, as calculated under our note indenture agreements, was 5.10 at June 30, 2021. Our 350-million-euro notes are reported in U.S. dollars and converted to U.S. dollars at each month end using the month end euro to U.S. dollar exchange rate. The unrealized foreign exchange loss on our euro notes was $5.3 million this quarter, or a loss of $0.11 per share, compared to an unrealized gain of $18.9 million last quarter, or $0.41 per share, and an unrealized loss of $0.9 million for the second quarter of 2020. As a result of the change in the value of the euro since June 30, 2020, our consolidated leverage ratio increased by 10 basis points. On a constant currency basis, our consolidated leverage ratio under our indentures would have been 5.00 versus 5.10 at quarter end. Bad debt and days sales outstanding: our bad debt expense as a percentage of revenues improved year-over-year and sequentially. Our bad debt expense improved to 0.5% of revenues for the quarter compared to 0.6% of our revenues last quarter and 0.9% in the second quarter of 2020. Our days sales outstanding, or DSO, for worldwide accounts receivable was 22 days for the quarter, a slight increase from 21 days last quarter, but better than our historical rates. I want to thank and recognize our worldwide billing and collections team members for continuing to do a fantastic job in serving our customers and collecting from our customers during very challenging times. And now I'll turn it back over to Dave.

David Schaeffer, Chairman and Chief Executive Officer

Thanks, Sean. I'd like to highlight a couple of strengths about our network, our customer base and our sales force. As I stated earlier, we continue to see strength in our NetCentric business, with revenues in that segment increasing 30.5% year-over-year. Streaming service providers are aggressively targeting overseas markets, and we are a beneficiary of this growth. We have positioned our network and our capabilities to support streaming on a global basis, and I'd like to highlight some of these important characteristics. At quarter end, we connected to 1,309 carrier-neutral data centers in 48 countries around the world. In addition, we connected to 54 Cogent-owned data centers, more data centers connected to our network than any other carrier as measured by third-party research. The breadth of this coverage enables our NetCentric customers to better optimize their networks and reduce latency in the delivery of their content. We expect that we will continue to widen this lead in the market as we continue to add approximately 100 carrier-neutral data centers to our network each year for the next several years. At quarter end, we directly connected to over 7,530 access networks, which represent a 5.6% increase from a year earlier. This collection of Internet service providers, telephone companies, cable network operators and mobile phone companies provides us access to the vast majority of the world's broadband subscribers and mobile phone users. This critical mass of end users makes us attractive to streaming service providers who are looking to directly connect with our customers, improving quality of service and speeds of download. At quarter's end, we have a sales force of 231 professionals who focus exclusively on the NetCentric market. We believe that this group of professionals focusing on this market segment is the largest and most sophisticated sales team of its type in the industry. Our Corporate customers have been seeing an increase in activity due to their planning for the eventual return to office of their workforces. We believe that North American cities will continue to get back to a more normal pre-pandemic level of activity as Corporate businesses have their employees return to offices. And our Corporate business will return to historical average levels of sales. We're also optimistic that there will be a pickup in a number of upgrades from Corporate customers as they've deferred many of the investments to reconfigure their internal networks. We're experiencing an improvement in our sales force productivity due to our continuing training efforts and the continued aggressive managing out of underperforming reps. This has been challenging in a remote environment, and we are looking forward to having a portion of our sales force begin to return to the office. On a sequential basis, our total sales rep head count increased to 565 and the number of full-time equivalents within that sales force declined slightly to 511 at quarter's end. Year-over-year, our total sales rep head count decreased by seven or 1.2% and the number of full-time equivalents decreased by 22 or 4.1%. Our sales force turnover at 5.6% per month in the quarter was a significant drop from the average of 6.6% per month we experienced in the first quarter, and is consistent with our long-term averages. These factors have resulted in a continued rebound in our sales force productivity with 4.5 orders installed per rep per month, a 4.7% increase from the 4.3 orders installed per rep per month in the first quarter of 2021. Overall, we believe that our sales force continues to deliver industry-leading results. I want to thank the entire sales force and the Cogent support team for all the work they've done in these difficult conditions, and I look forward to a strong second half of the year for Cogent and the return of many of our employees back to our Cogent offices on a going-forward basis. Cogent, in summary, is a low-cost provider of Internet access and transit service. Our value proposition remains unmatched in the industry. Demonstrating this low-cost position is the fact that our cost of goods sold per bit mile transmitted has fallen at a compounded rate since 2016 of 22.5%. We remain optimistic about our unique position in serving small and medium-sized businesses located in the central business districts of major North American cities. We have over 1,800 large multi-tenant office buildings on-net, comprising 980 million square feet. In response to rising vacancies in major cities, we have seen landlords aggressively lower rents, shorten lease terms and provide significant tenant improvement allowances all designed to attract new tenants into Class A office space, the footprint that we serve. We are optimistic that our Corporate business can resume its historical average growth rates as Corporate employees continue to return to offices in these buildings. Our customer churn, our bad debt and days sales outstanding are all either improved or within historical norms. We believe that these statistics represent the strong credit quality of our customer base, and the seminal importance of Cogent's services to those businesses. Our targeted multiyear constant currency growth rate of approximately 10% and our long-term targeted EBITDA margin expansion of about 200 basis points remains intact as we begin to emerge from the pandemic. Our Board of Directors has approved our 36th consecutive increase on our regular quarterly dividend, growing that dividend sequentially by $0.025 to $0.805 per share for the quarter. This represents a 14.2% growth rate in our quarterly dividend. Our consistent dividend increases demonstrate the optimism regarding the increased cash flow capabilities of our business. Upon the payment of this dividend, Cogent will have returned, through a combination of dividends and share repurchases, over $1 billion to our equity stakeholders. This is a significant accomplishment, which includes the purchase of over 10.4 million shares of our common stock over the past 15 years. We have not repurchased any stock in the second quarter, and we have over $30.4 million remaining in our current buyback authorization, which is in place through the end of this year. Our operating cash flow for the first six months of 2021 grew at 24.5% versus the first six months of 2020, and our dividend growth rate for this period was 17.3%. Thank you, and I'd now like to open the floor for questions.

Operator, Operator

Your first question is from Sami Badri with Credit Suisse. Your line is open.

George Engroff, Analyst - Credit Suisse (on behalf of Sami Badri)

Hi, Dave and Sean. This is George Engroff on for Sami, actually. Yes, thanks for the question. So Dave, in the past you've talked about the composition of your NetCentric customer base and how it's changing and driven by a variety of new providers. I guess if you could walk us through how that's progressing and impacting the business, that would be great?

David Schaeffer, Chairman and Chief Executive Officer

Yes, sure. So our NetCentric customers fall into two primary categories: those 7,530 access networks distributed around the world, and about 5,000 content-generating NetCentric customers. In fact, while we have our network in 48 countries, we have customer bases that actually purchase transport to reach the Cogent network, and our reach spans over 170 countries around the world. Their customer base is downloading content from the Internet. There's a significant asymmetry in the way in which different user groups use the Internet. End users primarily download much more than they upload, and we provide access to more content directly than any other provider. On the other side, content providers are pushing applications and content out to those customers. What they are looking to do is get as close to those customers as possible, to be as efficient as possible in using the network and achieve the lowest price points for the transmission of their content. They tend to be a more concentrated base with very large service providers dominating that segment. Today, over 71% of traffic stays on the Cogent network, meaning it goes from a paying Cogent content generator to a paying Cogent access network operator. That number has consistently increased over the past several years, and it is part of what's driving our decision to continue to internationalize our footprint. Ninety-six percent of our traffic comes from these two NetCentric segments. In the remaining 29% of the cases, in either direction, that traffic is exchanged with one of our peers. We have fewer than 24 peers globally. In those instances, we are only getting paid on one side of the transaction, meaning we get paid by our customer, but exchange that traffic at no revenue with that peer. We continue to see the two-sided traffic patterns increase for Cogent, helping drive the profitability of our NetCentric segment.

George Engroff, Analyst - Credit Suisse (on behalf of Sami Badri)

No, thank you for that. And then I guess maybe a two-parter on refinancing. Could you help us understand what is driving the difference between a $10 million in interest savings that you earned previously and the $6.5 million you noted today? And then secondarily, given the credit rating increase, is there any opportunity to refinance your 2024 euro notes?

David Schaeffer, Chairman and Chief Executive Officer

So two different comments. First of all, the differential I had noted included two things. One, we raised an incremental $55 million of capital, so the savings was partially offset by the interest on that incremental capital. Second, we are planning to enter into a fixed versus variable swap that will allow us to further reduce our interest rate, taking advantage of the low variable interest rate market and resulting in that incremental savings. So it's kind of a two-step process. We've completed the first portion of that. Now with regard to the euro notes, interest rates have continued to decline. We are continuing to monitor that. We do have a significant make-whole on those euro notes that would be about a €10 million cost to us. I think we are monitoring that, and as that breakage cost declines over the next one to two years, we will probably look to refinance those notes.

George Engroff, Analyst - Credit Suisse (on behalf of Sami Badri)

And then one last one if I could. Dave, you mentioned the continued return to office on this call despite some of the coronavirus headlines that we've been seeing lately. I would be interested to understand how the commentary from your Corporate customers differs from last quarter?

David Schaeffer, Chairman and Chief Executive Officer

So I think many Corporate customers remain cautious due to the emergence of the Delta variant. There has been revised CDC guidance, there have been indoor mask requirements placed in a number of markets, and there are a number of employees who have expanded their view of work and are looking for work-life balance that includes a hybrid work model. While that is not a direct result of the pandemic, it was clearly accelerated by it. Offsetting that is the commentary from many corporate executives that employees are more productive in offices. In a recent survey, 45% of Fortune 500 companies responded saying that employees are more productive in an office environment than in a home environment. These forces are being weighed by different companies. I think we've seen most businesses targeting after Labor Day as an inflection point. There will be variability based on geography and vaccination rates. But we are seeing a slow increase in employee return to office and an increase in traffic on those Corporate networks.

Operator, Operator

Your next question is from Phil Cusick with JPMorgan. Your line is open.

Philip Cusick, Analyst - JPMorgan

Hi Dave, thank you. Let's maybe expand on the Corporate environment improvement. Can you talk about what the conversations with customers look like? It sounds like there's some early sales indications; let's start there?

David Schaeffer, Chairman and Chief Executive Officer

Yes, sure Phil. So our sales force is trying to reach out to about 100 prospects per salesperson per day. Now they don't have that many conversations, but that's what their target is. From that, we have seen an increase in customers' willingness to engage, to begin planning for their return to office. We've seen an actual pickup with some of the early adopters in rep productivity, considering the majority of our sales force, over 70% of it, is Corporate. We're seeing heightened activity levels. We're also seeing companies realize that in a hybrid model, having a bigger connection gives them more flexibility. Sean commented around the 1-gigabit overtaking the 100-megabit product several quarters ago and continuing to outpace the growth. Most of the churn has been from the smaller customers who had the older 100-meg product. If you had asked me this question five or six weeks ago, there was a much clearer path to return to office. I think the lack of ubiquity of vaccination and the emergence of the Delta variant has caused many companies to either temporarily pause or reevaluate the reopening plans. I think there is a general consensus that after Labor Day there will be a watershed event, and we've even seen some companies be more aggressive in moving to mandatory vaccinations, which then gives them greater confidence around those employees being back in the office and therefore reaccelerating Corporate growth. It's a bumpy road. I wish I had perfect visibility, but it does appear that the three sequential quarters where we've seen the dollar value of decline in Corporate revenues is improving, and we hope that that rate of improvement is going to accelerate over the next quarter or two, and we should return back to that historic Corporate growth rate.

Philip Cusick, Analyst - JPMorgan

Can I follow up with one thing there? The slowdown or backing off on return to office, is that mostly East Coast and West Coast? Or is that in the center of the country as well?

David Schaeffer, Chairman and Chief Executive Officer

I would say it's coastal for sure: East Coast and West Coast. L.A. was the first major jurisdiction to go to an indoor mask mandate. We've seen San Francisco adopt similar policies. The East Coast was more cautious. Ironically, Texas and Florida, which are significant markets for us, had been much more aggressive about reopening; yet now they have the highest case volumes and highest hospitalization rates. There does seem to be a hope that they'll get that under control as vaccination rates in those two states are starting to rise. As President Biden indicated, those two states account for over one-third of all cases in the United States. So it is very geographically disparate.

Sean Wallace, Chief Financial Officer

And Phil, just to add to what Dave said, we've also seen a bifurcation between tech companies and financial services. It's very clear that the financial services firms want to go back 100%. Tech companies are much more flexible, and some are adopting hybrid approaches. New York City, D.C., Boston are seeing a lot more full return, while San Francisco is a little more hybrid. The other thing I might add is that these firms are focusing on getting people back to office and getting things back to normal; they are not focusing on upgrading their networks. I'd also indicate we had a conversation with a broker and they have 12 KPIs they're looking at for people and companies coming back to work, and the worst indicator, the one that had the lowest amount of take-up, is the releasing and subletting of space. That really hasn't come back, and that is obviously a big opportunity for us as new entities come into some of that space. We think our sales force will be very successful there, but we haven't seen that as yet.

Operator, Operator

Your next question is from Frank Louthan with Raymond James. Your line is open.

Frank Louthan, Analyst - Raymond James

Can you comment a little bit on the streaming services you're getting? What are the terms you're getting in those contracts? And how is the pricing relative to your base?

David Schaeffer, Chairman and Chief Executive Officer

Yes, Frank. Our most common contract remains three years. The majority of our NetCentric customers do renegotiate those contracts in term; that was the 2,700 connections that Sean referred to in his remarks, and the approximately $24.8 million of incremental revenue commitment to Cogent going forward. Most of that actually does come from streamers. We have a pretty transparent pricing model: the longer you commit and the greater the volume, the lower your pricing. I had a call just last week with an international streaming company that was looking to get the exact same price as one of the major U.S. streaming companies. I offered the identical price if they could commit to the volume, and they said they were too far behind in volume to make that kind of commitment today. So they will pay a higher price. Our average price continues to fall at about 23% annually; you saw that in this most recent quarter, where we commented both on the installed base falling at about 24% and the average new sale falling about 21%. That differential bounces around a few points quarter-to-quarter. But overall, the long-term trend of roughly 23% price decline per bit is continuing, and streamers are driving that. The final point I'd make is our ability to expand gross margins and maintain low capital intensity is a good indication of the architecture that we have chosen versus our competitors, and how we are so much more effective at capturing advances in technology than our competitors. That allows us to both price lower in the market and concurrently expand margins. Many of the companies we compete with have declining revenues and compressing margins. We're on the opposite side of that because of the architecture we've deployed.

Operator, Operator

Your next question is from Colby Synesael with Cowen. Your line is open.

Colby Synesael, Analyst - Cowen

I'll ask them all at once. First, on Corporate revenue on-net it was down about 3% sequentially, a little bit better than what we saw in the first quarter. I'm curious if you have visibility as to when you think that could start to turn positive or if it's just too difficult, particularly with the Delta variant still emerging. Secondly, as it relates to leverage targets, what are your thoughts there in terms of maybe bumping them up and how that might impact your ability to continue to grow the dividend going forward. And third, you spent, I think you said $6.2 million purchasing fiber in the quarter. Where do you think that metric trends over the next several quarters because it has been inching up a little bit versus previous quarters?

David Schaeffer, Chairman and Chief Executive Officer

Three very good questions, Colby. First, with regard to Corporate on-net growth, you are correct that it is improving sequentially. We think that trend of improvement is going to continue. We also know that if we return to full occupancy environments similar to pre-pandemic levels, we will be back to being roughly a 2% grower sequentially in our Corporate on-net business. When that will exactly happen, I am not sure. I think we are on a path to return to office, but that path is not perfectly linear and not perfectly visible to corporations. As Sean mentioned, tech companies are taking a slightly different approach than, say, law firms. I think businesses are anxious to get employees back into the office. The Delta variant has injected another layer of uncertainty. I would suspect we'll continue to see improvement over the next couple of quarters, but I don't have visibility to predict whether it's two quarters or three until we turn positive in the growth rate in that business. On leverage targets: a big portion of the increase in our reported leverage has come from currency distortion. Because we do not hedge our obligations or our revenues outside the U.S., when the euro appreciates against the dollar that injects volatility into our reported metrics. We feel comfortable with the leverage ratios that the Board has authorized. We have 36 sequential quarters of growing the dividend, and at this point we think the underlying strength of the business, even with the pandemic, should allow us to continue to grow the dividend at a similar pace into the foreseeable future. And on fiber purchases: we do not control where data centers are being built. We've seen proliferation of data center construction in newer and international markets. When we decide to light a data center, we look at whether it is carrier neutral, multi-tenanted and close to fiber we already have. Occasionally, data centers are large or significant enough that we look to expand and that has driven incremental fiber purchases. Our vendor supply chain has increased to 282 different fiber suppliers, and that drove the incremental spending. As we look at what's on the drawing board, we're comfortable that fiber expenditure should start to come down and be back in a more historical range of a couple of million dollars a quarter.

Sean Wallace, Chief Financial Officer

Colby, to add to Dave's comments, we were really happy with the execution on the $500 million note issuance at 3.5%. We'll evaluate the euros, but we will probably be around that 5 times gross leverage. If we get phenomenal execution, maybe we'll consider lower, but for now we're targeting about 5 times gross leverage.

Operator, Operator

Your next question is from Walter Piecyk with LightShed. Your line is open.

Walter Piecyk, Analyst - LightShed

Dave, I want to go back to Phil's question. I think you mentioned that five or six weeks ago your answer would have been different in terms of the sequential growth. I think Phil asked you at this conference and you had said within a few quarters you expected to get to 2% to 2.5% sequential growth in the Corporate business. Now it sounds like you're saying within a couple of quarters you hope to get just positive. Am I understanding that properly?

David Schaeffer, Chairman and Chief Executive Officer

So first, you are accurate in noting both statements. Over the past six weeks, the interjection of the Delta variant has caused many Corporate customers and prospects to delay their return-to-office plans. I don't have perfect visibility to each company's decision-making process. Based on the rate of change in companies' decisions, I am more cautious in saying that rather than getting back to normal — i.e., 2% to 2.5% sequential growth — we may first see positive growth. The Delta variant has made the recovery look more bumpy than linear, so I'm trying to be a little more cautious.

Walter Piecyk, Analyst - LightShed

Understood. So why reference Labor Day as an inflection point? That's a month away, and the daily numbers on Delta seem to be getting worse.

David Schaeffer, Chairman and Chief Executive Officer

Many companies, when surveyed, have indicated that Labor Day is a significant date for them and they are planning around it. Companies may adjust those plans depending on how the situation evolves. I am repeating the most current data available — sales force funnel data, third-party survey data, broker studies and government data. We put all of that together to make our best prediction. I won't give quarterly revenue guidance, but I will say we see the underlying business as strong and expect eventual recovery in Corporate demand. I don't believe office work is going away; if you thought that, you'd be shorting office REITs. I believe the long-term trend toward urbanization and office activity will return.

Walter Piecyk, Analyst - LightShed

Got it, Dave. Some of the unit growth in those offices was already slowing, and some of the revenue growth was supported by upgrading customers to higher revenue services. That only goes so far. I want to move on to what Tom Rutledge said on his call in terms of SDN and fiber. Could you say that you've seen no impact from Charter at all up to this point in terms of competitive impact in your business? Historically they've been SMB focused, but they seem to be moving toward enterprise.

David Schaeffer, Chairman and Chief Executive Officer

We purchase off-net loops from Spectrum and other cable companies and telcos, so as they expand fiber they can be a supplier to us. In our on-net Corporate footprint, they are not a significant competitor. They generally do not pay building license fees and generally do not pre-wire risers with fiber; consequently they are not competitive based on install times and cost of install. Regarding upgrades: there are two different points. One is that we do have customers upgrading from 100-meg to gig, and some small segment even upgrading to 10-gig in Corporate. The other is the VPN business. SD-WAN and VPLS are replacing MPLS; that replacement cycle was well underway pre-pandemic and the pandemic paused it. It is now beginning to reaccelerate, which allows Cogent to sell a second connection at the same location. Based on our network architecture versus cable providers, I feel confident our ability to offer VPN alternatives is superior and attractive to customers.

Walter Piecyk, Analyst - LightShed

Got it. And then just last question on net debt leverage at about 3.4 times, which is up from under three. Is there a limit to how high you're going to take leverage and continue to expand the balance sheet in order to pay dividend growth?

David Schaeffer, Chairman and Chief Executive Officer

We've been clear that we have a range, and the Board will reevaluate it if appropriate. A large portion of the increase in reported leverage came from currency appreciation of the euro. We don't control currency fluctuations. We do believe we have sufficient cash flow and asset base to take advantage of lower-cost capital when available. Will we raise the target? I don't know; we'd look at the cause. For context, our net leverage target is 2.5 to 3.5 times net.

Walter Piecyk, Analyst - LightShed

So you're at the high end?

David Schaeffer, Chairman and Chief Executive Officer

We're above the median. We were below earlier. We take a measured long-term approach and consider the cause of any increase in leverage. If it's currency distortion that's different than operational underperformance.

Operator, Operator

Your next question is from Nick Del Deo with MoffettNathanson. Your line is open.

Nick Del Deo, Analyst - MoffettNathanson

Good morning. Regarding the Corporate side, is there anything you have your salespeople doing differently than normal to stay especially close to customers and prospects such that they'll be ready to catch them when those businesses are ready to buy rather than letting those opportunities slip? Or is it just the sheer volume of calls you talked about that does the trick on that front?

David Schaeffer, Chairman and Chief Executive Officer

Running the sales force in a remote environment was necessary to protect health, but it was challenging to keep activity levels high because many customers were remote as well. As IT departments and some employees begin to return to office, there's a lot more engagement. One leading indicator we track is whether the IT department has returned to the office. Our goal is to touch every potential prospect in an on-net building once a month, but we don't always achieve that because we don't have enough salespeople and some prospects haven't been willing to speak. Over the last couple of quarters we've seen an increase in call activity per rep, which is now translating into higher installs per rep. It's a gradual ramp.

Nick Del Deo, Analyst - MoffettNathanson

Okay, that's helpful. And maybe one on NetCentric: when I look at overseas markets where you don't yet have an on-net presence, India stands out. It's a big country, early in streaming adoption, and presumably not hostile to a foreign carrier like Cogent. Is that on your radar, or are there hurdles such that serving Indian customers via Europe will remain preferable?

David Schaeffer, Chairman and Chief Executive Officer

India is definitely on our radar. Today, we are a primary upstream provider to Jio, which is the largest operator in India. The vast majority of the Indian population is mobile-first. The Indian licensing process is bureaucratic and lengthy. We applied for a license over a year ago and are still in a review phase. We expect to get a license, but it's probably at least a year away based on discussions with counsel in India. We tried a similar approach in Russia years ago and ultimately served Russian carriers from nearby hubs like Helsinki, Stockholm or Frankfurt because of local restrictions. For most Indian customers today, we serve them via nearby hubs; we have identified cable capacity but we are waiting on license approval before establishing a direct presence.

Operator, Operator

And that concludes the Q&A session for today. I will turn the conference call back to Mr. Dave Schaeffer for closing.

David Schaeffer, Chairman and Chief Executive Officer

Thank you very much. I'd like to thank everyone. Hopefully we answered all your questions. We appreciate your support. I want to thank the entire Cogent team for delivering in these difficult times, and hope everyone stays safe and we can actually see each other soon. Take care. Bye-bye.

Operator, Operator

Ladies and gentlemen, this concludes today's conference call. Thank you for your participation. You may now disconnect. Stay safe and goodbye.