Cogent Communications Holdings, Inc. (CCOI) CEO Dave Schaeffer on Q3 2018 Results - Earnings Call Transcript

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About: Cogent Communications Group, Inc. (CCOI)
by: SA Transcripts

Cogent Communications Holdings, Inc. (NASDAQ:CCOI) Q3 2018 Results Earnings Conference Call November 1, 2018 8:30 AM ET

Executives

Dave Schaeffer - Chairman and CEO

Tad Weed - CFO

Analysts

Philip Cusick - JP Morgan

Walter Piecyk - BTIG

Greg Williams - Cowen and Company

Mike McCormack - Guggenheim Partners

Brett Feldman - Goldman Sachs

Matthew Niknam - Deutsche Bank

Nick Del Deo - MoffettNathanson

Timothy Horan - OPCO

Brandon Nispel - KeyBanc Capital

Michael Funk - Bank of America

Operator

Good morning and welcome to the Cogent Communications Holdings Third Quarter 2018 Earnings Conference Call. As a reminder, this conference call is being recorded, and it will be available for replay at www.cogentco.com. [Operator Instructions]

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

Dave Schaeffer

Thank you, and good morning to everyone. Welcome to our third quarter 2018 earnings conference call. I’m Dave Schaeffer, Cogent’s Chief Executive Officer, and with me on this morning’s call is Tad Weed, our Chief Financial Officer.

We are pleased with our margin results for the quarter and continue to be optimistic in the underlying strength of our business and the outlook for the remainder of 2018 and beyond. Our EBITDA margin for the quarter increased by 340 basis points to 36.1% from the third quarter of 2017, representing the highest EBITDA margin percentage in our 19-year history. Our EBITDA for the quarter increased year-over-year by $6.7 million, which represents a 16.7% annual increase from the third quarter of 2017. Our gross margin for the quarter continued its expansion from the last quarter and increased by 160 basis points from the third quarter of 2017 to 58.2%.

On a constant currency basis, we achieved sequential quarterly revenue growth of 1.1% and year-over-year revenue growth for the third quarter of 6.2%. Our quarterly sales rep productivity, as measured on a monthly basis, improved to 5.8 units installed per full-time equivalent rep per month, a productivity rate that was again significantly above our long-term historical average productivity of 5.1 units per full-time equivalent rep per month. For the quarter, our year-over-year traffic growth accelerated and we achieved sequential traffic growth of 10% and year-over-year traffic growth on our network of 46%.

During the quarter, we returned $24.8 million to our shareholders through our regular quarterly dividend. At quarter end, we had a total of $41.5 million available in our stock buyback program and our board further extended that program through the end of 2019, so December 31, 2019.

During the quarter, we issued an additional $70 million of par value of our senior secured notes. We did not repurchase any stock in the quarter. Our gross leverage ratio increased to 4.46% and our net leverage ratio actually decreased to 2.89% from 2.93%. During the quarter, we transferred $169 million of our accumulated builder basket from our operating companies, up to the holding company level, Cogent Holdings. Our cash held at holdings was $162 million at the end of third quarter 2018. That cash is unrestricted and available to be used for the payments of dividends and/or buybacks.

We remain continued, confident in the growth potential of our business and the cash-generating capabilities of our business. As a result, as indicated in our press release, we’ve announced yet another $0.02 per share increase in our regular quarterly dividend from $0.54 per share per quarter to, from $0.54 per share per quarter to $0.56 per share per quarter. This represents our 25th consecutive sequential increase in our quarterly dividend.

Throughout this discussion, we will highlight several operational statistics. I will review in greater detail some of the operational highlights and trends and Tad will provide some additional detail on our financial performance. Following our prepared remarks, we’ll open the floor for questions and answers.

Now I’d like Tad to read our solid safe harbor language.

Tad Weed

Thank you, Dave, and good morning everyone. This earnings conference call includes forward-looking statements. These forward-looking statements are based upon our current intent, belief and expectations. These forward-looking statements and all other statements that may be made on this call that are not historical facts are subject to a number of risks and uncertainties and actual results may differ materially. Please refer to our SEC filings for more information on the factors that could cause actual results to differ. Cogent undertakes no obligation to update or revise forward-looking statements.

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

I will turn the call back over to Dave.

Dave Schaeffer

Hey, thanks, Ted. Hopefully, you’ve had a chance to review our earnings press release. Our press release, includes a number of historical metrics reported on a consistent basis. Our targeted guidance for long-term full-year revenue growth is in the range of 10% to 20%. Our long-term EBITDA annual margin expansion targeted guidance is an, for an annual improvement of approximately 200 basis points.

Based on the results of the first 9 months of this year, we expect that our full-year revenue growth will be below our targeted range. However, we do expect our annual EBITDA margin expansion to be above our target, and will improve by more than 200 basis points. Our revenue and EBITDA guidance are intended to be long-term goals and are not intended to be used as specific quarterly guidance.

Now I’d like to turn it over to Tad for some additional details on the quarter.

Tad Weed

Thanks again, Dave, and again good morning to everyone. I’d also like to thank and congratulate the entire Cogent team for their results and continued hard work and efforts during another busy and very productive quarter for the company.

Some comments on revenues, corporate and NetCentric in customer connections. We analyze our revenues based upon network type, which is on-net, off-net and non-core, and we also analyze our revenues based upon customer type. And we classify all of our customers into 2 types, NetCentric customers and corporate customers.

Our NetCentric customers buy large amounts of bandwidth from us and carrier-neutral data centers and our corporate customers buy bandwidth from us and large multi-tenant office buildings. Revenue from our corporate customers grew sequentially by 2.7% to $85.5 million and grew year-over-year by 11.8%. We had 44,552 corporate customer connections on our network at quarter end. Quarterly revenue from our NetCentric customers declined sequentially by 3% and also declined year-over-year by 4%. We had 33,823 NetCentric customer connections on our network at quarter end.

Our NetCentric revenue growth experiences significantly more volatility than our corporate revenues, due to the impact of foreign exchange, which was negative for the quarter and year-over-year, customer size and other certain, other seasonal factors. Revenue in customer connections by network type. Our on-net revenue was $93.8 million for the quarter, which was a sequential quarterly increase of 0.8% and a year-over-year increase of 6.7%. Our on-net customer connections increased by 3% sequentially and by 13.5% year-over-year. And we ended the quarter with over 67,300 on-net customer connections on our network in our 2,635 total on-net multi-tenant office buildings and carrier-neutral data buildings.

Our off-net revenue was $36.2 million for the quarter, which was a sequential quarterly increase of 0.3% and a year-over-year increase of 3.8%. Our off-net customer connections increased sequentially by 2.1% and by 10% year-over-year. We ended the quarter serving over 10,600 off-net customer connections and over 6,600 off-net buildings and these buildings are primarily located in North America. Some comments on pricing. Consistent with historical trends, the average price per megabit of our installed base decreased for the quarter. However, the average price per megabit for our new customer contracts again increased due to customer mix.

However, we do expect on a long-term basis that the price per megabit for new contracts will decline. The average price per megabit for our installed base declined sequentially by 10.1% to $0.78 and declined by 27.6% from the third quarter of 2017. The average price per megabit for our new customer contracts for the quarter increased sequentially by 7.5% to $0.42 and decreased by 22.7% for our new customer contracts that were sold in the third quarter of 2017. Some comments on ARPU. Our on-net and off-net ARPU both decreased sequentially for the quarter.

Our on-net ARPU, which includes both corporate and NetCentric customers was $471 for the quarter, which was a decrease of 2.2% from last quarter. Our off-net ARPU, which is primarily corporate customers was $1,140 for the quarter, which was a decrease of 1.9% from last quarter.

Some comments on churn. Our on-net and off net churn rates were stable during the quarter. Our on-net unit churn rate was 1% for the quarter, which was the same as last quarter and our off-net churn rate was 1.2% for the quarter and this rate also was the same rate as last quarter.

Some comments on NetCentric move and change orders. We offer discounts related to contract term to all of our corporate and NetCentric customers, and we also offer volume commitment discounts to our NetCentric customers. During the quarter, certain NetCentric customers took advantage of our volume and contract term discounts and entered into long-term contracts for over 2700 customer connections and that increased their revenue commitment to Cogent by over $23.6 million.

Some further comments on EBITDA and EBITDA as adjusted. Our EBITDA and EBITDA as adjusted are reconciled to our cash flow from operations in all of our press releases for each quarter. Seasonal factors that typically impact our SG&A expenses and consequently our EBITDA and EBITDA as adjusted, include the resetting of payroll taxes at the beginning of each year for the United States, annual cost of living or CPI increases, the timing and level of our audit and tax services and net neutrality fees and the timing and amount of gains in our equipment transactions and finally benefit plan annual cost increases, primarily in the U.S.

Our quarterly EBITDA increased by $1 million or by 2.2% sequentially to $46.9 million and increased year-over-year by $6.7 million or 16.7%. And our quarterly EBITDA margin increased by 60 basis points sequentially to 36.1% and increased year-over-year by 340 basis points. As Dave mentioned, our EBITDA margin percentage of 36.1% this quarter, represents the largest EBITDA margin percentage in the company’s history. Our EBITDA as adjusted, was not materially different than EBITDA, and it includes gains related to our equipment transactions. Our quarterly EBITDA as adjusted increased by $1.1 million or by 2.3% sequentially to $47.4 million and increased year-over-year by $6.8 million or by 16.6%. Our EBITDA as adjusted margin increased sequentially by 60 basis points to 36.4% and increased by 340 basis points year-over-year. Our equipment gains which are included in our EBITDA and as adjusted have recently been declining and were $0.4 million for the quarter, which is the same amount as the third quarter of last year and the same amount as last quarter.

Some comments on earnings per share. Our basic income per share was $0.18 for the quarter, up from $0.15 last quarter and $0.08 for the third quarter of last year. Our diluted income per share was $0.18 for the quarter, up from $0.14 last quarter and $0.08 for the third quarter of 2017.

Some comments on foreign currency impact. Our revenue reported in -- is reported in U.S. dollars and earned outside of the United States and that amount was about 23% of our total revenues. About 17% of our revenues this quarter were based in Europe and about 6% of our revenues were related to our Canadian, Mexican and Asian operations. Continued volatility in foreign currency exchange rates can materially impact our quarterly revenue results and our overall financial results. The foreign exchange impact in our reported quarterly sequential revenues was a negative $600,000 and the year-over-year foreign exchange impact on our reported quarterly revenues was a negative $400,000. Our quarterly revenue growth rates on a constant currency basis were 1.1% sequentially and 6.2% year-over-year. And the impact of foreign exchange is primarily an impact on our NetCentric revenues.

The average euro to U.S. dollar rate so far this quarter is $1.15 and the average Canadian dollar exchange rate is $0.77. Should these average foreign exchange rates remain at current leverage levels for the remainder of our fourth quarter, we estimate that the foreign exchange conversion impact on our sequentially quarterly revenues for the fourth quarter will be a negative $200,000 and that the year-over-year impact on our quarterly revenues is estimated to be a negative $600,000.

Customer concentration, we believe that our revenue and customer base is not highly concentrated and our Top 25 customers represented less than 6% of our revenues for the quarter.

Some comments on CapEx. Our CapEx for the quarter was comparable to the second quarter of 2018. Our capital expenditures were $12.1 million this quarter, compared to $10.9 million for the third quarter of 2017 and $12 million for the second quarter of 2018.

Some comments on capital lease payments. Our capital lease IRU obligations are for long-term dark fiber leases and typically have initial terms of 15 to 20 years or longer, and often include multiple renewal options after the initial term. Our capital lease IRU fiber obligations totaled $161.6 million at quarter end, and at quarter end, we had IRU contracts with a total of 237 different suppliers of dark fiber. Our capital lease principal payments under these IRU agreements were $2.1 million for the quarter and if you combine our capital lease payments with our CapEx, there was a decrease sequentially by 9.8% and that total was $14.2 million in this quarter, compared to $15.7 million last quarter and $14.2 million for the third quarter of 2017.

Some comments on cash and operating cash flow. At quarter end, our cash and cash equivalents totaled $284.6 million, and for the quarter our cash increased by $60.3 million. We received net proceeds of $69.9 million from the issuance of our $70 million of senior secured notes during the quarter in August, We returned $36.7 million of capital to our stakeholders during the quarter. And during the quarter we paid $24.8 million for our regular quarterly dividend payment and $12 million was spent on the semiannual interest payment on our debt, including our new notes.

Comments on debt ratios. Our total gross debt including, our capital lease IRU obligations, was $808.3 million at quarter end and our net debt was $523.8 million. Our total gross debt to trailing last 12 months EBITDA, as adjusted was 4.46 at quarter end and our net debt ratio was 2.89.

Finally comments on bad debt and accounts receivable. Our bad debt expense was only 0.7% of our revenues for the quarter and our days sales outstanding for worldwide accounts receivable was only 24 days, and again I want to thank and recognize our worldwide billing and collection team members for continuing to do a fantastic job in serving our customers and collecting from our customers.

And now I’ll turn the call back over to Dave.

Dave Schaeffer

Hey, thanks, Ted. Now for a few comments about the scale and scope of our network. At the end of the quarter, we had over 934 million square feet of multi-tenant office space in North America, directly on our network. Our network consists of over 32,500 miles of metropolitan fiber and 57,400 miles of intercity fiber. Cogent remains the most interconnected network in the world. We today directly connect to 6,510 networks, less than 30 of these are settlement-free peers and all of the remaining networks are Cogent transit customers. We are currently utilizing approximately 26% of our lit capacity. We routinely augment capacity in parts of our network to maintain these lower utilization rates. For the quarter, we achieved sequential traffic growth on our network of 10% and our year-over-year traffic growth improved to 46%.

We operate 52 Cogent-owned data centers with 585,000 feet of raised floor space and we are currently utilizing approximately 32% of that capacity. Our rep turnover rate in the quarter was 5.1% per month, again better than our long-term attrition rate and the sales force of 5.7%. Our sales rep productivity in the quarter, as measured on a monthly basis, was 5.8 units installed per full-time equivalent per rep, which is substantially above our historical long-term average of 5.1 units per rep per month. We ended the quarter with 453 reps selling our services, which is a significant increase from the 438 sales reps that we had at the end of the second quarter of 2018.

Cogent remains the low-cost provider of Internet access transit services and other IP services. We remain unmatched in the industry. Our business remains completely focused on the Internet IP connectivity and data center co-location services, which are a necessary utility for our customers. Beginning in April of this year, we began selling SD-WAN services. These have not yet materially been a contributor to our revenues.

We expect our multi-year constant-currency long-term growth to be consistent with our historical annualized growth rates of between 10% and 20% on a constant-currency basis, and we expect our long-term EBITDA margin expansion on an annualized basis to be approximately 200 basis points.

Our Board of Directors has approved yet another increase in our regular quarterly dividend, increasing that dividend by $0.02 a share quarterly to $0.56 per share per quarter.

Our dividend increase demonstrates our continued optimism in both the growth in our business and the cash flow capabilities of our business. We will be opportunistic about the timing and purchase of our common stock in the public markets. At quarter end, we had $41.5 million remaining under our current buyback authorization and our board has extended that authorization through December 31, 2019. We are committed to returning an increasing amount of capital to our shareholders on a regular basis.

Now I’d like to open the floor for question.

Question-and-Answer Session

Operator

Thank you. [Operator Instructions] And our first question comes from Philip Cusick with JP Morgan. Your line is now open.

Philip Cusick

Reps are up, but we’ve seen a couple of quarters now of full-time equivalents down and now down year-over-year. Productivity as well hasn’t returned to its highs in early ‘17. How should we think about these numbers and the impact on sales as sales have slowed down as well? Is the size of the opportunity, smaller?

Dave Schaeffer

Sure, Philip. Thanks for the question. So first of all, we are committed to growing the total number of sales reps between 7% and 10% per year. We will do that this year and next year. Secondly, we have not relaxed any of our criteria for reps continuing with Cogent and while many reps do succeed, some do not and that results in turnover. Our average rep tenure actually continues to increase, where the average quota-bearing reps at the beginning of the year was here for about 27.7 months, that has actually increased towards at the end of the third quarter, 29.2 months, meaning those reps that are succeeding, are continuing to stay here longer and longer.

We have revamped and improved our training program, which I think will continue to help us keep reps longer. We also have experienced productivity that is substantially above the long-term average. You are correct that we are not at all-time highs, but the 5.8 units per full-time equivalent is actually substantially above the 5.1 average. We feel that the TAM remains very large, the total addressable market, and we still are understaffed relative to the number of reps that we have. We did experience slightly greater declines in revenue per bit in the quarter than our historic average. We do think we will continue to see about 23% per year as the average price decline for our NetCentric revenues. Our corporate revenues performed quite well in the quarter with 2.7% sequential growth and 11.8% year-over-year growth and roughly three quarters of our sales force is focused on that market, primarily in North America. The business spend on dedicated Internet access is about $9 billion a year. The business spend on VPN services of all different technologies is about $45 billion a year. We touched 10% of that market on-net, another 45% of that market off-net, with fiber that we can buy from one of our 90 different off-net suppliers that have about 1,030,000 buildings fiber connected. So we feel that we have plenty of ample addressable market for our corporate sales and they performed quite well. The shortfall in revenue was really on the NetCentric side. That market remains a $1.5 billion TAM. We continue to take share growing our traffic nearly double the rate of the market, but most of the growth has come in the last couple of quarters from our very largest customers who get the very lowest prices. So that has resulted in the decline in revenue. We do think over the long term, we’ll see a broadening out of the growth in NetCentric and therefore return to our more historical NetCentric growth rates of between 9% and 10%.

Philip Cusick

If I can follow up quickly, are you having a harder time finding quality new hires, because of the overall strong economy and deem to compensation go higher?

Dave Schaeffer

So our compensation I think remains very competitive. We actually saw the number of applicants for jobs at Cogent increase. So for the first 9 months of this year, we’ve had about 7800 applicants for jobs at Cogent in sales. We ultimately extended offers to about -- little over a 100 of those applications, so we remain capable to being very selective. I will say that the steepness to the funnel has increased, meaning a lot of the applicants we’re getting are potentially lower quality, so we need to be more selective in the screening process. Last year, over the same period, same 9 months, we only had about a little over 6,000 applicants, so we actually got almost 20% more applicants. Yet we only hired about 10% more people.

Operator

And our next question comes from Walter Piecyk with BTIG. Your line is now open.

Walter Piecyk

Thanks. Dave, I wanted to go back on the NetCentric side. I guess currency had a solid impact, right, and 3% sequential is probably less than 2% on a constant currency since that’s for your international traffic which is still down. Last quarter, you talked about some of these customer connections, I guess [indiscernible], didn’t seem to happen this quarter. So obviously you’re getting price pressure. If these volume discounts that you’re referencing in your prepared comments, for apparently these large customers. The way you composition it in the opening remarks was that these are new, I guess, I don’t know, multi-year maybe multi-month or quarter contracts, but should some of that help abate the price pressure going into next quarter. So we won’t see a third quarter of sequential declines in NetCentric?

Dave Schaeffer

So 3 different questions Walt. So first of all, on FX you are correct. It entirely is impacting NetCentric. It has virtually no impact on corporate, even though we have about 6% of our corporate business in Canada, it’s just not material. We didn’t have a material fluctuation. Secondly, there are really 2 different ways in which price can decline. The first way is an annual reduction in the list price of services and that has declined pretty consistently around 22%, 23% on the NetCentric base. The second way prices can decline is by volume. And what we have seen is most of the growth and traffic and that has accelerated, has come from the very biggest companies, the FAANG companies and some of the other hyperscale providers on the content side and some of the very largest access networks. So what has compounded the normal 22%, 23% price decline has been a mix shift within the base. It is not further reductions for those customers. They’re declining at about the same rate as the smaller customers, but more of our growth over the last few quarters have come from the very largest customers. The Internet has gone through waves of consolidation and then fragmentation. We are experiencing most growth from these large customers which is concentration. But at the end of the day, we feel comfortable that our NetCentric business will return to its historic revenue growth rate now that we’ve seen traffic return to its historic growth rate. And in terms of grooming of circuits, that really doesn’t have an impact on NetCentric revenue, it can impact the port count. And we continue to see a lot of our larger customers groom away from multiple 10-gig connections within a given data center to fewer 100-gig connections as the customer equipment to support 100-gig becomes widespread. It’s really just a grooming exercise to reduce cross-connect costs.

Walter Piecyk

So when a company like Akamai talks about their bandwidth costs overall being down, is that just because they’re not growing as fast and the price declines are normal for some of these companies, whether it’s Akamai or others and they are just not growing enough to offset the normal price declines that are in the market? Because there’s been some commentary about absolute bandwidth or declines in bandwidth costs.

Dave Schaeffer

So total bandwidth costs continue to decline at about 22%, 23% per year. The CDN Akamai that you referenced is a Cogent customer. Their input cost, their purchase from Cogent declines. If their business grows faster, they become a bigger a customer and therefore the bigger they are the lower their price per megabit. So they can actually see their input costs decline even faster if they grow relative to the market. If they are growing slower than the market, then their relative costs will not decline as rapidly and others that are growing faster will decline at a faster rate, because the more you buy, the lower your prices are. So the very largest access networks globally and the very largest content companies get the very lowest prices from Cogent.

Operator

And our next question comes from Colby Synesael of Cowen and Company.

Greg Williams

It’s actually Greg Williams sitting in for Colby. Dave, I want to talk about your EBITDA margin, it’s very solid. Just wondering if there’s any onetime benefits in either COGS, SG&A or other, and longer term your 200 basis point target. Let’s assume your top line doesn’t accelerate back to the 10% goal, how confident are you then in the 200 basis point EBITDA goal? Do you need the top line acceleration or can you talk about taking costs out of the business?

Dave Schaeffer

Sure. Thanks, Greg. First of all, this was not a onetime event in the margin expansion. If you go back and look at last 5, 6, 7 quarters, you’ve seeing consistent improvement both in gross margin and SG&A efficiency. There are no significant onetimers. On the COGS side, we’re getting more operating leverage out of the network.

Our on-net growth is faster than our off-net growth, which obviously helps margin. Our EBITDA contribution margins are actually close to 60%, versus the long-term average of 44% and that’s as a result of slowing down our footprint expansion. We do feel comfortable this year we will beat the 200 basis points that we’ve laid out. We’ve clearly done that on the 9 month comparable, 9 months versus 9 months.

As we go forward, we expect our EBITDA margins to continue to grow from the roughly 36.4% today to approximately 50% in a mature state. That means, we’ve got probably about another 7 or so years at a 200 basis point per year expansion. We’ve grown below trend line for the past 5 or 6 years. If we look at our long-term trend line of growth, it’s actually 10.7% which is at the low end, but within our guidance range.

For the past 5 years, our growth has averaged closer to 7%. Yet, we have been able to deliver the margin expansion. We feel comfortable that even if we are below our targeted range, which we do not anticipate over the long run being, we will still be able to deliver the 200 basis points.

Operator

And our next question comes from Mike McCormack with Guggenheim Partners. Your line is now open.

Mike McCormack

I guess just a couple. From a competitive standpoint, any change you’re seeing in the marketplace from Level 3/Century, whether or not the spectrum providing opportunity or them getting more aggressive on pricing anything like that. And the second one on the buyback side. When you evaluate that, what are the sort of key drivers in the decision-making process there? Thanks.

Dave Schaeffer

Thanks, Mike, for both questions. So we see CenturyLink in our corporate business within their geographic footprint of the ILEC. We do not see them significantly out of footprint, just as we see Verizon and AT&T and Bell Canada and their respective footprints. I think, those companies remain committed to high priced MPLS services are reluctant to cannibalize that revenue and focus just on Internet access or VPLS services. So on the corporate side, we have seen no real change in competitive behavior. And if you look at the business wireline revenues of all of those 4 competitors, they are all negative, while our corporate revenue growth is 12%.

So actually, our growth differential to the market is widening. On the NetCentric side, we absolutely continue to see Level 3, Telia and NTT as our primary competitors. Level 3 has deemphasized the sale of transit and have become less aggressive since the acquisition with CenturyLink. They are actually have fallen in global rankings and today it’s ourselves and Telia that kind of battle it out for number 1 and number 2, with Level 3 moving from number 1 down to number 3 and NTT remains fourth in those global rankings. I don’t think that is going to change. Transit is a scale business and one that you need to be very specialized in and I think that’s why we’ve been able to grow our traffic at double the rate of the market, even though a lot of that growth has come from the largest customers I had mentioned.

Now with regard to your second question of mechanisms of return of capital and particularly buyback, we are committed to returning the capital and over the past decade, we have shown our commitment to do that to our equity investors. Over the past 6 years, dividends have increasingly become the primary means of that return. As we think about buyback, we think it is a two-part analysis. The first is to measure the discount in our stock versus the intrinsic value of the business. And we are convinced that our stock trades at a discount to a DCF value of our business. The second is to try to capture market volatility. And we have been in a period of low volatility only in the past month or so.

We’ve seen volatility return to the market and Cogent’s volatility, while it had been greater than that of the market, has fallen to being less of that average of the market. So, we want to capture market volatility. And we have been in a period of low volatility only in the past month or so. We’ve seen volatility return to the market and Cogent’s volatility, while it had been greater than that of the market, has fallen to being less of that average of the market. So we want to capture some of that volatility. We have a buyback authorization. We will use it when we get those 2 conditions met, and we are also committed to growing the dividend. So I think the minor reduction in our net leverage in the quarter, going from 2.93% to 2.89%, I think, shows people that we’re committed to maintaining a rational balance sheet and leverage and returning capital. And the board will consistently interact with shareholders and we’ll evaluate whether or not we need to address either changing the rate of dividend growth and or supplement it with more buybacks.

Operator

Thank you. And our next question comes from Brett Feldman with Goldman Sachs. Your line is now open.

Brett Feldman

Hi, thanks for taking the question. If you don’t mind, I like to go back talking about NetCentric traffic growth. I mean, you made the point that growth has accelerated. It’s actually nearly doubled in -- since the beginning of last year and it is back to, I guess, its historical average and you acknowledged you’re still not seeing revenue growth back at its historical average. And so my question would be, what has to happen in order for the revenue trajectory to improve, meaning, if you’re going to be in extended period, where most of the traffic growth is coming from the biggest customers who get the lowest prices, do you need to see another doubling of the rate of traffic growth to actually get back to your historical revenue trends or do you think that it’s probable that something else, another use case for the Internet, whether it’s 5G or something else that could come along that can maybe get you there with a better pricing trajectory? Thanks.

Dave Schaeffer

Thanks for your question, Brett. So our long-term average growth rate is just at 50%, so 46% is clearly a huge improvement from where we were a year, year and a half ago and just about at normal growth rate. Our price declines on the installed base are actually slightly worse at 27% and it’s this mix where over the past year and a half, most of our growth has come from our biggest customers. Now we like growth from both big and small customers. There has been an increased concentration of traffic on the Internet and quite honestly, we don’t control that. If that continues, we will have to see a further acceleration in unit growth to be able to return to that 9% to 10% NetCentric growth rate. We also know that, as access users get improved service, whether it be through better DOCSIS 3.1 deployment, whether it be through better ADSL, or increasingly wirelessly the migration from 4G to 5G, that ends up broadening the application set and increasing the amount of time that people spend online. So while we do not directly participate in the 5G rollout, we are a beneficiary of that as customers spend more minutes per day using data and greater data rates per minute, which should accelerate traffic growth. And it’s why we don’t give specific quarterly guidance. We just don’t have the visibility on that granular of a basis. But we remain committed to the belief that the Internet is still at its early stages of growth and has not hit a law of large numbers or maturation point, and I think, just the growth in traffic kind of validates that thesis. Applications for the users could be more augmented in virtual reality, Internet of Things, sensor technology, whether it’s self-driving cars and/or other applications of remote data collection, all of these things that are kind of part of this virtuous cycle of better connectivity i.e. 5G and better wireline, and then better applications should help our NetCentric business improve.

Operator

And our next question comes from Matthew Niknam with Deutsche Bank.

Matthew Niknam

I’ve one follow-up and then one broader question. First, just the follow-up on the shareholder return question. Do rising rates change, at all, the way you’re thinking about broader capital allocation strategy or shareholder returns? And then my second question’s more around international. I think at the Analyst Day, the talk that the company had been looking at some international markets for the corporate business. Can you share any updates on the thought process there and what kind of factors you’re considering as you evaluate the decision? Thanks.

Dave Schaeffer

Hey, thanks for Matt, for both questions. So first of all, we absolutely have to look at interest rates and evaluating our capital structure and the return of capital. We, I think, have a reasonable cost of borrowing and while interest rates have risen, our cost of debt capital has not risen significantly. In fact, we sold our most recent tack-on to our bond offering at a premium to its initial offering price in a lower interest rate environment. So we believe that we will continue to have access to the debt markets at a reasonable cost. Secondly, for the investor, they have alternatives to buy riskier debt assets at higher yields and therefore, we understand that our dividend yield has to be sufficiently attractive and I think it’s both the high yield and the compounded growth of 25 consecutive quarters that gives us a lot of confidence that yield investors will continue to support Cogent. We know that markets will hit pockets of volatility and we remain poised to use buybacks. But we absolutely are committed to taking the cash that we are producing and returning it to shareholders through either mechanism, as tax efficiently as we possibly can. And to just remind investors, a lot of our dividend has historically been classified as return of capital, which has added benefit to the shareholder of not being immediately tax. Now with regard to your international corporate expansion, Canada remains a significant market for us with about 6% of our corporate business in Canada. Outside of Canada, we really are a NetCentric company in the 42 or 41 other countries other than U.S. and Canada that we operate in. Many of them do not have the correct demographics. Some of them do. Some have regulations that do not incent our business model, meaning, international carrier or a dumb pipe model. We continue to evaluate those. We do think that some of the Latin American and Asian markets that we initially expand into with NetCentric could be ripe for a corporate expansion. But we have not made any final decisions at this point to broaden our corporate business to any of those Asian or Latin American markets. We do not see Europe as a significant corporate market for us, just because of the building demographics.

Operator

And our next question comes from Nick Del Deo with MoffettNathanson.

Nick Del Deo

I actually have two that tie into the questions that were previously asked. First on the, regarding the margin commentary you gave a few moments ago, I wanted to drill into SG&A expense trends in particular, because those have been pretty solid. Are there any drivers there worth calling out, though even if it’s not onetime in nature, but like real estate rationalization or ASC 606 related? I am trying to get a sense for how long you can hold SG&A growth at these sorts of level?

Dave Schaeffer

I’m going to give Tad the 606 one for sure.

Tad Weed

Yes. We did see a benefit this year, which was primarily in the first quarter from lower commission expense, from the, having to capitalize essentially commissions as prepaid of about $1 million. Absent that, in the SG&A, there are no material onetime amounts either way, either up or down. It’s really a driver of headcount and the level of bad debt expense or the material variable SG&A expenses. And then the ones I mentioned in the script, we have tax increases in the first quarter and the variability of just timing of audit work and those sort of things. But those are normal, but the only out-of-normal adjustment this year was in the first quarter and was about $1 million related to the SG&A expense for the prepaid commission.

Dave Schaeffer

And in terms of rationalization Nick, I mean, we constantly look at the roughly 90 facilities that we rent around the world, 52 of those are data centers, the remainder are sales offices and sometimes a data center also has a co-located sales office. And in a softer real estate market, we have been able to lower some of our base rents, which has had some help. But I would not say there are a material contributor, but every little bit helps. And there’s kind of like no one item that really has resulted in better SG&A. The question came up earlier about slightly higher turnover, Phil’s question, on the difference between total reps and full-time equivalents and again remaining disciplined about managing out underperformers, I think, helps us hold SG&A costs flat as well.

Nick Del Deo

And then second, kind of tied into Matt’s question on the international, I was looking at your network map yesterday and I guess, sometime over the past year or so, it looks like you’ve added a route between Europe and Asia, you’ve added some transpacific links including one to Australia. You added a route into Brazil. What’s the background there? If you’re not moving into corporate for this foreseeable future, I guess, it ties into NetCentric, some interest in the background there?

Dave Schaeffer

Yes, it is today driven entirely by NetCentric. We did expand into Latin America and to Australia in the past year and probably in the past 3 years, more expansion in Asia-Pac.

So first of all, the Internet is becoming more global. When Cogent got started 19 years ago, 85% of the Internet was resident in the U.S. Today, that’s down to below 34%, and at some point we realized that only be 4% of global Internet traffic will come from the U.S. because we’re only 4% of the people in the world. We’re not there yet, but these other markets are experiencing faster growth rates. We have an, we’ve had for a number of years, a number of Australian, Asian and Latin American customers. They were forced to reach us in the U.S. or in Europe. As the cost of transoceanic transport came down, and as their markets grew, we made the decision to expand into that footprint to, one, to serve the customers we already had. But secondly, to be able to reach down to the next layer of customers in those markets. It’s usually the smaller customers who can’t afford to buy their own transoceanic capacity and by extending into that market, we can now go downmarket to a lot of those smaller local ISPs or smaller content companies. And I think over the next several years, you’ll see us continue to evaluate markets, look at the cost of transport, and the regulatory framework. It’s no secret that for 6 years, we continued to evaluate expanding the network into Russia for example, and eventually just gave up based on the political climate and the lack of regulatory certainty.

Operator

Our next question comes from Timothy Horan with OPCO. Your line is now open.

Timothy Horan

Dave, just two quick ones. Can you just talk, I guess, I’m a little confused about the pricing environment. Maybe can you talk about the on-net corporate customer pricing environment? Are you seeing pricing pressures from competition? And secondly, if you’re seeing a little bit less competition in the on-net IP transit business, why couldn’t prices on improve there, the trends there. And just remind me the historical growth rate, I heard the 50% on the volumes and the price declines historically has that been in the 23%, 24% range?

Dave Schaeffer

Yes, so let me take all 3 questions. So first of all, with regard to the on-net corporate footprint, we have seen the rate of price decline be relatively consistent at about 5%, 6% per year, primarily driven by contract lengthening because we offered discounts to corporate customers for longer-term contracts. Partially offsetting that has been some customers in the corporate footprint, moving from just 100-meg connections to gig, even though they may not need that additional bandwidth, when it’s available some will take it.

So about 7% of corporate customers today do buy gig connections, which partially offsets that contract lengthening. But that kind of 5%, 6% year-over-year decline for on-net corporate feels about right. For the off-net corporate, we continue to see prices come down, because in those campus environments, increasingly, we have 2 facilities based fiber alternatives and cable and in telco, which has allowed us a lower loop cost, which helps us lower prices.

Now, with regard to the NetCentric business, IP Transit prices. When you look at the entire market declines at about 23% per year within any given window of time, we give lower prices to bigger customers, part of the greater rate and price decline, and are struggling to see that revenue growth from NetCentric has been that most of the growth over the past 6 quarters or so have come from the very biggest customers. So there was kind of a thesis proposed maybe a year or 2 ago, that transit was going to go away as the big guys were all going to do it themselves, nothing could be further from the truth. They are actually buying more transit, not less transit, but because they are so big, they get the lowest prices which does put pressure on our revenue growth in the NetCentric business.

Timothy Horan

Just seems to be a bit of a disconnect between the 27% price decline now and a 23% historically versus the revenue you’re showing but we can take it offline maybe.

Dave Schaeffer

Okay, sounds good, Tim.

Timothy Horan

Thank you.

Operator

Thank you. And our next question comes from Brandon Nispel with KeyBanc Capital. Your line is now open.

Brandon Nispel

Thanks for taking the question. Dave, just one for you. I think one of the things that you mentioned was that the traffic -- obviously the mix has went to the largest customers, but one of the things that you said was, I think you -- that the traffic share should spread out among your customer base, and I’m curious why you think that some of these large platforms aren’t going to dominate traffic share going forward. Thanks.

Dave Schaeffer

So listen, I want all of our customers to succeed. But what we have seen is over the 25-year history of the Internet, a lot of onetime dominant players decreased their dominance and new bottles evolve. That’s the first point. So just historical trends. Secondly, the Internet is an engine of innovation. The barriers to entry for innovators continue to decline and I’m not sure all of the innovation will come out of the biggest players. Third, particularly in Europe and in other parts of the world, we’re seeing a lot of regulatory scrutiny to some of the big platform companies and their domination should just as regulators stepped in and mitigated the market power of access networks and of software companies, we’re now seeing regulators, whether it be the fines in EU against Google and others, the UK proposed digital tax, we’re seeing a lot of different environments in which the regulatory backlash against this concentration of platform power may indicate that they’ve reached a high point, and again, this is just a speculating. We take the traffic from wherever it comes from. But if 15 years ago, you told me, the whole Internet was going to be AOL, that seemed like a reasonable assumption. Today people would laugh at you making that comment.

Operator

Our next question comes from Michael Funk with Bank of America.

Michael Funk

One quick one for you. You made some interesting comments earlier about the shift in share in transit and specifically noting that Level 3 is falling from number 1, like what you -- where you said they went 2 now, but certainly not number 1 share that they -- that they used to have. And I think your commentary, looking at your commentary about projected revenue growth and NetCentric growth seems to express confidence at Level 3 won’t reemphasize that line of business, and I was curious about that given that Level 3’S former CEO, Jeff Storey, who clearly at one point did emphasize that business, is now the CEO of CenturyLink. So why do you have confidence they won’t come back and try to regain share there?

Dave Schaeffer

So I think it’s a few things. First of all, in interviewing sales reps, we understand that their compensation program deemphasized its transit. Two, it is a relatively small addressable market at only $1.5 billion in total and because of the larger scale of the combined CenturyLink/Level 3, their ability to move the needle for the combined company off of that smaller addressable market probably doesn’t make a lot of sense. Their public commentary has all been around the growth in their enterprise business and their belief that they can capture market share in that addressable market, which today is larger, but is shrinking, witness the fact that 10 out of 10 business wireline providers had negative top line growth. Cogent is unique in that, we’re growing that business nearly 12%. So they’re focused on a bigger market, although it’s declining, they think their ability to gain share makes sense. I mean, obviously, a lot of that question needs to be addressed to that management team, but just the behavior we’re seeing both through the comp schedule, the observed results in the market and the size of the addressable market, I think, tell us that it may not be completely rationale for them to be more aggressive. And remember, even when they were aggressive, they were losing share to Cogent because we go in and guarantee to undercut them or any other provider by 50%.

Michael Funk

And one more quick one for you as well. I heard the commentary on what’s been impacting SG&A to date but as we think about 2019 and we’re trying to model out our own numbers here for that 200 basis point increase in margin, what are you doing to keep SG&A in check. Given we’re seeing record wage growth across U.S. obviously very tight labor markets. What are the programs that you have in place today or will have in 2019 to allow you to hit that margin increase given potential pressure on SG&A?

Dave Schaeffer

So first and foremost, it’s growth in revenue and the mix of on-net versus off-net and the high operating leverage from on-net revenue versus all. Secondly, on SG&A by far and away, the biggest expense is the S piece, it’s sales. And while at target, our comp is 50% variable and 50% base, the reality is, not all of our reps are at target. And we’re really probably about 62%, 63% base salary and only about 37% variable. But clearly, if you’re paying more on the variable side, you’re getting more revenue growth and therefore it’s a great investment.

Our cost of revenue acquisition is tracked very precisely and it’s been about 6x more efficient than other providers and continues to be that. We’ve had some slight rationalization in some office leases and things, and that was answering Nick’s question, but you know at the end of the day, it’s just good, hygiene, and containing costs not deploying salespeople and products or services that the market doesn’t want, not putting offices in places where people don’t want to buy service and selling the right products. I mean, there’s no magic here. It’s just good solid cost hygiene.

Operator

Thank you. I am not showing any further questions at this time. I would now like to turn the call back over to Mr. Schaeffer for any closing remarks.

Dave Schaeffer

Well, first of all, I thank everyone. We did a pretty good job at keeping it closed on time, with a good list of questions. So I want to thank everyone. Thanks for the support and the questions. We feel very confident in the progress of our business and look forward to talking to you soon. Take care. Bye, bye.

Operator

Ladies and gentlemen, thank you for participating in today’s conference. This does conclude today’s program, and you may all disconnect. Everyone have a wonderful day.