What changed in this filing

/stocks — the workspaceLOADING

Item 2. Management’s Discussion and Analysis

2022-08-05 compared with 2022-05-05 · 222 added, 121 removed, 305 unchanged (53% of the section changed)

6 unchanged sentences

The COVID-19 pandemic and accompanying government policies worldwide;

vaccination and in-office requirements, delays in the delivery of network equipment and optical fiber, future economic instability in the global economy, which could affect spending on Internet services;

vaccination and in-office requirements, delays in the delivery of network equipment and optical fiber, future economic instability in the global economy, including the risk of economic recession which could affect spending on Internet services;

the impact of changing foreign exchange rates (in particular the Euro to US dollar and Canadian dollar to US dollar exchange rates) on the translation of our non-US dollar denominated revenues, expenses, assets and liabilities into US dollars;

18 unchanged sentences

We do not believe that the termination of services to certain Russian customers or the impact of the war on our ability to provide services in Ukraine will have, taken together, a material impact on our network, financial statements or operating results.

Cogent Ukraine represented less than 0.4% of our consolidated revenues for the three months ended March 31, 2022 and less than 0.7% of our consolidated assets as of March 31, 2022.

Cogent Ukraine represented less than 0.3% of our consolidated revenues for the six months ended June 30, 2022 and less than 0.7% of our consolidated assets as of June 30, 2022.

General Overview

7 unchanged sentences

Our on-net service consists of high-speed Internet access and private network services offered at speeds ranging from 100 megabits per second (“Mbps”) to 400 gigabits per second (“Gbps”).

Our on-net revenues represented 75.5% of our revenues for the three months ended March 31, 2022 and 74.9% of our revenues for the three months ended March 31, 2021.

Our on-net revenues represented 75.4% of our revenues for the three months ended June 30, 2022, 75.1% of our revenues for the three months ended June 30, 2021, 75.5% of our revenues for the six months ended June 30, 2022 and 75.0% of our revenues for the six months ended June 30, 2021.

We provide our on-net Internet access and private network services to our corporate and net-centric customers.

1 unchanged sentence

Our net-centric customers include bandwidth-intensive users that leverage our network to either deliver content to end users or to provide access to residential or commercial internet users.

Content delivery customers include over

the top (“OTT”) media service providers, content delivery networks, web hosting companies, and commercial content and application software providers.

Content delivery customers include over the top (“OTT”) media service providers, content delivery networks, web hosting companies, and commercial content and application software providers.

Our net-centric customers include 7,685 access networks comprised of other Internet service providers (“ISPs”), telephone companies, mobile phone operators and cable television companies that collectively provide internet access to a substantial number of broadband subscribers and mobile phone subscribers across the world.

3 unchanged sentences

We provide these off-net services primarily to corporate customers using other carriers’ circuits to provide the “last mile” portion of the link from the customers’ premises to our network.

Our off-net revenues represented 24.4% of our revenues for the three months ended March 31, 2022 and 25.0% of our revenues for the three months ended March 31, 2021.

Our off-net revenues represented 24.4% of our revenues for the three months ended June 30, 2022, 24.8% of our revenues for the three months ended June 30, 2021, 24.4% of our revenues for the six months ended June 30, 2022 and 24.9% of our revenues for the six months ended June 30, 2021.

We also provide certain non-core services that resulted from acquisitions.

1 unchanged sentence

We expect revenue from non-core services to continue to decline or to remain flat.

Our non-core revenues represented less than 0.1% of our revenues for both the three months ended March 31, 2022 and March 31, 2021.

Our non-core revenues represented less than 0.1% of our revenues for all periods.

Competitive Advantages

17 unchanged sentences

This choice to lease rather than build reduces our capital intensity and the operating costs of our intercity and metro networks.

The nature of this portfolio and the individual leases provides us long-term access to dark fiber at attractive rates and the opportunity in many cases to extend these leases for multiple terms.

The nature of this portfolio and the individual leases provide us long-term access to dark fiber at attractive rates and the opportunity in many cases to extend these leases for multiple terms.

On average, a modest number of our dark fiber leases come up for renewal each year.

67 unchanged sentences

Develop a Worldwide Peering Platform.

In late 2020 we introduced a new product, Global Peer Connect (“GPC”), targeted at the growing demand for certain net-centric customers to dynamically peer traffic anywhere on our global platform.

Our GPC product provides access to our Global Peer Exchange (“GPE”) which is a worldwide connectivity platform for the exchange of peering traffic destined for the Internet.

In late 2020 we introduced a new product, Global Peer Connect, targeted at the growing demand for certain net-centric customers to dynamically peer traffic anywhere on our global platform.

Our GPC product provides access to our Global Peer Exchange which is a worldwide connectivity platform for the exchange of peering traffic destined for the Internet.

Similar product offerings in the marketplace offer a materially smaller geographic footprint configuration and require a higher fixed cost for customers.

9 unchanged sentences

Expand our Off-net Corporate Internet Access Business.

We have agreements with national carriers providing us last mile network access to over 4.0 million commercial buildings across North America that are lit by fiber optic cable and that are not currently served by our network.

We have agreements with national carriers providing us last mile network access to over 4.0 million commercial buildings that are lit by fiber optic cable across North America and that are not currently served by our network.

We believe these agreements broaden our addressable market for corporate dedicated internet access and enhances our competitive position through the ability to provide enterprise-wide connectivity for corporate customers.

1 unchanged sentence

We continue to negotiate reduced pricing under our numerous carrier agreements that enable us to reduce our cost of off-net services which enhances our competitive position in the marketplace.

Three Months Ended March 31, 2022 Compared to the Three Months Ended March 31, 2021

Our management reviews and analyzes several key financial measures in order to manage our business and assess the quality and variability of our service revenue, operating results and cash flows.

Results of Operations

Three Months Ended June 30, 2022 Compared to the Three Months Ended June 30, 2021

The following summary tables present a comparison of our results of operations with respect to certain key financial measures.

The comparisons illustrated in the tables are discussed in greater detail below.

The comparisons illustrated in the table are discussed in greater detail below.

Three Months Ended

6 unchanged sentences

Depreciation and amortization expenses

Unrealized foreign exchange gain on 2024 Notes

Loss on debt extinguishment and repurchase – 2022 Notes

Foreign exchange gain (loss) - 2024 Notes

Loss on debt extinguishment and redemption – 2024 Notes

Loss on debt extinguishment and redemption – 2022 Notes

Change in valuation expense – interest rate swap

Interest expense

Income tax expense

(1) Includes equity-based compensation expenses of $144 and $2,076 in the three months ended March 31, 2022 and 2021, respectively.

(2) Includes equity-based compensation expenses of $5,912 and $5,231 in the three months ended March 31, 2022 and 2021, respectively.

(1) Includes equity-based compensation expenses of $145 and $136 in the three months ended June 30, 2022 and 2021, respectively.

(2) Includes equity-based compensation expenses of $5,762 and $6,738 in the three months ended June 30, 2022 and 2021, respectively.

NM – not meaningful

11 unchanged sentences

In the net-centric market, we offer comparable services in terms of capacity but typically at significantly lower prices.

Our service revenue increased by 1.6% from the three months ended March 31, 2021 to the three months ended March 31, 2022.

Our service revenue increased by 0.4% from the three months ended June 30, 2021 to the three months ended June 30, 2022.

Exchange rates negatively impacted our increase in service revenue by $3.4 million.

All foreign currency comparisons herein reflect results for the three months ended March 31, 2022 translated at the average foreign currency exchange rates for the three months ended March 31, 2021.

All foreign currency comparisons herein reflect results for the three months ended June 30, 2022 translated at the average foreign currency exchange rates for the three months ended June 30, 2021.

We increased our total service revenue by expanding our network, by adding additional buildings to our network, by increasing our penetration into the buildings connected to our network and by gaining market share by offering our services at lower prices than our competitors.

1 unchanged sentence

We record these taxes billed to our customers on a gross basis (as service revenue and network operations expense) in our consolidated statements of comprehensive income.

The impact of these taxes including the Universal Service Fund, resulted in a decrease to our revenues of $0.8 million from the three months ended March 31, 2021 to the three months ended March 31, 2022.

The impact of these taxes including the Universal Service Fund, resulted in a decrease to our revenues of $1.4 million from the three months ended June 30, 2021 to the three months ended June 30, 2022.

Our corporate customers generally purchase their services on a price per connection basis.

Our net-centric customers generally purchase their services on a price per megabit basis.

Revenues from our corporate and net-centric customers represented 57.7% and 42.3% of total service revenue, respectively, for the three months ended March 31, 2022 and represented 62.7% and 37.3% of total service revenue, respectively, for the three months ended March 31, 2021.

Revenues from corporate customers decreased by 6.4% to $86.1 million for the three months ended March 31, 2022 compared to the three months ended March 31, 2021.

Revenues from our net-centric customers increased by 15.1% to $63.1 million for the three months ended March 31, 2022 compared to the three months ended March 31, 2021.

Revenues from our corporate and net-centric customers represented 57.4% and 42.6% of total service revenue, respectively, for the three months ended June 30, 2022 and represented 61.2% and 38.8% of total service revenue, respectively, for the three months ended June 30, 2021.

Revenues from corporate customers decreased by 5.9% to $85.2 million for the three months ended June 30, 2022 compared to the three months ended June 30, 2021.

Revenues from our net-centric customers increased by 10.2% to $63.3 million for the three months ended June 30, 2022 compared to the three months ended June 30, 2021.

Exchange rates negatively impacted our increase in our net–centric service revenue by approximately $3.4 million.

Our corporate customers take advantage of our superior speeds, service levels and installation times versus our competitors.

The growing trend of customers installing second lines for redundancy in order to construct Virtual Private Networks (“VPN’s) has also led to our ability to increase our corporate revenues.

The growing trend of customers installing second lines for redundancy in order to construct Virtual Private Networks (“VPNs”) has also led to our ability to increase our corporate revenues.

However, beginning in the second quarter of 2020, we saw corporate customers take a more cautious approach to new configurations and upgrades as well as a reduction in demand for connecting smaller satellite offices as a result of the challenges and uncertainties of the COVID-19 pandemic.

5 unchanged sentences

The net-centric market exhibits significant pricing pressure due to the continued introduction of new technology which lowers the marginal cost of transmission and routing, and the commodity nature of the service where price is typically the only differentiating factor for these customers.

Our average price per megabit of our installed base of customers declined by 18.6% from the three months ended March 31, 2021 to the three months ended March 31, 2022.

Our average price per megabit of our installed base of customers declined by 18.7% from the three months ended June 30, 2021 to the three months ended June 30, 2022.

We expect that our average price per megabit will continue to decline at similar rates.

The impact of foreign exchange rates has a more significant impact on our net-centric revenues.

Our on-net revenues increased by 2.4% from the three months ended March 31, 2021 to the three months ended March 31, 2022.

Our on-net revenues increased as we increased the number of our on-net customer connections by 4.1% at March 31, 2022 from March 31, 2021.

On-net customer connections increased at a greater rate than on-net revenues primarily due to a decrease in our on-net ARPU from the three months ended March 31, 2021 to the three months ended March 31, 2022 and the negative impact of foreign exchange.

Our on-net revenues increased by 0.8% from the three months ended June 30, 2021 to the three months ended June 30, 2022.

Our on-net revenues increased as we increased the number of our on-net customer connections by 4.0% at June 30, 2022 from June 30, 2021.

On-net customer connections increased at a greater rate than on-net revenues primarily due to a decrease in our on-net ARPU from the three months ended June 30, 2021 to the three months ended June 30, 2022 and the negative impact of foreign exchange rates.

ARPU is determined by dividing revenue for the period by the average customer connections for that period.

Our off-net revenues decreased by 0.9% from the three months ended March 31, 2021 to the three months ended March 31, 2022.

Our off-net revenues decreased primarily from the decrease in our off-net ARPU from the three months ended March 31, 2021 to the three months ended March 31, 2022 offsetting the 5.8% increase in the number of our off-net customer connections from March 31, 2021 to March 31, 2022 and the negative impact of foreign exchange.

Our off-net revenues decreased by 1.1% from the three months ended June 30, 2021 to the three months ended June 30, 2022.

Our off-net revenues decreased primarily from the decrease in our off-net ARPU from the three months ended June 30, 2021 to the three months ended June 30, 2022 offsetting the 6.2% increase in the number of our off-net customer connections from June 30, 2021 to June 30, 2022 and the negative impact of foreign exchange rates.

Network Operations Expenses.

Network operations expenses include the costs of personnel associated with service delivery, network management and customer support, network facilities costs, fiber and equipment maintenance fees, leased circuit costs, access and facilities fees paid to building owners and excise taxes billed to our customers and recorded on a gross basis.

Our network operations expenses, including non-cash equity-based compensation expense, increased by 0.6% from the three months ended March 31, 2021 to the three months ended March 31, 2022.

Our network operations expenses, including non-cash equity-based compensation expense, increased by 0.6% from the three months ended June 30, 2021 to the three months ended June 30, 2022.

Non-cash equity-based compensation expense is included in network operations expenses consistent with the classification of the employee’s salary and other compensation.

The increase in network operations expense is primarily attributable to an increase in costs related to our network and facilities expansion activities being partly offset by a $1.9 million decrease in equity-based compensation expense from the vesting of restricted employee shares that occurred in the three months ended March 31, 2021 and by price reductions obtained in certain of our leased circuit costs.

The increase in network operations expense is primarily attributable to an increase in costs related to our network and facilities expansion activities partly offset by price reductions obtained in certain of our leased circuit costs and by a $1.4 million reduction in taxes including the Universal Service Fund.

Selling, General, and Administrative (“SG&A”) Expenses.

Our SG&A expenses, including non-cash equity-based compensation expense, decreased by 2.0% from the three months ended March 31, 2021 to the three months ended March 31, 2022.

Our SG&A expenses, including non-cash equity-based compensation expense, decreased by 4.8% from the three months ended June 30, 2021 to the three months ended June 30, 2022.

Non-cash equity-based compensation expense is included in SG&A expenses consistent with the classification of the employee’s salary and other compensation.

SG&A expenses decreased primarily from a decrease in salaries and benefits from a reduction in our total headcount and a reduction in our bad debt expense.

Our sales force headcount was 620 at March 31, 2022 and 693 at March 31, 2021, and our total headcount was 987 at March 31, 2022 and 1,066 at March 31, 2021.

We experienced an increase in both voluntary and involuntary employee departures, particularly within our sales department, in the second half of 2021 and in the first quarter of 2022.

Our sales force headcount, inclusive of sales management, was 619 at June 30, 2022 and 710 at June 30, 2021, and our total headcount was 988 at June 30, 2022 and 1,087 at June 30, 2021.

We experienced an increase in both voluntary and involuntary employee departures, particularly within our sales department, beginning in the second half of 2021 and continuing into the first half of 2022.

We believe that this rise in departures was attributable both to an increased focus on monitoring sales productivity and to the unwillingness of some employees to be vaccinated and/or to return to a full-time, in-office environment.

Depreciation and Amortization Expenses.

Our depreciation and amortization expense increased by 3.3% from the three months ended March 31, 2021 to the three months ended March 31, 2022.

Our depreciation and amortization expense increased by 4.4% from the three months ended June 30, 2021 to the three months ended June 30, 2022.

The increase is primarily due to the depreciation expense associated with the increase in deployed fixed assets.

Interest Expense and Losses on Debt Extinguishment and Redemptions.

Our interest expense resulted from interest incurred on our 2022 Notes until these notes were fully extinguished in May 2021, interest incurred on our €350.0 million of 2024 Notes, interest incurred on our $500.0 million of 2026 Notes that we issued in May 2021, interest incurred on our installment payment agreement and interest incurred on our finance lease obligations.

In March 2021, we repurchased and extinguished $115.9 million of our 2022 Notes at 103.24% of par value resulting in a loss on debt extinguishment and repurchase of $3.9 million and reduced the par value from $445.0 million to $329.1 million.

In May 2021, we extinguished the remaining $329.1 million of our 2022 Notes at par value.

In August 2021 we entered into an interest rate swap agreement (the “Swap Agreement”) that has the economic effect of modifying the fixed interest rate obligation associated with our 2026 Notes to a variable interest rate obligation based on the Secured Overnight Financing Rate (“SOFR”) which results in the interest payable on the 2026 Notes effectively becoming variable based on overnight SOFR.

Our interest expense resulted from interest incurred on our 2022 Notes until these notes were fully extinguished in May 2021, interest incurred on our €350.0 million of 2024 Notes until these notes were fully extinguished in June 2022, interest incurred on our $450.0 million of 2027 Notes that we issued in June 2022, interest incurred on our $500.0 million of 2026 Notes that we issued in May 2021 and interest incurred on our finance lease obligations.

Our interest expense decreased by 5.3% from the three months ended June 30, 2021 to the three months ended June 30, 2022.

This decrease was primarily due to the reduction in interest expense from the lower interest rate on our 3.50% 2026 Notes as compared to our 5.375% 2022 Notes and from a net interest payment that we received in May 2022 of $1.2 million related to our interest rate swap agreement (the “Swap Agreement”) discussed below.

In March 2021, we redeemed and extinguished $115.9 million of our 2022 Notes at 103.24% of par value resulting in a loss on debt extinguishment and redemption of $3.9 million and reduced the aggregate par value from $445.0 million to $329.1 million.

In May 2021, we extinguished the remaining $329.1 million of our 2022 Notes at par value resulting in a loss on debt extinguishment and redemption of $10.8 million.

In June 2022, we extinguished our 2024 Notes at 101.094% of par value resulting in a loss on debt extinguishment and redemption of $11.9 million.

Change in Valuation - Interest Rate Swap Agreement.

In August 2021 we entered into our Swap Agreement that has the economic effect of modifying the fixed interest rate obligation associated with our 2026 Notes to a variable interest rate obligation based on the Secured Overnight Financing Rate (“SOFR”).

This results in the interest payable on our 2026 Notes effectively becoming variable based on overnight SOFR.

The Swap Agreement is recorded at its fair value at each reporting period, and we incur gains and losses due to changes in market interest rates.

The values that we report for the Swap Agreement as of each reporting date are recognized as non-

cash interest expense with the corresponding amounts included in assets or liabilities in our consolidated balance sheets.

As of March 31, 2022 the fair value of our Swap Agreement was a net liability of $30.3 million and we recorded an unrealized loss as non-cash interest expense of $21.3 million in the three months ended March 31, 2022.

The values that we report for the Swap Agreement as of each reporting date are recognized as non-cash amounts with the corresponding amounts included in assets or liabilities in our consolidated balance sheets.

As of June 30, 2022 the fair value of our Swap Agreement was a net liability of $37.8 million and we recorded an unrealized loss as a non-cash change in the valuation of the Swap Agreement of $7.5 million in the three months ended June 30, 2022.

We did not elect hedge accounting for our Swap Agreement.

Under our Swap Agreement, we pay the counterparty a semi-annual payment based upon overnight SOFR plus a contractual interest rate spread, and the counterparty pays us a semi-annual fixed 3.50% interest payment.

These settlement payment is made in November and May until the Swap Agreement expires in February 2026.

Under the first Swap Agreement settlement payment we received a payment of $0.6 million from the counterparty for a net cash savings of $0.6 million for the period from August 9, 2021 (the Swap Agreement inception date) to October 31, 2021.

Under the settlement payment made on May 4, 2022, we recevied a payment of $1.2 million from the counterparty for a net cash savings of $1.2 million for the period from November 1, 2021 to April 30, 2022.

Our interest expense increased by 123.8% from the three months ended March 31, 2021 to the three months ended March 31, 2022.

This increase was primarily due to the reduction in interest expense from the lower interest rate on our 2026 Notes as compared to our 2022 Notes being offset by the additional $21.3 million of additional non-cash interest expense we recorded related to our Swap Agreement in the three months ended March 31, 2022.

Unrealized Gain on Foreign Exchange – 2024 Notes .

Our 2024 Notes were issued in Euros and are reported in our reporting currency – US Dollars.

As of March 31, 2022, our 2024 Notes were valued at $389.0 million.

Our unrealized gain on foreign exchange on our 2024 Notes from converting our 2024 Notes into USD was $8.0 million for the three months ended March 31, 2022 and $18.9 million for the three months ended March 31, 2021.

These settlement payments are made in November and May of each year until the Swap Agreement expires in February 2026.

Under the first Swap Agreement settlement payment made in November 2021 we received a payment of $0.6 million from the counterparty for a net cash savings of $0.6 million for the period from August 9, 2021 (the Swap Agreement inception date) to October 31, 2021.

Under the settlement payment made in May 2022, we received a payment of $1.2 million from the counterparty for a net cash savings of $1.2 million for the period from November 1, 2021 to April 30, 2022.

Gain (Loss) on Foreign Exchange – 2024 Notes .

Our 2024 Notes were issued in Euros and were reported in our reporting currency - US Dollars - until they were extinguished and redeemed in June 2022.

Our 2024 Notes were issued in June 2019 and June 2020 when the Euro to USD rate was approximately $1.13 and they were extinguished in June 2022 at a Euro to USD rate of $1.06.

Our gain on foreign exchange on our 2024 Notes from converting our 2024 Notes into US Dollars was $23.5 million for the three months ended June 30, 2022 and our loss on foreign exchange was $5.3 million for the three months ended June 30, 2021.

We have not entered into hedging arrangements for our foreign currency obligations.

Income Tax Expense.

Our income tax expense was $0.5 million for the three months ended March 31, 2022 and $7.4 million for the three months ended March 31, 2021.

The decrease in our income tax expense is primarily related to the decrease in our income before income taxes.

Our income tax expense was $8.6 million for the three months ended June 30, 2022 and $0.4 million for the three months ended June 30, 2021.

The increase in our income tax expense is primarily related to the increase in our income before income taxes.

Buildings On-net.

As of March 31, 2022 and 2021, we had a total of 3,065 and 2,939 on-net buildings connected to our network, respectively.

As of June 30, 2022 and 2021, we had a total of 3,095 and 2,975 on-net buildings connected to our network, respectively.

The increase in our on-net buildings was a result of our disciplined network expansion program.

We anticipate adding a similar number of buildings to our network for the next several years.

Six Months Ended June 30, 2022 Compared to the Six Months Ended June 30, 2021

The following summary tables present a comparison of our results of operations with respect to certain key financial measures.

The comparisons illustrated in the table are discussed in greater detail below.

Six Months Ended

(in thousands)

Service revenue

On-net revenue

Off-net revenue

Network operations expenses (1)

Selling, general, and administrative expenses (2)

Depreciation and amortization expenses

Foreign exchange gain – 2024 Notes

Loss on debt extinguishment and redemption – 2024 Notes

Loss on debt extinguishment and redemption – 2022 Notes

Change in valuation expense - interest rate swap

Interest expense

Income tax expense

(1) Includes equity-based compensation expenses of $289 and $2,212 in the six months ended June 30, 2022 and 2021, respectively.

(2) Includes equity-based compensation expenses of $11,674 and $11,969 in the six months ended June 30, 2022 and 2021, respectively.

NM – not meaningful

Six Months Ended

Other Operating Data

Average Revenue Per Unit (ARPU)

Average Price per Megabit — installed base

Customer Connections—end of period

Service Revenue.

We continually work to grow our total service revenue by increasing the number of potential customers that we can reach on our network.

We do this by investing capital to expand the geographic footprint of our network, increasing the number of buildings that we are connected to, including carrier neutral data centers and multi-tenant office buildings, and increasing our penetration rate into our existing buildings.

These efforts broaden the global reach of our network and increase the size of our potential addressable market.

We also seek to grow our service revenue by investing in our sales and marketing team.

We typically sell corporate connections at similar pricing to our competitors, but our clients benefit from our significantly faster speeds, enhanced service level agreements and rapid installation times.

In the net-centric market, we offer comparable services in terms of capacity but typically at significantly lower prices.

Our service revenue increased by 1.0% from the six months ended June 30, 2021 to the six months ended June 30, 2022.

Exchange rates negatively impacted our increase in service revenue by $5.4 million.

All foreign currency comparisons herein reflect results for the six months ended June 30, 2022 translated at the average foreign currency exchange rates for the six months ended June 30, 2021.

Revenue recognition standards include guidance relating to any tax assessed by a governmental authority that is directly imposed on a revenue-producing transaction between a seller and a customer and may include, but is not limited to, gross receipts taxes, Universal Service Fund fees and certain state regulatory fees.

We record these taxes billed to our customers on a gross basis (as service revenue and network operations expense) in our consolidated statements of comprehensive income.

The impact of these taxes including the Universal Service Fund, resulted in a decrease to our revenues of $2.1 million from the six months ended June 30, 2021 to the six months ended June 30, 2022.

Our corporate customers generally purchase their services on a price per connection basis.

Our net-centric customers generally purchase their services on a price per megabit basis.

Revenues from our corporate and net-centric customers represented 57.6% and 42.4% of total service revenue, respectively, for the six months ended June 30, 2022 and represented 61.9% and 38.1% of total service revenue, respectively, for the six months ended June 30, 2021.

Revenues from corporate customers decreased by 6.1% to $171.3 million for the six months ended June 30, 2022 compared to the six months ended June 30, 2021.

Revenues from our net-centric customers increased by 12.6% to $126.3 million for the six months ended June 30, 2022 compared to the six months ended June 30, 2021.

Our corporate customers take advantage of our superior speeds, service levels and installation times versus our competitors.

The growing trend of customers installing second lines for redundancy in order to construct Virtual Private Networks (“VPNs”) has also led to our ability to increase our corporate revenues.

However, beginning in the first quarter of 2020, we saw corporate customers take a more cautious approach to new configurations and upgrades as well as a reduction in demand for connecting smaller satellite offices as a result of the challenges and uncertainties of the COVID-19 pandemic.

We also witnessed a deteriorating real estate market in and around the buildings we service, with rising vacancy levels and falling lease initiations or renewals resulting in fewer sales opportunities for our salesforce.

As a result, we have experienced a slowdown in new sales to our corporate customers which negatively impacted our corporate revenue results.

While we believe that demand for office space in the buildings in which we operate will remain among the strongest in our markets, we may experience increased corporate customer turnover, fewer upgrades of existing corporate customer configurations and fewer new tenant opportunities which would negatively impact our corporate revenue growth.

Our revenue from our net-centric customers increased primarily due to an increase in our number of net-centric customers and growth in network traffic from these customers partly offset by a decline in our average price per megabit.

Our net-centric customers purchase our services on a price per megabit basis.

Our average price per megabit of our installed base of customers declined by 18.7% from the six months ended June 30, 2021 to the six months ended June 30, 2022.

We expect that our average price per megabit will continue to decline at similar rates.

The impact of foreign exchange rates has a more significant impact on our net-centric revenues.

Our on-net revenues increased by 1.6% from the six months ended June 30, 2021 to the six months ended June 30, 2022.

Our on-net revenues increased as we increased the number of our on-net customer connections by 4.0% at June 30, 2022 from June 30, 2021.

On-net customer connections increased at a greater rate than on-net revenues primarily due to a decrease in our on-net ARPU from the six months ended June 30, 2021 to the six months ended June 30, 2022 and the negative impact of foreign exchange rates.

ARPU is determined by dividing revenue for the period by the average customer connections for that period.

Our off-net revenues decreased by 1.0% from the six months ended June 30, 2021 to the six months ended June 30, 2022.

Our off-net revenues decreased primarily from the decrease in our off-net ARPU from the six months ended June 30, 2021 to the six months ended June 30, 2022 offsetting the 6.2% increase in the number of our off-net customer connections from June 30, 2021 to June 30, 2022 and the negative impact of foreign exchange rates.

Network Operations Expenses.

Our network operations expenses, including non-cash equity-based compensation expense, increased by 0.6% from the six months ended June 30, 2021 to the six months ended June 30, 2022.

Non-cash equity-based compensation expense is included in network operations expenses consistent with the classification of the employee’s salary and other compensation.

The increase in network operations expense is primarily attributable to an increase in costs related to our network and facilities expansion activities being partly offset by price reductions obtained in certain of our leased circuit costs and by a $2.1 million reduction in taxes including the Universal Service Fund.

Selling, General, and Administrative (“SG&A”) Expenses.

Our SG&A expenses, including non-cash equity-based compensation expense, decreased by 3.4% from the six months ended June 30, 2021 to the six months ended June 30, 2022.

Non-cash equity-based compensation expense is included in SG&A expenses consistent with the classification of the employee’s salary and other compensation.

SG&A expenses decreased primarily from a decrease in salaries and benefits from a reduction in our total headcount and a reduction in our bad debt expense.

Our sales force headcount, inclusive of sales management, was 619 at June 30, 2022 and 710 at June 30, 2021, and our total headcount was 988 at June 30, 2022 and 1,087 at June 30, 2021.

We believe that this rise in departures is attributable both to an increased focus on monitoring sales productivity and to the unwillingness of some employees to be vaccinated and/or to return to a full-time, in-office environment.

Depreciation and Amortization Expenses.

Our depreciation and amortization expense increased by 3.9% from the six months ended June 30, 2021 to the six months ended June 30, 2022.

The increase is primarily due to the depreciation expense associated with the increase in deployed fixed assets.

Interest Expense and Losses on Debt Extinguishment and Redemptions.

Our interest expense resulted from interest incurred on our 5.375% 2022 Notes until these notes were fully extinguished in May 2021, interest incurred on our €350.0 million of 4.375% 2024 Notes until these notes were fully extinguished in June 2022, interest incurred on our $450.0 million of 7.00% 2027 Notes that we issued in June 2022, interest incurred on our $500.0 million of 3.50% 2026 Notes that we issued in May 2021 and interest incurred on our finance lease obligations.

Our interest expense decreased by 8.1% from the six months ended June 30, 2021 to the six months ended June 30, 2022.

This decrease was primarily due to the reduction in interest expense from the lower interest rate on our 3.50% 2026 Notes as compared to our 5.375% 2022 Notes and from a net interest payment of $1.2 million that we received in May 2022 related to our Swap Agreement.

In March 2021, we redeemed and extinguished $115.9 million of our 5.375% 2022 Notes at 103.24% of par value resulting in a loss on debt extinguishment and redemption of $3.9 million and reduced the par value from $445.0 million to $329.1 million.

In May 2021, we extinguished the remaining $329.1 million of our 2022 Notes at par value resulting in a loss on debt extinguishment and redemption of $10.8 million.

In June 2022, we extinguished our 4.375% 2024 Notes at 101.094% of par value resulting in a loss on debt extinguishment and redemption of $11.9 million.

Change in Valuation – Interest Rate Swap Agreement.

The Swap Agreement is recorded at its fair value at each reporting period, and we incur gains and losses due to changes in market interest rates.

As of June 30, 2022 the fair value of our Swap Agreement was a net liability of $37.8 million and we recorded an unrealized loss as non-cash change in the valuation of the Swap Agreement of $28.8 million in the six months ended June 30, 2022.

We did not elect hedge accounting for our Swap Agreement.

These settlement payments are made in November and May of each year until the Swap Agreement expires in February 2026.

Under the settlement payment made in May 2022 we received a payment of $1.2 million from the counterparty for a net cash savings of $1.2 million for the period from November 1, 2021 to April 30, 2022.

Gain on Foreign Exchange – 2024 Notes.

Our 2024 Notes were issued in Euros and were reported in our reporting currency - US Dollars - until they were extinguished and redeemed in June 2022.

Our 2024 Notes were issued in June 2019 and June 2020 when the Euro to USD rate was approximately $1.13 and they were extinguished in June 2022 at a Euro to USD rate of $1.06.

Our gain on foreign exchange on our 2024 Notes from converting our 2024 Notes into US Dollars was $31.6 million for the six months ended June 30, 2022 and was $13.6 million for the six months ended June 30, 2021.

We have not entered into hedging arrangements for our foreign currency obligations.

Income Tax Expense.

Our income tax expense was $9.1 million for the six months ended June 30, 2022 and $7.8 million for the six months ended June 30, 2021.

The increase in our income tax expense is primarily related to the increase in our income before income taxes.

Buildings On-net.

As of June 30, 2022 and 2021, we had a total of 3,095 and 2,975 on-net buildings connected to our network, respectively.

The increase in our on-net buildings was a result of our disciplined network expansion program.

We anticipate adding a similar number of buildings to our network for the next several years.

Liquidity and Capital Resources

In assessing our liquidity, management reviews and analyzes our current cash and restricted cash balances, accounts receivable, accounts payable, accrued liabilities, capital expenditure commitments, and required finance lease and debt payments and other obligations.

As our business has grown as a result of an increasing customer base, broader geographic coverage and increased traffic on our network, we have produced a growing level of operating cash flow.

As a result of the operating leverage of our network, our annual capital expenditures as measured as a percentage of revenues has fallen over the last decade.

Increasing our operating cash flow is in part dependent upon expanding our geographic footprint and increasing our network capacity.

Recent supply chain issues in obtaining network equipment may adversely impact our ability to grow our network and revenue.

We have also had increasing success in raising capital by issuing notes and arranging financing and leases that have had a lower cost and more flexible terms.

The combination of this improved operating performance and access to capital has enhanced our financial flexibility and increased our ability to make distributions to shareholders in the form of cash dividends or through share repurchases.

Since our initial public offering, we have returned over $1.0 billion to our shareholders through share repurchases and dividends.

We will continue to assess our capital and liquidity needs and, where appropriate, return capital to shareholders.

In assessing our liquidity, management reviews and analyzes our current cash balances, accounts receivable, accounts payable, accrued liabilities, capital expenditure commitments, and required finance lease and debt payments and other obligations.

Over the next several years we have significant contractual and anticipated cash outlays including our indicative dividend payments on our common stock, our maturing debt obligations, interest payments on our debt obligations and our projected capital expenditure requirements in order to help execute our business plan.

Based upon our historical growth rate of our dividend, we expect that we would have to provide approximately $354 million in order to meet our expected quarterly dividend payments over the next two years.

Our $500.0 million 2026 Notes mature in May 2026 and include annual interest payments of $17.5 million until maturity.

Our €350 million 2024 Notes mature in June 2024 and include annual interest payments €15.3 million until maturity.

Our €350 million 2024 Notes are denominated in Euros and expose us to potentially unfavorable adverse movements in foreign currency rate changes.

Our overseas operations provides us access to Euros, however these amounts may be insufficient to fund our obligations under our 2024 Notes.

Additionally, we have not entered into foreign currency hedging arrangements which would seek to reduce our risks related to foreign exchange volatility.

Interest rate swap agreement

As of March 31, 2022, we were party to our Swap Agreement that has the economic effect of modifying the fixed interest rate obligation associated with our 2026 Notes to a variable interest rate obligation based on the SOFR so that the interest payable on our 2026 Notes effectively became variable based on overnight SOFR.

The critical terms of our Swap Agreement match the terms of our 2026 Notes, including the notional amount and the optional redemption date on February 1, 2026.

The Swap Agreement is recorded at its fair value at each reporting period, and we incur non-cash gains and losses due to changes in market interest rates.

By entering into the Swap Agreement, we have assumed the risk associated with variable interest rates.

Changes in interest rates affect the interest expense that we recognize in our consolidated statements of comprehensive income.

The values that we report for the Swap Agreement as of each reporting date are recognized as non-cash interest expense with the corresponding amounts included in assets or liabilities in our consolidated balance sheets.

As of March 31, 2022 the fair value of the Swap Agreement was a net liability of $30.3 million of which $0.6 million is presented with accrued and other current liabilities and $29.7 million is presented with other long-term liabilities.

We recorded an unrealized loss related to the Swap Agreement of $21.3 million in the three months ended March 31, 2022 which is presented in interest expense in our statement of comprehensive income.

We have made a $35.0 million deposit with the counterparty to the Swap Agreement.

If the fair value of the Swap Agreement exceeds a net liability of $35.0 million we will be required to deposit additional funds with the counterparty equal to the net liability fair value in excess of $35.0 million.

As of March 31, 2022, $30.3 million of the deposit was restricted and $4.7 million was unrestricted.

Under the Swap Agreement, we pay the counterparty a semi-annual payment based upon overnight SOFR plus a contractual interest rate spread and the counterparty pays us a semi-annual fixed 3.50% interest payment.

The settlement payments is made in November and May until the Swap Agreement expires in February 2026.

Under the first Swap Agreement settlement payment, we received a payment of $0.6 million from the counterparty for a net cash savings of $0.6 million for the period from August 9, 2021 (the Swap Agreement inception date) to October 31, 2021.

Under the settlement payment made on May 4, 2022, we received a payment of $1.2 million from the counterparty for a net cash savings of $1.2 million for the period from November 1, 2021 to April 30, 2022.

Any future acquisitions or other significant unplanned costs or cash requirements in excess of amounts we currently hold may require that we raise additional funds through the issuance of debt or equity.

We cannot assure you that such financing will be available on terms acceptable to us or our stockholders, or at all.

Insufficient funds may require us to delay or scale back the number of buildings and markets that we add to our network, reduce our planned increase in our sales and marketing efforts, or require us to otherwise alter our business plan or take other actions that could have a material adverse effect on our business, results of operations and financial condition.

If issuing equity securities raises additional funds, substantial dilution to existing stockholders may result.

In March 2021, we redeemed and extinguished $115.9 million of our 2022 Notes.

In April 2021 we redeemed $45.0 million of our 2022 Notes and in May 2021 we redeemed the remaining $284.1 million of our 2022 Notes with the proceeds from our issuance of $500.0 million of our 2026 Notes.

Our 2022 Notes accrued interest at 5.375% and our 2026 Notes accrue interest at 3.50%.

Our $500.0 million of 2026 Notes mature in May 2026 and include annual interest payments of $17.5 million until maturity.

In June 2022 we redeemed our 2024 Notes with the proceeds from our issuance of $450.0 million of our 2027 Notes.

Our 2024 Notes accrued interest at 4.375% and our 2027 Notes accrue interest at 7.00%.

Our $450.0 million of 2027 Notes mature in June 2027 and include annual interest payments of $31.5 million until maturity.

In August 2021 we entered into our Swap Agreement that has the economic effect of modifying the fixed interest rate obligation associated with our 2026 Notes to a variable interest rate obligation based SOFR which results in the interest payable on the 2026 Notes effectively becoming variable based on overnight SOFR.

The Swap Agreement is recorded at its fair value at each reporting period, and we incur gains and losses due to changes in market interest rates.

These settlement payments are made in November and May of each year until the Swap Agreement expires in February 2026.

As of June 30, 2022 the fair value of the Swap Agreement was a net liability of $37.8 million.

We have made a $48.5 million deposit with the counterparty to our Swap Agreement.

If the fair value of our Swap Agreement exceeds a net liability of $48.5 million we will be required to deposit additional funds with the counterparty equal to the net liability fair value in excess of $48.5 million.

As of June 30, 2022, $37.8 million of our deposit was restricted and $10.7 million was unrestricted.

We may need to, or elect to, refinance all or a portion of our indebtedness at or before maturity and we cannot provide assurances that we will be able to refinance any such indebtedness on commercially reasonable terms or at all.

In addition, we may elect to secure additional capital in the future, at acceptable terms, to improve our liquidity or fund acquisitions or for general corporate purposes.

In addition, in an effort to reduce future cash interest payments as well as future amounts due at maturity or to extend debt maturities, we may, from time to time, issue new debt, enter into interest rate swap agreements, enter into debt for debt, or cash transactions to purchase our outstanding debt securities in the open market or through privately negotiated transactions.

In addition, in an effort to reduce future cash interest payments as well as future amounts due at maturity or to extend debt maturities, we may, from time to time, issue new debt, enter into debt for debt, or cash transactions to purchase our outstanding debt securities in the open market or through privately negotiated transactions.

We will evaluate any such transactions in light of the existing market conditions.

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The amounts involved may be material.

In light of the economic uncertainties associated with the COVID-19 pandemic, our executive officers and Board have continued to carefully monitor our liquidity and cash requirements.

We cannot assure you that such financing will be available on terms acceptable to us or our stockholders, or at all.

If issuing equity securities raises additional funds, substantial dilution to existing stockholders may result.

In light of the economic uncertainties associated with the COVID-19 pandemic, our executive officers and Board of Directors have continued to carefully monitor our liquidity and cash requirements.

Based on current circumstances, we plan to continue our current dividend policy.

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The following table sets forth our consolidated cash flows.

Three Months Ended March 31,

Six Months Ended June 30,

(in thousands)

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Effect of exchange rates changes on cash

Net decrease in cash and cash equivalents

Net increase in cash, cash equivalents and restricted cash

Net Cash Provided by Operating Activities.

Our primary source of operating cash is receipts from our customers who are billed on a monthly basis for our services.

Our primary uses of operating cash are payments made to our vendors, employees and interest payments made to our finance lease vendors and our note holders.

Our primary uses of operating cash are payments made to our vendors and employees and interest payments made to our finance lease vendors and our note holders.

Our changes in cash provided by operating activities are primarily due to changes in our operating profit and changes in our interest payments.

Cash provided by operating activities for the three months ended March 31, 2021 include interest payments on our note obligations of $12.4 million.

There were no interest payments on our note obligations for the three months ended March 31, 2022.

Net Cash Used In Investing Activities.

Our primary use of cash for investing activities is for purchases of property and equipment.

Purchases of property and equipment were $18.1 million and $15.4 million for the three months ended March 31, 2022 and 2021, respectively.

Purchases of property and equipment were $35.4 million and $32.7 million for the six months ended June 30, 2022 and 2021, respectively.

The changes in purchases of property and equipment are primarily due to the timing and scope of our network expansion activities including geographic expansion and adding buildings to our network.

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Our primary uses of cash for financing activities are payments to redeem and extinguish our debt, dividend payments, principal payments under our finance lease obligations and our installment payment agreement, and for purchases of our common stock.

During the three months ended March 31, 2022 and 2021 we paid $41.3 million and $36.1 million, respectively, for our quarterly dividend payments.

During the six months ended June 30, 2022 and 2021, we paid $83.2 million and $73.1 million, respectively, for our quarterly dividend payments.

Our quarterly dividend payments have increased due to increases in our quarterly dividend per share amounts.

In March 2021, we paid $119.7 million to repurchase and extinguish $115.9 million of our 2022 Notes at 103.24% of par value.

Principal payments under our finance lease obligations were $5.9 million and $5.7 million for the three months ended March 31, 2022 and 2021, respectively.

Principal payments under our finance lease obligations were $11.1 million and $11.9 million for the six months ended June 30, 2022 and 2021, respectively.

The changes in our principal payments under our finance lease obligations are primarily due to the timing and extent of our network expansion activities including geographic expansion and adding buildings to our network.

Principal payments under our installment payment agreement were $0.6 million and $2.4 million for the three months ended March 31, 2022 and 2021, respectively.

There were no purchases of our common stock in both the three months ended March 31, 2022 and 2021.

Principal payments under our installment payment agreement were $0.8 million and $4.3 million for the six months ended June 30, 2022 and 2021, respectively.

There were no purchases of our common stock in both the six months ended June 30, 2022 and 2021.

We completed a series of debt redemptions and issuances in the six months ended June 30, 2022 and the six months ended June 30, 2021.

In March 2021, we paid $119.7 million to redeem and extinguish $115.9 million of our 2022 Notes at 103.24% of par value.

In May 2021, we redeemed and extinguished the remaining $329.1 million of our 2022 Notes at par value and paid $11.5 million of interest through December 1, 2021.

The total payments to redeem our 2022 Notes were $459.3 million.

In May 2021 we issued $500.0 million of our 2026 Notes for net proceeds of $496.9 million.

In June 2022 we paid $375.4 million to redeem and extinguish our 2024 Notes at 101.094% of par value.

In June 2022 we issued $450.0 million of our 2027 Notes for net proceeds of $446.0 million.

Cash Position and Indebtedness

Our total indebtedness, at par, at March 31, 2022 was $1.1 billion and our total cash, cash equivalents and restricted cash was $311.8 million.

Our total indebtedness at March 31, 2022 includes $245.2 million of finance lease obligations for dark fiber under long-term IRU agreements.

Our total indebtedness, at par, at June 30, 2022 was $1.2 billion and our total cash, cash equivalents and restricted cash were $349.8 million.

Our total indebtedness at June 30, 2022 includes $254.2 million of finance lease obligations for dark fiber under long-term IRU agreements.

Summarized Financial Information of Holdings

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Under the indentures we are required to disclose financial information of Holdings including its assets, liabilities and its operating results (“Holdings Financial Information”).

The Holdings Financial Information as of and for the three months ended March 31, 2022 is detailed below (in thousands).

March 31, 2022

The Holdings Financial Information is detailed below (in thousands).

June 30, 2022

Cash and cash equivalents

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Accumulated deficit

Three Months Ended

March 31, 2022

June 30, 2022

Equity‑based compensation expense

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Our Board of Directors has approved purchases of our common stock under a buyback program (the “Buyback Program”).

There were no purchases of our common stock in the three months ended March 31, 2022 and 2021.

As of March 31, 2022, there was a total of $30.4 million available under the Buyback Program which is authorized to continue through December 31, 2022.

There were no purchases of our common stock in the three or six months ended June 30, 2022 and June 30, 2021.

As of June 30, 2022, there was a total of $30.4 million available under the Buyback Program which is authorized to continue through December 31, 2022.

Dividends on Common Stock and Return of Capital Program

On April 29, 2022, our Board of Directors approved the payment of our quarterly dividend of $0.88 per common share.

This estimated $41.0 million dividend payment is expected to be made on May 27, 2022.

On August 4, 2022, our Board of Directors approved the payment of our quarterly dividend of $0.905 per common share.

This estimated $42.3 million dividend payment is expected to be made on August 31, 2022.

The payment of any future dividends and any other returns of capital, including stock buybacks, will be at the discretion of our Board of Directors and may be reduced, eliminated or increased and will be dependent upon our financial position, results of operations, available cash, cash flow, capital requirements, limitations under our debt indentures and other factors deemed relevant by the our Board of Directors.

We are a Delaware corporation and under the General Corporate Law of the State of Delaware distributions may be restricted including a restriction that distributions, including stock purchases and dividends, do not result in an impairment of a corporation’s capital, as defined under Delaware Law.

We are a Delaware corporation and under the General Corporation Law of the State of Delaware distributions may be restricted including a restriction that distributions, including stock purchases and dividends, do not result in an impairment of a corporation’s capital, as defined under Delaware law.

The indentures governing our notes limit our ability to return cash to our stockholders.

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In addition, we do not engage in trading activities involving non-exchange traded contracts.

As such, we are not materially exposed to any financing, liquidity, market or credit risk that could arise if we had engaged in these relationships.

As such, we are not materially exposed to any financing, liquidity, market or credit risks that could arise if we had engaged in these relationships.

Impact of COVID-19 on Our Liquidity and Operating Performance

We continue to operate with a high level of liquidity, and as of March 31, 2022, we had cash, cash equivalents and restricted cash of $311.8 million.

We continue to operate with a high level of liquidity, and as of June 30, 2022, we had cash, cash equivalents and restricted cash of $349.8 million.

The COVID-19 pandemic has not impacted our credit rating to date, nor do we believe that it has materially changed our cost of capital.

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Our employees have largely complied with our vaccine mandate in the United States.

However, we experienced an increase in both voluntary and involuntary employee departures, particularly within our sales department, in the second half of 2021 and first quarter of 2022.

However, we experienced an increase in both voluntary and involuntary employee departures, particularly within our sales department, beginning in the second half of 2021 and continuing into the first half of 2022.

We believe this rise in departures is attributable both to an increased focus on managing underperforming sales representatives and to the unwillingness of some employees to be vaccinated and/or to return to a full time, in office environment.

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Moreover, with the spread of the Delta variant of COVID-19 in the summer of 2021 and then the Omicron variant in December of 2021, we believe many companies delayed the return of their employees to in-office work.

As the pandemic

has continued, and the return of employees to their offices has been delayed, a greater number of corporate customers with contracts that reached their termination date have elected not to renew their service with us.

As the pandemic has continued, and the return of employees to their offices has been delayed, a greater number of corporate customers with contracts that reached their termination date have elected not to renew their service with us.

As such, we began to see increased corporate customer turnover.

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Critical Accounting Policies and Significant Estimates

Management believes that as of March 31, 2022, there have been no material changes to our critical accounting policies and significant estimates from those listed in Item 7 “Management’s Discussion and Analysis of Financial Condition and Results of Operations” of our annual report on Form 10-K for the year ended December 31, 2021.

Management believes that as of June 30, 2022, there have been no material changes to our critical accounting policies and significant estimates from those listed in Item 7 “Management’s Discussion and Analysis of Financial Condition and Results of Operations” of our annual report on Form 10-K for the year ended December 31, 2021.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Management believes that as of March 31, 2022, there have been no material changes to our exposures to market risk from those disclosed in Item 7A “Quantitative and Qualitative Disclosures About Market Risk” of our annual report on Form 10-K for the year ended December 31, 2021.

Management believes that as of June 30, 2022, there have been no material changes to our exposures to market risk from those disclosed in Item 7A “Quantitative and Qualitative Disclosures About Market Risk” of our annual report on Form 10-K for the year ended December 31, 2021.

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 2. Management’s Discussion and Analysis