What changed in this filing

/stocks — the workspaceLOADING

Item 2. Management’s Discussion and Analysis

2022-11-04 compared with 2022-08-05 · 151 added, 123 removed, 404 unchanged (40% of the section changed)

5 unchanged sentences

Factors that could cause or contribute to these differences include, but are not limited to:

Our pending acquisition of Sprint Communications, including delays or conditions on the obtaining of necessary regulatory approvals, our failure to close the acquisition or difficulties integrating our business with the acquired Sprint Communications business;

the COVID-19 pandemic and accompanying government policies worldwide;

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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 0.3% 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.

Cogent Ukraine represented less than 0.1% of our consolidated revenues for the nine months ended September 30, 2022 and less than 0.1% of our consolidated assets as of September 30, 2022.

Sprint Acquisition

On September 6, 2022, Cogent Infrastructure, Inc., a Delaware corporation (the “Buyer”) and a wholly owned subsidiary of Holdings, entered into a Membership Interest Purchase Agreement (the “Purchase Agreement”) with Sprint Communications LLC, a Kansas limited liability company (“Sprint”) and an indirect wholly owned subsidiary of T-Mobile US, Inc., a Delaware corporation and Sprint LLC, a Delaware limited liability company and a direct wholly owned subsidiary of T-Mobile (the “Seller”), pursuant to which Holdings will acquire the U.S.

long-haul fiber network (including the non-U.S.

extensions thereof) of Sprint Communications and its subsidiaries (the “Wireline Business”).

The Purchase Agreement provides that, upon the terms and conditions set forth therein, Holdings will purchase from the Seller all of the issued and outstanding membership interests of a Delaware limited liability company that holds Sprints’ assets and liabilities relating to the Wireline Business (such transactions contemplated by the Purchase Agreement, collectively, the “Transaction”).

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General Overview

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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 75.4% 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.

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

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

Our corporate customers are located in multi-tenant office buildings and typically include law firms, financial services firms, advertising and marketing firms, as well as health care providers, educational institutions and other professional services businesses.

Our corporate customers are located in MTOBs and typically include law firms, financial services firms, advertising and marketing firms, as well as health care providers, educational institutions and other professional services businesses.

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.

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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 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.

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

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

2 unchanged sentences

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

In connection with our Sprint acquisition we will begin to provide optical wavelength services over our fiber network.

We will sell these wavelength services to our existing customers, Sprint customers and to new customers who require dedicated optical transport connectivity without the capital and ongoing expenses associated with owning and operating network infrastructure.

Competitive Advantages

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We believe that our organization has the following competitive advantages:

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Low Cost of Operation:

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Since our founding, we have strategically focused on delivering a very narrow product set to our customers.

The vast majority of our revenue is driven or related to our high-capacity, bi-directional, symmetric internet access services which can be accessed on-net in multi-tenant office buildings and carrier neutral data centers or off-net through other carriers’ “last mile” connections to customer facilities.

The vast majority of our revenue is driven or related to our high-capacity, bi-directional, symmetric internet access services which can be accessed on-net in MTOBs and carrier neutral data centers (“CNDCs”) or off-net through other carriers’ “last mile” connections to customer facilities.

There are significant cost advantages as a result of this narrow product set.

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Our on-net service does not rely on circuits that must be provisioned by a third-party carrier.

In our on-net multi-tenant office buildings (“MTOBs”) we provide our customers the entire network, including the “last mile” and the in-building wiring connecting to our customer’s suite.

In our carrier neutral data centers (“CNDCs”) we are collocated with our customers.

In our on-net MTOBs we provide our customers the entire network, including the “last mile” and the in-building wiring connecting to our customer’s suite.

In our CNDCs we are collocated with our customers.

As a result, only a cross-connection within the data center is required to provide our services to our customers.

2 unchanged sentences

The vast majority of our on-net services can be installed in less than two weeks which is materially faster than the installation times for some of our incumbent competitors.

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High-Quality, Reliable Service.

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Grow our Corporate Customer Base.

Our on-net corporate customers are typically small to medium-sized businesses connected to our network through multi-tenant office buildings or connected to our network through one of our carrier neutral data centers.

Our on-net corporate customers are typically small to medium-sized businesses connected to our network through MTOBs or connected to our network through one of our CNDCs.

We generally sell two types of services to our corporate customers:

4 unchanged sentences

We believe that the importance of data centers will increasingly lead tenants to reconfigure their communications infrastructure to include dedicated internet access across their locations.

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Increase our Share of the Net-Centric Market.

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We expect that we will continue to grow our shares of these segments by offering our customers a series of attractive features including:

● Geographic breadth – We have the broadest carrier neutral data center footprint in the industry and currently offer network services in 51 countries – as net-centric customers seek a more international audience this footprint is a significant advantage;

● High capacity and reliability – We offer 100 Mbps to 100 Gbps ports in all of the carrier neutral data centers and 400 Gbps in selected locations on our network, which differentiates the capacity choices we provide our net-centric clients;

● Geographic breadth – We have the broadest CNDC footprint in the industry and currently offer network services in 51 countries – as net-centric customers seek a more international audience this footprint is a significant advantage;

● High capacity and reliability – We offer 100 Mbps to 100 Gbps ports in all of the CNDCs and 400 Gbps in selected locations on our network, which differentiates the capacity choices we provide our net-centric clients;

● Balanced customer base – Our leading share of content providers and access networks increases the amount of traffic that originates and terminates on our network thereby reducing latency and enhancing reliability;

● Large and dedicated salesforce – Our team of 208 net-centric sales professionals is one of the largest salesforces in this industry segment and enables us to better serve this customer segment while also identifying new sales opportunities and gaining new business and customers.

● Competitive pricing – We aggressively price and offer discounts for our services to customers in order to attract new customers and drive volume.

Develop a Worldwide Peering Platform.

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Our high-capacity network provides us with the ability to add a significant number of customers to our network with minimal direct incremental costs.

We intend to increase usage of our network and operational infrastructure by adding customers in our existing on-net buildings, as well as developing additional markets and connecting more multi-tenant office buildings and carrier neutral data centers to our network.

We emphasize our on-net services because they generate greater profit margins and we have more control over service levels, quality, pricing and our on-net services are provisioned in considerably less time than our off-net services.

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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.

Expand our product offerings to include wavelength services.

In connection with our Sprint acquisition we will begin to provide optical wavelength services over our fiber network.

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Results of Operations

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

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

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

1 unchanged sentence

Three Months Ended

September 30,

(in thousands)

4 unchanged sentences

Selling, general, and administrative expenses (2)

Acquisition costs - Sprint (T-Mobile Wireline)

Depreciation and amortization expenses

Foreign exchange gain (loss) - 2024 Notes

Loss on debt extinguishment and redemption – 2024 Notes

Loss on debt extinguishment and redemption – 2022 Notes

Foreign exchange gain - 2024 Notes

Change in valuation expense – interest rate swap

1 unchanged sentence

Income tax expense

(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.

(1) Includes equity-based compensation expenses of $176 and $163 in the three months ended September 30, 2022 and 2021, respectively.

(2) Includes equity-based compensation expenses of $6,035 and $6,425 in the three months ended September 30, 2022 and 2021, respectively.

NM – not meaningful

Three Months Ended

September 30,

Other Operating Data

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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.

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 CNDCs and MTOBs 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.

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

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

Our service revenue increased by 1.4% from the three months ended September 30, 2021 to the three months ended September 30, 2022.

Exchange rates negatively impacted our increase in service revenue by $4.2 million.

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.

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

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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 $1.4 million from the three months ended June 30, 2021 to the three months ended June 30, 2022.

The impact of these taxes including the Universal Service Fund, resulted in a decrease to our revenues of $0.7 million from the three months ended September 30, 2021 to the three months ended September 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 57.4% 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.

Revenues from our corporate and net-centric customers represented 57.0% and 43.0% of total service revenue, respectively, for the three months ended September 30, 2022 and represented 60.2% and 39.8% of total service revenue, respectively, for the three months ended September 30, 2021.

Revenues from corporate customers decreased by 4.0% to $85.5 million for the three months ended September 30, 2022 compared to the three months ended September 30, 2021.

Revenues from our net-centric customers increased by 9.6% to $64.5 million for the three months ended September 30, 2022 compared to the three months ended September 30, 2021.

Exchange rates negatively impacted our increase in our net–centric service revenue by approximately $4.2 million.

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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 18.7% from the three months ended June 30, 2021 to the three months ended June 30, 2022.

Our average price per megabit of our installed base of customers declined by 20.8% from the three months ended September 30, 2021 to the three months ended September 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 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.

Our on-net revenues increased by 1.9% from the three months ended September 30, 2021 to the three months ended September 30, 2022.

Our on-net revenues increased as we increased the number of our on-net customer connections by 3.1% at September 30, 2022 from September 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 September 30, 2021 to the three months ended September 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 1.1% 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.

Our off-net revenues decreased by 0.1% from the three months ended September 30, 2021 to the three months ended September 30, 2022.

Our off-net revenues decreased primarily from the decrease in our off-net ARPU from the three months ended September 30, 2021 to the three months ended September 30, 2022 offsetting the 6.9% increase in the number of our off-net customer connections from September 30, 2021 to September 30, 2022 and the negative impact of foreign exchange rates.

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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 June 30, 2021 to the three months ended June 30, 2022.

Our network operations expenses, including non-cash equity-based compensation expense, increased by 1.0% from the three months ended September 30, 2021 to the three months ended September 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 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.

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 a $0.7 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 4.8% from the three months ended June 30, 2021 to the three months ended June 30, 2022.

Our SG&A expenses, including non-cash equity-based compensation expense, decreased by 2.5% from the three months ended September 30, 2021 to the three months ended September 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 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.

SG&A expenses decreased primarily from a decrease in salaries and benefits from a weighted average reduction in our total headcount during the three months ended September 30, 2022 compared to the three months ended September 30, 2021 and a reduction in our bad debt expense.

Our sales force headcount, inclusive of sales management, was 669 at September 30, 2022 and 662 at September 30, 2021, and our total headcount was 1,041 at September 30, 2022 and 1,031 at September 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 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.

Acquisition Costs – Sprint (T-Mobile Wireline).

In connection with the Transaction and the negotiation of the Purchase Agreement the Company incurred $2.0 million of professional fees in the three months ended September 30, 2022.

Subject to the satisfaction or waiver of certain conditions and the other terms and conditions of the Purchase Agreement, the Transaction is expected to close in the second half of 2023.

Depreciation and Amortization Expenses.

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.

Our depreciation and amortization expense increased by 1.3% from the three months ended September 30, 2021 to the three months ended September 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 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.

Interest Expense.

Our interest expense resulted from 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 increased by 25.7% from the three months ended September 30, 2021 to the three months ended September 30, 2022.

This increase was primarily due to the increase in interest expense from the increase in interest rates on our 7.0% 2027 Notes as compared to our 4.375% 2024 Euro Notes.

Change in Valuation - Interest Rate Swap Agreement.

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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.

As of September 30, 2022 the fair value of our Swap Agreement was a net liability of $54.7 million and we recorded an unrealized loss for the non-cash change in the valuation of the Swap Agreement of $16.9 million in the three months ended September 30, 2022 and $3.1 million in the three months ended September 30, 2021.

We did not elect hedge accounting for our Swap Agreement.

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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 .

Under the Swap Agreement 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.

Under the Swap Agreement settlement payment made in November 2022, the Company made a payment of $3.4 million to the counterparty for a net cash interest cost of $3.4 million for the period from May 1, 2022 to October 31, 2022.

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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 $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.

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 September 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 $10.2 million for the three months ended September 30, 2021.

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

Income Tax Expense.

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.

Our income tax expense was $1.0 million for the three months ended September 30, 2022 and $8.7 million for the three months ended September 30, 2021.

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

As of September 30, 2022 and 2021, we had a total of 3,126 and 3,008 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

Nine Months Ended September 30, 2022 Compared to the Nine Months Ended September 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

Nine Months Ended

September 30,

(in thousands)

4 unchanged sentences

Selling, general, and administrative expenses (2)

Acquisition costs - Sprint (T-Mobile Wireline)

Depreciation and amortization expenses

Foreign exchange gain – 2024 Notes

Foreign exchange gains – 2024 Notes

Loss on debt extinguishment and redemption – 2024 Notes

3 unchanged sentences

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.

(1) Includes equity-based compensation expenses of $465 and $2,375 in the nine months ended September 30, 2022 and 2021, respectively.

(2) Includes equity-based compensation expenses of $17,709 and $18,394 in the nine months ended September 30, 2022 and 2021, respectively.

NM – not meaningful

Six Months Ended

Nine Months Ended

September 30,

Other Operating Data

2 unchanged sentences

Customer Connections—end of period

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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.

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

2 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 1.0% from the six months ended June 30, 2021 to the six months ended June 30, 2022.

Our service revenue increased by 1.1% from the nine months ended September 30, 2021 to the nine months ended September 30, 2022.

Exchange rates negatively impacted our increase in service revenue by $9.7 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.

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

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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.

The impact of these taxes including the Universal Service Fund, resulted in a decrease to our revenues of $2.8 million from the nine months ended September 30, 2021 to the nine months ended September 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.

Revenues from our corporate and net-centric customers represented 57.4% and 42.6% of total service revenue, respectively, for the nine months ended September 30, 2022 and represented 61.4% and 38.6% of total service revenue, respectively, for the nine months ended September 30, 2021.

Revenues from corporate customers decreased by 5.4% to $256.8 million for the nine months ended September 30, 2022 compared to the nine months ended September 30, 2021.

Revenues from our net-centric customers increased by 11.6% to $190.8 million for the nine months ended September 30, 2022 compared to the nine months ended September 30, 2021.

Exchange rates negatively impacted our increase in our net-centric service revenue by approximately $9.7 million.

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

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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.

Our average price per megabit of our installed base of customers declined by 19.4% from the nine months ended September 30, 2021 to the nine months ended September 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.

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Our on-net revenues increased by 1.7% from the nine months ended September 30, 2021 to the nine months ended September 30, 2022.

Our on-net revenues increased as we increased the number of our on-net customer connections by 3.1% at September 30, 2022 from September 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 nine months ended September 30, 2021 to the nine months ended September 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.

Our off-net revenues decreased by 0.7% from the nine months ended September 30, 2021 to the nine months ended September 30, 2022.

Our off-net revenues decreased primarily from the decrease in our off-net ARPU from the nine months ended September 30, 2021 to the nine months ended September 30, 2022 offsetting the 6.9% increase in the number of our off-net customer connections from September 30, 2021 to September 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.

Our network operations expenses, including non-cash equity-based compensation expense, increased by 0.7% from the nine months ended September 30, 2021 to the nine months ended September 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.

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 $2.8 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.

Our SG&A expenses, including non-cash equity-based compensation expense, decreased by 3.1% from the nine months ended September 30, 2021 to the nine months ended September 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.

SG&A expenses decreased primarily from a decrease in salaries and benefits from a weighted average reduction in our total headcount during the nine months ended September 30, 2022 compared to the nine months ended September 30, 2021 and a reduction in our bad debt expense.

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 2022.

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.

Acquisition Costs – Sprint (T-Mobile Wireline).

In connection with the Sprint Transaction and the negotiation of the Purchase Agreement the Company incurred $2.0 million of professional fees in the nine months ended September 30, 2022.

Subject to the satisfaction or waiver of certain conditions and the other terms and conditions of the Purchase Agreement, the Transaction is expected to close in the second half of 2023.

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.

Our depreciation and amortization expense increased by 3.0% from the nine months ended September 30, 2021 to the nine months ended September 30, 2022.

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

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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.

Our interest expense increased by 2.8% from the nine months ended September 30, 2021 to the nine months ended September 30, 2022.

The increase 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 being offset by the increase in interest rates on our 7.0% 2027 Notes as compared to our 4.375% 2024 Euro Notes.

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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.

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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 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.

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.

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 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.

As of September 30, 2022 the fair value of our Swap Agreement was a net liability of $54.7 million and we recorded an unrealized loss for the non-cash change in the valuation of the Swap Agreement of $45.7 million in the nine months ended September 30, 2022 and $3.1 million in the nine months ended September 30, 2021.

Gain on Foreign Exchange – 2024 Notes.

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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.

Our gain on foreign exchange on our 2024 Notes from converting our 2024 Notes into US Dollars was $31.6 million for the nine months ended September 30, 2022 and was $23.8 million for the nine months ended September 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.

Our income tax expense was $10.1 million for the nine months ended September 30, 2022 and $16.5 million for the nine months ended September 30, 2021.

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

As of September 30, 2022 and 2021, we had a total of 3,126 and 3,008 on-net buildings connected to our network, respectively.

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

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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.

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

Under the Swap Agreement the settlement payment made in November 2022, the Company made a payment of $3.4 million to the counterparty for a net cash interest cost of $3.4 million for the period from May 1, 2022 to October 31, 2022.

As of September 30, 2022 the fair value of the Swap Agreement was a net liability of $54.7 million.

We have made a $57.2 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.

If the fair value of our Swap Agreement exceeds a net liability of $57.2 million we will be required to deposit additional funds with the counterparty equal to the net liability fair value.

As of September 30, 2022, $54.7 million of our deposit was restricted and $2.4 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.

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The following table sets forth our consolidated cash flows.

Six Months Ended June 30,

Nine Months Ended September 30,

(in thousands)

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Effect of exchange rates changes on cash

Net increase in cash, cash equivalents and restricted cash

Net decrease in cash, cash equivalents and restricted cash

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Net Cash Provided by Operating Activities.

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

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

Purchases of property and equipment were $59.4 million and $54.6 million for the nine months ended September 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 six months ended June 30, 2022 and 2021, we paid $83.2 million and $73.1 million, respectively, for our quarterly dividend payments.

During the nine months ended September 30, 2022 and 2021, we paid $125.9 million and $110.7 million, respectively, for our quarterly dividend payments.

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

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.

Principal payments under our finance lease obligations were $21.0 million and $16.8 million for the nine months ended September 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 $0.8 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.

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

We completed a series of debt redemptions and issuances in the nine months ended September 30, 2022 and the nine months ended September 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.

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Cash Position and Indebtedness

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.

Our total indebtedness, at par, at September 30, 2022 was $1.2 billion and our total cash, cash equivalents and restricted cash were $323.7 million.

Our total indebtedness at September 30, 2022 includes $287.9 million of finance lease obligations for dark fiber under long-term IRU agreements.

Summarized Financial Information of Holdings

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

June 30, 2022

September 30, 2022

Cash and cash equivalents

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Accumulated deficit

June 30, 2022

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September 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 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.

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

As of September 30, 2022, there was a total of $30.4 million available under the Buyback Program which is authorized to continue through December 31, 2023.

Dividends on Common Stock and Return of Capital Program

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.

On November 2, 2022, our Board of Directors approved the payment of our quarterly dividend of $0.915 per common share.

This estimated $42.8 million dividend payment is expected to be made on December 2, 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.

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The amounts involved in any such transaction, individually or in the aggregate, may be material.

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Off-Balance Sheet Arrangements

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Impact of COVID-19 on Our Liquidity and Operating Performance

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.

We continue to operate with a high level of liquidity, and as of September 30, 2022, we had cash, cash equivalents and restricted cash of $323.7 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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First, we mandated that all U.S.

employees receive a COVID-19 booster vaccine no later than six weeks after first becoming eligible for such vaccine.

employees receive a COVID-19 booster vaccine no later than nine weeks after first becoming eligible for such vaccine.

Second, we mandated that all U.S.

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Third, for offices around the world that had not been closed by government order, we shifted much of our workforce to fully remote status on a temporary basis at the end of 2021 in order to reduce the density of our offices.

Sales representatives with less than 12 months tenure, sales representative on performance improvement plans and their managers remained working in our offices on a full-time basis, as we believe that the training and coaching required by new and underperforming sales representatives is significantly more effective when provided in an in-office environment.

Sales representatives with less than 12 months tenure, sales representatives on performance improvement plans and their managers remained working in our offices on a full-time basis, as we believe that the training and coaching required by new and underperforming sales representatives is significantly more effective when provided in an in-office environment.

In March 2022, all of our US employees returned to our offices on a full-time basis, and our employees around the world have returned to the office as and when permitted by local regulations.

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, beginning in the second half of 2021 and continuing into the first half 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 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.

As a result of our decisions to mandate COVID vaccination and to require employees to return to our offices on a full time basis, we may find it difficult to retain existing employees or hire new employees.

Further, a resurgence of COVID-19 due to immunity-resistant variants may cause employees to be more reluctant to continue in, or make new employees more reluctant to accept, a full time, in-office position due to concerns about COVID-19.

If this occurs, we may experience lower sales, revenue and profitability.

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We have experienced certain corporate customers taking 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.

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While we believe that demand for office space in the buildings in which we operate will remain among the strongest in our markets, and that most employers will eventually require their employees to return to their offices, we may experience increased customer turnover, fewer upgrades of existing customer configurations and fewer new tenant opportunities.

A potential resurgence of COVID-19 due to new immunity-resistant variants in the fall and winter of 2022 into 2023 could cause companies to continue to delay the return of their employees to the office, to cause companies to shift workers in the office back to remote work and to delay further opening new offices.

These trends may negatively impact our revenue growth, cash flows and profitability.

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Critical Accounting Policies and Significant Estimates

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.

Management believes that as of September 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 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.

Management believes that as of September 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