Cogent Communications Holdings, Inc.

website. I would now like to turn the call over to Mr. Dave Schaefer, Chairman and Chief Executive Officer of Cogent Communications Holdings.

Yeah, hi, good morning. Welcome to our earnings call for the fourth quarter of 2023 and full year 2023. I'm Dave Schaefer, Cogent's Chief Executive Officer. With me on this morning's call is Tad Weed, our Chief Financial Officer. Hopefully you've had a chance to review our earnings press release. Our press release includes a number of historical metrics that we present on a consistent basis each and every quarter. Now for a quick summary of our results. We closed the acquisition of the Sprint business on May 1st, 2023. This transaction significantly expanded our network, our customer base, and materially increased the scope and scale of our business. Our annualized revenue run rates are now in excess of a billion dollars. We acquired a large number of enterprise customer relationships. These customers are typically larger than our cogent legacy corporate customer base. We also acquired a significant network comprised of owned fiber, and owned facilities, many of which are being converted to data centers. We acquired a network with an appraised value substantially above a billion dollars for $1. We are repurposing the acquired fiber network to be optimized for the sale of wavelength services. We received a total of $700 million over time from T-Mobile to offset the operating losses of serving enterprise customers. 350 million of these payments will be made in the first year at 29.2 million per month. And then 350 million of payments will be spread out over the next 42 months of 8.3 million per month. We remain optimistic about the cash flow capabilities of our combined operations. Our recent results show that we have achieved immediate and substantial savings in multiple areas, many of which have exceeded our initial expectations. We anticipate additional cost savings from our current run rates. Our combined cogent business had a very good quarter and a very good year. Our total revenues for the quarter were $272.1 million and $940,900,000 for full year 2023. Our EBITDA as adjusted for the quarter was $110,500,000 and for the full year was $352.5 million in 2023. Our EBITDA as adjusted margin was 40.6% for the quarter and 37.5% for full year 2023. We received three payments totaling 87.5 million from T-Mobile this quarter and a total of seven payments in 2023 totaling 204.2 million. Our gross total debt trailing 12-month EBITDA is adjusted, and our net debt ratio significantly improved in the quarter. Our gross debt to trailing 12-month EBITDA as adjusted ratio was 4.07 at year end, and our net debt ratio was 3.75, a substantial improvement from the 4.8 to three times in the last quarter. Our network traffic increased sequentially by 7% and was up 22% year over year. We have a number of areas in which we expect to continue to execute on cost savings. We're in the process of realizing savings and synergies over a three-year period that will result in an annualized savings of $220 million. We anticipate achieving additional SG&A savings and other cost and revenue synergies over this over the next several years, hopefully exceeding that $220 million target. Our recent progress in achieving these savings is very encouraging, And we do intend to surpass the targets that we have laid out. Our Salesforce productivity last quarter was 3.6 units installed per rep and 3.3 units per full-time equivalent this quarter. Our sales rep productivity has been substantially impacted by the enterprise customer reps that joined us from the Sprint business. These new enterprise reps are continuing to receive training on Cogent sales processes and have not yet reached their full productivity. Now for the size and scope of our sales force, in connection with the Sprint acquisition, we hired a total of 942 employees. As of today, 742 of these employees remain employed with Koja. During the quarter, our total sales rep count increased by 20, or approximately a 3% sequential increase. For full year 2023, our total sales reps increased by 109, or a 20% increase, substantially ahead of our normal rate of sales worth growth. catching up for some of the solar growth that occurred throughout the pandemic years. We ended the year with 657 sales reps, of which 620 were counted as full-time equivalents. Now for some comments on our wavelength and optical transport services. In connection with our acquisition of the Sprint business, We are expanding our product offering to include wavelengths and optical transport over our newly acquired fiber optic network. We are selling these wavelength services to existing customers as well as customers acquired from Sprint. These customers require dedicated optical transport connectivity without the capital and ongoing expenses associated with operating their own network. We have sold wavelengths to date in 65 locations. Many of these have shorter provisioning cycles. We have connectivity and capability to sell wavelengths today in an additional 285 locations with longer provisioning cycles. By year end 2024, we expect to be able to offer wavelength services in 800 North American carrier neutral data center locations with substantially shorter provisioning times. Our footprint expanded materially with the acquisition of Sprint. We added 18,905 route miles of own litter city fiber and 12,000, excuse me, 1,257 route miles of owned metropolitan fiber to our network. We also added 11,400 route miles of inner-city IRU fiber and approximately 4,500 route miles of metropolitan IRU fiber to the CoGED network. We are in the process of rationalizing these acquired IRU fiber agreements as their contractual terms allow us to exit them. To date, we have also reconfigured 22 of the acquired SPRINT facilities into data centers, and we added these new data centers to the 1,558 carrier-neutral data centers that we operate, bringing and brought the total of Cogent-operated data centers to 77. which today have 157 megawatts of power. We're in the process of converting an additional 23 Sprint facilities into Cogent data centers and optimizing and rationalizing our data center footprint. During the quarter, we returned $46.4 million to our shareholders with our regular quarterly dividends. We paid four quarterly dividends in 2023, totaling $181.7 million or $3.76 per share. We expect the tax treatment for these dividends are generally treated as completely return of capital. So therefore 100% of those dividends will be treated on a tax deferred basis. Our Board of Directors, which continues to evaluate our growth in cash flow and the capabilities of our team to execute against our opportunities, inclusive of the Sprint acquisition, increased our quarterly dividend yet again by a penny a share sequentially, raising our quarterly dividend from 99.5 cents per share per quarter to 96.5 cents per share per quarter. This increase represents the 46th consecutive sequential increase in our quarterly dividend and a 4.3% annual growth rate in that dividend. Now for a couple of comments around our long-term targets. Now that Cogent is fully integrated and combined with the Sprint business, we anticipate our long-term average revenue growth to remain between 5% and 7% annually. And we expect our EBITDA margins as adjusted to increase by approximately 100 basis points annually. This will be impacted in the short term by the step-down in payments from T-Mobile. Our revenue and EBITDA guidance targets are intended to be multi-year goals and are not intended to be used as quarterly or annual specific targets. Our EBITDA as adjusted and leverage ratios are impacted by the $700 million payment stream that we received from T-Mobile. Beginning in May of 2024, these payments will step down from $29.2 million per month to $8.3 million a month and remain in place for the subsequent 42 months. The reductions will impact our future EBITDA as adjusted, leverage ratios, and will impact our ratios in the third quarter of 2024 on a trailing 12-month basis. Now, I'd like to turn it over to Tad to read our safe harbor language and provide some additional details, and then I will jump back on to address some additional operating metrics.

Tad Hallman Thank you, Dave, and good morning, everyone. This earnings conference call includes forward-looking statements These forward-looking statements are based upon our current intent, belief, and expectations. These forward-looking statements and all other statements that we made on this call that are not historical facts are subject to a number of risks and uncertainties, and actual results may differ materially. Please refer to our SEC filings for more information on the factors that could cause actual results to differ. Cogent undertakes no obligation to update or revise our forward-looking statements. If we use non-GAAP financial measures during this call, you will find these reconciled to the corresponding GAAP measurement in our earnings releases that are posted on our website at cogentco.com. So some comments on the accounting for the Sprint acquisition, which was very complex, frankly. In connection with our accounting for the acquisition, we recorded a total gain on bargain purchase for the year of $1.4 billion, or almost $27 per share for the year. Included in that $1.4 billion gain is the discounted present value of the $700 million IP Transit Services Agreement with T-Mobile. During the fourth quarter, and in consultation with our auditors and valuation specialists, a Big Four accounting firm, we recorded both Big Four accounting firms, We recorded an additional intangible asset for 9.9 million of IPv4 internet addresses that we acquired in the Sprint acquisition. These IPv4 addresses have an indefinite useful life and are not being amortized. This asset was recorded at 458 million, or an average of about $46 per address. because of the novel nature of this asset and the fact that the transaction has already resulted in a material borrowing purchase gain prior to recording this asset. We recorded the asset after consideration of the appropriate valuation approach. The net after-tax impact of recording the IPv4 internet addresses and other valuation adjustments that we made this quarter resulted in a net additional gain on the bargain purchase of $254 million that we recorded in the fourth quarter. The acquired network, including owned real estate assets, fiber routes, right-of-way agreements, network equipment, and the IPv4 internet addresses, have been appraised by a Big Four accounting firm at a total valuation of $1.4 billion. The total fair value of the net assets acquired, so net of liabilities, was $800 million, and including the net present value of the consideration to be paid to us by T-Mobile of $600 million, a discounted value, and the $458 million of IPv4 internet addresses. Again, the total acquisition resulted in a $1.4 billion bargain purchase gain. These amounts are subject to additional adjustments through one year from the closing date, which will be May 1 of 2024. Some comments on corporate and net-centric revenue and customer connections. We analyze our revenues based upon network connection type, which is on-net, off-net, wavelength services, and non-core services. and we analyze our revenues based upon customer type, and we classify all of our customers into three types, net-centric, corporate, and enterprise. Our corporate business continues to be influenced by real estate activity in central business districts. We continue to remain cautious in our outlook for our corporate revenues, given the uncertain economic environment and other challenges from the lingering pandemic effects. Our corporate business was 46.5% of our revenues this quarter and our quarterly corporate revenue increased year over year by 47.6% to a total of 126.6 million from the fourth quarter of last year and increased sequentially by 5.1%. For the full year 2023, corporate revenue increased by 29.5% to 443.7 million. we had 54,493 corporate customer connections on our network at year-end. This represented a sequential decrease of 1% and a year-over-year increase of 21.5%. For the quarter, the sequential impact of USF taxes recorded as revenues on our corporate revenues was a positive $5.9 million and a positive year-over-year quarterly impact of $16.3 million. For the full year, the positive USF impact was $34.8 million. Some comments on the net-centric business. Our net-centric business continues to benefit from the continued growth in video traffic, streaming, and wavelength sales. Our net-centric business represented 34.2% of our revenues this quarter, and declined sequentially by 1.9% to 93.1 million and grew by 40.7% on a year over year basis. For the full year 2023, our net centric revenue increased by 33.7% to 343.6 million. We had 62,370 net centric customer connections on our network at year end That was a slight sequential increase of 0.1% and a year-over-year increase of 20.7%. Comments on the enterprise business. Our enterprise business represented 19.2% of our revenues for the quarter and was $52.3 million. We had 20,740 enterprise customer connections at the end of the year on our network. Our enterprise revenue decreased sequentially by $7.7 million or by 12.8%. For the full year 2023, our enterprise business revenue was 16.3% of our revenues. It's a reminder there was no enterprise revenue last year, or $153.6 million. Lastly, on the wavelength business, our new wavelength product represented 1.2% of our revenues this quarter and was 3.3 million, and we had a total of 667 wavelength connections on our network at year end. Revenue and customer connections by network type. Need to make some comments also on the billing transition that we went through in the fourth quarter. In the fourth quarter, we fully integrated our Sprint customers into our billing platform. All Cogent customers worldwide are now billed from one Cogent billing system. This transition delayed some customer payments from December into January since the former Sprint customers needed to update their systems to remit payments to our lockbox from the T-Mobile lockbox. This increased our day sales to 37 at year end, which was a temporary increase. Additionally, once we provisioned every Sprint order into our billing system, we reclassified 1 million of on-net revenue and 400,000 of off-net revenue from Q3 to non-core revenue. We also reclassified 1,373 on-net customer connections at the end of the third quarter to 157 off-net customer connections and 1,216 non-core customer connections. This was to conform to our classification methodology as we were using the T-Mobile billing system through October of 2023. These changes are reflected retroactively in our summary of financial and operational results tables that is included in our press release. On net revenue. Our on-net revenue, including wavelength revenue, was $141.2 million for the quarter. That was a sequential increase of 6.9% and a year-over-year increase of 22.8%. For the full year 2023, our on-net revenue increased by 14.5% to $518.6 million. Our on-net customer connections were $88,733 at year-end. We serve our on-net customers in our 3,277 total on-net multi-tenant office and carrier neutral data center buildings. We continue to succeed in selling larger 100 gigabit connections and 400 gigabit connections in carrier neutral data centers and selling 10 gigabit connections in selected multi-tenant office buildings. Selling these larger connections has the impact of increasing our year-over-year and sequentially on-net ARPU. Our off-net revenue was $123.7 million for the quarter. That was a sequential decrease of 5.3% and a year-over-year increase of 235.4%. The sequential decline in our off-net revenue was partially impacted by our migration of certain off-net customers to on-net. For full year 2023, our off-net revenue increased by 169.2% to $393.5 million. Our off-net customer connections were 36,895 at year end, and we served these off-net customers in over 27,000 off-net buildings. These off-net buildings are primarily located in North America. Lastly, on non-core revenues, Our non-core revenue was $7.3 million for the quarter. That was a sequential decrease of $5.6 million or 43.5% due to our decision to end-of-life these non-core products. Non-core customer connections were $1,975 year-end. Some statistics on pricing. Our average price per megabit for our installed base decreased sequentially by 7.1% to $0.28. but increased year-over-year by 4.9%. Our average price per megabit for our new customer contracts for the quarter was $0.10. ARPU. Our on-net ARPU increased sequentially and our off-net ARPU decreased. However, our year-over-year on-net and off-net ARPUs increased, primarily from the impact of the Sprint business and also selling larger connections. Our on-net ARPU increased sequentially by 9.7% from 484 to 530. Year over year, our on-net ARPU increased by 14.4% from 464 last year. Our off-net ARPU decreased sequentially by 2.9% from 1,150 to 1,117. Year over year, our off-net ARFU increased by 22.2% from $914 last year. Our sequential churn rate for our on-net and off-net connections for the combined business improved. Our on-net unit monthly churn rate was 1.2% for the quarter, which was a material improvement from 1.8% last quarter. Our off-net unit Monthly churn rate was 1.3% this quarter and improvement from 1.5% last quarter. EBITDA and EBITDA margin. We reconcile our EBITDA to our cash flow from operations in each of our quarterly press releases. We incurred $17 million of Sprint non-capital acquisition costs this quarter compared to $400,000 last quarter, included in that $17 million of Sprint acquisition costs quarter are $16.2 million of severance costs that we paid but are fully reimbursed by T-Mobile and have been fully reimbursed. Under U.S. GAAP, these costs need to be reported as SG&A post-acquisition costs and correspondingly as a component of the bargain purchase gain, so no net P&L impact. And they are reflected as Sprint acquisition costs since they are directly tied to the acquisition. classified that way on our P&L. EBITDA as adjusted and EBITDA as adjusted margin. Our EBITDA as adjusted includes adjustments for Sprint acquisition costs and cash payments received under the $700 million IP Transit Services Agreement with T-Mobile. We billed and collected $87.5 million under that agreement this quarter. We billed $233.3 million and collected $242.2 million under that agreement for the full year 2023. All amounts billed under the IP Transit Services Agreement have been paid to us on time. Our EBITDA as adjusted for Sprint acquisition costs and cash payments under the IP Transit Services Agreement was $110 million for the quarter and a 40.6% margin. EBITDA as adjusted was $352.5 million for the full year and a 37.5% margin. Comments on foreign currency. Our revenue earned outside of the United States is reported in US dollars and was about 16% of our revenue this quarter and 18% for the year. About 10% of our revenues for the quarter were based in Europe and the remaining 6% outside of the U.S. were related to Canada, Mexico, Oceanic, South American, and African operations. The average USD to Euro rate so far this quarter is $1.09, and the Canadian dollar average rate, 75 cents. And if those average rates remain at their current levels for the remainder of the first quarter of this year, we estimate that the FX conversion impact on our sequential quarterly revenues would be positive and about half a million dollars and the same impact on a year-over-year basis. We believe that our revenue and customer base is not very highly concentrated even with the Sprint acquisition, including the impact of the customers acquired in the Sprint business. Our top 25 customers represented 16% of our revenues this quarter and 15% for the year. Our quarterly CapEx was $43.6 million this quarter, and our CapEx was $129.6 million for the year. We are continuing our network integration of the former Sprint network and legacy Cogent network to one unified network and converting Sprint switch sites into Cogent data centers. On finance leases and payments, Our finance lease IRU obligations are for long-term dark fiber leases and typically have initial terms of 15 to 20 years or longer and often include multiple renewal options after the initial term. Our total IRU finance lease obligations were $484.5 million at quarter end. We have a very diverse set of IRU suppliers and we have contracts with over 325 different dark fiber suppliers worldwide. comments on cash and cash flow. At quarter end, our cash and cash equivalents and restricted cash is 113.8 million. Our 38.7 million of restricted cash is directly tied to the estimated fair value of our interest rate swap agreement. Our operating cash flow results are materially impacted by the timing and amount of our payments under our transition services agreement with T-Mobile and the presentation of payments under the $700 million IP transit services agreement. Payments under the IP transit $700 million agreement under US GAAP are considered cash receipts from investing activities and not classified as operating activities. Our operating cash flow was a use of $32.5 million for the quarter compared to $52.4 million of a use last quarter. Our operating cash flow this quarter was impacted by the billing conversion, and our operating cash flow was $33.6 million for full year 2023. Our payments received under the IP Transit Agreement are recorded as cash provided by investing activities and were $87.5 million last quarter, the same as this quarter, and for the year, $204.2 million was collected. Our total gross debt at par, including finance IRU lease obligations, was $1.5 billion at year end, and net debt was $1.4 billion. Our total gross debt to last 12 months EBITDA has adjusted, and our net debt ratios both significantly improved this quarter. Our total gross debt to last 12 months EBITDA as adjusted was $4.07 at year end, and net debt was $3.75. an improvement of 4.23 at the end of Q3. This is compared to a gross debt and last 12 months EBITDA as adjusted ratio of 4.79 at the end of Q3 and again, a net ratio of 4.23 last quarter. Our consolidated leverage ratio as calculated under our note indentures, slightly different, reduced to 3.67 from 4.57 last quarter, and our secured leverage ratio is calculated under the note indentures reduced to 2.4 from 2.97 last quarter. Some comments related to our swap agreement. We are party to an interest rate swap agreement that modifies our fixed interest rate obligation associated with our $500 million 2026 notes to a variable interest rate obligation based upon the secured overnight financing rate or SOFR For the remaining term of those notes, we recorded the estimated fair value of the swap agreement each reporting period and incur corresponding non-cash gains and losses due to the changes in market interest rates. Our interest expense and operating cash flow for the full year 2023 was impacted by $21.5 million of interest expense paid in May and November associated with the swap agreement. and that was compared to 2.1 million last year. The fair value of our swap agreement decreased by 17.7 million from last quarter to 38.7 million. We are required to maintain a restricted cash balance with the counterparty equal to the liability. Our day sales outstanding, or DSO, as I mentioned earlier, was significantly impacted by the billing conversion. Our DSO for worldwide accounts receivable was 37 days versus 27 last quarter. Our DSOs after year end have reverted back to historical norms. Our bad debt expense was $1.9 million and 0.7% of our revenues for the quarter. That was also impacted by the billing conversion. Our bad debt expense was $8.6 million and 0.9% of our revenues for the year. Finally, I want to thank and recognize our worldwide billing and collection team members for managing this billing conversion from the legacy T-Mobile Sprint billing platform to our Cogent billing engine. This was a tremendous operational achievement, and we completed this in only six months from the acquisition date. All customers were billed worldwide from the Cogent billing system starting in November of 2023. I will now turn the call back over to Dave.