Cogent Communications Holdings, Inc.

Good morning and welcome to the Cogent Communications Holdings first quarter 2024 earnings conference call. As a reminder, this conference call is being recorded and it will be available for replay at www.cogentcall.com. A transcript of this conference call will be posted on Cogent's website when it becomes available. Cogent's summary of financial and operational results Attached to its press release can be downloaded from the Cogent's website. I would now like to turn the call over to Mr. Dave Schaefer, Chairman and Chief Executive Officer of Cogent Communications Holdings. You may begin.

Thank you, and good morning to everyone. Welcome to our first quarter 2024 earnings conference call. I'm Dave Schaefer, Cogent's Chief Executive Officer, and with me on this morning's call is Tad Weed, or Chief Financial Officer. Hopefully, you've had a chance to review our earnings press release. Our press release includes a number of historical metrics we present in a consistent manner each and every quarter. On May 2nd of this year, we closed the issuance of our $206 million IPv4 securitization notes at 7.9%. These notes mature in five years but may be extended for up to a 30-year term. This securitization was the first ever of a securitization of IPv4 lease revenue. Cochran is the owner of approximately 38.8 million IPv4 addresses. We acquired 28.8 million of these addresses when we purchased PSInet and various other acquisitions early in our history. We acquired an additional 9.9 million IPv4 addresses in May of 2023 with the acquisition of the Sprint Network assets from T-Mobile. We are leasing approximately 12.2 million of these IPv4 addresses out for a monthly revenue run rate of approximately $3.4 million a month. We have securitized 3.1 million of that monthly leased revenue, and this represents revenue from 11.1 million leased addresses. We also included 1.4 million unleased addresses in the pool of this securitization. The IPv4 internet addresses are a finite resource. The price of these addresses has substantially increased over the past several years. Now for an overview of our results. Our combined cogent business had a very good quarter. Our total revenues were $266.2 million and a quarter. This did represent a $5.9 million sequential decline. Our on-net revenues increased by 0.4% to $138.6 million. Our revenue under the commercial services agreement with T-Mobile declined sequentially by 5.8 million. Our non-core revenues declined by 1.2 million. Our wavelength service revenues increased sequentially by 7% to 3.3 million. All of the decline in our revenues was attributable to the decline in commercial services agreements and non-core services as was expected. Our EBITDA as adjusted for the quarter was $115 million, an increase of $4.5 million sequentially, or approximately 4.1%. Our EBITDA as adjusted margin for the quarter was 43.2%. This is up 260 basis points from the 40.6% we reported last quarter. We received three payments from T-Mobile for a total of 87.5 million in the quarter. Our sprint costs are reported separately and were 9 million in a quarter compared to 17 million last quarter. These costs include approximately $4.3 million of severance reimbursement in the quarter as compared to $16.2 million in severance reimbursements in the previous quarter. Despite the seasonally increased costs associated with SG&A in our first quarter, our SG&A did decrease by 6.4% from $74.9 million last quarter to $70.1 million this quarter. These SG&A numbers are net of that severance reimbursement that I mentioned earlier. Our SG&A as a percentage of revenues decreased to 26.3% for the quarter, down from 27.5% last quarter. Our cost of goods sold decreased by 3.2% from the previous quarter. Traffic on our network increased by 1% sequentially and was up 20% year over year. Our gross debt to trailing 12-month EBITDA as adjusted and our net debt ratios both significantly improved in the quarter. Our gross debt to trailing last 12 months EBITDAs adjusted was 3.57 in the quarter, and our net debt ratio was 3.17, substantially below the range we have set historically as a target. We are in the process of realizing cost savings and synergies over the next three years. We will continue to receive the impact of these savings and achieve an aggregate of $220 million in savings. We anticipate additional SG&A and other cost savings and revenue synergies as well over the next several years. Our recent progress in achieving these cost savings are very encouraging. and we intend to surpass our initial targeted savings goals. Our sales force performed well in the quarter. Our rep productivity in Q4 of 2023 was 3.3 installed orders per rep per month. This improved sequentially to four units installed per rep per month in the first quarter of 2024. Our sales rep productivity results do also include the impact of enterprise sales reps that joined us from the acquired sprint business. These new enterprise sales reps are continuing to receive training on coaching sales processes and methods and have not yet fully reached their maximum level of productivity. Now for our total headcount. In connection with the Sprint acquisition, we hired 942 total employees. At quarter end, 718 of these employees remained with Cogent. During the quarter, our total sales rep count increased by 20, or a 3% net sequential increase in our sales floor. Now for our new wavelength and optical transport service business, in connection with the acquisition of Sprint, we have expanded our offerings to utilize the Sprint network to sell wavelength services or optical transport services across that network. We are selling these services to existing customers, to acquired customers, and to new customers. These customers require dedicated optical connectivity without the capital cost and ongoing expenses associated with owning and operating their own transport network. We have connectivity and wavelength sales capabilities today in 419 locations. However, these locations do require longer than acceptable sales provisioning cycles. We have sold wavelengths to date in a total of 104 locations. By the end of this year, we will be able to offer wavelength services in over 800 locations across North America with much more rapid provisioning cycles. Our wavelength revenue in a quarter increased sequentially by 7% to $3.3 million for the quarter. Our Sprint acquisition materially expanded our network footprint. To date, we have reconfigured 25 of the acquired Sprint facilities into cogent data centers and added these data centers to our inventory of 1,586 third-party carrier neutral data centers and 78 cogent data centers, which today contain an operational 159 megawatts of power. We are in the process of converting an additional 23 of these facilities to cogent data centers and optimizing our data center portfolio footprint. In a market where we had a former Sprint data facility that we converted to a data center and a legacy leased Cogent data center, we decommissioned one leased data center in the quarter. Now for a comment on our dividend and buyback strategy. In our first quarter dividend was $45.8 million. and was accrued at quarter end and paid on April 9th due to our expanding the period for our sales call. Our board of directors, which reflected on the strong cash flow generating capability investment opportunities, including the additional opportunities afforded us by the integration of the Sprint assets, decided to increase our quarterly dividend by yet another one cent a share, raising our quarterly dividend from 96.5 cents a share to 97.5 cents per share per quarter. This increase represents the 47th consecutive sequential increase in our regular quarterly dividend and a 4.3% annual growth rate in dividend. Now for a couple of comments on our long-term goals. Now that Cogent is fully integrated and combined with the former Sprint network, we are anticipating long-term average revenue growth rates of between 5% and 7%. And EBITDA has adjusted margin expansion of approximately 100 basis points annually. Our revenue and EBITDA's adjusted guidance targets are intended to be multi-year targets and are not intended to be used as quarterly or specific annual guidance. Our EBITDA's adjusted and leverage ratios are impacted by the $700 million IP transit subsidy agreement that we received with T-Mobile in conjunction with the acquisition. Beginning in June of 2024, these payments monthly will be reduced from $29.2 million a month to $8.3 million a month, and then will continue for an additional 42 months. This reduction will impact our future EBITDAs adjusted, our leverage ratios, beginning in the second quarter of 2024, which are always measured on a trailing 12-month basis. We will also be looking to monetize other assets that were acquired in the acquisition. This will include excess data center space and power, additional monetization of our IPv4 address unleashed inventory, and dark fiber over the next several years. Now I'd like to turn the call over to Tad to read safe harbor language and give some additional operational performance metrics for the quarter. Following these remarks, we will open the floor for questions and answers. Tad.

Thank you, Dave, and good morning to everyone. This earnings conference call includes forward-looking statements. These forward-looking statements are based upon our current intent belief, and expectations. These forward-looking statements and all other statements that may be made on this call that are not historical facts are subject to a number of risks and uncertainties, and actual results may differ materially. Please refer to our SEC filings for more information on the factors that could cause actual results to differ. COGIT 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 gap measurement in our earnings releases that are posted on our website at cogenco.com. We analyze our revenues based upon network connection type, which is on-net, off-net, wavelength, and non-core, and we analyze our revenues based on customer type. We classify all of our customers into three types, net-centric, corporate, and enterprise customers. 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 effects of the pandemic. Our corporate business represented 46.9% of our revenues for the quarter, and it decreased sequentially by 1.4% to 124.9 million. due to the grooming of low-margin off-net connections and the elimination of non-core products. We had 51,821 corporate customer connections on our network at quarter end, and for the quarter, the sequential impact of USF on our corporate revenues was not significant. Our net-centric business continues to benefit from continued growth in video traffic, streaming, and wavelength sales. Our net-centric business represented 34.6% of our revenues for the quarter, and it declined sequentially by 1.3% to 92 million, and the decline was primarily due to the 5.4 million reduction in the commercial services agreement provided at T-Mobile that Dave mentioned earlier. We had 61,599 net-centric customer connections on our network at quarter end. Our enterprise business represented 18.5% of our revenues this quarter and was $49.3 million. We had 19,463 enterprise customer connections at the end of the quarter, and our enterprise revenue decreased sequentially by 5.7%, primarily due to the elimination of non-core products and the grooming of low-margin off-net services. on revenue by network connection type. Our on-net revenue was $138.6 million for the quarter, a sequential increase of 0.4%. Our on-net customer connections were $87,574 at quarter end. We serve our on-net customers in our 3,321 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 on-net ARPU. Our off-net revenue was $118.2 million for the quarter, a sequential decrease of 4.4%. The sequential decline in our off-net revenue was partially impacted by our migration of certain off-net customers to on-net and the grooming of low-margin off-net contacts. Our off-net customer connections were $34,579 at the end of the quarter. Our wavelength revenue was $3.3 million for the quarter, which was a sequential increase of 7%, and that was $693 million. wavelength customer connections. Our non-core revenue was $6 million for the quarter, a sequential increase of $1.2 million, or 16.8%, due to our decision to end-of-life these non-core products. Non-core customer connections were $10,037 at quarter end, a decline of 16.2%. Some comments on pricing. Our average price per megabit for our installed base decreased sequentially by 5.8% to $0.26, but increased year-over-year by 5.9%. Our average price per megabit for our new customer contracts for the quarter was 11 cents, a sequential increase of 5.1%. On ARPU, our on-net ARPU increased sequentially and off-net and wavelength ARPUs slightly decreased. However, our year-over-year on-net and off-net ARPUs increased primarily from the impact of the Sprint business. Our on-net ARPU increased sequentially by 0.8% from 521 to 525. And year over year, our on-net ARPU increased to 12.6%. Last year, it was 467. Our off-net ARPU decreased sequentially by 1.3% from 1,120 to 1,106. And year over year, it was an increase of 21.5%. Last year, it was 910. Our wavelength ARPU was 1,638. Our sequential quarterly churn rate for our on-net and off-net connections for the combined business increased. Our on-net unit churn monthly rate was 1.4% compared to 1.2% last quarter, primarily due to the reduction in the T-Mobile CSA revenue and the associated connections. Our off-net unit monthly turn rate was 2.1% compared to 1.3% last quarter, again, from grooming low-margin off-net contracts and the T-Mobile commercial services contract changes. On EBITDA and EBITDA margin, we reconcile our EBITDA to our cash flow from operations in each of our quarterly earnings press releases. We incurred $9 million of Sprint non-capital acquisition costs this quarter compared to $17 million last quarter. Included in the $9 million of Sprint acquisition costs for the quarter are $4.3 million of severance costs. Included in the $17 million of Sprint acquisition costs last quarter were $16.2 million of severance costs. These severance costs are paid by us but are fully reimbursed by T-Mobile. We will incur some additional severance costs in Q2-24, but none thereafter. Under U.S. GAAP, these severance costs need to be reported as a receivable at the closing date. These severance costs are classified as post-acquisition costs and as a component of the bargain purchase gain. On EBITDA as adjusted and margin, our EBITDA as adjusted includes adjustments, again, for the sprint acquisition costs and cash payments received under our $700 million IP Transit Services Agreement with T-Mobile. We billed and collected $87.5 million under the IP Transit Services Agreement this quarter and last quarter. 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 payments under the IP Transit Agreement was at $115 million for the quarter That was a 43.2% EBITDA as adjusted margin. That was a sequential increase of $4.5 million in EBITDA and a 260 basis point margin increase over last quarter. Our first quarter has traditionally been a quarter when we experienced a decline in EBITDA margin due to cost of living salary increases, which again we had this year, the resetting of payroll taxes in the United States, and our audit fees. That did not occur this quarter. Our foreign currency impact. Our revenue earned outside of the United States was reported in U.S. dollars and was about 17% of our revenues this quarter, consistent with prior quarters. About 11% of our revenues this quarter were based in Europe and 6% related to Canada, Mexico, Oceania, South America, and Africa in operations. Our average Euro to dollar rate so far this quarter is $1.07 and the Canadian rate is 73 cents. Should these average foreign exchange rates remain at current levels for the remainder of this quarter, we estimate that the FX conversion impact on sequential quarterly revenues would be negative 0.4 million and the impact year over year would be a negative 0.5 million. We believe that our revenue and customer base is not highly concentrated. Our top 25 customers represented about 18% of our revenues for the quarter. Our quarterly capital expenditures were $40.9 million this quarter, down 6.3% from last quarter. We are continuing our network integration of the former Sprint Network and Legacy Cogent Network into one unified network and converting former Sprint switch sites into cogent data centers. Our finance lease IRU obligations are for long-term dark fiber leases and typically have an initial term of 15 to 20 years or longer and often include multiple renewal options after the initial term. Our IRU finance lease obligations were $517.5 million at quarter end. This is inclusive of an uneconomic finance lease that we acquired from Sprint. We have a very diverse set of IRU suppliers, and we have IRU contracts with 328 different dark fiber suppliers across the world. At quarter end, our cash and cash equivalents and restricted cash totaled $163.3 million. Our $44.8 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 TSA agreement with T-Mobile for transition services and the presentation of the payments of our $700 million IP transit agreement. Payments under the IP transit agreement under US GAAP are considered cash receipts from investing activities and not classified as operating activities. Our operating cash flow was a positive $19.2 million for the quarter compared to a negative $48.7 million in the fourth quarter of last year. Payments under the IP Transit Agreement, again, are reported as investing activities and were both $87.5 million this quarter and last quarter. Debt and debt ratios, our total gross debt at par, including our finance lease IRU obligations, 1.5 billion at quarter end and our net debt was 1.3 billion. Our total gross debt to last 12 months EBITDA as adjusted and our net debt ratio both significantly improved this quarter. Our total gross debt to last 12 months EBITDA as adjusted ratio was 3.57 at quarter end and our net debt ratio was 3.17. This compares to gross debt of the last 12 months EBITDA ratio 4.07, last quarter RAND and the net ratio 3.75. Our consolidated leverage ratio as calculated under our note indentures was 3.51 and our secured leverage ratio was 2.33. Some comments on 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 for the remaining term of our 2026 notes. We record the estimated fair value of the swap agreement at each reporting period, and we incur corresponding non-cash gains and losses due to changes in market interest rates. fair value of our swap agreement increased by 6.2 million from last quarter to a liability of 44.8 million we are required to maintain a restricted balance with the counterparty equal to the liability as of today the value of our swap agreement is 35.5 million lastly some comments on bad debt and day sales outstanding our day sales outstanding or dso was significantly impacted at year end by the conversion of all former Sprint customers to our billing system in November of 2023. Our DSO for worldwide accounts receivable significantly improved from year end and is reverting to historical norms. Our DSO was 27 days at the end of the quarter versus 37 days at the end of last quarter, so a 10-day improvement. Our bad debt expense was 2.6 million and 1% of our revenues for the quarter, and that's in line with historical performance. Again, I want to thank and recognize our worldwide billing and collection team members for a fantastic job in serving our coaching customers. And with that, I will turn the call back over to Dave.