Cogent Communications Holdings, Inc.

Ladies and gentlemen, good morning and welcome to the Cogent Communications Holdings second quarter 2024 earnings conference call. As a reminder, this conference call is being recorded and it will be available for replay at www.cogentco.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, excuse me, Attached with press release can be downloaded from the Cogent website. I would now like to turn the call over to Mr. Dave Schaefer, Chairman and Chief Executive Officer of Cogent Communications Holdings.

Hey, good morning and thanks everyone for joining today's call. Welcome to our second quarter 2024 earnings conference call. 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. This release includes a number of historical metrics that we present on a consistent basis each quarter. Now for a couple of comments on activity in the quarter. In the quarter, we had two debt transactions. On May 2nd, we closed the issuance of our inaugural $206 million-dollar asset-backed securitization of our IPv4 notes at 7.9%. These notes mature in five years and may be extended for up to a 30-year term. This securitization transaction was the first ever of IPv4 lease revenue. We are the owners of approximately 37.8 million IPv4 addresses. We acquired 27.9 million of these addresses when we purchased PSINet and other acquisitions in the early 2000s. We further enhanced our portfolio when we acquired 9.9 million additional IPv4 addresses in May of 2023 as part of our acquisition of the Sprint Global Markets Group from T-Mobile. On June 11th, we close the issuance of our $300 million 7% unsecured notes. These are mirrored notes. These notes have identical terms to our existing $450 million 2027 notes. We use 114.6 million of the proceeds from this offering to prepay a dark fiber IRU finance lease at a 12% discount rate, saving $15.6 million in cash. This IRU dark fiber lease had monthly cash payments of $4.2 million a month through 2026, all of which have been eliminated and therefore materially improving our cash flow through December of 2026. We are leasing approximately $12.8 million of our IPv4 addresses out for a monthly revenue run rate of $3.6 million per month at the end of the quarter. We securitized $3.1 million of these leases in our IPv4 securitization. One million of the leased addresses and 1.4 million unleased addresses were part of that securitization transaction. The IPv4 internet addresses are a finite resource. The market price of these addresses has substantially increased over the past several years. In the quarter, we also purchased some of our stock back. In June of 2024, we took advantage of market volatility. We purchased 153,000 shares of our common stock back for a cost of $8 million and an average price of $51.97. We have 22.4 million remaining in our authorization for share repurchases through December of 2024. Now for a comment on expected cost savings. We are in the process of realizing significant cost savings and synergies through the integration of the Sprint assets with the Cogent network. Based upon differences between monthly cost run rates at closing in May of 2023 and the monthly cost run rate in June of 2024, We have realized a annualized savings rate of $135 million. This represents 62% of our targeted cost savings of $220 million over a three-year period. Now for some summary results for the quarter. We did have a very good quarter. Our revenue for the quarter was $260.4 million. Foreign exchange had a negative sequential impact of $300,000. And changes in USF tax rates had a sequential negative impact of $1.4 million on our quarterly revenues. Adjusting for these two negative impacts of $1.7 million, Our sequential revenue did decline by 1.5% primarily due to the decline in our non core products and the management out of low margin off net services. Our on net revenues increased sequentially by 1.5% and a quarter to 140.8 million revenues under our. Commercial services agreement with T-Mobile increased sequentially by $2.7 million to $5.9 million and a quarter. Traffic on our network increased sequentially by 1.9%. It was up 17.4% on a year-over-year basis. Our off-net revenues did decrease by 5.7% to $111.5 million due to the continued elimination of these low margin services. Our non-core revenues, which generally carry negative gross margin, declined by $1.4 million to $4.6 million and a quarter. And then finally, While we have not completed the reconfiguration of the Sprint network, we have installed some wave services. A wave revenue increased modestly by 9% sequentially quarter over quarter to 3.6 million, and that represents actually a 128.7% increase on a year-over-year basis. We expect this to materially accelerate starting in early 2025 as we will complete the network integration and optimization for wave services by year end. Our EBITDA as adjusted was $106.2 million and our EBITDA as adjusted margin was 40.8% for the quarter. In accordance with our IP Transit Services Agreement with T-Mobile, we received three payments in the quarter totaling $66.7 million. This compares to the three payments we received in Q1 of $87.5 million. The payments in this quarter included two $29.2 million payments and one $8.3 million payment. An additional 41 payments are expected to be made by T-Mobile each of 8.3 million a quarter continuing through November of 2027. Our spread acquisition costs in the quarter were 12.4 million. Included in this cost and a significant portion of it was the $8 million in final severance reimbursements that were paid to former T-Mobile employees and these costs are fully reimbursable by T-Mobile. We achieved significant cost reductions both in our cost of goods sold and our SG&A in a quarter. Our SG&A decreased by $5 million or 7.1% from the previous quarter and decreased by $12.5 million or 16.1% from q2 of 2023 sgna as a percentage of our revenue decreased to 25 percent in the second quarter from 26.3 percent in the previous quarter our cost of goods sold decreased by 12.7 million or 7.8 percent on a sequential basis from q1 2024 as we continue to reduce network costs and bring off net traffic on net. We finalized the purchase accounting associated with our acquisition of the Sprint Global Markets Group. And this quarter, we received a additional final gain in our bargain purchase, bringing that total bargain purchase gain to $1.4 billion. Our gross debt to trailing last 12 months EBITDA as adjusted ratio was 4.06 at the end of the quarter, and our net debt ratio did reduce in the quarter from 3.17 times EBITDA to 3.14. We ended the quarter with 426.2 million in cash and cash equivalents on our balance sheet. Now for a comment on our sales force. Our sales rep productivity was four units in Q1 per rep per month and 3.8 units installed per rep full-time equivalent per month in Q2. In conjunction with the Sprint acquisition, we hired 942 employees. At quarter end, 655 of these employees remain employed with us. Now for a couple of comments on our optical transport and wave services. In connection with the acquisition of the Sprint GMG business, We expanded our product offering to include optical wavelength services and optical transport services over our fiber network. We're selling these wavelength services to existing customers as well as new customers. These customers require dedicated optical transport without the capital and ongoing expense of owning and operating their own infrastructure. As of today, We have connectivity and wavelength capability services in 574 locations. However, our provisioning cycles remain elongated at about 90 days. We intend to substantially reduce that provisioning time as we complete the network optimization programs by year end. We have sold wavelengths in 156 locations. By year-end 2024, we expect to be able to offer wavelength services in over 800 North American locations with substantially reduced provisioning cycles. We have a significant backlog and funnel of wave opportunities representing over 2,700 unique wavelengths. Our Sprint acquisition materially expanded our data center footprint. To date, we have reconfigured 34 of the Sprint acquired facilities and added these new data centers to the 1,602 carrier neutral and 86 data centers that Cogent operates. The Cogent data centers in operation today have 164 megawatts of protected power. We are decommissioning some legacy Cogent data centers and waste facilities where they are redundant with these simple owned facilities that we acquired from Sprint. We are in the process of converting an additional 18 Sprint former Sprint facilities into Cogent data centers and we'll continue to optimize our portfolio. With regard to dividends, our board of directors reflected on the strong cash flow generating capabilities, investment opportunities, and decided once again to increase our quarterly regular dividends sequentially by one cent a share. Raising our quarterly dividend from 97.5 cents per share to 98.5 cents per share. This represents the 48th consecutive sequential quarter where we have grown our dividend. Our dividend growth rate is now at an annualized rate of 4.2%. Now for long-term expectations. Now that we have combined the Sprint and Cogent networks and operations, We anticipate our long-term annual growth rates to be between 5% and 7%, and EBITDA has adjusted margins to expand by approximately 100 basis points annually. Our revenue and EBITDA guidance are intended to be multi-year targets and are not intended to be used for specific quarterly or annual targets. or EBITDA is adjusted and leverage ratios are impacted by the $700 million IP transit agreement we entered into with T-Mobile. In accordance with this agreement, beginning in June of 2024, we began receiving cash payments of $29.2 million per month for 12 months. And then those payments step down for the next 42 months to $8.3 million a month and continue through November of 2027. The reduction in monthly cash payments will impact our EBITDA as adjusted and leverage ratios, which are measured on a trailing 12-month basis. Now I'd like to turn it over to Ted to read Safe Harbor language and give us some additional operating metrics on the business.

Thank you, Dave, and good morning, everyone. This earnings conference call includes forward-looking statements. These forward-looking statements are based upon our current intent, belief, and expectations. These forward-looking statements and all other statements that may be made on this call that are not historical facts are subject to a number of risks and uncertainties, and actual results may differ materially. Please refer to our SEC filings for more information on the factors that could cause actual results to differ. COGENT undertakes no obligation to update or revise our forward-looking statements. If we use non-GAAP financial measures during this call, you will find these reconciled to the corresponding GAAP measurement We analyze our revenues based upon network connection type, which is on net, off net, wavelength services, and non-core services. And we also analyze our revenues based upon customer type. We classify our customers into three types, net-centric customers, corporate customers, and enterprise customers. Our corporate business represented 45.9% of our revenues for the quarter, and our corporate revenue grew by 7.7% year over year, but decreased sequentially by 4.3%. The sequential decrease was due to the continued grooming of low margin off-net connections and the elimination of non-core products. We had 48,690 corporate customer connections on our network at the end of the quarter, For the quarter, the sequential impact of negative USF on our revenues was minus 1.4 million. On Netcentric, our Netcentric business continues to benefit from continued growth in video traffic, activity related to AI or artificial intelligence, streaming, and wavelength sales. Our Netcentric business represented 35% of our revenues this quarter, and grew by 4% year over year and by 4.5% on a constant currency basis, but declined sequentially by 0.9%. We had 61,736 NetCenter customer connections on our network at quarter end. Our network traffic for the quarter, as Dave mentioned, increased by 1.9% sequentially and was up by 17.4% year over year. 19.1% of our revenues this quarter and was $49.8 million. We had 18,356 enterprise customer connections at the end of the quarter, and our enterprise revenue increased by 20.8% year over year and increased sequentially by 0.9% on revenue and customer connections by network type and on-net revenue. We serve our on-net customers in our 3,386 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 we also sell 10 gigabit connections in selected multi-tenant office buildings. Selling these larger connections has the impact of increasing our on-net ARPU, which occurred again this quarter. Our on-net revenue was $140.8 million for the quarter, a year-over-year increase of 10.3%, and a sequential increase of 1.5%. Our on-net customer connections were $87,387 at quarter end. On off-net revenues, Our off-net revenue was $111.5 million for the quarter, year-over-year increase of 9.3%, and a sequential decrease of 5.7%. Again, the sequential decline in our off-net revenue was partially impacted by our migration of certain off-net customers to on-net, and more importantly, the continued grooming and termination of low-margin off-net customer contracts. Our off-net customer connections were 32,758 at quarter end. Our wavelength revenue was 3.6 million for the quarter. That was a sequential increase of 9% and a year-over-year increase of 128.7%. Our wavelength customer connections were 754 at the end of the quarter, which was an 8.8% sequential increase. Some comments on IPV4, our leasing revenue. Our IPV4 leasing business had an excellent quarter. We were leasing 12.8 million of addresses at the end of the quarter, and that was a 4.9% increase in leased addresses from last quarter. Our IPV4 leased revenue increased by 4.4% from last quarter to 10.7 million. Our average revenue per IPv4 address sold for the quarter was $0.51 per address, and that is a very material increase from our base at the beginning of the quarter for all addresses. That was approximately $0.30. Lastly, our non-core revenue was $4.6 million for the quarter. That was a sequential decrease of $1.4 million, or 23.7%, as we're ending these non-core products. Non-core customer connections were 7,883 at quarter end, a sequential decline of 21.5%. Some comments on pricing, ARPU, and churn. Our average price per megabit for our installed base decreased sequentially by 5% to $0.25. Our average price per megabit for new customer contracts was $0.12, which actually was an increase of $0.13. 0.5%. ARPU. Our on-net ARPU increased from the impact of selling larger connections. Our off-net ARPU slightly decreased. Our on-net ARPU increased sequentially by 2.1% from 525 to 536. On a year-over-year basis, it was an increase of 11% from 483 from Q2 of last year. Our off-net ARPU slightly decreased sequentially from 1,106 to 1,103. Year over year, that was a decrease of 14.7%. It was 1,294 last year. Our wavelength ARPU increased by 2% and was 1,670 this quarter. It was 1,638 last quarter. Our average revenue per IPV for address sold, again, was 51 cents per address for the quarter. Again, a significant increase from $0.30 from the base at the beginning. On churn, our on-net unit monthly churn rate was stable, 1.4%, the same as last quarter. Our off-net churn rate did tick up. It was 2.3% this quarter, 2.1% last quarter. Again, we continue to groom and terminate low-margin off-net contracts. EBITDA and EBITDA margins. We reconcile our EBITDA to our cash flow from operations in each of our quarterly press releases. Our EBITDA increased sequentially by 8.7 million, and our EBITDA margin increased sequentially by 350 basis points to 10.4%. This is EBITDA classic. EBITDA as adjusted and as adjusted margin. And as a reminder, our EBITDA as adjusted is adjusted for Sprint acquisition costs and cash payments received under the $700 million IP Transit Services Agreement with T-Mobile. We collected $66.7 million under the IP Transit Services Agreement this quarter. As was scheduled decline, it was $87.5 million under the same agreement last quarter. Our EBITDA, as adjusted, was $106.2 million for the quarter, and that was a 40.8% margin. We incurred $12.4 million of Sprint non-capital acquisition costs this quarter, an increase from $9 million last quarter, largely due to the end of the severance payments. Included in Sprint acquisition costs for the quarter were $8 million of reimbursed severance costs, and last quarter included in the $9 million, that was $4.3 million. These severance costs are paid by us, but are fully reimbursed by T-Mobile. Under U.S. GAAP, the accounting for these severance costs needs to be retroactively reported as an acquired receivable asset in purchase accounting at closing, and that results in an increase to our acquired assets and a corresponding increase to our gain on bargain purchase. Again, the total gain after the one-year window for adjustments was $1.4 billion. When we pay the severance to an employee, we record this transaction as sprint acquisition costs. When we reimburse by T-Mobile, the opening balance sheet receivable from T-Mobile is reduced from the cash payment. This is the final quarter for the severance reimbursement, so this is now behind us. Foreign currency impact. Our revenue earned outside of the United States is reported in US dollars and was approximately 17% of our revenues for the quarter. About 11% of our revenues were based in Europe and 6% of our revenues were related to our Canadian, Mexican, Oceanic, South American, and African operations. The average Euro to USD rate so far this quarter is $1.09 and the average Canadian dollar rate is 73 cents. Should these average rates remain at these current levels, we do not expect the material effects impact both sequentially and on a year-over-year basis. Customer concentration. We believe that our revenue and customer base is not very highly concentrated. Our top 25 customers were about 20% of our revenues for the quarter. On capital expenditures. Our quarterly capital expenditures were $48.8 million this 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. We have accelerated our data center conversion program due to the very high level of demand for our power availability. Our finance lease IRU obligations are for long term dark fiber leases. Our IRU finance lease obligations were $426.4 million at the end of the quarter. That was a reduction of $91.1 million from last quarter. The significant decrease from last quarter resulted from the early prepayment at a discount of $114.6 million under the IRU lease partly offset by replacement IRU route cancellations for new routes of 42.2 million for the quarter. We have a very diverse set of IRU suppliers, and we have contracts with 356 dark fiber suppliers at the end of the quarter. At quarter end, our cash and cash equivalents and restricted cash totaled 426.2 million. Of our total, $41.8 million of restricted cash, $35.5 million of that was tied to the swap, and $6.3 million, which is new, was tied to the customer payment processing requirements under our IPV4 notes. Debt and debt ratios. Our total gross debt at par, including our finance lease obligations, was $1.9 billion at the end of the quarter, and net debt was $1.5 billion. Our total gross debt to last 12 months EBITDA as adjusted ratio was 4.06 at quarter end and net was 3.14. Our consolidated leverage revenue ratio rather as calculated under our notes was 4.5 and our secured leverage ratio as calculated under our note indentures was 2.49. Some further comments on the swap. We are party to an interest rate swap agreement that modifies our fixed interest rate obligation with our $500 million 2026 notes to a variable interest obligation based on SOFR, and that is for the remaining term of these 2026 notes. The fair value of our swap agreement decreased by 9.3 million from last quarter and was $35.5 million. Changes in the fair value of the swap agreement are now required to be classified in our public filings with interest expense. As of today, the value of our swap agreement was $30.99, so it's declined. Lastly, on bad debt and day sales, outstanding. Our day sales improved from last quarter and was 26 days versus 27 in last quarter. That debt expense was $2.9 million, 1.1% of revenues. That's consistent with our historical performance. And I want to again thank and recognize our worldwide billing and collections team members for continuing to do just a fantastic job serving our coaching customers. And with that, I will turn the call back to Dave.