Cogent Communications Holdings, Inc.

Good morning and welcome to Cogent Communications Holdings third 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. That is www.cogentco.com. A transcript of this conference call will be posted on Cogent's website when it becomes available. Some of the financial and operational results attached to inspected leads 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. Please go ahead, sir.

Thank you, Lane. Good morning to everyone. Welcome to our third 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, our Chief Financial Officer. Hopefully you've had a chance to review our earnings press release. Our press release includes a number of historical quarterly metrics, which we present on a consistent basis every quarter. Now I'd like to take a moment to address some of the expected cost savings that we've been able to achieve. We are continuing to make substantial progress in realizing cost savings and synergies from the acquisition of the Sprint Global Markets business. Based on the difference between our monthly cost run rates in May of 2023 and September of 2024, we have realized $165 million of these savings are approximately 75% of our targeted $220 million in annual cost savings. These cost savings were initially expected to be achieved in their entirety by May of 2026. Our combined coach and business had a very good quarter. Our total revenue was $257.2 million for the quarter. Our revenue results for the quarter were impacted by the continuing grooming of low-margin off-net connections, the continued elimination of non-core products, and low-margin business with the reduction in revenues from the commercial services agreement that we have with T-Mobile. revenues under our commercial services agreement with T-Mobile decreased sequentially by $1.8 million to $4.1 million for the quarter from $5.9 million for Q2. Revenue from a low margin resale customer contract, which was acquired in the Sprint acquisition, which we intentionally terminated, was classified as on-net revenue and enterprise revenue and declined by $3.5 million sequentially. Excluding the impact of these two results for our total revenue, our revenues would have increased by $2.1 million or approximately seven-tenths of a percent sequentially. Our non-core revenues also declined by another $500,000 to $4.1 million for the quarter. Our wavelength revenues increased sequentially by 45.8% to $5.3 million, and an increase of 76.7% on a year-over-year basis. Our IPv4 leasing revenue increased sequentially by 11.8 percent to 12.8 million and increased 31.5 percent on a year-over-year basis. Our network traffic for the quarter increased by 8 percent sequentially and 19 percent on a year-over-year basis. Our EBITDA increased sequentially by $8.7 million, and our EBITDA margin increased sequentially by 350 basis points to 13.9%. Our EBITDA as adjusted was $60,900,000, and our EBITDA as adjusted margin was $23.7%. percent for the quarter versus $106.2 million and 40.8 percent for Q2 of 2024. The sequential change was due to the scheduled reduction of $41.7 million in a decline in payments under our IP Transit Services Agreement with T-Mobile but was partially offset for $8.7 million sequential increase in EBITDA. In accordance with our IP service transit agreement with T-Mobile, we received payments for the quarter totaling $25 million. This compares to the payments that we received in the previous quarter of 66.7 million. The payments for this quarter are three monthly payments of 8.3 million dollars. An additional 38 monthly payments of 8.3 million per month will continue through November of 2027. These payments are included in our EBITDA as adjusted. We continue to realize cost reductions from the acquired expense base. Our SG&A decreased by $4.9 million sequentially, or 7.5%. Our SG&A as a percentage of revenue also decreased to 23.4% from 25% last quarter. Our cost of goods sold increased by $5.3 million from the last quarter due to two major expenses. The additional costs involved in converting former Sprint switch sites into Cogent data centers that were not capitalized and certain vendor contract termination costs. The primary contract that was terminated was a tri-party agreement. This was the first opportunity we had to buy out of that agreement and to end that relationship. However, over the course of the year, on a year-over-year basis, our cost of goods sold still decreased by 12.1 million or 7%. Our gross debt to trailing 12 months EBITDA as adjusted ratio was 4.94 for the quarter, and our net debt ratio did increase from 3.14 last quarter to 4.13, primarily as a result of the reduction in IP transit payments from T-Mobile. We ended the quarter with $316.1 million of cash and cash equivalents on the balance sheet. Our sales force productivity improved in the quarter from 3.8 installed orders per rep per month in Q2 to four orders per rep per month in Q3. In conjunction with the Sprint acquisition, We hired a total of 942 employees in May of 2023. At quarter's end, 635 of these employees remain with Koja. Our wavelength business improved materially. In conjunction with the acquisition of the Sprint Network, We expanded our product offering to include optical wavelength services over our fiber optic network. We began selling these services to existing customers as well as acquired customers from Sprint and new customers. At the end of the quarter, we had connectivity and wavelength sales capabilities in 650 and 57 locations throughout North America, however, with longer provisioning cycles than we are targeting. We have sold wavelength services now in slightly over 200 locations. By the end of 2024, we expect to be able to offer wavelength services in over 800 locations, with a much more rapid provisioning cycle. We have a backlog and funnel of wave opportunities of over 3,400 unique wavelengths. Our sprint acquisition materially expanded our data center footprint. As of September 30th, we have partially reconfigured 43 of the acquired facilities and added them to our network. These added data centers are in addition to the 1,627 carrier neutral data centers that Cogent connects to. Today, there are 95 Cogent data centers which have an aggregate conditioned protected power capacity of 169 megawatts. We are decommissioning some legacy Cogent leased davis center facilities that are redundant with our fee simple owned sprint facilities our board of directors reflected on the progress that we have made and the cash flow generating capabilities of our business the investment opportunities we have and again decided to increase our quarterly dividend by one cent per share raising our quarterly dividend from 98.5 cents per share per quarter to 99.5 cents per share per quarter. This increase represents the 49th consecutive sequential increase in our regular quarterly dividend. This is a 4.2% annual dividend growth rate. We do expect the combined business of Sprint and Cogent to continue to achieve long-term average revenue growth of between 5% and 7%. And we expect adjusted EBITDA margins to expand on average over a multi-year period at roughly 100 basis points a year. Our revenue and EBITDA guidance are intended to be multi-year. and not intended to be used as specific quarterly guidance or even specific annual guidance. Our EBITDA is adjusted and leverage ratios are impacted by the $700 million that we receive under the IP Transit Agreement with T-Mobile. Now I'd like to ask CAD to read our safe harbor language, provide some additional operating performance metrics for the quarter, And then we will open the floor for questions and answers.

Thank you, Dave, and good morning, everyone. This earnings conference call includes forward-looking statements, and 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, 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, and if we use any non-GAAP financial measures during this call, you will find these reconciled to the corresponding GAAP measurements in our earnings release that are posted on our website at cogentco.com. 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, and non-core. And we also analyze our revenues based upon customer type. We classify all customers into three types, net-centric, corporate, and enterprise customers. On the corporate business, Our corporate business represented 45.2% of our revenues for the quarter and our quarterly corporate revenue decreased by 3.5% year over year and sequentially by 2.8%. The sequential decrease was primarily due to the continued grooming of low margin off-net connections and the elimination of non-core products. We had 47,613 corporate connections on our network at quarter end For the quarter, the sequential impact of USF on our corporate revenues was a positive $600,000. Net-centric business. Our net-centric business continues to benefit from continued growth in video traffic, activity related to artificial intelligence, streaming, and wavelength sales. Our net-centric business represented 35.7% of our revenues for the quarter and decreased by 3.2% year over year. but grew sequentially by 0.8%. Our net centric revenue under our commercial services agreement with T-Mobile declined by 1.8 million sequentially and declined by 3.9 million year over year, and that impacted our net centric revenue results. We had 62,273 net centric customer connections on our network at quarter end. On the enterprise business, Our enterprise business represented the remainder of our revenues, 19.1% this quarter, and was $49.1 million. We had 16,447 enterprise customer connections on our network at the end of the quarter. Our enterprise revenue decreased by 18.2% year over year and sequentially by 1.4% or by 700,000. This was primarily due to a reduction in non-core and low margin revenues. Revenue from a low margin retail customer we acquired in the Sprint acquisition that Dave mentioned that we intentionally terminated and classified as on-net revenue and enterprise revenue declined sequentially by $3.5 million. If you exclude this impact from this cancellation, our enterprise revenue would have increased sequentially by $2.8 million, or by 5.6%. On revenue and customer connections by network type, on-net revenue, we serve our on-net customers in our 3,424 total on-net multi-tenant office 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 select multi-tenant office buildings. Our on-net revenue was $136.5 million for the quarter, which was a year-over-year increase of 5.8%, but a sequential decrease of $4.3 million, or 3%. The decline in our on-net revenue under our commercial services agreement with T-Mobile and the cancellation of that low-margin resale customer negatively impacted our sequential on-net revenue results by an aggregate total of $5.7 million. Exclusive again of these impacts, our on-net revenue would have increased sequentially by 1%. Our on-net customer connections were $87,655 at quarter end. Our off-net revenue. Our off-net revenue was $111.3 million for the quarter a year-over-year decrease of 14.8% and a sequential decrease of 0.1%. The sequential small decline in our off-net revenue was partially impacted, again, by migration of certain off-net customers to on-net and the continued grooming and termination of low-margin off-net contracts, which had more of an impact. Our off-net customer connections were 32,420 at quarter end. Our wavelength revenue was 5.3 million for the quarter, sequential increase of 45.8%, and a year-over-year increase of 76.7%. Our wavelength customer connections were 1,041 at quarter end, a 38.1% sequential increase. Our IPv4 revenue, our IPv4 leasing business had an excellent quarter. We were leasing $12.9 million of the IPv4 addresses at the end of the quarter, and our IPv4 revenue increased by 11.8% from last quarter and increased by 31.5% year over year, and was $12.8 million for the quarter. Lastly, our non-core revenue was $4.1 million for the quarter, sequential decrease of $500,000 or 10.2%. And again, due to our decision to end of life these non-core products, non-core customer connections were 5,217 at quarter end, a sequential decline at 33.8%. Some comments on pricing per megabit. Our average price per megabit for our installed base decreased sequentially by 8.5% to 23 cents and 23.9% year over year, consistent with historical trends. Our average price per megabit for our new customer contracts for the quarter was $0.09, which was a sequential decrease of 29% and 47% year-over-year. Comments on ARPU. Our on-net ARPU decreased sequentially by 3.1% from $536 to $520. Year-over-year, it was an increase of 9.4%. Our off-net ARPU increased sequentially by 3.2% from 1,103 to 1,138. Year over year, our off-net ARPU increased by 1%. Our wavelength ARPU increased by 17.6% and was 1,964 this quarter compared to 1,670 last quarter. The average revenue per IPv4 address sold was materially higher and was 49 cents per address for the quarter. That was a 63.3% increase from an average of 30 cents for the base of all addresses at the beginning of the quarter. Our on-net monthly churn rate was 1.2% for the quarter. That was an improvement from 1.4% last quarter. Our off-net unit monthly turn rate increased to 2.6% this quarter from 2.3% last quarter. Comments on EBITDA classic and EBITDA margin. 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 13.9%. Our EBITDA as adjusted includes adjustments for Sprint acquisition costs and cash payments received under the IP Transit Agreement with T-Mobile. We collected $25 million under the IP Transit Services Agreement this quarter. Last quarter, it was $66.7 million, so a reduction of $41.7 million. Our EBITDA as adjusted was $60.9 million for the quarter. That was a 23.7% EBITDA as adjusted margin. Last quarter, it was $106.2 million, or 40.8%. The sequential change was due to the scheduled decline of $41.7 million of payments under the IP transit agreement with T-Mobile, and that offset our sequential increase of $8.7 million in EBITDA And we incurred $12.4 million of Sprint acquisition costs last quarter. We incurred none classified as Sprint acquisition costs this quarter as the one-year anniversary of the Sprint acquisition ended in May 2024. Some comments on foreign currency. Our revenue earned outside of the United States is reported in U.S. dollars, and it was about 18% of our revenues for the quarter. About 11% of that for the quarter of our revenues for the quarter were based in Europe and 6% the remainder related to Canada, Mexico, or oceanic South American and African operations. The average Euro to USD rate so far this quarter was 109 and the Canadian dollar exchange rate 73 cents. If those average rates remain at the current levels for the remainder of our fourth quarter, we estimate that the FX conversion impact on both sequential revenues and year-over-year would not be significant. Customer concentration, we believe that our revenue and customer base is not highly concentrated. Our top 25 customers represented 19% of our revenues this quarter, slightly down from 20% last quarter. CapEx, our quarterly capital expenditures were $59.2 million for the quarter, We are continuing our network integration to 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 and expanded our data center conversion program due to the high level of demand for our power availability. And this program will require similar capex spending as we incurred this quarter per quarter through mid 2025. comments on finance leases our finance iru obligations are for long-term dark fiber leases our iru finance lease obligations were 482.6 million at quarter end and we have a very diverse set of iru suppliers and we have iru contracts with 360 different dark fiber suppliers across the world cash and restricted cash At quarter end, our cash and cash equivalents and restricted cash in the aggregate was $316.1 million. Of our total $36.9 million of cash that was restricted, $29.9 million was tied to the fair value of our swap agreement, and $7 million was tied to the requirements under our IPv4 notes. Debt and debt ratios. Our total gross debt at par, including our finance IRU obligations, was 1.9 billion at quarter end, and our net debt was 1.6 billion. Our total gross debt to last 12 months EBITDA as adjusted ratio was 4.94 at quarter end, and our net debt ratio was 4.13. Our consolidated leverage ratio as calculated under our note indentures was 5.11. and our secured leverage ratio as calculated under our note indentures was 2.90. Our fixed coverage ratio as calculated under our note indentures was 3.08. For the comments on the swap, 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 on secured overnight financing rate for the remaining term of our 2026 notes. The fair value of our swap agreement decreased from last quarter by 5.6 million. Changes in the fair value of the swap agreement are classified in our public filings with interest expense as required under US GAAP. Finally, comments on bad debt and DSO. Our DSO was 32 days for the quarter versus 26 days last quarter. Our bad debt expense was $4.5 million and 1.8% of our revenues for the quarter. These increases were largely due to some collection issues associated with a large former Sprint customer that we since resolved after quarter end. And also just the calendar was kind of unkind with the 30th being where it fell and we incurred cash the first week after the 30th. We want to again thank and recognize our worldwide billing and collections team members for doing, again, a fantastic job in serving our Cogent customers. And with that, I will turn the call back over to Dave for some final remarks.