Cogent Communications Holdings, Inc.

Good morning and welcome to the Cogent Communication Holdings first quarter 2035 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 attached to its press release can be downloaded from the Cogent website. I would now like to turn the call over to Mr. Dave Shaffer, Chairman and Chief Executive Officer of Cogent Communication Holdings. Please go ahead.

Thank you, and good morning, everyone. Welcome to our first quarter 2025 earnings conference call. I'm Dave Shaffer, Cogent's Chief Executive Officer, and on this call this morning with me is Tad Weed, our Chief Financial Officer. We have received numerous comments from investors related to the structure of our earnings call. We greatly appreciate their observations and constructive comments, and we've implemented a number of those suggestions in the script that we are using for this call. Please continue to provide additional suggestions to help us refine our reporting. We are well aware that Cochran has undergone significant changes over the past two years, and we want to fully address the impact of those changes on our strategy and our prepared remarks and strive to focus on our growth plans going forward. For the quarter, I'd like to touch on some significant milestones that we achieved. I want to recognize that these achievements are but some of the milestones that we've achieved. We are now offering wavelength services in 883 data centers with 10 gig, 100 gig, and 400 gig capabilities. We have materially been able to reduce our provisioning times to today approximately 30 days. Our wavelength revenues for the quarter were $7.1 an increase of 114% over the same period in 2024. Sequentially, our wavelength connections increased by 18% sequentially, and our wavelength revenue increased by 2.2%. The vast majority of our connections were provisioned near the very end of the quarter. We have sold wavelength services now in 329 locations. We have provisioned and cleaned up our former backlog of wavelength orders. We currently have a backlog and funnel of 3,433 wavelength opportunities. With more wave provisioning experience and the actual ability to deliver services, we now anticipate that between 4 and 5% of this funnel will be installed each month going forward. We also expect, based on the growth in the sales activity, that by year end there will be 10,000 unique wave opportunities in our funnel. We currently have provisioning capacity to install 500 waves per month. We intend to capture 25% of this highly concentrated North American market within three years. Our IPv4 leasing revenue for the quarter increased sequentially by 14.8% to 14.4 million and increased 42% year over year. Due to the scarcity of this valuable asset and the terms of our customer contracts, we have been able to increase our IPV4 leasing pricing. We maintain a consistent acceptable use policy and did retrieve a significant number of addresses in the first quarter from a customer who violated these policies. Our average revenue per IPv4 address sold was $0.49 for the quarter, a 63% increase from the $0.30 installed base number at the beginning of the year. We have titled to nearly 38 million V4 addresses, which is more than any other service provider. We have realized the remainder of our targeted 220 million in cost savings that we outlined at the acquisition of Sprint. We expect to achieve at minimum another $20 million of cost savings through the second quarter of 2026. Demonstrating the impact of these savings on our cost of goods sold, they declined from 31.6 million in the first quarter of last year, and our gross margin increased by 790 basis points from the first quarter of 2024 to 44.6%. Additionally, our SG&A declined by 3.8 million from the first quarter of last year. 10.6 million of the sequential increase in SG&A expenses was due to traditional typical seasonal factors, including annual CPI increases, The timing of vacations taken and the accruals associated with them and the reset of payroll taxes. We are now connected to 3500 on net buildings. We have reconfigured several Sprint acquired facilities. These facilities have been added to our 1668 carrier neutral and 101 Cogent data center footprint. Our Cogent data centers have 183 megawatts of installed and available power. We have converted additionally 79 smaller Sprint facilities into edge data centers. These edge data centers each have approximately 40 rack capability, and in total have about 28 megawatts of additional installed power. So on a combined basis, Cogent has 180 data centers, edge and core, with 211 megawatts of installed power available for customers. After the quarter ended, we repurchased approximately 100,000 shares of our common stock for approximately $5 million at an average price of $53.07 under our stock buyback program. A total of $17.4 million remains available under that program through year-end. A comment on tariffs. We do not anticipate any material impact of tariffs on our business or our CapEx projections. Much of our data center and network conversion equipment has been ordered pre-tariff and a majority has been received. A portion of our network equipment purchases do have tariff input costs, but these are minimal. We recognize that we have increased our leverage due to these activities and our board of directors has elected to slow the rate of dividend growth but continuing that dividend growth rate at a half a cent per share per quarter our dividends for the quarter rose from one dollar and a half cent to one dollar and one cent this represents the 51st consecutive sequential increase on our regular quarterly dividend and an annual dividend growth rate of 3.6%. Now that the Sprint business is combined with our legacy business, and we have fully analyzed the revenue burn-off of undesirable revenues, we are adjusting our long-term annual revenue growth rates to 6% to 8%, and we are increasing the rate at which we anticipate our EBITDA as adjusted margin to expand annually to 150 basis points. Our updated revenue and EBITDA targets are meant to be multi-year goals and not designed to be specific quarterly or annual guidance. We are nearing the ending of grooming of undesirable revenues from Sprint contracts that are set to expire. We expect to return to total top line revenue growth by mid Q3 2025. Finally, I would like to take a moment to recognize one of our long serving board members, Blake Bath, for his outstanding counsel and service to coaching. Blake had served on our board since November of 2006. and elected to retire, and we wish him well in that retirement. Now I'd like to turn things back over to Tad to read Safe Harbor language and give some additional color on our operating performance.

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. FOJA undertakes no obligation to uptake or revise our forward-looking statements. We use non-GAAP financial measures during this call. You will find these reconcile to the corresponding GAAP measurement and our earnings releases that are posted on our website at codeandco.com. Now some comments on results. Our revenue for quarter was $247 million. Our rep productivity increased by 9% to 3.8 units per full-time equivalent rep this quarter, which was an increase from 3.5 units per full-time equivalent rep last quarter. Our EBITDA as adjusted was $68.8 million, which was a $1.9 million increase, and our EBITDA as adjusted margin increased sequentially by 130 basis points of 27.8%. Our EBITDA as adjusted is adjusted for sprint acquisition costs, if any, during the period, and payments under the IP transit agreement with T-Mobile. In accordance with our IP transit services agreement, we received three monthly payments totaling $25 million this quarter same as last quarter 25 million last quarter a year ago we received 87.5 million in the first quarter of 2024 as those payments stepped down in that quarter we will continue to receive an additional 32 monthly payments of 8.3 million each until november of 2027. there are further payments related to lease obligations we assumed at closing that total at least 28 million This amount is to be paid to us in four equal payments from November 27 to February 28. 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 upon customer type, and we classify our customers into three types, net-centric, corporate, and enterprise. Our corporate business represented 44.9% of our revenues this quarter. It decreased 11.4% year over year and 2.1% sequentially. These decreases in our corporate revenue are primarily due to the continued grooming of low margin off net connections and the elimination of non-core products. Our net centric business continues to benefit from the growth in video traffic activity related to artificial intelligence, streaming, and wavelength sales. Our net-centric business represented 37.5% of our revenues for the quarter, increased 0.7% year over year, and declined sequentially by 1.1%. Our quarterly net-centric revenue under our commercial services agreement with T-Mobile declined sequentially by 0.8 million and was 0.7 million for the quarter, and it declined two and a half million year over year. The decline in revenue from the commercial service agreement from T-Mobile and the negative impact of FX, which was 0.5 million sequentially and 1.3 million year over year had a negative impact on our net centric revenue results. Our enterprise business represented 17.7% of our revenues for the quarter, That revenue decreased by 11.3% year-over-year and sequentially by 4.1%, primarily due to reduction in non-core and low-margin enterprise revenues. On-net revenue. We serve our on-net customers in our 3,500 total on-net 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. Our on-net revenue was $129.6 million for the quarter, a year-over-year decrease of 6.5%, and a sequential increase of 0.9 million or 0.7%. Our sequential on-net revenue results were negatively impacted by the same contract with T-Mobile, the commercial services agreement, 0.8 million sequential decline in on-net revenue and also negatively impacted by 0.5 million of negative FX. Our off-net revenue was $107.3 million for the quarter, a year-over-year decrease of 9.2% and a sequential decrease of 5.2%. Our off-net revenue results are impacted by our migration of certain off-net customers to on-net and and the grooming and continued grooming and termination of low margin off net contracts. Comments on pricing. Our average price per megabit for our installed base decreased sequentially by 6% to 20 cents and decreased by 25% year over year. This is consistent with historical trends. Our average price per megabit for our new customer contracts for the quarter was 10 cents, a sequential price per megabit decrease of 10% and 5% year-over-year. Some ARPU churn statistics. Our ARPUs for the quarter were our on-net ARPU was 496, our off-net ARPU was 1,266, our wavelength ARPU was 1,945, and our IPv4 revenue per address for the quarter was 49 cents. On churn, our on-net monthly churn rate was 1.4% and off-net monthly churn rate was 2.2%. Our network traffic was flat sequentially for the quarter, but increased 8% year over year. Foreign currency comments, our revenue earned outside the United States is reported in US dollars and was about 18% of our revenues this quarter. The average Euro to USD rate so far this quarter is $1.12, and the average Canadian dollar rate is 72 cents. Should these averages remain at the current levels for the remainder of this quarter, the FX conversion impact on sequential revenues would be $2 million, and the positive impact year over year would be $1.2 million. We believe that our revenues and customer base is not very highly concentrated. Our top 25 customers were 18% of our revenues for the quarter. CapEx, Our total CapEx for the quarter was $58.1 million. Our principal payments on capital leases declined to $8 million for the 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 and expanded our data center conversion program due to the high level of demand for our power availability. spending for the first half of 25 similar to the last half of 24 and then decline in the second half of 25. our total gross debt at par including our finance lease obligations was 2 billion at quarter end and our net debt was 1.8 billion our total gross debt to the last 12 months even as adjusted ratio was 6.69 at quarter end and net debt was 6.08 As calculated under our note indentures, our leverage ratio was 5.86, secured leverage ratio was 3.44, and fixed coverage was 2.8. Finally, our day sales outstanding was 29 days at quarter end, the same as the end of the year, and our bad debt expense was 2.1 million, which was less than 1% of our revenues this quarter. I'm turning the call back over to Dave.

Hey, thanks, Ted. Now for a couple of comments on our Netcentric business. At quarter end, we directly connected to 8,240 other networks, of which 22 of these are peers and 8,218 are Cougent transfer customers. We remain focused on our Salesforce productivity and continue to manage out underperformers. Our Salesforce turnover rate was 7.1% a month. This is down from the peak of 8.7% per month, but was slightly above our historical average of 5.7% per month. At quarter's end, we had 296 professionals focused solely on selling that centric. 319 professionals focused on the corporate market and 14 professionals focused on the enterprise market. We remain excited about our ability to deliver profitable on-net and off-net IP services to enterprise and corporate customers. We are enthusiastic about our wavelength opportunity The portfolio of buildings that we now connect to and the backlog on that funnel of nearly 3,433 wavelength opportunities, we have completely refreshed that funnel and cleaned out older orders that had been accumulated over a year period while we were doing network reconfiguration. We have diligently worked on accelerating the cost savings of the Sprint network integration. We have exceeded our initial targets and raised those targets. We are able to continue to monetize IPv4 addresses, fiber assets, and excess data center spaces, either through sale or long-term leases. We are in active discussions beyond the LOI stage with multiple counterparties. And since our inception, we've offered superior service, expedited provisioning, and disruptive pricing. That is why Cogent remains an industry leader in the services itself. With that, I'd like to open the floor for questions.

Thank you. We will now begin the question and answer session. If you have dialed in and would like to ask a question, please press star 1 on your telephone keypad to raise your hand and join the queue. If you would like to withdraw your question, simply press the star 1 again. If you were called upon to ask your question and are listening via loudspeaker on your device, please pick up your handset and ensure that your phone is not on mute when asking your question. Again, press star 1 to join the queue and your first question comes from the line of Jim Schneider from Goldman Sachs.

Please go ahead. Hi, it's Josh in for Jim. Thanks for taking the questions. I guess within the Waves business, are you seeing any change in competition, be it pricing or terms or otherwise, as sequential revenue growth was not where most had expected? And do you think the Crown Castle Zayo deal will change the landscape at all? And then separately, you've referenced in the past a few more quarters of potential revenue headwinds in corporate. Can you give us an update on these trends and the mix of pricing and customer growth? especially as we think about your new revenue growth targets. Thanks.

Yeah, sure. Thanks a lot, Josh. So first of all, you know, our two primary competitors in the wavelength market have struggled to provision and do not have the ubiquity of coverage that we had. I think that is why many customers were willing to sign agreements with Cogent when Cochran couldn't even give them a firm delivery date or a commitment to exact endpoints. As we've purged that older funnel, the funnel that we have built now is a much more accurate representation of orders that will continue to install. We've developed enough of a cadence to know that about 5% of that funnel will convert each month. In the quarter, we installed virtually all of the incremental units, the 18% sequential growth, at the very end of the quarter. The reason for that is many of the customers were not ready when we were ready because they had waited. Many of those customers did take service at the end of the quarter. We expect that the competition will continue to improve on their ability to offer ubiquity and offer faster installs, but today we think we have a significant advantage. With regard to the Crown Castle-Zao combination, That is probably a year away. I know that each of those companies represents a number of previous acquisitions that are still being integrated, and I would anticipate even post closing it will take several years based on the pacing that each of those companies have achieved in integration for the entire company to. be functioning as a unified organization. We should always be paranoid about competitors, but at the end of the day, we think this is a fairly distant threat, not something immediate. Now, pivoting to your question on corporate revenue. We have gone through the undesirable revenue in the sprint base. we have churned the vast majority of that revenue. We know that that has inflected our total top line growth rate negative. We believe that we will be through that process by the mid part of Q3 based on our need to honor certain contract commitments. From that point forward, we anticipate Cogent's total revenue growth to be positive and continue after the roughly 18 years of positive growth that we demonstrated pre-acquisition of Sprint. Our growth did turn negative when we acquired a business that was declining at 74.4% a year. and represented 40% of the revenue of the combined company. We further accelerated that decline by electing to terminate these unprofitable non-core services. And I think the fact that we've been able to increase our EBITDA in absolute terms, even with revenue decline, is a very clear indication of the unprofitability of this business. But I think the corporate segment, as all of our segments, will be growing by the end or the middle of Q3 2025. Thanks, Josh.

Got it. Thank you.

Thanks.

Your next question comes from the line of Greg Williams at TD Callen. Please go ahead.

Great. Thanks for taking my questions. Dave, on the half penny per share dividend growth per quarter, is this like a temporary move? And would we, you know, think about returning to the penny growth quarter over quarter? And if so, what would the milestones need to be? I imagine leveraged targets would be one of them to return to that growth if you choose to do so. And then just back on the waves, Caden, you mentioned 45% of your, you know, bookings will be installed a month. That's about 150 circuits a month. In the past, you said you'd get to 500 circuits a month. What needs to happen to get to that target? And when could that be reached at this point? Thanks.

Yeah, sure. So let me take each of those questions. Thanks for them, Greg. First of all, the board reflected on the increase in leverage and realized that the fundamentals of the business remain strong. but that our leverage is going to continue to increase. We've outlined on several of these calls that our aggregate leverage will peak in Q3 of this year due to the decline in transit payments from T-Mobile. We have been able to affect a material amount of cost savings, but those still did not result in enough to fully offset the decline in monthly payments from T-Mobile from $29 million down to $8 million. As a result of that, throughout the year after those payments declined, our leverage is going up. As our leverage begins to decline in Q4 of this year and going forward, the board will continue to evaluate the pace of that delevering and is absolutely committed to returning capital to shareholders. Finally, We, I think, have continued to demonstrate our willingness to opportunistically enter the market and supplement our dividend with buybacks. That policy will continue going forward, but we absolutely believe that our ability to return cash flow will increase starting in the fourth quarter, and some of that will be used to Some will be used for increasing the dividend. And finally, some will be used for opportunistic buybacks. So I think the milestone will be the reduction in net leverage. I'm now going to pivot to your second question, which is wavelength installation. As we have been very clear in previous discussions with investors, we built a funnel of wavelength opportunities with no defined installation window. As it became clear that we could begin to install and select locations in Q3 of 2024, we began the process of cleansing that funnel. And as expected, the majority of that funnel fell out. Those customers went elsewhere because they could not wait for our deliveries. The funnel that we have now of 3,433 orders is a completely rebuilt funnel that was rebuilt from the end of Q3-24 to the end of Q1-25. We now have much more clarity around locations and about timing to be able to install. At 883 locations, we can now install in 30 days. We have sufficient field resources, pluggable optics, and service delivery coordinators to be able to provision 500 orders a month. With a 3,400 order backlog and funnel, that represents, with a 5% conversion rate, about 160. have more installation capacity than orders that are ready to install. As we build credibility with customers, we will both see an uptick in the number of opportunities going into that funnel. Based on the sales forecast that we have, we anticipate that funnel to reach 10,000 from 3430 by year end. So in the next seven months. And while we are hopeful that the conversion rate monthly will be greater than the 5% we outlined, we're basing that on our three-month experience of actually being able to provision orders. The final point I would make really is the sequential pacing of growth. With 18% sequential unit growth, we did very well. However, 2% revenue growth was as a result of those orders installing near the very end of the quarter. And the issue was, come January, we were ready to start installing. At that point, it was 802 sites. and we grew that to the 883, a quarter end, and that number has continued to grow. But many customers who still wanted the services needed time to have their equipment ready to accept those services, and that resulted in most of the install activity being back-end loaded at the end of the quarter. As we go into Q2 and beyond, we think that the pacing of installs will be more evenly distributed throughout the quarter. Hopefully that helped clarify the question. And the goal is to be very specific. With 500 capable installs per month, we think we will be hitting that target probably near the end of the year when the funnel reaches the 10,000 and the conversion rate remains at about 5%.

That's helpful. Thank you.

Hey, thanks, Frank.

So the next question is from the line of Alex Waters of Bank of America. Please go ahead.

Good morning, Dave. Thanks for taking my questions. Maybe just first, can you maybe talk about the wavelength ARPU and kind of where you see that trending throughout the year? And then secondly, just on the data center monetization, can you talk just timing, scale, and sizes of some of these potential deals. Thanks.

Yeah, hey, thanks, Alex, and congratulations on your new more senior role. You know, our wavelength ARPU was just under $2,000 in the quarter, about $19.30. You know, I think our base is now large enough, meaning we have enough visibility into the mix of 10, 100, and 400 gig waves, as well as contract duration and route length, that using an ARPU of about $1,900 is probably a reasonable way to model the business. As the base continues to grow, the installed base, I think that number will of the entire base will converge to something around $1,900 to $2,000 per wavelength. We are seeing a much higher uptick rate and higher capacity waves. 82% of our sales have been of 100 gig waves. That compares to the installed base in the industry of 55% of the base being 10 gig waves. So the waves that Cogent has been selling tend to be at 100 gig with about 8% of sales being 400 gig as compared to the industry base of about 3% at 400 gig. And then in terms of route length, we now have nationwide, or actually continental, ubiquity and pretty good visibility into the orders that we have been booking. And, you know, as we get stability around the book-to-bill cadence, I think that $2,000 ARPU is a good modeling number. Now, with regard to your second question of data center sales and monetization, We are continuing our work to convert those facilities and have just over 100 megawatts of power in what is now 24 facilities. We had originally targeted 23 that we are earmarking for sale or long-term lease. We have taken four of our letters of intent and moved forward towards initial contract negotiations, we are still engaging with parties who are conducting, you know, site condition studies and engineering due diligence. You know, we don't have an exact time frame, but we are highly motivated to sell this surplus capacity as it is not baked into our financial projections. but would be the easiest way for us to quickly deliver. Hopefully that was helpful.

Thank you, Dave.

Hey, thanks, Alex.

Your next question is from the line of Walter Pysak from LightShed. Please go ahead.

Thanks. Dave, I first wanted to go back to that a couple questions ago, just to make sure I heard you right. So, because I know there was this thesis that, you know, people who are bold on that it was just limited by your ability to execute. But I think you said you had the capacity, but you were just waiting on the customers to fill that capacity. And then if you can just talk about if you had installed at the start of the quarter, rather than 2.2% sequential growth, which was obviously impacted by the back-end loading, what that growth might have looked like so we get a sense of kind of unit growth conversion to revenue growth.

Yeah, so if we had assumed that the orders had installed mid quarter as opposed to end a quarter, our revenue growth rate would have been in the roughly 13% range. If we were fortunate enough that they had all installed at the beginning of the quarter, it would have been nearly 20% because the 18.2% unit growth actually understated the revenue growth because the ARPUs were actually slightly higher than the installed base. With regard to two very different metrics that we have given, the first metric is our ability to install. Our ability was limited by the repurposing of the Sprint network, and we were constrained till the beginning of this year where we had to do each installation that was done, the roughly 1,000 waves that we had sold, on a custom basis and a limited number of sites. After the first of the year, we have the ability at 802 sites, which has now grown to 883 sites, to install those services in 30 days. So that's on the cogent supply side. We can do it in those sites at any of three speeds and deliver within 30 days. We had a funnel of orders that had been booked with customers over a year and a half period as we were repurposing this network with little or no clarity to the customer on when we can install. It was not surprising to us, and we commented this extensively on our last earnings call, that we were going through a process to purge that funnel of orders that customers had gone somewhere else for. They couldn't wait for us. Now we have rebuilt that funnel. We also know that many of those orders, the customers are not ready when we are ready.

We expect that- Dave, I don't want you to have to repeat what you already said. I heard all that. I'm just, because it was just told to me, you know, rather than this install of 6% a quarter or whatever it is, which is, you know, how customers act, that there was this bold thesis that people were pitching that like, oh, it's just, it's fully about the supply and that they would just fill the supply as soon as that was available. So I think I heard you correctly. I was just trying to clarify that, which it sounds like that's the case. It's just customers have to be ready with their equipment and it's going to be And that's going to impact how that grows. Can I just move on to IP, which is like last quarter, Tad, I think, you know, during the call, I specifically asked about what you could do each quarter. And he said, it's going to bounce back to 500,000. And that was February. I know when you're in your, that was late February. So I know when you're prepared remarks, you said you had to basically disconnect somebody that was misusing it. So it's a disconnection like 700,000, IP addresses, and can you talk about, like, what does someone have to do with their IP addresses that would merit getting disconnected? And I guess, similarly, should we just assume it should bounce back to 500 a quarter going forward?

Yeah. Okay. So, one correction, Walt. I want to say 5%, not 6%. Sorry.

5%, yep.

As the conversion of the funnel and the growth in the funnel. So... Let me start with what someone has to do to be disconnected. And by the way, our acceptable use policy is clearly stated on our website. Typically, this will be one of three violations. Either there is a government order saying that from any of the 57 countries that we operate in the world, that a customer announcing those addresses is doing something that that government views as illegal. If that's the case, we immediately take it down, and it's upon the customer to resolve that issue with that government. The second area of abuse is typically copyright violations, and that is someone transmitting copyrighted information without the correct authority to do so. That is the case here that resulted in this fairly material takedown. This customer was violating the digital rights management requirements of the US government. And then the third potential area of abuse is if someone is using the addresses for a disruptive activity such as web scraping or spamming. Those are the three main categories of AUP violations. There were actually more than one customer in the quarter who had a significant digital rights management issue that resulted in a material decline in units, but also we were still able to grow revenues due to price increases. We absolutely anticipate to clearly answer your question, returning to a gross ad of north of 500,000 incremental addresses a quarter, and it is difficult for us to predict. There have been episodic periods in the past where we've had to take down blocks. This was a particularly larger

instances quarter okay so there could be additional churn going forward from this type of stuff but it's just too hard to protect product got it and then are you still good with the 350 for the year because it's obviously going to be a pretty big seven second half ramp to get there so we know that we have a very steep hill to climb on ibidop because we had a 104 million dollar

reduction in transit payments from T-Mobile. We feel comfortable. We are continuing to improve our EBITDA and grow that and should be able to achieve the goals that we've outlined.

And thanks and thanks for the short and prepared comments. Appreciate it.

Thank you. Your suggestions were helpful, Walt.

Your next question comes from the line of Chris Sol from UBS. Your line is open.

Great. Thank you for taking the questions. Just to follow up on your new long-term growth targets, what gives you confidence today to raise the target and any help breaking down that 6% to 8% revenue growth expectation by customer segment? And I believe in recent quarters for the legacy cogent business, you provided a core growth rate for both corporate and net-centric. What did core growth look like this quarter, and how do you expect that to evolve from here? Thank you.

Thanks for the question. Chris. So, you know, our growth was greatly impacted by absorbing Sprint's negative growth trajectory at closing and then accelerated by our attempt to purge undesirable services and revenues. That is how we have been able to actually grow Cash flow while declining top line. This is on a customer by customer basis. We now have clear line of sight to the remaining services that we need to disconnect and we've been able to negotiate in some cases customers agreeing to allow us to disconnect those services sooner than their contractual terms would allow us to. With that, we're comfortable that we'll be able to get through the vast majority of that intentional churn by mid Q3 and then return to organic growth. We also now have higher confidence in the wavelength trajectory due to the realistic book to bill cycle and the quality of the funnel. Within the customer segments, we think that enterprise revenues will effectively be flat. We think that corporate revenues should on a consolidated basis, net of this intentional churn should be growing in kind of the mid single digits of four to 5%. And that represents both the on-net cogent traditional corporate customer, as well as the corporate customers that we had acquired from Sprint. Most of which that could be moved on that have been moved on that. And then the remainder are going to continue to be off net as the locations are just not practical to bring on net. And then finally, on the net centric segment, that is where the vast majority of the wavelength revenue will be ascribed. And, you know, over 93 or 94 percent of the waves that have been sold to date have been to net-centric customers. With the combination of the net-centric IP growth and the wavelength growth, albeit a small percentage of that, we anticipate net-centric aggregate growth, so that's both IP and wavelengths, to be north of 10%. That combined growth rate and the fact that we have worked through the business that we want to exit should get us to an increased total revenue growth rate of 6% to 8%. Compare that to Cogent pre-acquisition of Sprint, where for an 18-year history, we had a compounded average growth rate of 10.2%. You know, a big part of the reason why we required T-Mobile to enter into the transit agreement and subsidize us was both the losses and the realization that for a period of time while we were correcting the revenue mix in the business we acquired, we were going to suffer negative revenue growth. That is now clearly in our sights to turn positive. And then secondly, we are comfortable that we will also get better margin contribution than we had initially forecast. And quite honestly, from the day we've closed, our margin contributions have actually exceeded our internal targets.

Thanks, Dave. And then just, do you have what the core growth rates were for corporate and net-centric in the quarter, X all of the grooming efforts?

So it's become harder and harder for us to kind of parse that out as we've re-provisioned the customers. You know, I believe the corporate segment grew between 3% and 4%, but that is not as precise of a number as I would like to give you. And I think net-centric probably grew at around 6% or 7%. on a year-over-year basis.

Great. Thank you, Dave.

Hey, thanks, Chris.

And your next question comes from the line of Nick DelDeo from Muffet Nathanson. Your line is open.

Hey, thanks for your questions. And Dave, also appreciate the new call format. I thought that was helpful, so thanks for making those changes. You know, first, going back to the SG&A line, I think you basically said that the entire sequential increase was due to normal seasonal items. It still feels like an awfully high increase, even after taking those into account. I guess, like, was Q4 SG&A depressed for some reason, such that it wasn't a good jump off point for thinking about Q1? And as we think about Q2 SG&A, you know, how should we think about, you know, the roll off of, you know, tax and audit costs and sales meeting costs and those sorts of things?

Now I'm going to start and I'm going to pass it to Tad. Our sequential increase in expenses was greater this year than it was last year, and the primary reason for that is we had the entire Sprint employee base in Cogent's numbers for 24 and in 23. We only picked up those expenses on May 1st, and all of the vacation accruals that those employees had were actually paid out in cash by T-Mobile as a condition prior to closing, so we did not assume those. Probably the biggest component of the sequential change in SG&A actually relates to the fact that people, we have a use or lose policy and, you know, people, user vocation in Q4 and then building accrual going forward. But I'm going to let Ted give you a little more granularity on the components and kind of the variance between this year and other years.

Sure. So in the fourth quarter, there were no unusual items. I would say, though, bad debt expense for the fourth quarter of last year was unusually low. We're usually at about 1% of our revenues, and it was 1% of our revenues, actually 0.8% this quarter. So that's about a million and a half. The remainder of the 10.6 million increase is all these seasonal factors that Dave mentioned. It's 2.5% CPI on everyone's salary that has been here for a year. It's resetting of tax expenses, payroll taxes in the United States. That happens every year. It's annual audit fees that happens every year. And then the vacation accrual, which is not insignificant. Sequentially, that's a $4 million change, and it's just a seasonal factor. People take vacation, of course, in the fourth quarter with the holidays. You're hitting the vacation accrual and not having to expense it because you've built that accrual over time. When you get back to the first quarter, you need to rebuild that again. So you have a swap. an expense now building the accrual when you were charging the accrual in the fourth quarter. It's not insignificant. It's $4 million of the $10.6 million sequential increase, but it's normal. And we have to say- It's a normal activity. I would say it was just outsized because of the nature of seven months versus a full year sprint employees. Does that help? Does that answer that?

Yes, yes, it does. Are you willing to share anything regarding where that's going to land in Q2? Where SGA is going to land in Q2? Or is this a run rate that we should think about?

It's slightly ticked down because more people will hit their FICA capacity, and the payroll taxes typically decline.

Okay, okay. On the IPv4 addresses, you said it was a large number that you took back. Are you willing to share the exact number?

Yeah. Well, it was from more than one customer, so it can't be attributed to just one. But it was in the order of about 600,000 to 700,000 addresses in aggregate that were taken back.

Okay, so your underlying trends are much better than they appear.

You know, we've had this in the past. You know, it's rare that you get this much in a quarter, but, you know, we don't predict when people do bad things. And, you know, Walt tried to say it's going to go away, and I can't answer that question because I can't tell you no one's going to violate, you know, Turkish security laws, and we get a takedown notice from the government of Turkey for a big block of addresses. I mean, stuff like that happens, and it is episodic. It was just more extreme this quarter than not. And fortunately for us, we had such a good tailwind from the price increases that the revenue still grew sequentially at 14.4%. Okay.

And then maybe one last quick one, if it's okay. I think you said that a majority of your Q4 of the backlog and funnel from waves that you showed in Q4 fell out as part of the cleanup process. I mean, again, can you share what that number is? I'm just trying to get a sense of what your gross adds to the backlog and funnel were in Q1.

Yeah. So between the stuff that fell out, and the stuff that installed starting in Q at the end of Q3. So we had visibility to starting to tell people we could give them firm delivery dates starting in January. Nearly 90% of the total funnel that existed at the end of Q3 24 fell out. Only about 10% of that funnel which was also about 3,500, ended up either installing or carrying over. And more of the installs that occurred, for example, in Q1 were things that were sold in Q4 and went into the funnel. And the funnel is continuing to grow. And, you know, until we could actually install I was extremely reluctant to give people kind of a book to bill kind of cadence and really even an ARPU. Now that we've got at least a couple of quarters where we could give people actual install dates with SLA commitments associated with it, we've got a lot more visibility. You know, I can look at the IP funnel and have a great deal of clarity around its conversion rate on a monthly basis. I think, you know, what we've said, you know, 4% to 5% is conservative, and I'm hoping that conversion rate actually accelerates as the funnel grows and we demonstrate to customers we can really deliver. The fact that we've actually delivered services now in 329 sites, I think just has earned us a lot of credibility and it's helped us build the funnel at a much faster pace than we were building it before.

It sounds like, based on your commentary, you had at least a few thousand, on a clean basis, a few thousand additions to the backlog and funnel in the quarter, which would I guess in tandem with your expected install, it kind of gets you to that 10,000 by year end.

That is correct.

Okay, great. Well, thank you guys.

Hey, thanks, Nick. You have a question from Michael Roland, Set City.

Please go ahead. Hi, Dave. Good morning. Thanks for taking the questions. Two, if I could. So first, First, if you could discuss the slower internet traffic growth year over year and what you're seeing also in regards to pricing and the implications of all of that as you look at internet transit revenue performance within the net centric revenue going forward. And then secondly, are you seeing any changes in customer behavior in terms of sales cycle, decision making, since the beginning of April after the tariff announcement? And can you just remind us, you know, how a slower macro could impact your business performance?

Yeah, let me start with the traffic growth number. So if you look at open vault data, which is looking at traffic on the other side, which is end user total downloads, that has slowed to about 8%. which is in alignment with what we're seeing kind of on the supply side or upstream component. I think there are really three things going on concurrently. One, the rate of broadband adoption in countries that have decent access network capabilities has slowed. The number of minutes of use per day has also moderated. And third, the adoption of video has slowed. So at the beginning of the pandemic, we were at about 18% of end user video consumption being streamed. That, you know, in five years, accelerated to about 54 percent it is going to continue to go up from here and in particular the pivot to more live event availability is helpful but i do think with a larger video base that application is maturing i also think we're in a period when Most of the network load for AI is directed at wavelengths because most of that network load is for training and not inference. But as the results of those large language models get distributed, that should present a new use case where users will use internet connectivity more and bit volumes will go up. So we have seen this pattern of kind of oscillations in aggregate demand as applications change historically. And I think that'll probably continue to be the case. But I think we're going to see over the next year or two a re-acceleration, at least in bit intensity, per user now in terms of pricing we have seen you know the rate of price declines pretty consistent now for 25 years that's at about 22 23 a year and while there is always some short-term variability that long-term trend line is pretty consistent, and I don't think that's going to change. Even though there is less competition, the technology associated with manufacturing those bit miles is continuing to improve pretty significantly. So I think we'll see some more price declines for the industry and kind of more of a return to historical traffic growth rate. To your last question around tariffs, I'm going to actually answer it with kind of two different views. One is for our net-centric customers, and this could be either WAVE or IP. Most of the time, they need equipment to accept those services. They're not happy that equipment is more expensive, it does have some tariff load on it, as at least a portion of it is coming from high tariff locations. But they still need it to deliver service. So I think that's probably an initial shock. And in terms of materiality to their overall cost structure, I think it's much like cogent. It's not material. But there's just a shock when that happens. But I would say the only thing on the tariff front that could potentially impact net centric business is if there is an effective content tariff, i.e., the movie tariff, which doesn't exist. I have no visibility to how that's going to affect end user demand. And then on the corporate side, I do believe that a number of corporate users are just concerned with the overall macro situation. And are we entering a period of reduced or negative growth and higher inflation? And for that reason, they're just being more cautious on long-term commitments. But again, because we sell a utility, I don't think that's going to have a material impact. I don't think we're in the kind of 2008, 2009 great financial crisis level of paralysis. And our underlying corporate growth continues. As we complete this grooming, we feel confident that aggregate growth and corporate growth will be positive later this year.

Thanks.

Hey, thanks, Mike.

Your next question comes from the line of Tim Horan from Oppenheimer. Your line is open.

Thanks, guys. Dave, can you give us maybe just some timing on the data center sale and maybe expectations on price if you've received any? And then on the wavelength side, have you seen any competitive response?

Yeah, I'm going to take those in reverse order, Tim. You know, probably the only competitive response was aimed at the hyperscaler segment of the wave market and the decision by at least one of our competitors after 20 years to agree to sell dark fiber. which is a potential substitute for wavelengths where the customer buys the dark fiber and then produces their own wavelengths on that. You know, I think on the kind of delivery of wavelength services, we have not seen any change in pricing or delivery schedules And what we have heard from customers that have put orders into our funnel is that our pricing is good. We have not had to be maybe as aggressive as we thought we would have to be once we had the network fully configured. Again, five months doesn't make a permanent trend, but we feel pretty good that the pricing that we're going to market has been well received by customers and viewed as adequately competitive to win share. I'm going to pivot now to your data center question. And as I stated earlier, we have a handful of situations where we are moving from letter of intent to contract. There is nothing that we can announce today. We are also continuing to do the work necessary to complete that data center conversion, but we think that'll be completed in the next two months. We were pretty clear that we'll have that done by the end of Q2, and we are on track to do that. In terms of pricing, I would say the A couple of parties that are negotiating leases are similar to our ask price. On the parties that are negotiating for outright purchase, there is a much wider dispersion. At least one of the contracts is at the ask price, but the others are below that. We need to vet the ability of each of the parties to perform, and that's part of what is going on while we are refining economic terms and an LOI into a contract. Because we've never done this before, I remain reluctant to give a firm date of when we can do this. I think we're making good progress and we'll get this We will monetize some of these, but it really does take two parties, and the parties have to have the wherewithal to perform. So we're going through that process. And I know early in the process, you had the ability to tour one of the facilities that was a work in progress. And I can assure you, if you go back to that facility, And Merchantville today would look very different than when you toward it.

But it's something you think you can get done in like three months or is it more of a, you know, six month type negotiation?

You know, it's really hard for me to answer, uh, to be conservative. I would take the longer view, Tim, not the shorter view, just because we've got parties at the table, but we've got to flush through. know what are the conditions they need met what is their timeline to close how much is their earnest money deposit what are the outs that they're looking to negotiate and again there's a fairly broad spectrum from sophisticated private equity to existing data center operators to more new business models and you know I just want to maximize value and I think it's going to be more than three months. I don't know how much more, but I think that's probably aggressive to say that there's an actual closed sale.

Got it. Thank you.

All right. I think we are through our questions. The last topic I'm going to touch on just quickly is something that affects me personally. And that is that I have due to coaching stock volatility had to substantially increase some of the shares that I had pledged to pay taxes over the years. I have not increased any borrowing, but I do want shareholders to be aware that, you know, I'm trying to be as transparent as possible. You know, I've been forced to inject money into my real estate portfolio. and that is continuing i want to personally thank everyone hopefully this new format was more efficient we did get everybody's questions answered and got it down to an hour 15 and uh i look forward to seeing you all in person soon take care thanks bye-bye this concludes today's conference call thank you all for joining us you may now disconnect