Cogent Communications Holdings, Inc.

Good morning and welcome to the Cogent Communications Holdings Second Quarter 2026 Earnings Conference Call. As a reminder, this conference call is being recorded and it will be available for replay at www.cogentcall.com. A transcript of this conference call will be posted on Cogent's website when it comes available. Cogent's summary of financial and operational results attached to this press release can be downloaded from the Cogent website. I would now like to turn it over to Mr. Dave Schaeffer, Chairman and Chief Executive Officer of Cogent Communications Holdings, you may begin.

Hey, thank you and good morning. Welcome to our second quarter 2026 earnings conference call. I'm Dave Schaeffer, Cogent's Chief Executive Officer, and with me on this morning's call is Tad Weed, our Chief Financial Officer. I'd like to focus on a few key events and significant matters that transpired in the quarter. I'd like to recognize these events and give you an update on these important matters. We have made significant progress in several areas. Our data center monetization, our net leverage reduction, our cost reduction and completion of various integration projects, the continued product rotation and a reduction in our capital lease payments and continued progress in the sale of wavelength services. First, for data centers and leverage. As we stated in our previous call, we intend to monetize 24 of the facilities that we acquired from and converted into data centers, either through the outright sale or leasing these facilities on a wholesale basis. In June, we closed on the sale of 10 of these former Sprint facilities that we had converted into data centers for total proceeds of $225 million. Thank you for joining us. and the remaining former Sprint facilities We are in negotiation for several letters of intent on these facilities. Our total cash and restricted cash balances at the end of Q2 2026 was $369.7 million. Now I'd like to touch on the amendment that we received to are 2032 secured note indenture. In June, we obtained approval from the majority of the holders of these 2032 notes to amend the note with a supplemental indenture. The key features included in this revision are an increase in maximum secured debt leverage ratio from four times to 4.7 times, 475 times. A commitment on our part to use at least $175 million in proceeds from the sale of these initial data centers that was then contributed from outside of the borrowing group into the borrowing group to be used for the repurchase of debt obligations at a discount. During the quarter, we repurchased $20.4 million of par value 2032 notes at an average price of $91.955, resulting in a gain in the quarter of $1.6 million. Continuing in July, we purchased an additional $118.4 million of par value and an average price of $90.071, resulting in an additional gain of $11.8 million, which will be recognized in the third quarter. The total purchases of our 2032 notes to date have been $138.8 million of face value at an average price of $90.348, resulting in a cumulative gain of $13.4 million. We are making progress on the refinancing of our $750 million 2027 unsecured news. Our $750 million unsecured notes mature in June of 2027. The May call period for our 2027 unsecured notes ended on June 15, 2026. These notes have become current and we are in the process of completing or refinancing of these notes. We expect that transaction Thank you for joining us. and provisioning intervals in approximately 30 days, which do continue to improve. Although length revenue for the quarter was $14.8 million, an increase of 63.8% from a year ago had a sequential increase of 9.2%. Our Wavelength customers increased year-over-year by 66.4% and sequentially by 8% to a total of 2,445 customer connections. In addition, during the quarter, to the new installs that we have reported, we reprovisioned 77 existing wavelengths converting them into higher capacity wavelengths. Most of these were conversions from 100 gig to 400 gig waves as customers have become more confident in the quality of our network. At quarter's end, we have sold wavelength services in 608 unique locations, And we have sold those wavelength services now to a combined customer base of 546 unique customers. We still believe that we will capture 25% of the North American long-haul wavelength market. We also, today, still have only captured 3% of that market. Now for a comment on our gross margin improvement. We continue to reduce costs. Our gross margins percentages increase on a year-over-year basis by 260 basis points and increase sequentially by 90 basis points to 47%. Our EBITDA, EBITDAs Adjusted, and EBITDA Adjusted margins also improved. We expanded our sequential EBITDA as adjusted margin. Our EBITDA as adjusted for the quarter increased sequentially by $900,000, or just under a million dollars, to $71.1 million. And our EBITDA as adjusted margin increased sequentially We also have worked diligently on the organizational optimization of our workforce. As we are completing various integration projects, we are evaluating the optimal size of all of our departments as the integration of these former Sprint Assets into Cogent is now being completed. We reduced our total headcount to 1,682 at quarters end, a reduction of 113 individuals from the end of the previous quarter, and a reduction of 207 individuals from Q2 This reduction represents approximately 6% of our workforce from the previous quarter. The expenses associated with these reductions have been recognized in the second quarter. Now I'd like to take a moment to talk about our long-term objectives and beliefs around targets. We expect our revenues to grow at between 6% and 8% over a multi-year period. While we acknowledge our revenue growth in Q2 of 2026 was negative, we do believe that the decline in revenue from the acquired sprint customer base is moderating. We anticipate EBITDA margins to average over a multi-year period approximately 200 basis points a year, kind of mirroring the type of margin expansion that Cogent had experienced prior to the acquisition of Sprint. Our revenue and EBITDA guidances are not intended to be quarterly or targeted to a specific year, but rather a multi-year. Now I'd like to ask Thad to read our safe harbor language and provide some additional details on our operating performance for the quarter. I'll then conclude with a few summary remarks, and we'll then open the floor for questions. Thad?

Yep. Thank you, Dave. 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. The Code 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 record tiles for the corresponding gap measurement in our earnings releases that are posted on our website at cogentco.com. Discussion of the results for the quarter. And the revenue mix since spring closing, which the first quarter was Q3 23 versus this quarter. Despite our revenue decreases, we have been able to increase our margins. Our increases in our gross margin and our EBITDA margin have been driven by cost reduction and a rotation to our more profitable on-net products. Comparing our revenue by connection type from the third quarter of 2023, which again was the first full quarter we were combined with Sprint Wireline, to this quarter illustrates the material changes to the composition of our revenue, Our total on-net revenues, including on-net wavelengths, increased 63.8%, so close to 64% of our total revenues this quarter, and that was compared to 62.4% last quarter and 57.4% in the second quarter of last year. Our off-net revenues were 48% of our total revenues in the third quarter of 2023, and much less profitable. Our off-net revenues have decreased to 35.9% of our total revenues this quarter, compared to 37.2% last quarter and 41.5% in the second quarter of last year. 18% of our sales this quarter were for on-net services in the aggregate. Our non-core revenues were 5% of our total revenues in the third quarter of 2023, and they have decreased to less than $1 million and were about 0.4% of our revenues this quarter. Our total revenues for the quarter were $235.6 million. Our total revenue declined by $3.6 million to 1.5%. USF tax revenues had a negative impact on our sequential revenue results of $0.6 million and a negative year-to-year impact of $1.1 million. We analyze and classify our revenues into four network connection types and three customer types. Our four network connection types are on-net, off-net, wavelength, and non-core. Our three customer types are net-centric, corporate, and enterprise customers. For the quarter, Sequentially, our on-net revenues, including wage revenues, increased by $1 million. Our less profitable off-net revenues declined by $4.5 million, so most of the decline was related to off-net. Our non-core revenues decreased by $0.1 million. Our wavelength revenues by themselves, which is almost entirely on-net, increased by $1.2 million. IPV4 lease revenue, which is included in on-net, Our on-net IPV4 leasing revenue increased sequentially by 0.5% to $18.1 million and 18.1% year-over-year. Our lease price per address has been stable for the last several quarters and was $0.40 per month. We have titled the 37.8 million IPV4 addresses, and we've leased approximately $15 million IPV4 addresses as of today. The substantial changes in the acquired Sprint Wireline revenue base have mapped the underlying performance of our code and classic business. Our consolidated revenue declines have been largely attributed to the reduction in the acquired Sprint Wireline corporate and enterprise non-core and off-net revenues. At closing, the Sprint Wireline revenues were 42% of our total revenue. We acquired the Sprint Wireline with a revenue run rate of $118.25. This acquired revenue base has decreased from $118 million to down to $34 million for this quarter. That's an $84 million reduction in quarterly revenues related to our acquired Sprint Wireline revenue base for a 71% decline in deal closing. At deal closing, which was three years ago, Our cogent classic revenue run rate was $155 million per quarter. And the cogent classic revenue base has increased from then by 29% from $155 million to $200 million for this quarter. Revenue by corporate, net-centric, and enterprise. Our total corporate business represented 41.9% of our revenues for the quarter. That decreased by 9.6% year-over-year and sequentially by 2.4%. Our total net-centric business continues to increase and to benefit from the growth in video traffic, activity related to artificial intelligence, streaming, IPV4 leasing, and wavelength sales. Our net-centric business represents 45.6% of our revenues this quarter. Our quarterly net-centric revenues increased by 10.4% year-over-year and sequentially by 1.6%. Lastly, our enterprise business. Our total enterprise business was 12.5% of our revenues this quarter. Our quarterly enterprise revenue decreased by 26% year-over-year and sequentially by 8.9%, primarily due to reduction in required sprints Barline Enterprise off-net revenues as non-core is down to less than a million dollars. Revenue and customer connections by network type, on-net revenue. We serve our on-net customers in 3,627 total on-net buildings. Our total on-net revenue, including on-net wavelength sales, is $150.2 million for the quarter. a year-over-year increase of 6.2% and a sequential increase of 0.7%. Our off-net revenue was $84.5 million for the quarter, a year-over-year decrease of 17.3% and a sequential decrease of 5.1%. Our off-net revenue results are impacted by the continued grooming and termination of low-margin off-net contracts, in particular the acquired BrinkWireline customers. and David Schaeffer. Thank you for joining us. Our off-net IP ARPU was $1,197. Our wavelength ARPU was $2,100. And our wavelength ARPU for new waves this quarter was $2,206 as there were more larger connections installed. Our IPv4 ARPU, again, was $0.40 per address, very stable. Our churn rates. Our on-net churn rate, monthly churn rate, slightly increased to 1.3% from 1.2% last quarter. Our off-net churn rate is primarily driven by the reduction in required sprint customer base. That rate was 2.3%, an increase from 1.7% last quarter. Lastly, our wavelength monthly churn rate was about 0.5%. Profit. Our IP network traffic growth continued for the quarter. Our IP network traffic growth for the quarter increased sequentially by 3%, in what is a traditionally seasonally slow quarter for traffic growth, and year over year grew at an accelerated rate up to 16%. Sales rep productivity. Our sales rep productivity materially improved sequentially. and was 4.5 this quarter compared to 4.1 last quarter. Our long-term average is 4.8. Comments on FX. Our revenue earned outside of the United States was about 21% of our revenues for the quarter. Very consistent. Based on the average Euro and Canadian conversion rate so far this quarter, so in the third quarter, we estimate that the FX conversion impact Our revenues and customer base are not highly concentrated. Our top 25 customers are 16% of our revenues this quarter. CapEx and payments on capital leases. Our CapEx declined by 16.7% sequentially and 31.4% year-over-year. We continue to experience multiple equipment price increases from vendors due to supply chain constraints so far this year. Our principal payments on capital leases also declined by 27.7% and were $9.7 million for the quarter. Debt and debt ratios. Total gross debt at par, including our $630.2 million of finance IRU leases, and our reduced principal amount of our 2032 notes, which at quarter end was reduced from $600 million to $579.6 million. The total was $2.3 million at quarter end. Our net debt, total debt net of our cash, and our $151.5 million amounts due from T-Mobile was $1.8 million. Principal balance on our 2032 notes again has been reduced further after quarter end and is now 461.2 million from the purchases we made in July. Our leverage ratio as calculated under our more restrictive unsecured 750 million 2027 notes was 5.94. Our secured leverage ratio under the notes was 3.67. Our fixed coverage ratio was 2.28. The definition of Consolidated Cash Flow under our $600 million Secured 2032 Notes Inventure includes cash payments under our IP Transit Service Agreement with T-Mobile in the determination of Consolidated Cash Flow under the Inventure. And those ratios were as follows. Our leverage ratio as calculated under the $600 million Note in venture was 4.56, secured leverage was 2.81, and fixed coverage was 2.97. Cash and restricted cash. 168 million of the proceeds from the sale of the 10 dad centers was considered restricted cash at closing under the terms of our supplemental in venture since that amount was reserved for purchases of our debt obligations at a discount. We purchased 20.4 million par value of our 2032 notes in June. As a result, the balance of restricted cash related to the data center sale proceeds was 147.6 million as of June 30. Again, we purchased an additional 118.4 million par value of our 2032 notes in July, so the remaining balance of the restricted cash The cumulative purchases of our 2032 notes were $138.8 million of par value. That was retired for paying $126.2 million at an average price of $90.348 and the cumulative total gain $13.4 million. Lastly, bad debt and day sales. Our DSO improved and was 29 days at quarter end, a two-day improvement from 31 last quarter, and our bad debt expense was only 0.6% of our revenues for the quarter. And with that, I will turn the call back over to Dave.

Hey, thanks, Thad. I'd like to highlight a couple of strengths around our network, our customer base, and our sales force. We remain direct Beneficiaries of increased traffic volumes from over-the-top video, artificial intelligence activity, streaming, and gaming trends. At quarter's end, we were able to sell WAVE services into 1,137 unique data centers with reduced provisioning windows for approximately 30 days. We sell those waves in 608 of those locations as of today to 546 unique customers. At quarter's end, we were signed for IP services globally in 1,953 data centers. At quarter's end, our IP network remains the most connected in the world with 7,572 networks directly connected, 22 of these networks represent peers, and 7,550 networks are paying cogent transit customers. We remain focused on our sales force productivity and continue to manage out underperforming reps. Our sales force turnover was 7.5% a month in the quarter, which is above our historical average of 5.7% per month. At quarter's end, we had a total quota-bearing sales force of 506, 263 of these professionals focused on the net-centric market, 230 focused on the corporate market, and 13% We've made significant progress in several areas. We continue to improve our margins, grow our EBITDA due to our diligence and cost reductions, the completion of many of the integration programs that we outlined three years ago, and our focus in selling more profitable on-net services. In the second quarter, 82% of all sales in the quarter were on-net services, and as a result, in our revenue base, the percentage of revenues that come from on-net increased sequentially to 64%. We're actively working on further monetization of the converted Sprint facilities. Our ability to increase EBITDA margins through optimization and asset divestiture will accelerate our delivering and allow us to resume a program of aggressively returning capital to equity holders. We remain disciplined in our capital investments. We're focused on expansion projects with the highest Return on Incremental Capital. Our Wavelength services are differentiated by the quality, breadth of our footprint, uniqueness of our routes, and efficient provisioning capabilities. Our on-net services, whether they be Wave or IP, are unparalleled in their value to customers. At Quarters End, we're providing services in 1,781 carrier-neutral data centers and 172 cogent data centers. This footprint and aggregate reaches facilities with approximately 17 gigawatts of installed power. The cogent data centers have a total of 155 megawatts of installed and available power and over 1.5 million square feet. The proceeds that we've been able to garner from these data center sales have allowed us to reduce leverage and has allowed us to add resources to the marketing of the remaining facilities. We are in the process of completing the refinancing of our 2027 notes, which we anticipate will complete in the third quarter of this year. We offer superior products, unparalleled quality, broad footprint, and to traffic well locations, with expedited provisioning and disruptive pricing. In summary, We continue to gain market share by the value we deliver our customers. 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 doubted and would like to ask a question, please press the star 1 on your telephone keypad. And if you would like to withdraw your question, please press the star 1 again. Your first question comes from the line of Brad Williams with TD Collins. Please go ahead.

Great, thanks for taking my question. First of all, just on WAVES, your peers over the last two weeks noted some strong WAVE numbers. Your numbers came in a touch light to the estimates mine in the streets, I think. And I realize you don't provide the backlog KPIs, but any help on backlog direction would be helpful. As we're wondering here, is this still about customers delaying or not accepting orders? And you reiterated the 25% share in the long term. Like, what needs to happen? You're a far cry from that number. Thank you for the questions, Greg. With regard to wave sales,

are now coming back and asking to increase The capacity on those wavelengths and helping us push ARPU up. We have been frustrated by the fact that many customers struggle to have the ability to use the waves that they've ordered, whether it be equipment deliveries, power constraints, or data center space and cooling availability, or even data center completion. because of the surge in demand for computing, the entire supply chain is adjusting, and that has impacted our customers. It has not to date slowed our ability to provision, but it has increased our capital, and the fact that we were able to have a meaningful reduction and our capital spending sequentially and expect that number to continue to improve is because of our efficiency in deploying that capital. In terms of wavelength market share, we are at only 3% of the North American long-haul market today. You know, we remain encouraged by the breadth of customer base that we have, 546 unique companies using our wavelengths, getting comfortable with cogent, and the fact that we've now delivered those into more than half of our wave-enabled footprint, 608 out of the 1,137 wave-enabled I think we expect our rate of wave installs to accelerate, but I do think it will be several years till we get to that 25% market share. I'm going to now pivot over to the EBITDA progression and You know, while we experienced a significant revenue decline of $3.6 million sequentially, our EBITDA did grow by nearly a million dollars on a sequential basis. Embedded in those costs and retarding our rate of margin expansion, were some of the expenses that we have incurred in the quarter as we have round down many of the integration projects. Just to remind investors, when we initially acquired Sprint, we had targeted $220 million of targeted direct cost savings, and we had incurred a monthly integration expense of about $5 million a month. We updated those numbers and as recently as last earnings call, we had taken that $220 million number to 240 and we had indicated that of that 240, There was less than $20 million of annualized run rate remaining. We have brought that number down. There is still a small stub of remaining costs, but the vast majority of the $240 million in cost savings have been achieved. We also commented over the last three years on the decline in our spending on integration projects. That monthly spend of $5 million a month had declined to about $3 million a month at the end of Q1. We accelerated that decline in large part through the optimization of our workforce. While we had been Gradually reducing our workforce, that rate of reduction accelerated in a quarter, and we reduced our workforce by about 6%. There will be further reductions in the third quarter, but at a more moderate rate. The cost of these reductions, severance benefits payments, and the fact that many of these employees did continue to work at least partially in the quarter did impact the rate of margin expansion. I do believe that over the next several quarters we will return to a more accelerated rate of margin expansion through the combination of continued on-net sales and The continued discipline around taking out those integration expenses. As we had outlined previously, going back to September of 2022 when the deal was announced, that we anticipated all of those integration costs to be gone by the end of 2026, year end. We will probably be in a position to beat that, but we have materially reduced those expenses and therefore we'll see uplift in both the third and fourth quarter from that.

Thanks. A quick follow-up. You mentioned that CapEx was down and you expect that number to continue to come down. Is that a quarter-reporter or near-term target? Is that sort of a longer-term view?

So it was both on a year-over-year basis and sequentially that capital declined. We would expect a further decline on both a sequential and year-over-year basis in the third quarter. You know, as I commented extensively on the last call, it has been difficult for us to give exact capex guidance because of the pacing of equipment Price Increases We had experienced five increases from one vendor in the first five months of the year. Fortunately, in the next three months, we've only experienced one increase, and they were of relatively equal size. Our other primary vendor has had three increases. And we do believe that that rate of price increase is moderating, and we do expect our total CapEx spend to continue to moderate.

Got it. Thank you. Hey, thanks, Greg.

And your next question comes from the line of Chris Scholl with UBS. Please go ahead.

Great, thank you. Dave, just a follow-up on the status of those 14 Sprint data center sites that have been converted. Do you envision selling those 14 as a block or as a piecemeal approach more likely based on the interest you're seeing so far and any color you can give on the number or types of buyers expressing interest at this stage and what the timeline looks like from here? Thank you.

Yeah, sure, Chris. I think it's most likely that they will be sold in chunks. We do have Numerous both operators and private equity looking at these facilities. We currently have signed letters of intent from purchasers that we have not accepted, that we have validated their creditworthiness, and those are for four facilities. Two letters of intent, one for three, one for one. You know, we are also in discussion for many of the remaining 10 facilities, but we do not today possess letters of intent. with those counterparties, but we remain optimistic. I think for the other 10 facilities, the counterparties are still being vetted, and we also do not yet have a firm offer from them, in some cases verbal, indications of interest, but I think it's our intention to only announce Once we have something that we feel will absolutely close, and we're encouraged by, you know, I Square's progress and their professionalism and moving from letter of intent to contract to closing.

If I can just follow up on the 10 sites you did sell, can you just remind us how much expense should drop out in 3Q for those assets, and is it fair most of that spend it in COGS today?

Yeah, so the expense associated with those facilities on an annual basis was about $7 million, so we would anticipate just under Thank you very much. to those savings. We also will be receiving payments from I-Squared for providing transition services to them that will be recognized either as an offset to cost or revenue. Great. Thank you. Say thanks, Chris.

And your next question comes from the line of Mike Falk with Bank of America. Please go ahead.

Good morning, Dave. How are you? Hey, great, Michael. Yeah, good to hear from you again. So, we'll go back to Wavelengths, Dave. You know, we really have not seen acceleration in connections as a lot of us had anticipated. So, can you maybe just talk a little bit about the, you know, the conversion process of, you know, some of that backlog and what the impediments have been. And then on the sale or potential sale of the remaining Sprint data centers, I'd love to get your thoughts on how we should think about valuation, you know, based on the location, quality, tenants, whether that would be comparable to valuation the data center has already sold, the tenant you closed on.

Yeah, sure. Two very good questions, Michael. So, first of all, on wavelengths, you know, the constraints, I think, have fallen into two primary categories. One, customers not being able to accept the wavelengths because of constraints that they are facing. Existing data center occupancy is at a record high. Switches, Plugable Optics, all of these components that allow the customer to use the Wavelength that we deliver have elongated delivery times. I think secondly, and we commented on this several quarters ago and have talked about it repeatedly, customers, I think, still are amazed at our ability to provision as compared to others. You know, I know the question and comment came up about others reporting quote-unquote strong wavelength sales. To the best of my knowledge, none of our competitors get the level of granularity of wavelength sales that we disclose. The number of wavelengths, the ARPU, and they oftentimes do not break wavelength revenue out as a separate line item. So, you know, it's one thing to qualitatively say things are great. It's another to be very granular and specific. I'm not saying that in a defensive way, but I do think our transparency on this has allowed investors More clarity and more granularity than our competitors. You know, we today have equipment and are able to continue to deploy wavelengths. We have had to make decisions around, is the customer who has an order really going to take the wavelength? And then two, prioritize some equipment and resources to customers that already are using wavelengths and are upgrading. You know, I think we did better than the headline number, you know, demonstrates in the quarter with the reprovisioning of 77 wavelengths on top of the 182 that we deploy. These are still relatively small numbers, you know, We have a strong year-over-year growth rate at over 60%, a strong sequential growth rate of 10%. These are, I think, admirable, but we need to continue to grow the base. We do believe that the demand is real, the customer base is broad, the footprint we have is the footprint that customers want. There's been conversations around Cogent's willingness to go either into proprietary single-tenant data centers or to corporate sites. We do accommodate waves to those locations. We have provisioned them, but we do so in a different manner. We usually look for the single tenant at that data center to provide dark fiber extensions back to a carrier neutral where we then interconnect and hand the wavelength off. This allows us to minimize our capital exposure yet still meet the requirements of the customer. That is primarily the hyperscalers. And then for large enterprises where we have sold a handful of waves. They are typically buying them in single-tenant office buildings, and there we use a combination of dark fiber tails and local providers to interconnect because we cannot justify the deployment of capital for that single-tenant opportunity. I'm going to now pivot over to your question around the complexion of the unsold data centers both in terms of quality and anticipated price. You know, the facilities that we have sold are, I think, you know, comparable to the facilities that we have to sell. There is clearly a divergence in scale from the largest of the remaining 14 being our Fort Worth facility with 14 megawatts and the smallest of the remaining to be sold Having just less than one megawatt in Pearl City, Hawaii. You know, I think some of the remaining sites have incremental power available above and beyond what we have today provisioned. But that is part of the back and forth on our negotiations with the potential buyers. You know, the geographic footprint remains diverse, and I do believe that most of the remaining facilities will eventually transact. You know, it's really only been a few quarters Since these facilities were fully converted, and I think, you know, there are probably some private equity investors waiting to see kind of I-square's business strategy and potentially, you know, replicate it. So I think over the next several quarters, we will be able to transact on more. The final point is, based on Cochran's North American NOL inventory, I think it may be optimal for us not to transact in North America until early next year when we will have some additional NOL capacity to offset taxes.

Understood. Just really quickly, can you remind us, please, the total megawatts in the 14 remaining facilities?

Yeah, so the price per megawatt that we transacted with I2 was approximately $4.2 million a megawatt, and that inventory was 55 megawatts, roughly, and then the remaining footprint is about 55 megawatts.

Great. Thank you, David.

Hey, thanks, Michael.

And your next question comes from the line of Walter Pysak with LightShed. Please go ahead.

Hey, Dave. I want to go back to the first question. You gave a very comprehensive answer, but I just want to dissect it a little bit to understand it. On SG&A specifically as it relates to synergies and then ongoing integration expenses, I know in Q1 you had your typical sales meeting. So I saw with, you know, with basically the ongoing synergy stuff, you might see a decline in Q2. That didn't happen. But I think you said in that first answer, that's because of ongoing integration expenses. I know you were talking a little bit more about gross margin, but I guess if we could just focus on SG&A, should that SG&A or is there more room for that SG&A to decline on an absolute basis as we kind of conclude the rest of the year?

The answer directly to your question is yes, it will decline sequentially into the third quarter and the fourth quarter. Embedded in that SG&A number, in addition to the sales meeting in the first quarter, were the audit expenses associated with the first quarter and the increase in employee load due to FICA matches, which do max out and typically go down. But in addition, in the second quarter, we had an accelerated rate at which we ended integration projects. There are still some ongoing, but at a much reduced rate. And we took out 6% of our sales pool. Rather than many companies which put out a press release of what they're intending to do and then the expenses followed, we took a slightly different approach and took those employees out on a very tactical basis that were related to many of these integration projects. There were severance costs. Those terminations did not all occur early in the quarter. and we would expect to see a flow-through in SG&A improvement in both Q3 and Q4.

Yeah, that makes sense. And then on the IP addresses, you know, growth seems to have stalled out a bit, so I guess it goes back to the age-old question. you know kind of given the debt leverage I know you you know you just kind of detailed what you could you hope for in the data centers but like why not just sell these things now it doesn't seem like it's providing any actual at least on a sequential basis right or maybe things will kick back in the second half of the year but I guess just why not sell these IP addresses I know the prices are down but it's not like you're seeing good lease revenue growth and it obviously could help with the debt leverage

And listen, we are very focused on reducing our leverage. We understand that as a result of the Sprint acquisition, our leverage increased, and there are really three major tools that we have to improve that leverage. The sale of assets is one of those. The growth in more profitable business is more impactful. And then finally, the reduction in costs. We look at the IP addresses and we have leased out approximately $15.2 million of the total $37.8 million that we have. On a year-over-year basis, the Revenues associated with IP address leasing grew 18.1%. That's a pretty healthy growth rate. Yes, on a sequential basis, it only grew at a half a percent. We will focus on growing those revenues. I don't believe in today's market we will maximize value by selling them. I do believe We maximize value to Michael's question around, you know, the remaining 10 data centers and generating meaningful proceeds to delever. So I actually view our path to delevering as working. You know, we are basically 6.2 times levered today, and that is a material improvement. Thank you very much. Thank you for joining us. We need to be able to grow EBITDA, and I think the IP address incremental leasing from this point will be a tool in helping us do that.

I hope to see that. And just one last one, Dave, if you don't mind. With the EBITDA declining this quarter at a time when you're trying to do the refi, what should we expect in terms of What that rate would look like so we can kind of factor that into our cash burn analysis.

So, as I said, our EBITDA actually sequentially improved quarter over quarter.

Which it always does in Q2 because of the reduction in expenses.

Right, but we did have these extraordinary expenses that were unique.

The decline year over year, so I'm just questioning how that impacts the refi and what rate you might get.

Yeah, so we have taken a number of steps to improve our financeability and cost of capital. One of those was the entry into the supplemental indenture and the expansion of our spirit capacity. So we are going to be replacing the unsecured notes with secure. That typically lowers your cost of capital. Offsetting that is the fact that our current secured debt is trading at a discount. Witness the fact that we bought it back for 90.2 cents on the dollar, resulting in a $13.4 million gain in the quarter. I think that's an indicative cost of capital, so the yield to worse on those notes is about 8.8%, 8.9%. We are working with bankers to determine the optimal enhancements to our notes to potentially lower that cost of capital. You know, I think it's premature for me to announce a rate. Ultimately, the market will set that. And then the final point is, you know, since those 2032 notes were issued, Treasury rates on the comparable benchmark are up nearly, you know, a full percentage point. So it is absolutely reasonable that we're going to be paying more for our capital, but I'm not in a position today to give you a rate, other than to look at where the current secures trade.

Thanks, Dave. Appreciate it.

Hey, thanks, Walt.

And your next question comes from the line of Nick Bildeo with Muppet Nathanson. Please go ahead.

Hey, morning. Thanks for taking my questions. First, Dave, on the sales force, it looks like a lot of the headcount reductions you had in the quarter affected the sales force. The sales productivity went up, so I assume that was concentrated in lower-performing salespeople. But I guess, prospectively, as you're looking to obviously grow your revenues, how do you think about the current size and composition of the sales force relative to what you need?

Yeah. So, Roughly about 40% of the headcount reduction was salespeople. We have been very disciplined about managing out underperformers, and we had some remaining former Sprint salespeople who were here primarily to transition and maintain the relationship with those remaining Sprint customers. We took a much more disciplined approach to managing those individuals out. They were underperforming. They had been given, I guess, a pass on our normal discipline mechanisms and turnover rules, and we implemented those more evenly in the quarters. I think in terms of the size of the sales force, it is probably needs to be about where it is today. You know, like one of my board members always jokes, you know, Stalin quote, there are fewer Russians after World War II, but better Russians. I'm not sure I'm ready to go there with my sales force. The idea that we need to maintain productivity. A metric that we look at, probably even more important than the productivity, is our cost per dollar of revenue acquisition. Ever since the Sprint acquisition, that number had gone up. It is materially coming down with this emphasis on productivity and on net I'm not in a position to give you an exact headcount number, but I think it's probably in the 500 range feels about right. Our corporate market is clearly growing slower than it historically had and has never fully recovered from the pandemic, and I don't see it probably growing Recovering at this point, I think it's time to stop talking about the pandemic. Whereas, with the added ability to sell wavelengths, almost exclusively through the net-centric sales team, you know, less than 5% of wavelength sales have been to enterprise and about 10% to corporate. It's not zero, but it is a very small base. It's mostly net-centric customers. That's where we need to allocate more resources. So I do think you'll see a continued shift. Most of the Salesforce turnover has been on the corporate side.

Okay. Okay. That's helpful, Colin. Thank you. You know, one other question, you know, think about Waves. It seems like everybody across the connectivity space is, you know, talking about a step up in demand from Neoclouds. that have really exploded on the scene in the past couple of years. So I guess how would you characterize the demand that you're seeing from that vertical? And what are you doing to make sure that your sales force is in front of those customers, many of which are newer, to educate about your services and be able to capitalize on that opportunity?

Yeah, so we actually have a focused neocloud effort. We've identified those accounts. We've allocated them to more experienced reps. We have had great success with all of the household names. And I think we will increase our percentage of their purchases as we demonstrate the ability to provision and the ability of the service to deliver high reliability after its provision. You know, I'm always reluctant to mention names that sometimes can offend customers, but, you know, the companies that are rumored to be going public, those that are public, are already today cogent wave customers. You know, I encourage investors to do channel checks and reach out to customers. Well, I can't disclose her name. The customer can clearly give an opinion on Koshin. What I will say, though, is most of the AI spend is announced but not yet deployed. So even though probably a trillion dollars of capital has been deployed and AI infrastructure, only a small percentage of that trillion is actually in production being used for LLM creation or inference. You know, there's an expectation that over the next four years, there'll be a total of $7 trillion invested. But it's a little bit like a jigsaw puzzle where all the pieces need to come together before it's complete. And for many of these neoclouds, they are either waiting on GPUs, they are waiting on data center capacity, they are waiting on power. There could be rare cases. I know of one specific case of a large data center in North Dakota that's relatively proximate to our network. where the neocloud is desperate to get wavelengths because they have power, but unfortunately, there's no fiber today constructed between where their data center is constructed and the nearest network, which turns out to be cogent to get them back to major markets. So, you know, I would expect in that case, that Last mile, and it's a lot more than a mile, is probably going to take a lot longer than, you know, three or four months to permit and construct. We are not going to do that. It will get done, and that backlog of waves will then be available. They've already told us how many they need. We've beefed up our network to deliver that. I mean, that's just an anecdotal example.

Okay. That's great. Thank you, Dave.

Good, thanks, Seth. And your next question comes from the line of Frank Lawton with Raymond James. Please go ahead.

Hey, Dave. This is Rob Long for Frank. Hey, so, you know, obviously, you know, you were just talking about the way of business. You spoke to it a bit, you know, earlier remarks. You know, what are some things that, you know, you think you can do in order to drive more sales there as it definitely appears the market is rising and then, you know, What do you need to do to improve the legacy business from here?

Yeah, hey, thanks for both questions, Rob. So, you know, I think, first of all, the best way to win any business, legacy or wave, is to provide the best value in the market. Now, as I've commented before, value can mean price, it can mean location, it can mean speed. It can mean reliability. And your reputation is built order by order. In many ways, one of the most encouraging numbers in what we reported is the fact that 77 existing wavelengths in the quarter were upgraded to larger capacities. That kind of demonstrates that someone who dipped their toe in the water with Cogent now is feeling comfortable to upgrade and take more locations. You know, we do have the broadest footprint. We have the ability to provision quickly. And because of our network architecture, we have greater reliability. Ninety percent of Cogent's routes are unique to Cogent. We do know that for the areas of Sprint where they do not have fiber and we have used leased fiber, the fiber often comes from our wavelength competitors, and the reliability on those leased routes is far below the reliability we deliver on our own route. So I think it's just proving out all of those components. And again, you know, while we're extremely transparent and granular, I would encourage you to talk to the couple of major competitors that we have for wavelengths and really find out if the wave demand that they are talking about is actually producing revenue today. as opposed to waived demand that's effectively in the funnel. I totally concur that that waived demand is there. It's the question of converting it, and because cogent is a new entrant, it's very visible. You know, we've gone from not even being considered on a third-party ranking service to now being in the second tier of providers Our expectation is in the next year or so we'll break into that top tier, and eventually we'll be one of the two or three major nationwide wave providers. For the cogent legacy services, I think there's three answers to the question. For off-net services, there is a proliferation of fiber, which is allowing us to serve those locations, but we're going to do it with profit discipline, and it is not our primary focus. But there are more locations. Cogent has never sold off-net services on non-fiber infrastructure. We did inherit some from Sprint and then rapidly decommissioned as much of that as our contracts allowed. For our on-net footprint for corporate users, I will fully acknowledge that while the market has improved from the depth of, you know, vacancies at the pandemic, the office market across North America is still far weaker than it was pre-pandemic, and number of workdays in the office remain at about 60% of pre-pandemic levels. So, you know, while I think we are growing market share in our on-net footprint, we understand that that footprint has these structural constraints. And then to that final point on that market segment, we don't intend to build into smaller or less Traffic Rich Locations. And then finally, on our Netcentric business, which is by far and away the biggest part of our legacy business, you know, it's about 46% of our total revenues, and it's 98% of our traffic. There we continue to gain market share with 1,953 on-net data centers. That, I think, is a testament to the breadth of our network, 308 markets, 58 countries. And the fact that traffic grew sequentially 3% and year-over-year traffic accelerated to 16% is a demonstration of we're gaining share in the IP transit market and expect that to continue to grow. And considering we're already the largest player in that market, I think it's impressive that we're gaining share. If you compare our traffic growth numbers to either Cisco visual indexing or open vault data or reliable third parties, we're growing substantially fast. We're almost double the rate of the market. And considering we're the biggest player in the market, I think that's still a testament to our ability to have market share to gain.

Great. Thanks, Dave. Hey, thanks, Rob.

And your next question comes from the line of Anna Goschko with Bank of America. Please go ahead.

Hi. Thanks, Dave. I know this call is going long, so I'll try to just have some quick ones for you. So, first of all, the proceeds from the data center sales on the net basis, I think, was $224 million, and it looks like you spent $125 million to buy back the bonds at a discount, which is a good thing, that leaves about $100 million, simple math. So on that remaining $100 million of proceeds, are you going to go and try to buy back more of the existing secured at a discount, or can you take that money and just repay the $27 million that's going to reduce the total amount of refi that you need to do? That's my first question.

First of all, in many ways, Ana, you can ask as many as you want, because your question may be the most important to our investors on this call. So, I think we are expecting to try to raise less than the $750,000 and use some of the proceeds to do that. We may be in the market to buy back some of the $27,000 while there are discounts. is not as pronounced as it is on the 32s. I believe we have met our contractual obligation under the supplemental indenture to the holders of the 32s. We may also buy some additional 32s, but I think our primary objective over the next couple of weeks Thank you very much. to Michael's question earlier, we're also going to think about these additional proceeds, and I think we've demonstrated to the debt markets we are extremely committed to delevering, and we intend to use more proceeds to reduce debt.

Okay, so that was my second, thank you, so that was my second question, so The data centers that are still being marketed, those are technically outside the restricted group for the debt. So I guess one, are you committing to use those sales proceeds to repay debt in the future? And then you addressed or mentioned that you're in discussion with potential underwriters about enhancements to what the new bond will be. So is that part of the enhancements that you're discussing? Is the commitment of future data centers still proceeds to the debt group?

Yes. I'll actually kind of answer those together, even though they were two questions. So you are absolutely correct that the data centers and the burn associated with them sit outside of the borrower group. So our intention when we created this structure at the acquisition of Sprint was not to take collateral away from the current bondholders at the time, but rather to shield them from the carry cost of those data centers and be forced to use restricted payments capacity out of the borrower group to fund that burn. I think that strategy was bondholder friendly, and for the more sophisticated bondholders, I think they understand that. I think then, secondly, our willingness to go ahead and voluntarily contribute the proceeds into the borrower group and remember, we contributed 100% of the net proceeds into the borrower group. While they're not all guaranteed to buy back debt, you know, it definitely reduces net leverage at the borrowing group and we've already spent, publicly disclosed, more than half and it is our intention to use Most, if not all, of that to just reduce gross debt as well as net at the borrower group. In terms of the other data centers, we are definitely receptive to contributing those proceeds into the borrower group. You know, to be candid, we have ample RP capacity to cover the burn, and since we have dramatically reduced our dividend expense, We have a great deal of flexibility, and that is something that ultimately will be part of the discussion between the underwriters. And, you know, while the underwriters are intermediaries, ultimately it's the holders. And if, you know, new bondholders felt that it was additive to make that affirmative commitment, it is absolutely something that the company will consider.

Okay, and then just finally, I think a bigger picture question for the whole structure. So, you know, CapEx was still more elevated this quarter, and I think you already asked and addressed that. But, you know, you're not generating positive free cash flow, so obviously, you know, anyone buying kind of a new credit or a new piece of debt is going to want to see that there's positive free cash flow to be able to service the debt. So could you just give us The plan for getting sustained positive free cash flow.

I think it comes down to four inputs. First, our ability to grow desirable revenues. Two, our ability to continue to expand margins. I believe It is almost unprecedented, I have not seen an example ever of a public company that had 12 consecutive quarters of revenue decline and sequentially in 11 of those 12 quarters grew its EBITDA on an absolute basis in face of those declines. Now, the tools we had to use were mostly Thank you for joining us. Thank you for joining us. David Kapp, Jean-Michel F.F Slagmuylder, Thank you very much. I think if you look at Cochran's ROIC, since it went public in 2005, we've had an ROIC that's been substantially above our incremental cost of capital for that entire period. We understand that not including the subsidies from T-Mobile, that looked bad after the acquisition. Thank you for joining us. You know, we're going to continue to be very capital-focused, and I do think that will help us lower our cash burn and become cash flow positive more quickly. I know that was a long-winded answer to your question, but, you know, I get it. Free cash flow is what investors care about.

Okay, great. Thank you, David. Hey, thanks, Ronald.

And your last question comes from the line of Michael Rollins with City Pizza Hut.

Thanks. Good morning, Dave. I'm curious to go back to your comments about the network traffic growth acceleration to 16%. I'm curious if you could talk more about the significance of that between, you know, what you're seeing coming out of the corporate building portfolio or the multi-tenant buildings relative to data centers and, you know, what that means for the future key times key math to try to grow that transit revenue for cogent on the annual basis.

Yeah, so two parts to the answer, Mike. First, our corporate and the multi-tenant office on-net buildings and off-net and enterprise business is irrelevant to our total traffic. It's only a couple percent of Cogent's traffic. And 97, 98 percent of our traffic comes from data centers, from net-centric customers. You know, our end-user business Thank you for joining us today. That traffic growth and that 16% year over year. What we are seeing are two key things happening. Total traffic growth accelerating, but actually on a bit transferred basis, it's accelerating even faster. So we bill our services on a peak Utilization, either 90 or 95th percentile, so we throw out either 36 or 72 hours of peak traffic and bill on that variable, and we only bill on the higher of the directions, meaning in or out. For our access network customers, it's mostly in. For our content producers, it's mostly out. Three-quarters of all Cogent's traffic remains completely on our network. And if traffic patterns were not shifting, then the kind of difference between average and peak would not be relevant. But what is happening with the deployment of agentic AI is we are seeing a marked shift in end-user traffic Thank you very much. who are providing inference, they are now receiving a lot of bits that they historically had not received. And those also do not immediately generate more revenue. But I do believe that as the internet reverts back to a more symmetric network, which was what it was at its inception, we will see a and David Kapp. We are only about 27% utilized in our IP network and have substantial inventory to sell without incremental capital, where many of our competitors don't have that volume of inventory, have to go out and deploy capital, and in many cases, they can't even get the equipment if they want to deploy the capital. So I think it's all Thank you. Hey, thanks, Mike.

And that concludes our question and answer session. I would like to hand it back to Mr. Dave Schaeffer for closing remarks.

I want to thank everyone. I know today's call went a bit long, but I think these were extremely important topics for us to cover. I really appreciate investors' time and attention, and we'll be available at a few conferences to continue these discussions over the next week or so. Take care, all. We'll talk soon. Bye-bye.

Thank you. And this concludes today's conference call. Thank you all for joining me now. This connects.