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.