Q3 2022 Cogent Communications Holdings Inc Earnings Call
How are you all going to the Cogent Communications Holdings third quarter 2022 earnings Conference call I said, Oh My God. This call is being recorded and it will be available for replay at www Dot O J codes.
A transcript of this conference call will be posted on the same website when it becomes available.
Summary of financial and operational results attached to its press release can be downloaded from the cogent website.
I'd like to turn the call over to Mr. Named Shafer, Chairman and Chief Executive Officer of Perfect Communications holding.
Thank you and good morning, everyone welcome to our third quarter 2022 earnings Conference call I'm, Dave Shaffer, Cogent CEO and with me on this morning's call is Tad weed, our chief Financial Officer, hopefully you've had a chance to review our earnings press release.
Our press release includes a number of historical metrics that we present in a consistent manner for every quarter.
Our revenue growth to accelerate at this quarter and our corporate revenues increased sequentially by four tenths of 1% from the first quarter. The first time since the beginning of the pandemic and it's important due to the increase in USF revenues.
Excluding the $670000 sequential increase in USF revenues for corporate revenues were essentially flat sequentially for the quarter.
Our total revenues increased sequentially by 1% to exactly $150 million, an increase of 1.4% year over year.
Our total revenues and our Netcentric revenues were materially impacted by the negative impact of foreign exchange in the quarter and the continuing strengthening of the U S. Dollar for the quarter the sequential negative impact of foreign exchange was $1.5 million.
It was negative $4.2 million on a year over year basis.
On a constant currency basis, our revenues grew sequentially by 2%, but grew by four 3% year over year.
Our corporate business continues to be influenced by real estate activities in the central business districts of major North American cities.
Two key statistics.
Including the level of security card swipes in buildings, and we shouldn't activities indicate that year to date, the real estate market and Alicia activities in the central business District, and I have seen some improvement but have not yet returned to their.
Pre pandemic levels.
We shouldn't get jeopardy across major Marquez and workers return to offices continue to improve albeit slowly.
On a U S GAAP basis, our corporate revenues increased sequentially four tenths of a percent for the first time since the second quarter of 2020.
We continue to remain cautiously optimistic.
Outlook for improvement in our corporate revenues in these uncertain economic times.
Generally to deal with the challenges of COVID-19.
Our Netcentric business continues to benefit from continued growth in video traffic and streaming.
For the quarter, our network traffic was up 2% sequentially and Tropic accelerated to a year over year growth rate of 21% in the third quarter on a U S. GAAP basis, our Netcentric revenues grew sequentially by 1.9 per <unk>.
<unk> grew by nine 6% on a year over year basis on a constant currency basis, where do you send a truck revenues grew sequentially, 4.3% an increase.
By 16.8% from the third quarter of 2021.
Our EBITDA margins.
Adjusted for the $2 million extraordinary expense associated with the acquisition of T mobile wireline or known as the spring Gmg business.
That were incurred in the quarter increased sequentially by 50 basis points.
The 90 basis points on a year over year basis to 39, 9%.
This EBITDA margin represents the highest adjusted EBITDA margin in the Companys 23 year history.
Our sales force Rep productivity was four six units per rep.
Per full time equivalent as compared to four nine in the last quarter. While this is a decline of 6.1% there's still represents a 7% year over year improvement.
We significantly increased the size of our sales force by adding 45 sales reps, a 9.4% sequential increase representing the largest ever net increase in the sales force and coach ancestry. This did impact our.
Our rep productivity we.
We entered the quarter with 522 reps and 465 full time equivalents, a three 6% increase in full time equivalent sales reps.
Now for a couple of words on the acquisition of the sprint wireline business.
We are diligently working through the approval process to complete our acquisition of spreads wireline business in conjunction with T mobile and numerous various regulatory agencies around the world.
Closing.
Over the next three years, we anticipate annualised savings of $180 million on the North American network, primarily by utilizing the cogent metro footprint in our on net building.
Portfolio.
We also anticipate $25 million of annual savings on the international network by migrating off of a loose network onto the owned Cogent network globally.
And we thirdly expect about a 15 million dollar reduction and cogent operating and maintenance expenses associated with an I R. U that we will be abandoning there will be additional SG&A savings that include.
<unk> head count reduction and other general operating cost synergies.
During the quarter, we returned $42.7 million sure shareholders through our regular dividend program, we did not purchase any stock during the quarter and have $30.4 million available under our buyback program, which the board extended.
220 23.
Or board of directors.
Reflecting on the strong cash flow generating capabilities investment opportunities in front of the company decided to increase our quarterly dividend sequentially by one cent per share racing or quarterly dividend for.
From 90.5 cents per share to 91.5% per share.
This increase represents the 41st consecutive sequential inquiries and our regular quarterly dividend.
A 4.4% annualized dividend growth rate is now in line with our growth rate and free cashflow generation.
Yeah for a couple of comments around longterm expectations.
Or talkative longterm EBITDA Marsh and expansion of guidance is for approximately 200 basis points per year.
Are targeted multiyear constant currency growth rate is targeted to be 10 per cent.
Once our entities that is cogent and sprint or a combined we anticipate that for the combined entity. They annual revenue growth rate will be between five and seven per cent and the EBITDA margin expansion annually after.
Her initial center cheese, or a cheap will be about 100 basis points per year.
Revenue and EBITDA guidance targets are intended to be multi year targets and are not intended to be used for either quarterly or even specific annual guidance.
No I'd like to ask Tad read some safe Harbor language provide some additional operating performance data and then after that we will open the call for questions and answers.
Thank you, Dave and good morning to everyone.
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.
Please refer to our SEC filings for more information on the factors that could cause actual results to differ.
Cogent undertakes no [noise] excuse.
Excuse me obligation to update or revise are forward looking statements. If we use non-GAAP financial measures. During this call you'll find these reconciled cause it's corresponding gap measurement earnings releases, which are posted on our website at cogent co dot com [noise].
Comment on COVID-19, and risk updates like many companies we continued to be impacted by the COVID-19 pandemic and are at risk related to COVID-19, and other risks are described in more detail in our annual report on Form 10-K for 2021, and then our quarterly reports.
On the Form 10-Q for the first and second quarter and this quarter's report, which will be filed Friday.
Corporate and Netcentric revenue one customer connections.
We analyze our revenues based upon network connection type, which is on that off net and non-core and we also analyze our revenues based upon customer type.
Classify all of our customers into two types netcentric customers and corporate customers.
Our corporate customers buy bandwidth for Muslim large multitenant office buildings Orange carrier neutral data centers.
Customers are typically professional service firms financial service firms edgy.
Educational institutions located in Multitenant office buildings or connected to our network through our carrier neutral datacentre footprint.
Our net center customers by significant amounts of bandwidth from us and carrier neutral data centers.
Include streaming companies and content distribution service providers as well as access networks, who serve consumers and business customers.
Our corporate business represented 57% of our revenues this quarter.
At our corporate revenue decline year over year by 4% to $85.5 million from the third quarter of last year, but as Dave mentioned, an increase sequentially by Oh, 0.4% for the first time since the second quarter of 2020 [noise].
We have 45176 corporate customer connections on our network, a quarter and which was a sequential increase of O, 0.2% a year over year decline of 1.8%.
Our total revenues and our corporate revenues are impacted by changes in the USAF tax rates, which are updated quarterly.
For the quarter the impact of USAF on our revenues was a positive $1.7 million and the impact was negative year over year by the same amount of $4.7 million.
Our netcentric business, which represented 43% of our revenues this quarter and despite material FX headwinds at another solid quarter and grew by 1.9% to 64.5 million sequentially and grew by nine 6% on a U S gap.
On a year over year basis.
Volatility in foreign exchange rates, primarily impacts are netcentric revenue and the impact was materially negative bowl sequentially and year over year.
On a constant currency basis are netcentric revenue increased year over year by 16.8%.
Was an increase from the constant currency revenue increase last quarter of 16.2% <unk>.
<unk> grew sequentially by four 3%, which also was an increase from last quarter, which was 2.5%.
We have 51145 netcentric customer connections on our network and quarter and that was a sequential increase of 1.9% a year over year increase of seven 8%.
And revenue in customer connections by network type R.
Our on net revenue was 113.2 million for the quarter, which was a sequential increase of 1.1% a year over year increase of 1.9 per cent.
Are on that customer connections increased by O, 4% sequentially 82614, and increased by 3.1% year over year.
We serve our customers and our 3126 total on net Multitenant office carrying neutral data center buildings.
We continue to succeed in selling larger connections hundred gigabit connections and 400 gigabit connections.
Selected locations and that has had the impact of increasing our on net harp.
Are often that revenue was $36 6 million for the quarter, a sequential increase of 1.9%.
Small year over year decrease of 1.1%.
Are off net revenues are impacted by incorporating the cost savings, we obtained from lower local loop prices into our pricing.
The introduction of these customers into our off net revenue base lowers are off net <unk>.
Are often their customer connections increase sequentially by 1.5% to 13359 off net connections that was six 9% year over year increase.
We ended the quarter, serving are often customers and about 8100 off net buildings. These.
These often that buildings are primarily located in North America.
Our average price per megabit of our installed customer base decrease for the quarter and our average price per megabit for our new customer contracts was flat.
Average price per megabit for our installed base declines sequentially by 6.3% to 2007.
And decline year over year by 28%.
The annual rate of this annual rate of decline was better than our historical long term rate of decline for our installed base of 21.5%.
The average price per megabit for our new customer contracts for the quarter was 15 cents that was the same as last quarter and a year over year decline of 24.2%.
This annual rate of decline it was compared to our long term.
Right a decline of 22.1%.
Swelling larger connections results in a change in our connection mix and has the effect of lowering our average price per megabit at a greater rate than changes in our <unk>.
Are on <unk> slightly increased and are off net <unk> continued to decline, but at a slight right from lower pricing. We are obtaining from our off net circuit vendors that we pass onto our often that customers.
Are on <unk>, which includes both corporate and net central customers increase sequentially by a half percent from $455 to $458.
Are often that are poo, which is predominantly comprised of corporate customers clients sequentially by O, 0.8% from $927 to 920.
Some comments on churn.
Or sequential quarterly churn rates for both on net and off net connections were relatively stable and they continued to hover around 1%.
On that unit churn rate was 1.1% this quarter compared to 1% last quarter and are off net unit churn rate was 1% this quarter at 1.1% last quarter.
In order to reduce our customer turnover, we employ a dedicated sales group that works to retain customers who have indicated that they are considering terminating their service with us.
We may offer pricing discounts to these customers in order to induce them to reverse their determination decision to purchase additional services from us and or extend the term of their cogent contract.
During the quarter of certain of our on that customers.
Net central customers took advantage of our volume contract term discounts and entered into longterm contracts with us for over 2350 customer connections and that increase their total revenue commitment to cogent by over 21 $5 million.
Some comments on EBITDA and EBITDA margin we.
We reconcile our EBIT onto our cash flow from operations in each of our quarterly earnings releases.
Seasonal factors that typically impact our EBITDA and our SG&A expenses in particular include the resetting of payroll taxes in the United States at the beginning of each year.
Annual cost of living or CPI increases seasonal vacation periods, the timing level of our audit and tax services and more recently sprint acquisition costs and our annual benefit plan cost increases.
Our EBITDA. If you include the $2 million of sprint acquisition professional fee costs decrease sequentially by O $6 million and increased slightly year over year by O point $1 million.
Our EBITDA, excluding these sprint acquisition cost increase sequentially by $1.4 million and $2.1 million a year over year.
The negative impact of foreign exchange reduced our year over year EBITDA growth by $1.8 million.
Our quarterly EBIT margin, including the sprint acquisition costs decrease sequentially by 80 basis points to 38.6% and year over year by 40 basis points.
Our quarterly EBIT margin, excluding the $2 million of sprint acquisition costs.
Increase sequentially by 50 basis points to 39.9% and.
And increased year over year by 90 basis points.
[noise] comments on earnings per share.
Who did incur a net loss of this quarter due to the $16.9 million non-cash increase in the valuation of our swap agreement on.
On our basic and diluted loss per share was 17 for the quarter.
Foreign exchange gains and losses on the translation of R 2024, Euro notes and to USD until we extinguish them in June 32022.
Losses on the extinguishment of debt and the non-cash changes in the valuation of our interest rate swap agreement had been the primary contributors to the variability in our net income and constant consequently are per share results.
Further comments on foreign currency.
Our revenue earned outside of the United States is reported in U S dollars and was approximately 24% of our total quarterly revenues this quarter.
About 16% of our revenues this quarter were based in Europe , and 8% of our revenues were related to our Canadian Mexican Asia Pacific and South American and African operations.
As we experienced again this quarter volatility in foreign exchange rates can materially impact our quarterly reported us GAAP results.
The foreign exchange impact on our revenue this quarter was materially negative both sequentially and year over year and is expected again to be materially negative in the fourth quarter.
The average Euro U S dollar rate so far this quarter's who are fourth quarter is 98 cents and the average Canadian dollar exchange rate is 73.
Should these average foreign exchange rates remain at the current levels for the remainder of the fourth quarter of this year, we estimate that the FX conversion impact on our sequentially quarterly revenues for the fourth quarter would be a negative $1 million in the year over year conversion impact on our quarterly <unk>.
<unk> would be a negative for $3 million.
We believe that our revenue in customer base is not highly concentrated in our top twenty-five customers represent about 6% of our revenues for the quarter consistent with.
The past.
Some comments on Capex.
Our quarterly capital expenditures increase sequentially to $24 million.
Supply chain uncertainty and purchases in anticipation in the closing of our sprint acquisition of caused us to shift our typical purchasing schedule for network equipment.
These anticipatory investments are designed to ensure that we have satisfactory inventory levels of network equipment to accommodate our growth plans and that includes our new wavelength product offering as a result of the sprint wireline acquisition.
And the interconnection of our two networks together in multiple locations and to meet are cogent customer needs.
Finance leases and finance lease payments.
Our finance lease hire you obligations are formed longterm dark fiber leases and typically have initial terms of 15 to 20 years or longer and often include multiple renewal options. After the initial term.
Are are you financed lease obligations for $287.9 million at quarter end.
We have a very diverse set of ire you suppliers and have argued contracts with 306 different dark fire suppliers across the world.
Cash in operating cash flow.
At quarter end, our cash and cash equivalents in restricted cash was $323.7 million.
$54 $7 million of restricted cash is directly tied to the estimated fair value of our interest rates Ralph agreement as collateral.
Our cash flow from operations was 53.6 million this quarter.
Cogent record.
And an increase of $6 $2 million from the third quarter of last year, and a significant increase of $19.2 million from last quarter.
Some comments on that and ratios.
Our total gross debt at par, including finance higher you lease obligations with $1.2 billion, a corner and and our net debt was $914 $2 million.
Our total gross debt to Twilling trailing last 12 months EBITDA as adjusted for our Sprint acquisition costs ratio was 531 quarter and and our net debt ratio was 393.
Our consolidated leverage ratio as calculated under the note and dentures.
Slightly different five three O and are secured leverage ratio was 337.
Are fixed coverage ratio is calculated under our note and dentures was 393.
Some comments on the swap we are party to an interest rate swap agreement that modifies are fixed interest rate obligation associated with our $500 million 2026 nodes to a variable interest rate obligation based on the secured overnight financing right or sofa for the remaining term of the <unk>.
2000 2006 notes.
We record the estimated fair value of the swap agreement reporting period and.
And we incur corresponding non-cash gains and losses due to changes in market interest rates.
At quarter end, the fair value of the swap agreement increased by $16.9 million from last quarter to a net estimated liability of $54.7 million.
We are required to maintain a restricted cash balance with the counterparty equal to the net estimated liability.
The settlement payments under our swap agreement are made in November and May.
Our initial settlement payment, which we made in November of last year was a net cash savings of 1.6 million.
Under the settlement payment we made in May of last year, we have seen.
Achieved in net cash savings of $1.2 million for the period from November 2021 April 32022.
That was a total combined savings of $1.8 million for those two payments.
Under the settlement payment that we are making.
Remember third there'll be a net cash interest expense of $3.4 million for the period from May one through October 31.
Lastly, some comments on bad debt and VSO with both improved.
Are bad that expense was only O points.
Of our revenues from the quarter unchanged from last quarter, but a significant improvement from Oh, 0.7% in the third quarter of last year.
In our day sales outstanding or DSO for worldwide accounts receivable improved and was 21 days improve by one day from 22 days last quarter.
Excellent collection activity results and.
And we want to thank and recognize our worldwide billing and collection team members for continuing to do just a fantastic job, serving our customers and collecting from our customers.
And with that I'll turn the call back over today Okay.
Hey, Thanks Ted.
To highlight a few of the strength of our network, our customer base and our sales force.
Now for a couple of comments for all of our net centric performance, we achieved excellent revenue growth in our Netcentric business.
Here over a year Netcentric revenue growth was behind 0.6%.
16.8% on a constant currency basis and acceleration from the 16.2 per cent constant currency growth that went to Harvard and Q2.
Weird correct beneficiaries of an increasing trend of over the top video and screaming, particularly in international markets.
At quarters and.
There were.
1433 carrier neutral data center connected to our network 54, <unk> data centers for a Grand total of 1400, and 87 data centers more than any other carrier as measured by independent third party <unk>.
The breath of our our coverage enables our netcentric customers to better optimize their networks and reduce latency. We expect that we will continue to want nor of lead in this market.
Project to add over an additional 100 carrier neutral data centers to our network each year for the next several years.
And we were directly connected to 70 766 networks that comprise the majority of the Internet.
This collection of Isps telephone companies cable companies mobile operators and other carriers provide us access to the vast majority of the world's broadband and subscriber and mobile subscriber customers.
Ah quarters, and we had a sales force of 208 sales professionals, who focused exclusively on the netcentric market.
We believe that the sales force is one of the largest and most sophisticated sales teams for this market segment in the industry.
Now for a couple of comments on our corporate business, we are seeing some positive trends in our corporate business.
Work from home environment becomes since Stablish as part of People's normal work routines.
We see many of our corporate customers looking to upgrade their internet access infrastructure to larger capacity connections for corporate customers are aggressively integrating new applications, which have become part of the work from home.
<unk> environment, including video conference, saying.
This usage will require higher capacity connections, both inside and outside it's a promise.
Crush of poor to lower cost of bandwidth and provide greater of coverage has begun to boost demand for a corporate product, which is a robust bidirectional symmetric either one gig for 10 gig interface.
Corporate customers are increasingly buying connections and Kelly are neutral data centers for redundancy to support.
<unk> users AD hoc vpns and a hybrid work environment.
We remain focus on her salesforce productivity.
Continue or improve our sales training program.
And man a child Underperformers.
On a sequential basis, our sales rep head count increased significantly 545 quota bearing raps or 9.4% sequentially and 1.2% here over here too.
Four of 522 reps.
Alright number of full time equivalent wraps also increased to 465 from 449.
Our sales force turnover rate.
Continued to improve ambush reduced to 5.5% per month from the 5.9 per cent.
Reported in queue to and from the peak rate of turnover during the pandemic of 8.7 per cent per month.
<unk> were sold of having our sales force back in the office and having our ability to do in person training.
Now for a few summary remarks, we remain optimistic about our unique position and serving small and midsize businesses that are located in the central business districts of major cities and a 1832.
Large multitenant office buildings.
Of our network, representing nearly a billion square feet of office space.
We're excited about adding a new customer segment that is large enterprise costs for mergers and also adding optical.
Transport networking <unk> service are commonly known as wavelength surfaces to our product portfolio as a result of our acquisition of the sprint.
Us.
Currently key indicators for office activity, including workplace re entry unleashing <unk>.
Remain below pre pandemic levels. However, we are all encouraged that many tenants have indicated that a return the office in 2022 is going to continue unleashing activities for curb Marshall office space had begun to.
Rebound, we're optimistic that with the combination of our sales team being an office and the return of our customers to a more normalized work environment.
Will benefit from showing tenants, who have differed or delay network upgrade decisions due to the pandemic.
Many companies are establishing longterm network architectures that will support a permanent hybrid work policy.
A certain corporation, so hot to downsize her office requirements and multi tenant buildings. The number of tenants per building well actually increase increase incursions on net corporate opportunity.
We also will benefit from showing our services to new tenants, who are occupying these buildings as a direct result of the aggressive leashing that is being done by landlords across the U S and Canada.
Our target a multiyear constant currency revenue growth rate remains 10 per cent.
Long term EBITDA margin expansion rage will be approximately 200 basis points per year.
However, once we have combined with sprint our revenues scale increases by nearly 90%.
Our growth rate will decelerate to between five and 7%.
EBITDA margins once we have completed the network <unk> will be consistently able to grow by about 100 basis points a year.
<unk> cash held a coach and holdings was 84 point, such Milan, and we had an additional $122.8 million at <unk>.
Which is freely transferable to holdings, giving us $207.4 million of unrestricted cash available for either dividends or buybacks.
Our board of directors once again <unk>.
Proved a sequential increase in our dividend.
This is the 41st consecutive sequential increase our dividend.
Christians are given N at a penny per share to 91.5 cents per share.
This represents a 4.4% annualized dividend growth rate, which is in line with our current growth rate and free cashflow.
Mark consistent <unk> increase demonstrates our continued optimism.
Our businesses ability to generate increasing amounts of free cash flow.
We were diligently working through the approval process to complete the acquisition of the sprint wireline business.
We are excited and optimistic about the improved cashflow generating opportunities that we will have with a larger and more globally diverse product and customer base.
We anticipate yeah from section to close by mid mid to end of the year 2023.
What's that I thought I would like to open the floor for questions.
[noise]. Thank you.
[noise] excellent.
It's just like for me.
In practice.
[noise] perfect.
I'm all set.
Like you said.
Please go ahead.
Can you just.
Tickets through the conversation with the board too it led to the reduction in your sequential increase in the dividend.
Kind of what the thought process was there and how we should think about but going forward, especially posts sprint closing.
Right. So what is high.
Reiterated on <unk> call and in numerous public venues over the last corner.
It is necessary for the growth rate and the dividend and a growth rate and free cash flow to come into alignment I think the board look at our current rate of growth and cash flow they were encouraged.
By the underlying improvements in our corporate business.
Are also realistic that the improved mentioned in the corporate environment are gonna take some time so in order to mitigate the increase in net elaborate urge the board decided to moderate the rate of dividend.
Growth to that one per cent.
Or one cent per share a 4.4% annually.
We will continue to monarch her the improvements in our business and it's free cash flow generation, we are committed to being efficient stewards of capital and returning that capital to shareholders through either dividends.
Or buy backs.
And it is our expectation that our growth rate and free cash flow will rate accelerate.
<unk> with the improvement in our corporate business, but we're on certain how quickly that improvement will occur. So it seemed more prudent to the board to take this more moderate rate of increase in the dividend.
Got it and then just one follow up is.
So you have this swap is performed for you guys over the past year or so.
Just looking giving your outlook you know for your company the macro.
New Mexico business any change or any fraud on on what might change your target leverage ratios for the company or are you satisfied with with the current targets.
Yeah. So you are absolutely correct. The swap has not worked out as well as we had hoped while we had initial cash savings of $1.8 million is tadd indicated we will be in a cash deficit.
Yeah.
Interest payment that'll be made today, a $3.4 million. So a net economic hosch on the swap of about 1.6 million, we did not anticipate the velocity and magnitude of interest rate.
<unk> increases, while we anticipated som they increase and the feds spun rate has it been more.
Accelerated than we had for a cash we also think that the underlying rate of inflation will continue to moderate and therefore that rate of increase in interest will moderate and may even to cry and most like.
Walter Cry.
During the swap period. So you know I think Detroit yourself, but between now and 2026, we still think that the swap pushed the right decision and we will be better off because of that because we will have diversified our borrowings.
To about 50% fixed and 50% variable now the second part of your second question, which is the ultimate leverage target.
Our range is two and a half to three and a half times on a net basis.
At 3.93 today, which is above that range, we do have excess cash on the balance sheet.
And as we have communicated to investors consistently actually over the past decade. Our goal has been to disgorge cash in return more than 100 per cent of free cash flow to our equity holders that policy remains implies.
We think with the more moderate rate of increase in the dividend, we should expect to say they net leverage up.
Relatively peak, where it is now and begin to decline. So we're going to take a measured approach. We will look at the growth N are free cash flow and remain committed to returning that cash flow to equity.
And in fact.
Hi, Thanks Wall got it. Thank you. Thank you.
And our next question will come from James pain with William player.
Please go ahead.
Thanks for taking a question David talked about some of the longterm targets for the business once the acquisition closes.
From a growth perspective can you just talk about how it might change the absolute EBITDA levels in Capex levels, and then also seemingly capex jumped quite a bit this quarter sequentially. You can just talk about that.
What's the big Sir Thanks.
Yeah, I'm gonna take the Capex, one first and then talk about the long term targets second y R.
Our capex has been elevated to well up to those quarter for one reason and now for two the first reason, which still access is we are watering excess equipment because of supply chain.
<unk> constraints from our vendors the equipment that we order is modular we order a complete tit of configuration and find ourselves receiving maybe only 70 or 80% of what we'd ordered and then <unk>.
<unk> and somewhat random components ship much later that has forced us to carry much higher levels of equipment and inventory than we are accustomed to we believe and dishes and discussions what.
Cisco our main vendor that we have passed the worst of these components sure nations and the ability to ship in a more normal I schedule will continue to improve over the next six to 12 months and we'll be back to a more normal.
Wise.
Order to delivery cycle, and we'll be able to draw down on those inventories.
The second expenditure, which was unique to this quarter was the beginning of spending money to interconnect.
Our network with the sprint network in multiple locations around the world.
We are told in fast first that there would be a one time expenditure of about $50 million to achieve those enter connections off some of the capex that we spent is as a result of the.
One time expenses and they will continue for the next several quarters, we can actually do this work and test them pictorially and in advance of getting the regulatory approvals now we do run the risk of not getting regulatory approvals, but we view that risk.
As the men M S.
Our purchase agreement does include a traditional hell and high water provision shut both sides will do what it takes to get this deal through the regulatory approval process.
On a going forward basis.
The combined company will have a revenue scale at close of about $1.1 billion up from coach ends roughly 650 million dollar scale as a result of that larger scale and.
And our new product wavelengths, we anticipate that the going forward annual capital expenditures for the larger combined company will be about $30 million higher than they would've been for cogent stand or.
Wow, So two things the one time 50 million dollar set of extraordinary expenses and then to the <unk>.
Harangue $30 million of incremental going forward.
Now for the long term targets boats around revenue growth and <unk>.
You know.
<unk> core business has been tremendously negatively impacted by the pandemic.
We are seeing that negative impact subside and our growth rate is returning that's encouraging show us and we think that trend will continue but we also are not comfortable and protecting exactly when we will return to that historic average.
Organic growth rate for cold trance business of 10 per cent per year.
Feel comfortable we will.
We also know that of the $450 million of revenue that we are acquiring from T. Mobile the sprint <unk> most of that is concentrated in large enterprise customers.
That generate about 442 O five $450 million in revenue.
And because these are very long term agreements.
And these companies have already configured their networks, we do not anticipate material growth Howard of that revenue stream, probably in the order of one to two per cent annually.
But the real.
Meteoric growth and the combined Besner's will come from our ability to sell the optical transport products or wavelengths today that is only an 8 million dollar business.
Sprint, we anticipate that within five years of closing we can grow that to a 400 billion dollar business shut when we add the three legs of growth together.
A kind of more normalized basis getting past this initial ramp up and the wavelength business. We should find the combined company with EBITDA margins and the low to mid thirties.
And the ability to grow top line five to seven per cent and the ability to expand margins consistently at about 100 basis points a year the slower barsh an expansion as a result of those raw.
Tivoli static large enterprise customer revenue streams, and the lower marsha associated with them while in absolute dollars. They produce cash while they are not growing at the same pace as the other products in the company, but one way to look at the ability to.
Whoever to watch question and recurrent cash to shareholders. The combined company is in a much more sustainable and scalable possession, then cogent independently one of them.
Just a quick follow up to that so if you look at the combined company revenue, obviously, a lot larger, but you're not taking an incremental debt. So does that mean off of this sort of low to mid thirties EBITDA margin combine you'll have a higher free castle yield.
Because he and his expense will be small relative to the revenue that you have now.
That is absolutely correct, Jim we will happily be producing significantly more free cash flow per share.
Things may actually even be better than what we are forecasting and again, we've tried to be transparent with him pastors, we are getting $700 million in cash for 54 months from T Mobile N.
In our forecasts of revenue growth and marching we are taking the most conservative approach and not counting any of that has revenue.
It is highly likely that we can count some possibly even at all I think that's unlikely all of that has revenue if that is the case, our revenue growth well actually have a material step function op.
With those payments and are martians will be much better than what we are predicting.
Great. Thanks.
Jeff.
Alright next question welcome have a drink with that with Raymond James.
Please go ahead, great. Thank you great. Thank you when when will you know what that status is with what you're able to recognize and then as the sprint network kind of on the same pace that it was in some of the business sort of declining and so forth does that still on the same page that it was when you when you announced deal. Thanks.
Yeah first of all how may take the rate of decline. It is actually accelerating Frank and a reason is in our agreement with T. Mobile these sub scale and unprofitable products are being.
And <unk>, they're our customer contractual obligations shall we can't turn off the switch.
We are working with the engineering teams at sprint and all showed the sales teams to give customers alternatives, but I to sign we expect the revenue stream to decrease by close.
To 25% from 560 million down a 450 and about the one year period from announcement to closing that's actually about twice as fast as the rate of decline had historically been however, once that set off on <unk>.
Half of a wall products is purged from the network.
We expect the remaining products to remain stable and our ability to increase through part by bringing those customers on net using our metro footprint not only improves Martian, but it allows the customer to get a 10 X.
Kris and there yeah ultimate services.
Yeah with respect to the accounting for the contract.
Transit contracts with with T mobile.
The accounted for that will be combined with the acquisition since the that contract is entered into at the same time as the acquisition and the final determination will be made once the appraisal is performed of the acquired business. We would expect that to be performed at the same time in the second half of next year.
I will say on a preliminary basis. It appears that the majority of the IP transit payments.
Would be straight line revenue over the term.
Yeah, 54 months, yeah, and we're going to ultimately need that appraisal and work with our auto insurance and young.
Before work comfortable and reporting that exact number two lines Oscars.
Alright, great. Thank you very much.
Right.
Our next question will come by next L D L and last name.
Simpson Jeremy.
Please go ahead.
[noise] can make your life I needed. Please go ahead.
Oh, sorry, good morning, Guy sorry, sorry about that that's okay neck.
I figure you know two and a half years and you'd remember too was on mute but.
The first one one quick clarification, and then two more substantive ones.
I didn't write the numbers down fast enough as you're speaking with a total expected savings you articulated for this sprint deal in your prepared remarks, the same as what you shared it reason investor conferences.
The answer is yes, they were identical and absent SG&A and head count numbers were anticipating an aggregate set of savings of about $220 million a year that bank $180 million of North American <unk>.
<unk> network savings about $25 million of international Sprint network savings and approximately $15 million of North American Cogent networks Anythings.
Okay. Okay, great. Thank you. Okay. So first first real question your principal payments on capital leases at a record level and your capital lease obligations were up about 34 million sequentially, which is pretty meaningful but what's behind that <unk> was there any sort of are you are Ah reclass like you had a coupla years ago or is it something else.
<unk>.
So two very different things. The first point is we began to acquire I argues for fiber to physically enter connect the two networks.
When we do that there is both a cash payment upfront, which was relatively modest but we also have to reflect in the leash balance all of the O&M over that charm.
And actually for some of those new fiber routes. The term is actually 44 years show that number can be pretty large.
The second thing that happened in a quarter is a measure of I R U in France.
<unk> there was no upfront payment, but we elected to extend that for another 20 years and then have to reflect that.
<unk> four O one am over that 20 year period. So those are the two reasons why both the balance and the initial payments increased.
Okay was there any opex impact to the.
To the extension in France.
No because it already.
Was a capital lease when okay reclassification occur three years four years ago. The remaining several years of that moved from Opex to capex, but just until that period.
Then we had this one time window that we could have walked away and elected to extend and part of our extension was in negotiation with the counter party for a lower C. P. I R. Josh Ma'am, which sounds counterintuitive in this market.
Why they would lower the C. P I rate of increase but you know it's better to get something done nothing cause kind of what we convince them off and what happened really with the.
Transaction in France, as we had a number of individual pieces that were all aggregated and made coterminous under one long term lease so both extended determined simplified.
Really the accounting for it and.
The contract.
Okay. Okay makes sense last question, David can you give us any updates on.
Customer feedback or early expressions of interest are getting you know regarding the potential to to sell dark fiber or wavelengths post spring clothes.
Yeah. So.
<unk>, the North American network operators group, which is a engineering forum.
<unk> held its quarterly conference in Los Angeles about a month ago.
I was not initially attending to are planning to attend that conference.
But chose to do so.
After we announced the sprint deal just so I could sit down with the engineering teams of many of our key customers as being you know folks like Amazon Microsoft Facebook.
Charter Cox some of some of our orange or net centric customers and really kind of understand their wish list of what they would like to be able to purchase and I love those meetings not able to sign a waters because I.
Can't until the deal closes.
But very very encouraged that there was a significant pool of demand for the services and.
It was surprising to me that many customers have actually done their homework came to meetings, what's shopping less a very specific routes and city pairs that they were interested in and you know we told them. We can you know kind of <unk>.
Provide these services day, one at closing, but we could not.
Take those waters yet.
Okay.
Great to hear thank you Dave.
Mmm.
Our next question will come from David.
David Mann with Bank of America.
Yeah Yeah.
Hey, thanks, so much for taking the the questions Dave.
Just on that point [noise].
So I guess you know.
Cause we followed the company.
We've got the net centric business, where you kind of have this very.
Marginal costs.
Strategy on pricing.
Which I think was really.
Geared towards scaling up your relevant to.
To the industry and then we've got the corporate side, where where you've been making the money you know.
Really focused on a very simple low cost broadband strategy and as we think about this.
Half between 8 million and the 400 million that you're trying to get two wavelengths services.
Which of these two.
Two strategies is it is it is it kind of mercilessly lower price to win incremental share and figure out. The profit later or is it is there something more like the corporate strategy.
Where there's real money to be made in the near term.
And then the second piece I guess is.
Related to the $700 million that.
You're going to get I know that there's a tax potential peace taxable piece of this I guess that goes along with the.
The audit.
The that will happen alongside closing what would it be your attention to to take that cash flow and apply it to to your dividend thought process with the board on the far side of the closing thank you.
Yeah, So I'm going to take your first question first and I'm Gonna actually disagree slightly with the premise of the question, which is that we don't <unk> [laughter]. That's okay that we don't make money on.
Centric business, the most profitable business, a cogent bizarre on net services.
In our corporate product Max 60% of revenues come from on that and 40% come from off net N.
Our netcentric business, 90% of revenues come on that at 10% off that and the wavelengths products.
It will be virtually a 100 per cent on net offering.
That's really the only practical way to sell it and as part of the reason why sprint has struggled in the market.
We also have a network.
With Ah naturally day, one a negative cost spacious.
There is about a 2 billion dollar addressable market.
That's dominated by two major players women in <unk>.
We will be as aggressive in that market as we have been and the transient market. We rose out of a pool of 200 trance or providers 20 years ago to know carrying nearly 24% of the world's traffic.
Being number two and literally within a couple of percentage points of being number one.
We have the same kind of ambitions for our wavelength business.
So we will be a crush of we don't Wanna destroy the market, but we will capture share through the breath of location. So we can offer and our pricing model.
We will be profitable and doing this now to the you know kind of tax consequence of the payments from T. Mobile the more fit that is recognized as revenue and you heard cats say the majority we think wellbeing.
We will still pay taxes, but we pay them ratably as opposed to upfront.
If a portion of that is subscribed to the assumption of an economic contracts, we have to recognize that ganging upfront and pay upfront.
So yeah, we're going to work with our tax advisors with our auditor to come to the best answer we can <unk> be compliant with the law.
You know we look at the total fungibility of cash and we are committed to returning an ever increasing amount of cash to shareholders, whether that's through dividends buybacks or a combination as measured by the board each and every.
Water.
You know you saw that dynamic process play out this quarter, where we do celebrate at the rate of growth.
But that's not a lack of commitment and growth and dividend. It's just a reflection of what two years of Covid has done to our corporate business, but we think that business is going to improve.
The underlying acquire sprint business is going to improve and we will have $700 million in advance.
<unk> need to reduce the cost so when we put all of that together, we believe that on a combined company basis, we will be in a position every quarter poach closing to return more cash to shareholders than we were.
Have as a stand alone cogent.
Now whether that is dividends for buybacks, there's something that the board will determine each and every quarter.
Got it thanks, Dave.
Thanks, Dave.
Alright next question will come from that thousand with Goldman Sachs.
Please go ahead, yeah, thank you and and and to follow up questions. If you don't mind. So you were just talking about how you're going to be aggressive and the wavelength market. When the deal closes and I I think the point here is your acquiring assets have low I think you said negative cost bases mean, <unk> acids, you requiring that you intend to leverage.
In the market I don't think it's your intent to start deploying new capital cause you could be doing that now so I want to I want to clarify that because the question I really have is what portion of the wavelength market. Do you think you can actually address with the athletes requiring and then the second question.
Sorry, I forgot the stature on but I think you said you're going to see this asset transition from 30 products a day before it closed and so it's a two part question. One is the accountability of winding down all those businesses like are there mechanisms to make sure that when you get the asset not only the revenue, but the expenses are gone.
Actually a clean asset and then the four.
Revenue streams that you're gonna be taking on are they actually growing today. What is something you have to happen to turn those into growth businesses at the close thank you.
Yeah, So let's start with the wavelength business and dark fiber, which we have a mansion because we haven't totally size.
[noise] sized that mark.
Dark fiber would be 100% margin and there's no incremental capital need it is just selling inventory.
Wavelengths.
I'd say.
Slightly more subtle answer and that one more spending the money upfront to tie the networks together shall we have.
Maximum number of end points that we could sell that's a one time expense, but we need to do that for the I P and for the V. P. N business anyhow. So it's not an incremental expanse. We also know that on a going forward basis.
The optical transport technology will continue to improve the plausible objects to see our optics and the transponder cards will continue to improve while we're will be inheriting a large inventory of that equipment, we will be spending cash.
Capital to continue to modernize that wavelength portfolio to remain at the cutting edge of technology and all that.
That is embedded in our expectation of $30 million of incremental.
Cap at all for the combined business.
So we think that we can eventually get to 25% to 30% of the market.
Maybe better, but we prefer to set our sights realistically and then raise are targets and.
We'll have to see how our competitors react, but so far what appears to be happening as far a competitor short going in different directions, and focusing on different customer segments. Much as say have seated chair and trance, Joe Us I think they will.
She share in this product segment that will be very profitable for coach and it may be less profitable for them.
Now to the product part of your question Brad.
The.
The answer is most of these products will end of life prior to closing, but they're our customer relationships that extend beyond or expect to close date and some of these products while end of life will still be supported.
Part of the 700 million dollar payment from T mobile.
Help us copper those negative cost Wow, we on Earth those contracts, we will not dishonor N a contract to any customer that we are acquiring what we will do however is go to those customers and mostly.
<unk> try to find a alternate provider <unk>.
So yeah, we will provide the connectivity and they will provide the underlying service on top of that connectivity.
Now to the revenue growth rates within the business.
Basically there are two major products are being required.
<unk> access and Vpns based on M. P. L S.
Both of those products are about 220 million of revenue. So 440 up to 450 come from those two products they.
They have been relatively stable inside of sprint for a number of years.
But both of those would decline without us improving the service. So what we will be doing is bringing the customers on that and.
Increasing the bandwidth per port by 10 acts and.
Converting the back end of that VPN technology from a M. P. L. S to V. P. L. S service I actually reviewed a customer contract that was working for an extension yesterday and the costs from our point it out that they.
Have a over a 40 year.
Almost exclusive relationship with sprint and sprint had previously migrated them from X twenty-five to frame relay and then frame rate Y K M. P. L S and they wanted a timeline for this what they hope to be their last migraine.
<unk> from M. P. L. S. A V P. Outlasts show that will happen, we believe that that large embedded base of revenue.
Basically flat, maybe we can grow 1% to 2% a year.
But we do not anticipate material growth or material revenue attraction.
Christians coming through the send the life products and the growth is coming through the optical transport products.
Great quick point of clarification to 25 to 30 per cent of the wavelength market. You think you can address is at the U S wavelength marketers or international component to that.
Its north American shows U S and Canada American, which is basically where we can utilize the sprint network.
We currently have no plans to expand that.
In Europe .
Pam Africa right you should pack, obviously, if there were other I possessions, we would walk at that but at this point. This is a north American products.
Okay.
[noise] Alright next question will come from Sammy by me, what kind of sleep.
Hey, Dave This is georgeanne graph on for Sammy Yeah, just touching one something as you mentioned last quarter, where you noted that the corporate growth rate was not materially impacted and prior recessions outside of the 2008 2009 period is anything sort of changed your view on it.
Potential recession's impact to today's corporate growth rate or should.
Should we think about the sort of the dividend deceleration and free cashflow alignment is just sort of a normalization from the the COVID-19 period.
So I'll I'll take those reverse water you know I think the dividend growth rate moderation.
Is just a recognition that the M pack of Covid, our our corporate business was longer and deeper than any of us anticipated and the recovery wall occurring.
Lower than expected and it just seemed prudent to be able to Ah line the growth some free cashflow until the growth and the dividend.
To the recession part of the question.
The buildings. So we serve tend to be the most desirable in every market.
The tenants tend to be more restructure improve the new channel business population.
The only time, we saw negative impact from a recession.
It was a true quarter period at the end of a wait beginning of O nine and our corporate business and the great recession.
Other recessions have not negatively impacted our corporate business and the fact that there is so much talk of recession, and we're seeing continued improvement, albeit slow and our corporate business. We don't think there.
There's a material risk to either our revenue streams for our ability to continue to grow the dividend. We also had been extremely fortunate.
That.
R Netcentric business, it's somewhat counter cyclical and that's actually been a historic pattern not just COVID-19 that when there's a recession people scream more video and therefore, they actually end up consuming more bets and generating more revenue.
New for US I think these trends are in place and kind of independent of what happens in the macro environment absence, some kind of major depression.
We feel comfortable and our ability to grow the dividend.
Got it that's that's helpful and then just as a follow up.
In the past the board of directors have been sort of hesitant to change the dividend growth rate and so I just followed you know adding onto that.
You know it.
The growth rate in free cash flow does reaccelerate at a certain point in time is there going to be a sort of similar lag where you.
The board of directors wants to see and make sure that it is going to be a sustained reacceleration I guess, what sort of a way should we be thinking about that.
Yeah. So first of all the board has.
Improve the growth rate in the dividend multiple times as initially was one cent a share in one to two cents and then two and a half cents a share.
The board has looked at.
The underlying performance and respond to.
This response.
Was basically the recognition that the corporate improvement is slower and less linear than we expected even six months ago I think the board would react pretty quickly.
Two.
Re accelerating the rate of dividend growth F. Cashflows continued to improve also if interest rates Monterey the ability to use the balance sheet and take on leverage makes more sense. So we would look at both of those factors.
Great Yeah, congrats on the corner.
Thank you very much.
Our next question will come from Michael Rawlins Penny.
Please go ahead.
Hi, Thanks for taking a question yeah too if I could you know first if you look at the market share that you have currently in corporate buildings today of about 14% you Dave what's the range of outcomes, you're seeing in buildings, where you've been operating in them for more.
Then a year or two.
And what do you think is the the path.
For just pushing that high or is it just simply the return to office or there's some other steps that accompanies taking to to push the share up and then just you know separately also in these corporate buildings are you seeing any significant interest or demand for private wireless networks and is.
Is cogent a natural partner to either provide the fiber connectivity for those networks or to actually provide and enable those private networks with gas in small cells and just you know make that open to.
Whichever carrier wants to to join into that thanks, Yeah.
Yeah, So first of all the.
The best building. So we were in we have some buildings. So we have 90 plus percent market share that is not normal and those are buildings, where the tenants tend to be the most leopard to bandwidth and therefore are more interested in <unk>.
<unk> I think you know what her <unk> corporate business is three factors one.
Very obvious increase in faith and she writes that she she don't understand or it's just lost people to sell to in the building.
Two <unk>.
Many customers.
Basically stopped making changes because of the uncertainty of Covid and the uncertainty around work from home versus return the office and I think that picture is still not perfectly clear to every company.
But it is increasingly coming into focus and things are improving.
And that improvement in clarity is allowing customers to know place waters and has helped us improve our corporate growth rate.
Third factor is we had a sales force that was for a boat and while we tried as hard as we could to make them as productive as they could be what they work from home because of our high turnover in a direct sales.
Possession.
That's telemarket it we.
We saw a decline in rap productivity now that we've brought reps back to the office or trainers are they are in person way I've seen rep productivity improve and rep turnover <unk>.
Again, we can't predict the pandemic, but we says Shirley how.
Is that what the vaccine policy that we've implemented that will not ever be forced to send our people home again.
This was a once in a lifetime of fat, maybe hopefully once and hundreds of years and as a result of that all three of these factors I think will help us improve our productivity.
Now to your second question about Wifi networks, Dad's networks and small cell.
We have.
Worked.
Alright, well I'm at at Le with some wireless carriers to provide all three of those different.
Solutions and the vast majority of our buildings, we have the right to do that there are a small percentage of our buildings, where we would have to go back to the land or to get an additional right, but that would not significantly impact our ability.
To participate in this segment so far.
All three of these.
Technologies.
Would say are limited and how widely they're being deployed show. The answer is yes, it's an opportunity yes, we're talking to the right players, but today, it's not a meaningful contributor to our revenues.
Thank you.
Thanks, Mike.
And our final question comes from Borelli with RBC capital market.
Please go ahead.
Just one question from my side Hatton I'm able historically.
Yeah, So historically spoken about capex declining over time.
Mm given that international markets X fashion, and you've indicated that you were interested in actually expanding internationally.
Further given the opportunity provided that the sprint assets that should we be thinking about.
<unk> would it be elevator for like three to five years or X number of years before I start.
Returning resuming a downward trajectory or is are those is that international market expansion actually included in that 30 million spend capex again he cited earlier.
Yeah. So the answer is it does include our international expansion.
We again have tried to be very transparent there's gonna be this $50 million that we need to spend initially to kind of harmonized and networks and N. R. Connect them. That's a one timer we also.
Quite honestly did not anticipate the equipment supply chain issues that we've had to face for the past year and a half for the first six months of the pandemic that was not an issue, but it probably P. A couple of quarters ago and it is improving but there are.
Still chip shortages of key components and as a result, we've had to spend more capital and over inventory gear.
That should go away.
As a percentage of revenue or Capex should decline and even on an absolute basis. It should decline, but because we are picking up the wavelength product the revenue scale is archer.
<unk> they can get to a kind of non expansion capex number of 35 million, which was our maintenance number for a coach and I think that number will be closer to $65 million for the combined company <unk>.
And we do think there will still be some additional expansion capex spent every year for the foreseeable future.
Ah the hundred plus data centers, a year that we will be adding so you know I think for the next several years investors should expect much.
Much more than 65 million and remember each day the center, there's about a you know kind of 120000 dollar expanse roughly.
And we're gonna add 100 of those were Oregon is still add a handful of empty obeys show you know our Capex will go down, but it won't get to that kind of maintenance level for several more years.
Okay. Thanks very much.
Hey, thanks for.
[noise] question and answer session I'd like to turn the call back to Mister name Shaffer closing remarks.
I'd like to thank everyone I know our calls go along but we try to answer all of the questions. I appreciate everyone's support and we will talk soon take care.
Bye bye.
And that's all conclude today's conference. Thank you for your participation and you may now disconnect.
[music].