Q4 2022 Cogent Communications Holdings Inc Earnings Call
Good morning, and welcome to the Cogent Communications Holdings Fourthquarter 20 twenty-two in full year 20 twenty-two earnings conference call as.
As a reminder, this conference call is being recorded and it will be available for replay at Www Dot Cogent co dot com.
A transcript of this conference call will be posted on cogent website when it becomes available.
Cogent summary of financial and operational results attached to this press release can be downloaded from the cogent websites.
I would now like to turn the call over to Mister, Dave Shaefer, Chairman and Chief Executive Officer of Cogent Communications Holdings. Please go ahead Sir.
Thank you and good morning, everyone welcome to our fourth quarter 2022, and four year 20 twenty-two earnings conference call do Shreveport, Cogency O and with me on this morning's call was Ted we'd our Chief Financial Officer, hopefully you've had a chance to review or.
Our earnings press release or press release includes a number of historical quarterly metrics and we present these in a consistent way huge corner.
Now for a couple of comments on our results.
Or revenue growth accelerated this corner.
Corporate revenues increased by three tenths of a percent.
Ah revenue for the quarter increase sequentially by 1.3% to $152 million, an increase of 3.2% here over a year or revenue increased by 1.7 per cent for four year.
Two.
$599.6 million on a constant currency basis or quarterly revenue grew here every year by 5.5% for full here on a constant currency basis or revenue growth was 3.9%.
Constant currency basis, and also adjusting for the negative impact of Universal service fee revenues foreigner revenue quarter over quarter or ear or over a year on a quarterly basis or revenues grew by 5.7%.
For full year 20, twenty-two grew five 4.4%.
Or corporate business continues to be influenced by real estate activity in central business District.
Two statistics, so we look at our building entries as measured by security card swipes in buildings and what are you, saying activities that year to date indicate that while the central business District Marquez have seen some improvement.
<unk> proved meant can choose at a slow pace and it's still not at prey pants at my claws.
We continue to remain cautious about the outlook for corporate revenue growth given the uncertainty economic environment and other challenge shows as a result of emerging from the pandemic.
Our netcentric business continues to benefit from accelerating tenured grows if video traffic and screaming for the corner our network traffic was help 11% sequentially at traffic growth accelerated on a full year basis.
225% year over here.
For full year.
Our network traffic rose continues to improve.
On a U S gap spacious are netcentric revenue growth through sequentially by 2.6%.
And crude by 9.6% here over here.
On a constant currency basis, or netcentric revenue growth for the quarter increased 515.2% from the fourth quarter of 2021 <unk>.
<unk> for full year 2022 group by 16.7%.
Our sales force Rep productivity was impacted by the rapid expansion of our sales force.
Rep productivity with 3.8.
Orders installed per full time equivalent per month.
We increase the number of sales reps this quarter by 26 or five per cent. We ended the quarter with 548 reps and 503 full time equivalents. This is a increase of 8.2.
Percent and full time equivalents sales reps.
For full year 2022, we increased our sales force by a net number of 58 or 11.8 per cent.
Or average Rep tenure decline due to this rapid pace of sales force expansion.
Did have a negative impact on full time equivalent of sales rep productivity.
Yeah, I'd like to take them home and and talk about our progress and closing are pending merger for the sprint T mobile wireline business.
We are diligently working to close our acquisition.
The sprint wireline business with T. Mobile we have received all material approvals from regulatory agencies globally, including in the U S. C. F C C and the California Public Service Commission.
We anticipate this acquisition will close in the second quarter of 2023, we get incur approximately $200000 no professional fees associated with this acquisition and a quarter and for full year 2022.
<unk>, approximately 2.2 million and fees associated with the acquisition.
We anticipate sprint wireline revenues.
At yearend 2021 or $560 million.
We also anticipate that they run right at time of closing will be an annual number of approximately $450 million.
<unk> automatically expect the number of sprint wireline products to be reduced dramatically from approximately 30 unique products or skews today down to four.
We have begun to sell the wavelength service this quarter to our customers through a commercial resale agreement with T mobile.
Over the next three years, we expect to continue to achieve significant cost savings through the integration of our networks are.
Approximately reducing the network expense of sprint wireline network in North America by $180 million.
The cheeping approximately $25 million.
Savings in the rest of the world on the sprint wireline network.
And then finally, achieving $15 million from savings for a cogent and its operation and maintenance expands for its North American network.
We anticipate also additional S. G N a savings and other caution revenue center cheese over the next several years.
With all of the regulatory approvals now in hand, we do feel the transaction is eminent to close in the second quarter of 2023.
Now for a comment on our dividend and buy back shrouded shape.
During the quarter, we retired $44 million to our shareholders through our regular quarterly dividend.
For full year 2022, we return $169.9 million to shareholders through our regular quarterly dividend payments.
Our board of directors.
Which reflected on our shrunk cash generating capabilities investment opportunities and the pending merger with sprint decided to increase our quarterly dividend yet again by one sent sequentially. This corner.
<unk> quarterly Deb again from 91.5 cents per share to 92.5 cents per share.
<unk> the 42nd consecutive sequential order of growing are regularly.
<unk> and the annualized growth right and this dividend. This now approximately 4.4 per cent.
Now for a couple of expectations about our long term guidance, what's really have combined with the sprint wireline businesses, we anticipate an annual revenue growth rate of between five and seven per cent.
An annual EBITDA Martian expansions on the combined business of approximately 100 basis points per year.
Our revenue and EBITDA guidance targets are intended to be multi year goals and are not intended to be used as quarterly or even annual guidance.
No I'd like to turn the call over to Tad re safe Harbor wine, which now provide.
Further review of some of our operating performance in a corner.
And then I will reach Hawaii and following these remarks, we will open the floor for questions and answers cat.
Yep. Thank you day, then good morning, everyone.
This earnings conference call includes forward looking statements and these forward looking statements are based upon our current intent beliefs and expectations. These.
These forward looking statements and all other statements that may be made on this call and are not historical facts are subject to a number of risks and uncertainties an actual results may differ materially.
Please refer to our SEC filings for more information on the factors that could cause actual results to differ.
Cogent undertake no obligation to update or revise are forward looking statements.
If we use non-GAAP financial measures. During this call you will find these reconciled to the corresponding gap measurement and our earnings releases, which are posted on our website a cogent co dot com.
Like many companies, we continued to be impacted by the COVID-19, pandemic and our risks related to COVID-19, and other risk factors are described in more detail in our annual report on form K for 2022 that will be filed this week at the end of this week.
And in our quarterly reports on Form 10-Q.
On corporate Netcentric revenue in customer connections.
We analyze our revenues based upon network connection type, which are on net off net an encore and.
And we also analyze our revenues based upon customer tight.
We classify all of our customers into two types netcentric customers in corporate customers.
Our corporate customers buy bandwidth for Muslim large multitenant office buildings Orange carrier neutral data centers.
These customers are typically professional services firms financial services firms and educational institutions located in Walton in office buildings or connected to our network carrier neutral data center footprint.
Our netcentric customers by significant amounts of bandwidth from us.
Neutral data centers and includes streaming companies and content distribution service providers as well as access networks, who serve consumer and business customers.
Our corporate business represented $56, 4% of our revenues this quarter.
57.1% of our revenues for 2022.
Our quarterly corporate revenue declined year over year by 1.2% $85.8 million from the fourth quarter of 2021.
But as Dave mentioned increase sequentially by O 0.3%.
For full year 2022.
Revenues declined by 4.4%.
The 342.6 million.
We had 44844 corporate customer connections on our network at year end.
That was a sequential decrease the 0.7% a year over year decline of 1.3 per cent.
Our total revenues and our corporate revenues were negatively impacted by changes in the U S F tax rates on a year over year basis.
For the quarter the impact of USAF on our revenues was flat, but there was a negative year over year impact about 300000 from the fourth quarter of last year and for the full year of the negative impacts of USAF was 3.1 million.
A constant currency basis, and if you adjust for the year over year decline in USF revenues are total revenues for the full year increased by four 4% substantially better than the comparable to 4% constant currency and USAF tax adjusted revenue growth rate from 2020.
2021.
Our netcentric business, which represented 43.6% of our revenues this quarter at another solid quarter and grew by 2.6% to 62 66.2 million sequentially and by 9.6% year over year.
For the full year, our net centric revenue grew by 11.1% to 157 $257 million again, as Dave mentioned volatility in foreign exchange, primarily impacts are netcentric revenues, so on a constant currency basis or quarterly netcentric revenue decreased year over year.
15, 2% sequentially by 2.5%.
And for the full year net centric on a concert currency basis grew by 16.7%.
We had 51670 netcentric customer connections on our network at quarter and that was a sequential increase of 1% a year over year increase of 7%.
Our on net revenue was 114.9 million for the quarter.
<unk> will increase of 1.5% a year over year increase of 3.8%.
Our on net revenue increased by 2.2% for the full year to $452.8 million.
Our on net customer connections, where 82620 at year end.
And we serve these on net customers and our 3155 total.
Multitenant office and carry a neutral data center buildings.
We continued to succeed in selling larger 100, gigabyte connections and 400 gigabit connections and selected locations, which has increased our on net <unk>.
Are off net revenue was 36.9 million for the quarter.
That was a sequential increase in 0.7% in year over year of 1.6%.
Are often net revenues are impacted by incorporated the cost savings, we obtain for lower local loop prices into our pricing to our customers.
Are often customer connections or 13531 at the end of the year.
We serve these often that customers in about 8300 off net buildings that are primarily in North America.
The average price per megabit for our installed base declined sequentially by 2.8% to 26 cents in the year over year by 19.6%.
However, this annual rate of decline for our installed base was better than our store go long term average of 21.5%.
The average price per megabit for new contracts for the quarter was 13 cents. So.
Sequential decline of 13.5% a year over year of 24%.
Selling 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 and changes in our <unk>.
So regarding our poop or on that are approved for the quarter increased and are often that are approved continued to decline without a modest rate.
From the lower pricing again, we are obtaining far off net circuit vendors that we pass onto our off net customers.
Are on that <unk>, which includes both corporate of net centric customers increase sequentially by 1.3%.
458 to $464.
Are often that are poo, which is predominantly corporate customers.
Clines sequentially by 0.7% from 920 to $914.
Our churn remains strong or sequential quarterly turn rates for our on then often connections were relatively stable and continued to hover around 1%.
Are on that unit churn rate was 1% for the quarter slight improvement from 1.1% last quarter.
And are often that churn rate was one 1% for this couple quarter compared to 1% last quarter.
In order to reduce our customer turnover, we employ dedicated sales group that works to retain customers who have indicated that they are consult considering terminating the service with us.
We may offer pricing discounts to these customers in order to induce them to reverse their termination decision to purchase additional services from us and or to extend the term of their contracts.
During the quarter certain of our Netcentric customers took advantage of our volume and contract term discounts and entered into longterm contracts with us for over 2150 customer connections and that increase their revenue commitment to cogent by over $20 million.
Some comments on EBITDA, an EBIT margin.
Again, we reconcile our EBITDA to our cash flow from operations in each of our quarterly earnings press release.
Seasonal factors that typically impacts our EBITDA and predominantly are SG&A expenses.
Include the resetting of payroll taxes in the U S at the beginning of each year.
Annual cost of living or Sleepy eye increases.
Seasonal vacation periods.
Your end bonuses paid to our employees and.
And the timing the level of audit and tax services and now sprint acquisition costs.
And also annual benefit plan cost increases.
We encourage $2 $2 million of sprint acquisition costs for the full year.
And about 200000 in the fourth quarter.
Our EBITDA for the quarter inclusive of the sprint acquisition costs decreased sequentially by point $7 million and decreased by point $3 million a year over year.
Our EBITDA for full year 2022 inclusive of these cost increase sequentially by 1.2% to.
$236 million.
Our fourth quarter and full year twenty-two EBIT results were impacted by the increase in our sales Rep head count inquiries.
Increased circuit costs related to our international expansion.
And a year and $1.5 million one time bonus that we granted two are eligible employees to help to offset the impact of inflation.
Our quarterly EBIT margin inclusive of sprint costs decrease sequentially by 100 basis points to 37, 6% a year over year by 140 basis points.
For the full year are EBIT margin inclusive of sprint decreased sequentially by 10 basis points, 38.5%.
Excluding sprint acquisition costs for the full year, our EBITDA increased by 2.2% in our margin decreased sequentially by 220 basis points to 37.8% for the quarter and year over year by 120 basis points.
For the full year 2022 are EBITDA margin, excluding sprint increase sequentially by 20 basis points to 38.8%.
Comments on foreign currency are.
Ah revenue earned outside of the United States is reported in U S dollars and was approximately 25% of our total quarterly revenues this quarter.
16% of our revenues this quarter were based in Europe at 9% of our revenues were related to our Canadian Mexican Asia Pacific South American African operations.
Our average euro to USD right. So far this quarter is about one dollar eight and the Canadian average raped USD 75 cents.
If these average rates remained for the remainder of the quarter the first quarter of 2023.
Foreign exchange estimated impact on sequential revenues would be positive by 1.4 million, but year over year would be negative by the same amount one $4 million.
We believe that our revenue in customer base is not highly concentrated.
Our top 25 customers represented again about 6% of our revenues this quarter.
Our quarterly Capex expenditures decreased sequentially to $19 6 million and we're $79 million for the full year.
Supply chain uncertainty and purchases in anticipation of the closing of our sprint acquisition.
<unk> 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, including new wavelength product offerings. As a result of the sprint acquisition and the interconnection of our two networks together in multiple locations to meet our customer.
Needs.
Some balance sheet comments.
Are financed lease are you obligations are for long term dark farber leases and typically have initial terms of 15 to 20 years or longer and often include multiple renewal options. After your initial term our longest term lease is for 44 years.
Our current ire, you finance lease obligations totaled $304 $2 million at year end.
We have a very diverse set of are you suppliers and that we have argued contracts with a total of 308 different dark fiber suppliers.
At quarter end, our cash and cash equivalents and restricted cash was $275 $9 million.
$52.1 million or restricted cash is tied to the estimated fair value of our interest rate swap agreement.
Our cash flow from operations was $36 $3 million for the quarter and $173 $7 million for the year.
Our total gross debt at par, including are you obligations was $1.3 billion at year end and our net debt was $978.3 million.
Our total gross debt to trailing last 12 months EBITDA adjusted for sprint costs. The ratio was 539 at quarter end and our net debt was 4.2.
Our consolidated leverage ratio is calculated under our indentures slightly different 532 and are secured leverage ratio was 341.
On our fix coverage ratio is calculated or the indentures was 349.
We are party to an interest rate swap agreement that modifies are fixed interest rate obligation with our $500 million 2000, 2006 notes to a variable interest rate obligation based on the secured overnight financing rate for the remaining term in these notes.
We will record the estimated fair value of the swap agreement at the end of each reporting period, and we occur corresponding non-cash gains or losses due to changes in market interest rates.
A quarter and the fair value of the swap agreement decreased from last quarter by two six.
To $52.1 million.
We are required to maintain a restricted cash balance with the counterparty equal to the liability.
Settlement payments under the swap agreement are made each November and May.
There are initial payment made in November 2021, we achieved in net cash savings interest savings $1.6 million and.
And for the next payment.
A period of August 21 to October 2021.
The next payment I'm, sorry under the payment that we made in May 2022 was it additional savings of $1.2 million for the period for November 21 to April 30 22.
And under the previous settlement payment that we made in November 22, we had a net cash cost of $3.4 million for the period from May to October 2022.
Finally, some comments on bad debt and day sales, which were excellent for the year for the quarter.
Are bad that expense was only 5% of our revenues for the quarter and 0.4% of our team.
Yeah that was an improvement of 6% of our revenues from last year.
Our days sales outstanding is very consistent in excellent at 22 days at year end.
We want to thank and recognize as always our worldwide billing and collections team members for continuing to do just a fantastic job in serving our customers and collecting from these customers.
And with that I will turn the call back over to Dave Hey, Thanks, Tad I'd like.
To highlight a couple of strengths of our network, our customer base and our sales force.
Shaved excellent revenue growth in our net centric business <unk> correct beneficiary of increased over the top video streaming services, particularly in our natural markets.
Ah quarters hand, we.
We are on net N 1458 carrier neutral data centers.
You also have 54 <unk> owned data centers, bringing our total on net data center footprint to 1512 data centers more than any other carrier globally as measured by independent third Party research.
The breath of this coverage enables our netcentric customers better optimize our networks and reduce latency, we expect to continue to whine mislead over the market as we project to connect.
<unk> hundred carrier neutral data centers per year to our network over the next several years and we will be also adding approximately 45 sprint.
Data centers to our network footprint.
A quarter and we directly connect to 70 792 unique networks.
The collection of Isps telephone companies cable systems mobile operators and other carriers give us direct access to the vast majority of the world's broadband subscribers a mobile phone users.
Quarter, and we have a sales force of 216 professionals, who focus solely on this netcentric market. We believe this group of professionals is the largest and most sophisticated sales team focused on this market segment.
Sales force will also primarily be responsible for the sale of our wavelengths products as we close this spring transaction.
Now for a couple of comments on the corporate market segment, we're seeing positive trends in our corporate business as work from home environment becomes established as part of the way in which people work in an office environment, We believe our corporate customers.
Will continue to look to upgrade their internet access infrastructure to larger capacity connections have more diverse connections or corporate customers are aggressively integrating some of the new applications that came became part of the work from home and fire.
German such as video conferencing.
This usage will require high bandwidth connections, both inside and outside of the promise or a crossword push to lower bandwidth costs and provide greater coverage has begun boosh corporate demand for a robust bidirectional smotrich, one gig and 10 Giga.
<unk> porch corporate customers are increasingly buying connections interior neutral data centers for redundancy and to support the AD hoc vpns.
There are hybrid workforce requires.
We will remain focus.
Our sales force productivity and sales <unk> growth.
And continue or improve our sales training programs and man <unk> underperforming sales reps.
On a sequential basis or total sales rep head count increased by a net of 20th six or 5% sequentially am by 11.8% year over year to 548 quota bearing raps.
A number of full time equivalent wrapped <unk> for more than three months increased from 500 to 503 from 465.
Our sales worst turnover rate improve began to 4.7% per month.
From last quarter when that number was 5.5.
Per cent per month.
This is down substantially from a peak during the pandemic of 8.7% turnover per month.
And that was in fact, the worst sales force turnover rate in our corporate history, but we are now operating below historic averages with sales worst turnover rate averages over the past 17 years, averaging 5.7%.
So in summary, we remain optimistic about our unique position and surfing small and medium sized businesses located in the central business does structure major North American cities. We have 1800 37 large multichannel office buildings on that.
Representing over 1 billion square feet of rentable space and average building size or approximately 550000 square feet.
We are excited about adding large enterprise customers to our customer base through the sprint acquisition.
And our most excited about our ability to sell wavelengths optical transport networking services, a new product to coach and that we are adding to our portfolio and expanding into all of our U S data center footprint.
Currently key indicators of office activity, including workplace re entry unleashing activities are improving to remain below pre pandemic levels were are encouraged that many tenants have indicated that they are returning to office.
They are leasing new space and they are now settling on what their new network architectures will look like.
Certain corporations elect to downsize her office space requirements Multitenant office buildings.
Increases the opportunity for new tenants to move into those buildings and allows us to increase our total addressable market and on neck corporate buildings.
Under our indenture agreements, including the 250 million dollar general restricted payments basket carve out we have accumulative amount available for dividends aside that stock buybacks that actually exceeds the $275 million of cash we have.
On hand.
We are diligently working to close to sprint wireline transaction, we're excited and the opera I'm very optimistic about the cashflow generating capabilities of the combined company with our expanded product sat and footprint we.
We expect the transaction to close in the second quarter of 2023 with that I'd like to now open the floor for questions.
Thank you at this time I would like to remind everyone in order to ask a question press star and the number one on your telephone keypad.
We'll take our first question from Frank Louisiana at Raymond James.
Great. Thank you.
To be clear you think this is gonna close more towards the beginning of the quarter of towards towards the end and can you get in any updates on how the revenue in the EBITDA are going to are gonna be recognize you're gonna be able to recognize that from any updates to the account in the states.
Yeah. Thanks for both questions frying, so while we have all regulatory approvals.
And we have been working diligently with over 30 working groups on the integration.
Longest aline item remaining.
Successful completion of our transition services agreement, while we have the framework emphatic Raymond and more of identifying all off the rack was set off items to be included <unk>.
Negotiation of that is continuing I would say probably mid quarter is the most likely closing date up but we feel highly confident it will close during the corner. It is probably unlikely that we will close at the very beginning of the call.
<unk> just based on the fact, we only have five weeks to complete that transition service negotiation and there are over 200 discrete items that have to be addressed and agreed to bypass parties foie characterize the negotiations as very constructive.
And both parties are determined to get the Stan there is just a lot of detail work that needs to occur.
Now to the question about the transient services agreement that we entered into with T. Mobile as part of this transaction in consultation with Ernst and young our auditors, we feel comfortable that we will be able to <unk>.
<unk> the vast majority of that 700 million dollar stream of revenue has revenue for cogent and therefore will be included and are reporting and N R financials.
Okay, great. Thank you very much.
Mmm.
We'll go next to James Green at William Blair.
Alright, thanks for taking the question.
Follow up on that you talked about the run rate of revenue at close. Thank you sit around 450 any sort of thoughts on is that sort of the bottom there and you've taken it down to the bare minimum and it grows from there or do you think you'll see more revenue attrition, what's the deal closes. Thanks.
Yeah. Thanks for question Sham show two points, we do project sustainable revenue run rate of the acquire enterprise customer base to be approximately 450 million because the transaction is properly.
Are you going to close sooner than we had initially anticipated.
Our expectation that at closing and the second corner C annualized run rate will actually be about 450 million.
Requirement and most of the acquired customers contracts to give them adequate notice about the end of life products has so we will probably see some of those and the wife products.
At closing being acquired and then over the next several months will probably get down to that 450 million dollar run right.
We've also identified a team of individuals primarily sprint sales professionals, but also some coach and sales professionals will be focused on that customer base of about 1200 large enterprises with the Gulf.
Oh of improving the quality of their service modernizing their networks and preserving that revenue initially and the ultimate expectation is that we will be able to grow the enterprise revenue base at about one <unk>.
2% per year, we think we're probably a year or two away from that.
But we do expect to plateau at about $450 million of large enterprise revenue.
Great. Thanks, and then just the cash flow side around the transaction. The first payment that you get from T mobile would that come right as the deal closes or like periods between one.
Real close to what he received the payment.
It comes at the end of the month first month after closing and that payment is slightly over $29 million a month for the first 12 months and then reduces down to approximately $9 million per month for the next 42.
Months because this is.
Going to be able to be treated as recognized revenue.
We will probably end up having to xray on that contract value should we will have some ah national deferred revenue that will then burn off over the life of the links.
Great. Thanks.
Thanks.
Well the next step randomness Pal at Keybanc capital market.
Hi, <unk> Avenue hung on for Brandon did you talk about your SG&A expenses for the quarter and your sales rep hiring going forward do you think that that's going to continue impacting expenses.
Yeah, so off for the corner Evan we first of all elected to do a 1.5 million dollar bonus to our global workforce as in Lou of a larger C. P. I N Kris.
We felt that.
I'm not sure of the impact of inflation was a one time shot while there is a continuing component we did not want to be locked into that continuing higher expanse. So that was an extraordinary expanse in the corner.
And.
<unk> was roughly 100 basis points of March and hit through that bonus second of all.
To address the head count number we were very clear that pre pandemic, we had about 600.
<unk> raps about 550 quota bearing of F. T A's and the pandemic was particularly hard on our head count we actually experience head count decline of approximately 18.
<unk> per cent.
We have emerged from the pandemic, we have accelerated in our higher ranked to the fastest pace in the company's history and water to regain that cost frown, we anticipate getting back to that pre pandemic.
Level of about 600 quota bearing raps about 550 full time equivalent quota bearing raps. There used numbers are not inclusive of the roughly 60 quota bearing individuals that will.
Come from the sprint transactions so they are additive.
So off of that base of about 660, total wraps and with the sprint team almost the entire team is an F. T. A sensor average tenure is quite long we expect.
To grow the sales force head count on a going forward basis at a much more normalised rate of about 7% per year. So once we get to that roughly 660 head count we expect our high.
Fearing pace to decelerate.
We hope that our turnover rate will continue to be below historic averages. We think they're training programs have we put in place have helped quite a bit and with that the total sales force should grow at about 7% per year or about four.
<unk> five net ramps slower paced and work growing today.
Alright, the next day.
Hey, thanks.
Well, maybe next to Nick <unk> at S V B market Nathan.
Hey, Thanks for taking my questions. This is Michael <unk> on your wife's earnings call you sharing that you had received expressions of interest for wavelengths and dark fiber from customers you spoke with <unk>. Shortly after the deal was announced that was obviously very encouraging now you've mentioned that you began to sell wavelengths through a commercial resale agreed.
<unk> with T mobile.
I was wondering if you can give us an update on the degree to which that's continued and what it might mean for the speed with which you might start recognizing wavelengths and dark fiber revenue after closing.
Yeah sure Michael Thanks for the questions. So.
We needed to negotiate that commercial agreement that we could allow us to sell wavelengths pre closing that agreement was put in place last month.
Actually in February we began training our sales engineers.
And training staff at the beginning of the month to sell wavelengths and then actually just last week formally launch the product to the sales team through a series of <unk> around the world.
In the initial period.
Process is actually more complicated than it would be after the deal closes in the next couple of months. It does require us to enter into arms length agreements to then resell we also have a.
A much smaller number of locations that we can sell in today than what we ultimately anticipating so just to refresh your memory sprint had trial this product and was only able to sell it in about 25 location.
<unk> bye.
By integrating the <unk>, we have added an additional 50 locations immediately so today wavelengths are available <unk>, we're spread can resell our metro footprint in about 80 locations.
Over the next 60 days, we expect that number to go from 80 to approximately 200.
It probably will take another year before the wavelength product is standard across our 800 locations.
You know we have already booked initial waters.
We do have a great deal of interest I would say the initial order account at this point from the coaching side.
Is probably found a dawson wavelengths I think that's pretty good for less than a week of selling.
You know I think the sprint side using our Metro network since they could formally do that also beginning last week.
Also in that same kind of roughly.
10, or so so these are pretty encouraging discussions in terms of dark fiber sales, we have a memorandum of understanding with one counterparty.
One route we.
We <unk>.
I have been cautious and trying to sell dark fiber in advance of the transaction closing for three reasons, one it's not a product of sprinters ever sold two there's not a lot of precedent.
<unk> pricing. So if we were reselling get we would need to demonstrate arm's-length prior to deal closing and we didn't want to take any regulatory risk and then finally, we wanted to make sure that the value of money received from a sale would accrue.
<unk> T mobile so we would not want a dark fiber sale to be completed until after the transaction is close I think realistically, we're going to focus all wavelengths first dark fiber second and I think by the time we.
Report.
Quarter, we should be in a position to.
To give much more color on the dark fiber market opportunity.
Got it thanks, and one more if I can can you talk about the cadence of corporate sales activity from Q3 into Q4, and I was trying to get into the first quarter and the overall state of the final.
Yeah, I would say that it has continued to improve and in fact, the sequential three tenths of a percent growth is much better than what we had been experiencing during the pandemic.
But I also want a temper that by saying we're far from the pre pandemic kind of 2% sequential growth rates. So we have average and when we look at all of the bleeding indicators, whether it be proposals waters.
Our poo all of those are giving goss encouraging.
Indications that there'll be continued sequential corporate improvement, but as I've tried to counsel on the last couple of earnings calls.
Anticipated [laughter] and more rapid return to our normal <unk> corporate growth rate and now we're.
Taking a white and say again, we're encouraged but I think it's gonna still be.
No more than a year before we're back to that kind of 2% sequential corporate growth rate.
Got it that makes sense.
Thanks, Michael.
And that's a reminder, if you would like to ask a question. Please press star one.
We'll go next to David Urban at D F a securities.
Hey, you got a John Crawford on per day.
Just curious about leverage so it's continuing to grow over the past few quarters above that two and a half to three and a half.
What direction, you're expecting that to head and twenty-three and if your mindset about this gorging excess caches has changed since last you spoke on it.
So thanks for the question and a crusher on Dave's name, it's Dave Barton, but.
I think we've had a consistent policy of utilize our balance sheet and slowly discouraging cash through a systematic increase in the dividend I think we are going to remain committed to that strategy.
It is true that our leverage did increase.
Isn't the corner, primarily due to our elevated capital leash principal payments and are increase in cat facts.
Much of this is a effort to tie the networks together.
Hi indicated earlier, we've got you know an additional 50 data centres connected to the sprint network each of those had a capital expenditure associated with that.
I have another 150 and process, where we have also already spent that capital.
I think we will see our leverage.
Mmm on a net basis, maybe go up a little from here, but not much and start to come down and remember the recognition of the $700 million in cash payments from T mobile as revenue.
Flows directly through to EBITDA, because our transient product does a 100% gross margin Prada.
The locations that we have reserved port capacity for T mobile to utilize that service if they choose to would have no incremental opex cost <unk>, so with that additional revenue stream and margin we will wrap.
<unk> D laugher.
Got it thanks, and then another if I can so I know you mentioned that the Netcentric team would be working on wavelength sales I was wondering if your philosophy on a head count rationalization from that transaction has changed since you announced it like the number of people you're hoping to bring over.
It really has not remember the sprint organization.
That's the day, we signed the deal had 1300 and 20 employees and only 60 of those were in sales.
All of those salespeople remain there have been a number of voluntary reductions in force.
That have occurred.
Under T mobile Stuart <unk> T mobile has been very generous and the severance packages that they have offered employees.
[noise] head count today is slightly below 1100 employees.
We expect that number to continue to decline through the use of the severance packages.
All of the employees.
Are expected to become cogent employees, and we have realigned artwork and his facial structure with both senior sprint people and management roles as well as cogent, but following the cogent Oregon.
<unk> structure.
My guess is there will be some additional fall out post closing as some individuals choose not to take those new assignments.
We negotiated an additional 25 million dollar.
<unk> of capital above and beyond the 700 million with T. Mobile. So we can mirror their severance program post closing I would say that we anticipate you know.
At closing to be somewhere around a thousand employees additional to the about thousand and 75 that coaches has.
So no just over 2000, and we would expect some additional operational electrician pose closing offset in part by our growth and the sales force.
So we anticipate the combined companies head count to be between 2020 100.
Great. Thanks.
We'll go next step Orelia RBC capital markets.
Hi, Thanks for taking the questions.
Oh can you remind us where you're expanding internationally and how you're thinking about those efforts and capex, while integrating the <unk> assets.
Yeah. Thanks for the question Bora, So cogent today operate in 51 countries around the world.
Our most recent expansion was Peru, and we are constructing through I R U acquisition.
Multiple rings in Lima S or a national market. So when we go into an international market. We typically by dark fiber Inter city, and then also dark fiber and <unk> and walk to connect to all <unk>.
<unk> data centers in those markets.
We are in the process of several other countries.
That cogent organically, adding and in addition to that we will be acquiring three new markets.
<unk> had intended to go but has had a significant regulatory lag that being India.
Thailand.
<unk> <unk>.
Sprint already has the requisite licenses and each of those markets. So they will come on net quickly. So I would suspect N 23, we will add those three markets and probably about another five or six.
Additional countries that coaching organically is working on that is factored into our expectation of adding approximately 100 carrier neutral data centers a year.
And.
Just to remind investors the sprint network outside of the U S. Inclusive of Canada, Mexico was entirely based on lit rented capacity to Cogent network is entirely based on.
<unk> dark fiber. So we are in the process of converting over those.
Sprint and our city networks and data center connectivity onto the Cogent owned network.
About.
15 of the international data centers have already been brought on net.
We have about another 30 M process and then we will continue that effort until we have completely eliminated the least sprint international network and that is anticipated to resolve and about a 25 million dollar a year.
Air annual savings story.
Thanks for that and one more if iPad.
So you have someone alluded to that and your your answer to my question, but in terms of the longterm guidance.
5% to 7% revenue growth and more specifically at 100.
Point margin expansion per year are you thinking of the sources of that margin expansion between content SG&A. Thank you.
Yeah, you know historically cogent has gotten it's 200 basis points of margin expansion almost equally from <unk>.
Cox efficiency and SG&A efficiency, roughly a 50 50 split if you go back and look at the past 17 years.
<unk>, Yeah filings I think going forward, we would expect about the same.
When we hooked on our EBITDA performance, we actually had the very best gross margin quarter I think in the company's history at 62.5% in the fourth quarter continued improvement you know the.
Oh.
Smaller rate of EBITDA margin expansion year over year was really impacted by S. G N a and it was really just wrap it rehiring of our sales force post pandemic I think will be through that by mid year. This year.
And we should get back to kind of a cadence of about half of our EBITDA margin improvement coming from gross margin pick up at about half of it coming from SG&A efficiency.
Alright.
Hey, thanks.
And we will take our next question from Michael Rawlins at city.
Hi, good morning.
I'm curious.
Think about the process of taking share in each the corporate and the Netcentric pregnant.
How does the practice of taking share.
Generally compare with your expectations of that pace when you create the multiyear your business plan and update that every so often.
And.
What are the factors that you're fine cause the various whether it's a positive variance or negative variance and is there something to learn from that as we try to consider the opportunities.
To take share from these products that you can expand with this upcoming acquisition. Thanks.
Yeah sure Mike. Thanks for the question and I think going for word they'll actually be a third category, which is large enterprise, which really is a very different customer base than our traditional corporate customer, which tends to be a smaller medium size business.
I think when we look at the corporate segment.
Arcane and market share is as a result of more footprint.
Better penetration and that footprint I think the variance came as a direct result of the pandemic.
Increase in vacancy rate and that footprint and the <unk>.
Hi, thank paralysis of decision, making by the remaining tenants with the uncertainty around their office configurations.
As we are emerging from that and companies are.
Settling on a work <unk>.
Plant, whether it be a hybrid or entirely in the office, we're seeing an improvement because there is still elevated they can see and.
<unk> work plan implementations are not universally adopted you at I think we've seen a slower than expected rebound in the corporate business. It is rebounding. It is clearly much better than it was during the pandemic, but.
It is not back to kind of the pre pandemic consistency that we had and I think we're trying to be realistic about that we look at all of the leading indicators as well as actual performance and then modify our plan and that's why earlier and recall I sure, we're probably at least a year away.
From that 2% sequential growth just based on the data we have <unk>.
Moving over to the Netcentric business.
There we look at you know actual traffic patterns on a daily basis, we look at the <unk>.
Need of our customers to have multiple connections to reduce latency and their applications and we look at aggregate traffic growth in there.
We were probably too conservative in our modeling around the Netcentric business. We I think we're very accurate and a rate of price decline and I think that will continue and we've been very consistent in that massive Chang.
But in terms of the rate of traffic growth and the gain market share we were probably too conservative.
We continue to grow our netcentric business on a year over year basis constant currency at about 60% faster than our long term average, we expect that outpaced prone to continue for longer than we expected, but we also think that it will.
<unk> at some point begin to moderate.
The final piece, which we have less empirical data on other than you know the diligence materials re reviewed inside of sprint.
Is that large enterprise customer base and the fact that they've been with sprint for 30 years is extremely encouraging they've been through multiple technology refresh cycles, and we can improve bar Jones and quality by bringing those services on that.
We think that we're being pretty conservative and our belief that we will see you know.
The 560 million run rate declined 450, and O plateau for a year or two and then only grow in a modest 1% to 2%. So that's kind of the thinking that goes into each of those.
<unk> and they are literally revisited every corner and you know we adjust our projections for the board each and every quarter based on real world inputs in each of these categories.
That's helpful. Thanks.
Thanks, Mike.
And next will go to occupy sick at light shed.
Hi, Dave. This is this is Joe on for Walt Ah.
Apologies if I missed this earlier, but I guess, a capital intensity remains elevated though.
<unk> way to think about.
What's maintenance versus growth and what kind.
And a big acquisition standpoint going forward.
Does this year I guess and we thank you for there was the large capital lease principal payment.
Yep.
So.
We have been very clear about the.
The three categories, Yeah, the first being the maintenance number four cogent has kind of is organic business that number needs to be about $35 million a year and we anticipate that number continue.
Huang.
What we would be spending above and beyond that would be expansion.
We have added about 120 buildings at an average cost of about $125000, a building or about $15 million and building connectivity.
And then we also add additional metro fibre either in new Mark is set way expand in two four densify markets that we are in.
Above and beyond that we have said that we will spend $50 million one time.
For the integration of the sprint and Cogent networks.
<unk> actually a significant part of that capital lease was to get the fiber to begin to integrate those networks. The sprint locations are often times not in central business district and need.
To be connected in and we've spent a significant portion or is still some more to spend on that one time integration expands.
And then the third bucket of capital intensity, which will be higher for the combined company is that the sprint business that we are acquiring.
<unk> of the capital needed to support the wavelength product, it's about $30 million a year.
So the way to think about the business. Once this one time integration effort is complete is 35.
For the code your business, 31st Sprint, So 65 million a recurring mate.
Backs.
And then whatever footprint expansion, we're going to do and that's probably right now running in the April hug of about 30 to 35 million about $15 million of that is buildings and hopefully shed will be adding about 100 carrier neutrals.
And then the necessary either inner city or a metro fiber in these new markets.
Okay, great. Thank you.
Thanks, I'm glad you gave well today off.
And that does conclude our question and answer session I would like to turn the conference back of any day Schaefer for any closing remarks.
I'd like to thank everyone, hopefully, we've been complete and answering all of their investors questions and most importantly, we look for closing the sprint transaction quickly, making sure that we have a fully negotiated transition services agreement.
That protects both parties and we feel quite confident that will happen in the second quarter Take-all care every one of them will talk soon bye bye.
And this concludes today's conference call again, Thank you for your participation you may now disconnect.
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