Q2 2023 Cogent Communications Holdings Inc Earnings Call

Good morning, and welcome to the Cogent Communications Holdings.

Second quarter 2023 earnings conference call.

As a reminder, this conference call is being recorded and it will be available for replay at Www Dot Cogent co dot com <unk>.

Script that this conference call will be posted on the same website when it becomes available cogent summary of financial and operational results attached to its press release can be downloaded from the cogent website I would now like to turn the call over to Mr. Dave Schaeffer, Chairman and Chief Executive Officer of Cogent Communications.

Vacations Holdings. Please go ahead.

Thank you and good morning to everyone on the stroke by apologizing for the possible length of this call. There are a number of new topics that where you are going to be chatting about but we will try to be complete in the answering everyone's questions.

Welcome to our second quarter 'twenty twenty-three earnings conference call I'm, Dave Shaffer Coach's, Chief Executive Officer with me on this morning's call is Tad Wade our Chief Financial Officer, hopefully you've had a chance to review our earnings press release, and our 10-Q for the quarter were purse.

The release includes a number of historical quarterly metrics <unk> percent on a consistent basis every quarter. We've included a number of additional metrics this quarter related to our acquisition of sprint and we will continue to provide these metrics each quarter going forward or.

Press release metrics now include corporate Netcentric and enterprise revenue.

And customer connections our metrics related to the sprint network assets.

Now for a few summaries of round all results, we closed our acquisition of the sprint wireline business purchased from T. Mobile on May 1st 20 twenty-three.

This transaction significantly expanded our network, our customer base or employee talent and materially increased the scope and scale of our business. We now have an annualized revenue run rate in excess of $1 billion.

Acquired a number of or enterprise customers, many fortune 500 companies.

Cogent.

Customers are larger than the typical customers and codeshare this corporate customer base.

We acquired a significant fiber network of owned assets and owned real estate.

<unk>, we acquired a number of right of way agreements and relationships it would've been virtually impossible to assemble the set of assets on our own.

We hired many valuable experience employees from the wireline business. The majority of these employees have been with the company for over 22 years.

We acquired a network with a current value of over $1 billion for $1. We received a $700 million cash commitment from T mobile to help offset the operating losses of the business that we acquired.

$350 million will be paid in the first year in monthly installments of $29.2 million per month.

In months.

13 through 42, we will receive monthly payments of $8 $3 million per month or approximately another $350 million.

We're very optimistic about the cash flow generating capabilities of the combined operation.

A recent analysis shows immediate and substantial cost savings will be achieved in multiple areas. Many of these will exceed our initial expectations from the due diligence that we conducted prior to closing.

Our legacy Cogent business had a very good quarter.

Our total cogent legacy revenues grew by five 3% sequentially and 9% year over year.

Cogent legacy Netcentric revenues grew by 11, 1% sequentially and 19, 3% year over year.

Cogent legacy corporate revenues experienced growth of seven tenths of a percent sequentially and six tenths of a percent here over a year.

Cogent legacy EBITDA was a record $61.7 million for the quarter and an EBITDA margin of 38.1%.

This is the first time and cogent history that its business has achieved EBITDA in excess of $60 million.

Sequential EBITDA margin increase in the legacy business, plus a 160 basis points.

For a couple of comments around the transaction and the purchase price under the purchase agreement we paid $1 four.

Wireline business that we acquired.

Under the working capital provisions in your agreement, we paid $61 1 million.

And were provided $47 1 million and acquired Cass freight total debt payment of $14 $4 million.

Under the purchase agreement, we also will receive payments from T mobile for 50% of the assumed short term lease liabilities.

Sure equal monthly payments at the end of the IP Transit service agreement period, there's been months 55 through 58.

Currently those payments are estimated to total $57.1 million.

This transaction resulted in a material bargain purchase gain in connection with the accounting for the acquisition, we recorded a gain on a bargain purchase of $1.2 billion or approximately $24.

<unk> per share.

Included in the $1.2 billion gain.

Discounted present value of the $700 million IP Transit services agreement with T mobile.

We had initially expected to account for the IP Transit services agreement on a straight line basis as revenue over the contract term.

However in consultation with our auditors.

And with the Securities and Exchange Commission via a pre clearance process. We concluded in conjunction with the FCC in early August . It was determined we should report these as consideration from T mobile.

You did to the acquisition and therefore, not as revenue, resulting in the purchase gain.

The acquired network, including the real estate assets fiber routes right of way agreements and network equipment.

Praised by a independent big four accounting firm.

<unk> of approximately $1 billion. The total fair value of the net assets acquired was 569 million.

Including the net present value paid to us by T mobile under the IP services agreement of $596 million to.

To 569, plus 596 totals approximately a 1.2 billion dollar bargain purchase gain.

Now for a couple of comments on our anticipated synergies and cost savings.

Over the next three years, we continue to believe that we will achieve annual cost savings and three areas approximately $180 million annual run rate savings in the optimization of the North American now.

A $25 million.

Savings and realized on the sprint International Wireline network.

And an additional $15 million and reduced operation and maintenance expenses for the legacy Cogent network.

We also anticipate achieving additional SG&A savings and other cost of revenue synergies over the next several years or.

Our recent progress in achieving these cost savings that are very encouraging and we intend to surpass the targets we have laid out now.

Now for a couple of comments on revenue and our new class of customers or revenue for the quarter increased by 56, 1% to $239 $8 million and it increased by 61.

5% on a year over year basis.

Revenue from the sprint wireline business was $78 million or the two month period.

<unk>.

The $78 million of revenue from the wireline business when our revenues would have increased five 3% sequentially and 9% year over year.

In connection with the Sprint acquisition, we are now reporting revenues or our enterprise customers. We've classified revenues, we acquired from the sprint wireline business as 52% enterprise, 32% corporate and <unk>.

<unk> percent netcentric using definitions that cogent as historically.

We define enterprise customers as large corporations typically fortune 500 companies with greater than $5 million in annual revenue running large wide area networks, which typically encompass from several dozen.

Several hundred sites. These enterprise customers typically purchase services in multiple locations on a discrete basis.

Our sales force productivity substantially increase from the 4.0, we reported last quarter that is installed orders per full time equivalent to 9.2.

Orders per FTE.

In this quarter.

Included in Rep productivity for the quarter were 9000 units and $7 $3 million of revenue sold to T mobile outside of the IP Transit agreement under a traditional commercial services contract.

Hi.

The revenues from these commercial services contracts are in addition to the $700 million IP transit.

Services agreement across.

Thing for these units our rep productivity would have been approximately four <unk>.

Orders install per rep per month, the same as last quarter.

Rep productivity includes enterprise customer sales reps that we acquire and are still being trained on coach and systems and processes.

Sales force size and composition.

In connection with the Sprint acquisition, we hired a total of 942 total employees.

<unk>, our 75 quota bearing sales reps and a total of 114 people in the sales organization.

Wireline business included many talented.

Experienced and dedicated employees. This represents a tremendous asset to the combined company going forward.

The average tenure Rfps wireline employee has been over 22 years.

During the quarter, we increased the number of our sales reps by 85.

15% sequential increase in our sales force.

We ended the quarter with 647 sales reps 567 full time equivalent reps.

5% sequential increase in our full time equivalent sales reps.

Now for a comment on the sale of new products, our wavelength optical transport products in conjunction with the acquisition of the wireline business.

We have expanded our offerings to include optical wavelength services in optical transport over our fiber optic network. We're selling these wavelength services to our existing customers you acquired customers of sprint.

Two new customers. These customers require dedicated deterministic optical transport connectivity without a capital expense or ongoing operational expenses and owning and operating a network or wavelength revenue for the quarter was.

One $6 million and there were 414 discrete wavelengths connected in the quarter at quarter end, we have sold the services and 35 discrete locations with shorter provisioning cycles, we have.

Activity to approximately 200 locations that still have longer provisioning cycles.

Over a two year period, we expect to be able to offer wavelengths and over 800 carrier neutral locations in north.

Okay.

Now for a comment on our expanded footprint.

Our sprint acquisition materially expanded our network footprint.

We have added 18905 route miles of owned and Intercity fiber 1257 route miles of owned Metropolitan fiber.

We will reconfigure 44 acquired sprint facilities and add 44.

New data centers to our footprint, we have already reconfigured one of those facilities. Our total carrier neutral footprint is 1500 26 facilities and there are 56 cogent data centers and addition.

To that.

We have converted one of the legacy sprint switch sites and we are in the process of completing those additional conversions. We also added approximately 11400 route miles of inter city, Iowa.

<unk> fiber and approximately 4500 route miles of Metropolitan IRR, you fiber to the Cogent network. Some of these are redundant with fiber that we already have and we will be eliminated as an area of cost savings.

Now for a comment on the transition services agreement on called the closing date, we entered into a transition services agreement with T mobile for certain services in order to ensure the orderly transition of the wireline business. These transition.

Services are related to information technology support back office finance real estate facilities management.

Vendor and supply chain management, including processing of invoices and paying wireline vendors on our behalf as cost and certain human resources services are consumed.

We are providing services under a reverse transition services agreement to T. Mobile that include information technology and network support.

Finance and back office and other wireless business support.

During the quarter, we recorded a $118 $8 million due to T mobile under the transition services agreement the initial primarily.

Expenses related to the reimbursement of vendor invoices may on T. Mobile's behalf for the benefit of Cogent, we recorded approximately $7 million due from T mobile under the reverse transition services agreement.

The amounts billed under the TSA and reversed TSA or do in 30 days from receipt of invoice.

As of June 32023, under these agreements, we O T mobile $118 8 million at T mobile owed us $7 million.

Before I comment on our dividend and return of capital program.

During the quarter, we retire returned 44 $9 million to our shareholders through our regular quarterly dividend program or.

Our board of directors, which routinely reflect on our business and recognize the strong cash flow generator rating capabilities and investment opportunities inclusive of the sprint acquisition decided to increase our dividend.

But by another <unk> <unk> per share this quarter sequentially, raising our quarterly dividend from 93.5 cents per share to $94 five per share.

This increase.

<unk> to 44.

Second of sequential increase in our regular quarterly dividend, which is now growing at an annualized rate of four 4%.

Comment against.

Expectations.

Now that we are a combined company with the sprint wireline business, we anticipate long term annual revenue growth rates of 5% to 7% for the combined business and we expect EBITDA margin expansion to be approximately a one one.

Basis points annually our.

Our revenue and EBITDA guidance targets are intended to be multi year and should not be used as specific quarterly or annual guidance.

Now I'd like to turn the call over to Tad weed, our CFO to read the Safe Harbor language and provides some additional operating and specific metrics to our performance in the quarter.

Following our remarks, we will open the floor for questions Ted.

Thank you, Dave and good morning to everyone.

This earnings conference call includes forward looking statements. These forward looking statements are based on our current intent belief and expectations.

Forward looking statements and all of our 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.

<unk> undertakes no obligation to update or revise our forward looking statements.

These non-GAAP financial measures. During this call you will find these reconciled to corresponding GAAP measurement in our earnings releases that are posted on our website at <unk> Dot com.

Some comments on revenue.

By corporate and Netcentric and now wavelengths and non core.

We analyze our revenues based upon network connection type, which is on net off net wavelength services and non core services.

We also analyze our revenues based upon customer type and as Dave mentioned, we now classify all of our customers.

Three types netcentric corporate and enterprise customers.

Our corporate customers buy bandwidth from us in large multi tenant office buildings or in carrier neutral data centers.

And these customers are typically professional services firms financial services firms and educational institutions located in multi tenant office buildings.

Shifting to our network through our data center footprint.

Our netcentric customers buy significant amounts of bandwidth from us in carrier neutral data centers and includes streaming companies content distribution service providers as well as access networks, who serve consumer and business customers.

Our enterprise customers generally purchase our services on a price per location basis and.

There are typically larger than our legacy cogent customer base.

On revenue classifications.

Reclassifications in connection with the sprint acquisition, we reclassified a small portion of legacy cogent revenue to an enterprise revenue and enterprise customer connections.

Reclassified 300000 of legacy monthly recurring revenue enterprise revenue and 387 legacy cogent customer connections to enterprise customer connections.

Corporate business, our corporate business continues to be influenced by real estate activity in central business districts.

Two key statistics, including the level of card swipes in buildings and leasing activity indicate that year to date, the real estate market and leasing activity in central business districts, where we operate and are seeing some improvement, but it has not returned to pre pandemic levels in most geographic regions.

<unk> to remain cautious in our outlook for our corporate revenues, given the uncertain economic environment and other challenges from the pandemic.

Our corporate business represented 46, 3% of our revenues this quarter and our.

Quarterly corporate revenue increased year over year by 32% to $111 million from the second quarter of last year and was a sequential increase of almost 30%.

We have 61284 corporate customer connections on our network at quarter end.

And that was a sequential increase of 37, 5% and a.

The year over year increase of 35, 9%.

Corporate customer connections from the wireline business were 17571 at quarter end.

Corporate revenue from the wireline business was $25 2 million.

Legacy corporate customer connections decreased by one 1% sequentially and by 2% year over year.

Our legacy.

Yes.

Increased modestly by 1% sequentially and by 6% year over year.

For the quarter, the sequential impact of USF on our revenues, which <unk> inclusion in the wireline business was a positive $6 8 million and a positive year over year impact of $7 6 million.

The USF taxes related to the wireline business was $7 million for the two month period in this quarter.

On Netcentric, our Netcentric business continues to benefit from continued growth in video traffic and streaming.

For the quarter, our network traffic growth accelerated and was up 4% sequentially.

Up 21% year over year.

Our Netcentric business represented 36, 5% of our revenues this quarter and grew sequentially by 28, 9% to $87 6 million that was 38, 4% year over year growth.

We had 66 seven.

711, netcentric customer connections on our network at the end of the quarter, an increase of 26, 2% year over year over year sequentially and year over year at 31, 6%.

Netcentric customer connections from the wireline business were 5607 at quarter end and rate related revenue was $12 1 million.

Legacy Cogent Netcentric connections increased by 15, 6% sequentially and by 26% year over year or.

Our legacy Cogent Netcentric revenue increased sequentially by 11, 1% and by 19, 3% year over year.

Our enterprise business was 17, 2% of our revenues this quarter and we had 22004.

435 enterprise customer connections on our network at quarter end.

Enterprise revenue from the wireline business was $47 million and enterprise customer connections were 23034.

Yes.

Revenue and connections by network type.

Our on net revenue was $127 7 million for the quarter.

A nine 9% sequential increase and a 14% year over year.

On net customer connections.

2008.

<unk> hundred 46 at quarter end.

Our net revenue from the wireline business included 2546 on net customer connections and $4 $1 million.

Our legacy Cogent on net revenue increases increased sequentially by six 4% and by 10, 3% year over year.

We serve our on net customers and 3227 total on net multi tenant office and carrier neutral data center buildings.

We continue to succeed in selling larger 100 gigabit connections and 400, given gigabit connections in selected locations, which has the impact of increasing our on net <unk>, which again occurred this quarter.

Our off net revenue was up $102 million for the quarter that was a sequential increase of 173, 5% in a year over year increase of 181, 1%.

Off net customer connections were 38762 at quarter end.

Off net revenue from the wireline business, including 24243 off net customer connections at quarter end and was $63 9 million.

Our legacy Cogent off net revenue increased sequentially by two 1% and by four 9% year over year.

Including the new off net locations from the wireline business, we now serve off net customers and over 28000 off net buildings and these.

Off net buildings are primarily located in North America.

Wavelength revenue was $1 6 million for the quarter and 414 customer connections.

Wavelength revenue from the wireline business was 404 customer connections and $1 6 million.

Lastly, noncore revenue or non core revenue was $8 6 million for the quarter and 19408 customer connections noncore revenue from the wireline business totaled 19021 customer connections and was $8 4 million.

Comments on pricing.

Average price per megabit for our installed base increased sequentially by 12, 3% to 28.

And declined year over year, but by only four 6%.

The average price per megabit for our new customer contracts for the quarter was 10, which was the same price per megabit for new customer contracts as last quarter and a year over year price declined 31%.

Selling larger connections results in a change in our connection mix and can have the effect of lowering our average price per megabit at a greater rate and changes in our ARPA.

With respect to <unk>, our on net and off net <unk> for the quarter both increased.

Our on net <unk> increased sequentially by three 5% from 467% to 483 and <unk>.

Our off net <unk> increased sequentially by 42, 2% from 910 to 1294, primarily from the pricing impact of these off net customers we acquired in the wireline business.

Churn or churn rates for our on net and off net customer connections for the combined business increase from the impacts of the wireline business, our legacy cogent churn rates were relatively stable.

Our on net unit churn rate was one 4% for the quarter compared to 1% last quarter and off net was one 6% also 1% last quarter.

On the EBITDA and the EBITDA margin.

We reconcile our EBITDA to our cash flow from operations in each of our quarterly earnings press releases.

And now incorporate a component from our cash flow statement.

We incurred $7 million of sprint acquisition costs during the quarter.

Our EBITDA for the quarter, including spring acquisition costs, and not including any payments from the ITC.

Transit services agreement decreased sequentially by $31 9 million and by $34 3 million year over year.

Our EBITDA margin.

Increased to 10, 1%.

Our EBITDA for the wireline business by itself for the two months was negative $37 6 million.

Excluding the negative impact of the wireline business, our EBITDA would have been $61 7 million for the quarter. So the coaching legs.

Our legacy business, EBITDA, which was a 10% sequential increase and a 6% year over year increase in that margin would have been 38, 1%.

EBITDA as adjusted our EBITDA as adjusted.

As it as the past few quarters includes an add back for sprint acquisition costs and now includes cash payments received under the 700 million IP Transit services agreement, we have with T mobile.

We build for two months during the quarter, so of $58 3 million under the IP Transit services agreement during the quarter and only one cash payment was due so we collected cash of $29 2 million during the quarter.

Our EBITDA as adjusted for the sprint cost and the IP Transit services agreement.

And that was $54 1 million for the quarter, which was 22, 5% EBITDA as adjusted margin.

In subsequent quarters, three monthly payments under the IP Transit services agreement will be included in our EBITDA as adjusted and that won't be a total of $87 6 million for the three payments.

We had both both of the payments $29 $2 million payments included in that.

EBITDA as adjusted for the quarter, our margin would have been about 35%.

All amounts billed in the IP Transit services agreement had been paid on time.

Some comments on foreign currency.

Our revenue on outside of the United States as reported in U S dollars and it was about 18% of our revenues this quarter about 11% of our revenues were based in Europe , and 6% of our revenues were related to our Canadian Mexican oceanic South American and African operations.

Sprint's Internet of the wireline business International revenue was only about 3% of total wireline revenues.

The average euro to U S dollar rate the average for this quarter. So far is $1 11, and the average Canadian dollar exchange rate is about 76.

These averages continue for the remainder of the third quarter, we estimate that our positive ex FX impact on sequential revenues will be about a half million in year over year, a positive $2 3 million.

Customer connections.

We believe that our revenue and customer base or concentration rather we believe that our revenue and customer base is not very highly concentrated but it is more concentrated after the wireline business acquisition <unk>.

Including that impact our top 25 customers represented approximately 18% of our revenues. This quarter, we acquired a number of larger enterprise customers with the wireline business.

On Capex, our quarterly Capex was $37 4 million.

Fly chain uncertainty 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 the conversion.

Data centers to cogent data centers, and including new wavelength product offerings from the sprint acquisition and the interconnection of our two networks together in multiple locations and to meet customer needs.

Finance leases and lease payments are finance lease <unk> obligations are for long term dark fiber leases and typically have terms of 15 to 20 years or longer on initial term and often include multiple renewal options. After the initial term.

<unk> finance lease obligations totaled $331 5 million at quarter end, there were new no finance lease obligations acquired in the wireline business.

We have a very diverse set of <unk> suppliers and have higher new contracts with over 320 different dark fiber suppliers.

We acquired relationships with several new suppliers of dark fiber with the wireline business and all of those ICU leases were treated as operating leases.

Fiber and network in connection with our sprint acquisition, we acquired numerous right of way agreements across the United States.

Right of way agreements represent a significant acquired asset and would be extremely difficult to obtain on their own.

We also acquired 482 technical buildings.

One of those technical buildings has been converted into a cogent data centers and we will convert another 44 buildings to cogent data centers.

We acquired a significant amount of owned dark fiber and significantly extended our network.

We acquired 19135 Intercity route miles of owned dark fiber one.

1259 Metro route miles on dark fiber.

So our network now consists of following with respect to fiber.

72694, these intercity route miles of dark fiber.

And that's 11376 from sprint and 61318 legacy Cogent Intercity route miles.

22556 leased Metro route miles of dark fiber, that's 4527 sprint Metro route miles and 18000 in 2009 legacy Cogent Cogent Metro route miles.

Okay.

240000, and 430 leased intercity fiber miles of dark fiber.

This includes $122648.

Sprint intercity fiber miles and 117782 legacy cogent intercity fiber miles.

Lastly, 74577 leased metro fiber miles and dark fiber and Thats 32346 from sprint.

42231 legacy Cogent Metro fiber miles.

So a lot of miles.

Cash and operating cash flow.

At quarter end, our cash and cash equivalents and restricted cash totaled $244 million.

Our $551 6 million of restricted cash is tied to the estimated fair value of our interest rate swap agreement at quarter end.

Our operating cash flow was $82 7 million for the quarter, 130% increase sequentially and a year over year increase of 140%, including in net cash provided by operating activities was the mountain Dew to T mobile under the TSA of $118 eight.

$8 million.

Some comments on that and our debt ratios.

Our total gross debt at par, including our finance lease obligations.

Obligations again.

Finance lease obligations acquired with the wireline business in total was $1 3 billion at quarter end and our net debt was $1 billion.

Our total gross debt to 12 last month's EBITDA as adjusted was $5 63 at quarter end net debt ratio was 456.

Our consolidated leverage ratio as calculated under our note indentures, which is slightly different interest income is essentially counted.

Under that calculation it was five 3% for the quarter, which was a decline of 542 and.

And our secured leverage ratio as calculated under the note indentures was 345% an improvement from three five.

On our swap agreement and the restricted cash.

We are a party to an interest rate swap agreement that modifies our fixed interest rate obligations associated with our $500 million in 2026 notes to a variable interest rate obligation based on the secured overnight financing rate for the remaining term of our 'twenty six notes.

We recorded the estimated fair value of the swap agreement at each reporting period, and we incur corresponding noncash gains and losses due to changes in market interest rates.

At quarter end, the fair value of the swap agreement increased by $1 3 million from last quarter to a liability of 51, $1 6 million $61 6 million.

We are required to maintain our restricted cash balance with the counterparty equal to this liability.

On bad debt and days sales outstanding.

Our days sales outstanding for worldwide accounts receivable was 2004 days most of the customers of the wireline business are billed in advance. However, they are building several building cycles during the month.

All legacy Cogent customers are billed monthly in advance in the third quarter, we will be converting the billing of the wireline business customers to the cogent billing platform and under the Cogent legacy billing cycle.

And at this point I should mention that this will be the last quarter, we will be speaking of the wireline business separately. It will be a total combined operation in the third quarter and we wont be speaking about legacy cogent and wireline business separately it will be all combined.

Our bad debt expense was 2% of our revenues for the quarter.

Net bad debt expense related to the wireline business was.

$3 million and we were required under U S GAAP and the accounting rules to record accounts receivable at their book value absent any reserves, we had to re establish those reserves which was it.

Unusual charges for bad debt related to the wireline business of $3 million for the quarter.

If you exclude that impact our bad debt expense would've been one 1% of revenues, which is consistent with our historical trends.

Finally, I want to recognize and thank our worldwide billing and collection team members, including our new billing and collection employees from the wireline business, we're doing a fantastic job in serving our legacy cogent customers and our new sprint wireline customers and collecting from them. They are doing an amazing job.

And with that I will turn it back over to Dave.

Thanks, Tad I'd like to highlight a couple of strengths about our network, our customer base and our sales force.

Now for some Netcentric details, we continue to experience significant growth in our legacy Netcentric business.

Direct beneficiaries of the continued acceleration in over the top video and streaming, particularly in international markets at quarter's end there were.

1526 carrier neutral data centers and 56 Cogent owned data centers directly connected to our network for a Grand total of 1582 data centers. This is more than any other carrier.

<unk> as measured by independent third Party research.

Breath of this coverage allows us to enable our netcentric customers to better optimize their networks and reduce latency and connecting to their customers.

We expect to continue to widen our lead in this market and project to add an additional 100 carrier neutral data centers per year to our footprint over the next several years.

We also expect to convert an additional 44 of the sprint technical spaces into cogent data centers to date, we have converted one of these facilities.

As of today, we are selling wavelengths with a rapid provisioning cycle in 35 carrier neutral data centers.

And with an extended provisioning cycle, we can sell wavelengths and over 200 carrier neutral facilities.

By the end of 'twenty 'twenty, four we anticipate being able to sell wavelengths and 800 or more U S carrier neutral data centers.

With continued reduced provisioning intervals.

We have significantly expanded our network footprint with owned fiber and additional IR Hughes as well as right of way agreements at quarter's end.

Are directly connected to Sim.

891.

<unk> networks. This collection of Isps telephone companies cable companies mobile operators and other carriers give us direct access to the vast majority of the world's broadband subscriber base in mobile phone users.

At quarter's end, we had a sales force of 259 professionals solely focused on the Netcentric market. We believe this group of professionals is one of the largest most sophisticated.

The cadence of sales teams focusing on this market segment in the industry. This sales force will be primarily responsible for the sale of our wavelength products that we continue to expand availability of.

Now for a couple of corporate observations, we're seeing positive trends in our corporate business.

Customers are continuing to aggressively integrate new applications.

And become part of a world in which working includes the use of video conferencing. This usage of video connectivity requires higher capacity connections, both inside and outside of their premises or a <unk>.

The push to lower bandwidth cost provide greater coverage has gone to boost the corporate demand for our products, which are typically bidirectional symmetric one gig and 10 gigabit interfaces corporate customers are increasingly buying <unk>.

Actions and carrier neutral data centers for redundancy to support their AD hoc vpns to support remote workers.

Now for a comment on our Salesforce, we remained focus on growing our sales force and sales force productivity.

We continue to improve our training, Brian Williams and manage out Underperformers.

On a sequential basis, our total number of sales force.

Reps increased by 85 to 647.

Our sales force turnover rate was approximately five 6% per month for the quarter down from a peak of eight 7% per month during the pandemic and slightly below our historical average of 5.7%.

So in summary, we are extremely optimistic about our unique position in serving small and medium sized businesses in the central business districts major North American cities with <unk> thousand 844, multi tenant office buildings and over 1 billion square feet of <unk>.

The office space on that.

We are.

Excited about the addition of our large enterprise customers to our customer base.

And we are very optimistic about our ability to sell optical transport services or wavelengths, adding that product to our portfolio and expanding our network capabilities.

And expanding the cogent owned data center footprint currently key indicators for office activity, including workforce reentry leasing activity still remain below pandemic levels in many parts of the country, but in many regions.

We're seeing a return to pre pandemic activity levels and pre pandemic sales efficacy.

We are encouraged to see that an increasing number of tenants are requiring employees to spend more time in the office. We also note that many corporates are downsizing their office requirements.

Ultimately, resulting in our ability to have a larger addressable market as we will have more discrete tenants per building, increasing our corporate opportunity.

Under our indenture agreements, including the $250 million general basket, the cumulative amount of cash we have available at the holding company for dividends and buybacks actually exceeds cash on hand.

Sure.

We are diligently working to integrate the sprint wireline assets we have.

Remain encouraged and optimistic about our ability to take cost out of these.

Assets and achieve the annual cost savings and cash flow generation that we project.

Over the next three years, we intend to achieve.

Annual savings of approximately $180 million on a north American sprint network $25 million on the international Sprint network and a $15 million savings on the legacy Cogent network.

We also anticipate additional SG&A savings through head count optimization, as well as system and office efficiencies.

These revenue synergies should manifest themselves over the next several years with that I'd like to open the floor for questions.

Thank you if you have a question. Please press star one on your telephone keypad to withdraw your question simply press Star one again.

Your first question comes from the line of Phil Cusick with Jpmorgan. Your line is open.

And David maybe we can start with Netcentric and just maybe go through again, what the organic growth is in Netcentric this quarter.

Both year over year and sequentially and help us think about size of customers committing and things like that that's going to drive revenue growth in that segment going forward.

Yes so.

As we mentioned in the call we saw an acceleration sequentially both in traffic growth as well as a year over year improvement in traffic growth, we have seen strong demand organically from <unk>.

Customers outside of the U S as well as having two additional benefits in this quarter that being the benefit of selling Netcentric services to T mobile outside of the transit agreement. These.

Primarily co location services and.

And VPN services, and we ended up acquiring.

Customer base of <unk>.

Off net and on net layer two services with T mobile.

The traffic growth was approximately 11, 1%.

3%.

Even if you netted it out the additional services that we sold T mobile the growth in that business was similar to Q2 of 'twenty two both on a sequential and year over year basis.

Okay.

Thank you that's helpful and how do you think about the.

Obviously theres going to be another another month of.

Movement in this quarter, but the organic go forward growth in that business.

Is that is that a sustained double digit.

Sort of annualized growth from here once everything is through given all of these other opportunities.

Yes. So you are correct, Phil we clearly will have an additional benefit in the third quarter, because we will recognize a full three months of the commercial services that we're selling T. Mobile some of those services will wean away by design, but we.

Think there is a very long tail to our ability to provide some of those non transit services to T mobile.

Independent of that phenomena. We also believe the underlying strength in the organic business, which has been about 10 or 11% revenue growth rate year over year continued in this quarter and will continue.

<unk> forward.

We're very encouraged by strong demand in international markets to.

To remind investors our netcentric business over an 18 year history.

We went into the pandemic growing substantially below that trend line at about 3% year over year growth group skyrocketed at the beginning of the pandemic all the way up to 26% year over year.

Slowly reverted closer to the average but remains above that long term average as I said, we're growing about 11% now year over year, and we believe that Netcentric revenues for the combined company will continue to grow in low double digits.

For the foreseeable future.

If I could follow up on one more any change in the size of customers buying last quarter. It was a lot larger.

This quarter any shifts there.

We continue to actually see some strong demand from some of our Orange hyper scaler.

As Tad mentioned, our average new sale remained flat at about 10 per megabit.

Bob.

Actually our installed base went up on a per megabit basis to 28 <unk> in part because of the acquired T mobile customer.

Our customer base.

The big change in buying patterns, we've seen actually.

Over the last couple of quarters has been a shift towards people buying for a new application that being artificial intelligence and the collection of data. So what we have seen is some customers who have traditionally had traffic very <unk>.

Metrically skewed in the outbound direction now collecting a significant amount of data and the return path.

And that has driven more growth from some of the larger <unk>.

Software and Hyperscale companies that I think are using that data to build their orange language models and.

Create generative.

Artificial intelligence applications, we think we're only at the beginning of that trend and that is an encouraging tailwind.

For the entire Netcentric business now some of our smaller customers may catch up and start also exhibiting those types of patterns most of our growth to small customers has really been in international markets from more reach.

<unk> access networks, who have really seen an acceleration in streaming video much as we did here in the U S and Western Europe , maybe 18 months ago. So there is some lag so you've got really two different things going on the orange customers are increasing.

<unk> pulling information as opposed to pushing for their AI applications, and the smaller international customers or accelerating the pull of content.

That's helpful. Thanks, Doug.

Okay. Thanks, Tom.

Your next question comes from the line of Frank <unk> with Raymond James Your line is open.

Great. Thank you.

Wanted to be clear.

Can you walk us through kind of what the run rate cash payments received from T mobile going going forward each full quarter just to be clear youre going to be recognizing EBITDA, the cash payments, adding back not the straight line recognition that you'd previously thought that she would be able to recognize.

Yes sure Frank So for the first 12 months of the agreement we were recognized $29 $2 million, a month or 87 6 million a quarter. This quarter, we recognized only one payment even though we had.

Billed for too we are recognizing that on a cash basis.

When we consulted both with the FCC and with our auditors.

Auditors Ernst <unk> young.

We concluded.

And alignment with T mobile that there should be a bargain purchase transaction, even though we are providing the IP transit services and they do meet many of the criteria associated under six shows.

Six for revenue recognition if they were treated as revenue we would have recognized that revenue on a straight line basis, because it is a unified contract the cash payment stream will actually stepped down in month 13, two <unk>.

Point $3 million a month and continue for the next 42 months. So we will recognize 24 $9 million a quarter on a cash basis. After the first 12 month period.

Reason for the change.

Change in accounting treatment was that T. Mobile made the decision to treat us as a bargain purchase at that point, we had our customers, saying that they were viewing this as a transactional cost and not as.

A services agreement David.

Correct, one thing T mobile didn't treat it as a bargain purchase that's our that's our side.

<unk> treated it at the end of 'twenty, two as a loss on disposition of a business, but that was their side. So in terms of kind of matching the R side, we had the bargain purchase gain sorry, yes.

Got that clear Thats why you are the account and Tad.

But.

We will recognize that and add the cash back each quarter.

Because it is cash and we are reconciling that to our cash flow statement.

Was that helpful. Frank Okay, great Yeah, no that's great and then on the customer customer size. I think you gave kind of the breakdown what is the largest customer as a percentage of revenue and is that a legacy sprint or legacy cogent customer and then what's the largest customer as a percentage of revenue and what's kind of been the trend with that.

Revenue.

Yeah. So our largest customer is now a legacy sprint corporate customer.

They are as a percentage of total revenues of about 4% of revenues.

Bob.

And we did acquire a number of large portion.

Kind of 500 companies to larger single Flex I think buy services from Cogent in approximately 16 100 locations around the world.

Okay, Alright, great. Thank you.

Your next question comes from the line of Greg Williams with TD Cowen Your line is open.

Great. Thanks for taking my questions first.

First question.

Gateway, it's a nice insight on your Q&A here in the Netcentric business ex sprint in terms of customers' connection and organic revenue growth can you do the same on corporate.

How much did the reclaim some of the sprint customers and revenue impact and what was the true organic growth on the legacy Cogent corporate business.

Second question is just.

On the waves business when does that really start to ramp to the 800 data centers and get those 259 sales folks up to speed.

What's sort of the opportunity next year and year after.

Big ambitions, there and just.

Lastly, if I can sneak in a housekeeping question. So if T mobile only paid one months.

Are you guys is are.

Are we going to see four months of payments next quarter or is it typically going to be in arrears in Q3.

Three months next quarter. Thanks.

I'll take the easy one first we'll get three months next quarter. They pay us typically on the second or third of the month. After we invoice salmon as Tad indicated they had been extremely prompt in making those payments on time now let me take your first two.

Questions on the corporate side organically Cogent grew sequentially 110.

4%.

Our year over year, 6%.

Six tenths of a percent excuse me six tenths of a percent so.

We're just under 1% and that was independent of any customers that were re classed from the sprint acquisition and as Ted said going forward, we will treat all customers by type equally so.

They will either be corporate netcentric.

For enterprise independent of whether they were organically sold by cogent or acquired we had customers.

Moving in the other direction as well as we took a small number of cogent customers and re class them as enterprise.

And this would give us I think a good baseline. So we can report consistently going forward, but that sequential growth rate and year over year growth rate.

In the corporate business is eight an improvement from last quarter.

And indicates the last four quarters trend line of slow, but fairly consistent improvement in the corporate business now.

Now for the wavelength question.

All 259 of our Netcentric reps as well as our enterprise and our.

Corporate National account managers can sell wavelengths.

Vast majority of the wavelength market is netcentric type customers.

The Cogent sales force has been engaged with existing wavelengths customers existing netcentric transit customers and wavelength opportunities that we have not had a previous commercial relationship with I would say that our <unk>.

<unk> has already engaged with the vast majority probably 95% of the.

Central market and discussing the wavelength opportunity.

The challenge for US is to get the sprint network connected to enough locations, where that demand can be fulfilled and then secondly to streamline the provisioning of wavelength.

Inc Service says.

There are two dimensions to that in terms of connectivity.

We're over a quarter of the way through our goal.

We today have 777.

Carrier neutral data centers on net debt numbers growing we'll have north of 800 by year end U S carrier neutrals and that number will continue to grow.

Of those we have 35 of those where we have sold wavelengths and Kim provision in.

And acceptable.

But not our ultimate target.

So when we looked at sprint and looked at their test sales of way.

They had average about 142 days in provisioning a wavelength.

In the.

Two months that we have operated the business we installed only 10 incremental wavelengths now some of the 404 that we acquired were actually sold by Cogent.

During the period, where we were a reseller of sprint wavelengths, but they actually provision very late in the process Thats why the run rate is actually slightly higher than the run rate, we had announced when we acquired the business.

For the wavelengths that we install we averaged 62 days, so a substantial improvement, but still not to our.

<unk> 17 gay.

Goal for a contractual minimum and what we are looking to do is mirror, our nine day average transient pork install window, we will be able to do that by the end of 'twenty four.

All 800.

S carrier neutral facilities.

So again there is two different things happening one we've got to go from 202.

A total of 800 facilities.

We'll report on that number every quarter, we expect to have that relatively linearly ramp over the next five quarters to give us that full footprint and then second way, we need to reduce the provisioning.

And to do that it means staging transponder shelves in those locations and deploying Oh Atms in location and surplus will facilitate this rapid provisioning.

We're in the process of doing that that process will be complete for the combined network.

By the end of 'twenty 'twenty four.

So we anticipate.

Wavelength revenue two relatively linearly increase over a seven year period from what is today about a $10 million run rate.

Two a $700 million run rate, putting our run rate not our trailing performance, but our run rate on a monthly basis.

Hi.

One year from closing May of 'twenty 'twenty four at about $80 million, meaning we will be selling.

About.

Call it $6 $5 million a month of wavelengths and then growing that number pretty consistently at the beginning we have a lot of pent up demand that we can't fulfill.

Using those expressions of demand to help us prioritize the.

Equipping of those 200 facilities.

If we are resource constrained, we can't turn them all on on day, one as there are a number of foundational steps that need to be made but we're very comfortable that we wants a footprint in.

In place to hit our wavelength goals.

And the demand base has actually been better than what we had anticipated.

Great. That's very helpful. Thank you.

Hey, Thanks, Craig Thanks for hosting me and by the way I heard one of our wavelength competitors at your conference indicate they were going to have a wavelength available on a daily basis. The only way you can do that as pre provision.

Alright, good color. Thank you.

Thanks.

Your next question comes from the line of Walter Piecyk with like chat partners. Your line is open.

Thanks.

Dave I want to go back to corporate I think on thank.

I think you've mentioned maybe twice on this call.

It was up sequentially I just wanted to make sure that we're talking.

Apples to apples because we're not if I took the number pulled out.

I think it's $12 nine for the sprint contribution.

Obviously, you didn't look at noncore and took out USF.

It looks like it was down like three 7% sequentially the corporate business.

For a true legacy organic number.

So I'm guessing my math is wrong and I'm just hoping you can give me if we're not looking at the benefit that you had from.

USF.

Where should we strip out sprint did it grow sequentially.

It did grow sequentially.

The U S F benefit was actually very minimal most of that benefit.

Came from the increase in USF for the sprint customers.

And again to remind you corporate includes.

<unk> core and non core products, so I'm not trying to be coy here, but every product.

Every service gets four classifications, because on net versus off it gets customer type, which is corporate netcentric and now enterprise. It gets geographic which is U S and rest of the world and then finally.

It gets product and the products include <unk>.

Internet access VPN services co location now wavelengths and then finally non core services when you look at the organic cogent.

Revenues for our corporate customers they grew sequentially 110th of a percent.

Seven.

<unk> seven <unk>.

<unk> and <unk>.

<unk> and six <unk> year over year expense year over year got it. So what was what was specifically the USF contribution from sprint because I know last quarter was <unk>. So what's the comparable for the legacy business on USF.

Sprint USF contribution was about $7 million. It was the majority of any change in the U S.

Yes, the Ashley USF rate flat.

Got it.

Okay.

Then which gives goes to the next question, Dave you haven't grown corporate sequentially since.

I think it's like September of 'twenty.

So that was a long run that's now finally inverted the opposite way can you can you speak to the issues on on why that happened I know I have friends.

There are companies that there is obviously a bit of a crackdown finally, maybe going into labor day. Maybe this is finally, the labor day that Youre prediction will all hit in terms of getting people back in the office I mean can you just speak to the issues on on wide corporate is finally inverted positive and then how you expect on a sequential basis.

Things to kind of play out over the course at the end of the year and into early 'twenty four.

Yeah.

So I do believe that many companies are taking a more proactive approach on getting employees into the office at least on a part time basis.

Currently we have seen.

Market by market, a great deal of differences and I think there is a trend that when we've seen markets like South Florida, Texas.

Phoenix kind of.

Of.

Perform as if there was no pandemic, we think that.

Kind of improvement will continue to spread to other markets now if we looked at our worst performing market San Francisco, It's almost like there has been no recovery from Covid.

It is sure.

Geographically an equal however.

We saw it happen starting in South, Florida has now spread into Texas, and Arizona and the markets like Atlanta are improving they are not still quite to pre pandemic levels, but we're tracking this on a market by market basis I think the second thing that's happening is.

Companies can only procrastinate, so long and making decisions as they need to deploy new tools and modernize and I think the three year hiatus and decision making is starting to wane.

And we appear to see improved sales efficacy and.

Improved funnels in markets, where we hadn't seen that maybe six or nine months ago. So again.

You don't know until the customer actually signs the water, but it does appear that we're getting a lot more corporate activity and we are on a path to recovery, but again six tenths of a percent growth year over year is not the 11% that we have historically how much.

At least that's not at least it's not.

So it's not negative, though Dave so that was a good trend.

To finally break you I think I guess my final question is more kind of a disclosure question, which is on a prior call you.

You kind of contested some derogatory terms they have for sprint's business that you purchased.

You didn't pay anything for it to pay that you pay that you pay a dollar for it. So I don't think Theres any question that this is maybe not a highly valued business.

And yet corporate historically has been that kind of a workhorse and Jim until we have this kind of COVID-19 multiyear COVID-19 dip.

So why wouldn't you provide investors.

Now, it's finally inverted positive why wouldn't you provide this kind of legacy.

That going forward.

People say, okay lets look at they bought this.

If not we are highly valued business for nothing right youre not getting able to print the revenue, let's put it in aside bucket and see what what what expenses, Dave can squeeze out of it and maybe get some revenue some revenue synergies, but then look at the core thing that really what's driving your ability to grow the dividend and see how that returning to growth I don't understand.

Why you would match that stuff together.

Like other companies do that to hide a bad story like if this is now a good story why not present that to investors going forward.

Well first of all I think we actually have multiple good stories to tell so let me kind of disaggregate. Your question and statement, let's start with the asset that we bought we bought two different things we bought a physical network.

We actually hired a third party KPMG to come in and evaluate that arm's length. We had no previous relationship never use them as an auditor for tax work that just come in and do an appraisal on this asset.

They realized that that asset was worth $8 billion, we paid a dollar for dollar, but it's an asset that T mobile had no use for it.

It was a fiber optic network and a series of switch sites that were not strategic to their business.

So they view them as a liability and pay taxes on them. They were literally sitting empty much like an office building that would have no Turner and Senate and we saw a value in that and said, we can repurpose that and create a growth business and selling high capacity.

Optical transport services and by selling co location in that footprint. We are in the process of making that conversion practical we're connecting it to the rest of the world we're putting in the correct <unk>.

Bonder equipment in OE dms to be able to provision wavelengths quickly and.

We've actually I wish I could tell you is so spark than I would've gone the AI tailwind for optical transport and co location was coming but the reality is theres been a huge uptick in the.

Short term for demand for both of those services because of the need for high compute and high data transfer or that is not easily done on the internet. So we were at the right place David Let me let me.

Let me just interrupt you though.

I respect the fact that that you can argue that T mobile soda sold $1 billion asset right before it was going to take off because I certainly appreciate that but even if thats true as a narrative then.

Why not put that in a separate bucket and show what you did with this business you bought and then continue to show how the legacy businesses rather than matching them altogether.

And I'm going to get there and answer the rest of your question.

Okay.

The second part of your question is we acquired a customer base that had a bunch of unprofitable surfaces associated with them.

We looked at this business initially it was burning $300 million of EBITDA and $30 million of Capex nearly a million dollars a day that had nothing to do what the network, where the services network was virtually <unk>.

Sitting there empty.

Give you a sense the data center or the switch sites, we acquire have.

<unk> 2500 racks of that equipment that has been in service for at least a decade setting in them, we have to clear that stuff out.

On the business, we bought we knew we needed a additional stream of revenue to at least give us the time to end of life products and to move that traffic on net and fix it.

We convinced T mobile to buy $700 million I'm transit services from us with the payment stream that we disclosed in order to mitigate the burn in the operating business.

Third point is.

We acquired a customer base, we were actually told that that customer base was enterprise, we only saw a five.

<unk> hundred 96 customer names prior to closing.

That's fair that's the way the FTC wants things and non consummated transactions. Once we unmask those customers. We quickly realized there were some corporate and there were some netcentric customers in there and we classified them appropriately. We also said we should.

Go the other way and maybe there are some cogent corporate customers that really fit the definition of enterprise, we true that up we went through a customer by customer port by Port reconciliation for the 151000 customer connections and made that true up now to your fleet.

Mineral point, which is why do you not report this as two separate businesses. The way we are going to get savings is put all of the traffic on one network converged products converge the billing systems. The sales organization. There are not people that work for sprint and people that work for coach.

They all work for one company as Tad said, we're collapsing 20 billing cycles to two to mirror Cogent, we're doing that by pushing those customers into cogent systems, we're not going to operate two separate databases.

Two separate networks, two separate customer basis, it will be impossible to disaggregate, what we will report consistently which will actually be a headwind.

Two our growth is we will report all corporate customers in that we've got legacy sprint corporate customers, which have had a higher churn rate than legacy cogent corporate customers, we understand that we're signing up for a greater headwind.

But it makes absolute sense to treat these all the same since you're buying the same products, they're going to be paying the same thing and theyre going to be riding the same network. It would be misleading to try to say that we've run two separate businesses.

We are going to run one network, one customer base one set of products.

Roger that thanks, Dave.

Thanks, Paul.

Just real quick I did want to give you the actual USF numbers.

Those views so spread was $7 million of the USF sequentially and total USF went up six eight so cogent classic USF was down 200000 sequentially.

Our mix of corporate and enterprise in that or is that just can you just give them.

Farmer.

That's helpful. Thank.

Thank you got.

Got it thanks Bill.

Thanks, Paul.

Your next question comes from the line of David Barden with Bank of America. Your line is open.

Nice to talk to you again.

Thanks for all the detail Dave as always.

We've spent a lot of time kind of noodling on the wave links and lit services.

And some of the cost savings opportunities I think something you've kind of referenced today.

These 40 technical facilities, one of which you converted into a cogent data center could you elaborate a little bit on this opportunity is this purely a way to expand your reach.

With a more on net approach to some of these product we've already talked about or is there an actual.

Linked to data center strategy, where you're gonna be putting.

Capital to work for technical facility to generate X megawatts of capacity that could generate.

Incremental dollars of revenue could you just share with us a little bit your thinking there.

Yeah, Hey, Thanks, David for the question and.

The only thing I'm going to dispute as to need to spend incremental capital to do this.

So.

Sprint built a fiber optic network that terminated.

In tandem switch sides.

These switch sites were designed to allow connectivity to black Gladys. This wasn't designed back in the eighties and early 90 days.

That network carried exclusively voice traffic until the late 90 days and then carried some proprietary data and a little bit of Internet traffic.

At work.

Virtually empty today, almost no traffic on it and it terminates and these former switch sites. There are 482 technically technical buildings owned fee simple there's actually one six.

<unk> million square feet in those facilities.

In addition to that <unk> nearly 300000 feet of least technical space that we will be exiting as part of our cost savings initiatives and that project is well underway as we can exit those leases that is big part of the way we can save that one.

Wondered $80 million run rate in North America at the $25 million internationally, but for the owned facilities.

Look at the largest of those there were 45 of them that comprised one 3 million square feet and already have 160 megawatts of power to those facilities that are today generating no revenue.

Sitting empty with no connectivity to the rest of the world other than to the sprint back bone and two.

It lacks in their territory.

For Tdm interfaces, which are no longer applicable.

So we are doing for <unk>.

One we are physically connecting those networks to our macro footprint. We have two reasons to do that wanted to make the data center market a ball to we need to extend the sprint network into carrier neutral data centers. So we can sell wavelengths. The second thing we're doing.

Is cleaning these facilities out of sight. Your attic, that's full of old things that you forgot about and you go buy something new you got to have a place to put it to go up there to clean the old junk out one or a case, we want to turn niche in the data centers and those 22500 racks are in no.

Way they need to come out and we're going to do that house cleaning and that's well underway.

The third thing that we need to do.

Is go into these facilities and convert to power plants telephones central offices and that's what these <unk> are negative.

Negative 48 volt power plants.

Data centers run positive one 'twenty AC.

D C you put in and burner in a relatively modest capital expense to invert that power and turn it into a <unk>. We're doing that at all of these facilities. The final thing. We're doing is taking the active network equipment that we will need to operate.

And put it in one small cage in the corner.

Pop into corners, what our program on this call.

And as a result, we will have completely empty mark at a ball 160 megawatts of power and one 3 million square feet of space spread across 45 incremental facilities.

Additive to the.

50.

Five facilities that cogent operated pre acquisition with 70 megawatts of power.

All right.

We are going to take those data centers and do two things, we're going to take one data hall and turn it into a cogent data center, meaning retail sales one or two racks at a time, but they are typically three or four independent data halls in each of these facilities.

Those will be sold or leased.

To either other data center operators on a wholesale basis, or perhaps hyper scaler or AI companies to put equipment in to do compute.

That is a very large incremental opportunity.

And our business case going forward, we did not anticipate the accelerated demand for edge computing and for AI compute capacity, we were assuming that we would only derive a similar revenue mix from.

Legacy Cogent products, which is about 3% of revenues. So if you looked at cogent classic about $20 million a year is coming from our co location business, we kind of assumed another three.

3% or so of the spurt revenues could come from co location.

Another $15 million to $20 million I think our thinking has changed and we do think there is a significant incremental opportunity to monetize that in place 160 megawatts of power.

We will do that over the next year. It is going to take us at least a year to get these things to be commercially viable, but the demand set that we've seen from some of our larger customers encouraged as us that I think we will do all up better than <unk>.

3% of revenues with this cohort of opportunity and we think there may be another 30 or $40 million of incremental revenue, that's not baked into our forecast.

Hopefully that was helpful.

Perfect.

Your next question comes from the line of Brett Feldman with Goldman Sachs. Your line is open.

Hey, Dave two questions. If you don't mind, you talked about this target of getting to $700 million of wavelength revenues over a multiyear period I think thats higher than what you had discussed before so correct me if I'm wrong, but I'm just curious.

What's giving you some confidence in that outlook.

And then yes.

Obviously, the business is positioned to delever going forward.

Clearly above your current target range. How are you thinking about your current comfort level with operating closer to the higher end or lower end of that range and then how does your trajectory of Delevering ultimately factor into evolution and capital returns, meaning when you start raising the dividend at a faster pace or how would you think about buybacks is not fair.

Thanks.

Yes, let's so let's start with the wavelength market. We took the initial view that the market was going to be static at a 2 billion dollar scale there.

There had been independent third party studies that indicate that market is going to grow at about 7% a year.

You have said that we will get to 25% market share over a seven year period.

The $700 million number just represents the same 25% market share of a slightly larger market what appears to be driving the growth in that market seems to be these AI applications for large data.

Replication that do not sit well on the public internet, let's be very clear a wavelength is less flexible and higher cost per bit than using the public internet the public internet.

Is the majority of traffic in the world and Thats, where the majority of growth is coming from but they are now.

A new driver for this premium service of wavelengths, and we feel uniquely positioned to be able to capture that and we think our growth is going to be relatively linear we're going to get to a 25% market share and right.

Now, we believe that market appears to be growing and thats a positive for us.

Now to the leverage question.

Sorry, if you don't mind.

If you don't mind, just a follow up on the wage question before we get to leverage can you just give us your update how are you pricing in the wave market right now how much of a discount that you talk about how is the premium priced market. But are you are you coming in and saying well if not premium priced if you buy with cogent because you've got such a low cost base.

So we have four distinct levers to pull and winning business.

I think the most important is the uniqueness of the routes.

Werent available in the market before and people want routes that we have for diversity.

<unk> it will be the ubiquity up the number of data centers that we are offering services part of Cogent strategy is to go wide and have the ability to provision quickly transient and now wavelengths and every data center, where there is demand.

The third thing that we have is the ability to offer an end to end solution in many situations today, a customer has to buy a natural wave of one vendor.

And a inner city wave from a different vendor.

We will have a holistic and NAND solution with seamless provisioning.

And then the fourth thing, which is critical is to being able to actually deliver what you sell and what we have heard consistently from the marketplace is that many of our competitors fail to deliver or don't deliver in a timely manner.

It is critical that we replicate our service delivery quality for wavelengths as we have delivered on transcend.

Now with those four advantages we will use price my goal is not to destroy the market, but it is to capture market quickly we will discount.

We have an established brand we have an established sales force and because of that I don't think we will need to be as aggressive as we were in the transit market.

We will if necessary to cover their costs as Walt said I've got a network for a buck that's great, but I don't want to sell it cheaper than I have to but if it takes price declared a market we will use it and we feel very comfortable that our market share targets and revenue scale.

Our.

Lee achievable.

Now I'll switch to your leverage question. Thank you.

Eric Eric medically, we are going to delever very rapidly because of the payments from T mobile and the ramping of this incremental high margin revenue stream.

The cost of capital is higher today than it was two or three years ago, we could not replicate our debt at its current levels. Today now rates may come back down windows to refinance while open but I think in the short term we are committed to bringing.

Leverage down.

We also don't want to hoard cash we don't want an inefficient balance sheet should we will opportunistically add gap when it makes sense.

And we intend to maintain that leverage within the range that we've laid out.

A two and a half to three five times net leverage target. We are above that now we're going to come down and be in that range, but then what we do with that extra capital is going to be market driven.

We are committed to not hoarding capital we are committed to doing no bad M&A hopefully this transaction shows in fasteners. The discipline that we've applied to 825 targets and how we view them when we do M&A.

All <unk> there is no deal worse than a bad deal and we're not going to do a bad deal. So that means we're going to have extra cash and it probably means we'll be raising the rate of dividend growth when appropriate.

We will supplement it with buybacks, but the commitment our board has made and were making is we are going to return to capital we're going to look to make sure shareholders are rewarded for being with group.

Okay.

Our next question comes from the from the line of Tim Horan with Oppenheimer <unk> Company. Your line is open.

Ken Your line is open.

Alright.

Without a major improvement in Netcentric pricing do you think that's sustainable and what do you think is driving that and then I just had some basic questions on the on the go forward guide.

Yes, so in terms of Netcentric pricing.

There are.

Really four factors that weigh into that pricing, how much a customer buys how all say by four <unk>.

And in what geography, they are buying Yahoo.

They are on top of that existing customers that tend to work to extend their commitments each and every quarter and we typically see.

2500 customer connections or corner that ended up doing a reprice and extent in this quarter was no different so I think when we layer those.

Overall pricing disciplines onto our customer base.

We're going to see a slight moderation in the rate of price decline for Netcentric more of the growth is coming from international markets more of the growth is coming from smaller customers in general we are seeing however, large customers.

Also having this new use case that they didn't have before and driving some growth when we kind of player that together.

23% long term decline in price per megabit is probably moderating a little bit may be reducing down.

A 20% rate of decline, but the price of transcend is going to continue to come down for two reasons. The market is sufficiently competitive we are not a monopolist I wish we were but we're not and then secondly that the underlying technologies to produce.

<unk> route a bit miles continue to improve at pretty consistent rates.

Whether it be optically interfaced routing improving at about a 40% per year CAGR or.

Wave division multiplexing, improving at about an 80% compounded improvement those underlying trends youre going to continue so I think it would be naive to think that netcentric prices will ever plateau, but I think the rate of decline will moderate.

So the rate of decline to 500 basis point improvement, but are you seeing a lot of improvements from.

From geographic diversification from customer diversification and now new use cases so.

It will look better than the 20% decline for a while because of these.

That's right Tim.

<unk> right.

And then on the <unk>.

Just on the guide.

The guidance for 6% revenue growth long term and 100 basis points improvement can you just give us the base that's awful.

Related to this can you give us some sense of what the revenue and EBITDA are going to look like for the third quarter. I know you don't give guidance, but we have a ton of moving parts here.

And with both Newport group related.

Well.

This is a much longer call than I think most people would like but I think it is critical for foundational reasons to give all of this background. So to be clear. The revenue guidance is a range of 5% to 7% you pick the midpoint of that over the next month.

T here period the base that is all fault is the combined revenue of the company.

Within that base there are multiple components. There are noncore revenues that we want to go away and go down.

There are corporate and Netcentric revenues Walts question about reporting better now combined there are enterprise customers that are combined and then there is the new product of wavelengths that will be reported and dips.

The wavelengths like any other on net product carry the absolute highest incremental margin.

We also have T mobile as a customer above and beyond their tranches purchase from us for other services that we know will decline over time as they wean their wireless networks dependence on the transport.

That work that we acquired these were inner matched assets when we put all of those pieces together.

We'll be building off of a revenue base of about 1 billion, one 1 billion to a year.

Growing 5% to 7%.

One way to look at the mix of products that we will have on net and off net.

We will be able to deliver.

A 100 basis points a year of margin expansion.

In the third quarter, because we will have three payments from T mobile not one <unk>.

And in Q and Q2, we had two months of expense and only one month of payment from T. Mobile in Q3, we will have reduced expense and three months, we should have margins and.

Inclusive of the T mobile transit payment in the mid Thirty's.

Okay.

And so the 100 basis points guide is that off that.

That mid <unk> range.

It is but remember over a multiyear period that T mobile payment for the $700 million transferred agreement is going to step down.

So yes.

But also I mean 10 years from now the goal would be 45% of that 35% roughly.

Yes, I think Thats, a fair way to think about it Tim.

Great job, Thanks, Dave and good luck.

<unk>.

Your next question comes from the line of Nick del Deo with Moffett Nathanson. Your line is open.

Hey, good morning, Dave.

Just want to confirm that the revenue from the commercial agreement with T mobile is being allocated entirely to netcentric.

Yes. It is entirely netcentric. It is predominantly on that there is a small component of it that is off net.

And it is for two primary services.

Layer to VPN services and co location.

Okay, I think you said earlier.

I forget who asked the question, but I think you said that if you deducted the commercial agreement from the Netcentric results. In Q2, you got growth rates that were similar to Q2 a year ago.

When I adjust for it I guess I've got numbers that are.

Yes, slightly up sequentially.

Just wanted to confirm.

What you said because im trying to figure how to allocate these these changes appropriately.

Yes, I think Thats right next so last year in Q2 of 'twenty, two I think our sequential netcentric growth was.

<unk> three tenths of a percent.

It tends to be not the biggest traffic growth quarter.

Because of the heavily dependence on students and feedback that people start to go outside more so I think.

It clearly was much better sequentially because of the sale to T mobile.

These non transit.

Service is predominantly on net.

And they are counting etcetera.

Okay. Okay got it thanks for that and then second just thinking about <unk>.

EBITDA.

Can you talk a bit about costs that may have weighed on the bottom line this quarter.

Related to that you are not specifically breaking out in his remarks I think in the in the queue. You mentioned some bad debt expense for sprint. It seems like it's sort of a onetime initial thing, but I'm wondering if there <unk>.

Severance or termination costs, you're not breaking out over time, either inefficiencies and stuff like that that we should consider when looking at the at the bottom line results.

Yeah. So.

Tad did mention day need to re establish a bad debt reserve for the acquired business.

There wasn't one previously in our accounting and that was a $3 million SG&A hit that was one time to this quarter.

We also have.

The inefficiencies are processing payments through T mobile under the transition services agreement.

Yes.

$118 million that we have to send them as primarily for them to send defenders and.

While those payments are handled remotely.

We will not have the ability to be as disciplined as I think we are in terms of auditing them and being.

Very aggressive with our vendors.

Fully intend to bring that in house quickly.

As it turns out we were expecting to transition the Ias infrastructure from T mobile to cogent and run it in parallel for a year we.

We have been unable to do that due to some of the security concerns that T mobile is.

Dealing with.

So we have accelerated our timeline to move all of the customers all of the network monitoring.

Monitoring into cogent systems in the third quarter, so by year end.

The legacy <unk>.

Sprint and T mobile systems, the roughly 220 software tools that they use will only be for archival purposes with that we absolutely expect to get some additional benefits and cost savings that we have not.

Fully quantified.

We just said there are probably better than our models project.

We also in terms of head count.

Ill.

When we started looking at this business there were almost 1800 employees.

When we signed our purchase agreement last September that were 13 120 employees.

We ended up acquiring 942 of those employees.

<unk>.

We understand that we will probably have some more.

Head count that doesn't fit well in the cogent model.

We as part of our total agreement with T. Mobile has the ability to pay severance so those employees and have that severance funded by T. Mobile. So we don't anticipate that being an additional drag and we.

We do expect that there will be both through.

Realignment retirements as Tad said the average employee has been here 22 years, we will probably see another 100 to 150.

People on the operation side eventually exit the combined company, resulting in additional incremental SG&A savings. We have office consolidations underway that are part and parcel of those savings numbers. So I think there are some.

<unk> SG&A benefits that are not fully baked in Nevada, we kind of focused on the network.

Okay, and just to be clear with respect to severance.

From an accounting perspective.

Is that reported on a gross basis.

When you get reimbursed by T mobile or is reported on a net basis, how should we think about that.

The entire cost of the severance would not hit our P&L since it's reimbursed by T. Mobile so it would be our cash out the door. When it's paid and then build to them on the next month and then we would be reimbursed. So when you see the amount due from T mobile under the our TSA.

A lot of that will increase.

In.

After June because of severance severance amounts that were paid but we have no P&L impact on that but we can't report that as revenue ad.

Our revenue and it's not expenses, it's just a cash transaction.

Okay, Okay got it.

You just kind of quickly sorry for dragging this out.

What was behind the decision to treat the transit payments.

In EBITDA.

Or rather to include them based on when they are paid rather than when they're builder accrued.

We had to reconcile to the cash flow statement and you can't reconcile accruals to that.

EBITDA is a non-GAAP measure.

We felt that it was critical that investors understood. This money was coming in and how it impacted our ability to pay our bills and meet the cash burn of the acquired operating business and it made the most sense to reconcile it to the cash flow state.

And as such it can only recognize it as you receive it not as your ballot.

Okay got it thanks guys.

Okay. Thanks.

Your next question comes from the line of Brandon <unk> with Keybanc. Your line is open.

I guess first question with the 100 basis point margin expansion is that based off of.

The.

The mid Thirty's that were at from <unk>, just trying to gauge where we're going to end up for the EBITDA.

<unk> ended the year.

And I was just wondering if you guys.

Have had any more learnings about dark fiber.

It seemed like you were still not quite sure what the market was looking like or what the demand would be like so just wondering if theres been any developments with that thank you.

Hey, I have and I'll take those from reversal Warner So.

We are absolutely committed to monetize the assets, we have and that includes selling dark fiber.

We need to better understand the inventory and the demand set on a route by route basis, we have had a number of requests for dark fiber.

We're not in a position to start selling that because we don't have a complete enough view of the demand set the pricing we can achieve.

And the overall inventory that we have we will be in a position probably in about a year to really consider those dark fiber sales. They are not base baked into our model at all there is nothing.

And there. So it is again something that is 100% margin and completely additive, but we want to be.

Thoughtful before we sell that long term asset or lease it on a long term basis.

To your question around margins. The overall trend is to say 100 basis points a year of margin expansion over say the next decade or so.

The inclusion of the payments from T mobile or in that but we also know that those payments will be stepping down so.

I think you need to look at it on.

A long term basis.

Rather than trying to use that 100 basis points and divided into a 25 basis point improvement every quarter sequentially as I said over a 10 year period and answering Tim's question, we will achieve those types of coals.

But.

There's going to be a lot of moving parts here, whether it be these incremental sales and margin opportunities that we've discussed whether it being incremental savings and also the decline in both commercial services to T mobile as well as ultimately the sunsetting of.

They're transient payment choice.

So really think of these as long term.

Youre not going to try to give you a year end EBITDA number.

Okay. Thanks.

Alright, Thanks, Kevin.

And your final question comes from the line of Michael Rollins of Citigroup. Your line is open.

Thanks, and good morning, and thanks for fitting the questions in.

Two more if I could.

<unk>.

When you look at the contracts of the acquired customer relationships.

The pacing.

That youll be able to manage each of these relationships over to either pushed them into our product menu that is good for cogent.

Or ask the customer to consider alternatives.

Given the direction of focus for cogent.

The acquired assets.

Then the second question would be on just Capex. If you can give us an update of how to think about the heritage pacing of Capex.

Through the rest of this year and next year.

As well as the opportunities to invest.

Invest that capital Youre describing to.

So Judy integration and augment the assets that you purchased to enable all the new products.

Service that you want offer thanks.

Yes, hey, thanks, Thanks for sticking around so all Mike asked the question.

And.

Let's start with the customer contracts.

Yes, it's probably the longest duration customer contracts that we acquired from sprint run through the end of 'twenty 'twenty six.

I would say the average remaining term on the contract is about 18 months.

All the contracts so are very custom very bespoke.

And they fall into two primary categories. One is for the services as they exist today.

Second is for incremental services going forward and virtually all of these customers are continuing to do moves adds and changes. So therefore incremental services. So each time one of those requests for new.

New services are originated we have the opportunity to have a discussion about modernizing the products.

Finally, these customers have been notified by T mobile as part of the purchase process and have been reminded by cogent about sunsetting certain products and end of life Ing that those are those 19.

Non core products and the $8 $4 million of revenue in the quarter that came from those non core products.

We will.

Continue to manage those how there had been some customers said, please give us a little more time and we've addressed those on a customer by customer basis.

For the moves adds and changes.

There are three changes that customers are being informed of one our desire only to sell services delivered over fiber. So therefore, we are sunsetting local access loops that are delivered.

Over copper coax wireless more satellites.

And.

We're not religious about this in the sense that yes, we'll accommodate our customer if there is no other alternative in a short term, but long term we are looking for quality of service purposes, and scalability owing to use fiber.

The second Big change is international sales in countries that we are not licensed so we today have licenses and 55 countries, where operational and 54 of those 55 and we serve customer.

Mers that are based in about 180 countries. The message that sprint used to procure loops and those non licensed markets is not something we are comfortable with I don't believe it technically fits and what the country is.

Trying to do and its licensing regime. So for that reason, we have altered the way in which those customers can buy services in those non licensed markets.

Places like Yemen.

Uruguay.

Even China, where it is very difficult for a U S based.

Get a license there are only two countries in a world where customers have to have a license to buy there are 200 are countries, where service providers have to have a license to sell so what we're acquiring is for some of those exotic locations that we will.

Purchase on behalf of the customer that tail circuit, but they will get two bills one for cogent for the port in a country or a license and the second will be a loop.

That provider in that country, where they are in direct contract. So that will be a difference for those services in those markets and the final change, which is a little different than we had anticipated when we first looked at the asset and even.

At closing is our ability to support mpls.

<unk> a longer timeframe.

We firmly believe that the customers.

Good Mike right to AEP Pls platform.

And.

We are encouraging them to do that but when talking to customers. What we have found is there is.

A huge desire for them not to have to go through that forklift upgrade for as I said, one customer at 1600 sites. So we came up with a technological way using our equipment that we have pulled out of the cogent network, we have nearly three.

And routers sitting on the shelves.

That we viewed as obsolete that can support and Pls show a very positive message we've delivered to our customers is our willingness to support those mpls circuits for up to a decade that has been very well received by those.

Customers and is the majority of the pain is coming in these non core products.

We actually think there will be more ability for us to.

<unk>.

Retain and even grow some of incremental business from those customers than we had initially expected now to your Capex question.

There are four buckets of Capex.

There is.

The cogent.

Core $35 million of maintenance Capex, there's about $30 million of cogent expansion Capex, there was about $30 million of maintenance Capex inside of the acquired business of sprint and then.

Finally, we had a 50 million dollar number four integration Capex. We've spent a little over 30 of that Theres about 20 more to span we don't anticipate that changing so I think.

On a run rate basis investors should expect roughly a $95 million to $100 million combined capex number maybe slightly elevated for the remainder of this year due to the completion of those integration projects, but I think that run rate.

Should be pretty good going forward.

Thanks, Dave.

Hey, Thanks, Mike.

There are no further questions at this time I will turn the call back to Mr. Dave Schaeffer for closing remarks.

Well. Thank you all very much hopefully this was not too confusing we tried to be as transparent and consistent as possible.

I want to thank everyone for their patience for being on this call and if you had to predict the one surprise I didn't hear anyone ask us how we reported $24 of EPS in a quarter, but.

I can assure you we won't repeat that again next quarter take care, everyone stay well and we are available to answer your follow on questions.

<unk>.

This concludes today's conference call. Thank you for joining you may now disconnect your lines.

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