Q3 2023 Cogent Communications Holdings Inc Earnings Call
Hello, ladies and gentlemen.
He would like to apologize I don't afford the same time, we will begin in about two to three minutes. Thank you.
[music].
Okay.
Yes.
Good morning, and welcome to the Cogent Communications Holdings third quarter 2023 earnings Conference call.
As a reminder, this conference call is being recorded and it will be available for replay at Www Dot Hill Genco Dot Com a transcript of this conference call will be posted.
<unk> website when it becomes available.
Summary of financial and operational results attached to our 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 Holdings. Please go ahead.
Thank you and good morning, everyone and welcome to our third quarter of 2023 earnings call I'm, Dave Shaffer Coach's CEO.
With me on this morning's call is Tad weed, our chief Financial Officer, hopefully you've had a chance to review our earnings press release. Our press release includes a number of historical quarterly metrics, which we per cent.
Consistent manner each quarter now.
Now for a few comments on our results.
What is your acquisition of the sprint business on May one 2023.
This transaction significantly expands our growing network.
From a base.
Materially increase the scope and scale of our business our annualized revenue run rate now exceeds $1 billion.
We acquired a number of large enterprise customers many of which are fortune 500 companies.
Customers are typically larger than our typical coach Inc. Corporate customer base.
We acquired significant one fiber optic routes and facility.
We acquired numerous right of way and relationships with the underlying line of donors, which represent over tens of thousands of route miles of dark fiber.
These assets and relationships would be virtually impossible for us to assemble on her own.
We hired many valuable experience sprint business employees many of the sprint business employees had an average tenure with the company 22 years prior to the acquisition.
We acquired a network with an appraised value of over $1 billion for one dollar.
We will receive a total of $700 million from T mobile to offset operating losses for serving enterprise customers and for providing T. Mobile IP transit services $350 million in the first year or $29 2 million.
In monthly installments, and then $350 million over the next 42 months for a monthly installment.
One 3 million per month.
We're very optimistic about the cash flow generating capabilities of the combined operation or.
Christian we're sole sure we achieve immediate and substantial savings in many areas many of which exceeded our initial expectations. We anticipate additional substantial cost savings from our current run rates in many areas.
As we mentioned in our last earnings call. We have combined the cogent classic legacy business and the sprint business operations.
As a result, we will no longer be reporting separate metrics. The combined cogent business had a very good quarter. Our total revenues were $275.4 million.
Our operations from the quarter include a full quarter of the sprint business versus two months as reported in Q2.
Our EBITDA as adjusted was 131 4 million an increase by $77 4 million from Q2 of 2023.
Our EBITDA as adjusted margin was a record at 47, 7% of <unk>.
<unk> increase from the EBITA adjusted margin last quarter of 25, 2%.
We receive three payments totaling 87 5 million under the transit services agreement from T mobile in the quarter versus only one IP transit service payment of $29 2 million in Q2.
Our gross debt.
Trailing 12 months EBITDA as adjusted and our net debt ratio both significantly improved in the quarter.
Our total gross debt to trailing 12 months EBITDA as adjusted ratio was 4.56 at the end of the quarter and our net debt ratio as at the end of the quarter was 424.
This is compared to a gross at 5163 times.
In Q2, and a net debt.
4.79, we anticipate further improvements in these leverage levels over the next several quarters.
Our network traffic increased sequentially by 6% or 26% year over year. This traffic growth acceleration was better than the 4% sequential growth rate, we've seen in Q2, and the 21% year over year.
Air traffic growth.
We have begun to realize synergies and over the next three years, we will continue to an anticipated achieving annual savings of $180 million annually from the sprint North American network $25 million from.
The sprint International Wireline network, and a 15 million dollar reduction in O&M expenses or Cogent North American network.
We anticipate achieving additional SG&A savings and all of our cost and revenue synergies over the next several years or recent progress in achieving these savings is very encouraging.
And.
In fact exceeded our initial targets on savings.
Our total revenue for the quarter increased sequentially by 14, 9% to $275 4 million and increased by 83, 6% on a year over year basis.
Our rep productivity at 9.2 last quarter and 3.6 this quarter for full time equivalents.
This number included the full time equivalent productivity because of the 9000 commercial services orders sold T mobile under our commercial services contract.
Commercial service contract with T. Mobile is in addition to our $700 million of IP transit contract.
Our rep productivity results also included the impact of the enterprise customer sales reps that weighted acquired from sprint.
Sure now counted as full time equivalents and are continuing to receive training all kosher products and are not yet fully productive.
In connection with the Sprint acquisition, we hired a total of 942 employees.
During the quarter, our total sales reps actually decreased by 10 or one 5%. We ended the quarter with 637 sales reps and 621 full time equivalents and now.
9.5% increase in full time equivalent reps.
Primarily due to the reps that were higher from the sprint business now being counted as full time equivalents.
Now for a comment on our optical transport services or wavelength businesses.
Connection with our acquisition of the sprint business, we have expanded our offerings have optical wavelength services and optical transport network to utilize the sprint outward we're selling these wavelength services to existing customers acquire customers from sprint and <unk>.
New customers.
Customers require dedicated optical transport without the capital and ongoing expenses of owning their own infrastructure and network.
Our wavelength revenue for the quarter was $3 million and there were 449 wavelength customer connections at quarter end.
We have sold wavelengths and a total of 50 locations with shorter provisioning cycles, we have connectivity and what are you playing sales capabilities in over 250 locations booked with longer provisioning cycles.
And approximately 14 months, we'd expect to be able to offer wavelengths and over 800 carrier neutral data center locations in the U S with more rapid provisioning cycles.
Our sprint acquisition materially expanded our network footprint.
We added 18905 miles route miles of inner city owned fiber 12570 route miles of Metropolitan own fiber network. We added approximately 11400 route miles.
Mills of inner city, I argue five or better.
Approximately 4000 or 500 Metro route miles.
I argue fibre to the Cogent network.
Most of this is redundant and will be eliminated as part of our cost saving measures we eliminated approximately 430.
Redundant.
Fiber route miles that were leased in the quarter.
We will reconfigure 45.
Wired sprint facilities into data centers and add those to the 1500 28 carrier neutral data centers that we operate in.
And the 60 proprietary cogent data centers to date, we have converted four of these acquired sprint facilities into cogent data centers.
Now for a comment on our dividend program.
Quarter, we return 45 1 million to our shareholders through our regular dividend.
Our board of directors, which reflects our strong cash flow generating capability and investment opportunities.
<unk> this spring.
<unk> decided to increase our quarterly dividend yet again by an additional one cent per share sequentially.
Raise your dividend quarterly from 94, five cents per share to $95.05 per share. This represents the 45th consecutive sequential increase in our regular quarterly dividend and a four point.
4% annual growth rate in our dividend.
Now for a comment on our future guidance and expectations.
Now that we've combined the sprint business with the Cogent business, we anticipate long term average revenue growth of between five and 7% per year and EBITDA margin expansion of approximately 100 basis points per year.
Our revenue and EBITDA guidance are intended to be multiyear goals and are not intended to be used as specific quarterly or annual guidance.
Our EBITDA as adjusted and our leverage ratios were impacted by the 700 million dollar IP Transit services agreement.
We are entered into with T mobile beginning.
Beginning in May of 'twenty four.
These payments will be reduced from 29.2 billion per month to $8 3 million.
That work auction and behalf future EBIT.
As a trusted and our leverage ratios.
Getting in the work in the second quarter of 2024. However, these metrics are measured on a trailing 12 month basis.
Unlike task Tad to read our safe Harbor language and provide some additional operating performance metrics for the quarter.
Following our remarks, we will open the floor for questions and answers.
Thanks, Dave and good morning to everyone.
This earnings conference call includes forward looking statements. These forward looking statements are based upon our current intent belief and expectations. These forward looking statements and all other statements that may be made on this call that are not historical facts are subject to a number of risks and uncertainties and actual results may differ materially.
Please refer to our SEC filings for more information on the factors that could cause actual results to differ.
Cogent undertakes no obligation to update or revise our forward looking statements. If we use non-GAAP financial measures. During this call you will find these reconciled to the corresponding GAAP measurement in our earnings releases that are posted on our website at cogent co dot com.
We analyze our revenues based upon network connection type, which is on net off net wavelength services and non core services.
And we also analyze our revenues based upon customer type.
We classify all of our customers into three types netcentric customers corporate customers and enterprise customers.
Our corporate customers buy bandwidth from us in large multi tenant office buildings or in carrier neutral data centers.
These corporate customers are typically professional services firms financial services firms and educational institutions.
Catered multi tenant office buildings.
Turning to our network through or connecting to our network through our carrier neutral data center footprint.
Our netcentric customers buy significant amounts of bandwidth from us in carrier neutral data centers and include streaming companies and content distribution service providers as well as access networks, who serve consumer and business customers are.
Our corporate and enterprise customers generally purchase our services based on a price per location.
Netcentric customers.
Purchase our services based upon price per megabit.
Comments on the corporate business, our corporate business continues to be influenced by real estate activity in central business districts to.
Two key statistics, including the level of card swipes in buildings and leasing activity indicate that year to date real estate market and leasing activity in central business districts, where we operate has seen some continuing improvement in certain areas of the country, but it's not return to pre pandemic levels in most geographic.
Graphic regions.
Continuing to remain cautious in our outlook for our corporate revenues, given the uncertain economic environment and other challenges from the lingering effects of the pandemic.
Okay.
Our corporate business represented 43, 7% of our revenues for the quarter.
Quarterly corporate revenue increased year over year by 49% to $125 million from last year and increased sequentially by eight 5%.
We had 5000 55045 corporate customer connections on our network at quarter end.
The sequential decrease of 10, 2% on a year over year increase of 21, 8%.
The sequential net decrease in corporate customer connections, primarily resulted from the elimination of our noncore product for corporate customers.
During the quarter, we eliminated 8486 session initiation protocol or Sip noncore customer connections of which 5006 of these 80 404 noncore corporate customer connections.
Alluding the impact of the Sip corporate customer connections that reached end of life, our corporate customer connections.
<unk> by 1200 connections or by two 2% from last quarter and that was also due to some other non core products being end of life.
For the quarter, the sequential impact of USF on our corporate revenues was a positive $3 5 million and a positive year over year impact.
$4 million.
Some comments on the Netcentric business, 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 by 6% sequentially and 26% year over year.
Our Netcentric business represented 34, 5% of our revenues for the quarter and grew sequentially by eight 4% to.
To $94 9 million and grew by 47, 2% year over year.
We had 62291 netcentric customer connections on our network at quarter end.
It was a sequential decrease of six 6% on a year over year increase of 21, 8%.
Explaining the sequential decrease included in our Netcentric customer connections at the end of last quarter or 8028, Netcentric customer connections under the commercial services agreement with T mobile that Dave mentioned earlier.
And 1088 of the Sip customer connections that product that reached end of life.
At the end of the quarter, there were 4661 netcentric customer connections under the commercial services agreement with T mobile.
If you exclude the impact of both these netcentric customer connections under the T Mobile commercial services agreement and the Sip product that reached end of life in both periods, our netcentric customer connections increased sequentially by 35 connections.
Our enterprise business was 21, 8% of our revenues for the quarter.
We had 20689 enterprise customer connections at the end of Q3.
There were 2392 Sip enterprise connections at the end of last quarter that reached their end of life this quarter.
Again, all Theyre all the Sip connections were canceled during the quarter, whether there were corporate netcentric or enterprise and all of that product was noncore.
Revenue and customer connections by network type on net revenue.
Our on net revenue was $130 million for the quarter that was a sequential increase of one 9% year over year 14, 9%.
Our on net customer connections were 89623 at the end of the quarter.
We serve our on net customers and 3257 total on net multi tenant office and carrier neutral data center buildings.
We continued to succeed in selling larger 100 gigabit connections and 400 gigabit gigabit connections okay.
Aaron neutral data centers, and selling 10 gig gigabit connections and select multi tenant office buildings.
Selling these larger connections has the impact of increasing our year over year on net ARPA.
Off net revenue.
Our off net revenue was $131 million for the quarter sequential increase of 28, 4% and year over year increase of 257 seven.
7%.
Including our new off net locations from the sprint business, we now serve off net customers and over 27800 off net buildings.
These off net buildings are primarily located in North America.
Wavelength revenue.
Wavelength revenue increased by 88, 8% sequentially and was $3 million for the quarter.
Our wavelength customer connections were $4 49 at quarter end.
Non core revenue, our noncore revenue was $11 4 million for the quarter non core.
Connections were 11187 at quarter end at the end of last quarter total non core customer connections again, including included the 8486 customer connections that reached their end of life this quarter.
Comments on pricing, our average price per megabit for our installed base increased sequentially by seven 7%.
To 30.
And also increased year over year by nine 6%.
Our average price per megabit for our new customer contracts was <unk> 17.
That was almost 64% increase over 10 from last quarter and a year over year price increase of eight 8% increases all around.
Yeah.
Comments on <unk>, our on net and off net <unk> for the quarter decreased sequentially, primarily from the impact of the sprint business outcomes. However, our year over year on net and off net <unk> increased.
Our on net <unk> decreased sequentially by one 7% to $483.
<unk> $483 to $475 and.
And year over year, our on net <unk> increased by three 8% and it was 458 last year, but the third quarter.
Our off net <unk> decreased sequentially by 10, 7% from 1294 to 1156.
And year over year, our off net ARPA increased by 25, 6%. It was 920 last year for the third quarter.
Churn rates, our sequential churn rate for our on net connections for the combined business did increase from the impact of the sprint business this quarter.
Our on net unit churn rate was one 8% for the quarter up from one 4% last quarter.
Our off net unit churn rate was one 5% for the quarter, which was a slight decrease from one 6% last quarter.
These on net and off net churn rates do not include large number of non core churn customer connections.
On EBITDA, we reconcile our EBITDA to our cash flow from operations in each of our quarterly press releases.
We incurred $404 million of sprint non capital acquisition cost this quarter compared to <unk> 7 million last quarter.
Our EBITDA for the quarter increased sequentially by $19 4 million.
And decreased by $14 3 million year over year.
Our EBITDA margin increased to 15, 8% from 10, 1% last quarter.
Now on EBITDA as adjusted.
Our EBITDA as adjusted which includes adjustments for sprint acquisition cost and the cash payments received under our 700 million of IP Transit services agreement with T mobile.
We billed and collected $87 5 million under the IP Transit services agreement this quarter.
Last quarter, we built $58 4 million and collected $29 2 million under the agreement.
All amounts billed under the IP Transit services agreement had been paid on time and as of this call. We have received two additional teams.
Our EBITDA as adjusted for Sprint acquisition cost and cash payments received under the $700 million IP Transit services agreement.
$131 4 million for the quarter that was a 47, 7% EBITDA as adjusted margin.
This EBITDA as adjusted margin is a company record and a substantial increase from 22, 5% last quarter and.
The increase was from both additional payments under the IP Transit services agreement and cost reduction.
And an increase in revenue.
Foreign currency impact.
Our revenue earned outside of the United States as reported in U S dollars and was approximately 16% of our revenues this quarter.
About 10% of our revenues this quarter were based in Europe, and 6% of our revenues related to our Canadian Mexican oceanic South American and African operations.
The average euro to U S dollar rate so far this quarter, it's about $1 six and the average Canadian dollar exchange rate is about 73.
If these average foreign exchange rates remain at their current levels for the quarter, we estimate that the FX conversion impact on our sequential revenues would be a negative about $1 million.
And the FX conversion impact year over year would be a positive of about $8 million.
Customer concentration.
We believe that our revenue and customer base is not very highly concentrated.
Though it has increased with the sprint acquisition.
Including the impact of the customers acquired in the sprint business. Our top 24 customers represented about 19% of our revenues this quarter.
We acquired a number of larger enterprise customers with the sprint business and we are providing services to T mobile under the commercial services agreement.
Our quarterly Capex materially decreased and was $25 4 million this quarter compared to $37 4 million last quarter.
On finance leases and finance lease payments also known as capital leases.
Our finance lease obligations.
Obligations are for long term dark fiber leases and typically have initial terms of 15 to 20 years or longer and often include multiple renewal options. After the initial term.
Or are you finance lease obligations totaled $483 2 million at quarter end.
We have a very diverse set of <unk> suppliers and argue contracts with over 315 different dark fiber suppliers.
We acquired relationships with several new suppliers of dark fiber with the spread business.
During the quarter.
Courted a purchase accounting measurement period adjustment to reclassify a lease agreement from right of use operating lease assets acquired from T mobile to finance lease assets.
This adjustment under U S GAAP accounting.
Accounting standard 842 accounting for leases resulted in a re class of almost of about $161 million from our acquired operating lease liabilities to our finance lease liability.
The corresponding adjustment also reduced our cost of goods sold run rate by $12 $6 million per quarter.
<unk> increased our depreciation expense by about $11 million.
Some comments on cash and operating cash flow.
At quarter end, our cash and cash equivalents and restricted cash totaled $166 1 million.
Our $56 4 million of restricted cash is tied to the estimated fair value of our interest rate swap agreement.
And as of November six so just recently the swap valuation reduced from 60 56, 4% to $43 8 million.
Our operating cash flow results are materially impacted by the timing and amount of our payments under our transition services agreement with T mobile and the presentation of payments under our $700 million IP Transit agreement.
Payments under the IP Transit agreement under U S. GAAP are considered cash receipts from investing activities and are not classified as operating activities.
Our operating cash flow was a use of $52 4 million for the quarter compared to a positive $82 6 million last quarter.
Mostly from the impact of the transition services agreement.
Last quarter. The TSA agreement provided $118 8 million of operating cash flow since no payments were due or made during the quarter.
This quarter, we paid $153 1 million under the TSA.
Under their terms and when the payments were due.
Combined with amounts billed under the TSA for the quarter net cash provided from the TSA was $9 $5 million this quarter and that changed from last quarter. Under this one line item is $109 3 million.
Most of the amounts paid under the TSA are for direct reimbursement of sprint business vendors paid by T mobile on our behalf.
We have transitioned a significant majority of these payments to our payable systems and expect to transition the remaining vendors by the end of the year.
IP transit payments under the IP transit agreement to $700 million.
Our payments received under the IP Transit agreement are recorded as cash provided by investing activities and were $29 2 million last quarter compared to 87 5 million this quarter.
Total net cash used in investing activities.
Was $22 3 million last quarter and cash provided by investing activities was $62 1 million this quarter.
That was a sequentially quarterly increase of cash of $84 4 million for this line item investing activity.
Okay.
Dave mentioned that in debt ratios are.
Our total gross debt at par, including our finance lease obligations was $1 4 billion at quarter end and our net debt was $1 3 billion.
Our total gross debt to last 12 months EBITDA as adjusted and our net debt ratio both significantly improved this quarter.
Our total gross debt to last 12 months EBITDA as adjusted ratio was $4 seven nine and net debt ratio was 424.
This is a material improvement and compared to a gross debt trailing.
Trailing ratio as adjusted of 563 last quarter and net debt ratio of 456.
Our consolidated leverage ratio as calculated under the note indentures reduced to $5 nine from 530 last quarter.
Our secured leverage ratio as calculated under our note indentures increased slightly from three five up to three five from 345.
Additional comments on the swap agreement.
We are a party to an interest rate swap agreement that modifies our fixed interest rate obligations associated with our $500 million 2026 nodes to our variable interest rate obligations based upon the secured overnight financing rate for the remaining term of our 2026 notes.
We record the estimated fair value of the swap agreement at each reporting period, and we occur a corresponding noncash gains or losses due to the changes in market interest rates.
The fair value of our swap agreement increased by $4 8 million from last quarter at quarter end to a liability.
<unk> $56 4 million.
We are required to maintain our restricted cash balance.
With the counterparty equal to the liability.
And as I mentioned previously.
As of November six our swap valuation reduced to $43 8 million.
Okay.
Lastly, some comments on bad debt and DSO or days sales outstanding or DSO remained stable or DSO for worldwide accounts receivable was 2004 days the same as last quarter.
In the fourth quarter, we will be converting the billing of the sprint business customers for the cogent billing platform and in fact, we just completed that process.
Our bad debt expense was only <unk> eight.
<unk> 8 million and only 3% of our revenues for the quarter outstanding results.
Again, we want to thank and recognize our worldwide billing and collections team members, including our new billing and collections employees from the sprint business, we're doing a fantastic job in serving our legacy cogent customers and our new sprint customers and collecting for them and converting the sprint billing.
Two of the cogent billing system.
I will now turn the call back over to Dave Hey, Thanks Tad.
Like to highlight a couple of strengths of our network, our customer base and sales force, we continue to experience significant revenue and profit growth in our legacy Netcentric business.
We are direct beneficiaries.
Screaming over the top video and other streaming applications, particularly in international markets.
At quarters end, we were on net in 1528 carrier neutral data centers and <unk>.
60 of Cogent owned data centers for a Grand total of 1588 data centers more than any other carrier as measured by independent third Party research.
So far our coverage enables wondering netcentric customers to better optimize your network and reduced legacy.
We expect that we will continue to widen its lead in the market and project to add approximately an additional 100 carrier neutral rules per year to our network footprint over the next several years.
We expect to convert an additional 41 of the former sprint technical facilities to new Cogent data centers to date, we have converted four of these facilities as of today, we're suddenly wavelengths and 15 carrier neutral data centers.
With reasonable provisioning windows, and we are selling wavelengths in 250 additional locations with a prolonged.
Billety to install those services.
The next 14 months, we expect to be able to sell wavelength services and 800 U S carrier neutral data centers was substantially reduced provisioning times.
Traffic growth accelerated in the quarter.
Traffic growth increased by 6% sequentially and 26% year over year.
Expansion of our footprint and have additional io or use an owned fiber and right of way agreements.
At quarter's end, we are the most interconnected network in the world with 70 971 networks directly.
To cogent.
This collection of Isps telephone companies cable companies mobile operators and other carriers will allow us to reach directly but the vast majority of world's broadband subscribers.
Phone customers.
At quarter's end, we had 257 sales professionals solely focused on the netcentric market.
This group of professionals as one of the largest.
Successful sales teams in the industry.
This team will be primarily responsible for growing our wavelength market.
Now for a couple of comments one of our corporate business. We are seeing positive trends in our corporate business corporate customers are increasingly integrating new applications and part of their working environment includes the regular use of streaming video conferencing.
This requires high capacity connections, both inside and outside as their premise alright.
Alright aggressive push to lower.
With costs and provide greater coverage has begun foose.
Corporate demand for bi directional symmetric one gig and 10 gig ports corporate cross commercial are increasingly find connections and carrier neutral data centers, who have done and see for the AD hoc vpns that support a hybrid work environment.
Our enterprise customers continue to focus on our dedicated Internet access and VPN services, we are continuing to terminate non core products and the significant reduction that you saw in the last quarter was the elimination of our voice service.
<unk>.
Based on session initiation protocol.
Now for a comment on our sales force productivity, we remain focused on training and improving our sales force efficacy, we do manage out underperformers.
Actual basis.
Head count and sales decreased by 10% to 637 reps our sales force turnover rate was stable at a five 7% per month for the quarter down from a peak of $8 seven during the pandemic and consistent with our long term.
Average.
Rate of sales force turnover of five 7%.
We remain very optimistic about our unique position to serve small and medium sized businesses located in the <unk> hundred 60.
Multi tenant office buildings, representing over 1 billion square feet of rentable space in central business districts.
We're excited about the addition of the large enterprise customer base.
And our ability to sell optical transport networking too.
<unk> or.
Our netcentric as well as enterprise customers. We also remain encouraged by demand in our data center footprint and our ability to expand that footprint.
We have a significant backlog and funnel avoided quarters of <unk>.
<unk> 1000 unique wavelengths, however, due to longer provisioning cycles that were temporarily experiencing were onshore if all of these opportunities will convert into installed orders.
Currently we see key indicators of office activity work reentry and leasing activity.
<unk> improving as tenants continue to require employees to return to their offices and commercial office.
Vacancy rates have continued to decline.
Sure corporations have decreased the amount of square footage or taking per location, which will ultimately allow us to grow our addressable market for unique corporate customers.
Under our indenture, including our 250 million dollar general basket.
We have a cumulative amount of cash available for dividends and buybacks and actually exceeds the amount of cash we have available.
So we have effectively the ability to use all cash for shareholder friendly activities, whether it be dividends <unk> buybacks.
Due to diligently working on integrating the sprint business, we're excited and optimistic about the cash flow generating capabilities, while continuing to achieve annual savings of about $180 million on the North American network $25 million internationally.
And $15 million and production and Cogent expenses, we also anticipate additional SG&A savings and other costs and revenue synergies over the next several years now I'd like to open the floor for questions.
Yes.
Gentlemen, we are now opening the quest.
<unk> and answer session.
Today, if you would like to ask a question. Please press by number one on your telephone keypad.
First question comes from Greg Williams from Cowen. Your line is now open.
Great. Thanks for taking my question, Dave I was hoping you can unpack the EBITDA beat.
Beat by a little bit.
I know you've integrated.
<unk> business with cogent, but the way so the investors are looking at it is in our core EBITDA for cogent typically around $60 million youre going to add another 87 million to the T mobile payment and then we are subtracting the EBITDA burn.
From the sprint <unk> business.
And it sounds like you've got more from sprint T&D then than we appreciate it. So I guess the question is.
Typically you said you're at a run rate when you close the does that $180 million burn where does that run rate today and the second question. Then is if you are cutting more than we expected.
Do you still anticipate breaking even by year, two R&D here or could that be accelerated to breakeven faster. Thanks.
Yeah, So as Chuck mentioned, we're no longer segregating the customer soon.
Acquired sprint customers are now fully integrated and the cogent and are part of our single accounting and single billing platform. We are ahead of schedule in terms of reducing the expenses of that business.
Probably the most significant savings comes from the immediate elimination of gross margin negative products.
The nearly 9000 Sip services that we were able to eliminate in the corner.
<unk> us to improve margins that termination did not occur till the end of the quarter. So it was a September 30th termination. These customers were given notice of end of life of these products a year ago when the initial transaction.
Action was signed with T. Mobile in early September of 2022 as part of that agreement T. Mobile agreed to end of life a number of products.
Our Sip products was the largest of those products. So 24 products that we identified for elimination carry negative gross margins. So there are either direct costs or direct employee involvement in those products that we've been able to eliminate.
Hey.
We are not in a position today to modify our breakeven two years post closing, but we do feel right now we are running ahead of schedule.
On those cost synergies and should be able to continue to achieve better cost reductions. There are other noncore products beyond <unk> that are also being eliminated you saw that in the 233.
Products that were eliminated for corporate customers in the quarter.
That were non Sip products not all of that reduction was encore, but the majority of it was so what we're trying to do as quickly as possible managed customers away from these unprofitable products, but also as part of our agreement with T mobile.
We were going to honor each customer's contract.
And customers have various contractual provisions that require us to provide some of these services through the end of 'twenty 'twenty six so it is why we were so.
Definitive and our ability to schedule out the reduction in costs now in some cases, we've been able to convince customers to allow us to terminate these products early and that is an added benefit to us in helping us reduce the cash burn.
Got it thank you.
Okay. Thanks, Greg.
Our next question comes from David Barden from Bank of America. Your line is now open.
Hey, good morning, Alex on for Dave.
Dave maybe just first question here just in terms of wavelength I think it came in a little bit lighter than our expectations and can you just kind of frame the opportunity and where you think you can.
Could be in wavelength revenues in at the end of 2024, and then secondly on SG&A, sorry, if I missed it on the call, but can you talk a little bit more about what drove the decrease quarter over quarter, and then what kind of the run rate. We should expect here for SG&A heading into the next year. Thanks.
Yes, so I'll take those in order on wavelengths as we commented on the previous earnings call. We had a very narrow set of locations, where we can provision within a 60 day window and a larger but still.
Yes.
Not adequate set of locations, where we can provision within a 120 day window.
We have increased the number of locations, where we can provision.
Within that shorter window, we've also partially reduced that wind down.
Down from 60 to about 50 days still not the 17 day SLA target that we gave for our transit services.
We have over a hausen.
<unk> wavelength waters, either in provisioning or in our sales funnel.
Yeah.
That would meet.
All of our growth objectives, and there will be additional orders being added to that funnel on a daily basis I want to caution, though that some of these orders will have 120 to 130 day provisioning and assay.
Resolved some of those orders may not ultimately get installed customers may be frustrated.
We're trying to manage those expectations.
Have a number of foundational steps that were taking to streamline our provisioning of wavelength services.
We already provisioned this quarter about 100 and.
50, additional wavelengths just since the close of last quarter.
So basically a third of what we had in the base just got profession in the past six weeks, we expect that pace to continue to accelerate.
Also believe that we will be on a revenue run rate of close to a $100 million in wavelength sales post closing.
Closing so in May of 'twenty four.
Monthly.
Run rate for wavelength sales should be in the order of about $8 million a month and our sales funnel.
Inc.
Supports that and the continued interest that we're seeing.
Due to the uniqueness of our routes.
And the ubiquity of locations, we wished to serve.
Inc. Are all indications have will do better.
On SG&A.
Some of it is head count reduction.
Some of it is.
Facilities consolidations those are the two main areas that we've been able to achieve.
SG&A improvements.
Also a substantial improvement in bad debt expense quarter to quarter that was a $4 million.
Reductions. So we were all we were less than 1% of revenues. This quarter. Our typical bogey is about 1% of revenue. So we outperformed on that and bad debt expense was abnormally high last quarter as we had to reestablish some reserves.
I think we're at a three tenths of a percent this quarter.
I think as the lowest bad debt expense.
Got it in the company's history.
Thank you both.
Okay.
Yes.
Our next question comes from Heng.
From Raymond James Your line is now open.
Great. Thank you.
To talk about the outlook for the business if return to office doesn't really improve so how much of that long term guide that you've given out is kind of dependent on an improvement in the return to office environment and what level of occupancy do we kind of need to hit over the long term to achieve that and then what are your options if that doesn't happen.
Kind of hit that long term guidance goals. Thanks.
Yes, so our long term growth targets of 5% to 7% are predicated on <unk>.
Office occupancy corporate performance being similar to the.
Current levels that they are at today again, we have diversified our total revenue base now, having three discrete segments being less exposed to pure corporate correct.
Our enterprise customers.
Tend to be much more global in their footprint.
Just to remind you 44% of total revenues or corporate 34%, our netcentric, 22% our enterprise.
Our Netcentric business has actually continued to outperform long term averages.
And our ability to have a total revenue growth rate in that 5% to 7% range.
As possible with vacancy rates remaining elevated at about 15% in central business districts. While we believe that vacancy number will come down we can achieve on our growth rate and our guidance targets at these LSA.
Needed levels.
And our guidance is also predicated on our Netcentric business moderating, which it continues to accelerate as you saw in their traffic stats that we provided sequential growth growing from 4% sequentially.
Last quarter to 6% year over year growth.
Growing from.
'twenty one.
226%, so material improvements in that business continuing longer and then finally.
We are very optimistic about our wavelength opportunity based on the breadth of our sales backlog.
And you mentioned on the waves and an $8 million run rate for sales.
A quarterly run rate of conversion to that from sales to kind of what youll recognize would be able to recognize in the quarter.
So.
Obviously [laughter].
The growth rate we achieved.
Our waves of 88% sequentially is not sustainable.
Our growth rate will moderate I would say that.
For the.
I guess so.
Second quarter.
24.
Wavelength sales will probably be in the.
<unk>.
One $8 million ish range for the quarter.
The only thing throughout the quarter alright.
Alright, great. Thank you Dave.
Yeah.
Our next question comes from Walter <unk> from <unk>.
Your line is now open.
Hey, Dave.
Just some questions on corporate I know Theres a lot of moving parts now that you have that.
Sprint T mobile business in there, but it looks like on a pro forma basis. It was down sequentially Im just curious when you expect that to grow.
On a sequential basis.
Actually I would disagree with it being down I think the majority of what was down in corporate was the elimination of the Sip product and other non core products.
We did acquire corporate customers from sprint as well as enterprise customers.
If we looked at.
Our MTO b footprint, we actually saw.
The number of connections grow.
So I would kind of disagree with the premise of your statement all it'd be great. If you actually reported I know Todd in his prepared remarks, Steve pro forma sub growth type numbers, but maybe providing pro forma revenue and EBITDA would have been more helpful. So.
So if we look at the fourth quarter, then or is there going to be a similar type of excuse in terms of the shutdown at the end of the fourth quarter or should there be actual sequential growth in the fourth quarter.
Well as we have said there are still non core products that we are trying to eliminate.
Quickly as we possibly can these products carry negative gross margin they were a significant contributor to the losses at <unk>.
T mobile.
And Sip was the largest of these products.
But the <unk>.
Run rate what is the baseline so what is the baseline that for corporate of non I guess.
Can you give us some type of comparable.
We don't always have the excuse of like Oh, we just churned off non core stuff like what is the baseline and corporate revenue.
Thats generating gross margin.
So we report.
The non core products separately.
And we had a run rate of those non core products of about $11 million.
That will go to zero versus close to zero as possible. So as that 11, and the $1 20 from the quarter.
Yes.
For corporate revenue that was reported.
Any of that 11 11 is non core revenue.
Non core accounts corporate yes. So that is the majority of that is in corporate.
Baseline in corporate as effectively.
Basically one whatever it is 120 minus 11.
And we will just have to get an update on the 11 every quarter and then we'll figure out what your true organic growth rate is I would suggest maybe you actually just put that in the press release and provide that as a pro forma number to give better transparency to whats going on in the business.
I also have a question on the on the lease expense.
So you moved I think it was like $12 $5 million out of Opex are you boost your EBITDA by $12 $5 million Andrew.
And the Capex or if I look at that.
Lease number on Capex.
I think that was like $40 million.
It's gotten so with X. It's in principal payments because it is a lease payment that is not a got it.
No I understand.
I do this for the telcos.
Telco was always like to try and exclude that from Capex I consider that capex. So that's fine but bottom line as you moved it you help EBITDA and you moved it onto the cash flow statement fine is that a recurring $12 $5 million is that like how do we look at that number because obviously free cash flow is ultimately everything that matters.
Right yes.
And the accounting so it will continue until the lease expires and as we indicated.
In the appraisal for the acquired assets was approximately $150 million of an economic lease obligations that reduced the appraised value to get to the 1 billion dollar value for the.
A network.
And the majority of that was associated with this lease.
And this lease in fact met all the criteria to be treated as a financing or a capital lease as opposed to an operating lease. This was just a correction will continue until that lease expires.
But the capital lease principal payments I guess, thats, how youre, calling it was $41 million.
So of that 41.
Only 12 was moved out of Opex, helping your EBITDA is that do I have that right.
Yeah, that's about right, yes, that's correct.
Okay. Thank you Albert.
What was the other because last quarter was $8 million. So what's what are those what are the other $30 million or $25 million of payments that are capital leasing is that an ongoing payment that's going to pinch your free cash flow.
So we have a total of 315 different suppliers and over 3000 unique high argues.
So it was high <unk> fluctuate some are paid annually. Some are paid quarterly summer played monthly some are paid upfront and.
And you can go back and look at the principal payment on capital lease run rate.
That we've had as a see a fair amount of sequential volatility based on quarter on our annual but you could take the annualized rate.
And extrapolate that and add this additional $12 million a quarter and that would get you to.
What is the annual rate.
<unk> legacy obviously didn't include sprint.
If im adding 12, what is the legacy because I look at 22.
$45 million. So you are saying that it's great.
For only finance lease with the acquired business. This is the only incremental lease.
Got it only filings.
So we're talking like $60 million on a go forward basis for what you call principal payments, what I call Capex, but whatever you want to call it impacts the free cash flow.
That's correct.
Got it awesome. Thank you Dave.
Yep.
Our next question comes from Tim Horan from Oppenheimer. Your line is now open.
Well, thanks, a lot guys.
Hey can you just level set where you think EBITDA margins will be four or five years from now.
Also maybe where you think the wavelength.
Revenue run rate will be at that time and then.
Just a clarification on your $20 million of sales of wavelength in the second quarter next year.
Is that bookings or was that recognized revenue I mean, we will take another quarter or two to recognize that revenue.
Talking about our wholesale bookings or you actually when you use the word sales that revenue or bookings.
We're actually talking about revenue run rate recognized installed revenue and again to be clear we anticipate.
This backlog that we have as well as additional sales to begin new install was shorter and shorter provisioning windows.
But we expect to be doing about $20 million of reported.
<unk> bookings were reported and the idea of presenting a backlog number is something in a bookings number is something that we historically don't do and probably will do for the next couple of quarters until and fast per se.
Consisting cadence and our growth and wavelength revenue and at that point, we will only be reporting actual revenue not pipeline.
Pipeline and funnels and provisioning.
But I think in the short term that's necessary.
And then to go to answer your question around a five year target and I'm going to use five years from close so may of 'twenty three to may of 'twenty eight.
We anticipate.
<unk> on a run rate per wavelength sales.
Approximately $500 million.
And a total run rate for the combined business.
In excess of one 5 billion up from the $1 1 billion of $1 1 billion 51 point too that we're running at right now.
And EBITDA margins in the mid Thirty's.
And that will be.
Well actually will probably be a little bit above that because we will still be getting a payment stream from T mobile which will be counted.
But we will be going away, probably five year six.
Very helpful and just the way the market can you give us just a little bit more color on what's going on do you think with the overall growth in that market of volumes and pricing and the competitive dynamics that you've had more time to be in that market.
Yeah I mean.
We did a fair amount of customer outreach.
During the period between signing and closing and since closing we're actually taking orders has the backlog I've mentioned is a good indication of that.
The demand set seems robust.
Yes.
List of data centers that people want connectivity too as long it is.
Fortunate that we're already in those facilities, but are not yet wave enabled in those facilities. So there's kind of two steps one can we even sell a wave in the facility and then two can we provision it in a much more expeditious way we are working on both.
France and.
Terms of the demand that we're seeing it from some of our larger content companies Hyperscale type customers, we're seeing it from a broader set of content.
Players and a number of regional and international access network operators.
We are seeing a small but growing set of AI centric businesses that have traditionally not been wavelength buyers approaching us to buy wavelengths and some of these data centers. So.
We are seeing.
Discrete buckets to three Netcentric bumps us I've just spoken about and then finally, some enterprise customers, who historically have bought waves from sprint and other enterprise customers, who are constructing private networks that are independent of the internet.
Yes.
A wavelength is more expensive than transact on a per bit.
Utilized basis. However, it has the three positive attribute of being able to support large file transfers, having pre defined latency and completely diversity from the internet for greater.
Our security those are the reasons why companies will pay a premium per bit mile for a wavelength.
Thank you <expletive>.
Our next question comes from Nick.
From Moffett Nathanson your line is now open.
Hi, good morning, guys.
I didn't catch all of Ted's comments regarding the <unk>.
TSA change or at least that's recorded it looks like the balance sheet value in terms of what you owe to mobile went down quite a bit.
Just to review or is that just a function of getting off their platforms faster and I think you noted that you are out there drilling system effective now.
What's left to do on that front.
Yes, the TSA is entirely associated with paying vendors. So initially they were paying 100% of the vendors you're seeing with the wireline business on our behalf and that has been winding down in the second quarter.
Built for May and June however, those payments were not due yet so we made no payments in the second quarter that resulted in those charges being cash flow from operating activities of about $118 million in this quarter. We have made three monthly payments similar to <unk>.
The IP transit, but on the cost side instead of the revenue side. So that's why you see the large swing in that line item if you'd looked at the cash flow statement at the end of the quarter.
Sure.
We still own $69 million under the TSA agreement, which is essentially two months of activity as.
As we sit here now we have migrated most of the vendors to our accounts payable systems and we anticipate having all of the vendors migrated by the end of year. The long pole and that tenant is no one would be surprised or some of the circuit vendors, which just take longer based upon.
Our nature to get those migrate it.
Right and to add complexity.
T mobile had consolidated.
It's circuit spends for its wireless business in many instances with the wireline business. So not only do we have to migrate that center, we have to segregate the portion of the Bill Thats attributable to the business, we acquired a T mobile has been very cool.
Operative and helping us do that but it is an arch was tasked with hundreds of vendors I mean, your couple of dozen that really matter in terms of scale.
On.
Actually very pleased that we're as far along and transitioning our accounts.
Oh, Paul into our own systems, and being able to pretty confidently say, we will have virtually all of them within cogent systems by year end and equally impressive.
Thank you is the fact that we have migrated the billing platform to our platform and will be billing with cogent bills going forward actually shutting down the acquired.
That form that sprinted yours, just disappoint a reference.
We still actually get off net circuit bills from Verizon, Let's say Mci on now.
Yes.
It's been.
<unk> over 15 years since Verizon acquired Mci that Bill does not say Verizon It says Mci.
That's funny, that's funny, but I got good work.
Kind of getting your system will be over.
That quickly.
Separate question on the.
On the data center front.
You converted a few more facilities. This quarter I guess are you finding that the broader supply pinch in certain data center markets and increasing interest.
In your data center facilities, whether it's old cogent ones or the ones that you're converting from sprint.
Or is there a size and location and other attributes power density et cetera.
Not necessarily be benefiting from that.
Supply dynamic.
Yeah, So I'm going to segregate the two groups of data centers, because they are substantially different to cogent data centers are all in leased facilities tend to be small or both in size and power.
Today, we have.
And the coach and footprint, including the facilities that we've converted 109 megawatts of power available in those facilities.
We still have 41 facilities to convert and we anticipate about another 100 megawatts coming from those facilities. So we concentrated on the facilities that had the biggest.
Footprint of rack space.
And power the second challenge we've had is that these facilities.
Were occupied by <unk>.
Unused telecom equipment.
I'd mentioned on our previous call. There were over 22500 phase of equipment that are not in service, but physically sitting on the floor.
We're removing those right now with the pace of about 400, a week across the footprint.
Lets go take a year, we're trying to accelerate that.
Have a footprint today that will support.
Little over 40000 patients.
<unk> of equipment so.
The challenge has been not the interest in our data centers, but really not disappointing customers and making promises that we can't keep in terms of when these facilities will have vacant space and power that customers can use.
The demand has been strong there is at least for now a short term crunch empower availability.
Thank the locations of our facilities are adventurous to companies who are trying to have a more decentralized component to their data center model.
So for the largest consumers of data center space. They currently have kind of a two tier hierarchy their own proprietary very large purpose built facilities, and then a footprint and carrier neutral facilities for connectivity to.
The greater Internet.
Most of those customers are looking to add a third tier which would be something between those two extremes in our data centers are very interesting to them. We are in discussions.
Around wholesale capacity in our centers, but again, we're just not in position to sell at this point.
Okay, great. Thanks, Dave.
Our next question comes from Dan Dinges.
Keybanc capital markets. Your line is now open.
Great. Thanks for taking the questions could you just go through.
The corporate Netcentric and enterprise connection net adds this quarter, excluding the impact, but I was hoping you could give us what the revenue impact of the shutdown because it did sound like as of September 30th shut down.
And then can you help us sort of bridge from <unk> to <unk> from a revenue standpoint across the three customer segments.
We talked already about the 11000 non core connection that you still have how much how much of that will be end of life.
At the end of next quarter would.
It would be helpful to get the trajectory of revenue right.
Yes, so I'll start by taking those in reverse order brand in the <unk>.
First one is the 11000 noncore connections that we have.
Our across 23 product categories.
They will go away much slower.
<unk> was the largest of these categories.
One that also had.
Most <unk>.
Notice requirement because it was regulated.
At least.
One cost from our protest to the FCC that a one year notice that they received was an adequate.
And wanted to get an extension, which was not granted but.
Out of the 19000 noncore connections we went after the biggest group first.
And then for the others products are much more.
Heterogeneous and the path will be much longer.
I'd suspect.
We will see a reduction every quarter, but it's probably going to take till the end of 2006 till these noncore products are completely eliminated.
It is a major component.
Our cost savings.
I can repeat the customer connections for you. So the Sip connections were 8486 at the end of last quarter. Those are all noncore connections when you look at corporate Netcentric and enterprise.
<unk> 8486 connections.
5006 for corporate.
1088 were Netcentric and 2392 were enterprise and Thats the numbers at June 30.
2023, and obviously at 930 of those numbers are zero.
Yes, so for the remaining 11000 non core connections.
They are spread across all three customer types I will say that.
Theres less netcentric, even than there was for Sep.
So, it's probably roughly 80% of it.
Is.
In the enterprise space, and corporate base and less than 20% of that would be in netcentric.
Could I just follow up did you guys say that these products were end of life.
Timber and so there is a revenue impact in the fourth quarter I think that as well.
I'm trying to get at because.
Obviously this quarter.
Trends were trends were below expectations and it doesn't make sense that it was the simple impact if that was shut down at the end of the quarter.
Yes.
So just trying to understand sort of where we should be going and looking for in terms of total revenue.
Next quarter. So they are in the quarter Bob.
A big headline yesterday.
Yeah.
Mod might disagree with that statement, but.
We ended up.
Okay.
Pushing these customers on almost a weekly basis reminding them this product was going away.
The stragglers were shut off at the end of the quarter. So the product is completely gone it is end of life.
But the revenue was declining.
Ever since we acquired the business that was declining under T mobiles.
Ownership and it was a big contributor to why the revenue run rate at signing was $560 million and was down to about $485 million at closing.
Yeah.
Nine months later and a lot of it was one off in the non core products and in <unk> and.
In particular, we.
I think pushed even more aggressively so.
While the unit count was down materially the revenue impact from these end of life products in the third quarter was not very material.
Got it.
Can I just sneak one more of the 1000 and wavelength.
In terms of backlog what percentage of those were signed during the quarter and then what do you what's the average sort of provisioning.
On the <unk>.
You have in backlog.
So.
I would say the majority of them were signed in the quarter some were actually signed.
In the previous quarter.
Q2, right after closing.
And.
And <unk> is very misleading on provisioning times, because it's dependent on the two data centers that need to be connected being wave enabled it is why I've tempered by backlog comment on saying some of.
These may never install because people may get frustrated.
We're not going to wait 14 months till we have all of the data centers wave enabled.
We increased the number of wave enabled facilities by about 25% in the quarter.
Warner.
I think we will see that pace accelerate.
If you looked at an average it's probably more than 150 days because you've got a subset that are in the kind of 50 day provisioning window, both ends or insights we can do today.
Or more like a 120.
20 days.
One site is in the shorter window and one side just on the longer window and then we've got waves to sites that are not yet wave enabled.
Now we've colo customers, we're working as quickly as we can.
Still wanted to see.
<unk> orders, but some of those may not install because I'm not convinced the customer is going to wait six seven months to get a wave and there could be a subset of those that take that long.
Okay.
Okay.
Okay.
Okay.
Thank you don't hear any responses.
In terms of again.
Nick <unk> from <unk>.
P. J your line is now open.
Hey, Dave This is Jerome on fulfill a couple of follow ups. If I could you mentioned that corporate grew this quarter could you quantify that for US is it really been any change in trajectory could you talk about customer conversations incorporate or the weaker market starting to come along and how should we think about the potential for growth to pick up second could you just talk about the <unk>.
SG&A in <unk>, how that should look at the <unk> given some of the cost cutting that's going on how should we think about overall margins heading into the fourth quarter and into 2024. Thank you.
Yeah. So on corporate growth I would say it was very similar to the growth rates that we have had in Q2, that's kind of an underlying kind of same store growth rate of about 1% year over year for less than the kind of 10%.
11% that we had long term average.
Bob.
<unk> seen.
Slow.
But consistent improvement in corporate buying cycles, and expect that corporate growth to continue to improve.
Uh huh.
Non core services.
In answering brandon's question that are heavily weighted towards corporate and enterprise will continue to decline, but probably not nearly as precipitously as they did this quarter. So you may see a low customer connection count, but you were.
We'll see.
Revenue growth probably continue to be positive.
From this point forward since Sip was the largest of these noncore products and then in terms of SG&A.
As Tad mentioned, we had record low bad debt expense I think we're probably expecting that to revert back to historical norms and then.
We are continuing to.
You didn't hear to groom head count and expect to see some underlying improvement.
Okay.
So the Q3 run rate is about reflective of our current run rate.
As we exited the quarter.
Okay. Thank you.
Okay. Next question comes from Michael Rollins from Citi. Your line is now open.
Thanks, and good morning, just a couple of questions.
Back to some of the comments from earlier in the call and then just one on the business. So first in the same way you just couple of questions ago recapped the breakdown of what happened.
With the Sip product could you do the same with the T mobile commercial services agreement in terms of just recapping and summarizing in total what happened, which customer verticals that volume came out of <unk>.
What's left going forward for that.
And then secondly.
With respect to the re class of the operating leases or operating leases to the capital lease if im doing the math right it looks like it.
About three years in terms of the change in the cost of the lease.
Versus how much you increase the balance sheet accounts by and just curious if that's something that Weinstein expires. It goes away or is this something that needs to get renewed like how should we be thinking about.
What needs to happen for this lease.
After you get through the next few years of the balance that you have increased and then I have an operating question I'll follow up with.
Okay.
Sure very good question, Mike and you did your arithmetic quickly.
That lease ends at the end of 2026, it will not be renewed it does not need to be replaced it is completely on economic and it is for an IR you that is not event.
And use and is totally redundant to fiber that we have today is something that sprint signed.
Almost 35 years ago and had CPI.
The and.
The lease is our.
Yes, well, we have the ability to exit it.
About three years at the end of 'twenty will exit it as quickly as possible.
Leases way out of market as I indicated.
Yes.
On the previous earnings call, there's about $150 million of.
An economic value and at least that far out of market and it was a reduction in the gain in our purchase of the assets.
It's just something we had to take.
And I'm sure T mobile would say that's why we're paying them $700 million took some bad stuff and that's probably the single worst item.
It clearly meets the test should be a capital lease is for fiber.
Ill.
And it's something that will not.
Not be replaced.
I can take the first CSA so.
Under the commercial services agreement with <unk>.
T mobile and this is.
Just like <unk>.
Customer not under the IP Transit services agreement. So the revenue was $7 3 million in the second quarter and $8 million in the third quarter.
The connections. This is all Netcentric revenue connections were 8028 at the end of the second quarter at 4661 at the end of the third quarter. So the revenue was about the same and the connections.
Dropped about 50%.
And Mike to give you a little more granularity there are really two primary services that are not covered by the transfer agreement. The first is co location niche or T mobile.
<unk> our racks that are located in our facilities that we are removing.
At the request of T mobile.
But there's a long tail on those and then the second.
Are the VPN services, the Ethernet point to point services that are providing backhaul for T mobile through our network and they are a grooming those circuits as well. So we would expect the unit count to continue to come down.
<unk>.
We also do expect the revenue to eventually come down but.
I think what has been going on in the short term has been grooming units more than.
Our revenue focus.
And so.
So even though the volume fell significantly quarter over quarter.
Would you expect as Youre, describing a more measured roll down to this over the next few years.
I don't have visibility that far out that would really be a question you'd need to ask T mobile because they can cancel these with 30 days notice.
I do have visibility.
This quarter and it looks very similar to.
Q3, Q4 should be similar to Q3 in terms of revenue.
Fewer units.
And then just moving to the operating side of the business.
For all that detail.
You made a comment earlier in the discussion about how customers on the Netcentric side are really pushing too much higher.
Levels of switching I think you mentioned 100 gig 400 gig and as customers are moving up to these higher port.
Speeds.
What does that mean in terms of volume being a lesser indicator of revenue because customers are pushing more volume theyre just doing it through fewer connections and is this a short term blip, where this type of grooming our optimization happens quickly on the volume side or do you.
See for whatever the reason that there might be an ongoing difference between the way the revenue in Netcentric performs in a way volume performs because more customers across more ports adopt these higher speeds.
Yes, so we've been through two similar grooming extra sizes in the past 20 years the <unk>.
Primary driver of the exercise is to reduce cross connect costs.
So when you see volume, they're really two different volumes volume of connections may actually go down as people consolidate 100 gig ports into 400 gig ports and the remnant of the 10 gig to one <unk>.
<unk> consolidation continues.
And then the second volume measure is the number of bits ploughing.
So the average price per bit has declined.
<unk> got 23 years, almost 23 and a half years at cogent since we've been in business and we will continue to decline.
Volume growth has outpaced that allowing us to achieve an average of about 9% Netcentric revenue growth.
A flat addressable market.
I think look we will continue to happen over the next couple of years as we will see an acceleration in the 100 to 400 gig.
Conversion of course, it cuts your cross connect costs by 75%.
And the cost of those 400 gig Talkable optics is come down meaningfully in the past year and today I would say.
A couple of percent of Netcentric ports are at 400 gig. So we have a long way to go in this grooming cycle that will suppress the number of connections report sold.
Well not depressed revenue.
We literally had the same exact phenomenon when we went from.
Multiple 10 gig too.
Yes, I'll lock pure 100 gig interfaces and I think thats happening.
Also seeing on the wavelength Si customers looking to take 400 gig wavelengths.
Our network is equipped to be able to support that we will be selling those we have some of those in the funnel that I had described.
And I think customers.
<unk> are sensitive to cross connects expense.
Thanks very much.
That concludes our question and answer session I would now like to hand back over to Mr. Dave Schaeffer for any closing remarks.
Well, thank you all very much.
We'll be chatting as anyone has any follow up questions.
And we'll talk soon thank you all very much take care bye bye.
Yes.
Thank you for attending today's session you may now disconnect your lines.
Okay.
Yeah.
Yeah.
Yeah.
Yeah.
Yeah.