Q1 2024 Cogent Communications Holdings Inc Earnings Call
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Speaker Change: Good morning, and welcome to the call Jensen indications holdings first quarter 'twenty 'twenty four earnings conference call as.
Speaker Change: As a reminder, this conference call is being recorded and as if it will be available for replay at triple double your debt, but genco dotcom.
Speaker Change: As of this conference call will be posted on <unk> website, when it becomes available.
Speaker Change: Cogent summary of financial and operational results at that stage press release can be downloaded from the collagen. So that's right.
Speaker Change: We'd now like to turn the call over to Mr. David.
Speaker Change: Dave Schieffer, Qi, Chairman and Chief Executive Officer of Cogent Communications Holdings, you may begin.
Speaker Change: Thank you and good morning to everyone welcome to our first quarter 2024 earnings Conference call I'm, Dave Shaffer coach as Chief Executive Officer, and with me on this morning's call as Tad weed, our Chief Financial Officer, hopefully you've had a chance to where a P O our earnings press release.
Speaker Change: Our press release includes a number of historical metrics, we present in a consistent manner, each and every quarter.
Speaker Change: On may 2nd of this year, we closed the issuance of our $206 million IPV for securitization notes at seven 9%.
Speaker Change: These notes mature in five years, but may be extended for up to a 30 year term. This securitization was the first ever securitization of IPV four of lease revenue.
Speaker Change: Cogent as the owner of approximately 38.8 million IPV four addresses we acquired $28 8 million of these addresses when we purchased P. S on it and various other acquisitions early on RFS free we acquired an additional nine.
Speaker Change: 9 million IPV four addresses in May of 2023 with the acquisition of the sprint network assets from T mobile.
Speaker Change: What are you seeing approximately $12 2 million of these high P. P. Four addresses out for a monthly revenue run rate of approximately $3.4 million a month, we have securitized $3 1 million of that monthly leased revenue and disrupt.
Speaker Change: Revenue from 11.1 million leased addresses we also included $1 4 million unleashed addresses and the pool of the securitization. The IPV for Internet addresses are a finite resource as the price of these as crashes has substantially Inc.
Speaker Change: Kris over the past several years.
Speaker Change: Now for an overview of our results are a combined cogent business had a very good quarter.
Speaker Change: Our total revenues were 220, $266 2 million in a quarter that did represent a $5 $9 million sequential decline our on net revenues increased by four tenths of a percent to 138 points.
Speaker Change: 6 million our revenue under the commercial services agreement with T mobile declined sequentially by $5 8 million or.
Speaker Change: Our non core revenues declined by $1 2 million.
Speaker Change: Our wavelength service revenues increased sequentially by 7% to $3.3 million.
Speaker Change: All of the decline in our revenues was attributable to the decline in commercial services agreements and non core services as was expected.
Speaker Change: Our EBITDA as adjusted for the quarter was $115 million, an increase of $4.5 million sequentially or approximately.
Speaker Change: Four 1%.
Speaker Change: Our EBITDA as adjusted margin for the quarter was 43.2%. This is up 260 basis points from the 46% we reported last quarter, we were three three.
Speaker Change: Payments from T mobile for a total of $87 5 million in the quarter. Our spring costs are reported separately and were $9 million in a quarter compared to $17 million last quarter. These costs include approximately 4.3.
Speaker Change: Millions of dollars of severance ramp burst ran in the quarter as compared to $16 2 million in severance reimbursements in the previous quarter.
Speaker Change: Despite the seasonally.
Speaker Change: Increase cost associated with SG&A in our first quarter.
Speaker Change: SG&A did decrease by six 4% from $74 9 million last quarter to $70 1 million. This quarter. These SG&A numbers are net of that severance reimbursement that I've mentioned earlier.
Speaker Change: Our SG&A as a percentage of revenues decreased to 26, 3% for the quarter down from 27, 5% last quarter.
Speaker Change: Cost of goods sold decreased by three 2% from the previous quarter.
Speaker Change: Traffic on our network increased by 1% sequentially and was up 20% year over year.
Speaker Change: Our gross debt to trailing 12 month EBITDA as adjusted.
Speaker Change: And our net debt ratios, both significantly improved in the quarter.
Speaker Change: Our gross debt to trailing last 12 months EBITDA as adjusted was 3.57 in the quarter as.
Speaker Change: And our net debt ratio was 3.17 substantially below the range, we have said historically as a target.
Speaker Change: We are in the process of realizing cost savings and as synergies over the next three years, we will continue to receive the impact of these savings and achieve an aggregate of $220 million in savings we anticipate additional.
Speaker Change: SG&A and other cost savings and revenue synergies as well over the next several years.
Speaker Change: Our recent progress and as shaping these cost savings are very encouraging and.
Speaker Change: And we intend to surpass our initial targeted savings goals.
Speaker Change: Our sales force performed well in the quarter.
Speaker Change: Productivity in Q4 of 2023 was 3.3 installed orders per rep per month. This improved sequentially to four units installed per rep per month, and the first quarter of 'twenty 'twenty four.
Speaker Change: Our sales Rep productivity results to also include the impact of enterprise sales reps that joined us from the acquired sprint business.
Speaker Change: These new enterprise sales reps are continuing to receive training.
Speaker Change: Coach and sales processes and methods and has not yet fully reach their maximum level of productivity.
Speaker Change: Now for our total head count in connection with the Sprint acquisition, we hired 942 total employees at quarter end 718 as these employees remained.
Speaker Change: With cogent.
Speaker Change: During the quarter, our total sales rep count increased by 20 or a.
Speaker Change: 3% net sequential increase in our sales force.
Speaker Change: Now for our new wavelength optical transport service business.
Speaker Change: In connection with the acquisition of Sprint, we have expanded our offerings to utilize the sprint network to sell wavelength services or optical transport services across our network. We are selling these services to existing customers to acquire customers and.
Speaker Change: Two new customers. These customers require dedicated in the optical connectivity without the capital cost and ongoing expenses associated with owning and operating their own transport network.
Speaker Change: We have connectivity as wavelength sales capabilities today and 419 locations. However, these locations do require longer than acceptable sales provisioning cycles, we have sold wavelengths today.
Speaker Change: Eight and a total of 104 locations.
Speaker Change: By the end of this year, we will be able to offer wavelengths history and over 800 locations across North America.
Speaker Change: With much more rapid provisioning cycles.
Speaker Change: Our wavelength revenue in the quarter increased sequentially by 7% to $3.3 million for the quarter.
Speaker Change: Our sprint acquisition materially expanded our network footprint.
Speaker Change: To date, we have reconfigured 25 of the acquired sprint facilities into Cogent data centers and added these data centers to our inventory of 1500 86 third party carrier neutral data centers and 70 <unk>.
Speaker Change: Eight cogent data centers, which today contain an operational 159 megawatts of power.
Speaker Change: We are in the process of converting an additional 23 of these facilities to cogent data centers.
Speaker Change: Optimizing our data center portfolio footprint.
Speaker Change: In a market, where we had a former sprint data facility that we converted to a data center and as legacy lease Cogent data Center, we decommission one leased data center in the quarter.
Speaker Change: Now for a comment on our dividend and buyback strategy.
Speaker Change: Our first our first quarter dividend was $45 8 million that was accrued at quarter end and paid on April nine due to our expanding that period or our sales call.
Speaker Change: Our board of directors.
Speaker Change: Reflected on the strong cash flow generating capability investment opportunities, including the additional opportunities afforded us by the integration of the sprint assets.
Speaker Change: Decided to increase our quarterly dividend by yet another one center share raising our quarterly dividend from 96, five cents a share to 97 five cents per share per quarter.
Speaker Change: Increase represents the 47th consecutive sequential increase in our regular quarterly dividend and a 4.3% annual growth rate in dividends.
Speaker Change: Now for a couple of comments on our long term goals.
Speaker Change: Now that cogent as fully integrated and combined with the former Sprint network. We are anticipating long term average revenue growth rates of between five and 7%.
Speaker Change: And EBITDA as adjusted margin expansion of approximately 100 basis points annualized.
Speaker Change: Our revenue and EBITDA as adjusted guidance targets are intended to be multiyear targets and are not intended to be used as quarterly or specific annual guidance.
Speaker Change: EBITDA as adjusted.
Speaker Change: Leverage ratios are impacted by the $700 million IP transit subsidy agreement that we received with T mobile in conjunction with the acquisition.
Speaker Change: Beginning in June of 'twenty 'twenty four these payments monthly will be reduced from $29 $2 million a month to $8 $3 million a month and then will continue for an additional 42 months.
Speaker Change: This reduction will impact our future EBITDA as adjusted.
Speaker Change: Leverage ratios beginning in the second quarter of 2024, which are always measured on a spoilage as trailing 12 month basis.
Speaker Change: We will also be looking to monetize other assets that were acquired in the acquisition.
Speaker Change: This will include excess data center space and power.
Speaker Change: Additional monetization of our IPV for address unleashed inventory and dark fiber over the next several years.
Speaker Change: Now I'd like to turn the call over to Tad to read the Safe Harbor language and give us some additional operational performance metrics for the quarter. Following these remarks, we will open the floor for questions and answers Pat.
Thaddeus G. Weed: Thank you, 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.
Speaker Change: Results may differ materially please.
Speaker Change: Please refer to our SEC filings for more information on the factors that could cause actual results to differ.
Speaker Change: Cogent undertakes no obligation to update or revise our forward looking statements.
Speaker Change: As 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.
Speaker Change: We analyze our revenues based upon network connection type, which is on net off net.
Speaker Change: They've links and non core and we analyze our revenues based upon customer type.
Speaker Change: We classify all of our customers into three types netcentric corporate and enterprise customers.
Speaker Change: Our corporate business continues to be influenced by real estate activity in central business districts.
Speaker Change: We continue 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.
Speaker Change: Our corporate business represented 46, 9% of our revenues for the quarter.
Speaker Change: And it decreased sequentially by one 4% to $124 9 million due to the grooming of low margin off net connections and the elimination of non core products.
Speaker Change: We had 551821 corporate customer connections on our network at quarter end.
Speaker Change: And for the quarter, the sequential impact of USF on our corporate revenues was not significant.
Speaker Change: Our Netcentric business continues to benefit from continued growth in video traffic streaming and wavelength sales.
Speaker Change: Our Netcentric business represented 34, 6% of our revenues for the quarter and as declined sequentially by one 3% to $92 million and the decline was primarily primarily due to the $5 4 million reduction in the commercial services agreement provided a T mobile that Dave mentioned earlier.
Speaker Change: We had 61599 netcentric customer connections on our network at quarter end.
Speaker Change: Our enterprise business represented 18, 5% of our revenues this quarter and was $49 3 million we.
Speaker Change: We had 19463 enterprise customer connections at the end of the quarter and our enterprise revenue decreased sequentially by five 7%, primarily due to the elimination of non core products and the grooming of low margin off net services.
Speaker Change: On revenue by network connection type.
Speaker Change: Our on net revenue was $138 6 million for the quarter, a sequential increase of 4% our on net customer connections were 87574 at quarter end.
Speaker Change: We serve our on net customers and at 3321 total on net multi tenant office.
Speaker Change: Neutral data center buildings.
Speaker Change: We continue to succeed in selling larger 100 gigabit connections and 400 gigabit connections and carrier neutral data centers and selling 10 gigabit connections and selected multi tenant office buildings.
Speaker Change: Settling these larger connections has the impact as of increasing our year over year on net ARPA.
Speaker Change: Our off net revenue was $118 2 million for the quarter, a sequential decrease of four 4%.
Speaker Change: The sequential decline in our off net revenue was partially impacted by our migration of certain off net customers to on net and the grooming of low margin off net contracts.
Speaker Change: Our off net customer connections or 34579 at the end of the quarter.
Speaker Change: Our wavelength revenue was $3 3 million for the quarter, which was a sequential increase of 7% and that was 693 wavelength customer connections.
Speaker Change: Our noncore revenue was $6 million for the quarter, a sequential decrease of $1 2 million or 16, 8% due to our decision to end of life. These noncore products.
Speaker Change: Noncore customer connections were 10037 at quarter end, a decline of 16, 2%.
Speaker Change: Some comments on pricing.
Speaker Change: Our average price per megabit for our installed base decreased sequentially by five 8% to 26.
Speaker Change: But increased year over year by five 9%.
Speaker Change: Our average price per megabit for our new customer contracts for the quarter was 11.
Speaker Change: As sequential increase of five 1%.
Speaker Change: On <unk>, our on net <unk> increased sequentially and off net and wavelength <unk> slightly decreased.
Speaker Change: Our year over year on net and off net <unk> increased primarily from the impact of the spread business.
Speaker Change: Our on net <unk> increased sequentially by <unk>, 8% from 521 525.
Speaker Change: And year over year, our on net <unk> increased to 12, 6% last year was 467.
Speaker Change: Our off net <unk> decreased sequentially by one 3% from 1120 to 1106.
Speaker Change: And year over year. It was an increase of 21, 5% last year was 910.
Speaker Change: Our wavelength our pool was 1638.
Speaker Change: Our sequential quarterly churn rate for on net and off net connections for the combined business increased.
Speaker Change: Our on net unit churn monthly.
Speaker Change: Rate was one 4% compared to one 2% last quarter, primarily due to the reduction in the T mobile CSA revenue and the associated connections.
Speaker Change: Our off net unit monthly churn rate was two 1% compared to one 3% last quarter again from grooming low margin off net contracts and the T mobile commercial services contract changes.
Speaker Change: On EBITDA and EBITDA margin, we reconcile our EBIT onto our cash flow from operations in each of our quarterly earnings press releases, we incurred $9 million as sprint non capital acquisition cost this quarter compared to $17 million last quarter.
Speaker Change: Included in the $9 million of sprint acquisition costs for the quarter or $4 3 million of severance cost incurred.
Speaker Change: Included in the $17 million of sprint acquisition costs last quarter were $16 2 million of severance costs.
Speaker Change: Our EBITDA as adjusted for Sprint acquisition costs and payments under the IP Transit agreement was at $115 million for the quarter that was a 43, 2% EBITDA as adjusted margin.
Speaker Change: It was a sequential increase of $4 5 million in EBIT, EBITDA and a 260 basis point margin increase over last quarter.
Speaker Change: Our first quarter as traditionally been a quarter when we experienced a decline in EBITDA margin due to cost delivering cost of living salary increases, which again, we have this year the.
Speaker Change: The resetting of payroll taxes in the United States and our audit fees.
Speaker Change: That did not occur this quarter.
Speaker Change: Our foreign currency impact.
Speaker Change: Our revenue earned outside of the United States as reported in U S dollars and was about 17% of our revenues this quarter consistent with prior quarters.
Speaker Change: About 11% of our revenues this quarter were based in Europe, and 6% related to Canada, Mexico, Oceanic South America and Africa operations.
Speaker Change: Our average euro to dollar rate so far this quarter as $1 seven and the Canadian rate to 73.
Speaker Change: Should these average foreign exchange rates remain at current levels for the remainder of this quarter, we estimate that the FX conversion impact on sequential quarterly revenues would be negative $4 million and the impact year over year would be a negative <unk> 5 million.
Speaker Change: We believe that our revenue and customer base as not highly concentrated our top 25 customers represented about 18% of our revenues for the quarter.
Speaker Change: Our quarterly capital expenditures were $49 million this quarter down six 3% from last quarter. We are continuing our network integration of the former sprint network and legacy Cogent network into one unified network and converting former sprint switch sites and to cogent data centers.
Speaker Change: Our finance lease <unk> obligations are for long term dark fiber leases and typically have an initial term of 15 to 20 years or longer and often include multiple renewal options. After the initial term.
Speaker Change: Our IR you finance lease obligations were $517 5 million at quarter end.
Speaker Change: As inclusive of an economic finance lease that we acquired from sprint.
Speaker Change: We have a very diverse set of <unk> suppliers, and we have <unk> contracts with 328 different dark fiber suppliers across the world.
Speaker Change: At quarter end, our cash and cash equivalents and restricted cash totaled $163 3 million or $44 8 million of restricted cash as directly tied to the estimated fair value of our interest rate swap with Marina.
Speaker Change: Our operating cash flow results are materially impacted by the timing and amount of our payments under our TSA agreement with T mobile for transition services and the presentation of the payments of our 700 million IP Transit agreement.
Speaker Change: Payments under the IP Transit agreement under U S. GAAP are considered cash receipts from investing activities are not classified as operating.
Speaker Change: Our operating cash flow was a positive $19 2 million for the quarter compared to a negative $48 7 million in the fourth quarter of last year.
Speaker Change: Payments under the IP Transit agreement again are reported as investing activities and were both $87 5 million in this quarter and last quarter.
Speaker Change: Debt and debt ratios, our total gross debt at par, including our finance lease are you obligations was $1 5 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.
Speaker Change: <unk>.
Speaker Change: Our total gross debt to last 12 months EBITDA as adjusted radio ratio was three $5 seven at quarter end and our net debt ratio was three seven.
Speaker Change: This compares to gross debt over the last 12 months EBITDA ratio of 4.07 last quarter and the net ratio of 375.
Speaker Change: Our consolidated leverage ratio as calculated under our note indentures was 351 and our secured leverage ratio was 233.
Speaker Change: Some comments on our swap agreement we are party to an interest rate swap agreement that modifies our fixed interest rate obligations associated with our $500 million 2026 notes to a variable interest rate obligation based upon the secured overnight financing rate for the remaining term of our 2026.
Speaker Change: Notes.
Speaker Change: We record 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.
Speaker Change: The fair value of our swap agreement increased by $6 2 million from last quarter to a liability of $44 8 million. We are required to maintain a restricted balanced with the counterparty equal to the liability.
Speaker Change: As of today, the value of our swap agreement as $35 5 million.
Speaker Change: Lastly, some comments on bad debt and days sales outstanding our days sales outstanding or DSO was significantly impacted at year end by the conversion of all former sprint customers to our billing system in November of 2023.
Speaker Change: Our DSO for worldwide accounts receivable significantly improved from year end and as reverting to historical norms.
Speaker Change: Our DSO was 27 days at the end of the quarter versus 37 days at the end of last quarter. So a 10 day improvement.
Speaker Change: Our bad day, a bad debt expense was $2 6 million and 1% of our revenues for the quarter and that's in line with historical performance.
Speaker Change: Again, I want to thank and recognize our worldwide billing and collection team members for a fantastic job in serving our cogent customers.
Speaker Change: With that I will turn the call back over to Dave.
Dave: Thanks, Tad now for a few highlights on the strength of our network, our customer base and sales force.
Dave: Our netcentric business continued to experience significant traffic growth in our business from streaming and other customers. We are a direct beneficiary of the continued migration of video to over the top.
Dave: At quarter's end, we were on net and 1586 third party carrier neutral data centers and 78 of Cogent owned data centers for a total of 1664 data center.
Dave: This is more data centers connected by a network than any other carrier as measured by third Party research.
Dave: The breadth of this coverage enables us to serve our netcentric customers and a larger number of locations and helping them reduce latency on their network.
Dave: We continue to expand our footprint and anticipate adding approximately 100 carrier neutral data centers to our network per year over the next several years above and beyond the additional 23 data centers that Ted mentioned.
Dave: Earlier that we are adding due to the conversion of the sprint switch sites into data centers.
Dave: We are continuing to experience extended provisioning cycles for wavelengths, but we now can offer wavelength services and 419 locations.
Dave: We will have over 800 carrier neutral locations connected to our network throughout North America with substantially reduced provisioning cycles that will mirror. The provisioning time. So we are able to achieve with our transit services.
Dave: As a quarter's hand, we were directly connected to 8098 networks. This collection of ISP as telephone companies cable companies mobile operators and other carriers allow us to reach the vast majority of the work.
Dave: <unk> broadband and mobile phone users cogent remains the most interconnected network in the world.
Dave: Our corporate customers.
Dave: Aggressively integrating new applications that become part of their working world such as video conferencing. These.
Dave: This year's tissues will require higher speed connections, both inside and outside as their premises.
Dave: Our enterprise customers.
Dave: Can you to groom their networks and are focused on our core connectivity products of Gia and virtual private network services, including both <unk> and Mpls managed network services.
Dave: Now for a highlight on our Salesforce, we remain focused on growing our sales force and increasing the productivity of those sales reps, we continue to expand and modify our training programs and we routinely manage out under <unk>.
Dave: Forming sales reps, our sales rep turnover in the quarter was five 5% per month, which was down from a peak of eight 7% per month at the peak of the pandemic and as in.
Dave: In line with our historical averages, which have been at five 6% of the sales force, leaving as a company each month.
Dave: We continue to train new reps as well as provide supplemental training for the reps that joined us from the sprint business, our sales rep productivity increased sequentially, 23% to four <unk>.
Dave: Stall as units per rep per month.
Dave: At quarter's end, we had a sales force of 284 sales professionals globally focused on the Netcentric market.
Dave: 379 sales reps focused on the corporate market and 14 sales reps focused on our enterprise market segment.
Dave: In summary, we remain very optimistic about our unique position to be able to serve the connectivity needs of small medium and large businesses in major cities across North America in the central business districts, we have 861 on.
Dave: On net multi tenant office buildings connected to our network with over 1 billion square feet of office space.
Dave: We remain excited and optimistic about our enterprise customer base and the ability to provide connectivity services to those companies globally.
Dave: And our opportunity to repurpose assets acquired from sprint.
Dave: <unk> purpose Singh of the network to sell wavelength or optical transport services is progressing well.
Dave: And the conversion of former sprint switch sites and to data centers is also progressing.
Dave: Increasing cogent status center footprint and available power.
Dave: We have a significant backlog and funnel with over 2400 wavelength opportunities. However, due to these all their provisioning cycles. We are uncertain. If all of these orders will remain with us through our ability to provision them.
Dave: We will be able to reduce that provisioning cycle as we complete our network optimization and mirrored the provisioning windows that we are able to achieve and our IP business.
Dave: Key indicators show that office activity as improving workforce workplace reentry and leasing activity remained substantially below pre pandemic levels. However, many tenants are returning to offices and leasing activity.
Dave: For our commercial offices has begun to improve in many areas.
Dave: We are working diligently to continue to reduce cost and integrate sprint assets we have.
Dave: We're optimistic about the cash flow capabilities of this combined.
Dave: Yes.
Dave: Over the next three years, we anticipate continuing to achieve annual cost savings and exceeding our initial $220 million of annual cost synergies that were project at <unk>.
Dave: Signing of our transaction with T mobile.
Dave: We look forward to monetizing many underutilized assets, whether it be excess data center space, our IPV four addresses or the substantial inventory of dark fiber that we have on our network.
Dave: Sprint acquisition cost.
Dave: Not include separately identified integration costs related to the operating expenses associated with the integration this highest reduced our EBITDA and EBITDA margins as adjusted but we felt that.
Dave: It was more appropriate to just include these in our standard run rates finally, I want to take US moment Toy Trust question on several shareholders appraised with Meg and that as.
Dave: My sale of a portion of my Cogent holdings.
Dave: Unfortunately, I have a large real estate portfolio outside of cogent and that portfolio has been under significant pressure.
Dave: Stock sales are solely attributable to supporting that portfolio and have no.
Dave: <unk> all my optimism of Cogent in fact, I'm more optimistic today about <unk> prospects to both grow its revenues and expand its profitability as than I have been in cogent entire history.
Speaker Change: With that let me open up the floor for questions.
Speaker Change: Okay.
Speaker Change: Operator, thank you.
Speaker Change: As far as now open for questions as you have got anything.
Speaker Change: As a question. Please press star one telephone keypad to Asia and Shannon. Thank you. If you would like to withdraw your question simply press Star one again.
Speaker Change: As you have caught up on to ask your question and I listened in via loud speakers on your device.
Speaker Change: Please pickup your handset and ensuring that your phone is not on mute and when asking a question.
Speaker Change: Okay.
Shannon Party: Your first question comes from the line as soon as Channel Party with Jonathan Michael J P. Morgan Your line is open.
Channel Party: Alright, thank you continuing to see.
Speaker Change: Okay.
Speaker Change: Sure.
Speaker Change: Okay.
Michael Ian Rollins: Hi can you hear me.
Speaker Change: Hey man continuing to see issues with the provisioning on the wave side I mean, what gives you comfort in hitting the 800 locations by year end and how.
Speaker Change: How should we think about the trajectory of the ramp up in the.
Speaker Change: Revenue portion of that as you progress over the course of the year and then perhaps.
Speaker Change: 12 to 18 month basis thereafter.
Speaker Change: Can you help us perhaps trying to get more comfortable with the decline in enterprise.
Speaker Change: Maybe help us think about the you said a lot of the revenue decline was predicated on non.
Speaker Change: Non core.
Speaker Change: And the other legacy revenue as kind of deteriorating.
Speaker Change: Help us think about enterprise, specifically and what is the glide path there that as a continued decline in revenue or is that should that stabilize in the coming quarters, but perhaps maybe.
Speaker Change: Before returning to growth.
Speaker Change: Pins that war wave enabled to 419 in the 12 months since the acquisition was closed.
Speaker Change: The wave of enablement contains four key work efforts we need to.
Speaker Change: Put a transponder shelf in each of our carrier neutral data centers to accept the wavelengths, we need to reconfigure the metropolitan networks to be optimized for wavelength delivery.
Speaker Change: We need to physically extend the sprint network to intersect our Metro networks, and then finally, we need to deploy a reconfigurable add drop multiplexer at the intersection of the inter city and <unk>.
Speaker Change: City networks.
Speaker Change: All four of those efforts are underway to touch all 800 of the locations. This project has multiple sub projects and multiple constraints most of those constraints that were out.
Speaker Change: Side of Cogent as hands have been brisk.
Speaker Change: Resolved.
Speaker Change: And now all of the additional work as work that is under our control.
Speaker Change: All of our markets are now physically in our connected.
Speaker Change: All of the markets have a clear project plan to complete them and I think we'll see a continued.
Speaker Change: The increase in that number relatively linearly between 419 on May nine to 800 by 12 31 24.
Speaker Change: Now to maybe the more important question all wavelengths as provisioning.
Speaker Change: One of the key advantages that cogent will have in this market as the standardization of our products and the ability to provision the services within a two week window, which as far better than the industry.
Speaker Change: As <unk>.
Speaker Change: It has historically been able to provision wavelength services.
Speaker Change: 25 years ago, when Cogent started selling high capacity transit services, the provisioning windows in the industry for those services average over 90 days cogent.
Speaker Change: Transform the industry by shrinking that to an average of nine days to install and that as a big part of the reason why cogent has become the largest tranche of provider globally.
Speaker Change: Now with wavelength services.
Speaker Change: Most carriers provision those on a customized or bespoke basis.
Speaker Change: We have architected the network show the provisioning is much more standardized.
Speaker Change: Each of the data centers will have the requisite set transponder shelf and the actual provisioning will require three key steps.
Speaker Change: The first step will be the plugging of a plausible optic at each of the two end points. So that's actually two of the steps one at the AAN wanted to CN, which does require a field technician coordination, but since these are all in carrier neutral data centers.
Speaker Change: And we have nearly 500 people in our field services organization, we anticipate being able to do that within two to three days of water validation.
Speaker Change: The second piece as once those physical work efforts at the two endpoints are complete the network operation center needs to build the physical path through all of the intermediate devices.
Speaker Change: All of that work has been automated and scripted that work as ton by the nearly 250 people in our customer care and Knox support group on a routine basis, we've been doing that literally for decades to support the cogent Hi P network.
Speaker Change: It was invisible to customers, but now it will be customer facing so we should be able to reduce those provisioning time substantially.
Speaker Change: Today Cogent is averaging over 120 days to provision of wavelengths and we're talking about a 10 X improvement and that provisioning, but it's migrating from a custom one off provisioning to a modularized.
Speaker Change: Standardized provisioning program and we feel very comfortable that we have the resources and the architecture to do that so as the sites become fully wave enabled the amount of custom engineering declines materially.
Speaker Change: I'm now going to switch to your second question around enterprise.
Speaker Change: One of the challenges in the enterprise market globally, and as a as a challenge that the sprint enterprise business faced.
Speaker Change: Is that the.
Speaker Change: The service providers to maximize revenue often times sold products and services, where they had little or no core competence.
Speaker Change: When we acquired the business from sprint.
Speaker Change: Tens of thousands of non core services spread over 'twenty four discrete product categories. We have been end of life Ing those services, we've reduced our non core revenue sequentially by another one point to me.
Speaker Change: This is by design. These are products that have negative gross margin cogent adds no value and delivering those services. These tend to be security management services or land administration type services.
Speaker Change: Which were sold in conjunction with connectivity.
Speaker Change: Part of Cogent differentiation from other service providers is the limited number of products that we support.
Speaker Change: We are a connectivity company, we basically sell.
Speaker Change: Five key products, we sell internet access by far and away our largest product our second <unk> product is VPN services. These are connectivity services delivered over the internet.
Speaker Change: As either an mpls tunnel or a V pls encapsulated mash.
Speaker Change: We sell <unk>.
Speaker Change: Wavelength services, which are transport between point, a and point Jay.
Speaker Change: We sell Internet address space to customers and then we sell space and power.
Speaker Change: In our 78 data centers and 159 megawatts of capacity.
Speaker Change: And that's it that's what cogent sells.
Speaker Change: So in our enterprise business, we are going through two simultaneous grooming exercise the first as the elimination of the non core products.
Speaker Change: Second as analyzing the connectivity products on a circuit by circuit basis.
Speaker Change: We are aggressively migrating off net to on net you saw that show up in our substantial margin improvement and reduction in cost of goods sold.
Speaker Change: We are also.
Speaker Change: Hal sockets across delivery.
Speaker Change: Medium better not supportable, whether it be wireless coax or even twisted copper consolidating on an entire fiber based platform that will give us the ability to scale.
Speaker Change: And we are withdrawing from countries and markets that are on profitable and one in which sprint was offering services without the requisite regulatory infrastructure show for all of these reasons we are grooming.
Speaker Change: As a profitable business, we think the enterprise business will stabilize over the next several quarters and we actually have the opportunity to grow that business as many other global service providers are withdrawing from this market space.
Speaker Change: Thanks, Dave.
Speaker Change: Okay.
Speaker Change: Your next question comes from today as Greg Williams with TD call. Ron Your line is open.
Gregory Bradford Williams: A question.
Gregory Bradford Williams: Maybe I can follow up on the wage question just ask it differently.
Gregory Bradford Williams: $3 3 million in ways revenue last fall I think you said youre going to get a run rate of about $20 million in revenue annualized by around now of course, you rescinded that that goal.
Gregory Bradford Williams: But when could we reached the $20 million or any other target you can give for waves just help us figure out the cadence and the conference in the way of revenue increase and then the second question as just on the <unk>.
Speaker Change: Integration costs for sprint to $9 million and sprint acquisition costs, but at the end of your scripted remarks, I think you were mentioning.
Speaker Change: <unk> identified integration costs, and that's reducing our EBITDA, what does that number how much of it as onetime sort of integration cost as sprint you haven't and where's that going throughout the course of.
Speaker Change: The next year or two.
Speaker Change: Okay, two very good questions Craig So first of all on wavelengths.
Craig: We continue to grow our funnel, we're actually trying to discourage customers until we can give them more realistic provisioning timelines.
Speaker Change: The demand for the routes that we have and the data centers that we are targeting as stronger than we had initially expected.
Speaker Change: As we kind of outlined we anticipate the wave business could be about a 500 million dollar run rate business five years after the acquisition.
Speaker Change: We were hoping that we could grow that business linearly, meaning ever grow $100 million to $100 million business a year of post closing 200 in the second year.
Speaker Change: And our hope was based on the fact that the ink limited number of locations that we initially sure would actually be the locations that the market wanted.
Speaker Change: What we discovered as we began selling was that the wave demand was much more diffuse across a much larger number of data centers as <unk>.
Speaker Change: Not that the demand is not there as just spread out into facilities that we cannot provision so.
Speaker Change: So we do still believe that there will be a $500 million business.
Speaker Change: Bye.
Speaker Change: On rate of May of 'twenty, eight I know, that's a long time and investors want much near or targets.
Speaker Change: The reconfiguration of the network is progressing.
Speaker Change: We are over half way through bringing on the number of sites that we need.
Speaker Change: We are not though yet in our possession to have the standardized delivery that I spoke about.
Speaker Change: That will be in place by year end, we hope that that will allow us to eat into the backlog and to also accelerate new sales as we will be more comfortable in taking those orders with more standardized purvis.
Speaker Change: <unk> windows.
Speaker Change: So in terms of a specific target.
Speaker Change: <unk> burned once I'm not going to get burned again, unless something out other than we anticipate a relatively linear approach to a $500 million business bye.
Speaker Change: The spring of 'twenty 'twenty eight.
Speaker Change: And we will fully have met that the initial demand did not line up with the locations, but we will catch up as those sites come online now.
Speaker Change: Now for your second question around integration costs.
Speaker Change: The operational integration of the business has a real cost associated with it.
Speaker Change: Often times companies put a.
Speaker Change: Bucket of expenses in to that and our kind of given a free pass by investors. As these are viewed as transitory as opposed to permanent expenses.
Speaker Change: We already had enough accounting complexity associated with this transaction.
Speaker Change: It is highly unusual to have a transaction that has a bargain purchase gain.
Speaker Change: Has a effective.
Speaker Change: Someone gave you some thing as.
Speaker Change: And it has the ability to take costs out normally a company pays for our transaction and then integrate set over time.
Speaker Change: Additional complexity.
Speaker Change: Resulted in us ultimately going to the chief accountant of the Securities and Exchange Commission, we've mentioned as previously to get a final ruling on how we should appropriately account for it and we included the transit service payment agreement.
Speaker Change: From T mobile, which as the $700 million payment and EBITDA as adjusted.
Speaker Change: We did not want yet another extraordinary adjustment.
Speaker Change: But there are numerous operational costs associated with converting back office systems and billing systems, we have not quantified those externally and don't want to report on them to yet have another metric that would be EBITDA as adjusted as such.
Speaker Change: Adjusted as adjusted I think Thats, just a little too.
Speaker Change: Infusing for people.
Speaker Change: But you should see continued operational improvement going forward that will include head count rationalization site optimization network integration.
Speaker Change: Dan.
Speaker Change: Integration cost will decline they are baked into our overall guidance.
Speaker Change: At least 100 basis points a year of annual margin expansion I think you saw the very rapid impact of that this quarter with a sequential improvement in EBITDA margins of 260 basis points.
Speaker Change: A quarter that would traditionally have a decline in EBITDA margins.
Speaker Change: <unk> and <unk>.
Speaker Change: Something to the sprint cost that we do include so theyre just professional fees associated with directly associated with the acquisition. So nonrecurring and then because under the U S. GAAP accounting, we need to record the severance amount as a receivable at the.
Speaker Change: Closing date, so you put that asset on the books and it increases the gain even though they're reimbursed when we are actually paying those severance costs. They are also included as.
Speaker Change: As an expense so that as obviously directly attributed to the acquisition and those severance costs are included in the sprint costs I.
Speaker Change: I hope that helps.
Speaker Change: That is helpful. Thank you.
Speaker Change: Thanks, Craig.
Speaker Change: Your next question will come from the line of David Barden with Bank of America. Please go ahead.
Speaker Change: Yes.
David William Barden: Hey, guys. Thanks for taking the questions.
David William Barden: Just one kind of housekeeping item Dave.
David William Barden: Gave us the IPV for contribution $3 4 million per month can you kind of give us.
David William Barden: A sense as to what that would look like sequentially and year over year from a from a growth standpoint.
David William Barden: Distributor to the two presumably the corporate <unk>.
David William Barden: Revenue line.
Speaker Change: And then just unrelated point.
Speaker Change: You've discussed the reservoir of IP before that you have.
Speaker Change: And the data center opportunity that's kind of midstream.
Speaker Change: And then the dark fiber.
Speaker Change: Could you kind of give us a sense as to how.
Speaker Change:
Speaker Change: We monetize that as the intention to do more kind of ABS type financings to reinvest in the business or.
Speaker Change: Have you had any inbounds for potential sales of these assets that sort of thing. Thank you.
Speaker Change: Okay couple of great questions Dave.
Speaker Change: So first of all the growth rate in the IP fee for revenue stream has been running between two and 3% sequentially per month for the past year and a half and we anticipate that growth.
Speaker Change: To continue.
Speaker Change: As part of focusing on the IPP for value. We did a few things we modified our compensation structure for the sales force to increase their commission rates to make leasing of address space equivalent to that of <unk>.
Speaker Change: Selling bandwidth.
Speaker Change: And two we have incrementally raised prices on addresses now we did not raise the install base, but for new sales, we have increased prices because of the pricing umbrella established by both Amazon through eight.
Speaker Change: The U S and Microsoft through Azure. So I would expect this business to continue to grow at a similar rate. We are also evaluating should we sell some of the addresses because it may <unk>.
Speaker Change: Of course too long at this growth rate to fully recognize value out of them by leasing them.
Speaker Change: As a final decision has not been made.
Speaker Change: <unk>.
Speaker Change: Today, our leasing out about a third of our inventory, meaning two thirds of our Unutilized will continue to aggressively.
Speaker Change: Raised prices and increased sales and then may also choose to pair our inventory by selling again, a final decision has not been made and as somewhat dependent on market conditions.
Speaker Change: I think the IPV for purchase market was more robust six months ago as slack off a little bit I think that will come back and that may impact our decision on timing and the exact magnitude of it.
Speaker Change: <unk> sales now.
Speaker Change: Now with regard to the data centers.
Speaker Change:
Speaker Change: There we have a lot of foundational work so independent of everything that I've described.
Speaker Change: On the network reconfiguration, there as a dedicated team of individuals working on clearing out the sites and then converting them into modern datacenters that work as well underway.
Speaker Change: We have converted 25 of the facilities. We have 23 more that are in the process of conversion and even of the 25 that have been converted there is still some additional remedial work.
Speaker Change: Al.
Speaker Change: Within those facilities, we are basically defining the facility into three areas there as a small pop room that as being established that will house our network equipment.
Speaker Change: Typically that utilize as about a half a megawatt of power at about 1000 square feet.
Speaker Change: The facility.
Speaker Change: Secondly, we are establishing a retail cogent data center and each of these locations those will range from five to 10000 square feet.
Speaker Change: And we will typically be between a half and one megawatt of power and they will look exactly like the inventory of data centers that cogent had previously and the customer base as typically take one and two racks of.
Speaker Change: Space at a time with typically two to five kilowatts per rack.
Speaker Change: That leaves a substantial amount of inventory approximately.
Speaker Change: A million square feet and about.
Speaker Change: A 100 megawatts of power today.
Speaker Change: As surplus.
Speaker Change: We have begun the process of marketing that to third parties on a wholesale basis.
Speaker Change: That will either be direct users or other data center operators, we have offered those.
Speaker Change: Participants two different models.
Speaker Change: Can lease space from us on a per megawatt basis.
Speaker Change: Or they can elect to purchase the facility along with the power we've gone out to about a 117 counter parties.
Speaker Change: Begun those negotiations.
Speaker Change: We have three LOI and hand after two weeks after three specific facilities.
Speaker Change: It is probably too early for us to bake that into our financial model, but probably over the next quarter or two we'll be in a position to comment on the monetization and if they are leases there will be long term streams of revenue that we would work.
Speaker Change: To secure ties if we want a cash or just harvest.
Speaker Change: Their sales they would obviously.
Speaker Change: Reduce our leverage on our balance sheet and give us additional capital.
Speaker Change: And then on dark fiber, we have a substantial footprint of dark fiber. However.
Speaker Change: We have not.
Speaker Change: <unk> been willing to sell that not because of any philosophical reason because the team that's involved and provisioning that dark fiber as the exact team of people that are.
Speaker Change: Full speed ahead on delivering are waived network reconfiguration.
Speaker Change: By year end.
Speaker Change: At wave reconfiguration will be substantially complete and then we can turn our attention to figuring out how deep and what is the right pricing model for the dark fiber in our network. So all of these assets are ones that we.
Speaker Change: We will ultimately create value out of what we need to sequence us properly hopefully that was helpful. Dave.
Dave: Super helpful. Thank you so much.
Dave: Your next question will come from the line of Frank Louthan with Raymond James. Please go ahead.
Frank Garrett Louthan: Great. Thank you Hey, Dave can you comment on kind of where the non core revenue bottomed out I assume it doesn't necessarily go to go to zero, but when you get rid of the negative gross margin any other products and so forth how should we think about where that revenue line on a bottoms out how long do you think it will take to get there and is there any part of it that you might consider putting in.
Dave: <unk> since you are clearly in kind of pushing it out for first question and secondly can you comment on the usage of the circuit as T mobile paying over their cash payments are they are they using those as a potential for them to grow and do more business with you beyond that thanks.
Speaker Change: Yes, two very different questions. So in the non core business.
Speaker Change: Prior to the sprint acquisition Cogent had about $100000 a month of noncore revenue about 300000, a quarter and that was services that were left over from acquisitions.
Speaker Change: <unk> or 18 years or more earlier.
Speaker Change: So there is a very long tail on these services.
Speaker Change: We are actually still providing a hosted email to sign up customers.
Speaker Change: 101 years after the acquisition.
Speaker Change: We kind of wish it goes away it produces some margin and we support it.
Speaker Change: Sprint services were much more complex and probably much lower margin. Our goal is to get rid of them as quickly as possible.
Speaker Change: Our expectation as they will be substantially gone by the end of 2026, which as the longest dated contracts that we're obligated to support.
Speaker Change: But there probably will be some residual tail beyond that.
Speaker Change: We are also looking at the enterprise customer base and realizing that some of the services they are getting for cat activity.
Speaker Change: Not economically viable the locations are very remote the services are delivered over inferior transmission off net circuits.
Speaker Change: And the margins are very low we're doing a combination of raising prices and migrating traffic first and foremost anything thats off net that we can bring and to on that.
Speaker Change: Doing that and you see that in both our numbers are in terms of on net connections.
Speaker Change: And also revenue improvement as well as margin improvement.
Speaker Change: We have no intention.
Speaker Change: Putting these services into a separate bucket of discontinued operations, there as already too much accounting complexity here at cogent.
Speaker Change: Yes.
Speaker Change: Comparing.
Speaker Change: The amounts related to this.
Speaker Change: As noncore revenue and the associated costs as well.
Speaker Change: Not material enough to group and do it as discontinued operations bucket.
Speaker Change: Alright, Thanks, Brian.
Speaker Change: Thanks.
Speaker Change: Your next question will come from the line of Walter Piecyk with light Jet ventures. Please go ahead.
Walter Paul Piecyk: Thanks, David just wanted to.
Walter Paul Piecyk: I just want to go back to Barton's question on.
Walter Paul Piecyk: Sure.
Walter Paul Piecyk: On the IPV for stuff. So two 5% does that mean that a year ago, you had about $3 million of revenue and when exactly did that.
Speaker Change: Does that revenue start for you on corporate Dave.
David William Barden: Okay. So.
Speaker Change: First of all we began leasing IPV fours and 2015, one thing I did not correct. In Dave's question was the breakdown between corporate Netcentric and enterprise, let me give that an IPP for leasing.
Dave: 85% of the revenues are netcentric.
Speaker Change: 14%, our corporate at 1% or enterprise.
Speaker Change: Between 2015 and mid year 2022, we would only leash addresses two companies have also purchased bandwidth from us at the same time.
Speaker Change: In the summer of 'twenty, two we relax that restriction.
Speaker Change: At that point the growth rate in this business materially accelerated.
Speaker Change: The second thing that we did.
Speaker Change: <unk>.
Speaker Change: At the beginning of this year.
Speaker Change: Was to normalize the commission structure. So we would pay the sales force the same payout ratio if they leased addresses as opposed to just selling bandwidth that has a positive impact on the sales rate.
Speaker Change: And then the third thing that we implemented actually April 1st.
Speaker Change: As an increase in pricing.
Speaker Change: This was a relatively small part of <unk> business and something that quite honestly, we had not focused on initially.
Speaker Change: We were approached by a number of banks to potentially do an asset backed securitization of our network.
Speaker Change: We have reviewed that and concluded that would be impractical due to the fact that our network versus 12000.
Speaker Change: <unk> local and national jurisdictions from perfecting a security interest and that broad of a network as just not practical second 60% of our network as based on IR Hugh while there is precedent to securitize that it's more challenging and third.
Speaker Change: As not a huge amount of customer diversity.
Speaker Change: As we hooked in our aggregate balance sheet, we thought that it would make sense for us to reach out to ABS investors as a new group of investors and realize that RV for.
Speaker Change: Revenues were an optimal candidate.
Speaker Change: Widely diffused customer base.
Speaker Change: <unk> thousand customers 12000 unique agreements.
Speaker Change: Very sticky customer base.
Speaker Change: Churn rate and IPV for leasing as point.
Speaker Change: Eight of 1% annually.
Speaker Change: Almost 15 times better than the churn rate and our bandwidth business.
Speaker Change: And as an extremely high margin business, but no real operating cost so as an ideal candidate for this market now what turned out to be challenging and doing this transaction, where two things the complexity involved in securitizing.
Speaker Change: I don't like domestic but international revenue streams, and then secondly.
Speaker Change: Educating investors on a new asset that they had never seen before.
Speaker Change: So it was a lengthy process, but our business for IPV for leasing has some significant tailwind and the decision by Microsoft and Amazon to lease out at 12 ex cogent as rates at the time.
Speaker Change: In 2023 created quite a high umbrella for us in terms of pricing and giving us the confidence that we have the ability to move prices up hopefully.
Speaker Change: Hopefully that one as an outlet.
Speaker Change: When you mentioned that last quarter, Dave about Amazon and Microsoft and so it's been 90 days it does.
Speaker Change: As it looks like growth accelerated there or you sold and then I think in answering Barton's question you said.
Speaker Change: As the market was a little softer I guess for IP before so.
Speaker Change: I mean, who knows what happens given what can happen with IPV fix it would seem like there would be some immediacy to either increase price with the existing leases trying to lease more aggressively or sell it more aggressively.
Speaker Change: In case that market disappears. So just comments about and also as it relates to corporate I know.
Speaker Change: This is more of a netcentric business, but.
Speaker Change: I think youre buildings drop for the first time I look back in my model I think I'd go back to like 2008.
Speaker Change: I don't think I've ever senior multi tenant buildings actually drop with what's going on with that because usually add buildings, which obviously gives you incremental potential capacity for some corporate growth.
Speaker Change: Okay I'll take those in reverse order.
Speaker Change: So post pandemic, we have slowed the rate of multi tenant building additions.
Speaker Change: We actually did add several buildings in the quarter, but we also had.
Speaker Change: A half a dozen buildings converted to residential service from office. So the net reduction of one building from.
Speaker Change: <unk> hundred 62 to <unk> 61 was fairly insignificant as.
Speaker Change: The square footage increase meaning the new building as I came all of our larger than the ones that were taken offline because of the residential conversion. We do expect our multi tenant footprint to continue to grow but at a more moderate rate it makes more sense.
Speaker Change: Deferred that capital into more data center connectivity as that as a more robust and growing market now.
Speaker Change: Now I'll go tier IPV for monetization question.
Speaker Change: IP <unk> six was introduced at 1998.
Speaker Change: It today accounts for a whopping 7% of Internet traffic.
Speaker Change: The federal government U S federal government, but in 2010 put a mandate out for all agencies to be entirely on fee six within 18 months.
Speaker Change: Today, there are less than 2% converted.
Speaker Change: This has a very long tail it as a very finite resource and the expense of re numbering is not trivial. So even if you had <unk> six and it would work.
Speaker Change: The cost of leasing and address as so de Minimis first as the benefit of Gibbs most companies will take a very long time to re number and no. One wants a partial view of the Internet. The primary reason sale prices have softened over the past six months.
Speaker Change: As Amazon and Microsoft have been withdrawing from the purchase market as they accomplish our initial goals now I think both of those companies will reenter the market there is still a broad and active market.
Speaker Change: Rising for larger blocks has actually continued to go up.
Speaker Change: So we will explore sales, we're very comfortable with our ability to continue to grow the leasing business and we're going to do what it takes to create the maximum long term value for shareholders out of this asset our data center assets at <unk>.
Speaker Change: Fiber assets no one should have any doubt that cogent as sitting on file assets that can be monetized.
Speaker Change: Okay. That's helpful. David but in the absence of a sale maybe you can just give us some sense of without having the IPV fours in order to secure that incremental financing.
Speaker Change: Obviously, these TSA payments are going to drop from 87% to 24.
David William Barden: So that drop alone I think takes your EBITDA to a level that I'm not sure. It covers capex in.
Speaker Change: Cash interest expense, so when we think about incremental financing.
Speaker Change: Without IPV for assets to lean on for incremental gross debt increases.
Speaker Change: As that Reagan will look like.
Speaker Change: So yes.
Speaker Change: Yes, so first of all if I remember Walt I had a few fairly aggressive questions from you as several quarters ago, a route our aggregate leverage and as I pointed out it peaked at a net leverage target of 4.6, which was as you point out on that call.
Speaker Change: <unk> substantially above the two five to three and a half range, we had laid out.
Speaker Change: We have been able to reduce that leverage to three <unk>, one seven substantially below the high end of that range and that number will come down even further and then next quarter as it as as Todd pointed out an LTM task.
Speaker Change: We are going to look at our aggregate balance sheet and try to optimize that whether it be through incremental high yield whether it be through securitization.
Speaker Change: Or through asset sales, we have many levers to pull.
Speaker Change: We are have been very transparent around the reduction in payments from T mobile they are going down.
Speaker Change: They will go down in June however, we are achieving substantial cost savings.
Speaker Change: Ed off what we laid out and again I know I think it was last quarter you had great doubts on our call about our ability to do that and I think our improvement in EBITDA shows clearly our ability to reduce those costs, both SG&A and Cogs substantially.
Speaker Change: So I think it will be the combination of cost reductions and revenue growth.
Speaker Change: As the incremental wavelength business.
Speaker Change: Grows at a more normalized rate with very high contribution margins are aggregate EBITDA will begin to grow as high as laid out on the last call. We did $352 million in EBITDA and 23 up from $2 33 in 'twenty two.
Speaker Change: <unk>.
Speaker Change: While we're not giving exact guidance it will be similar and 'twenty four but in 'twenty five the impact of wavelengths.
Speaker Change: PV for monetization.
Speaker Change: And data center monetization, coupled with growth in the core IP business should grow our EBITDA and expand margins as I said, it's a topline 5% to 7% growing business with a 100% or 100 basis point a year margin.
Speaker Change: I'm also going to clarify a question that I didn't answer for Frank which is T mobile's utilization.
Speaker Change: And that's two part one the commercial services are typically connectivity services and Colo.
Speaker Change: We're getting out of our facilities they are stopping using us for backhaul in many cases, we're buying at reselling it to them as part of why off net decline.
Speaker Change: They are very far along in that exit revenues declined sequentially.
Speaker Change: Sequentially at about $5 million.
Speaker Change: On the transient services. It was always meant to be a subsidy payment to cogent. They are using a couple percent of the transit that we are providing them. They could use at all it would be fine with us it's all provision but.
Speaker Change: Im not sure Theres, a huge incremental opportunity with T mobile.
Speaker Change: Hopefully with some incremental rate.
Speaker Change: The question was what's the incremental rate when you're not using <unk> tabak.
Speaker Change: Cash you're going to need to pay the dividend because again.
Speaker Change: The leverages as going down Dave that's just math right youre getting TSA payments, but when those payments dropped from 87% to 24. So does the EBITDA and then as to EBITA can't cover capex or cash interest.
Speaker Change: It's just math right the leverage as obviously.
Speaker Change: Go ops, but the only question as what is the right. When you have to borrow more what do you think the rate on that debt new debt.
Speaker Change: Look like.
Speaker Change: So a couple of things one you are correct.
Speaker Change: As the TSA payments go away that will have a negative impact on EBITDA, however growth in the business and the ability to monetize these assets will have a positive impact they are roughly going to offset each other so EBITDA for full year 'twenty.
Speaker Change: Four will be similar to full year 2003, and we'll grow in full year 'twenty four in terms of being a prognosticator on interest rates, that's difficult I'm, not Jay Powell and I'm not in a position to answer that question totally but what I can tell you is that our curve.
Speaker Change: Current unsecured.
Speaker Change: Bonds not IPV for secure ties are trading at around 99, giving a yield to worst of about seven 5% I think that would be indicative of about what our incremental cost of capital would be.
Speaker Change: We will.
Speaker Change: A combination of additional securitizations and additional debt, we understand that as our EBITDA grows we have a targeted range. We are committed to returning capital to shareholders.
Speaker Change: To your point that we're giving out more than 100% of our free cash flow.
Speaker Change: As old news, Walt it's been our policy since 2000 and cat.
Speaker Change: I'm not talking about the dividends I was saying that EBITDA as not covering capex or cash interest that is no.
Speaker Change: That is new after these payments run run.
Speaker Change: Because of the cash interest from the deal that if that's the new thing.
Speaker Change: Okay.
Speaker Change: I don't I will disagree with your arithmetic I think you're right.
Speaker Change: Now I'll play the Dave just one last question just on the synergies just ballpark like what have you what have you realized so far and whats left in the bucket when we when we try and come up with EBITDA estimates.
Dave: We know what the targets are as you don't need to review that I'm, just kind of percentage realize or dollars already realized thank you yes.
Speaker Change: Yes, we're probably 40% through the synergy realization.
Speaker Change: Awesome. Thank you very much thanks.
Speaker Change: Thanks, a lot.
Speaker Change: Some will come from the line of Michael Rollins with Citi. Please go ahead.
Michael Ian Rollins: Hi, Dave Good morning, Hey.
Michael Ian Rollins: I'm curious.
Michael Ian Rollins: If we take a step back can you simplify either how hurricane your growth rate in corporate and Netcentric.
Michael Ian Rollins: Are performing.
Michael Ian Rollins: And if you rather do it pro forma given the integration of the business, but just some way to kind of appreciate the level of growth. What you are achieving relative to what you are used to over the long term and if you see thing.
Michael Ian Rollins: Those growth rates.
Michael Ian Rollins: Putting more positively or pulling back in terms of that rate of growth as you look out over the next few quarters and look at the sales trends the volumes.
Michael Ian Rollins: Hello.
Speaker Change: Yeah, absolutely by good questions.
Speaker Change: Cogent has two market segments. It has a netcentric.
Speaker Change: Segment that focuses on transit sales.
Speaker Change: That continued to grow.
Speaker Change: Mobile as a customer was a netcentric customer there are service provider. If you just net out their decline in revenue that business grew traffic grew sequentially, 1% roughly 20% year over year as as business on a heritage.
Speaker Change: Basis, as probably growing around 10% and.
Speaker Change: In the heritage business as.
Speaker Change: Represented about 40% of cogent aggregate revenues.
Speaker Change: The other larger business heritage was cogent corporate customer base.
Speaker Change: That corporate customer business.
Speaker Change: Actually declining during the pandemic far worse than as long term average growth rate of 11%.
Speaker Change: Today, as probably at a growth rate of.
Speaker Change: Around 3% to 4% year over year still far worse than what we had experienced for nearly 15 years between going public.
Speaker Change: And the beginning of the pandemic that business is slowly improving.
Speaker Change: But I've given up trying to predict when everybody is going to be back in the office at the same level of occupancy pre pandemic.
Speaker Change: There is improvement that business is improving sequentially and year over year, but you know it.
Speaker Change: It is a slow pace.
Speaker Change: As you know.
Speaker Change: We now have a singular.
Speaker Change: Integrated customer base, we report now on three customer types.
Speaker Change: And we report on some additional products that were not material noncore, we always reported on but was immaterial knowledge more material.
Speaker Change: And we now have wavelengths as a service so yes, cogent became more complicated when we acquired sprint, we got new customers and new products, but the trends in the underlying heritage business.
Speaker Change: Reasonable theyre not at peak, but theyre doing pretty well I mean, 10% growing netcentric base, and a kind of 3% to 4% corporate does not terrible.
Speaker Change: And two follow ups, if I could just first on the corporate side.
Speaker Change: Just given where your share is in your buildings of unique customers.
Speaker Change: What do you see as the catalyst to try that.
Speaker Change: <unk> share is there anything competitively that shifting in that market.
Speaker Change: A help or hurt.
Speaker Change: This performance.
Speaker Change: It's been a gradual shift.
Speaker Change: Everybody in our footprint as already using internet connectivity and if they need a VPN service they already have a VPN service.
Speaker Change: So.
Speaker Change: They need to either relocate.
Speaker Change: Or they need to change their usage patterns.
Speaker Change: I think video conferencing was a huge tailwind to that as people became dependent on it that maxed out their connections. However, many many companies were reluctant to enter into new IP contracts.
Speaker Change: <unk> they had some clarity around their office real estate requirement as I think companies are now kind of settling into what that new real estate requirements.
Speaker Change: Print looks like so I think.
Speaker Change: We're seeing this gradual improvement, but there are still leases that have term left on them that people intend to exit or downsize from and until they make that final real estate decision theyre not going to make a permanent bandwidth decision bandwidth.
Speaker Change: As a utility to support their office occupancy.
Speaker Change: I don't know if theres another killer application, that's going to drive things, but I do think.
Speaker Change: The dependence on video conferencing is a significant shift in the world from pre pandemic to post pandemic and I think as companies figure out I'm going to stay in this office. This is how many square feet, they're going to be much more interested in signing a long term.
Speaker Change: Higher cap bandwidth connection.
Speaker Change: Interesting five years ago, our average corporate on net user was using about 18% of a 100 Meg connection at peak.
Speaker Change: Today, our average corporate customer as using 13% off a one gigabit connection at peak, so they're using eight times more bandwidth than they were five years ago.
Speaker Change: I think video conferencing as probably the one thing I would point to and remember they're doing that well.
Speaker Change: With our <unk>.
Speaker Change: 40% less employee days and they office.
Speaker Change: Hopefully that was helpful. Mike.
Mike: Thanks, Dave.
Mike: Yes.
Speaker Change: Your next question will come from the line of Nick del Deo with Moffat Nathanson. Please go ahead.
Speaker Change: Hey, Dave Hey.
Speaker Change: Hey.
Speaker Change: Hey, how are you.
Speaker Change: Lindsay as the proceeds from the securitization.
Speaker Change: Are you going to buy out that uneconomic dark fiber lease that you've seen from sprint that you've talked about.
Speaker Change: And if that's the case can you talk about the mechanics and the benefits.
Speaker Change: Yeah sure so I'll start with the benefits of mechanics.
Speaker Change: Should the lease has a provision that allows us to buy out at a 12% discount rate.
Speaker Change: This is a lease that as fiber, though we don't need and would like to exit as quickly as possible.
Speaker Change: There is about a $130 million liability associated with that lease today, the payment stream on that as $4 2 million of mom.
Speaker Change: And we would have to write a check for probably about $112 million to $113 million to buy out.
Speaker Change: I don't necessarily know we would use all of our cash to do that that we receive so we did $206 million and with an ABS securitization that we're both substantial cost and reserve accounts establish our net proceeds.
Speaker Change: We're about $200 million of which about six we're restricted in reserve accounts.
Speaker Change: So a 194 debt proceeds as.
Speaker Change: And I'm not sure I would want to use 112 of that in cash. So we are looking at the.
Speaker Change: The points of Walt raised we raised more money.
Speaker Change: So I think what we're going to do as keep some cash on the balance sheet.
Speaker Change: We will look to buy out of this ladies and <unk>.
Speaker Change: Continue to be able to invest and the business at the appropriate rates which include the.
Speaker Change: As a conversion of the data centers.
Speaker Change: Wave enablement of the network.
Speaker Change: And our ability to demonstrate I think kind of all three legs of the value proposition that we were anticipating from sprint.
Speaker Change: Been able to I think validate the.
Speaker Change: Worth of our IP address inventory.
Speaker Change: I think we have to show the value of the wavelength dark fiber assets and the co location and.
Speaker Change: I think these proceeds will be used to help demonstrate all of that.
Speaker Change: Okay, Okay, great and then.
Speaker Change: Two two clarifications on EBITDA.
Speaker Change: So first it looks like your unfavorable lease amortization went from $10 3 million in Q4 to $2 5 million in Q1.
Speaker Change: I think if we were to look at it on a cash basis I think the sequential improvement would have been even stronger than you showed.
Speaker Change: Is that fair.
Speaker Change: Yes, the unfavourable lease liability had to be adjusted and increased for the extension in.
Speaker Change: Renewal terms that we had already recorded on your.
Speaker Change: The leases themselves so the lease liabilities.
Speaker Change: That are on the balance sheet kind of as a gross up of the unfavorable lease needed to be matched to that so that was one of the corrections that was made in the quarter that resulted in a net $5 5 million reduction in the gain on the $1 4 billion gain.
Speaker Change: So the bargain purchase yes, so we would have been a little better without that accounting adjustment unless there is so much complexity to cogent accounting for this transaction. We are working very diligently to report everything in a consistent and non confusing way for our investors.
Speaker Change: Going forward in terms of changes to the purchase accounting, we will have additional severance.
Speaker Change: And perhaps an adjustment to the tax rate.
Speaker Change: What could be an adjustment to the deferred tax liability that as all that as expected in the second quarter.
Speaker Change:
Speaker Change: Yes, we also have an anticipated substantial tax refund coming as a result of this we had over paid.
Speaker Change: Based on Cogent as run rates go and again, our federal estimated tax and have approximately $18 million of a pending tax rates line. So that will be split we will get some prior to filing the tax return and the remainder on the tax churn as vial.
Speaker Change: It's about eight okay. Okay.
Speaker Change: That's great color just to be clear on the on the amortization point the reduction versus Q4, Youre, saying it went into the gain rather than an expense reduction.
Speaker Change: Oh, yeah sensitive right.
Speaker Change: Okay.
Speaker Change: And then second just a quick one.
Speaker Change: I know you called out FICA and vacation accruals in Q1.
Speaker Change: Ted did you say that you did not have audit expenses in Q1, because I don't normally how it goes.
Ted: Absolutely did so they were higher.
Speaker Change: Those associated just with the sprint acquisition, which was valuation services are in the sprint cost, but the traditional audit.
Speaker Change: We pay over $2 million you can read it in the proxy on a regular audits.
Speaker Change: As included in in the first quarter costs and the very okay.
Speaker Change: Asian vacation, if you look at fourth quarter.
Speaker Change: Two two first quarter its a couple of million dollars.
Speaker Change: Okay. Okay.
Speaker Change: Okay, I Must've misheard your comment there and then I did.
Speaker Change: Did you have your sales meeting this quarter as that in in Q2.
Speaker Change: We're actually not going to have it this year because it would.
Speaker Change: Just a large distraction we've got so much integration work going on now what we have gone as.
Speaker Change: Ramped up our regional learning manager program hire some additional resources.
Speaker Change: <unk> are doing it on a more regionalized basis as opposed to a global meeting.
Speaker Change: Presume that next year, but we felt with all of that was going on with the integration that it just wasn't enough cycles to do that we think theres great value went up but we're kind of taking a.
Speaker Change: Less impactful strategy and doing get just through regional meetings.
Speaker Change: Okay perfect. Thanks, guys.
Speaker Change: Alright, great.
Speaker Change: And we have no further questions at this time I'll hand, the call back to Dave Shaffer for any closing remarks.
David Schaeffer: As always our calls tend to be a little long I want to thank everyone for their patience I think.
David Schaeffer: Hopefully we've been clear in answering questions and.
David Schaeffer: We look forward to seeing each and every one of you as we get together at conferences take care see you soon bye bye.
Speaker Change: That will conclude today's meeting. Thank you all for joining you may now disconnect.
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