Q3 2024 Cogent Communications Holdings Inc Earnings Call

on a constant basis every quarter.

Dave Schaeffer: I'd like to take a moment to address some of the expected cost savings that we've been able to achieve. We are continuing to make substantial progress in realizing cost savings and synergies from the acquisition of the Sprint Global Markets business. Based on the difference between our monthly cost run rates in May of 2023 and September of 2024, we have realized $165 million of these savings are approximately 75% of our targeted $220 million in annual cost savings. These cost savings were initially expected to be achieved in their entirety by May of 2026.

Now I'd like to take a moment to address some of the expected cost savings that we've been able to achieve.

We are continuing to make substantial progress in realizing cost savings and synergies from the acquisition of the spring global markets business based on the difference between our monthly cost run rates in May of 'twenty 23, and September of 'twenty 'twenty four way of realized.

125 million or $165 million of these savings are approximately 75% of our targeted $220 million in annual cost savings. These cost savings are were initially expected to be achieved in their entirety.

By May of 'twenty 'twenty six.

Dave Schaeffer: Our combined cogent business had a very good quarter. Our total revenue was $257.2 million for the quarter.

Our combined cogent business had a very good quarter, our total revenue was $257.2 million for the quarter.

Dave Schaeffer: results for the quarter were impacted by the continuing grooming of low-margin off-neck The continued elimination of non-core products and low margin business that with the reduction in of revenues from the commercial services agreement that we have with T-Mobile. Revenues under our commercial services agreement with T-Mobile decreased sequentially by $1.8 million to $4.1 million for the quarter from $5.9 million for Q2. Revenue from a low-margin resale customer contract, which was acquired in the sprint acquisition, which we intentionally terminated, was classified as on-net revenue and enterprise revenue, and declined by $3.5 million sequentially. Excluding the impact of these two results for our total revenue, our revenues would have increased by 2.1 million or approximately seven-tenths of a percent sequentially.

Our revenue results for the quarter were impacted by the continuing grooming of low margin off net actions the continued elimination of noncore products.

And low margin business.

With the reduction in.

Our revenues from the commercial services agreement that we have with T mobile.

Revenues under our commercial services agreement with T mobile decreased sequentially by 1.8 million to 4.1 million for the quarter from 5.9 million for Q2.

Revenue from a low margin resale customer contract, which push acquired and the sprint acquisition.

Which we intentionally terminated was.

It was classified as on net revenue and enterprise revenue and declined by 3.5 million sequentially.

Excluding the impact of these two.

Our results for our total revenue our revenues would have increased by 2.1 million or approximately seven tenths of a percent sequentially.

Dave Schaeffer: Our non-core revenues also declined by another $500,000 to $4.1 million for the quarter. Our wavelength revenues increased sequentially by 45.8% to $5.3 million and an increase of 76.7% on a year-over-year basis. Our IPv4 leasing revenue increased sequentially by 11.8% to $12.8 million and increased 31.5% on a year-over-year basis. Our network traffic for the quarter increased by 8% sequentially and 19% on a year-over-year basis. Our EBITDA increased sequentially by $8.7 million and our EBITDA margin increased sequentially by 350 basis points to 13.9%. Our EBITDA, as adjusted, was $60,900,000. and our EBITDA as adjusted margin was 23.7.

Non core revenues also declined by another $500000 to 4.1 million for the quarter.

For wavelength revenues increased sequentially by 45.8% to 5.3 million and an increase of 76.7% on a year over year basis.

Our I P V for leasing revenue increased sequentially by 11.8% to 12.8 million and increased 31.5% on a year over year basis.

Art network traffic for the quarter increased by 8% sequentially and 19% on a year over year basis.

Our EBITDA increased sequentially by $8.7 million and our EBITDA margin increased sequentially by 350 basis points to 13.9%.

Our EBITDA as adjusted was 60.900 million.

And our EBITDA as adjusted margin was 23.7.

Dave Schaeffer: percent for the quarter versus 106 million point two and 40.8 percent for Q2 of 2024. The sequential change was due to the scheduled reduction of $41.7 million in a decline in payments under our IP transit services agreement with T-Mobile, but was partially offset for $8.7 million sequential increase in EBITDA. In accordance with our IP service transit agreement with T-Mobile, we received payments for the quarter totaling $25 million. This compares to the payments that we received in the previous quarter of $66.7 million. The payments for this quarter are three monthly payments of $8.3 million, an additional 38 monthly payments of $8.3 million per month will continue through November of 2027.

<unk> for the quarter versus 106 million 0.2, and 48% for Q2 of 'twenty 'twenty four.

The sequential change was due to the scheduled reduction of $41.7 million in a decline in payments under our IP Transit services agreement with T mobile.

But was partially offset.

Our 8.7 million dollar sequential increase in EBITDA.

In accordance with our IP service Transit agreement with T mobile, we receive payments for the quarter totaling $25 million.

This compares to the payments that we received in the previous quarter of 66.7 million.

The payments for this quarter are three monthly payments of $8 $3 million and additional 38 monthly payments of eight 3 million per month will continue through November of 'twenty 'twenty seven.

Dave Schaeffer: These payments are included in our EBITDA as adjusted.

These payments are included in our EBITDA as adjusted.

We continue to realize cost.

Dave Schaeffer: We continue to realize cost reductions from the acquired expense base. Our SG&A decreased by $4.9 million sequentially, or 7.5%. Our SG&A as a percentage of revenue also decreased to 23.4% from 25% last quarter.

Dave Schaeffer: Our cost of goods sold increased by $5.3 million from the last quarter due to two major expenses. The additional costs involved in converting former Sprint switch sites into Cogent data that were not capitalized and certain vendor contract termination costs. The primary contract that was terminated was a triparty agreement. This was the first opportunity we had to buy out of that agreement and to end that relationship.

Dave Schaeffer: However... Over the course of the year, on a year-over-year basis, our cost of goods sold still decreased by 12.1 million, or 7%. Our gross debt to trailing 12 months EBITDA as adjusted ratio was $4.94 for the quarter and our net debt ratio did increase from $3.14 last quarter to $4.13 primarily as a result of the reduction in IP transit payments from T-Mobile.

Dave Schaeffer: We ended the quarter with $316.1 million of cash and cash equivalents on the balance sheet. Are Salesforce productivity improved in the quarter from 3.8 installed orders per rep per month in Q2 to 4 orders per rep per month in Q3?

Dave Schaeffer: In conjunction with the Sprint acquisition, we hired a total of 942 employees in May of 2023. At quarters end, 635 of these employees remain with Cogent.

Dave Schaeffer: Our wavelength business improved materially. In conjunction with the acquisition of the Sprint Network, we expanded our product offering to include optical wavelength services over our fiber optic network. We began selling these services to existing customers, as well as acquired customers from Sprint and new customers. At the end of the quarter, we had connectivity and wavelength sales capabilities in 657 locations throughout North America, however, with longer provisioning cycles than we are targeting. We have sold wavelength services now in slightly over 200 locations. By the end of 2024, we expect to be able to offer wavelength services in over 800 locations.

Dave Schaeffer: with a much more rapid provisioning site. We have a backlog in front-of-wave opportunities of over 3,400 unique wavelengths.

Dave Schaeffer: Our Sprint acquisition materially expanded our data center footprint. As of September 30th, we have partially reconfigured 43 of the acquired facilities and added them to our network. These added data centers are in addition to the 1,627 carrier-neutral data centers that Cogent connects Today, there are 95 Cogent data. which have an aggregate conditioned protected power capacity of 169 megawatts.

Dave Schaeffer: We are decommissioning some legacy Cogent leased Davis Center facilities that are redundant with our fee simple owned Sprint facility.

Dave Schaeffer: Our board of directors reflected on the progress that we have made and the cash flow generating capabilities of our business, the investment opportunities we have, and again decided to increase our quarterly dividend by one cent per share, raising our quarterly dividend from 98.5 cents per share per quarter to 99.5 cents per share per quarter. This increase represents the 49th consecutive sequential increase in our regular quarterly dividend. This is a 4.2% annual dividend growth rate. We do expect the combined business of Sprint and Cogent to continue to achieve long-term average revenue growth of between 5% and 7%.

Dave Schaeffer: and we expect adjusted EBITDA margins to expand on average over a multi-year period at roughly 100 basis points a year.

Dave Schaeffer: Our revenue and EBITDA guidance are intended to be multi-year and not intended to be used as specific quarterly guidance or even specific annual guidance. Our EBITDA is adjusted and leverage ratios are impacted by the $700 million that we received under the IP Transit Agreement with T-Mobile.

Thaddeus Weed: Now I'd like to ask Thad to read our Safe Harbor language, provide some additional operating performance metrics for the quarter, and then we will open the floor for questions and answers. Thank you, Dave, and good morning, everyone. Earnings Conference Call includes forward-looking statements, and these forward-looking statements are based...

Thaddeus Weed: Content, Belief, and Expectation. forward-looking statements, and all other statements that call that are not historical facts are subject. 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 statement.

Thaddeus Weed: If we use any non-GAAP financial measures during this call, you will find these reconciled to the corresponding GAAP measurement in our earnings release that are posted on our website at cogentco.com.

Thaddeus Weed: Any comments on corporate and net-centric revenue and customer connections? We analyze our revenues based upon network connection type, which is on-net, off-net, wavelength, and non-core. And we also analyze our revenues based upon customer. classify all customers into three types, net centric, corporate, and enterprise. corporate Our corporate business represented 45.2% of our revenues for the quarter.

Thaddeus Weed: quarterly corporate revenue decreased by 3.5% year over year and sequentially by 2.8%. The consequential decrease was primarily due to the continued grooming of low-margin off-net connections and the elimination of non-core products. We had 47,613 corporate connections on our network at quarter end.

Thaddeus Weed: For the quarter, the sequential impact of USF on our corporate revenues was a positive 600.

Thaddeus Weed: Next entry. Our net-centric business continues to benefit from continued growth in video traffic, activity related to artificial intelligence, streaming, and wavelength. Our net centric business represented 35.7% of our revenues for the quarter.

Thaddeus Weed: Our net centric revenue under our commercial services agreement with T-Mobile declined by $1.8 million sequentially and declined by $3.9 million year over year, and that impacted our net centric revenue results. We had 62,273 NetCentric customer connections on our network at quarter end.

Thaddeus Weed: on the Enterprise. Our enterprise business represented the remainder of our revenues of 19.1% this quarter and was $49.1 million. We had 16,447 enterprise customer connections on our network at the end of the year.

Thaddeus Weed: Our enterprise revenue decreased by 18.2% year over year, and sequentially by 1.4% or by 700,000. This was primarily due to a reduction in non-core and low margin. Revenue from a low-margin retail customer we acquired in the Sprint acquisition that Dave that we intentionally terminated and classified as on-net revenue and enterprise revenue declined sequentially by $3.5 million.

Thaddeus Weed: If you exclude this impact from this cancellation, our enterprise revenue would have increased sequentially by $2.8 billion.

Thaddeus Weed: four by five. on revenue and customer connections by network type on We serve our on-net customers in our 3,424 total on-net, multi-tenant office, carrier-neutral data center buildings. continue to succeed in selling larger 100 gigabit connections. 400 gigabit connections and carrier neutral data centers and selling 10 gigabit connections and select multi-tenant offices Our on net revenue was $136.5 million for the quarter. The year-over-year increase of 5.8%, but a sequential decrease of 4.3 million or 3.8% The decline in our on-net revenue under our commercial services agreement with T-Mobile and the cancellation of that low-margin resale customer negatively impacted our sequential on-net revenue results by an aggregate total of $5.7 million.

Thaddeus Weed: Exclusive again of these impacts are on that revenue. would have increased subconsciously by 1%. Our on-net customer connections were 87,655 at core. Our off-net revenue was $111.3 million for the quarter, a year-over-year decrease of 14.8%, and a sequential decrease of 0.1%.

Thaddeus Weed: © The Bulletproof Executive 2013 and the continued grooming and termination of low-margin, off-net contracts, which had more. Our off-net customer connections were 32,420 at quarter end. Our wavelength revenue was $5.3 million for the quarter, sequential increase of 45.8%, and a year-over-year Our Wavelength Customer Connections were 1,041 at quarter end, a 38.1%.

Thaddeus Weed: Our IPv4 revenue, our IPv4 leasing business had an excellent quarter. We were leasing 12.9 million of the IPv4 addresses at the end of the quarter, and our IPv4 revenue increased by 11.8% from last quarter and increased by 31.5% year-over-year.

Thaddeus Weed: $12.89 for the quarter.

Thaddeus Weed: Lastly, our non-core revenue was $4.1 million for the quarter, sequential decrease of 500,000 or 10.2%. Again, due to our decision to end of life these non-core products, non-core customer connections were 5,217 at quarter end, a sequential decline at 33.8.

Thaddeus Weed: All comments on pricing per megabit. Our average price per megabit for our installed base decreased sequentially by 8.5% to $0.23. 23.9% year-over-year, consistent with historical trend.

Thaddeus Weed: Our average price per megabit for our new customer contracts for the quarter was $0.09, which was a coin... 99% and 47% year-over-year.

Thaddeus Weed: Comments on our on net ARPU decreased sequentially by 3.1%. 536 to 520. Year over year, it was an increase of 9.4%.

Thaddeus Weed: are often at ARPU. increased... by 3.2%. 1,103 to 1,138.

Thaddeus Weed: Year over year are often at our. Our wavelength, ARPU, increased by 17.6%. 1,900. for this quarter compared to 1,670.

Thaddeus Weed: The average revenue per IPv4 address sold was materially higher. $0.49 per address for the quarter. That was a 63.3% increase from an average of $0.30 for the base of all addresses at the beginning of the quarter.

Thaddeus Weed: are on that monthly churn rate. 1.2% for the quarter.

Thaddeus Weed: That was an improvement from 1.4% last quarter.

Thaddeus Weed: are off net unit. increased to 2.6% this quarter. 2.3%.

Thaddeus Weed: comments on EBITDA Classic and EBITDA Margin. We reconcile our EBITDA to our cash flow from operations in each of our quarterly press releases. Our EBITDA increased sequentially by 8.7 million, and our EBITDA margin increased sequentially by 350 basis points to 13.9%.

Thaddeus Weed: Our EBITDA, as adjusted, includes adjustments for Sprint Acquisition Costs. cash payments received under the IP transit agreement with T-Mobile. We collected $25 million under the IP Transit Services Agreement this quarter. Last quarter, it was $66.7 million, so a reduction of $41.7 million.

Thaddeus Weed: are even as adjusted. $25.9 million for the quarter, that was a $23.7 million. Even at its adjusted margin, last quarter it was $106.2 million or $40.8 million.

Thaddeus Weed: Sequential change was due to the schedule. The decline of $41.7 million of payments under the IP Transit Agreement with T-Mobile, and that offset our sequential increase of $8.7 million in EBITDA. And we incurred $12.4 million of Sprint Acquisition Costs last quarter.

Thaddeus Weed: We incurred none classified as Sprint Acquisition Costs this quarter as the one-year anniversary of the Sprint Acquisition ended.

Thaddeus Weed: Some comments on foreign currency. Our revenue earned outside of the United States is reported in US dollars, and it was about 18% of our revenues for the quarter. About 11% of our revenues for the quarter were based in Europe. 6%, the remainder related to Canada, Mexico, or Oceanic, South America. The average Euro-USD rate so far this quarter was $1.09 and the Canadian dollar exchange rate was $0.73.

About 11% of that for the quarter of our revenues for the quarter were based in Europe, and 6% the remainder related to Canada, Mexico, Our oceanic South American and African operations.

The average euro to USD rate. So far this quarter was 109 and the Canadian dollar exchange rate was 73.

Thaddeus Weed: If those average rates remain at the current levels for the remainder of our fourth quarter, we estimate that the FX conversion impact on both sequential revenues and year-over-year would Customer Concentration. We believe that our revenue and customer base is not highly concentrated. Our top 25 customers represented 19% of our revenues this quarter, slightly down from 20%.

If those average rates remain at current levels for the remainder of our fourth quarter, we estimate that the FX conversion impact on both sequential revenues and year over year would not be significant.

Customer concentration.

We believe that our revenue and customer base is not highly concentrated our top 25 customers represented 19% of our revenues this quarter slightly down from 20% last quarter.

Thaddeus Weed: CapEx, our quarterly capital expenditures were $59.2 million for the quarter.

Capex, our quarterly capital expenditures were $59 2 million for the quarter. We are continuing our network integration to the former sprint network and legacy Cogent network into one unified network and converting former sprint switch sites and to cogent data centers.

Thaddeus Weed: We are continuing our network integration to the former Sprint network and legacy Cogent network into one unified network and converting former Sprint switch sites into Cogent data We have accelerated and expanded our data center conversion program due to the high level of demand for our power availability. And this program will require similar CapEx spending, as we incurred this quarter, per quarter through mid-2025.

We have accelerated and expanded our data center conversion program due to the high level of demand for our power availability and this program will require similar capex spending as.

As we incurred this quarter per quarter through mid 2025.

Some comments on finance leases.

Thaddeus Weed: comments on finance. Our finance IRU obligations are for long-term dark fiber lease. Our IRU finance lease obligations were $482.6 million at quarter end. very diverse set of IRU suppliers and we have IRU contracts with three hundred different dark fiber suppliers across Cash and Restricted Cash.

Our finance <unk> obligations are for long term dark fiber leases.

Or are you finance lease obligations were $482 6 million at quarter end.

We have a very diverse set of <unk> suppliers, and we have <unk> contracts with 360 different dark fiber suppliers across the world.

Cash and restricted cash at quarter end, our cash and cash equivalents and restricted cash and the aggregated was $316 1 million.

Thaddeus Weed: At quarter end are Cash and Cash Equivalents and Restricted Cash. And the aggregate was $316.1 million. of our total $36.9 million of cash that was restricted, $29.9 million was tied to the fair value of our swap agreement, and $7 million was tied to the requirements under our ID.

Of our total $336 9 million of cash that was restricted $29 9 million was tied to the fair value of our swap agreement and $7 million was tied to the requirements under our ITB four notes.

Debt and debt ratios.

Thaddeus Weed: debt and debt ratios. Our total gross debt at par, including our finance IRU obligations, was $1.9 billion at quarter end, and our net debt was $1.6 billion. The total gross debt to last 12 months EBITDA as adjusted ratio was $4.94 a quarter end and our net debt was $1,000.

Thaddeus Weed: our consolidated leverage ratio as calc Notenday. 5.11. Cured leverage ratio as calculated under our new indentures was 2.90.

Thaddeus Weed: Our fixed coverage ratio as calculated under our notes.

Thaddeus Weed: Further comments on the swap, we are party to an interest rate swap agreement that modifies our fixed interest rate obligation. Associated with our 500 million 2026 notes to a variable interest rate obligation. based on secured overnight financing rate for the remaining term of our 2026 notice. The fair value of our swap agreement decreased from last quarter by $5.6 million. Changes in the fair value of the swap agreement are classified in our public filings with interest expense as required.

Thaddeus Weed: Finally, comments on BAD Debt and DSO. Our DSO was 32 days for the quarter versus 26 days last quarter. Our BAD Debt expense was $4.5 million and 1.8% of our revenues for the quarter. These increases were largely due to some collection issues associated with a large former Sprint customer that we since resolved after quarter end, and also just the calendar was kind of unkind with the 30th. where it fell and and we incur cashed the first week after the third.

Thaddeus Weed: We want to, again, thank and recognize our worldwide billing and collections team members who are doing, again, a fantastic job in serving our Cogent customers.

Dave Schaeffer: And with that, I will turn the call back over to Dave for some final.

Dave Schaeffer: Hey, thanks, Thad. I'd like to highlight a couple of strengths on our network customer base and Salesforce. We continue to experience substantial traffic growth accelerating in our net centric IP business. At Quarters End, we were in 1,627 carrier-neutral data centers and 95 Cogent-owned data centers, bringing that total to 1,722 facilities. The breadth of this coverage enables our NetCentric customers to better optimize their networks and reduce latency. We have a presence in 56 countries globally for these services. We expect to continue to widen this lead in the market and project adding over 100 carrier-neutral data centers to our network each year for the next several years.

Dave Schaeffer: By the end of 2024, we expect to be able to sell wavelength services in over 800 North American carrier-neutral data centers with substantially reduced provisioning. At Quarters End, we directly connected to 8,212 networks. 23 of these networks are peers, and 8,189 of these networks are Cogent Transit customers. We remain focused on our sales force. Our sales force productivity is dependent on managing out underperforming reps and training those reps that remain at the company to make them even more successful. Our sales force turnover rate was 6.7% per month for the quarter, down from a peak of 8.7% during the height of the pandemic, but still slightly above our historical average sales force turnover rate of 5.7% of the sales force per month.

Dave Schaeffer: At quarter's end, we had 279 salespeople focused exclusively on the net centric market. 363 sales professionals focused on the corporate market and 13 sales professionals focused on the enterprise. We remain optimistic about our unique position in serving small and medium-sized businesses with our IP-based services located in the central business districts of major North American cities, with over 1,870 multi-tenant office buildings directly connected to our network comprising over a billion square feet of rentable space. We are excited about the opportunity to continue to grow our profitable services to our large enterprise customer. We're enthusiastic and optimistic about our optical transport business or wavelength services and their addition to our product portfolio.

We remain optimistic about our unique position in serving small and medium-sized businesses with our IP-based services located in the central business districts of major North American cities.

with over 1,870 multi-tenant office buildings directly connected to our network, comprising over a billion square feet of rentable space.

We are excited about the opportunity to continue to grow our profitable services to our large enterprise customer base.

We're enthusiastic and optimistic about our optical transport business or wavelength services and their addition to our product portfolio.

Dave Schaeffer: We have a significant wavelength backlog, a funnel of over 3,400 wavelength opportunities. However, due to our longer provisioning cycles, we are not sure all of these orders will, in fact, be installed. We will substantially reduce that provisioning window by quarter end. We are diligently working to complete the integration of the SPRINT network and the Cogent network and remain very confident about the cash flow generating capabilities of this combined operation. Based on the difference between monthly costs at closing versus September of 2024, we have realized $165 million, or 75% of our targeted $220 million, in annual cost reduction.

We have a significant wavelength backlog, a funnel of over 3,400 wavelength opportunities.

However, due to our longer provisioning cycles, we are not sure all of these orders will in fact be installed.

We will

substantially reduce that provisioning window by quarter end. We are diligently working to complete the integration of the Sprint network and the Cogent network

and remain very confident about the cash flow generating capabilities of this combined operation.

Based on the difference between monthly costs at closing versus September of 2024, we have realized $165 million, where 75% of our targeted $220 million in annual cost reductions.

Dave Schaeffer: We will continue to look at ways to monetize our unleased IPv4 addresses, our excess dark fiber, and maybe most importantly, we are focusing on our excess data center capacity and power. We are marketing these on a wholesale basis, either as a direct sale or a long-term lease. Currently, we are in discussions with multiple counterparties for multiple sites. We have been taking feedback from those counterparties and accelerating the modification of these facilities to meet their requirements.

We will continue to look at ways to monetize our unleased IPv4 addresses.

or Excess Dark Fiber.

Maybe.

Most importantly, we are focusing on our excess data center capacity and power. We are marketing these on a wholesale basis, either as a direct sale or a long-term lease.

Currently, we are in discussions with multiple counterparties for multiple sites. We have been taking feedback from those counterparties and accelerating the modification of these facilities to meet their requirements.

Thaddeus Weed: With that, I'd like to open the floor for questions. Thank you. As a reminder, if you'd like to ask a question, please press star and the number one on your telephone keypad.

With that, I'd like to open the floor for questions.

Thank you. Bye-bye.

Speaker Change: Thank you. As a reminder, if you'd like to ask a question, please press star and the number one on your telephone keypad.

James Schneider: And our first question comes from the line of Jim Schneider from Goldman Sachs. Good morning. Thanks for taking my call. Hello, good morning. Thanks for taking my question. I was wondering, Dave, if you could maybe just comment on the Wavelinks business for a moment. Clearly, you had a nice uptick sequentially in revenue. Does that really reflect the fact that you're already kind of getting better improvement on provisioning than you would have expected maybe a quarter ago? And then maybe kind of comment on sort of what you said about the backlog, I think up 700 sequentially on the backlog, but also some of these may not be installed.

Speaker Change: And our first question comes from the line of Jim Schneider from Goldman Sachs.

Speaker Change: Douglas Goldstein, CFP®, is the director of Profile Investment Services and the host of the Goldstein on Gelt radio show.

Speaker Change: Hello, good morning. Thanks for taking my question. I was wondering, Dave, if you could maybe just comment on the Wavelinks business for a moment. Clearly, you had a nice uptick sequentially in revenue. Does that really reflect the fact that you're already kind of getting better improvement on provisioning than you would have expected maybe a quarter ago? And then maybe kind of comment on sort of what you said about the backlog, I think

Dave Schaeffer: So, maybe talk about, as we look to the next few quarters, the rate of backlog growth we could expect and whether at any point you would expect to write down any of that backlog if you determine you can't provision it. Yeah, so. Three different questions, Jim. Thanks for them. First of all, we substantially increased the number of endpoints that we could deliver wavelength services. We are quite confident that while we ended the quarter at 657 sites, by year-end that number will be over 800 sites. In order to provision a wavelength rapidly, all of the intermediate sites need to be optimized for that wavelength implementation.

Speaker Change: These may not be installed, so maybe talk about as we look to the next few quarters the rate of backlog growth we could expect and whether at any point you would expect to write down any of that backlog if you determine you can't provision it.

Yeah, so...

Speaker Change: Three different questions, Jim. Thanks for them. First of all, we substantially increased the number of endpoints that we could deliver wavelength services.

Speaker Change: We are quite confident that while we ended the quarter at 657 sites, by year-end that number will be over 800 sites.

Speaker Change: In order to provision a wavelength rapidly, all of the intermediate sites need to be optimized for that wavelength implementation.

Dave Schaeffer: Our goal is to get those wavelength install windows down to about two weeks from today, about 90 days. We had certain customers in our backlog that had significant needs for the wavelengths and we diverted some resources away from the network optimization program to provision these wavelengths. We were comfortable enough in the progress that we had made to hit the total 800 sites and all of the intermediate points by year-end that we did not risk that pushing out. We continue to talk to the customers that are in our backlog, and if we can accelerate certain of those orders, we will.

Speaker Change: Our goal is to get those wavelength install windows down to about two weeks from today, about 90 days.

Speaker Change: We had certain customers in our backlog that had significant needs for the wavelengths.

Speaker Change: And we diverted some resources away from the Network Optimization Program to provision these wavelengths.

We were comfortable enough in the progress that we had made to hit the total 800 sites and all of the intermediate points by year-end that we did not risk that pushing out.

Speaker Change: We continue to talk to the customers that are in our backlog, and if we can accelerate certain of those orders, we will.

Dave Schaeffer: We also know that some of those orders have been sitting for months. We have tried to be very transparent with customers in terms of our limitations on hitting what we view as acceptable provisioning windows. Most customers have been tolerant of that and have continued to reaffirm to us that they are interested in those waivers. But it is also realistic that if some of those orders have been sitting for six or seven months, when we actually go to provision them, some customers may not accept those orders, and we'll have those discussions. Now, with regard to the funnel building, we actually think the rate of funnel expansion should materially accelerate into next year.

Speaker Change: We also know that some of those orders have been sitting for months. We have tried to be very transparent with customers in terms of our limitations on hitting what we view as acceptable provisioning windows.

Speaker Change: Most customers have been tolerant of that and have continued to reaffirm to us that they are interested in those wavelengths.

Speaker Change: But it is also realistic that if some of those orders have been sitting for six or seven months, when we actually go to provision them, some customers may not accept those orders, and we'll have those discussions.

Speaker Change: Now, with regard to the funnel building, we actually think the rate of funnel expansion should materially accelerate into next year. Because we demonstrate success in delivering wavelengths.

Dave Schaeffer: As we demonstrate success in delivering wavelengths, we then establish more credibility with those buyers. They see that we can, in fact, meet our provisioning windows. The quality of the service meets or exceeds industry standards, and our pricing remains aggressive.

We then established

Speaker Change: more credibility with those buyers. They see that we can, in fact, meet our provisioning windows, the quality of the service meets or exceeds industry standards, and our pricing remains aggressive.

Dave Schaeffer: So we feel very optimistic that in 2025, we will see a material ramp in the growth in our wavelength business to be able to hit our five-year post-acquisition target of doing $500 million in wavelength sales, which represents a market share of 25% in North America similar to that of our market share for IP.

Speaker Change: So we feel very optimistic that in 2025 we will see a material ramp in the growth in our wavelength business.

Speaker Change: to be able to hit our five-year post-acquisition target of doing $500 million.

in Wavelength Sales, which represents

Speaker Change: a market share of 25% in North America, similar to that of our market share for IP transit.

James Schneider: That's very helpful. Thank you very much.

James Schneider: And then maybe as a follow-up, I wanted to ask about the network cost side of things. I think you cited some individual items converting the sprint sites and also some vendor termination costs. So on a go forward basis, maybe in Q4, as we head into a run rate for 2025, how should we be thinking about where those sort of overall cost of revenues align? Where does that settle out?

Speaker Change: That's very helpful. Thank you very much. And then maybe as a follow-up, I wanted to ask about the network cost side of things. I think you cited some—

Dave Schaeffer: So they will improve for three reasons. One, we continue to eliminate unprofitable products, whether they be low-margin, off-net circuits, or any non-core products that we can't eliminate once the customer is out of contract for those.

Speaker Change: So they will improve for three reasons. One, we continue to eliminate unprofitable products.

Speaker Change: whether they be low-margin off-net circuits or any non-core products that we can eliminate once the customer is out of contract for those services.

Dave Schaeffer: Secondly... This quarter, we did have a substantial one-time expense associated with buying out of a contract. That contract was complicated because it was not just a bilateral contract that we inherited, but it actually had two counterparties to it, and we had to get concurrence between those parties. While we can't disclose the exact settlement amount, it was substantially above the revenue that we were receiving and the cost that we incurred on a typical run rate basis. That is one time and it's gone. It was probably the largest and most complex of these cost of goods contracts that we've quite honestly worked on for almost a year to get people to concur to allow us to exit it.

Secondly...

Speaker Change: This quarter, we did have a substantial one-time expense associated with buying out of a

Speaker Change: contract. That contract was complicated because it was not just a bilateral contract that we inherited, but it actually had two counterparties to it and we had to get concurrence between those parties.

Speaker Change: While we can't disclose the exact settlement amount, it was substantially above the revenue that we were receiving and the cost that we incurred on a typical run rate basis.

that is one time and is gone.

It was probably the largest and most complex of these.

Speaker Change: Cost good contracts that we've quite honestly worked on for almost a year to get people to concur to allow us to exit it

Dave Schaeffer: While there are a few smaller contracts that will come up, they will be smaller, but some will show up definitely in 2025.

Speaker Change: While there are a few smaller contracts that will come up, they will be smaller but some will show up definitely in 2025.

Dave Schaeffer: And then the third item is, as we have accelerated the marketing of our wholesale data center space, either for sale or lease. We have been conducting. Dozens of tours at dozens of locations with many counterparts. We have been getting significant feedback from those counterparties on what they want to say. Now, sometimes we accept it, sometimes we don't, but it has. resulted in us accelerating our conversion of these facilities.

And then the third item is, as we have

Speaker Change: accelerated the marketing of our wholesale data center space, either for sale or leased. We have been conducting dozens of tours at dozens of locations with many counterparties.

Speaker Change: We have been getting significant feedback from those counterparties on what they want to see. Now, sometimes we accept it, sometimes we don't. But it has...

resulted in us accelerating our

Dave Schaeffer: Just to remind investors, when we announced the Sprint transaction, our intention was to convert 45 facilities. That's been increased to 48. Secondly, we were only intending to convert about 10,000 square feet and about one megawatt into a retail Cogent data center and the remaining space and power was going to sit fallow.

Speaker Change: conversion of these facilities. Just to remind investors, when we announced the Sprint transaction, our intention was to convert 45 facilities. That's been increased to 48.

Speaker Change: and the remaining space and power was going to sit fallow.

Dave Schaeffer: As the acceleration of AI training caused an acute shortage of data center power, we realized we had an incremental opportunity to monetize that excess power and space. We began last April talking to potential customers about that and listening feedback, conducting tours, and that did result in two things.

As the acceleration of AI training

Speaker Change: caused an acute shortage of data center power, we realized we had an incremental opportunity to monetize that excess power and space.

April: April talking to potential customers about that and listening feedback conducting tours and that did result in two things

Dave Schaeffer: A increase in capital spending that Thad mentioned, solely attributable to these data center conversions, and that was beyond the $50 million in network excess CapEx that we had anticipated. Based on the amount of time necessary to complete these conversions, we will be at an elevated capital run rate for probably a couple of more quarters as we complete the conversion of these data sets. we believe we will have them all converted and fully operational and marketable with all of the excess power by mid-year 25, so end of Q2.

April: a increase in capital spending that Thad mentioned, solely attributable to these data center conversions, and that was beyond the $50 million in network excess capex that we had anticipated.

April: Based on the amount of time necessary to complete these conversions we will be at an elevated capital run rate for probably a couple of more quarters as we complete the conversion of these data centers.

Speaker Change: We believe we will have them all converted and fully operational and marketable with all of the excess power by mid-year 2025, so end of Q2.

Dave Schaeffer: We also had to accelerate the deprovisioning and demo work in these facilities. And that demo work cannot be capitalized, so therefore it did increase our cost of goods sold. We expect that to start to come down this quarter and continue to come down for the next couple.

deprovisioning and demo work in these facilities.

Speaker Change: and that demo work cannot be capitalized so therefore it did increase our cost of goods sold. We expect that to start to come down this quarter and continue to come down for the next couple of quarters.

James Schneider: Thank you very much.

Thank you very much. Hey, thanks, Jim.

Thank you.

Greg Williams: Our next question comes from the line of Greg Williams. Thanks for taking my questions. Dave, your on-net revenue was, you know, down quarter to quarter. You mentioned that contract that was terminated had that $3.5 million impact, but it still would have been down $2.8 million, excluding this. So just trying to understand the color here. And, you know, I think you mentioned the size and cadence of future uneconomical contracts going forward. It'll sort of dribble into 2025. You know, more color there would be great. And the same store sales on corporate would be helpful.

Our next question comes from the line of Greg Williams.

The line is open. Thanks for taking my questions.

Greg Williams: Dave, your on-net revenue was, you know, down quarter to quarter. You mentioned that that contract that was terminated had that $3.5 million impact, but it still would have been down $2.8 million excluding this. So just trying to understand the color here.

Speaker Change: You know, I think you mentioned the size and cadence of future uneconomical contracts going forward. It'll sort of dribble into 2025.

Speaker Change: More color there would be great, and the same store sales on corporate would be helpful. Second question is just on the data center sale process you just mentioned.

Greg Williams: Second question is just on the data center sale process you just mentioned. You know, could they sell for less than the $10 million per megawatt marker? But it sounds like you're putting the CapEx into it for the next few quarters so they can then command and fetch a $10 million per megawatt price.

Speaker Change: Could they sell for less than the $10 million per megawatt marker? But it sounds like you're putting the CapEx into it for the next few quarters so they can then command and fetch a $10 million per megawatt price. Thanks.

Dave Schaeffer: Okay, let me try to hit all three of those, Greg. So, first of all, in the on-net revenue, there were two primary contributors to that decline. The first was a sequential decline of $1.8 million in our commercial services agreement with T-Mobile. As we have been very clear that, you know, we are bound by our purchase agreement to deliver these services to T-Mobile. They are not particularly profitable, and T-Mobile can, at its decision, continue to use them or not. We do anticipate them going asymmetrically to zero, and they did come down $1.8 million in a quarter.

Speaker Change: Okay, let me try to hit all three of those, Greg. So, first of all,

with T-Mobile.

as we have been very clear that

Speaker Change: You know, we are bound by our purchase agreement to deliver these services to T-Mobile. They are not particularly profitable.

Dave Schaeffer: The second big impact was actually twice as big as the reduction in the commercial services agreement. was the reduction in this contract. So we had a service that we were selling that had two counterparties to it that was resulting in a $3.5 million revenue stream, but actually more than that in cost. We could not get out of that agreement until both counterparties would agree to a buyout provision, which we exercised in the quarter. You know, I think we may have some smaller opportunities like this going forward, but this was the one that we've been working on, and quite honestly it took us almost 18 months to get the two parties to agree.

Speaker Change: resulting in a 3.5 million dollar revenue stream but actually more than that in costs.

Speaker Change: We could not get out of that agreement until both counterparties would agree to a buyout provision, which we exercised in the quarter.

You know, I think we

Speaker Change: may have some smaller opportunities like this going forward but this was the one that we've been working on and quite honestly it took us almost 18 months.

Thaddeus Weed: It wasn't something that we didn't know about, and it also was impossible for us to predict when this would happen for investors, just because we needed concurrence of both parties.

Speaker Change: to get the two parties to agree. It wasn't something that we didn't know about, and it also was impossible for us to predict when this would happen for investors, just because we needed concurrence of both parties.

Thaddeus Weed: All right, if I could just add to the on next. So this was in the prepared remarks. So the total impact of both. transactions, the CSA and the customer. If you just adjusted for those two sequentially, we would have been up sequentially by a third. Got it. Yep. Absolutely, Thad. Thanks.

Speaker Change: If I could just add to the ONIX. So this was in the prepared remarks. So the total impact of both of those...

Speaker Change: transactions, the CSA and the customer contract was $5.7 million on our OnNet, so if you just adjusted for those two sequentially, we would have been up sequentially by 1% in the OnNet line.

Speaker Change: Secondly, to your question about corporate, you know, our core corporate products,

Thaddeus Weed: And then secondly, to your question about corporate, you know, our core corporate products are continuing to perform at a reduced rate to where they were pre-pandemic, but still growing on a sequential and year-over-year basis. We are grooming two types of corporate revenue streams, the non-core services to corporate customers and we are grooming low margin or even negative margin off-net services that we cannot bring on net. That process will continue probably at a reduced rate but probably for several more quarters because in many cases we are contractually bound by contracts that we acquired in the acquisition to provide those services at a loss until such time as the contract ends.

Speaker Change: are continuing to perform at a reduced rate to where they were pre-pandemic but still growing on a sequential and year-over-year basis.

We are grooming.

Speaker Change: two types of corporate revenue streams, the non-core services to corporate customers and we are grooming

Speaker Change: low margin or even negative margin off net services that we cannot bring on net.

Speaker Change: That process will continue, probably at a reduced rate, but probably for several more quarters, because in many cases we are contractually bound by

Speaker Change: Contracts that we acquired in the acquisition to provide those services had a loss until such time as the contract ends. That is the primary reason T-Mobile paid us 700 million dollars.

Thaddeus Weed: That is the primary reason T-Mobile paid us $700 million.

Thaddeus Weed: Now I'll pivot to your data center question, you know. We looked at the price of data centers that have traded recently, and we looked at what other wholesale operators were charging and establishing our go-to-market price. We had no experience in this market. In fact, when we did the initial transaction, it was not an opportunity that we even contemplated. But as we sensed the acute need for this power in the marketplace, we began to start to convert those facilities. We felt that we were far enough along at the end of April to begin to allow counterparties to tour the facilities.

Now I'll pivot to your data center question.

We looked at the

Speaker Change: We had no experience in this market. In fact, when we did the initial transaction, it was not an opportunity that we even contemplated.

Speaker Change: But as we sensed the acute need for this power in the marketplace, we began to start to convert those facilities.

Speaker Change: We felt that we were far enough along at the end of April to begin to allow counterparties to tour the facilities. We've even allowed investors to go

Thaddeus Weed: We've even allowed investors to go on bus tours to some of the facilities, and some research analysts have written on that. These are different than a brand new purpose-built data center. They are a switch site that is being converted. While there are many things that we understood needed to be done, we have literally held dozens, maybe even hundreds of tours that we're gathering input from the customers. Sometimes their requests are unreasonable and things they want done. Sometimes they are reasonable. We also have diverted more of our team resources and the use of contractors to get these facilities ready.

Speaker Change: on bus tours to some of the facilities and some research analysts have written on that.

Speaker Change: These are different than a brand new purpose-built data center. They are a switch site that is being converted. While there are many things that we understood needed to be done, we have literally held

dozens, maybe even hundreds of tours.

Speaker Change: unreasonable on things they want done and sometimes they are reasonable.

Speaker Change: We also have diverted more of our team resources and the use of contractors.

Speaker Change: to get these facilities ready that does require incremental capital and it does require incremental cost of goods sold in that we are doing this

Thaddeus Weed: That does require incremental capital and it does require incremental cost of goods sold and that we are doing this demolition work as a precondition that cannot be capital. We're primarily done with that. I mean, there's still a little bit more to be done, but there is a lot of preparatory work. Now, I will say, among the counterparties, there's a great deal of divergence around what they want by site and by counterpart. We are trying to optimize to the highest return on capital. The amount of capital we are spending here is de minimis relative to the opportunity.

demolition work as a precondition that cannot be capitalized.

Speaker Change: We're primarily done with that, I mean there's still a little bit more to be done, but there is a lot of preparatory work.

Speaker Change: Now, I will say, among the counterparties, there's a great deal of divergence around what they want by site and by counterparty.

Speaker Change: We are trying to optimize to the highest return on capital.

Speaker Change: The amount of capital we are spending here is de minimis relative to the opportunity. So whether we get $10 million, $9 million, or $11 million a megawatt out of these sites,

Thaddeus Weed: So whether we get $10 million, $9 million, or $11 million a megawatt out of these sites, Based on our basis, even with this capital, this will be a phenomenal outcome if we sell that. We also have, I would say, more counterparties interested in long term leases than sales. We do have both, but the million dollar a megawatt per year with CPI increases on a triple net basis has been viewed, I think, as an exceptional bargain in the market. You know, we are continuing on a site by site basis to effectively have a quiet auction where we have multiple counterparts.

Speaker Change: Based on our basis, even with this capital, this will be a phenomenal outcome if we sell that.

We also have...

I would say more counterparties interested in long-term leases.

Speaker Change: then sales. We do have both, but the million dollar a megawatt per year with CPI increases on a triple net basis has been viewed, I think, as an exceptional bargain in the market.

Thaddeus Weed: And my guess is there will be some sites that we will get a premium to the ask, some we get the ask, and maybe some don't transact. You know, we are, it is a parallel effort to get the sites ready and to achieve the highest return for our shareholders.

Speaker Change: And my guess is there will be some sites that will get a premium to the ask, some will get the ask, and maybe some don't transact.

Speaker Change: You know, we are, it is a parallel effort to get the sites ready and to achieve the highest return for our shareholders.

Michael Rollins: Thank you. Our next question comes from the line of David Arden. The line's open. Hey, guys, it's Dave Barden. Hey, Dave and Thad, thanks for taking the question. So I guess I have two. The first is more of a housekeeping question, I guess, related to IPv4. And, you know, we've been seeing that IPv4 leasing volumes be growing at kind of like, you know, in the 5%, 6% range, you raise prices, and now it's kind of growing at the 1% range. Could you kind of talk a little bit about, Dave, your kind of senses to the price elasticity in that market right now?

Thanks for the Q & A!

Thank you.

Our next question comes from the line of David Arden.

The line's open.

Speaker Change: The first is more of a housekeeping question I guess related to IPv4 and you know we've been seeing that

Speaker Change: IPV4 leasing volumes be growing at kind of like, you know, in the 5-6% range. You raised prices and now it's kind of growing at the 1% range. Could you kind of talk a little bit about, Dave, your kind of sense as to the price elasticity in that market right now? You know, we've been looking at some of the brokerage sites and prices have been falling and this isn't kind of review.

Dave Schaeffer: You know, we've been looking at some of the brokerage sites and prices have been falling and just interested in kind of review your updated view there. And then second, Dave, at the risk of having you talk the rest of the call, I just wanted kind of your latest thoughts. You know, Lumen earlier this week, kind of quote, basically made the case that, you know, the current physical internet is too small, too slow, and not secure enough for the emerging AI opportunity and that, you know, they're the really the in the sweet spot, and that they're going to kill it in the AI world and that the puck is moving away from, you know, where the cogents of the world are operating.

Speaker Change: your updated view there. And then second, Dave, at the risk of

Speaker Change: having you talk the rest of the call. I just wanted your latest thoughts. You know, Lumen earlier this week basically made the case that the current physical internet is too small, too slow, and not secure enough.

Speaker Change: for the emerging AI opportunity, and that they're really in the sweet spot, and that they're going to kill it in the AI world, and that the puck is moving away from where the cogents of the world are operating.

Dave Schaeffer: If you could kind of give me your retort to that, I'd love to hear it. Thank you.

Speaker Change: Give me your retort to that. I'd love to hear it. Thank you.

Dave Schaeffer: Yeah, let me take the IP address space question first. So I think that the band remains robust. When we implemented a price increase, there was obviously some shock to customers that were in negotiations but had not signed contracts. at the lower price. And there's just a bit of, I think, adjustment that they need to get their head around in order to then, you know, pay the new price. I think most of that is behind us. I think you will see volumes continue to increase. Also, on the provisioning of those addresses, there is sometimes a bit of a lag as we do the diligence on the counterparties to make sure they don't run afoul of any security issues or foreign corrupt practices type issues.

Yeah, let me take the IP address space question first.

So, I think that the band remains robust.

Speaker Change: When we implemented a price increase, there was obviously some shock to customers that were in negotiations but had not signed contracts.

lower price and there's just a bit of

Speaker Change: I think adjustment that they need to get their head around in order to then, you know, pay the new price. I think most of that is behind us. I think you will see volumes continue to increase.

Also, on the provisioning of those addresses,

Speaker Change: There is sometimes a bit of a lag as we do the diligence

Speaker Change: or foreign corrupt practices type issues. We have a dedicated team of four people.

Dave Schaeffer: We have a dedicated team of four people that monitor the existing base of addresses and then vet new customers to make sure that they don't present a security threat. I think you'll see the volumes begin to re-accelerate. Then, to the point, and by the way, the 11.8% sequential revenue growth is still pretty good and off of a decent base. We do have substantial inventory.

Speaker Change: that monitor the existing base of addresses and then vet new customers to make sure that they don't present a security threat.

I think you'll see the volumes begin to re-accelerate.

Speaker Change: Then to the point, and by the way, the 11.8% sequential revenue growth is still pretty good and off of a decent base.

Dave Schaeffer: In terms of sales, I think the market is bifurcating. For small block sales, prices have fallen. For large block sales, the prices have held very firm. And remember, Cogent possesses the largest block that has ever been given on a single basis. Now, there are other Slash 8s the size of our blocks. I don't want to present that we're unique, but no one has more than we have in a single contiguous block. So I think we have a lot of leverage in terms of whether we want to sell them. But right now, we're pretty pleased with both the growth in volume and the growth that we're going to be able to achieve in pricing per address.

Speaker Change: We do have substantial inventory. In terms of sales, I think the market is bifurcated.

For small box sales, prices have fallen.

Speaker Change: For large block sales, the prices have held very firm. And remember, Cogent possesses the largest block that has ever been given on a single basis. Now, there are other Slash 8s.

Speaker Change: The size of our box. I don't want to present that we're unique, but no one has more than we have in a single contiguous box. So I think we have a lot of leverage in terms of whether we want to sell them. But right now, we're pretty pleased.

Speaker Change: with both the growth in volume and the growth that we're going to be able to achieve in pricing per address. So I don't think there's yet a demand elasticity problem.

Dave Schaeffer: So I don't think there's yet a demand to last.

Dave Schaeffer: I'm going to pivot and I promise to keep my answer short because I do want to get everyone else's questions answered on two things, the state of the public internet, and then the needs of AI for bandwidth. You know, the public enters. has been predicted to die for 25 years. Every time there is growth, there is always some alternate technology that's going to replace the internet, whether it's cross-connection data centers, peering fabrics, direct connections. CDNs, and the internet continues to grow. We grew traffic at an 8% sequential growth rate and a 19% year-over-year growth rate.

Speaker Change: I'm going to pivot, and I promise to keep my answer short because I do want to get everyone else's questions answered, on two things. The state of the public internet, and then the needs of AI for bandwidth.

You know, the public internet...

Speaker Change: has been predicted to die for 25 years. Every time there is growth, there is always some...

Speaker Change: alternate technology that's going to replace the internet whether it's cross-connection data centers, peering fabrics, direct connections

CDNs.

and the Internet continues to grow. We grew traffic.

Speaker Change: at an 8% sequential growth rate and a 19% year-over-year growth rate. That is hardly a technology that's in decline.

Dave Schaeffer: That is hardly a technology that's in decline. AI is possible because of all of the data that has been collected over the internet. Today, there is roughly 700 zettabytes of data that have been amassed from internet collections. And that is actually now growing at the rate of about 165 zettabytes a year. So a acceleration in the, collection and storage of data because it now has value for AI training. I think that trend is just beginning and we're going to see continued acceleration and these are third party Cogent only has visibility to the transmission piece of it, not to the storage.

Speaker Change: AI is possible because of all of the data that has been collected over the internet.

Speaker Change: collection and storage of data because it now has value for AI training. I think that trend is just beginning and we're going to see continued acceleration and these are third-party numbers.

Speaker Change: Hojan only has visibility to the transmission piece of it, not to the storage piece.

Dave Schaeffer: And then to the point about the current infrastructure not being sufficient. You know, there are thousands of strands of fiber. sitting dark between every major metropolitan area and the developed world. We carry a quarter of the internet's traffic on one pair of fibers and are not fully exhausted the optical throughput of that pair of fibers, and we're still only utilizing about 29% of our lit capacity. It is true that certain training models do require defined latency and additional security. The fact that Cogent is selling wavelength services allows us to attack that market. There is a hierarchy of cost per bit mile.

Speaker Change: and then to the point about the current infrastructure not being sufficient.

You know, there are thousands of strands of fiber.

Speaker Change: sitting dark between every major metropolitan area and the developed world.

Speaker Change: We carry a quarter of the internet's traffic on one pair of fibers and are not fully exhausted the optical throughput of that pair of fibers, and we're still only utilizing about 29% of our lit capacity.

Speaker Change: It is true that certain training models do require defined latency and additional security.

Speaker Change: The fact that Cogent is selling wavelength services allows us to attack that market.

There is a hierarchy of cost per bit mile.

Dave Schaeffer: The cheapest, most efficient way to move bits is the Internet. The second most cost-effective way is a wavelength. The third most cost effective way is to buy dark fiber. It's a premium service. And then finally, the absolute most expensive way to move a bit is build your own fiber. And there are companies engaged in those more expensive strategies.

Speaker Change: The cheapest, most efficient way to move bits is the Internet.

The second most cost-effective way is a wavelength.

Speaker Change: The third most cost-effective way is to buy dark fiber. It's a premium service.

Speaker Change: And then finally, the absolute most expensive way to move a bit is build your own fiber. And there are companies engaged in those more expensive strategies.

Dave Schaeffer: But I will disagree with the premise that the internet has peaked and there's something else replaced. Appreciate it, Dave.

Walter Piecyk: Thank you. Our next question comes from the line of Walter Piecyk. The line's open. Thanks, Dave. First, thanks for reducing the prepared remarks. That's a nice improvement for the score. Hopefully, we can continue that trend. I think we've got some additional synergies there. Thank you all. Uh, so on the CapEx, the, um... You haven't, none of this is, this is all basically speculative, meaning that... see the market in front of you. Obviously, you're engaging with these discussions. You spend the CapEx now and then we start to see first sales. in the second half of next year?

I appreciate it, Dave. Thank you. Thanks, Dave.

Speaker Change: Thank you. Our next question comes from the line of Walter Pythick.

The line's open.

Speaker Change: Thanks. Dave, first, thanks for reducing the prepared remarks. That's a nice improvement for this Corps. Hopefully, we can continue that trend. I think we've got some additional synergies there. Thank you all.

So, on the CapEx, the...

Speaker Change: you haven't none of this is this is all basically speculative meaning that

Speaker Change: You see the market in front of you. Obviously, you're engaging with these discussions. You spend the CapEx now, and then we start to see first sales.

Dave Schaeffer: Or have these guys specifically contracted to say, you do X, we're going to pay Y? Or have there already been sales that we can look at? So there have not been sales, we have letters of intent, we have multiple parties, we have not executed a letter of intent, we have gotten letters from buyers. We were not initially planning to even monetize this part of our acquired assets. If you go back and review the initial transcripts, we described a much wider data center footprint where we were going to use roughly a quarter of the footprint and probably only a couple of percent of the power that was in these facilities.

Speaker Change: in the second half of next year? Or have these guys specifically contracted to say, you do X, we're going to pay Y? Or have there already been sales that we can look at?

So there have not been sales.

Speaker Change: We have letters of intent. We have multiple parties. We have not executed a letter of intent. We have gotten letters from buyers.

Speaker Change: We were not initially planning to even monetize this part of our acquired assets.

Speaker Change: and probably only a couple of percent of the power that was in these facilities.

Dave Schaeffer: And we were going to sell our retail colo product, much like Cogent has and is continuing to sell. Based on inbounds initially and then our outbounds, we said we are sitting on an asset that today, because it exists, it doesn't have to be built, has real value, a time-to-market advantage. But we also knew we had to reconfigure these assets. That reconfiguration has two major components. One, you know, just all of the demo work and kind of preparatory work, and then a modest amount of capital. We are confident enough based on the number of parties. the market and the overall price differential that we have, that the modest amount of incremental capital we're going to spend over, you know, the next several quarters.

Speaker Change: And we were going to sell our retail colo product much like Cogent has and is continuing to sell

Thank you.

Speaker Change: Based on inbounds initially and then our outbounds, we said we are sitting on an asset that today, because it exists, it doesn't have to be built, has real value, a time-to-market advantage.

But, we also knew we had to reconfigure these assets.

We are confident enough, based on the number of parties

and the

Speaker Change: overall price differential that we have, that the modest amount of incremental capital we're going to spend over, you know, the next several quarters.

Dave Schaeffer: is going to give us a very high return. I don't want you to spend more time reiterating what you already said, I appreciate that. I guess the question is...

is going to give us a very high return.

Speaker Change: And you said that in a prior comment. I don't want you to spend more time reiterating what you already said. I appreciate that. I guess the question is...

Dave Schaeffer: When you look at the data centers, it's like you spend the numbers of your capexes, whatever it is, let's call it 60 million-ish for three quarters, then you hope to get sales in the second half. Does it then drop off, or do you say like, let's say you get a sale in June of 25, September 25, and then there's five more, or do we have this 60 then dropping back down to a more reasonable level? And then tied to that, the capital lease payments, I know you had a one-time payment last quarter, but that's 5 million, but I think there was like 80 million for the year, but is 5 million a new run rate in terms of capital lease?

Speaker Change: When you look at the data centers, it's like you spend the numbers, so your capex is whatever it is, let's call it 60 million-ish for three quarters, then you hope to get sales in the second half. Does it then drop off? Or do you say like, let's say you get a sale in June of 25, September 25, and then there's five more, or do we have this 60 then?

Speaker Change: dropping back down to a more reasonable level. And then tied to that, the capital lease payments, I know you had a one-time payment last quarter, but that's $5 million, but I think there was like $80 million for the year. But is $5 million a new run rate in terms of capital lease? I'm just trying to get a sense of...

Dave Schaeffer: I'm just trying to get a sense of… What else will contribute to cash burn? And does it basically end in June of next year, or is there some continuation there? Yeah, so to directly answer your data zone question, one, I believe we will have transactions, whether they be leases or sales, that are reportable before June. So you don't have to wait for June. Okay, good. A proof point. Now, whether that's the entire portfolio, I doubt it, but we will have proof points.

Speaker Change: What else will contribute to cash burn and does it basically end in June of next year or is there some continuation there?

Speaker Change: Yeah, so to directly answer your data zone question, one, I believe we will have

Speaker Change: Transactions, whether they be leases or sales, that are reportable before June, so you don't have to wait for June for a proof point. Now whether that's the entire portfolio, I doubt it, but we will have proof points.

Dave Schaeffer: Two, we will not have continuing CAPEX related to the data centers beyond this initial conversion. So what we are spending is the money to convert 48 of the 482 acquired facilities. With regard to the capital lease payments, we did have a very meaningful Pre-payment last quarter. That was a one-time event. We do still have some incremental capital leases related to network reconfiguration, but we also will see some of the acquired fiber leases that we got when we acquired Sprint dropping off, and our total number of miles will actually go down and our expenses will go down.

2, we will not have continuing CapEx.

Speaker Change: related to the data centers beyond this initial conversion. So what we are spending is the money to convert 48 of the 482 acquired facilities.

Speaker Change: With regard to the capital lease payments, we did have a very meaningful

prepayment last quarter that was a one-time event

Speaker Change: We do still have some incremental capital leases related to network reconfiguration, but we also will see some of the acquired

Speaker Change: fiber leases that we got when we acquired Sprint dropping off and our total number of miles will actually go down and our expenses will go down.

Dave Schaeffer: So this run rate of $5.25 million is probably the more reasonable number going forward on capitalist principal payments. Yeah, it seems pretty reasonable. Got it. So, so when we put all the pieces together, then in terms of ramping wavelengths, you know, Barden talked about the IP things, those volumes obviously dropped off, but you're getting price increases. you know, how this all contributes to revenue. Now this elevated CapEx, I mean, you know, your debt is, you're going to obviously have to increase debt if you continue to sustain the dividend. So I guess the question, because it's just there is cash burnt, like, I don't, I don't know how the math, especially with the TSA payment drop offs that exist.

Speaker Change: So this run rate of five million and a quarter is probably the more reasonable number going forward on capital lease principal payments.

Speaker Change: Yeah, it seems pretty reasonable. Okay, got it. So when we put all the pieces together then in terms of ramping wavelengths, you know, Barton talked about the IP things, those volumes obviously dropped off, but you're getting price increases.

Speaker Change: You know, how this all contributes to revenue, now this elevated CapEx, I mean...

Speaker Change: You know, your debt is, you're going to obviously have to increase debt if you continue to sustain the dividend. So I guess the question, because it's just there is cash burnt, like I don't know how the math, especially with the TSA payment drop-offs that exist.

Dave Schaeffer: So debt has to go up, because your cash is going to drop below, I mean, I don't know what you're what you think is comfortable in terms of working capital. But so is there any reconsideration in terms of the growth in the dividend, just given that maybe the industry outlook today? I mean, obviously, these things change by the day, right? Maybe not be as positive, given some of the projected policies that are that are going to occur in future quarters. Just thoughts on, and by the way, also, you know, you know, your leverage is up a turn, you're probably headed higher, just given how all these kind of numbers work together before some of these sales and revenues kick in.

Speaker Change: So, debt has to go up because your cash is going to drop below, I mean, I don't know what you think is comfortable in terms of working capital.

So, is there any reconsideration in terms of...

Speaker Change: The growth in the dividend just given that maybe the interest rate outlook Today, I mean obviously these things change by the day, right? Maybe not be as positive given some of the projected policies that are that are going to occur in future quarters just thoughts on

Speaker Change: And by the way, also, you know, you know, your leverage is up a turn, you're probably headed higher, just given how all these kind of numbers work together before some of these sales and revenues kick in. Is it the right time to be adding additional debt to the balance sheet to fund the dividend?

Dave Schaeffer: Is it the right time to be adding additional debt to the balance sheet to fund the dividend? So, we've had this discussion before, Walt, for 15 years, Cogent has extended more than 100% of cash flow as its EBITDA grew from $0 to $352 million last year. You are correct that the arithmetic of the T-Mobile IP transit payments dropped off, and it is a LTM test, so arithmetically, our leverage does go up. We have substantial access to additional capital. We have, for example, under the IPV4 ABS transaction, it's a trust. We have now increased the revenue into that trust by 50% run rate just since we initiated.

Speaker Change: So, we've had this discussion before, Walt, for 15 years, Cogent has extended more than 100% of cash flow as its EBITDA grew from $0 to $352 million last year.

Speaker Change: You are correct that the arithmetic of the T-Mobile IP transit payments dropped off and it is a LTM test, so arithmetically our leverage does go up.

Speaker Change: We have substantial access to additional capital. We have, for example, under the IPv4 ABS transaction, it's a trust.

Dave Schaeffer: That would give us 50% of the borrowing capacity immediately. We are quite comfortable that we have multiple factors of growth and ability to monetize and are very comfortable with our dividend policy as it has existed for the past 49 consecutive quarters and are comfortable in continuing a forward progression similar to what we've had historically.

We are quite comfortable that we have multiple

Speaker Change: factors of growth and ability to monetize and are very comfortable with our dividend policy as it has existed for the past 49 consecutive quarters.

and are comfortable in continuing a

forward progression similar to what we've had historically.

Dave Schaeffer: Got it. Thank you.

Dave Schaeffer: Hey, thanks. Thank you.

Got it. Thank you. Hey, thanks, Walt.

Michael Rollins: Our next question comes from the line of Michael Rollins. The line's open. Thanks and good morning. A couple of questions. First one is if you look at the constant currency revenue change year over year, I think this is now the first comparable quarter where you have everything in there for 12 months, and it's down 6.7 percent. And I apologize if you mentioned some of these numbers before, but can you share like on a year over year basis relative to that 6.7? You know, how much the corporate, the heritage corporate's growing, how much the, you know, heritage net centric is growing, and then what the decline, the shrink is, and all these other things that you're managing through with the acquired revenue.

Speaker Change: Thank you. Our next question comes from the line of Michael Rollins.

The line is open.

Speaker Change: It's down 6.7% and I apologize if you mentioned some of these numbers before, but can you share like on a year over year basis relative to that six, seven, you know, how much the corporate.

Speaker Change: ...the heritage corporates growing, how much the, you know, heritage net centric is growing, and then what the decline, the shrink is, and all these other things that you're managing through with the acquired revenue.

Thaddeus Weed: And then secondly, just, you know, given how much noise you described was in the cost of goods or cost of service, this quarter. What's the right run rate number, you know, that you get to in that cost of service to just appreciate kind of cost on a more normalized basis? Thanks.

And then secondly, just given how much noise you described was in the cost of goods or cost of service,

Speaker Change: this quarter. What's the right run rate number, you know, that you get to in that cost of service to just appreciate kind of cost on a more normalized basis? Thanks.

Thaddeus Weed: I mean, I can take the constant currency, so the impact year over year was negligible. on Yeah, so we basically had three buckets of intentional shrink. The first being the elimination of non-core service. And, you know, we're probably three quarters of the way through those non-core services going away. We would have liked them all to go away day one. Two, we've had low margin off net services. that we are grooming. Those are continuing to be groomed, but we're probably again... 50% of the way through what we can through. Third, we had this extraordinary situation, and it was larger than any of the others, but there are some kind of bad deals that we inherited after Sprint had been in business for 40 years that we are trying to unwind.

Speaker Change: I can take the constant currency, so the impact year over year was negligible. It was only $200,000.

Speaker Change: If total revenue was down 6-7, what did the heritage corporate grow at? What did the heritage net centric grow at? And what did the acquired revenue shrink?

Yeah, so we basically had three buckets of intentional shrinkage.

The first being the elimination of non-core services.

Speaker Change: And, you know, we're probably three quarters of the way through those non-core services going away. We would have liked them all to go away day one.

Two, we've had low-margin, off-net services.

that we are grooming. Those are continuing to be groomed, but we're probably again...

50% of the way through what we can run.

Thorg

We had this extraordinary situation.

Speaker Change: And it was larger than any of the others, but there are some kind of bad deals that we inherited after.

Speaker Change: Sprint had been in business for 40 years that we are trying to unwind. In this particular case, we did take a three and a half million dollar quarterly sequential revenue hit from getting rid of that deal.

Thaddeus Weed: In this particular case, we did take about three and a half million dollar quarterly sequential revenue hit from getting rid of that deal. And if we looked at the total acquired business of Sprint, it was in decline when we acquired it. Cogent was growing. of the combined company is growing due to, as you phrased it, the heritage revenues. And let's kind of parse those apart. There was no heritage enterprise revenue, so there's nothing to talk about there. The current enterprise business, absent this one tripartite termination, actually grew sequentially, which is actually a little surprising to us.

Speaker Change: And if we looked at the total acquired business of Sprint, it was in decline when we acquired it. Cogent was growing.

Speaker Change: The combined company is growing due to, as you phrased it, the heritage revenue stream.

Speaker Change: There was no heritage enterprise revenue, so there's nothing to talk about there. The current enterprise business, absent this one tripartite termination, actually grew sequentially, which is actually a little surprising too.

Thaddeus Weed: Some of that is because we've been able to implement some pricing discipline around the remaining services. And we've got better discipline as we've been selling new service. The kind of core Cogent, you know. corporate business absent these two. Reductions by design, that being low margin off net and non-core, is growing at about a 4% annual growth rate. And that's off of now the included acquired Sprint Corporate Base for Connectivity Service. And then finally, on the. Net-centric business, it is highly volatile, it's dependent on volume seasonality, but it is continuing to grow on a constant currency basis at around 10%.

Speaker Change: Some of that is because we've been able to implement some pricing discipline around the remaining services and we've got better discipline as we've been selling new services.

corporate business absent these two

Speaker Change: reductions by design, that being low margin off net and non-core, is growing at about a 4% annual growth rate.

Speaker Change: And that's off of now the included acquired Sprint corporate base for connectivity services.

net centric

business, it is highly

Thaddeus Weed: And while we saw a slowdown in traffic growth Last in Q2, in Q3, you saw material re-acceleration. And that kind of is back to more historical pattern. But, you know, this goes back to Dave Barden's question. Is the Internet peak and starting to decline? I can pretty comfortably say no.

Speaker Change: Last in Q2, in Q3, you saw material reacceleration, and that kind of is back to more historical patterns.

Speaker Change: But, you know, this goes back to Dave Boren's question, is the Internet peak and starting to decline? I can pretty comfortably say no.

Thaddeus Weed

Thaddeus Weed: Thanks. And on the cost of service, what's the right run rate level when you take out all of the noise that you described over the course of this call? It's probably more in line with what we did in Q2. and continuing to decline. But there is, you know, noise associated with terminating certain contracts. and the overall trend should allow us to grow EBITDA. You know, the previous quarter, almost all of the EBITDA growth came from COGS reductions in Q2. In Q3, they came more from SG&A reductions. And there is noise, but I think the COGS line should look more like it did in Q2 than in Q3.

Speaker Change: Thanks, and on the cost of service, what's the right run rate level when you take out all of the noise that you described over the course of this call?

Speaker Change: It's probably more in line with what we did in Q2.

and continuing to decline.

Speaker Change: But there is, you know, noise associated with terminating certain contracts.

and the overall trend should allow us to grow EBITDA.

Speaker Change: You know, the previous quarter, almost all of the EBITDA growth came from COGS reductions in Q2. In Q3, they came more from SG&A reductions, and there is noise. But I think the COGS...

Speaker Change: line should look more like it did in Q2 than in Q3. This was a very unusual

Thaddeus Weed: This was a very unusual set of cost of goods sold on this buyout. On the demo work, there is going to be some of that in Q4, but it should kind of, I think, be substantially complete by then and therefore won't show up in cost of goods sold. The monies that we do put into the wholesale data center space would exclusively hit CapEx.

Speaker Change: set of cost of goods sold on this buyout. On the demo work, there is going to be some of that in Q4, but it should

Speaker Change: kind of, I think, be substantially complete by then and therefore won't show up in cost of goods sold. The monies that we do put into the wholesale data center space would exclusively hit CapEx at that point.

Thaddeus Weed: And when you take a look at capital allocation in total, do you have, and you look at the possibilities for asset modernization that you mentioned during this call and in past calls, do you have a target dollar number by a certain target date? which is giving you some comfort in the way that you're going to manage the capital allocation over a multi-year period of time. Yeah, so I think we have comfort in two dimensions, Mike. One, our ability to organically grow our EBITDA, absent the subsidy payment stream from T-Mobile, and be able to grow that at a sufficient rate that we will be able to return more capital.

Speaker Change: And when you take a look at capital allocation in total, do you have, and you look at the possibilities for asset modernization that you mentioned during this call and in past calls, do you have a target dollar number by a certain target date?

Speaker Change: which is giving you some comfort in the way that you're going to manage the capital allocation over a multi-year period of time.

Speaker Change: Yeah, so I think we have comfort in two dimensions, Mike. One, our ability to organically grow our EBITDA absent the subsidy payment stream from T-Mobile.

Speaker Change: and be able to grow that at a sufficient rate that we will be able to return more capital. We did buybacks in Q2 as well as dividends and do that

Thaddeus Weed: We did buybacks in Q2 as well as dividends and do that even with a higher interest rate environment, as Walt pointed out. That may result in a equal or higher gross leverage, but a reduction in net leverage. And then we do see these three buckets of assets that will potentially be monitored. If I had to stack rank them today, I would say the data centers are the most probable. The IPv4 are the second most probable, and the dark fiber, the lowest probability, just because we've had very little experience. We did one dark fiber sale in the quarter.

Speaker Change: even with a higher interest rate environment, as Walt pointed out, that may result in a equal or higher gross leverage, but a reduction in net leverage.

And then we do see these three buckets of assets.

that

will potentially be monetized.

Speaker Change: If I had to stack rank them today, I would say the data centers are the most probable.

Speaker Change: The IPV4 are the second most probable and the dark fiber the lowest probability

Speaker Change: just because we've had very little experience. We did one dark fiber sale in the quarter. It was actually to a customer as more of a favor than it was that we were trying to productize it, but we have had

Thaddeus Weed: It was actually to a customer as more of a favor than it was that we were trying to productize it. But we have had a fairly large number of inbounds around monetized. just as we had on the data set. You know, for me to have a specific date and a specific dollar amount, I think there's just too many permutations to put that in front of investors, but I feel comfortable that we will get added benefit and de-levering beyond growth and EBITDA from the monetization of these other assets.

Speaker Change: A fairly large number of inbounds around monocosmos, just as we had on the data centers.

Speaker Change: You know, for me to have a specific date and a specific dollar amount...

I think there's just...

Thaddeus Weed: Dave and Thad, thanks for the help. Hey, thanks, Mike.

Dave and Thad, thanks for the help.

Hey, thanks Mike.

Nick Veldale: Thank you. Our next question comes from the line of Nick Veldale. The line is open. All right. Hey, thanks, guys. Dave, you said that the number of switch sites that you're planning to convert into data centers has increased? I think you gave a number earlier in the call. I guess, can you split out how that breaks out between retail sites you're planning to hang on to versus larger locations that you're looking to sell or engage in a long-term lease with, both in terms of the number of locations and the number of protected megawatts? I think I'm most interested in the sites you think you can sell or lease on a wholesale basis, which I think had been 88 protected megawatts across 21 facilities previously.

Speaker Change: Thank you. Our next question comes from the line of Nick Veldale.

The line is open.

Hey, thanks, guys.

Speaker Change: Dave, you said that the number of switch sites that you're planning to convert into data centers has increased. I think you gave a number earlier in the call. I guess, can you split out how that breaks out between retail sites you're planning to hang on to versus larger locations that you're looking to sell or engage in a long-term lease with?

Speaker Change: both in terms of the number of locations and the number of protected megawatts. I think, I'm most interested in the sites you think you can sell or lease on a wholesale basis, which I think had been 88 protected megawatts across 21 facilities previously.

Dave Schaeffer: And you are correct on both the megawatts and number of sites that we think are suitable for wholesale monetization. That is 21 of the 48 total sites that we are converting to data sets. And it is 88 of the protected megawatts out of the 169 that we have today. And there are still a few more centers that have not yet even been converted to offer retail services. So the number of centers will go up probably by about five. And the number of megawatts may go up by another 10 or so from where we're at today.

Speaker Change: And you are correct on both the megawatts and number of sites that we think are suitable for wholesale monetization.

Speaker Change: of the 48 total sites that we are converting to data centers.

ADA of the

Speaker Change: protected megawatts out of the 169 that we have today and there are still a few more centers that have not yet

Speaker Change: even been converted to offer retail services. So the number of centers will go up.

Speaker Change: probably by about five, and the number of megawatts may go up by...

another 10 or so.

Dave Schaeffer: But we only see 21 of them as. Good candidates. Now, our view is that, you know, the market will tell us more than what we think. And if a particular counterparty comes by and says, we just need this facility in this location, we didn't think it was one that we would monetize through either wholesale or outright sale. Everything's for sale at the end of the day.

Good candidates now.

Speaker Change: Our view is that, you know, the market will tell us more than what we think, and if a particular counterparty comes by and says, we just need this facility in this location, we didn't think it was one that we would...

monetized through either wholesale or outright sale.

Everything's for sale at the end of the day.

Dave Schaeffer: Okay, okay, that's helpful. And I thought it was interesting that you noted there was more interest in, you know, long-term leases rather than outright sales for the larger facilities. I guess if that, if that plays out, would you then be inclined to sell the stabilized leased facilities? You know, maybe the buyers looking for those sorts of income streams? I'm just kind of thinking about whether, you know, Cogent would fetch, you know, an appropriate market multiple for that income stream, you know, you know, if it's buried into the rest of the business or, you know, if it's best to be held outside of the REED structure.

Speaker Change: Okay, okay, that's helpful. And I thought it was interesting that you noted there was more interest in...

Speaker Change: You know long-term leases rather than outright sales for the larger facilities

I guess if that, if that plays out...

Speaker Change: Would you then be inclined to sell the stabilized leased facilities, you know, maybe the buyers looking for those sorts of income streams?

Speaker Change: I'm just kind of thinking about whether, you know, Cogent would fetch, you know, an appropriate market multiple for that income stream, you know, if it's buried into the rest of the business or, you know, if it's best to be held outside of the REIT structure.

Dave Schaeffer: Yeah, and the answer is, we would evaluate that at that time. You know, I think there might be an intermediate step, if that, in fact, turns out the way that these facilities get monetized, which is, you then do a specific securitization against that stream of revenue, and, you know, unlock some liquidity and cash that way. And then potentially sell that business. with a portable capital structure and a, you know, ability for the new owner to get a higher valuation. Okay, okay.

Speaker Change: Yeah, and the answer is we would evaluate that at that time.

You know, I think there might be an intermediate.

Speaker Change: step, if that, in fact, turns out the way that these facilities get monetized, which is you then do a specific securitization

against that stream of revenue.

Speaker Change: and, you know, unlock some liquidity and cash that way, and then potentially sell that business.

Speaker Change: with a portable capital structure and a, you know, ability for the new owner to get a higher valuation.

Dave Schaeffer: And then last one. You have to think about the waves opportunity. You've talked quite a bit about number of data centers you're gonna have enabled and network work that you're undertaking to get things where you need them to be. I guess think about the other building blocks that go into being able to sell waves at the cadence that you want to achieve. Do you feel like the sales force is appropriately trained and ready to go, you know, when you decide to press the button, you know, have the test installations you've done been providing results consistent with the provisioning timeframes you've laid out and so on?

Okay, okay. And then, you know, last one, um...

Speaker Change: Just think about the Waves opportunity. You've talked quite a bit about the number of data centers you're going to have enabled and network work that you're undertaking to get things where you need them to be. I guess think about the other building blocks that go into being able to sell Waves at the cadence that you want to achieve.

Speaker Change: Do you feel like the sales force is appropriately trained and ready to go you know when you decide to press the button?

Speaker Change: You know, have the test installations you've done been providing results consistent with the provisioning timeframes you've laid out and so on. I just want to make sure that kind of every building block of that business is, you know, kind of settling into where it needs to be.

Dave Schaeffer: I just want to make sure that kind of every building block of that business is, you know, kind of settling into where it needs to needs to be.

Dave Schaeffer: Yeah, and I think in looking at those building blocks, everything starts with the sales. We have conducted multiple trainings and certification for the 279 net centric sales Now, not every one of them has sold a wave yet, but we've got a little over 1,000 waves sold, but it's not by one or two reps. It is fairly broad across the organization. We have developed online training manuals. We have our regional learning managers that do supplemental work, and we work with transponder vendors to hold teach-ins and tutorials. So the CRM system is today completely integrated with the WAVE design tool.

Speaker Change: Yeah, and I think in looking at those building blocks, everything starts with the sales force.

Speaker Change: We have conducted multiple trainings and certification for the 279 NetCentric salespeople.

Speaker Change: Now, not every one of them has sold a wave yet, but, you know, we've got a little over a thousand waves sold, but it's not by one or two reps. It is fairly broad across the organization.

Speaker Change: We have developed online training manuals. We have our regional learning managers that do supplemental work. And we work with transponder vendors to hold teach-ins and tutorials.

Speaker Change: So, the CRM system is today completely integrated with the WAVE design tool.

Dave Schaeffer: So the rep, without engaging a sales engineer, gets a map with one meter accuracy, latency, down to one hundredth of a millisecond contractual accuracy. And we feel that we can generate contracts and deliver all the documentation quickly.

Speaker Change: So, the rep, without engaging a sales engineer, gets a map with one meter accuracy, latency, down to one hundredth of a millisecond.

Speaker Change: contractual accuracy and, you know, we feel that we can generate contracts and deliver all the documentation quickly.

Dave Schaeffer: The second piece is our service delivery organization. We have developed tools there. We have been able to provision WAVES in test cases, only a few, because not all the sites that were necessary for all of the WAVES could. But we have had some WAVES provision in a couple of weeks, which is our ultimate target. So we feel pretty comfortable that the service delivery process, toolkit, and staffing should allow us to do that. The building block of the network is dependent on the endpoints and the intermediate. We would not have diverted people to sell some dark fiber and to even install the waves we did in the water if we thought we jeopardized the goal of being fully.

The second piece is our service delivery organization.

We have developed tools there. We have

Speaker Change: Test cases, only a few, because not all the sites that were necessary for all of the waves could, but we have had some waves provisioned in a couple of weeks.

Speaker Change: which is our ultimate target. So we feel pretty comfortable that the service delivery process, toolkit, and staffing should allow us to do that.

Speaker Change: The building block of the network is dependent on the endpoints and the intermediate points.

Speaker Change: We would not have diverted people to sell some dark fiber and to even install the waves we did in the water, if we thought we jeopardized the goal of being fully transparent.

Dave Schaeffer: wave-enabled across the entire 800 North American locations by quarters end. So I feel that the network will be there, the service delivery team will be there, and the sales team will be there to deliver it.

wave-enabled across the entire 800 North American locations.

Speaker Change: by quarters in. So I feel that the network will be there, the service delivery team will be there, and the sales team will be there to deliver it. But ultimately what we have to do is build confidence with customers.

Dave Schaeffer: But ultimately, what we have to do is build confidence with customers. And that's probably the most important of the building blocks. And the way you do that, actually deliver what you say you're going to deliver without a problem. And then the customer comes back. It's exactly how we built our credibility and IP. And it's how we're going to do it in the way.

Speaker Change: And that's probably the most important of the building blocks and the way you do that, actually deliver what you say you're going to deliver without a problem. And then the customer comes back. It's exactly how we built our credibility and IP, and it's how we're going to do it in the wavelength.

Speaker Change: Actually deliver what you say you're going to deliver without a problem and then the customer comes back that's exactly how we built our credibility in Ik and it's how we're going to do it and the wavelength market.

Speaker Change: Alright, great. Thank you Dave.

Dave Schaeffer: Great. Thank you, Dave.

Dave Schaeffer: Hey, thanks. Thank you.

Nick: Thanks, Nick.

All right, great. Thank you, Dave. Hey, thanks, Shaq.

Speaker Change: Thank you.

Tim Farrant: Our next question comes from the line of Tim Farrant. The line's open. Thanks, guys. Three questions. Dave, there's kind of a feeding frenzy for data center capacity at the moment. It looks like we're good chance we're running out of capacity in the next year or so. So what dictates the timing of you announcing a sale or a lease of the capacity? And, you know, do you have any customers that want to buy the whole portfolio at this point? And then, secondly, I know you don't give much guidance, but can you give us a range of EBITDA margins for next year, given all the moving parts, and maybe just update, again, thinking in five years?

Speaker Change: Our next question comes from the line of Tim Horan.

Speaker Change: Your line is open.

Tim Horan: Thanks, guys I have three questions, Dave just kind of a feeding frenzy for data center capacity at the moment. It looks like we're good chance, we're running out of capacity in the next year or so.

The line's open.

Speaker Change: Thanks guys. Three questions. Dave, there's kind of a feeding frenzy for data center capacity at the moment. It looks like we're good chance we're running out of capacity in the next year or so.

Speaker Change: So what dictates the timing of your announcing a sale or a lease up the capacity and.

Speaker Change: So what dictates the timing of you announcing a sale or a lease of the capacity and

Speaker Change: Do you have any customers that want to buy the whole portfolio at this point.

Speaker Change: Do you have any customers that want to buy the whole portfolio at this point?

Speaker Change: Secondly, I know you don't give much guidance, but can you give us a range of EBITDA margins for next year, given all the moving parts and maybe just update again thinking in five years and then lastly can you just remind us when was the timing that you increase the IP before pricing and how much and can you do so next year. Thank you.

Speaker Change: And then secondly, I know you don't give much guidance, but can you give us a range of EBITDA margins for next year, given all the moving parts, and maybe just update again, thinking in five years? And then lastly, can you just remind us, when was the timing that you increased the IPV4 pricing?

Dave Schaeffer: And then, lastly, can you just remind us when was the timing that you increased the IPV for pricing and how much? And can you do so next year? Thanks.

Speaker Change: and how much, and can you do so next year? Thank you.

Speaker Change: Yeah. So.

Dave Schaeffer: Yeah, so I'll take each of those questions. There are several counterparties who are interested in the entire portfolio. We are not certain that is the highest and best type of transaction to enter into. It may be. You know, we... We're not initially contemplating this. You are correct. The market is continuing to tighten as there is more demand for power than can be met in a timely manner. Over time, there will be no power shortage, but that's a multi-year cycle. We have power available today. We've got to get these facilities ready. I think, you know, we hope, you know, sometime in the next couple of quarters, we'll be far enough along that we'll have deals that we can announce.

Speaker Change: I'll take each of those questions. There are several counterparties, who are interested in the entire portfolio.

Speaker Change: We are not certain that is the highest and best type of transaction to <unk>.

Speaker Change: We are not certain that is the highest and best type of transaction to enter into. It may be.

Speaker Change: Enter into it maybe.

Speaker Change: Bob.

Speaker Change: We.

You know, we...

Speaker Change: Were not initially contemplating this you are correct. The market is continuing to tighten as there is more demand for power than can be met in a timely manner over time, there will be no power shortage, but that's a multi year cycle, we have power available today.

Speaker Change: We're not initially contemplating this. You are correct. The market is continuing to tighten as there is more demand for power than can be met in a timely manner. Over time, there will be no power shortage, but that's a multi-year cycle. We have power available today.

Speaker Change: We've got to get these facilities ready I think.

Speaker Change: We've got to get these facilities ready. I think, you know, we hope, you know, sometime in the next couple of quarters we'll be far enough along that we'll have deals that we can announce.

Speaker Change: We hope.

Speaker Change: Sometime in the next couple of quarters will be far enough along that we will have deal. So we can announce but.

Dave Schaeffer: But, you know, part of it's on us to get the work done. Part of it is on the market to, you know, pay us what we think is a fair price. You know, in terms of EBITDA, we don't give quarterly guidance. So I want to be clear there. But we also understand that kind of the rate of improvement and underlying EBITDA that we demonstrated over the last couple of quarters is a cadence that investors should expect. So our improvement in EBITDA as adjusted. will lap the differential in payments from T-Mobile and therefore will be on a more clean basis.

Speaker Change: Part of it's on us to get the work done part of it is on the market too.

Speaker Change: But, you know, part of it's on us to get the work done. Part of it is on the market to, you know, pay us what we think is a fair price.

Speaker Change: Pay us what we think is a fair price.

Speaker Change: In terms of EBITDA, we don't give quarterly guidance, so I want to be clear there, but we also.

Speaker Change: You know, in terms of EBITDA, we don't give quarterly guidance.

So, I want to be queer there.

Speaker Change: but we also understand that kind of the rate of improvement and underlying EBITDA

Speaker Change: I understand that kind of the rate of improvement in underlying EBITA that we demonstrated overlap.

Speaker Change: that we demonstrated over the last couple of quarters is a cadence that investors should expect. So our improvement in EBITDA as adjusted

Speaker Change: Couple of quarters is a cadence that investors should expect so our improvement in EBITDA as adjusted.

Speaker Change: We'll lap the differential in payments from T mobile and therefore will be on a more clean basis. So the $25 million that we received in that IP transit payment. This quarter will continue for the next.

Speaker Change: will lap the differential in payments from T-Mobile and therefore will be on a more clean basis.

Dave Schaeffer: So the $25 million that we received in that IP transit payment this quarter will continue for the next nine quarters. And then the underlying EBITDA should probably continue to improve at 200 to 300 basis points a quarter as we continue to achieve these cost savings. And then on the IPv4 pricing, it was a two-step effort. The first step was raising prices of early summer on the new sales. And then second. taking 25 percent of the installed base and raising prices. We did that in September. We will also probably, by year end, go through and raise prices on another significant portion.

Speaker Change: So, the $25 million that we received in that IP transit payment this quarter will continue

Speaker Change: <unk> nine quarters, and then the underlying EBITDA should probably continue to improve.

Speaker Change: for the next nine quarters and then the underlying EBITDA should probably continue to improve at 200 to 300 basis points a quarter as we continue to achieve these cost savings.

Speaker Change: At two to 300 basis points a quarter as we continue to achieve these cost savings and then on the IPV for pricing it.

Speaker Change: And then on the IPv4 pricing, it was a two-step effort.

Speaker Change: Does a two step effort so far.

Speaker Change: First step was raising prices.

The first step was raising prices.

Speaker Change: Early summer on the new sales and then second.

Speaker Change: of early summer on the new sales and then second, taking 25% of the installed base and raising prices. We did that in September.

Speaker Change: Taking 25% of the install base and raising prices we did that in September we were.

Speaker Change: We'll also probably by year end go through and raise prices on a another significant portion.

Speaker Change: We will also probably, by year-end, go through and raise prices on another significant portion.

Dave Schaeffer: of the installed base. There is very little of that base that has contractual protections against our ability to do that. So, you know, I think there will be more growth in IP leasing revenue. You know, the 11.8% sequential growth that we demonstrated this quarter, I think, pretty significant and should continue. And going back to Walt's question, just gives us another tool if we choose to use ABS as a way to monitor. Very helpful.

Speaker Change: Of the installed base there is very little of that base that has contractual protections against our ability to do that so.

Speaker Change: of the installed base. There is very little of that base that has contractual protections against our ability to do that.

Speaker Change: I think there will be more growth in IP leasing revenue.

Speaker Change: So, you know, I think there will be more growth in IP leasing revenue. You know, the 11.8% sequential growth that we demonstrated this quarter, I think, is

Speaker Change: 11, 8% sequential growth that we've demonstrated this quarter I think is.

Speaker Change: Pretty significant and should continue and going back to Walt question just gives us another tool if we choose to use ABS as a way to monetize it.

Speaker Change: pretty significant and should continue and going back to Walt's question just gives us another tool if we choose to use ABS as a way to monetize.

Speaker Change: Very helpful. Just back to the data centers I mean, if you got your asking price and someone wanted all of it.

Dave Schaeffer: Just back to the data centers. I mean, if you got your asking price and someone wanted all of it, and they wanted to kind of customize it, because obviously, if you're going to do liquid cooling, you know, things are going to look quite different, you know, than what you have right now, or some other customization that they might want. I mean, could we hear, I guess, something, you know, sooner, maybe in the next couple of months instead of the next few quarters? Yes, so at least a couple of the counterparties we're talking to are planning liquid immersion and containment pods for their cooling needs and it is one of the feedbacks that we have taken into consideration as we think about the highest and best value and we're making sure that our HVAC systems can support that.

Speaker Change: Very helpful. Just back to the data centers. I mean, if you got your asking price and someone wanted all of it and they wanted to kind of customize it, because obviously if you're going to do liquid cooling, you know, things are going to look quite different, you know, than what you have right now or some other customization that they might want. I mean, could we hear, I guess, something, you know, sooner, maybe in the next couple of months instead of the next few quarters?

Speaker Change: I wanted to kind of customize it because obviously you have to kind of do liquid cooling you don't think its going to look quite different than what you have right now or some other customization that they might want I mean could we hear I guess something sooner or maybe in the next couple of months sort of the next few quarters.

Speaker Change: Yes, so at least a couple of the counter parties, we're talking to are planning liquid immersion.

Speaker Change: Yes, so at least a couple of the counterparties we're talking to, our planning, liquid immersion

Speaker Change: And containment pods for there are cooling needs and it is one of the feedbacks that we have taken into consideration as we think about the highest and best value and we're making sure that our HVA systems can some.

Speaker Change: and containment pods for their cooling needs. And it is one of the feedbacks that we have taken into consideration as we think about the highest and best value. And we're making sure that our HVAC systems can support that. In terms of timing,

Speaker Change: Port that in terms of timing, yes, there's not a single facility today that someone could come in and stack servers and start training and but there are a handful of the 21 facilities that are getting very close.

Dave Schaeffer: In terms of timing, you know, there's not a single facility today that someone could come in and stack servers and start training. But there are a handful of the 21 facilities that are getting very close. You and Nick both had opportunities to go and tour some of these facilities. And you picked them at random. They're actually, both of you went to facilities I've never been to. I get pictures on a weekly basis. But I think they're fairly typical. And I think while there's a lot of potential, there is still work to be done in each of these facilities.

Speaker Change: You know, there's not a single facility today that someone could come in and stack servers and start training in.

Speaker Change: But there are a handful of the 21 facilities that are getting very close.

Speaker Change: And net both had opportunities to go on tour. Some of these facilities and you picked them at random they're actually both of you went facilities I've never been to I get pictures on a weekly basis, but.

Speaker Change: You and Nick both had opportunities to go and tour some of these facilities, and you picked them at random. They're actually, both of you went to facilities I've never been to. I get pictures on a weekly basis, but

Speaker Change: I think they are fairly typical and I think while there's a lot of potential there is still work to be done in each of these facilities.

Speaker Change: You know, I think they're fairly typical, and I think while there's a lot of potential, there is still work to be done in each of these facilities.

Dave Schaeffer: Thank you. Thanks. Thank you.

Speaker Change: Thank you.

Speaker Change: Thanks.

Thank you. Thanks.

Speaker Change: Okay.

Speaker Change: Okay.

Speaker Change: Thank you.

Thaddeus Weed: Seeing as there are no more questions in the queue, that concludes our question and answer session.

Speaker Change: Seeing as there are no more questions in the queue that concludes our question and answer session I would now like to turn the call over to our chairman and CEO, Mr. Dave Shaffer for closing remarks.

Thank you.

Speaker Change: Seeing as there are no more questions in the queue, that concludes our question and answer session. I would now like to turn the call over to our Chairman and CEO, Mr. Dave Schaeffer, for closing remarks.

Dave Schaeffer: I would now like to turn the call over to our Chairman and CEO, Mr. Dave Schaeffer, for a closing remark. Well, thank you all very much. I even got a compliment from Walt on shortening the script, so that's worth something. I want to thank everyone. Take care, and we'll talk soon. Thank you.

Dave Schaeffer: Well. Thank you all very much even got a complement from Walt on shortening the script. So that's <unk>.

Dave Schaeffer: Well, thank you all very much. I even got a compliment from Walt on shortening the script, so that's worth something. I want to thank everyone. Take care, and we'll talk soon. Thank you. Bye-bye.

Speaker Change: Or something.

Dave Schaeffer: I want to thank everyone take care and we'll talk soon thank you bye bye.

Dave Schaeffer: Okay.

© The Bulletproof Executive 2013

Speaker Change: The meeting is now concluded thank.

Thaddeus Weed: The meeting has now concluded. Thank you all for joining and have a pleasant day. You may now disconnect.

Speaker Change: Thank you all for joining and have a pleasant day you may now disconnect.

Dave Schaeffer: The meeting has now concluded. Thank you all for joining, and have a pleasant day. You may now disconnect.

Speaker Change: Please wait the conference will begin shortly.

Thaddeus Weed: Please wait, the conference will begin shortly.

Dave Schaeffer: Okay.

Dave Schaeffer: Okay.

Dave Schaeffer: Okay.

Dave Schaeffer: Yeah.