Q4 2024 Cogent Communications Holdings Inc Earnings Call
A transcript of this conference call will be posted at COGEN's website when it becomes available.
Speaker Change: Cogen's summary of financial and operational results attached to his press release can be downloaded from the Cogen's website. I would now like to turn the call over to Mr. Dave Schaeffer, Chairman and Chief Executive Officer of Cogen Communications Holdings.
Speaker Change: Thank you and good morning to everyone. Welcome to our fourth quarter 2024 earnings call and summary of our full year 2024 results. I'm Dave Schaeffer, Coachings Chief Executive Officer, and with me on this morning's call is Taddeus Weed, our Chief Financial Officer.
Speaker Change: Hopefully you've had a chance to review our earnings press release. Our press release includes a number of consistently reported historical metrics which hopefully are helpful in understanding trends in our business.
Speaker Change: Our combined coach and business had a good quarter and a good year. Our total revenue for the quarter was $252.3 million and $1 billion for full year 2024 compared to $940,900,000 for full year 2023.
Our EBITDA, as suggested, was $66.9 million for the quarter.
Speaker Change: Our EBITDA as adjusted for the quarter increased sequentially by $6,000,000 and our EBITDA as adjusted margin increased sequentially by 280 basis points to 26.5%.
Speaker Change: Our wavelength revenues for the quarter grew sequentially at 31.8%, or $7 million, an increase of 124% over the previous year.
Speaker Change: Our IPV4 leasing revenue for the quarter increased sequentially by 11.8% to $12.6 million. And that represents a 27.2% increase year over year.
Speaker Change: Our IPv4 leasing revenue was $44.9 million for full year 2024, an increase of 24.5% over the previous year.
Speaker Change: We are in the process of continuing to realize significant cost savings from the integration of these Sprint assets.
Speaker Change: We have realized over 90% of our targeted $220 million in annual savings.
Speaker Change: Our projected savings are expected to continue to be achieved through 2026 and will be greater than the $220 million initially targeted.
Speaker Change: for the quarter or by another 7.5% from the previous quarter and a decrease by 19.2 million or 25.6% from Q4 of 2023.
to 22.2% this quarter from 23.7% in Q3 of 2024.
Speaker Change: A cost of goods sold decreased by $6.4 million in the quarter, or 4% from the third quarter of 2024.
Speaker Change: and decreased by $19.5 million or 11.2% from the fourth quarter of 2023. We ended the year with $227.9 million of cash and cash equivalents on our balance sheet.
Speaker Change: Our Salesforce rep productivity was 4 units per rep per month in the previous quarter and 3.5 units per rep per month in the fourth quarter.
At year-end, 624 of these employees remain employed with Coaching.
This represents a 34% reduction.
Speaker Change: We expanded our product offering on our fiber-optic network to include wavelength services or optical transport services.
Speaker Change: to both existing customers as well as new customers. At the end of the quarter, we had wavelength.
sales capability and connectivity to 808 locations throughout North America.
Speaker Change: This exceeded our target of 800 sites by year-end, with provisioning times of approximately 30 days.
Speaker Change: We ultimately will be able to reduce that provisioning time to two weeks, but at this point It is in fact at around 30 days
Speaker Change: We have actually sold waves and installed them in 280 locations.
And as we go through...
are existing sales follow-all.
Speaker Change: and backlogged, some of those orders have dropped out and at quarter end we still had 2,700 orders in our wavelength funnel.
Speaker Change: Our Sprint Network acquisition materially expanded our data center footprint. At year-end,
Speaker Change: We have reconfigured 115 acquired Sprint facilities and added those to our 1,646 carrier neutral data center footprint.
Speaker Change: These edge data centers are smaller in their footprint, can typically support about 40 racks, and in aggregate have an additional 20 megawatts of power.
Speaker Change: So, in total, we have a combined quotient footprint of 159 data centers with 197 megawatts available for customers.
Speaker Change: We are in the process of decommissioning some legacy cogent data centers and lease facilities where they are redundant with our own fee-simple acquired Sprint facilities.
Speaker Change: Our Board of Directors, which reflects on our growth in cash flow and our continued strong cash flow generating capabilities, as well as our investment opportunities.
Speaker Change: Once again, approve the increase in our quarterly dividend by another one cent per share, sequentially for the quarter.
Speaker Change: Raising our quarterly dividend from 99.5 cents a share to $1.50 per share.
Speaker Change: This represents the 50th consecutive sequential increase in our quarterly dividend and a dividend growth rate of about 4.1 percent.
Speaker Change: We anticipate annual growth of 5-7%, and EBITDA as adjusted margins expanding by about 100 basis points per year.
Speaker Change: Our revenue and EBITDA guidance are designed to be multi-year targets and are not designed to be specific quarterly or annual guidance.
with T-Mobile as part of the purchase of these assets.
Speaker Change: Now I'd like to turn it over to Tad to read our Safe Harbor language, provide some additional detail on our operating performance, and then I'll follow up with some summary comments and then we'll open the floor for questions and answers.
Thank you, Dave, and good morning, everyone.
Speaker Change: This earnings conference call includes forward-looking statements. These forward-looking statements are based upon our current intent, belief, and expectations.
Speaker Change: These forward-looking statements and all other statements that may be made on this call that are not historical facts are subject to a number of risks and uncertainties, and actual results may differ materially. Please refer to our SEC filings for more information on the factors that could cause actual results to differ.
Speaker Change: Cogent undertakes no obligation to update or revise our forward-looking statements. If we use non-GAAP financial measures during this call, you will find these reconciled to the corresponding GAAP measurement in our earnings releases that are posted on our website at cogentco.com
Speaker Change: We analyze our revenues based upon network connection type, which is on-net, off-net, wavelength services, and non-core. And we also analyze our revenues based upon customer type, and we have three customer types, net-centric, corporate, and enterprise customers.
Speaker Change: Our corporate business represented 44.8% of our revenues for the quarter. That was $113.1 million.
Speaker Change: Our quarterly corporate revenue decreased by 10.7% year-over-year and sequentially by 2.7%.
Speaker Change: These decreases in our corporate revenue are primarily due to the continued grooming of low-margin off-net customer connections and the elimination of non-core products. We had 46,371 corporate customer connections on our network at year-end.
Speaker Change: Our net centric business represented 37.1% of our revenues for the quarter, which was an increase of 0.5% year over year, and a sequential increase of 1.9%.
Speaker Change: Our quarterly net centric revenue under our commercial service agreement with T-Mobile declined sequentially by $2.6 million and declined by $7.1 million year over year, negatively impacting our net centric revenue results.
Speaker Change: We had 62,236 net-centric customer connections on our network at year-end.
Speaker Change: Our enterprise business represented 18.1% of our revenues for the quarter and was $45.6 million.
Speaker Change: We had 14,776 enterprise customer connections at the end of the year on our network.
Speaker Change: Our quarterly enterprise revenue decreased by 12.8% year-over-year and sequentially by 3.5 million or 7.1% primarily due to a reduction in non-core and low margin enterprise revenues.
Speaker Change: on revenues by network type, on-net revenue. We serve our on-net customers in our 3,453 total on-net buildings.
Speaker Change: We continue to succeed in selling larger 100-gigabit connections and 400-gigabit connections in carrier-neutral data centers and selling 10-gigabit connections in select multi-tenant office buildings.
Speaker Change: Our on-net revenue was $128.8 million for the quarter, a year-over-year decrease of 6.7% and sequentially 5.7%.
Our on-net revenue results were negatively impacted by three items.
Speaker Change: The $2.6 million sequential decline in the commercial services agreement, the on-net revenue compotion of that with T-Mobile.
Weed, David Schaeffer
Our on-net customer connections, we're 87,500 a year in.
Speaker Change: Our off-net revenue was $113.2 million for the quarter, a year-over-year decrease of 8.5%, and a sequential increase of 1.7%.
Speaker Change: The sequential increase is primarily due to increase in our margins on former Sprint off-net services. Our off-net revenue results are also impacted by our migration of certain off-net customers to on-net and the continued grooming and termination of low-margin off-net contracts.
Speaker Change: Our off-net customer connections were 28,963 at the end of the year.
Speaker Change: Our Wavelength Revenue was $7 million for the quarter, a sequential increase of 31.8% and year-over-year 124%.
Speaker Change: Our wavelength customer connections were 1,118 at the end of the year.
Speaker Change: Our IPV4 leasing business had another good quarter and a very productive quarter.
Speaker Change: We were leasing 13 million of our IPv4 addresses at the end of the year.
Speaker Change: And our IPV4 revenue increased by 11.8% from last quarter and 27.2% year-over-year to $12.6 million for the quarter.
Speaker Change: Some comments on pricing. Our average price per megabit for our installed base decreased sequentially by 9% to $0.21, and decreased by 25% year over year, consistent with historical trends.
Speaker Change: Our average price per megabit for our new customer contracts was $0.11, which was actually an increase of 31% sequentially and 11% increase year-over-year.
Speaker Change: Our off-net ARPU increased sequentially by 8% from 1,138 to 1,229, demonstrating our increased margins.
Speaker Change: Our wavelength, ARPU, increased sequentially by 9.5% and was 2,151 in this quarter, compared to 1964 last quarter.
Speaker Change: Our average revenue per IPV4 address sold was $0.44 per address this quarter. That is a 47% increase from the average base of $0.30 per address at the beginning of the year. So prices have been increasing.
Speaker Change: Our churn rates are relatively stable. Our on-net unit monthly churn rate was 1.3% this quarter, compared to 1.2% last quarter, and our off-net unit monthly churn rate was 2.6% this quarter, the same as last quarter.
Speaker Change: comments on EBITDA, EBITDA Classic. We reconcile our EBITDA to our cash flow from operations and each of our quarterly earnings press releases.
EBITDA as adjusted.
Speaker Change: Our EBITDA as adjusted, as a reminder, is adjusted for sprint acquisition costs if we incurred any during the period.
Speaker Change: and payments under the IP transit agreement with T-Mobile. There were no incurred and costs classified as Sprint Acquisition Costs after the second quarter of 2024, when our one-year purchase accounting adjustment period ended for the Sprint Acquisition Costs.
Speaker Change: Our EBITDA as adjusted for the year was $348.4 million and the margin was $33.6 million.
David Schaeffer, The David Schaeffer Show.
Speaker Change: In accordance with our IP Transit Services Agreement, we received the three monthly payments totaling $25 million this quarter, the same as last quarter. All payments have been paid in full and on time.
Speaker Change: For full year 2023, we received total payments of $204.2 million, and coincidentally, the same amount for full year 2024, $204.2 million, but the payment streams were different.
Speaker Change: The total was the same, but the streams were different. The total payments for 2023 included seven payments of $29.2 million each and the total monthly payments for 2024 included five payments of $29.2 million.
Speaker Change: and seven payments of $8.3 million. An additional 35 monthly payments of $8.3 million each will continue until November 2027.
Speaker Change: There are additional payments we will receive under the purchase agreement with T-Mobile. There are further payments related to lease obligations that we assumed at closing, and these payments will total at least $28 million and to be paid over four equal payments in months 55 to 58.
So, from November 27 to February 2020. Foreign currency comments.
Speaker Change: Our revenue earned outside of the United States is relatively consistent as last quarter. It was about 18% of our revenues, 11% of that was in Europe, and 7% related to Canada, Mexico, our Oceanic, South American, and African countries.
Speaker Change: Our average euro to USP rate so far this quarter is $1.04, and the average Canadian dollar exchange rate is 70 cents.
Speaker Change: If those rates continue at the current level, the FX conversion impact on sequential quarterly revenues would be negative at about $1 million, and year-over-year for quarterly revenues would also be negative at about $1.7 million.
Speaker Change: Our revenue and customer base is not highly concentrated. Our top 25 customers was about 18% of our revenues this quarter.
Speaker Change: On CapEx, our CapEx was 46.1 million this quarter. That was down 22.2% from last quarter, and our CapEx was 195 million for the full year.
Speaker Change: into one unified network and converting former Sprint switch sites into codes and data centers.
Speaker Change: We have accelerated and expanded our data center conversion program due to the high level of demand for our power availability.
Speaker Change: This program will require capital spending for the first half of 2025. That will be similar to the last half of 2024, and then tail off.
Speaker Change: Comments on our IRU lease obligations. Our finance IRU obligations are for long-term dark fiber leases.
Speaker Change: Our IRU finance lease obligations were $538.4 million at the end of the year. We have a very diverse set of suppliers and contracts with 369 different suppliers of dark fiber. At year end, our cash and cash equivalents and restricted cash was $227.9 million.
Speaker Change: $29.4 million of cash is restricted and $22.3 million of that was tied to our swap and $7.1 million was tied to the requirements under our IPv4 restricted notes.
Speaker Change: Comments on debt and debt ratios. Our total gross debt at PAR, including our finance leases, was $2 billion at year-end and net debt was $1.8 billion.
Speaker Change: Our total gross debt to the last 12 months EBITDA as adjusted ratio was 5.72 and net debt was 5.07.
Our leverage ratio as calculated under our note indentures.
Speaker Change: was 5.81 and our secured ratio was 3.38 and our fixed coverage ratio under the note indentures was 2.76.
Speaker Change: Our fourth quarter, 2024 annualized EBITDA as adjusted, increased sequentially by $24 million, or about $9.8 million.
percent from 243.4 million to 267.4 million.
Speaker Change: Some comments on the swap. As a reminder, we are party to an interest rate swap that modifies our fixed interest rate obligation with our 500,000,020 26 notes to a variable interest rate obligation.
Speaker Change: Based on the SOFR rate for the remaining term, the fair value of our swap agreement decreased by $7.6 million from last quarter to $22.3 million.
Speaker Change: Changes in the fair value of the swap agreement are required to be classified with interest expense under US GAAP.
Speaker Change: Only 0.6 million and only 2.2% of our revenues for the quarter was 1% of our revenues for full year 2024 which is consistent with historical results.
Speaker Change: As always, I want to thank and recognize our worldwide Billing and Collections team members for doing a fantastic job in serving our coaching customers.
David: And with that, I will turn the call back to David.
David: Thanks, Tad. I'd like to highlight a couple of strengths in our network, our customer base, and our sales force.
David: We continue to experience significant year-over-year traffic growth in our legacy net-centric business. We're direct beneficiaries of over-the-top video, artificial intelligence activities, and streaming traffic.
At year-end, we had 1,646 third-party carrier-neutral data centers,
David: 104 of our own data centers and an additional 55 of the smaller edge data centers connected to our network with cogent available power capacity of a hundred and ninety seven megawatts.
David: The breadth of this coverage enables us to serve our net-centric customers, better help them optimize their networks, and reduce latency.
David: We continue to expect to widen our lead in this market as we project adding over a hundred carrier neutral data centers to our network this year and for the next several years.
David: At year-end, we were able to sell our wavelength service in 808 of these carrier-neutral facilities with reduced provisioning times. This surpassed our year-end target of 800 carrier-neutral data centers being wave-enabled.
David: At year-end, we were directly connected to 8,250 different networks or autonomous systems with 23 of these networks representing peers.
David: And 8,227 of these customers were, in fact, purchasing transit from Cochin for their networks.
David: quarter was 5% per month. That is down from the peak of 8.7 at the height of the pandemic. It's still below our average rep turnover of 5.6% per month.
David: At year end, we had a sales force of 288 professionals focused on the net centric market. These individuals sell both transit and wavelength services.
David: 347 professionals focused on the corporate market and 15 individuals focused on our enterprise customer base and the new market opportunities in that segment.
David: In summary, we're very optimistic about our position and being able to serve small and mid-sized customers with IP services located in the central business districts of major cities.
David: We had 1,871 on-net, multi-tenant office buildings comprising over a billion square feet of rentable office space. We had 1,871 on-net, multi-tenant office buildings comprising over a billion square feet of rentable
David: geographically around the world. We're enthusiastic about the progress and continued opportunity in our optical transport business and the wavelength services that we have been able to provision.
David: We have a significant backlog and funnel of over 2,700 opportunities.
David: Well, this is down slightly from the previous quarter. It's been due to grooming that funnel. Many of those opportunities have been in the funnel for over a year as we could not provision them.
David: We believe that we will continue to accelerate our wavelength business.
David: We're digitally, we are working diligently on continuing cost reductions as a result of the integration of the Sprint network and the various customer bases we acquired.
David: over the next year or so. We're currently in discussion with multiple counterparties from multiple sites and hopefully we'll be in a position to announce something over the next several months. Now I'd like to open the floor for questions.
Speaker Change: We will now begin the question and answer session. If you'd like to ask a question at this time, simply press star followed by the number 1 on your telephone keypad. If you'd like to withdraw your question, press star 1 again.
Speaker Change: And your first question comes from the line of Michael Rollins with Citi. Michael, please go ahead.
Thanks and good morning.
Michael Rollins: Dave, curious, just to start us off, if you look at the customer verticals that you're now reporting in terms of corporate
Speaker Change: Enterprise and Netcentric. Can you give us an update just holistically in terms of where each of those segments are in terms of getting through some of these legacy acquired revenues and what's the opportunity for each of these segments to grow?
Michael Rollins: over the, you know, coming years, whether it's, you know, one, two, or maybe a three-year view.
Speaker Change: Yeah, sure, Mike, I think those are fair questions. So when we acquired Sprint, we acquired both corporate and enterprise customers, only a handful of net centric customers.
Speaker Change: Our net-centric business continues to grow, and that growth rate will actually accelerate since virtually all of the wavelength sales will be net-centric, and approximately 85% of our IPV4 leasing is to net-centric.
So within the net centric
Speaker Change: segment. We are growing today and we anticipate that growth rate to accelerate meaningfully as both the underlying IP business performs and we are able to add wavelength revenue to those customers.
Thank you.
for our corporate segment.
Speaker Change: who were purchasing non-core services, were purchasing very low bandwidth, non-fiber delivered, off-net services.
Speaker Change: and we have been in the process of grooming those less desirable services.
Speaker Change: This is why our margins have exceeded our guidance in terms of growth rate, and we expect that to continue.
Speaker Change: I think we're probably still just a couple of quarters away from getting through that grooming exercise and then seeing positive growth in our corporate segment.
Those corporate customers will predominantly purchase.
Speaker Change: It is a segment that has been heavily exposed to central business district office occupancy and we are continuing to see improvements in that.
Speaker Change: Many markets that have been negative net absorption, meaning increases in vacancy rates since the pandemic, have actually turned positive now and we're seeing net positive absorption across most markets across the country.
Speaker Change: So, as a result of the grooming, we will see probably a couple more quarters of negative corporate growth, stable, and then beginning to grow.
The majority of these locations are off-net.
Speaker Change: Our decision to support MPLS going forward for at least a decade has actually allowed us to actually win a handful of brand new enterprise accounts.
Speaker Change: that today only have a handful of connections with cogent but have indicated they will increase that. So we anticipate that the reduction in enterprise revenue will probably last
And the main reason for that is...
We are grooming some international operations and bifurcating...
Speaker Change: But we are requiring the customer to enter into direct contract with the local loop provider as we are not licensed to resell those.
Speaker Change: But we provide service in over 170 countries around the world.
Speaker Change: In the differential, we require the customer to purchase their own loop. Kojic had always used that structure, and we are migrating the acquired Sprint Enterprise customers to that. So probably about a year.
Speaker Change: of Continued Enterprise Decline, then flat to very modest growth. Probably in that segment, we do not anticipate more than kind of a 1% annual top-line growth.
Thanks, Mike. Thanks.
Speaker Change: Hi, thank you for taking the question. Just in regards to the waves, Dave, can you remind us how should we think about perhaps additional investments needed to perhaps unlock the opportunity there, whether it be from a Salesforce investment perspective, maybe connection costs, you know, related to, you know, just enabling that from a CapEx perspective? And then if we think about
Speaker Change: If we think about just the pace of installs, I think...
Speaker Change: Part of that is probably predicated on the backlog, but I think you said 500 or so monthly installs in waves is probably a near-term target, but
Speaker Change: perhaps accelerating from there. And so how should we think about the cadence or the trend there?
Speaker Change: that would be helpful as well. And then I guess one area of housekeeping related to waves, on the provisioning times, I think you're down to 30 days now. If you remind us, where was that last quarter? Thank you. And what's the timeline to get to the two weeks? Thanks.
Speaker Change: Yep, fair enough. I'm going to take those in reverse order, Sebastiano. So last quarter we were at, so in Q3,
Speaker Change: We were probably at 120 days for the waves that we can provision. By Q4, for the ones that we provisioned, we got that down to 90.
Speaker Change: In this quarter, we are down to a 30-day provisioning window, and we are continuing to refine some of the processes and field deployment.
Speaker Change: mechanisms and feel comfortable that we can get down to the same two-week average that we have in IP services, which we've been able to do now.
for over 20 years.
Speaker Change: We tested all of these provisioning systems and configurations, but there are always corner cases in the real world that you learn from. But we feel very comfortable that the 30 days, which is
Speaker Change: Far beyond what anyone else in the industry can do is great, but we have the ability to effectively cut that in half over the next several months.
With regard to the pacing of installs,
Speaker Change: We are ramping up to our full install capabilities, and we have both field resources and service delivery coordinators to support the 500 a month.
Speaker Change: You know, the hard part now has been working through the backlog that we have and flushing out which orders are still available for install and which the customers had to go somewhere else.
Speaker Change: and we have groomed the funnel, it did shrink even though there were some new waters coming into the funnel, and now we expect the funnel to actually accelerate in new water intake as we have demonstrated our ability to install.
Speaker Change: You know, I think we're still probably a month or two away from getting to kind of full cadence of 500, you know, installs a month as a result of this grooming exercise because it does take an iterative back and forth with the customer.
Now to the investment part of the wavelength question.
Speaker Change: And I'll answer that in two different areas, both capital in the network and Salesforce investment.
Speaker Change: You know 18 months since we announced that 800 target and we are rapidly Catching up so we have ubiquitous
six or seven weeks later is now close to 880.
There are still probably about
Speaker Change: 60 or 70 data centers that have IP connectivity from Cogent in North America that don't have waves that have come online in the past 18 months that were rapidly at a wave capability.
Speaker Change: We think our kind of run rate stabilized CapEx will be in that roughly $100 million a year range. That is somewhat dependent on the rate at which new data centers come online.
Speaker Change: But, you know, the amount of incremental capital to bring wavelengths to the data center versus just IP is fairly trivial, probably less than $15,000 per incremental data center.
Speaker Change: So we don't see a material uptick in CapEx. In fact, we see our CapEx declining after mid-year and the elevated CapEx that we are spending now is being focused heavily on
Speaker Change: We targeted 23 of the largest facilities. To do that, three have been fully converted.
20-R
Speaker Change: to be able to allow a counterparty to take control of them, whether they purchase them or lease them.
We have been marketing these facilities
Speaker Change: in kind of collecting offers and letters of intent as well as doing incremental tours.
Speaker Change: We believe that probably in the next six to eight weeks we will be far enough along that it'll make sense for us to do some calls for offers and kind of flush out how many of the LOIs
Speaker Change: are in fact serious and are ready to transact and at what economics. Now for the Salesforce piece.
Speaker Change: And it's in large part due to the fact that the Sprint network was based on extremely accurate GIS data, since it was not a roll-up or a series of acquisitions, but it was organically built by one company.
Speaker Change: We also have a number of Salesforce training programs that have been ongoing and are now accelerating
Speaker Change: And your next question comes from the line of Greg Williams with TD Cowen. Greg, please go ahead.
Greg Williams: Great. Thanks for taking my questions. Maybe dovetailing off the wave answer there, Dave, you know, you mentioned your competitive advantage is obviously getting to two weeks of provisioning and then you just mentioned one meter of accuracy for your Salesforce.
Speaker Change: We just got back from a Fiverr conference and Lumen specifically calling out investing heavily in waves.
Zeo is talking about 400 gig waves across the country.
Speaker Change: The Market Expansion Opportunity. Is there enough to go around for all of you?
Speaker Change: Second question is just on the IP version for price hikes. It sounds like
Speaker Change: It's $0.44 per address. You mentioned you're going to hike your prices on about 10 million addresses. Where is that process and how is that going along? What's the math there? If I think maybe $0.10 of a price hike on 10 million addresses, that's like $12 million in revenue opportunity.
Speaker Change: I'm trying to understand if I'm thinking of it correctly. Thanks.
Yeah, hey, thanks for the questions, Greg, and, uh...
Again, I'll take these in reverse order.
Speaker Change: On the IPv4 pricing, we initially raised the price of new sales, then we began cycling through the base that was not covered by contracts. We still do have some customers at lower rates that we will be.
Speaker Change: increasing prices on over the next several months. In addition to that, we will evaluate whether we can further raise prices for new sales.
Speaker Change: You know, we do have a large inventory of addresses that are on lease.
Speaker Change: pace growth in our IPV4 leasing. It has now become much more of a focus for cogent.
Speaker Change: as well as raising the average price of the base by both raising new incremental and going back to customers out of contract and raising that.
Speaker Change: Now to the wavelength question. We should never be naive. We should always believe we have competitors and we have to win business on a wave-by-wave basis.
Speaker Change: You know, the companies you mentioned have access to capital and are established players with substantial footprint.
Speaker Change: at least tell the market or advertise that they could deliver wavelength services, too.
Speaker Change: You know, we were at 808 at year-end and 880 today. We'll be over 900 in the next few months as we close out those remaining new data centers and bring them on to the wave network.
That additional ubiquity is important.
Speaker Change: The second key point is the architecture we deploy. It is radically different.
Speaker Change: than that of Zayo and Lumen. And it allows us to provision any to any in this very rapid period with minimum number of field dispatches and accurate fiber inventory.
Speaker Change: The two companies you mentioned had acquired a number of companies. They operate disparate, unintegrated networks.
Speaker Change: And for that reason, their typical wave install does take 90 to 120 days.
typically requires six or more field visits.
Speaker Change: and custom engineering in which they are unable even to produce an accurate route map.
But at the end of the day...
Speaker Change: We also have a much lower cost basis than they do in their assets, so we will be aggressive.
Speaker Change: I think we're going to grow our business by capturing new opportunities, but we will also displace current providers by offering a better solution.
Speaker Change: The switching costs are trivial in a data center because all you do is issue an LOA to the data center operator to
Speaker Change: migrate the CrossConnect in that data center from the previous provider to the new provider. It's a very easy process.
100% of our sites can support.
Kent Degg?
100 gig and 400 gig waves.
Speaker Change: Again, that's very different than our competitors. We can support all three speeds at 100% of the sites.
Speaker Change: The caveat I'm going to put on that is in every vector, so every direction out of a site, we can support 10 and 100
with a hundred percent coverage.
Speaker Change: to take some sites that are 400 gig enabled and make sure every direction out of that site can support 400. That work should also be complete this quarter, in the first quarter of 25.
Thanks. Great.
Speaker Change: And your next question comes from the line of Walter Pichik with LightShed. Walter, please go ahead.
Thanks. Dave, Taddeus highlighted the sequential growth in IPV4 revenue.
Walter Pichik: When I was looking at last quarter's revenue, it was higher so that shows that there was a sequential decline. Was there some type of restatement in IPV4 lease revenue? And then in terms of you saying focusing on IPV4 in terms of growth
Walter Pichik: Again, the net ads mean new lines, IPv4 addresses that you're leasing, I think only increased by like 90,000 in the quarter and used to increase by five, six, 700,000.
Walter Pichik: Was that based on some restatement on Q3 or is 90,000 kind of the run rate that you're delivering in terms of focusing on this area?
Walter Pichik: So the IPv4 revenue, the entity that has the secured notes, is going to be audited. So we have begun that process in auditing the revenue stream.
Walter Pichik: The data that has been disclosed have been based upon MRCs and totaling MRCs.
audited coming up in the next few weeks here.
Walter Pichik: Right, so that's on the revenue side. Now on the unit side...
As we raise prices,
Walter Pichik: There was some initial sticker shock. We did add just under 100,000 units in the quarter, but we also expect to be able to continue. The average
growth rate of nearly a half a million addresses.
Walter Pichik: per quarter over a multi-quarter period. If you go back and look at the data that we provided, there is volatility in every quarter in terms of the number of net new addresses added.
Okay, so.
Walter Pichik: So it's going to bounce back to 500,000 even though we haven't seen that since Q2
Speaker Change: Yeah, and even though you just increased price and are contemplating new price increases And this is just because you're focusing I guess on that business more and then the revenue restatement was just because it wasn't audited before So you're actually we're generating less revenue in IPV4 No The disclosure was based upon adding up MRC's as opposed to
Speaker Change: prorating the proper revenue amounts. You know, if a customer installs, for example, on the 20th of the month, we were adding up MRC.
Speaker Change: So end of quarter MRC's, right? That's right, so you had to go back. It might have been helpful to actually call that out in the press release of the prepared remarks. Rather than having to have it come up in Q&A.
Speaker Change: I mean, when you talk about sequential growth and it's actually down based on what you reported, yeah, I mean, I think maybe it's not material in dollars, but...
Whatever. Wavelengths...
Speaker Change: I guess a similar type of question. The backlog declining 20%. Was this basically like you had had orders from
Speaker Change: some time ago and then you checked in with these customers and they had gone elsewhere and I'm just curious like if we look at what remains
Speaker Change: After this 20% decline in your in your wavelength orders sequentially When's the last time you checked in with the customers that have existing orders in your backlog? And is there any chance that we'll see a similar reduction next quarter because they've gone elsewhere for their wavelengths
Speaker Change: Well, as we have stated on multiple previous calls, as we were building an order funnel and backlog,
Speaker Change: Some of the decline came from going to customers who had previously put in an order maybe 15 months ago and had gone somewhere else. Now that we have established a commitment.
800-A-CYCED
year-end and 880 sites today.
Speaker Change: We are cycling through that. There will be some breakage, but there are also new order intakes.
Speaker Change: at an accelerating rate. I think the way you characterize it as a 20% decline in waves is not correct. What it is... Well, 3,400 to 2,700. That's basic math, Dave. It's math. It is a grooming of a funnel.
The number of waves installed actually grew.
Speaker Change: Okay, can you also just lastly, you know, my favorite topic is just the
Speaker Change: I guess aside from leverage, but I'll leave that for the next call, which is now north of five. Your corporate revenue, which was declining 2.7%. I think in the prepared comments, again, you talked about off net and shifting off net to on net, but like, what can you just kind of cut to the root of it? What's going on in corporate? Is there any organic growth opportunity in that business or is this forever just in decline?
Speaker Change: I'm talking about the traditional cogent corporate, you know, that that really drove your dividend growth historically
Speaker Change: Well, our dividend growth has been driven by growth in cash flow and that growth in cash flow... Oh, cash flow. Debt leverage. Debt leverage. There's no cash flow. I'll finish answering your question. I'll let you ask the question. Okay. I'll finish answering it.
So, I already answered the question for Mike Rawlins.
earlier, which is that corporate growth
Speaker Change: will decline for another quarter or two as we continue to groom. As we groom both non-core and
Speaker Change: negative margin, off-net services that cannot be migrated to on-net, that results in a top-line decline but an expansion in EBITDA. We think this is the appropriate strategy.
The underlying on-net corporate footprint continues to grow.
Thank you, Walt. Next question. Thanks, Dave.
Speaker Change: And your next question comes from the line of Tim Horan with Oppenheimer. Tim, please go ahead.
Speaker Change: to capture share. And can you give us an update on, you know, maybe how much revenue you can get in wavelengths now and what you kind of are still expecting in five years?
Speaker Change: Thanks for your questions, Tim. First of all, I would actually say route redundancy is actually the most important factor to potential customers. If we rank their concerns, it's route redundancy, data center coverage.
Speaker Change: in terms of redundancy even for companies that have chosen to buy or build dark fiber
Speaker Change: Initially you would think that would take demand out of the market, but because the services on either dark fiber or waves are an unprotected service,
Speaker Change: at the closing of the deal in May of 23 and said within five years we would be at a run rate of $500 million annually in wavelength sales.
We think that the demand that we have received
Speaker Change: gives us a great deal of confidence we're going to make that number particularly as we prove to the market.
Speaker Change: You know, the fact that there have been some customers in the funnel for over a year that are still taking waves.
Speaker Change: So, can you just characterize how the sales effort is going right now? I mean, you're basically there now on provisioning and will be a couple of months from now, you're there on coverage, all the things we're talking about. Have the, I guess, the pitches ramped dramatically?
They have so as we
Speaker Change: went, you know, turned the calendar on 2025. We told customers in 808 sites
We would do 30 days, the sales force was...
Speaker Change: as we end up with an ability to show that we can provision.
Speaker Change: Lastly, David, can you just give us some, I know you're reluctant to do this and maybe you can't, some color on what we should expect for consolidated revenue and maybe consolidated EBITDA in total for this year? Obviously, there's a lot of moving parts.
Speaker Change: There are, and you know in 20, at the beginning of 24, we said that our EBITDA would be relatively equivalent to 23, and I think most sell-side analysts did not believe that. And then we ended the year at
Free
Speaker Change: 48 versus 352. So about a 4 million or 1% delta, I think going into the year.
Speaker Change: The, you know, kind of consensus was for about a 20% reduction in EBITDA due to the step-down in payments from T-Mobile. We have demonstrated our ability to take out costs.
Speaker Change: We also addressed the various customer segments and the declines and when we expect each of those segments to have flushed through the grooming of the non-core products.
Speaker Change: I would suspect that we will be delivering revenue that is slightly up for the full year due to wavelength sales.
Thank you, Dave.
Thanks, Tim.
Speaker Change: And your next question comes from the line of Jim Snyder with Goldman Sachs. Jim, please go ahead.
Speaker Change: over the next few quarters? And can you specifically talk to what's required in terms of Salesforce headcount and Salesforce productivity and how much productivity that needs to increase in order to get there?
Yeah, so in terms of...
We need to groom those non-core products.
that are sold to on-net customers.
Speaker Change: So there is going to be some connection, grooming that goes on.
Speaker Change: that were trapped in a group contract that we acquired from Sprint that we only migrate that customer once that contract has ended so we can recognize that savings.
Speaker Change: So, I think on a connection basis, we've got a couple more quarters of headwinds and then positive.
Speaker Change: On a revenue base, it will be very similar as we think the ARPUs will be relatively flat. There is some price decline that is typically offset by migrations to larger connections.
to address the Salesforce piece of it.
Speaker Change: Roughly 390, 387 of our salespeople focus on the corporate segment.
Speaker Change: That is the portion of the sales force that has the highest turnover. That is where we focus the majority of our normal training activities.
connection sold per rep per month to go up.
Speaker Change: Turnover, I'd always like turnover to be lower, and I think we will continue to see.
Corporate On-Net Growth
Speaker Change: Now, the return to office environment is the backdrop we're working against. It has been tough, it's lasted.
Much longer than we expected and we're always saying
Speaker Change: positive net office absorption turning in a dozen or so markets.
this quarter.
Making a Decision
Speaker Change: and companies occupying the space. But as I said to Mike's question, we feel comfortable that we're probably one to two quarters away from positive corporate revenue growth.
Speaker Change: Thanks, and maybe just a quick confirmation, I want to make sure that I understood what you said, heard what you said before properly, which is the sustaining capex in the business should be $100 million annualized run rate all in, after all the noise is flushed out of the numbers.
Speaker Change: of roughly $100 million by Q3 and Q4 of this year. We are at an elevated rate for the first half of the year, and most of that incremental capital is being spent on the data center enablement program.
Thank you.
Thanks.
Speaker Change: And your next question comes from the line of Christopher Scholl with UBS. Christopher, please go ahead.
Christopher Scholl: Great, thank you. Maybe just one on the under-monetized assets. Dave, would you say there's a preference for leasing versus selling the data center and IPv4 assets at this stage? And as you think about maximizing value, do you believe this most likely will be achieved through a few large deals or more so through a series of transactions? Thank you.
Christopher Scholl: Since Microsoft and Amazon are today not acquiring, at least in scale,
We think that...
If prices trade back up
Christopher Scholl: You know, the first trades occurred in 2011 at $4 an address.
Christopher Scholl: and, you know, today, 14 years later, they're at about 50. I think the long-term trend is up, but we would consider being a seller of some of that address space.
Christopher Scholl: We really are agnostic to whether it is a cash sale or a lease. We're allowing the market to tell us both which data centers
Christopher Scholl: they want and which of the two models they would prefer to use.
Christopher Scholl: There are about 60% lease, about 40% purchase. So, while there's a slight preference for leasing, it's not overwhelming.
Christopher Scholl: And that's out of after several hundred tours by different counter-parties. There's almost 50 counter-parties still actively working on these assets.
Christopher Scholl: If we decide to take a lease deal because the overall economics are better for cogent
Christopher Scholl: We would probably look to securitize that to raise cash off of those leases, so therefore the credit quality of the underlying tenant would be critical in our decision making process.
Christopher Scholl: And then the final part of your question, is it going to be a holistic deal or one-off? You know, while we have several offers for the entire portfolio...
They do not maximize value on specific assets.
Christopher Scholl: within the portfolio, again, until we do a call for offers, it can line everything up. I'm just not in a position to answer that. Now, I want to be absolutely clear with investors.
Christopher Scholl: This is something we haven't done before, we've got strong indications that our pricing is reasonable and there's strong demand, but we really want the market to answer the question for us.
Speaker Change: That's helpful, David. And then maybe just one more. You pointed to stable EBITDA in 2025. Can you just remind us the max leverage you're contemplating with the step-down in payroll payments and your comfort level with the dividend policy as you await the uplift from growth initiatives? Thank you.
Yeah, we're very comfortable with our dividend policy.
Speaker Change: As we mentioned on the previous call, our LQA, EBITDA, TROFT
in Q3.
Speaker Change: On an LTM basis, that is going to trough in Q3 of 25.
We are 5.07 today
Speaker Change: We will get into the high fives, 5, 7, 5, 8, in part due to the expenditures that we're making on the data centers and that drain on capital. We are comfortable with that because we also know that with the growth in EBITDA, we see a rapid
below the midpoint of our target.
Great, thank you.
Thanks, Chris.
Speaker Change: And your next question comes from the line of Nick Daldeo with Moffett, Nathanson, Nick
Thank you.
Nick Daldeo: Morning, guys. Just two quick ones given the time. I think you said traffic growth was 11% year over year, which I think is the lowest you've ever had, maybe aside from the quarter when you left mega upload back in 2012. What's going on there, and what does it mean for Netcentric Outlook?
Speaker Change: And then on the data center front, obviously we're mostly focused on the facilities you're trying to spruce up for wholesale or for sale. But I guess if you think about your retail assets, I think they've historically had
Speaker Change: utilization rates in the 30% range or so. I guess, should we expect that to go up in light of the broader supply-demand dynamic in the data center space?
Speaker Change: Yeah, so first of all on the traffic growth number, traffic was essentially sequentially flat.
in terms of
What's going on? We are reaching
Speaker Change: a level of maturity in streaming in the developed world with roughly 53, 54 percent of all video now being streamed.
Speaker Change: And that growth rate in streaming versus the, you know, hockey stick we saw post-pandemic is moderating.
I do think that
Speaker Change: that we are going to see a new leg up in growth as AI matures and as inference models become more ubiquitous and more commonly used.
Speaker Change: I think that will drive a new leg of growth and if we go back and look at
Cochran's
reported traffic roads over a
matured. Now these were off of much smaller bases.
Speaker Change: at similar historic rates. That's kind of in the 9-10% rate. And there are ebbs and flows in quarterly traffic. I know that several of our CDN customers did have
Speaker Change: a pretty tough quarter in terms of their traffic volumes And they are You know heavily dependent on us
But, you know...
Speaker Change: We're going to grow as fast or faster than the internet, gaining share, and it's got a long way to go before it's matured.
Speaker Change: To your data center question, you are correct in the premise that our primary focus today is getting that excess space marketable so we can monetize it.
Speaker Change: But we did add a lot of these smaller facilities, which are
more focused on our retail base.
Speaker Change: You know, the 55 EDGE data centers that we added average about 40 racks of capacity and about 350 kilowatts, so a third of a megawatt in existing power.
Speaker Change: I think we will be in a position to increase occupancy in the retail portion. We've been a little reluctant.
Speaker Change: And it didn't make sense to put someone in that 10,000 feet that was taking two or three cabinets, and that could be an impediment.
Speaker Change: 2 or 3 months from now when someone comes along and says I want to take the whole facility.
Speaker Change: But I think in general, we are probably a couple of years away from getting back to 30% occupancy now Hopefully the inference phase and the geographic ubiquity of our footprint
Speaker Change: changes that and accelerates that, but today we don't have a lot of data around AI edge cases.
Speaker Change: as a significant driver of co-location. Basically, our retail co-lo business has been aimed mostly at small corporates. And I think
Speaker Change: And your final question comes from the line of Brandon Nispel with Cape Town Capital Market. Brandon, please go ahead.
Brandon Nispel: How many waves specifically did you groove out of the funnel?
We groomed about
$1,500 out of the funnel
Speaker Change: Okay, $1,500. Were there any one-time expenses, network expenses? I think last quarter you called out some data center costs.
Speaker Change: clearing of those facilities that is not capitalized. I've mentioned that in the Q3 earnings call. We spent that in the third quarter and we said we would spend that also in the fourth quarter, but that
Speaker Change: Demolition component of spending would go away, and that is a non-capitalizable expense. So yes, there was some direct costs for that effort.
Speaker Change: Perfect. And then lastly, is there any way you can quantify just with one number on enterprise, corporate, and net centric, what the grooming activity is related to? So purposeful disconnects and or provide a churn rate that includes those disconnects and a churn rate excluding sort of the purposeful disconnects?
Thanks.
Speaker Change: It is hard for me to give you a single number because there are really three things going on at the same time. You've got, well, four things. You're moving some people from off net to on net. You're keeping the customer.
Speaker Change: But there are other cases where you're turning off a low-capacity corporate circuit that there's no fiber alternative for in North America.
Speaker Change: You're turning off enterprise circuits in international footprints where we are not licensed.
Speaker Change: And, you know, we had about a million dollar headwinds sequentially this quarter, 900,000, and we'll continue to turn that off. So there's not a single number, you really need to look at each of the subcomponents to kind of know what's going on a, you know, kind of one headline number would be misleading.
Thanks for taking the questions.
Speaker Change: Hey, thanks everyone. I want to appreciate everyone listening. We did cut our prepared remarks. We got done in less than an hour and a half, and thanks everyone. Take care. We'll talk soon. Bye-bye.
Speaker Change: This concludes today's conference call. Thank you all for joining. You may now disconnect.
Please wait, the conference will begin shortly.