Cogent Communications Holdings Inc at JPMorgan Global Technology, Media and Communications Conference Transcript

The following is excerpted from the question-and-answer section of the transcript.

Question: Sebastiano Petti - JPMorgan Chase & Co. - Analyst : Awesome. Well, thank you. And Dave, Cogent reported mixed 1Q results last week. David Schaeffer - Cogent Communications Holdings Inc - Chairman of the Board, President, Chief Executive Officer, Founder --

Question: Sebastiano Petti - JPMorgan Chase & Co. - Analyst : Got it. Okay. That's helpful context there. As we think about the first quarter from a [Waves] perspective, revenue and installs came in a little bit light with the installs concentrated towards the back half of the quarter. I think you attributed the shortfall to customers falling out of the backlog or just others perhaps not being able to accept the new services. Can you maybe double-click on that for us and help unpack some of the drivers there? David Schaeffer - Cogent Communications Holdings Inc - Chairman of the Board, President, Chief Executive Officer, Founder Yes. So Sprint had not been in the wavelength business. Its network was designed to support its long-distance voice business, which had been turned down in 2015. When we acquired Sprint, we acquired the network assets for $1 and we outlined a program to convert those assets into something that would generate demand in today's environment. And that included two things: repurposing the physical fiber network for optical transport or wavelength services; the second being repurposing a subset of the central offices into data centers. For the wavelength opportunity, we needed to extend the Sprint network to touch carrier-neutral data centers across North America. The Sprint network terminated in 23 data centers. We have expanded that footprint to 883 data centers. So Sprint did not have a metropolitan fiber network. We had to repurpose the physical long-haul fiber and then integrate it into our metro footprint. When we announced the deal in September of '22, we closed in May of '23 and we outlined a program that would take till the end of '24 to enable 800 data centers. We actually ended up with 802. We had deployed about 1,000 wavelengths on a custom install basis between closing and the enablement of the network. In that period, we garnered about 4,000 potential orders from customers starting in September of '22 and extending REFINITIV STREETEVENTS | www.refinitiv.com | Contact Us consent of Refinitiv. 'Refinitiv' and the Refinitiv logo are registered trademarks of Refinitiv and its affiliated companies. MAY 13, 2025 / 3:30PM, CCOI.OQ - Cogent Communications Holdings Inc at JPMorgan Global Technology, Media and Communications Conference through December of '24. Most of those orders fell out due to the fact that customers could not wait that long and we were unable to provision services. As we got clear line of sight to being able to deliver those wavelength services, we started to book new orders. We booked approximately 900 in the fourth quarter, about another 2,400 in the first quarter. We typically install about 5% of orders in our backlog per month. We have developed the provisioning capabilities to be able to provision 500 orders a month. And as we started to contact customers who had orders, many of them said, we are still interested, but not ready now. We actually grew our wavelength business sequentially by 18.2% unit number of orders, but only 2.2% by revenue due to the fact that virtually all of that revenue installed the last couple of days of the quarter.

Question: Sebastiano Petti - JPMorgan Chase & Co. - Analyst : And just sticking with that last point, I mean, if you have -- your ability to provision orders, right, is in excess of your customers' ability to accept them. Just thinking about the 30-day provisioning going down to 17 days, I mean, is that really an area of differentiation if customers are not necessarily accustomed to installing services that quickly? REFINITIV STREETEVENTS | www.refinitiv.com | Contact Us consent of Refinitiv. 'Refinitiv' and the Refinitiv logo are registered trademarks of Refinitiv and its affiliated companies. MAY 13, 2025 / 3:30PM, CCOI.OQ - Cogent Communications Holdings Inc at JPMorgan Global Technology, Media and Communications Conference Or is this more about your -- the last point of educating the -- not necessarily educating, but getting customers more comfortable with your abilities on the wave side and the faster provisioning? Just trying to think about that area of differentiation and how it materializes from here. David Schaeffer - Cogent Communications Holdings Inc - Chairman of the Board, President, Chief Executive Officer, Founder So it is absolutely an area of differentiation and it is something that customers will value if it is available to them. So the use cases for wavelengths fall into three primary categories: regional networks tying together islands of traffic; international carriers and content providers extending their networks transcontinentally; and then finally, AI training, tying databases to GPUs. In each of those use cases, because of the long lead times of our competitors and the inability to actually install 100% of the orders, the customers have become accustomed to living with long lead times, not because they want to, but because they had to. And secondly, oftentimes multi-sourcing, knowing that it was likely that one of their providers could not meet their requirements. If we are able to demonstrate ubiquity of coverage and quick installs with high reliability, that will be valued. And it's probably the way as a new entrant, we gain market share. One of the other learnings that we've had in this short period that we've actually been provisioning is the fact that we did not have to, at least to date, be as aggressive on pricing as we thought we would have to. So again, to just remind investors, we gained market share in our primary business, internet connectivity by guaranteeing to underprice the market by 50%. So we shortened the provisioning windows, broadened the number of locations customers can connect to us. And then finally, drove down the cost per bit and gained the largest market share of any provider in the world. That process took us nearly 20 years to complete as an unknown company without a sales force and a much broader universe of competitors. As we enter the wavelength market, we have an established sales force of about 625 quota-bearing reps. Roughly 1/2 of those focus on the wholesale customers in the wavelength market, 3/4 of those customers are already using Cogent as their internet service provider. And what we need to do is port that credibility that we have on IP to wavelengths. If we are able to do that, we believe that we will continue to gain share without having to use the lever of price. But because we have a much lower capital basis in our network, we do have the ability to be more aggressive if needed.

Question: Sebastiano Petti - JPMorgan Chase & Co. - Analyst : Great. And then maybe shifting gears to just financials and 2025 EBITDA outlook. On the call, you said that you would expect to achieve the goals we've outlined in regard to the 2025 EBITDA expectations. I guess, in the past you had described that as similar, right, or stable year-on-year. I guess what gives you confidence, I guess, in an improving EBITDA trajectory sequentially over the balance of the year? And you talked about the revenue expectations for the third quarter with sustained growth thereafter. Just help unpack that or tell us more about that. David Schaeffer - Cogent Communications Holdings Inc - Chairman of the Board, President, Chief Executive Officer, Founder Yes. So first of all, we have spent the first 25 minutes talking about something that represents today about 2% of Cogent's revenues and 89% of our revenues are in our IP business, which has continued to grow. We also have been able to demonstrate for the past year a reduction in top line as a result of that attentional grooming that I described, yet a growth in actual EBITDA, not just an expansion in margin, but a growth in EBITDA every quarter. We anticipate that growth to continue. Our payment stream from T-Mobile was bifurcated. In the first 12 months, the subsidies equaled $29.1 million a month. And then for the next 42 months, those payments stepped down to $8.3 million a month or $25 million a quarter. So in the first year, we acquired Sprint, we acquired it in May of '23. Cogent's EBITDA for '23 versus '22 went from roughly $260 million to $352 million. That payment stream stepped down mid-year '23 -- from '23 to '24. And as a result, our EBITDA for full year '24 was $348.2 million. In looking at calendar year '25, we have a $104 million headwind to overcome from that step-down in subsidy payments. To help us offset that, we have been cutting costs, growing EBITDA and will become total revenue growth positive mid-Q3. We also know that our wavelength revenue carries very high contribution margins. Our on-net services typically have a 90-plus percent contribution margin. With the acceleration of that business, we will see an acceleration in absolute EBITDA reported. We had said that our EBITDA will be relatively equivalent in '25 to '24. Now I somewhat softened my statement based on the $68.8 million or $69 million we did in Q1. We need that EBITDA to grow to get to that roughly $350 million range. If our wavelength business accelerates beyond kind of its current pace, we will easily achieve that. If it hits our current projections, we will fall slightly short of that. If we are able to pull in more orders to the funnel and improve the install cadence, we can easily achieve the guidance that we laid out. The underlying IP business, which is selling internet access and VPN services continues to grow

Question: Sebastiano Petti - JPMorgan Chase & Co. - Analyst : Got it. And then last week, Cogent slowed its quarterly dividend growth outlook to 0.5p from 1p. I mean, why does it make sense to continue to grow the dividend given the leverage concerns and what we're kind of discussing? And then how are you thinking about, I guess, the return to a more comfortable leverage ratio? REFINITIV STREETEVENTS | www.refinitiv.com | Contact Us consent of Refinitiv. 'Refinitiv' and the Refinitiv logo are registered trademarks of Refinitiv and its affiliated companies. MAY 13, 2025 / 3:30PM, CCOI.OQ - Cogent Communications Holdings Inc at JPMorgan Global Technology, Media and Communications Conference David Schaeffer - Cogent Communications Holdings Inc - Chairman of the Board, President, Chief Executive Officer, Founder So last quarter, we actually supplemented the dividend with additional purchases of stock due to the stock volatility. Cogent has returned approximately $1.6 billion to shareholders in a combination of dividends and buybacks, roughly $240 million in buybacks and about $1.35 billion in dividends. We've also been able to characterize the majority and in fact, 100% last year of our dividend as return of capital, making it extremely tax efficient for the recipient, reducing their basis, but not paying taxes on that distribution of capital. We have grown the dividend for 52 quarters sequentially. We have grown the dividend because of both the growth in EBITDA and the capital efficiency of our business. We have ratcheted leverage up. The step down in payments from T-Mobile have resulted in our leverage going above the range that we said we would be comfortable with. We know that leverage will peak in Q3 of this year and begin to decline just because we lapped that step down in those payments and it is an LTM test. If you did it on an LQA basis, our leverage has already been improving for the past two quarters. In our use of capital, our primary objective will initially be to reduce leverage back into the comfort zone that we have outlined; two, to then accelerate the return of capital to shareholders. We have not been a company prone to doing a large number of acquisitions that could potentially destroy value. Rather, we give that money back to shareholders and that intends to be our plan. So priority one is to reduce leverage. Priority two is to continue to accelerate the return of capital. Because of the short-term increase in leverage, but the longer-term view of the growth prospects, it made sense to reduce the rate of growth in dividend from 1p a share sequentially to 0.5p a share. We will supplement that with buybacks. And then as we delever over the next 1.5 years to 2 years, getting back down to the total leverage target that we have outlined, we will then be in a position to accelerate the return of capital and we'll then judge whether it makes sense to either reaccelerate the pace of growth or to be more aggressive on buybacks.