Cogent Communications Holdings Inc at Morgan Stanley Technology, Media & Telecom Conference Transcript

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

Question: Jonathan Greenberg - Morgan Stanley - Analyst : Let's get into it. So 2024 felt like the year of artificial intelligence or at least it's a big party coming into our industry. And so, maybe starting there. How do you think AI is going to impact Cogent? Maybe starting on the customer perspective but then getting into the OpEx perspective. David Schaeffer - Cogent Communications Holdings Inc - Chairman of the Board, President, Chief Executive Officer, Founder I think AI is like many other buzz phrases often used and sold them fully understood. And I think it does make sense to take a moment do a little bit of definitional work around it. I think it's one of the technologies that is transformational, and it is just beginning. It is very poorly named, and it's not what I think most investors think of when they think of artificial intelligence. REFINITIV STREETEVENTS | www.refinitiv.com | Contact Us consent of Refinitiv. 'Refinitiv' and the Refinitiv logo are registered trademarks of Refinitiv and its affiliated companies. MARCH 04, 2025 / 3:00PM, CCOI.OQ - Cogent Communications Holdings Inc at Morgan Stanley Technology, Media & Telecom Conference So artificial intelligence, no matter which large language model you use always functions the same way where it takes large data sets, poses a question to those data sets and then discerns the pattern that the program uses to come up with the correct answer. It does that repeatedly and eventually takes those patterns and project them into new back sets. The primary application of that inference will be the transformation of the way software is produced and impacts people. So initially, software for the first 30 years was all about computational efficiency. Software then for the next 50 years was all about process codification and improvement. And really what we're doing now is substituting capital and machines for people coming up with very agile code that can be applied in very specific situations, very customizable and very flexible. And I think that is going to transform the world. For Cogent, we benefit three ways from AI. First of all, the raw material to create AI is information collected over the internet. And in the internet's 30 year history, it has stored about 800 zettabytes of data, and it's adding to that pool now at the rate of about 200 zettabytes a year. So the information that is transmitted and collected on the internet now has value when it didn't, and that's a positive for Cogent as the world's largest internet carrier. We carry approximately 25% of the world's traffic. The second benefit is to our optical transport business or wavelength business. Typically, the large language model training occurs at locations that are distant from where the data resides, simply because of the power intensity of those processes. And as a result, you need to move the bits between their storage point and the location where that training is happening. The best way to do that is with either wavelengths or dark fiber while the internet is cheaper because the internet is latency indeterminate, it means your GPU utilization would decline if you were moving that traffic by the internet. So it's actually a positive driver for a relatively new part of Cogent's business. And then the third leg will be the ultimate inference phase, taking those patterns and projecting them into smaller data sets for very customized workflows and processes. And that will all be done over the internet. And I think it will drive a new wave of internet traffic growth, much like video or social media had driven previous waves of growth.

Question: Jonathan Greenberg - Morgan Stanley - Analyst : And we've talked a lot about the demand side in terms of your business and your ability to generate revenue off of this. But on the cost side, you spoke a lot on your earnings call about your sales to install cycle and the ability to provision customers quite quickly. You think AI is supportive of that longer term and your ability to keep addressing the customer? David Schaeffer - Cogent Communications Holdings Inc - Chairman of the Board, President, Chief Executive Officer, Founder So AI today is a small driver of our total revenue streams. 89% of our revenues come from selling internet-based services. Now some of those services do result in the data collection for AI, but it's co-mingled with many other services and processes. So if, for example, you're using Uber to get a car, you're using that particular application riding over the internet using Cogent's backbone. But at the same time, they're collecting data for their next generation of AI and training. So the application and the data collection are co-mingled. We have been growing our internet business consistently at gaining market share due to the network optimization that we did 25 years ago and have continued to perfect to result in the lowest-cost interface-routed bit mile. I know that sounds like a mouthful, but that's really what someone is using when they use the internet. We had the opportunity to repurpose the former Sprint Voice Network and 2024 was a year of transformation where we completed the repurposing of that network to sell optical transport or wavelength services. These are point-to-point committed services that are typically sold in three speeds, 10 gig, 100 gig and 400 gig, and we can offer those now in more locations across North America than any other provider. We have unique routes in 90% of the cases. We can produce very accurate GIS mapping for those routes. We can provision those routes much more quickly and because we have no real cost basis in the Sprint Network, we can price aggressively. With the acceleration of AI training and the nearly $2 trillion that has been committed to capital programs for that over the next five years. The use of this optical transport will only increase exponentially. And I think we're in a position to capture a large portion of that growth.

Question: Jonathan Greenberg - Morgan Stanley - Analyst : Where do you see CapEx settling out once you're through with the data center? David Schaeffer - Cogent Communications Holdings Inc - Chairman of the Board, President, Chief Executive Officer, Founder Yeah. So we spent about $150 million of extraordinary CapEx, about $50 million on the network integration and about $100 million on the data center repurposing. On a steady state, Cogent's CapEx should be around $100 million a year. That is for direct capital expenditures both for maintenance and modest network expansion. REFINITIV STREETEVENTS | www.refinitiv.com | Contact Us consent of Refinitiv. 'Refinitiv' and the Refinitiv logo are registered trademarks of Refinitiv and its affiliated companies. MARCH 04, 2025 / 3:00PM, CCOI.OQ - Cogent Communications Holdings Inc at Morgan Stanley Technology, Media & Telecom Conference We will also spend about $40 million in capital principal lease repayments. So these are leases on our balance sheet that have about $500 million of value, and we amortize those or pay those off at about a rate of $40 million a year. And then probably another $10 million or so for new capital lease inclusions for expansion opportunities. So all out the door about $150 million of capital in those three different places on the cash flow statement. And then for EBITDA, our EBITDA was flat year-over-year. So we went from $352 million in '23 and '24, we were $348.4 million, and we'll have similar EBITDA this year. Our revenues will also be flat at roughly $1 billion, but as these new growth initiatives kick in, we shall resume growth and margin expansion. And we've laid out plan to be at $1.5 billion of revenue, $500 million in EBITDA by mid-year 2028 and that's driven heavily by our growth in the wavelength market. The wavelength addressable market globally is about $7 billion. It's approximately $3.5 billion in North America, split into a $1.5 billion metro wavelength market and about a $2 billion intercity market, which is the primary market we're focused on. And we believe because of the superiority of the network, the uniqueness of the routes, we can capture a 25% share, mirroring our success on the IP market.

Question: Jonathan Greenberg - Morgan Stanley - Analyst : You have an increasingly diverse set of assets that you can monetize these days? We've talked a bit to the fiber. You also have the IPV4 assets and then, of course, the data centers. Maybe shifting in IPV4 for a moment. You've monetized them in two ways. One is price increases, and another is the IPV for securitization. And so, can you just talk about the future of that collection of assets, how you see the pricing trends going? And is there more securitization on the come? David Schaeffer - Cogent Communications Holdings Inc - Chairman of the Board, President, Chief Executive Officer, Founder Yeah. There are three assets to really show up on Cogent's balance sheet. The dark fiber that we have, the buildings that we own that we acquired for $1 that we're converting to data centers and IP addresses that we've acquired over the years. We have 38 million IPV4 addresses. And for a general industrial, what is that -- how does that have economic value? And Morgan Stanley did help us securitize that through an ABS. And in that first meeting, we had to explain the bankers why this had value, and why it was an asset that warranted being able to raise capital against it. So when the internet was first architected, there were three foundational technologies, TCP/IP, which have two computers talk to one another. BGP, how two networks communicate, and the third IPV4 as a unique addressing scheme. And at the time, it was thought there would be plenty of addresses with 4.3 billion addresses available on IPV4. It's 2 to the 30 second power addresses and arranged in hexadecimal sequences that are unique to each location on the internet. Once the internet became very successful, it became obvious that wasn't going to scale, and we needed a new technology, IPV6, which has 2 to the 128 power addresses. So it alleviates the constraint, but it's never been widely adopted. So as a result, the addresses that we own, 38 million, it is the third largest assemblage in the world has economic value. We began leasing those out, markets developed to buy and sell those addresses. In fact, Amazon and Microsoft have spent collectively nearly $5 billion buying addresses over a decade. We chose not to sell but rather lease. And we've had the ability to increase pricing as those addresses are a scarce resource, and we took that cash flow and securitized it. When we initially did this, we had $32 million of annualized cash flow in March of '24. By the end of the year, that cash flow was annualized up to $47 million, and we're looking to do some additional securitization against that incremental cash flow.

Question: Jonathan Greenberg - Morgan Stanley - Analyst : And for others out there who like me have a lot about IPV6, but it doesn't seem like there's much out there to more talk than action. Can you talk about the threats that exist to the extent that you see them on IPV6. David Schaeffer - Cogent Communications Holdings Inc - Chairman of the Board, President, Chief Executive Officer, Founder So there are three challenges to IPV6 being widely adopted. So the state came into play in 1998. And in 27 years, it has only gained 7% market share. The limitations are all equipment needs to be IPV6 compatible and can for the path of the package travel. That's becoming more common. It's still not the case today or probably over the next five years, I think that limitation will go away. The second limitation is probably the most important. And that is when you use the internet, you want to reach all of the endpoints. And if an endpoint only visible on IPV4, V6 can't see it. So as a result, if you like to use V6, you today only get 7% of the public internet and 93% of it remains dark to you. And given that choice, almost everyone says, I'll pay an extra $0.50 a month to be able to see the whole internet. And third issue, which is the ultimate process of transition is very problematic because it has to happen all at once. And there's a fair amount of labor involved and going to each device and changing the number. It's kind of like the Y2K problem on steroids where every device needs to be touched and upgraded to V6. But it all has to happen instantaneously. And because of the complexity, ubiquity and importance of the internet, I don't think that's practical today. So it's probably another couple of decades before we see widespread ubiquitous use of V6.

Question: Jonathan Greenberg - Morgan Stanley - Analyst : Dave referenced a tremendous number of numbers during this conversation for those reading the transcript, no, notes. You were referencing no notes. David Schaeffer - Cogent Communications Holdings Inc - Chairman of the Board, President, Chief Executive Officer, Founder That's okay. We've been doing this a long time. I can make one mistake, my 59 was 49. It's okay, I caught myself.