Cogent Communications Holdings Inc at UBS Global Media & Communications Conference Transcript

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

Question: Christopher Schoell - UBS - Analyst : Maybe we can start off with the wave business since that gets a lot of attention and is a key part of the growth strategy. So you've talked about reaching 25% market share by 2028 or about $500 million. What gave you confidence you can scale to that level? And within that, we find that within the enterprise connectivity space, buying decisions take time. So how did you get comfortable with that timeframe? David Schaeffer - Cogent Communications Holdings Inc - Chairman of the Board, President, Chief Executive Officer, Founder So three parts to the answer. First of all, the customer base is not enterprise, it's other service providers, whether they be content, generators, or access networks. They are not end-user enterprises. They represent less than 10% of the market. Two, we looked at the market two very different ways. From a top down, it is a market of about $2 billion North American intercity wavelength or transport services that's comprised of approximately 140,000 waves. We have sold 1,100. So not even 1% of the market to date, but we know that we touch all of the endpoints, we have unique routes, we have the ability to provision more quickly, and we have the ability to price very aggressively. On the bottoms-up side, we looked at the universe of buyers. 200 buyers account for roughly 80% of the market. Of those 200 buyers, 150 of them are already buying transit services from Cogent. So we have a pre-existing relationship and credibility. [Two], we have a dedicated sales force of 287 wholesale reps around the world who can help us sell to these wavelength customers. And we went to those salespeople, asked them to look within their account deck and make specific projections of how many waves they would sell over what period of time and at what price. We discounted that somewhat for the, I would say, unusual optimism that salespeople have. But we got comfortable that both from a top-down and a bottoms-up approach, we were triangulating on that $500 million run rate by midyear '28, which is five years post-closing. And I think with the preparatory work that we have done on the network, we're going to definitely hit that target. REFINITIV STREETEVENTS | www.refinitiv.com | Contact Us consent of Refinitiv. 'Refinitiv' and the Refinitiv logo are registered trademarks of Refinitiv and its affiliated companies. DECEMBER 09, 2024 / 7:15PM, CCOI.OQ - Cogent Communications Holdings Inc at UBS Global Media & Communications Conference

Question: Christopher Schoell - UBS - Analyst : When you acquired the Sprint lines, you also acquired this very large enterprise business. You've been in the process of grooming off lower-margin or negative-margin products and it's created some noise in the financials. Where are we in that process? And any help sort of sizing how much is left as we look into 2025? David Schaeffer - Cogent Communications Holdings Inc - Chairman of the Board, President, Chief Executive Officer, Founder Yeah. So there were three things that we wanted to exit. The most obvious were products that were gross margin negative. These were all resale products, typically of value-added services: firewalls, managed router services, DOS mitigation, security products. We are roughly 80% of the way through exiting those noncore products. REFINITIV STREETEVENTS | www.refinitiv.com | Contact Us consent of Refinitiv. 'Refinitiv' and the Refinitiv logo are registered trademarks of Refinitiv and its affiliated companies. DECEMBER 09, 2024 / 7:15PM, CCOI.OQ - Cogent Communications Holdings Inc at UBS Global Media & Communications Conference We did have to take contracts. It is part of the reason why we were paid $700 million by T-Mobile to take this business, knowing that we had to honor these contracts as they roll off. And that noncore revenue tail will extend through 2026. That is the longest duration contract. The second thing that we want to migrate is services that were delivered in countries where we and Sprint were not licensed. So we are licensed and operate in 56 countries around the world. We actually sell services to customers in 180 countries. But the differential is we require the customer in a non-licensed country to buy the access loop and then connect to Cogent. That is different than what Sprint was doing, where they were purchasing the access through a resale agreement. We were uncomfortable with the regulatory risk associated with that, and we're unwinding those agreements. We're probably about halfway through that unwind. And then the third area were services that were delivered at very low speed over non-fiber facilities. So these could be satellite, wireless, Twisted Pair, or coax. And in those services, we are looking to migrate all of those customers to fiber-based services. We are probably about 60% to 70% of the way through that migration. So with these three migrations, two things are happening: our revenues are shrinking, and our margins are expanding. When we announced the transaction, Sprint was doing $565 million of revenue, with negative $300 million of EBITDA. Between announcement and closing, T-Mobile affected a number of changes in conjunction with us that reduced revenues to $490 million and reduced the burn rate to negative $190 million. As I've stated earlier, we have further reduced that revenue run rate to about $400 million, but we have also reduced that burn rate to $40 million. The ultimate goal is to get the remaining business to be profitable and generate about $80 million of our aggregate EBITDA from that legacy base without anticipating growth.

Question: Christopher Schoell - UBS - Analyst : And then maybe just quickly touching on the legacy corporate business. Obviously, that was on the opposite end of the pandemic in terms of the headwinds that, that faced with more employees working remotely, businesses rightsizing their footprints. The growth has rebounded. It's not quite at the 10% that it used to be historically. What is the pathway to get back there? And how quickly can it happen? David Schaeffer - Cogent Communications Holdings Inc - Chairman of the Board, President, Chief Executive Officer, Founder Yeah. So Cogent's end user business, we're selling directly to corporate and now enterprise customers, had historically grown organically at 11% year over year for 15 years. From 2005 to going when we went public through 2020, our compounded corporate growth rate was 11% a year. When the pandemic hit, that growth rate declined to a negative 9% at the trough of the pandemic and has recovered to about a 4% positive growth rate. It is being impacted by the number of tenants and the buildings we're in, their willingness to make architectural changes, and their aggregate need for bandwidth. It is slowly improving, but not nearly at the pace we expected. So when we blend this together, we see the classic Cogent selling IP services, which really account for two different products: Internet access and VPN services over the Internet, 91% of our revenues, and they're growing at kind of mid-single digits at kind of 5% to 6% growth rate. So in understanding $1 of revenue at Cogent, we try to characterize each dollar four different ways: by network type, on-net or off-net; customer type, corporate, enterprise, or NetCentric, were there's service providers; by geography, US, rest of the world; and then by product, whether it be an IP-based service, and that can be two subcategories, Internet access or VPNs, it could be co-location, it could be IPv4 leasing, and now adding on wavelength services.

Question: Christopher Schoell - UBS - Analyst : And you've talked about a meaningful ramp in the EBITDA profile of the business over the next few years. I think you've suggested EBITDA would be flattish here in 2025 and then scaled over $500 million when you get to '28. Maybe just help us break apart the moving pieces there? And what are the biggest drivers of that inflection as you look out? David Schaeffer - Cogent Communications Holdings Inc - Chairman of the Board, President, Chief Executive Officer, Founder So let's start with what Cogent looked like before Sprint. We were $600 million in revenue and $260 million of EBITDA. That's reported numbers for '22. We layered on top of that $490 million of revenues, declining, and negative $190 million of EBITDA. But we received $350 million from REFINITIV STREETEVENTS | www.refinitiv.com | Contact Us consent of Refinitiv. 'Refinitiv' and the Refinitiv logo are registered trademarks of Refinitiv and its affiliated companies. DECEMBER 09, 2024 / 7:15PM, CCOI.OQ - Cogent Communications Holdings Inc at UBS Global Media & Communications Conference T-Mobile over the first 12 months in the form of $29.2 million a month subsidy payments for that acquired business. As a result, our reported EBITDA for 2023 was $352 million. I think there was a lot of skepticism among investors that we can maintain that pace as the T-Mobile subsidy payments stepped down in May of '24 from $29.2 million a month to $8.3 million or $100 million annually. That's a significant headwind. And even with that headwind, we will report EBITDA approximately equivalent to where we were last year, might be a little over, a little bit under, but in that general area. And then as we look at calendar year '25, we have a further $100 million headwind from that step down in subsidy payments, but we'll make that up with the operating leverage of the wavelength business and the remaining cost synergies. By 2026, we will lap that headwind, and we should start to see meaningful acceleration in EBITDA. By 2028, the payments from T-Mobile go away, and the business will be generating about $500 million of out of organic business as opposed to subsidy payment. And then from that point, we expect to grow the business at roughly a 5% to 7% rate with an annual margin expansion of roughly 100 basis points a year.