Cogent Communications Holdings Inc Q1 2025 Earnings Call Transcript

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

Question: James Edward Schneider - Goldman Sachs Group, Inc - Analyst : Hi, it is Josh [ph] in for Jim. Thanks for taking my questions. I guess within the Waves business, are you seeing any change in competition, be it pricing or terms or otherwise as the sequential revenue growth was not where most had expected? And do you think the Crown Castle, Zayo deal will change the landscape at all? And then separately, you have referenced in the past a few more quarters of potential revenue headwinds in corporate. Can you give us an update on these trends and the mix of pricing and customer growth, especially as we think about your new revenue growth targets? Thanks. David Schaeffer - Cogent Communications Holdings Inc - Chairman of the Board, President, Chief Executive Officer, Founder Yes, sure. Thanks a lot, Josh. So, first of all, our two primary competitors in the Wavelength market have struggled to provision and do not have the ubiquity of coverage that we had. That is why many customers were willing to sign agreements with Cogent when Cogent could not even give them a firm delivery date or a commitment to exact endpoints. As we have purged that older funnel, the funnel that we have built now is a much more accurate representation of orders that will continue to install. We have developed enough of a cadence to know that about 5% of that funnel will convert each month. In the quarter, we installed virtually all of the incremental units, the 18% sequential growth at the very end of the quarter. The reason for that is many of the customers were not ready when we were ready because they had waited. Many of those customers did take service at the end of the quarter. We expect that the competition will continue to improve on their ability to offer ubiquity and offer faster installs. But today, we think we have a significant advantage. With regard to the Crown Castle, Zayo combination, which is probably a year away. I know that each of those companies represents a number of previous acquisitions that are still being integrated. And I would anticipate even post-closing, it will take several years based on the pacing that each of those companies have achieved in integration for the entire company to be functioning as a unified organization. We should always be paranoid about competitors. But at the end of the day, we think this is a fairly distant threat, not something immediate. Now pivoting to your question on corporate revenue. We have gone through the undesirable revenue in the Sprint base. We have churned the vast majority of that revenue. We know that that has inflected our total top line growth rate negative. We believe that we will be through that process by the mid-part of Q3 based on our need to honour certain contract commitments. 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 08, 2025 / 12:30PM, CCOI.OQ - Q1 2025 Cogent Communications Holdings Inc Earnings Call From that point forward, we anticipate Cogent's total revenue growth to be positive and continue after the roughly 18 years of positive growth that we demonstrated pre-acquisition of Sprint, our growth did turn negative when we acquired a business that was declining at 7.4% a year and represented 40% of the revenue of the combined company. We further accelerated that decline by electing to terminate these unprofitable non-core services. And I think the fact that we have been able to increase our EBITDA in absolute terms even with revenue decline is a very clear indication of the unprofitability of this business. But I think the corporate segment, as all of our segments will be growing by the end or the middle of Q3 2025. Thanks,

Question: Gregory Bradford Williams - TD Cowen - Analyst : Great. Thanks for taking my questions. Dave, on the $0.05 per share dividend growth per quarter, is this like a temporary move? And would we think about returning to the $0.01 growth quarter-over-quarter? And if so, what would the milestones need to be? I imagine leverage targets would be one of them to return to that growth if you choose to do so. And then just back on the Waves cadence, you mentioned 4% to 5% of your bookings will be installed a month. That is about 150 circuits a month. In the past, you said you would get to 500 circuits a month. What needs to happen to get to that target? And when could that be reached at this point? Thanks. David Schaeffer - Cogent Communications Holdings Inc - Chairman of the Board, President, Chief Executive Officer, Founder Yes, sure. So let me take each of those questions. Thanks for them, Greg. First of all, the Board reflected on the increase in leverage, and realized that the fundamentals of the business remain strong, but that our leverage is going to continue to increase. As we've outlined on several of these calls that our aggregate leverage will peak in Q3 of this year due to the decline in transit payments from T-Mobile. We have been able to affect a material amount of cost savings, but those still did not result in enough to fully offset the decline in monthly payments from T-Mobile from $29 million down to $8 million. As a result of that, throughout the year, after those payments decline, our leverage is going up. As our leverage begins to decline in Q4 of this year and going forward, the Board will continue to evaluate the pace of that delivering and is absolutely committed to returning capital to shareholders. Finally, we, I think, have continued to demonstrate our willingness to opportunistically enter the market and supplement our dividend with buybacks. That policy will continue going forward, but we absolutely believe that our ability to return cash flow will increase starting in the fourth quarter, and some of that will be used to deliver, some will be used for increasing the dividend. And finally, some will be used for opportunistic buybacks. So, I think the milestone will be the reduction in net leverage. I'm now going to pivot to your second question, which is Wavelength installation. As we have been very clear in previous discussions with investors, we built a funnel of Wavelength opportunities with no defined installation window. As it became clear that we could begin to install in select locations, in Q3 of 2024, we began the process of cleansing that funnel. And as expected, the majority of that funnel fell out. Those customers went elsewhere, because they could not wait for our deliveries. The funnel that we have now of 3,433 orders is a completely rebuilt funnel that was rebuilt from the end of Q3 2024 to the end of Q1 2025. We now have much more clarity around locations and about timing to be able to install. 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 08, 2025 / 12:30PM, CCOI.OQ - Q1 2025 Cogent Communications Holdings Inc Earnings Call At 883 locations, we can now install in 30 days. We have sufficient field resources, pluggable optics and service delivery coordinators to be able to provision 500 orders a month. With a 3,400-order backlog in funnel, which represents with a 5% conversion rate about 160. So, we have more installation capacity than orders that are ready to install. As we build credibility with customers, we will both see an uptick in the number of opportunities going into that funnel. Based on the sales forecast that we have, we anticipate that funnel to reach 10,000 from 3,430 by year-end, so in the next seven months. And while we are hopeful that the conversion rate monthly will be greater than the 5%, we outlined, we're basing that on our three-month experience of actually being able to provision orders. The final point I would make really is the sequential pacing of growth. With 18% sequential unit growth, we did very well. However, 2% revenue growth was as a result of those orders installing near the very end of the quarter. And the issue was, come January, we were ready to start installing. At that point, it was 802 sites, and we grew that to the 883 at quarter end, and that number has continued to grow. But many customers who still wanted the services needed time to have their equipment ready to accept those services. And that resulted in most of the install activity being back-end loaded at the end of the quarter. As we go into Q2 and beyond, we think that the pacing of installs will be more evenly distributed throughout the quarter. Hopefully, that helped clarify the question. And the goal is to be very specific, with 500 capable installs per month, we think we will be hitting that target probably near the end of the year when the funnel reaches the 10,000 and the conversion rate remains at about 5%.

Question: Alex Waters - Bank of America - Analyst : Good morning, Dave. Thanks for taking my question. Just first, can you talk about the wavelength ARPU and kind of where you see that trending throughout the year? And then secondly, just on the data centre monetization, can you talk just timing, scale and size of some of these potential deals? Thanks. David Schaeffer - Cogent Communications Holdings Inc - Chairman of the Board, President, Chief Executive Officer, Founder Yeah. Hey, thanks, Alex, and congratulations on your new more senior role. Our wavelength ARPU was just under $2,000 in the quarter, about $1,930. I think our base is now large enough, meaning we have enough visibility into the mix of 1,000 and 400 gig waves as well as contract duration and route length that using an ARPU of about $1,900 is a reasonable way to model the business. As the base continues to grow, the installed base, I think that number of the entire base will converge to something around $1,900 to $2,000 per wavelength. We are seeing a much higher uptick rate and higher capacity waves. 82% of our sales have been of 100 gig waves. That compares to the installed base in the industry of 55% of the base being 10 gig waves. So, the waves that Cogent has been selling tend to be at 100 gigs with about 8% of sales being 400 gigs as compared to the industry base of about 3% at 400 gigs. So -- and then in terms of route length, we now have nationwide or actually continental ubiquity and pretty good visibility into the orders that we have been booking. And as we get stability around the book-to-bill cadence, I think that $2,000 ARPU is a good modelling number. 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 08, 2025 / 12:30PM, CCOI.OQ - Q1 2025 Cogent Communications Holdings Inc Earnings Call Now with regard to your second question of data centre sales and monetization. We are continuing our work to convert those facilities and have just over 100 megawatts of power in what is now 24 facilities we had originally targeted 23 that we are earmarking for sale or long-term lease. We have taken four of our letters of intent and move forward towards initial contract negotiations. We are still engaging with parties who are conducting site condition studies and engineering due diligence. We don't have an exact time frame, but we are highly motivated to sell this surplus capacity as it is not baked into our financial projections but would be the easiest way for us to quickly deliver. Hopefully, that was helpful.

Question: Walter Paul Piecyk - LightShed Partners, LLC - Analyst : Thanks. Dave, I first wanted to go back to that a couple of questions ago, just to make sure I heard you right. So, because I know there was this thesis that people are super bold on wavelengths that it was just limited by your ability to execute. But I think you said you had the capacity, but you were just waiting on the customers to fill that capacity. And then if you can just talk about if you had installed at the start of the quarter rather than 2.2% sequential growth, which was obviously impacted by the back-end loading, what that growth might have looked like, so we get a sense of kind of unit growth conversion to revenue growth? David Schaeffer - Cogent Communications Holdings Inc - Chairman of the Board, President, Chief Executive Officer, Founder Yeah, so if we had assumed that the orders had installed mid-quarter as opposed to end of quarter, our revenue growth rate would have been in the roughly 13% range. If we were fortunate enough that they had all installed at the beginning of the quarter, it would have been 20% because the 18.2%-unit growth actually. Understated the revenue growth because the ARPUs were actually slightly higher than the installed base. With regard to two very different metrics that we have given, the first metric is our ability to install. Our ability was limited by the repurposing of the Sprint network, and we were constrained till the beginning of this year where we had to do each installation that was done, the roughly 1,000. Waves that we had sold on a custom basis in a limited number of sites. After the 1st of the year, we have the ability at 802 sites, which has now grown to 883 sites, to install those services in 30 days. So that's on the cogent supply side. We can do it in those sites at any of three speeds and deliver within 30 days. We had a funnel of orders that had been bought. With customers over a year and a half period as we were repurposing this network with little or no clarity to the customer on when we can install. 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 08, 2025 / 12:30PM, CCOI.OQ - Q1 2025 Cogent Communications Holdings Inc Earnings Call It was not surprising to us and we commented extensively on our last earnings call that we were going through a process to purge that funnel of orders that customers had gone somewhere elsewhere. They could not wait for us. Now we have rebuilt that funnel. We also know that many of those orders, the customers are not ready when we are ready.

Question: Walter Paul Piecyk - LightShed Partners, LLC - Analyst : Okay. So, there could be additional churn going forward from this type of stuff, but it's just too hard to predict. Got it. And then are you still good with the $350 million for the year because it's obviously going to be a pretty big second half ramp to get there? David Schaeffer - Cogent Communications Holdings Inc - Chairman of the Board, President, Chief Executive Officer, Founder So we know that we have a very steep hill to climb on EBITDA because we had a $104 million reduction in transit payments from T-Mobile. We feel comfortable we are continuing to improve our EBITDA and grow that and should be able to achieve the goals that we have outlined. 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 08, 2025 / 12:30PM, CCOI.OQ - Q1 2025 Cogent Communications Holdings Inc Earnings Call

Question: Chris Scholl - UBS - Analyst : Great, thank you for taking the questions. Just to follow up on your long new term growth targets, what gives you confidence today to raise the target and any help breaking down that 6 to 8% revenue growth expectation by customer segment. And I believe in recent quarters for the legacy cogent business you have provided a core growth rate for both corporate and eccentric. What did core growth look like this quarter and how do you expect that to evolve from here? Thank you. David Schaeffer - Cogent Communications Holdings Inc - Chairman of the Board, President, Chief Executive Officer, Founder Yes. Thanks for the questions, Chris. So, our growth was greatly impacted by absorbing Sprint's negative growth trajectory at closing and then accelerated by our attempt to purge undesirable services and revenues. That is how we have been able to actually grow cash flow, while declining

Question: Chris Scholl - UBS - Analyst : Thanks Dave. And then, just do you have what the core growth rates were for Corporate and Netcentric in the quarter, excluding all the grooming efforts? David Schaeffer - Cogent Communications Holdings Inc - Chairman of the Board, President, Chief Executive Officer, Founder So, it's become harder-and-harder for us to kind of parse that out as we've re-provisioned the customers. I believe the corporate segment grew between 3% and 4%, but that is not as precise a number as I would like to give you. And I think Netcentric probably grew at around 6% or 7% on

Question: Chris Scholl - UBS - Analyst : Great, thank you, Dave.

Question: Nicholas Ralph Del Deo - MoffettNathanson LLC - Analyst : Hey. Thanks for taking my questions. And Dave, I also appreciate the new call format. I thought that was helpful, so thanks for making the changes. First, going back to the SG&A line, I think you basically said that the entire sequential increase was due to normal seasonal items. It still feels like an high increase even after taking those into account. I guess, like, was Q4 SG&A depressed for some reason such that it wasn't a good jump-off point for thinking about Q1? And if we think about Q2 SG&A, how should we think about the roll-off of tax and audit costs, the sales meeting costs, and those sorts of things? David Schaeffer - Cogent Communications Holdings Inc - Chairman of the Board, President, Chief Executive Officer, Founder Yeah. I am going to start, and then I am going to pass it to Tad. Our sequential increase in expenses was greater this year than it was last year. And the primary reason for that is we had the entire Sprint employee base in Cogent's numbers for 2024. And in 2023, we only picked up those expenses on May 1. And all of the vacation accruals that those employees had were actually paid out in cash by T-Mobile as a condition prior to closing. So, we did not assume those. 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 08, 2025 / 12:30PM, CCOI.OQ - Q1 2025 Cogent Communications Holdings Inc Earnings Call Probably the biggest component of the sequential change in SG&A, actually relates to the fact that people we have a use-or-lose policy, and people use the vacation in Q4 and then build an accrual going forward. But I am going to let Tad, give you a little more granularity on the components and kind of the variance between this year and other years.

Question: Nicholas Ralph Del Deo - MoffettNathanson LLC - Analyst : Yes, it does. Are you willing to share anything regarding where that is going to land in Q2? Where is SG&A going to land in Q2? Or is this a run rate to think about?

Question: Nicholas Ralph Del Deo - MoffettNathanson LLC - Analyst : Okay. On the IPv4 addresses you said it was a large number that you took back. Are you willing to share the exact number? 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 08, 2025 / 12:30PM, CCOI.OQ - Q1 2025 Cogent Communications Holdings Inc Earnings Call David Schaeffer - Cogent Communications Holdings Inc - Chairman of the Board, President, Chief Executive Officer, Founder Yeah, well, it was from more than one customer, so it can't be attributed to just one, but it was in the order of about 6,000 to 700,000 addresses and it's an aggregate that were taken back.

Question: Nicholas Ralph Del Deo - MoffettNathanson LLC - Analyst : Okay. And then maybe one last quick one, if it is okay. You said that a majority of your Q4 -- of the backlog and funnel from waves that you showed in Q4 fell out as part of the cleanup process. I mean again, can you share what that number is? I am just trying to get a sense of what your gross adds to the backlog and funnel were in Q1. David Schaeffer - Cogent Communications Holdings Inc - Chairman of the Board, President, Chief Executive Officer, Founder Yes. So, between the stuff that fell out and the stuff that installed starting in -- at the end of Q3. So, we had visibility to starting to tell people we could give them firm delivery dates starting in January, nearly 90% of the total funnel that existed at the end of Q3 2024 fell out. Only about 10% of that funnel, which was about -- also about 3,500 ended up either installing or carrying over. And more of the installs that occurred, for example, in Q1 were things that were sold in Q4 and went into the funnel, and the funnel is continuing to grow. And until we could actually install, I was

Question: Nicholas Ralph Del Deo - MoffettNathanson LLC - Analyst : Yeah, But it sounds like, based on your commentary, you had at least a few thousand on a clean basis, a few thousand additions to the backlog and funnel in the quarter, which would, I guess, in tandem with your expected install, kind of get you to that 10,000 by year-end? David Schaeffer - Cogent Communications Holdings Inc - Chairman of the Board, President, Chief Executive Officer, Founder That is correct. 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 08, 2025 / 12:30PM, CCOI.OQ - Q1 2025 Cogent Communications Holdings Inc Earnings Call

Question: Michael Ian Rollins - Citigroup Inc - Analyst : Hi Dave, good morning. Thanks for taking the questions. if I could. So first, curious if you could discuss the slower Internet traffic growth year-over-year and what you're seeing also in regards to pricing and the implications of all of that as you look at Internet transit revenue performance within the Netcentric revenue going forward? And then secondly, are you seeing any changes in customer behaviour in terms of sales cycle, decision-making since the beginning of April after the tariff announcement? And can you just remind us how a slower macro could impact your business performance? David Schaeffer - Cogent Communications Holdings Inc - Chairman of the Board, President, Chief Executive Officer, Founder Yes. Let me start with the traffic growth number. So if you look at Open Vault data, which is looking at traffic on the other side, which is end user total downloads, that has slowed to about 8%, which is in alignment with what we are seeing kind of on the supply side or upstream component. I think there are really three things going on concurrently. One, the rate of broadband adoption in countries that have decent access network capabilities has slowed. Two, the number of minutes of use per day has also moderated. And third, the adoption of video has slowed. So, at the beginning of the pandemic, we were at about 18% of end-user video consumption being streamed. That in five years, accelerated to about 54%. It is going to continue to go up from here. And in particular, the pivot to more live event availability is helpful. But I do think with a larger video base, that application is maturing. I also think we are in a period when most of the network load for AI is directed at wavelengths because most of that network load is for training and not inference. But as the results of those large language models get distributed, that should present a new use case where users will use Internet connectivity more and bit volumes will go up. So, we have seen this pattern of kind of oscillations in aggregate demand as applications change historically. And I think that will probably continue to be the case. But I think we're going to see over the next year or two, a reacceleration at least in bid intensity per user. Now, in terms of pricing, we have seen the rate of price declines pretty consistent now for 25 years, that's at about 22%, 23% a year. And while there is always some short-term variability, that long-term trendline is pretty consistent, and I do not think that is going to change. Even though there is less competition, the technology associated with manufacturing those bit miles are continuing to improve pretty significantly. So, I think we will see some more price declines for the industry and kind of more of a return to historical traffic growth rates. To your last question around tariffs, I am going to actually answer it with kind of two different views. One is for our Netcentric customers, and this could be either Wave or IP. 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 08, 2025 / 12:30PM, CCOI.OQ - Q1 2025 Cogent Communications Holdings Inc Earnings Call Most of the time, they need equipment to accept those services. They are not happy. That equipment is more expensive. It does have some tariff load on it as at least a portion of it is coming from high tariff locations. But they still need it to deliver service. So, I think that is probably an initial shock. And in terms of materiality to their overall cost structure, I think it is much like Cogent. It's not material, but there's just a shock when that happens. But I would say the only thing on the tariff front that could potentially impact Netcentric business is if there is an effective content tariff, i.e., the movie tariff, which doesn't exist, I have no visibility to how that's going to affect end user demand. And then on the corporate side, I do believe that a number of corporate users are just concerned with the overall macro situation. And are we entering a period of reduced or negative growth and higher inflation. And for that reason, they are just being more cautious on long-term commitments. But again, because we sell a utility, I do not think that is going to have a material impact. I do not think we are in the kind of 2008, 2009 great financial crisis level of paralysis. And our underlying corporate growth continues. As we complete this grooming, we feel confident that aggregate growth and corporate growth will be positive later this year.

Question: Timothy Kelly Horan - Oppenheimer & Co. Inc - Analyst : Thanks, guys. Dave, can you give us maybe just some timing on the data centre sale and maybe expectations on price if you've received any? And then on the wavelength side, have you seen any competitive response? David Schaeffer - Cogent Communications Holdings Inc - Chairman of the Board, President, Chief Executive Officer, Founder Yes. I'm going to take those in reverse order, Tim. Probably the only competitive response was aimed at the hyperscale segment of the wave market and the decision by at least one of our competitors after 20 years to agree to sell dark Fiber, which is a potential substitute for wavelengths where the customer buys the dark Fiber and then produces their own wavelengths on that. I think on the kind of delivery of wavelength services, we have not seen any change in pricing or delivery schedules. And what we have heard from customers that have put orders into our funnel is that our pricing is good. We have not had to be maybe as aggressive as we thought we would have to be once we had the network fully configured. Again, five months doesn't make a permanent trend, but we feel pretty good that the pricing that we're going to market has been well received by customers and viewed as adequately competitive to win share. 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 08, 2025 / 12:30PM, CCOI.OQ - Q1 2025 Cogent Communications Holdings Inc Earnings Call I'm going to pivot now to your data centre question. And as I stated earlier, we have a handful of situations where we are moving from letter of intent to contract. There is nothing that we can announce today. We are also continuing to do the work necessary to complete that data centre conversion, but we think that will be completed in the next two months. We were pretty clear that we will have that done by the end of Q2, and we are on track to do that. In terms of pricing, I would say the couple of parties that are negotiating leases are similar to our ask price. On the parties that are negotiating for outright purchase, there is a much wider dispersion. At least one of the contracts is at the ask price, but the others are below that. We need to vet the ability of each of the parties to perform, and that's part of what is going on while we are refining economic terms and an LOI into a contract. Because we have never done this before, I remain reluctant to give a firm date of when we can do this. I think we're making good progress, and we'll get this -- we will monetize some of these, but it really does take two parties, and the parties have to have the wherewithal to perform. So we're going through that process. And I know early in the process, you had the ability to tour one of the facilities that was a work in progress. And I can assure you, if you go back to that facility in Merchantville today, it would look very different than when you toured it.