Cogent Communications Holdings Inc Q2 2025 Earnings Call Transcript

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

Question: Gregory Williams - TD Cowen - Analyst : Great, thanks for taking my questions. Dave, you just ended the statements with focusing on quality as marketing your ways, ways seem to be continuing to be off to a slow start. Did you still target [400 to 500] circuits installed a month by year-end? Second question is just on your data center sales progress? Any additional color on interest you're seeing and perhaps more importantly, at this point, is 10 million a megawatt a realistic ask from the interest that you're seeing? Or should we see a haircut on this target? Thanks. David Schaeffer - Cogent Communications Holdings Inc - Chairman of the Board, President, Chief Executive Officer, Founder Yeah, hey, thanks for the questions, Greg. So we always knew that in order to win market share and wavelengths, we needed to be winning on three criteria: first, being ubiquity of coverage, Second, the price that we offer; and third, the quality of the service. And the quality is actually measured two ways: our ability to actually install in a timely manner and the service to be able to work once installed. We initially focused on the installed metric because we did not have a material base of wave lines. while our wavelength base is still small, about 1% of the North American market. It is now at least statistically significant enough that we can measure our performance quality as measured by a number of outages along each route. Today, and this is anecdotal, we are running at about 7x fewer outages per span than at least one of our major competitors as reported to us by customers who have similar city pairs along different fiber with that other vendor and with Cogent. We think all of these inputs are critical to us gaining share. In terms of our wavelength install cadence, while we installed and began billing 147 wavelengths in the quarter, we actually installed several hundred more wavelengths than we have begun to bill for. As we had mentioned in previous calls, we have been installing services faster than customers have expected. They then usually need to order a cross connects, sometimes pluggable optics on their side to be able to accept these wavelengths and they've been accustom to having protracted delays from other vendors. REFINITIV STREETEVENTS | www.refinitiv.com | Contact Us consent of Refinitiv. 'Refinitiv' and the Refinitiv logo are registered trademarks of Refinitiv and its affiliated companies. AUGUST 07, 2025 / 12:30PM, CCOI.OQ - Q2 2025 Cogent Communications Holdings Inc Earnings Call We are beginning to build credibility with those customers, and we are accelerating our ability to install. We have the capabilities to get to 500 wavelengths per month. We will ramp to that. And I think over the next several quarters, our customer base is going to become accustomed to our rapid provisioning, which is different than what the industry has traditionally experienced. And as a result of that, we think the number of wavelengths that we install, but do not bill will shrink. We report a number of granular KPIs. I think that is critical until we have a material base of billable revenue in our wavelength product set. The fact that our revenues increased 27% sequentially, I think is a good indication of our gain in market share albeit off of a small base. I'm going to pivot to your wave -- to your data center question. We continue to negotiate with the four initial parties that put in offers and have actually received two more offers. So we actually have a set of six total LOIs for firm offers on facilities. They range from the entire portfolio to as few as one facility. We have tried to be very cautious with investors not to project the proceeds of the data center sales into our recurring revenue. We have not done that before. We have, I think, been I'm a bit concerned that some of the counterparties have been unable to post meaningful nonrefundable security deposits as they move from letter of intent to contract. I think it is premature for us to conclude that we have to adjust pricing. We will ultimately let the market decide the pricing. We have no initial cost basis in these data centers. And the only basis we have is the work that we have done and the capital that we have spent to convert these centers. With that, we have a great deal of flexibility in divesting of these noncore assets. We continue to have tours, continue to have third-party consultants working on behalf of financial sponsors evaluating the assets and to be direct and answer your question, we have offers arrangement from our full ask price to a fraction of the price. And it's impossible for us to say exactly what we're going to have to accept until we get a contract with a binding deposit.

Question: Christopher Schoell - UBS - Analyst : Great. Thank you. Last quarter, Dave, I think you talked about the business returning to top line growth by mid 3Q. Can you just provide your latest thoughts here and to the extent expectations have changed what has shifted for several months ago. And I also believe you slightly raised the margin expansion target long term. Can you just walk us through what gave you confidence to do that today and the main drivers of upside there? Thank you. REFINITIV STREETEVENTS | www.refinitiv.com | Contact Us consent of Refinitiv. 'Refinitiv' and the Refinitiv logo are registered trademarks of Refinitiv and its affiliated companies. AUGUST 07, 2025 / 12:30PM, CCOI.OQ - Q2 2025 Cogent Communications Holdings Inc Earnings Call David Schaeffer - Cogent Communications Holdings Inc - Chairman of the Board, President, Chief Executive Officer, Founder Yeah, sure, thanks for both questions, Chris. So as we stated on our last earnings call, we expected our rate of revenue decline to materially decelerate, it actually did. It went from sequentially $5.2 million decline quarter-over-quarter to $800,000. We knew that in July, we had a significant resale agreement that was actually terminated in June, but we had a tail that we had to support in until July. That is behind us. And with that, one remaining large noncore contract now terminated we have a clear visibility to monthly growth in revenue. Whether that is sufficient to get to aggregate post for the quarter, it's very close, and I'm not prepared to say there's FX and there's just some noise around customers. But the rate of decline for the quarter maybe lower than the $800,000. It could actually be a positive number. And then from that point forward, we expect to see positive revenue growth each and every quarter sequentially. It's important also and it ties in your margin. A point that the revenue growth that we are experiencing is almost exclusively on net services, whether they be IP-based services, or wave line services. And the revenue declines are coming from much lower margin, in some cases, negative margin off-net services. The fact that we delivered 200 basis points of margin expansion sequentially last quarter, quarter-over-quarter. And looking back at the eight quarters since the acquisition of the Sprint assets, we have outperformed 200 basis points annually and now with a return to growth, we feel very comfortable that we will replicate the type of margin expansion that Cogent historically had prior to acquiring Sprint, just to align investors from the period in 2005 through 2023 when we acquired Sprint over that 18-year period, Cogent organically, without acquisition had experienced an average rate of margin expansion of 220 basis points. So this is something that is not theoretical, but it is our actual historical results. We had a margin reset that occur from acquiring a declining and negative margin business. We've taken more than $220 million of costs out of that business, and we have experience better than 200 basis points since the initial acquisition. While there were puts and takes for severance and other reimbursable by T-Mobile as part of the transaction with all of that extraordinary payment behind us. We now have a high degree of confidence that the 200 basis points, as I just outlined, is sustainable going

Question: Christopher Schoell - UBS - Analyst : Thanks, Dave. David Schaeffer - Cogent Communications Holdings Inc - Chairman of the Board, President, Chief Executive Officer, Founder Thanks, Chris.

Question: Walter Piecyk - LightShed Ventures - Analyst : Thanks, Dave, can you just remind us in terms of sources of capital or where you could borrow against because I think unless your CapEx, it falls off a cliff, you're probably going to need some incremental capital to fund the dividend growth by the early 2026. So can you just remind us what you can tap to bring funds in to fund that dividend? REFINITIV STREETEVENTS | www.refinitiv.com | Contact Us consent of Refinitiv. 'Refinitiv' and the Refinitiv logo are registered trademarks of Refinitiv and its affiliated companies. AUGUST 07, 2025 / 12:30PM, CCOI.OQ - Q2 2025 Cogent Communications Holdings Inc Earnings Call David Schaeffer - Cogent Communications Holdings Inc - Chairman of the Board, President, Chief Executive Officer, Founder Yes. Sure, Walt. So first of all, I'm going to disagree with your premise with over $300 million of cash on the balance sheet. Secondly, we have indicated that our capital spending was elevated in the second half of '24 in the first half of '25, primarily due to the upgrading of the data centers from DC power to AC that capital expense is behind us now and was approximately a $100 million spread over four quarters. So as a result of that, we anticipate our annual rate, and this will be the rate in the second half of '25 and full year '26 to be approximately $100 million in capital expenditures. On top of that $100 million of CapEx, we do make principal payments on capital leases. Due to GAAP accounting is shown at a different point in the cash flow statement, but it should be treated like CapEx. That number for the first half of this year was $16.5 million. We have indicated that the annual run rate for those principal payments should be about $40 million. So we were actually slightly below. It was elevated materially in '24 due to the buyout of the Verizon IRU as a onetime event, which we called out with is associating discount. As a result, the total amount of cash expenditures for principal payments and on capital leases and CapEx should be around $140 million a year. In terms of additional borrowing capabilities, we have borrowing capabilities at three levels in Cogent. We have additional capacity available in the group entity, where our leverage today is substantially below the covenant thresholds and our debt service coverage is substantially above. So at Cogent Group, there is several hundred million dollars more of borrowing capacity, either secured or unsecured allowed in our current indentures and it will be likely that we will look at the 2027 unsecured debt and probably look to refinance at some time in the latter part of 2026, possibly raising incremental capital but not necessarily. We also have incremental borrowing at Cogent infrastructure. That includes both the IPV4 ABS, which will have additional capacity based on the growth and cash flow in that as well as the ability to borrow against the other assets that reside in that entity. And then finally, there is always borrowing capability at the holding company level, which has no debt associated with it. (multiple speakers) Yes, I'll answer your question. We -- however, we do not anticipate needing material incremental borrowings to either fund the dividend or operations as on an LQA basis, our leverage peaked last year and has been declining -- and on an LTM basis, just arithmetically is going to continue to decline. So while we are at 6.6 times net leverage on a LTM basis at the end of this quarter, we anticipate that over the next six quarters, that number will fall below 5x and continue to delever.

Question: Walter Piecyk - LightShed Ventures - Analyst : It's math. Everyone has the numbers. They can do their own math. David Schaeffer - Cogent Communications Holdings Inc - Chairman of the Board, President, Chief Executive Officer, Founder I totally agree with that, and we absorbed a number of losses from T-Mobile, which have depressed our EBITDA and we received a stream of payments over 54 months equaling $700 million. The net present value of those payments goes down each and every quarter as we receive those payments.

Question: Walter Piecyk - LightShed Ventures - Analyst : But is there a cap on what you can pledge? Because if you just search GPT this is, I think, as occurred with Elon and other companies and boards have actually implemented caps on the percentage of shares that can be pledged. David Schaeffer - Cogent Communications Holdings Inc - Chairman of the Board, President, Chief Executive Officer, Founder There is not at Cogent. REFINITIV STREETEVENTS | www.refinitiv.com | Contact Us consent of Refinitiv. 'Refinitiv' and the Refinitiv logo are registered trademarks of Refinitiv and its affiliated companies. AUGUST 07, 2025 / 12:30PM, CCOI.OQ - Q2 2025 Cogent Communications Holdings Inc Earnings Call

Question: Walter Piecyk - LightShed Ventures - Analyst : Great thank you.

Question: Nicholas Del Deo - Moffettnathanson LLC - Analyst : Hi, morning, thanks for taking my questions. Dave, you noted that you had provisioned but not yet billed for several hundred waves. Did that metric

Question: Nicholas Del Deo - Moffettnathanson LLC - Analyst : Okay, meaningfully? David Schaeffer - Cogent Communications Holdings Inc - Chairman of the Board, President, Chief Executive Officer, Founder Meaningfully. And we commented on this when we reported Q1 numbers and the majority of the wavelengths were installed near the very end of the quarter, and it was the reason for the disconnect between 2% revenue growth and 18% unit growth. We also explained that we wanted to be careful not to alienate significant customers by being too aggressive and pressuring them to accept wavelengths. We have several large customers that have been truly shocked by our ability to provision in the windows that we have outlined. And as a result, they were not prepared to take the wavelength services. They typically order their cross connects, order their pluggable optics and accept them in a three to four-month window from placing new order. But in Cogent's case, we had one very large wave order that we were actually able to provision nearly 100 waves in seven days. I mean they were truly amazed at that, but they came back and said we can't take them. And I understand investors frustrations that they want to see an installed number. And we only report installations based on billing revenue. That's been our policy and practice since inception. We have given incremental KPI's help investors understand that there's demand here. But as I've said on previous earnings calls, and I want to repeat today, the ultimate goal is to be measured only by GAAP revenue growth. And now listen, on that metric, it looked really good, but it was because a lot of waves installed at the very end of the previous quarter, which got us to 27% sequential and 150% revenue growth. With a small base and with these lags, it is going to be lumpier than I would than I would like. REFINITIV STREETEVENTS | www.refinitiv.com | Contact Us consent of Refinitiv. 'Refinitiv' and the Refinitiv logo are registered trademarks of Refinitiv and its affiliated companies. AUGUST 07, 2025 / 12:30PM, CCOI.OQ - Q2 2025 Cogent Communications Holdings Inc Earnings Call Our piece of it is much smoother than the lumpiness suggests. And I think there will be a point in time when we can implement a force billing discipline, but we are unlining to do that at this point.

Question: Nicholas Del Deo - Moffettnathanson LLC - Analyst : Got it. Thanks, Dave. David Schaeffer - Cogent Communications Holdings Inc - Chairman of the Board, President, Chief Executive Officer, Founder Thanks Nick.

Question: Michael Funk - BofA Global Research - Analyst : Yeah, hi Dave. Good to hear from you again. David Schaeffer - Cogent Communications Holdings Inc - Chairman of the Board, President, Chief Executive Officer, Founder Welcome back, Mike. I know you've been covering some other sectors, but it's great to have you back. REFINITIV STREETEVENTS | www.refinitiv.com | Contact Us consent of Refinitiv. 'Refinitiv' and the Refinitiv logo are registered trademarks of Refinitiv and its affiliated companies. AUGUST 07, 2025 / 12:30PM, CCOI.OQ - Q2 2025 Cogent Communications Holdings Inc Earnings Call

Question: Michael Funk - BofA Global Research - Analyst : You have to I think that don't want to take what your time. I mean I think one other potential view concerned to be going be customers of overprovisioned to overpurchased wavelengths and are now maybe dragging their feet, delaying acceptance of delivery because if you look at other parts of the ecosystem, whether it's data center capacity or other pieces, customers can't take that fast enough, right? And so from my seat, I'm hearing this and I'm thinking the customers over provision just to make sure they had enough potential inventory capacity and now they're pushing out or delaying acceptance. I mean that's the concern from my standpoint, but I definitely hear what you're saying you've improved provision. Can I follow on a quick one, Dave. I think in the past, you talked about a 4Q exit run rate for Waves, I think $20 million was last time spoke. Can you update us there, please? REFINITIV STREETEVENTS | www.refinitiv.com | Contact Us consent of Refinitiv. 'Refinitiv' and the Refinitiv logo are registered trademarks of Refinitiv and its affiliated companies. AUGUST 07, 2025 / 12:30PM, CCOI.OQ - Q2 2025 Cogent Communications Holdings Inc Earnings Call David Schaeffer - Cogent Communications Holdings Inc - Chairman of the Board, President, Chief Executive Officer, Founder Yes, we still feel confident that we will hit that quarterly run rate in the fourth quarter. And I do want to go back to the overpurchasing and delay comment. That is not what we've heard from customers. It's really we're just surprised you did it when you said you would do it. And I do think it goes back to the other comment I started to make earlier, which is we still have to prove to people that not only can we provision faster, the quality is going to be higher than that of our competitors. And every vendor can make those claims. The only way you validate them is by delivering and monitoring. And I feel comfortable that we are building credibility and the size of the funnel that we are accelerating and building is giving us that confidence.

Question: Michael Funk - BofA Global Research - Analyst : Of course, thank you.

Question: Frank Louthan - Raymond James - Analyst : Great. Thank you couple of questions. First, a couple of questions. First, where are you -- are you getting most of your wavelength customers? Are they new to Cogent -- or are they from your existing base? And then as far as going forward with the data centers, do you need to hire more experienced dedicated salespeople for that space? Or do you have any sales channel relationships that can help with converting that space. Thanks. David Schaeffer - Cogent Communications Holdings Inc - Chairman of the Board, President, Chief Executive Officer, Founder Okay. Two very different questions. So first of all, on the wave line customers to date about three quarters of them have been existing Cogent transit customers and about 25% of them are brand new to Cogent. Whether that mix will continue to hold as we build the pipeline and install, I'm not sure, but to date of the 4,600 and change in the funnel and the 1,500 plus installed the 6000, the mix has been three quarters, one quarter. With regard to the data centers, Frank, what we are doing now is trying to do two very different things. One, continue to do one and two rack retail deals into our retail footprint. We have 187 facilities where we have a retail space available -- we're at about 14.5% utilization in that footprint and the entire 628 person Cogent sales force has been the ones who have been focused on filling that footprint up. And I think that will continue. The wholesale disposition is a very different process. There, we actually have one of our real estate professionals focused on that disposition process. REFINITIV STREETEVENTS | www.refinitiv.com | Contact Us consent of Refinitiv. 'Refinitiv' and the Refinitiv logo are registered trademarks of Refinitiv and its affiliated companies. AUGUST 07, 2025 / 12:30PM, CCOI.OQ - Q2 2025 Cogent Communications Holdings Inc Earnings Call

Question: Michael Rollins - Citi - Analyst : Thanks and good morning. Two topics, if I could, please. So first, when you look at the opportunities to improve revenue in the future, you talked about waves a bunch on this call. Can you talk more specifically about the customer verticals and how those are each progressing in terms of the corporate, the NetCentric and the enterprise. And then secondly, you mentioned earlier in the call you're targeted to reduce net debt leverage. Can you give us just a little bit more of an explanation of how you see both the numerator and denominator evolving over this next couple of years and what are the critical points of execution to deliver on each of those? Thanks. David Schaeffer - Cogent Communications Holdings Inc - Chairman of the Board, President, Chief Executive Officer, Founder Yeah. Sure, Mike. Very good questions. So first of all, as I stated in the prepared remarks, we remain focused on selling on-net services. Just to mind everyone on this call, every dollar of revenue gets classified by one off net customer type, geography and by product type. In our investor presentation, we give you a great deal of granularity and breakdown of the various mixes of customer type product and on-net and off-net. Our primary business is selling on-net services. We get much higher contribution margins from those on-net services. For our corporate customers, roughly half of their purchases are on that half are in locations that we concluded, we cannot economically get a return on invested capital to bring on net and buy off-net services for. For the enterprise base, based on their very disparate geography requirements, we are only about 10% to 15% on net and almost exclusively off-net. That is business that came to us from the acquisition of Sprint. And then finally, in the NetCentric segment, about 90% of our revenues are on-net, we are focused on our net corporate on-net NetCentric. Within that, wavelength as a product are almost exclusively on-net. The customer verticals for wavelengths are typically hyperscalers who are using them for AI or for content distribution other content distribution customers, regional access networks who connect their networks together, international carriers who extend their networks. And then finally, some enterprises should build their own private closed networks. Each of these represents drivers for lean for transit services, the market is typically divided between access networks which we have about 8,000 or so that pulled down content around the world and about 5,000 content-generating customers that push applications out. And they could be either hyperscalers for their core business. They can be CDNs. They can be publishing companies or application service providers. And this is a good pivot into the second part of your question, which is how do we delever? REFINITIV STREETEVENTS | www.refinitiv.com | Contact Us consent of Refinitiv. 'Refinitiv' and the Refinitiv logo are registered trademarks of Refinitiv and its affiliated companies. AUGUST 07, 2025 / 12:30PM, CCOI.OQ - Q2 2025 Cogent Communications Holdings Inc Earnings Call And we delever through three mechanisms. The first being growth in aggregate revenue. Since quartering Sprint, we've delevered, and we have improved EBITDA solely through the margin improvement that has occurred faster than the decline and the payment streams from T-Mobile. But over time, those payment subsidies will go away, and we need to grow EBITDA out of top line growth with high contribution margin products. It is why we were confident in saying we can return on a combined basis, to 200 basis points of margin expansion year-over-year. That is a significant delevering in and of itself and then returning from what is effectively negative 1% growth we reported this quarter to a year-over-year growth rate of between 6% and 8%, coupled with the delevering gets you to EBITDA growth rate in the low to mid-teens, which is comparable to where Cogent had been historically prior to acquiring the Sprint business. And then in terms of the abrogate leverage, it has been Cogent's policy since 2010 to return more than 100% of free cash flow. We did that successfully between 2010 and 2020, maintaining a net leverage range of around 3 times lever with the pandemic and the slowdown in our corporate business, our leverage creeped up to 4.2 times net lever. We acquired the assets from T-Mobile, all with the subsidy payments, we initially delevered due to the asymmetry of those payments down to below 3 times lever. But as those payments step down and went from $87 million a quarter to $25 million a quarter, our leverage has ticked up. We peaked in net leverage this quarter at 6.6x net leverage on a consolidated basis. That number will come down, but our gross leverage will probably not materially come down. It will come down by improving the aggregate amount of EBITDA.

Question: Timothy Horan - Oppenheimer & Co Inc - Analyst : Thanks guys. Dave, can you just reiterate your wavelength kind of longer-term $500 million target and timing and confidence there? Secondly, can you just give us some -- your best guess on timing of the data center resolution? And then third, can you give us some sense of what the actual EBITDA numbers will be for the second half of the year, either third or fourth quarter or full year? Any kind of sense would be helpful. David Schaeffer - Cogent Communications Holdings Inc - Chairman of the Board, President, Chief Executive Officer, Founder Yeah. Sure. Always good to hear from you, Tim, and thanks for the questions. So first of all, on the confidence on wavelengths, we are actually more confident today than we were on last quarter's call or the quarter before or since we acquired Sprint. The reception that we have received from the customer base, the orders that we have in our funnel and the customer feedback that we've gotten from the orders that we have installed, all REFINITIV STREETEVENTS | www.refinitiv.com | Contact Us consent of Refinitiv. 'Refinitiv' and the Refinitiv logo are registered trademarks of Refinitiv and its affiliated companies. AUGUST 07, 2025 / 12:30PM, CCOI.OQ - Q2 2025 Cogent Communications Holdings Inc Earnings Call give us confidence that we will reach our $500 million run rate on wavelength revenue by mid-year 2028, which is identical to what we laid out in our justification in September of '22 when we announced the potential transaction that ultimately closed in May of '23. With regard to the data centers, I am not going to put date. Of course, we have never done it before. We have interested parties. We could tell they're spending money, they're hiring professionals are doing analysis, they put in offers. But until we have an actual monetized deal with a meaningful at-risk deposit. I'm unprepared to put a stake in the ground of saying when we're going to close because we have no history, we have had a great deal of interest. We've had some point, as you say, it's not for them, and they've moved away but more have been interested than not and our many parties are continuing to do work. With regard to EBITDA, I'm going to qualify this by saying we don't give quarterly or even annual guidance. What I will say is we expect meaningful sequential growth in EBITDA each and every quarter going forward at or greater than the pacing that we delivered in the last several quarters. So I think you can model that out, but we feel comfortable that we are both delevering due to the growth in EBITDA and growing our cash flow. And the 6% to 8% top line growth, I think, is now much more realistic than it was when we announced the deal at 5% to 7% in '22. And again, just to remind investors from 2005 through 2020, Cogent with no acquisitions organically grew at 10.2% a year. Our growth rate went negative when we acquired the Sprint business as was planned. We initially thought we could only return to [$5 million to $7 million]. We've become comfortable that we've groomed out the undesirable revenue. The rate of revenue decline sequentially improved from $5.2 million negative to $800,000, and should be flat to slightly positive in Q3 and positive from that point going forward. And because we have demonstrated post-closing more than 200 basis points a year of margin expansion. And in fact, we delivered 200 basis points sequentially in a quarter this last quarter, we feel comfortable that's the right goalpost going forward. Hopefully, that was helpful, Tim.