Cogent Communications Q4 2024 Earnings Call Transcript

Quartr
Provided by Quartr
February 27, 2025

There are 9 speakers on the call.

Operator

Good morning, and welcome to the Cogent Communications Holdings Fourth Quarter and Full Year twenty twenty four Earnings Conference Call. As a reminder, this conference call is being recorded and it will be available for replay at www.cogentco.com. A transcript of this conference call will be posted at Cogent's website when it becomes available. Cogent's summary of financial and operational results attached to its press release can be downloaded from the Cogent's website. I would now like to turn the call over to Mr.

Operator

Dave Schafer, Chairman and Chief Executive Officer of Cogent Communications Holdings.

Speaker 1

Thank you, and good morning to everyone. Welcome to our fourth quarter twenty twenty four earnings call and summary of our full year 2024 results. I'm Dave Schaeffer, Cogent's Chief Executive Officer. And with me on this morning's call is Cath Lead, our Chief Financial Officer. Hopefully, you've had a chance to review our earnings press release.

Speaker 1

Our press release includes a number of consistently reported historical metrics, which hopefully are helpful in understanding trends in our business. Our combined coaching business had a good quarter and a good year. Our total revenue for the quarter was $252,300,000 and $1,000,000,000 for full year 2024, compared to $940,900,000 for full year 2023. Our EBITDA as adjusted was $66,900,000 for the quarter and $348,400,000 for the full year 2024 compared to full year 2023 of $352,500,000 Our EBITDA as adjusted for the quarter increased sequentially by $6,000,000 and our EBITDA as adjusted margin increased sequentially by two eighty basis points to 26.5%. Our wavelength revenues for the quarter grew sequentially at 31.8% or $7,000,000 an increase of 124% over the previous year.

Speaker 1

Our Wavelength revenue was $19,200,000 for full year 2024, a 240% increase over 2023. Our IPv4 leasing revenue for the quarter increased sequentially by 11.8% to $12,600,000 and that represents a 27.2% increase year over year. Our IPv4 leasing revenue was $44,900,000 for full year 2024, an increase of 24.5% over the previous year. Our network traffic in the quarter was essentially flat and up 11% year over year. On a quarterly basis, our network traffic for the full year 2024 grew by 16% over 2023.

Speaker 1

We are in the process of continuing to realize significant cost savings from the integration of the Sprint assets. We have realized over 90% of our targeted two twenty million dollars in annual savings. Our projected savings are expected to continue to be achieved through 2026 and will be greater than the $220,000,000 initially targeted. Our SG and A decreased by $4,500,000 for the quarter or by another 7.5 from the previous quarter and a decrease by $19,200,000 or 25.6% from Q4 of twenty twenty three. Our SG and A as a percentage of revenues decreased 22.2% to 22.2% this quarter from 23.7% in Q3 of twenty twenty four.

Speaker 1

Our cost of goods sold decreased by $6,400,000 in the quarter or 4% from the third quarter of twenty twenty four and decreased by $19,500,000 or 11.2 percent from the fourth quarter of twenty twenty three. We ended the year with $227,900,000 of cash and cash equivalents on our balance sheet. Our sales force rep productivity was four units per rep per month in the previous quarter and 3.5 units per rep per month in the fourth quarter. Our sales reps' headcount and productivity in connection with the Sprint acquisition, we hired a total of nine forty two employees in May of twenty twenty three. At year end, six twenty four of these employees remain employed with Cogent.

Speaker 1

This represents a 34% reduction in the former Sprint employee base. Now for a comment on our Wavelength and Optical Transport business. In connection with our acquisition of the Sprint network assets, we expanded our product offering on our fiber optic network to include wavelength services or optical transport services to both existing customers as well as new customers. At the end of the quarter, we had wavelength sales capability and connectivity to eight zero eight locations throughout North America. This exceeded our target of 800 sites by year end with provisioning times of approximately thirty days.

Speaker 1

We ultimately will be able to reduce that provisioning time to two weeks, but at this point, it is in fact at around thirty days. We have actually sold waves and installed them in two eighty locations. And as we go through our existing sales funnel and backlog, some of those orders have dropped out. And at quarter end, we still had 2,700 orders in our wavelength funnel. Our Sprint network acquisition materially expanded our data center footprint.

Speaker 1

At year end, we have reconfigured 115 acquired Sprint facilities and added those to our sixteen forty six carrier neutral data center footprint. There are 104 Cogent data centers, which have 177 megawatts of power. We have also converted some of these smaller Sprint facilities. 55 of these former facilities are now Cogent Edge data centers. These Edge data centers are smaller in their footprint and can typically support about 40 racks and in aggregate have an additional 20 megawatts of power.

Speaker 1

So in total, we have a combined Cogent footprint of 159 data centers with 197 megawatts available for customers. We are in the process of decommissioning some legacy Cogent data centers and lease facilities where they are redundant with our own fee simple acquired Sprint facility. Our Board of Directors, which reflects on our growth in cash flow and our continued strong cash flow generating capabilities, as well as our investment opportunities, once again approved the increase in our quarterly dividend by another $0.01 per share sequentially for the quarter, raising our quarterly dividend from $0.995 a share

Speaker 2

to $1.5 per share. This represents the fiftieth consecutive sequential increase in our quarterly dividend and a dividend growth rate of about 4.1%.

Speaker 1

Now that the Sprint business is combined with our legacy Cogent business, we anticipate annual growth of 5% to 7% and EBITDA as adjusted margins expanding by about 100 basis points per year. Our revenue and EBITDA guidance are designed to be multi year targets and are not designed to be specific quarterly or annual guidance. Our EBITDA as adjusted and our leverage ratio are impacted by the timing and sequencing of payments received under our $700,000,000 IP agreement with T Mobile as part of the purchase of these assets. Now, I'd like to turn it over to Tad to read our safe harbor language, provide some additional detail on our operating performance, and then I'll follow-up with some summary comments and then we'll open the floor for questions and answers.

Speaker 3

Thank you, Dave, and good morning, everyone. This earnings conference call includes forward looking statements. These forward looking statements are based upon our current intent, belief and expectations. These forward looking statements and all other statements that may be made on this call that are not historical facts are subject to a number of risks and uncertainties and actual results may differ materially. Please refer to our SEC filings for more information on the factors that could cause actual results to differ.

Speaker 3

Cogent undertakes no obligation to update or revise our forward looking statements. If we use non GAAP financial measures during this call, you will find these reconciled to the corresponding GAAP measurement in our earnings releases that are posted on our website at cogentco.com. We analyze our revenues based upon network connection type, which is on net, off net, wavelength services and non core. And we also analyze our revenues based upon customer type and we have three customer types, net centric, corporate and enterprise customers. Our corporate business represented 44.8% of our revenues for the quarter that was $113,100,000 Our quarterly corporate revenues decreased by 10.7% year over year and sequentially by 2.7%.

Speaker 3

These decreases in our corporate revenue are primarily due to the continued grooming of low margin off net customer connections and the elimination of non core products. We had 46,371 corporate customer connections on our network at year end. Our NetCentric business continues to benefit from the continued growth in video traffic, activity related to artificial intelligence, streaming and wavelength sales and was $93,600,000 for the quarter. Our NetCentric business represented 37.1% of our revenues for the quarter, which was an increase of 0.5% year over year and a sequential increase of 1.9%. Our quarterly NetCentric revenue under our commercial service agreement with T Mobile declined sequentially by $2,600,000 and declined by $7,100,000 year over year, negatively impacting our NetCentric revenue results.

Speaker 3

We had 62,236 NetCentric customer connections on our network at year end. Our enterprise business represented 18.1 of our revenues for the quarter and was $45,600,000 We had 14,776 enterprise customer connections at the end of the year on our network. Our quarterly enterprise revenue decreased by 12.8% year over year and sequentially by $3,500,000 or 7.1%, primarily

Speaker 2

due

Speaker 3

to a reduction in non core and low margin enterprise revenues. On revenues by network type, on net revenue. We serve our on net customers in our 3,453 total on net buildings. We continue to succeed in selling larger 100 gigabit connections and 400 gigabit connections in carrier neutral data centers and selling 10 gigabit connections in select multi tenant office buildings. Our on net revenue was $128,800,000 for the quarter, a year over year decrease of 6.7% and sequentially 5.7%.

Speaker 3

Our on net revenue results were negatively impacted by three items, the $2,600,000 sequential decline in the commercial services agreement, the on net revenue compotion of that with T Mobile a $1,000,000 of negative FX sequentially and revenue from a low margin resale customer we acquired in the Sprint acquisition that we mentioned last quarter and intentionally terminated that was $1,700,000 of the decline. Our on net customer connections were 87,500 at year end. Our off net revenue was $113,200,000 for the quarter, a year over year decrease of 8.5% and a sequential increase of 1.7%. The sequential increase was primarily due to increase in our margins on former Sprint off net services. Our off net revenue results are also impacted by our migration of certain off net customers to on net and the continued grooming and termination of low margin off net contracts.

Speaker 3

Our off net customer connections were 28,963 at the end of the year. Our Wavelength revenue was $7,000,000 for the quarter, sequential increase of 31.8% and year over year 124%. Our Wavelength customer connections were eleven eighteen at the end of the year. Our IPv4 leasing business had another good quarter and a very productive quarter. We were leasing $13,000,000 of our IPv4 addresses at the end of the year and our IPv4 revenue increased by 11.8% from last quarter and 27.2% year over year to $12,600,000 for the quarter.

Speaker 3

Lastly, non core revenue was $3,400,000 for the quarter. That was a $800,000 decrease and a year over year decrease of $3,900,000 again due to our decision to end of life these non core products. Some comments on pricing. Our average price per megabit for our installed base decreased sequentially by 9% to $0.21 and decreased by 25% year over year consistent with historical trends. Our average price per megabit for our new customer contracts was $0.11 which was actually an increase of 31% sequentially and 11% increase year over year.

Speaker 3

Our ARPU, our on net ARPU decreased sequentially by 5.7% from $5.20 to $4.90. Our off net ARPU increased sequentially by 8% from November to 12/29, demonstrating our increased margins. Our wavelength ARPU increased sequentially by 9.5% and was 2,151 this quarter compared to $19.64 last quarter. Our average revenue per IPv4 address sold was $0.44 per address this quarter. That is a 47% increase from the average base of $0.3 per address at the beginning of the year, but prices have been increasing.

Speaker 3

Our churn rates are relatively stable. Our on net unit monthly churn rate was 1.3% this quarter compared to 1.2% last quarter and our off net unit monthly churn rate was 2.6% this quarter, the same as last quarter. Comments on EBITDA, EBITDA Classic, we reconcile our EBITDA to our cash flow from operations and each of our quarterly earnings press releases. Our EBITDA for the quarter increased sequentially by $6,000,000 and our EBITDA margin increased by two seventy basis points to 16.6%. For the full year, our EBITDA was 122,800,000 and our EBITDA margin was 11.9%.

Speaker 3

Our EBITDA as adjusted, as a reminder, is adjusted for Sprint acquisition costs, if we incurred any during the period, and payments under the IP transit agreement with T Mobile. There were no incurred and costs classified as Sprint acquisition costs after the second quarter of twenty twenty four when our one year purchase accounting adjustment period ended for the Sprint acquisition. Our EBITDA as adjusted for the quarter was $66,900,000 and our margin was 26.5. That's a sequential increase of two eighty basis points. Our EBITDA as adjusted for the year was $348,400,000 and the margin was 33.6%.

Speaker 3

In accordance with our IP transit services agreement, we received the three monthly payments totaling $25,000,000 this quarter, the same as last quarter. All payments have been paid in full and on time. For full year 2023, we received total payments of $204,200,000 and coincidentally, the same amount for full year 2024, '2 hundred and '4 point '2 million dollars but the payment streams were different. The total was the same but the streams were different. The total payments for 2023 included seven payments of $29,200,000 each and the total monthly payments for 2024 included five payments of $29,200,000 and seven payments of $8,300,000 An additional 35 monthly payments of $8,300,000 each will continue until November 2027.

Speaker 3

There are additional payments we will receive under the purchase agreement with T Mobile. There are further payments related to lease obligations that we assume that closing and these payments will total at least $28,000,000 and to be paid over four equal payments in months fifty five million dollars to $58,000,000 so from November 27 to February 2022. Foreign currency comments, our revenue earned outside of The United States is relatively consistent as last quarter and was about 18% of our revenues, 11% of that was in Europe and 7% related to Canada, Mexico, our oceanic, South American and African operations. Our average euro to USD rate so far this quarter is $1.04 and the average Canadian dollar exchange rate is $0.7 If those rates continue at the current level, the FX conversion impact on sequential quarterly revenues would be negative and about $1,000,000 and year over year for quarterly revenues would also be negative and about $1,700,000 Our revenue and customer base is not highly concentrated. Our top 25 customers was about 18% of our revenues this quarter.

Speaker 3

On CapEx, our CapEx was $46,100,000 this quarter. That was down 22.2% from last quarter and our CapEx was $195,000,000 for the full year. We are continuing our network integration of the former Sprint network and legacy Cogent network into one unified network and converting former Sprint switch sites into COSA data center. We have accelerated and expanded our data center conversion program due to the high level of demand for our power availability. This program will require capital spending for the first half of twenty twenty five that will be similar to the last half of twenty twenty four and then tail off.

Speaker 3

Comments on our IRU lease obligations. Our finance IRU obligations are for long term dark fiber leases. Our IRU finance lease obligations were $538,400,000 at the end of the year. We have a very diverse set of suppliers and contracts with three sixty nine different suppliers of dark fiber. At year end, our cash and cash equivalents and restricted cash was $227900000.0.29400000.0 dollars of cash is restricted and $22,300,000 of that was tied to our swap and $7,100,000 was tied to the requirements under our IPV4 restricted notes.

Speaker 3

Some comments on debt and debt ratios. Our total gross debt at par, including our finance leases, was $2,000,000,000 at year end and net debt was $1,800,000,000 Our total gross debt to the last twelve months EBITDA as adjusted ratio was 5.72 and net debt was 5.07. Our leverage ratio as calculated under our note indentures was 5.81 and our secured ratio was 3.38 and our fixed coverage ratio under the note indentures was 2.76. Our fourth quarter twenty twenty four annualized EBITDA as adjusted increased sequentially by $24,000,000 or by 9.8% from $243,400,000 to $267,400,000 To comment on the swap, it's a reminder, we are party to an interest rate swap that modifies our fixed interest rate obligation with our $500,000,000 20 20 6 notes to a variable interest rate obligation based on the SOFA rate for the remaining term, the fair value of our swap agreement decreased by $7,600,000 from last quarter to $22,300,000 Changes in the fair value of the swap agreement are required to be classified with interest expense under U. S.

Speaker 3

GAAP. Lastly, some comments on bad debt and day sales outstanding. Our day sales significantly improved at year end and was twenty nine days versus thirty two days at the end of the third quarter. And our bad debt expense also substantially approved and was only $6,600,000 only $600,000 and only 0.2% of our revenues for the quarter was 1% of our revenues for full year 2024, which is consistent with historical results. As always, I want to thank and recognize our worldwide billing and collections team members for doing a fantastic job in serving our coaching customers.

Speaker 3

And with that, I will turn

Speaker 1

the call back to Dave. Hey, thanks, Tad. I'd like to highlight a couple of strengths in our network, our customer base and our sales force. We continue to experience significant year over year traffic growth in our legacy NetCentric business. We are direct beneficiaries of over the top video, artificial intelligence activities and streaming traffic.

Speaker 1

At year end, we had sixteen forty six third party carrier neutral data centers, 104 of our own data centers and an additional 55 of these smaller edge data centers connected to our network with Cogent's available power capacity of 197 megawatts. The breadth of this coverage enables us to serve our NetCentric customers, better help them optimize our networks and reduce latency. We continue to expect to widen our lead in this market as we project adding over 100 carrier neutral data centers to our network this year and for the next several years. At year end, we were able to sell our Wavelength service in eight zero eight of these carrier neutral facilities with reduced provisioning times. This surpassed our year end target of 800 carrier neutral data centers being wave enabled.

Speaker 1

At year end, we were directly connected to 8,250 different networks or autonomous systems with 23 of these networks representing peers and 8,227 of these customers were in fact purchasing transit from COSHA for their networks. We remain focused on our sales productivity and we are committed to managing out underperforming reps. Our sales force turnover in the quarter was 5% per month. That is down from the peak of 8.7 at the height of the pandemic. It's still below our average rep turnover of 5.6% per month.

Speaker 1

At year end, we had a sales force of two eighty eight professionals focused on the NetCentric market. These individuals sell both transit and wavelength services, three forty seven professionals focused on the corporate market and 15 individuals focused on our enterprise customer base and the new market opportunities in that segment. In summary, we're very optimistic about our position and being able to serve small and mid sized customers with IP services located in the central business districts of major cities. We had eighteen seventy one on net multi tenant office buildings comprising over 1,000,000,000 square feet of rentable office space. We are continuing to provide profitable on net and off net services to enterprise customers geographically around the world.

Speaker 1

We're enthusiastic about the progress and continued opportunity in our optical transport business and the wavelength services that we have been able to provision. We have a significant backlog and funnel of over 2,700 opportunities. While this is down slightly from the previous quarter, it's been due to grooming that funnel. Many of those opportunities have been in the funnel for over a year as we could not provision them. But now with the ubiquitous coverage and the more rapid provisioning cycles, we believe that we will continue to accelerate our wavelength business.

Speaker 1

We do have reduced provisioning cycles and we hope to convert many of these opportunities and funnel into installed orders. We're digitally we are working diligently on continuing cost reductions as a result of the integration of the Sprint network and the various customer bases we acquired. We look forward to the ability to monetize additional parts of our unleashed IPv4 address inventory, our dark fiber footprint and our excess data center space on a wholesale basis, either with direct sales or long term leases over the next year or so. We're currently in discussion with multiple counterparties from multiple sites, and hopefully we'll be in a position to announce something over the next several months. Now, I'd like to open the floor for questions.

Operator

And your first question comes from the line of Michael Rollins with Citi. Michael, please go ahead.

Speaker 4

Thanks and good morning. Dave, curious just to start us off, if you look at the customer verticals that you're now reporting in terms of corporate, enterprise and NetCentric, can you give us an update just holistically in terms of where each of those segments are in terms of getting through some of these legacy acquired revenues? And what's the opportunity for each of these segments to grow over the coming years, whether it's one, two or maybe a three year view?

Speaker 1

Yes, sure, Mike. I think those are fair questions. So, when we acquired Sprint, we acquired both corporate and enterprise customers, only a handful of NetCentric customers. Our NetCentric business continues to grow and that growth rate will actually accelerate since virtually all of the Wavelength sales will be NetCentric and approximately 85% of our IPV4 leasing is to NetCentric. So, within the NetCentric segment, we are growing today and we anticipate that growth rate to accelerate meaningfully as both the underlying IP business performs and we are able to add wavelength revenue to those customers.

Speaker 1

For our corporate segment, we acquired a number of corporate customers from Sprint who were purchasing non core services, were purchasing very low bandwidth, non fiber delivered off net services. And we have been in the process of grooming those less desirable services. It is why our margins have exceeded our guidance in terms of growth rate and we expect that to continue. I think we're probably still just a couple of quarters away from getting through that grooming exercise and then seeing positive growth in our corporate segment. Those corporate customers will predominantly purchase DIA and VPN services based on VPLS.

Speaker 1

It is a segment that has been heavily exposed to central business district office occupancy, and we are continuing to see improvements in that. Many markets that had been negative net absorption, meaning increases in vacancy rates since the pandemic have actually turned positive now and we're seeing net positive absorption across most markets across the country. So, as a result of the grooming, we will see probably a couple more quarters of negative corporate growth, stable and then beginning to grow. On the enterprise segment, the majority of these locations are off net. Most of these customers take global services from Cogent and they take two primary products, Internet access and VPNs based on MPLS.

Speaker 1

Our decision to support MPLS going forward for at least a decade has actually allowed us to actually win a handful of brand new enterprise accounts, yet today only have a handful of connections with Cogent, but have indicated they will increase that. So, we anticipate that the reduction in enterprise revenue will probably last into early twenty twenty six or longer than corporate. And the main reason for that is we are grooming some international operations and bifurcating the service to the customer where we will continue to sell the port in a country where Cogent is licensed, but we are requiring the customer to enter into direct contract with the local loop provider as we are not licensed to resell those. Sprint had previously worked through a resale structure where they were reselling and then effectively sub reselling, and we were uncomfortable with that legal construct. So, as a result, as these off net circuits in non licensed countries, our mine investors we're licensed in 56 countries, but we provide service in over 170 countries around the world.

Speaker 1

In the differential, we require the customer to purchase their own loop. Cogent has always used that structure and we are migrating the acquired Sprint enterprise customers to that. So probably about a year of continued enterprise decline, then flat to very modest growth. Probably in that segment, we do not anticipate more than kind of a 1% annual top line growth. Thanks, Mike.

Speaker 1

Thanks.

Operator

And your next question comes from the line of Sebastiano Petti with JPMorgan. Sebastiano, please go ahead.

Speaker 5

Hi. Thank you for taking the question. Just in regards to the waves, Dave, can you remind us how should we think about perhaps additional investments needed to perhaps unlock the opportunity there, whether it be from a sales force investment perspective, maybe connection costs related to just enabling that from a CapEx perspective? And then if we think about just the pace of installs, I think part of that is probably predicated on the backlog, but I think you said 500 or so monthly installs in waves is probably a near term target, but perhaps accelerating from there. And so how should we think about the cadence or the trend there that would be helpful as well?

Speaker 5

And then I guess one area of housekeeping related to waves. On the provisioning times, I think you're down to thirty days now, if

Speaker 6

you remind us, where was that last quarter?

Speaker 5

Thank you. And what's the timeline

Speaker 3

to get to the two weeks? Thanks.

Speaker 1

Yes, fair enough. I'm going to take those in reverse order, Sebastiano. So, last quarter, we were at so in Q3, we were probably at one hundred and twenty days for the waves that we can provision. By Q4, for the ones that we provisioned, we got that down to ninety. In this quarter, we are down to a thirty day provisioning window.

Speaker 1

And we are continuing to refine some of the processes and field deployment mechanisms and feel comfortable that we can get down to the same two week average that we have in IP services, which we've been able to do now for over twenty years. We tested all of these provisioning systems and configurations, but there are always corner cases in the real world that you learn from. But we feel very comfortable that the thirty days, which is far beyond what anyone else in the industry can do, is great, but we have the ability to effectively cut that in half over the next several months. With regard to the pacing of installs, we are ramping up to our full install capabilities and we have both field resources and service delivery coordinators to support the 500 a month. The hard part now has been working through the backlog that we have and flushing out which orders are still available for install and which the customers had to go somewhere else.

Speaker 1

And some of these orders had been in the funnel for over a year and that is a time consuming process and we have groomed the funnel, it did shrink even though there were some new orders coming into the funnel. And now we expect the funnel to actually accelerate in new order intake as we have demonstrated our ability to install. I think we're still probably a month or two away from getting to kind of full cadence of 500 installs a month as a result of this grooming exercise because it does take an iterative back and forth with the customer. Now, to the investment part of the wavelength question. And I'll answer that in two different areas, both capital in the network and sales force investment.

Speaker 1

I'll take the easiest one first, which is CapEx. We are substantially complete in our footprint. There have been additional data centers that have come online over the past eighteen months since we announced that 800 target, and we are rapidly catching up, so we have ubiquitous wavelength capability across the footprint. In fact, the eight zero eight that we ended the year with six or seven weeks later is now close to eight eighty. There are still probably about 60 or 70 data centers that have IP connectivity from Cogent in North America that don't have waves that have come online in the past eighteen months that were rapidly adding wave capability.

Speaker 1

And on a going forward basis, in new data center additions, they will automatically have both services. So, it won't be a two part process. In terms of the capital intensity of that, we think our kind of run rate stabilized CapEx will be in that roughly $100,000,000 a year range. That is somewhat dependent on the rate at which new data centers come online. But the amount of incremental capital to bring wavelengths to the data center versus just IP is fairly trivial, probably less than $15,000 per incremental data center.

Speaker 1

So, we don't see a material uptick in CapEx. In fact, we see our CapEx declining after mid year. And the elevated CapEx that we are spending now is being focused heavily on the data center conversion program, where we are trying to unlock 100 megawatts and 1,000,000 square feet of the data center footprint to be marketed on a wholesale basis. We targeted 23 of the largest facilities to do that, three have been fully converted, 20 are in the process of completing their conversion, their conversion has been underway, it is capital intensive and we anticipate by midyear, by the June, all 23 of those facilities will be fully ready to be able to allow a counterparty to take control of them, whether they purchase them or lease them. We have been marketing these facilities in kind of collecting offers and letters of intent as well as doing incremental tours.

Speaker 1

We believe that probably in the next six to eight weeks, we will be far enough along that it will make sense for us to do some calls for offers and kind of flush out how many of the LOIs are in fact serious and are ready to transact and in what economics. Now, for the sales force piece, we have invested in our CRM to automate the provisioning and quoting of wavelengths. We actually automatically produce a route map with one meter accuracy with each wave order. That is something that no other provider can do. And it's in large part to the fact that the Sprint network was based on extremely accurate GIS data since it was not a roll up or a series of acquisitions, but it was organically built by one company.

Speaker 1

We also have a number of sales force training programs that have been ongoing and are now accelerating due to the ability to actually provision in a reasonable window in these additional sites. And the cost of that is not an extraordinary expense, it's just a redirection of our sales training resources. We have a total of 13 dedicated sales trainers. They train salespeople on all products. But over the past several months, their primary focus has been on wave training and certification.

Speaker 1

So, we do not anticipate any extraordinary sales force investment. Thanks. Thank you.

Operator

And your next question comes from the line of Greg Williams with TD Cowen. Greg, please go ahead.

Speaker 4

Great. Thanks for taking my question. Maybe dovetailing off the wave answer there. Abe, you mentioned your competitive advantage is obviously getting to two weeks of provisioning and then you just mentioned one meter of accuracy for your sales force. We just got back from a fiber conference and Lumen specifically calling out investing heavily in waves, Zayo is talking about 400 gig waves across the country.

Speaker 4

Just trying to understand the competitive concerns that they ramp up their wave product and how much of your future growth and your $500,000,000 target is share ceiling versus the market expansion opportunity? Is there enough to go around for all of you? Second question is just on the IP version four price hikes. It sounds like it's $0.44 per address. You mentioned you're going to hike your prices on about 10,000,000 addresses.

Speaker 4

Where is that process and how is

Speaker 7

that going along? And what's

Speaker 4

the math there? If If I think maybe $0.1 of price hike on 10,000,000 addresses, that's like $12,000,000 in revenue opportunity? Just trying to understand if I'm thinking of it correctly. Thanks.

Speaker 1

Yes. Hey, thanks for the questions, Greg. And again, I'll take these in reverse order. On the IPv4 pricing, we initially raised the price of new sales, then we began cycling through the base that was not covered by contracts. We still do have some customers at lower rates that we will be increasing prices on over the next several months.

Speaker 1

In addition to that, we will evaluate whether we can further raise prices for new sales. We do have inventory of addresses that are on lease, but we also know that there is strong demand. So, I do think we can continue to have outpace growth in our IPV4 leasing. It has now become much more of a focus for Cogent.

Operator

It

Speaker 1

represents almost 5% of our total revenues and it will be the combination of incremental leasing activity, which you can see the cadence and progress of in our press release, as well as raising the average price of the base by both raising new incremental and going back to customers out of contract and raising that. Now, to the wavelength question. We should never be naive. We should always believe we have competitors and we have to win business on a wave by wave basis. The companies you mentioned have access to capital and are established players with substantial footprint.

Speaker 1

However, each of those companies has a much smaller number of data centers where they at least tell the market or advertise that they could deliver wavelength services too. We were at eight zero eight at year end and eight eighty today will be over 900 in the next few months as we close out those remaining new data centers and bring them on to the wave network. That additional ubiquity is important. The second key point is the architecture we deploy. It is radically different than that of Zayo and Lumen, and it allows us to provision any to any in this very rapid period with minimum number of field dispatches and accurate fiber inventory.

Speaker 1

The two companies you mentioned had acquired a number of companies. They operate disparate unintegrated networks. And for that reason, their typical wave install does take ninety to one hundred and twenty days, typically requires six or more field visits and custom engineering in which they are unable even to produce an accurate route map to the level that we have. So, we think we have unique right of way, we've got faster provisioning, more endpoints. But at the end of the day, we also have a much lower cost basis than they do in their assets.

Speaker 1

So, we will be aggressive. I think we're going to grow our business by capturing new opportunities, but we will also displace current providers by offering a better solution. The switching costs are trivial in a data center because all you do is issue an LOA to the data center operator to migrate the cross connect in that data center from the previous provider to the new provider. It's a very easy process. And then finally, on the interface speeds that we can support, 100% of our sites can support 10 gig, 100 gig and 400 gig waves.

Speaker 1

Again, that's very different than our competitors. We can support all three speeds at 100% of the sites. The caveat I'm going to put on that is in every vector, so every direction out of a site, we can support ten and one hundred with 100% coverage. And today with 400, we're at about 82% of the vectors that we can provide. So, we do have a little bit of work to take some sites that are 400 gig enabled and make sure every direction out of that site can support 400.

Speaker 1

That work should also be complete this quarter, in the first quarter of twenty twenty five.

Speaker 6

Thanks. Thank you.

Operator

And your next question comes from the line of Walter Piecyk with Leit Chat. Walter, please go ahead.

Speaker 2

Thanks. Dave, Pat highlighted the sequential growth in IPv4 revenue, but I was looking at last quarter's revenue. It was higher, so that shows that it was a sequential decline. Was there some type of restatement in IPv4 lease revenue? And then in terms of you're saying focusing on IPv4 in terms of growth, again, the net adds, meaning new lines, IPv4 addresses that you're leasing, I think only increased by like 90,000 in the quarter and used to increase by 500,000, six hundred thousand, seven hundred thousand.

Speaker 2

Was that based on some restatement on Q3 or is 90,000 kind of the run rate that you're delivering in terms of focusing on this area?

Speaker 3

So the IPv4 revenue, the entity that has the secured notes is going to be audited. So we have begun that process in auditing the revenue streams. The data that has been disclosed have been based upon MRCs and totaling MRCs as opposed to U. S. GAAP revenue per quarter.

Speaker 3

So you are correct in observing that we adjusted some of the amounts for prior periods to get to The U. S. GAAP numbers that will be audited coming up in the next few weeks here.

Speaker 1

Right. So, that's on the revenue side. And on the unit side, as we raise prices, there was some initial sticker shock. We did add just under 100,000 units in the quarter, but we also expect to be able to continue the average growth rate of nearly 500,000 addresses per quarter over a multi quarter period. If you go back and look at the data that we provided, there is volatility in every quarter in terms of the number of net new addresses added.

Speaker 2

Okay. So, it's going to bounce back to $500,000 even though we haven't seen that since Q2 and even though you just increased pricing or contemplating new price increases and this is just because you're focusing, I guess, on that business more. And then the revenue restatement was just because it wasn't audited before, so you actually were generating less revenue in IPv4.

Speaker 3

No, no. The disclosure was based upon adding up MRCs as opposed to prorating the proper revenue amounts. If a customer installs, for example, on the twentieth of the month, we were adding up MRCs,

Speaker 4

right?

Speaker 2

So end of quarter MRCs, right.

Speaker 3

That's right. That's right. So you had to go

Speaker 2

It might have been helpful to actually call that out in the press release or the prepared remarks, rather than having to have it come up in Q and A. But can we move on to the wavelength? The total revenue growth.

Speaker 4

I mean, when you talk about

Speaker 2

sequential growth and it's actually down based on what you reported, yes, I mean, I think maybe it's not material in dollars, but whatever. Wavelengths, I guess a similar type of question, the backlog declining 20%. Was this basically like you had had orders from some time ago and then you checked in with these customers and they had gone elsewhere? And I'm just curious like if we look at what remains after this 20% decline in your wavelength orders sequentially, when's the last time you checked in with the customers that have existing orders in your backlog? And is there any chance that we'll see a similar reduction next quarter because they've gone elsewhere further wavelengths?

Speaker 1

Well, as we have stated on multiple previous calls, as we were building an order funnel and backlog, we knew that we could not provision those orders. Some of those orders were provisioned. So, some of the decline came from the incremental orders that were provisioned. Some of the decline came from going to customers who had previously put in an order maybe fifteen months ago and had gone somewhere else. Now that we have established a commitment to deliver today with a contractual penalty if we fail of thirty days in eight zero eight sites at year end and eight eighty sites today, we are cycling through that.

Speaker 1

There will be some breakage, but there are also new order intakes at an accelerating rate. I think the way you characterized it as a 20% decline in waves is not correct. What it is

Speaker 2

Well, 3,400 to 2,700, that's basic math, Dave. It

Speaker 1

is a grooming of a funnel. The funnel reduced, but not the waves. The number of waves installed actually grew.

Speaker 2

Okay. Can you also just just lastly, my favorite topic is just the, I guess, aside from leverage, but I'll leave that for the next call, which is now north of 5%. Your corporate revenue, which was declining 2.7%, I think in the prepared comments, again, you talked about off net and shifting off net to on net, but like what can you just kind of cut to the root of it, what's going on in corporate? Is there any organic growth opportunity in that business or is this forever just in decline? I'm talking about the traditional cogen corporate that really drove your dividend growth historically.

Speaker 1

Well, our dividend growth has been driven by growth in cash flow and that growth in cash flow

Speaker 2

Cash flow, debt leverage, debt leverage, not cash flow. We finish the leverage.

Speaker 1

I'll let you ask the question. I'll finish answering it. So, I already answered the question for Mike Rollins earlier, which is that corporate growth will decline for another quarter or two as we continue to groom. As we groom both non core and negative margin off net services that cannot be migrated to ON net, that results in a top line decline, but an expansion in EBITDA. We think this is the appropriate strategy.

Speaker 1

The underlying on net corporate footprint continues to grow. Thank you, Walt. Next question?

Speaker 2

Thanks, Dave.

Operator

And your next question comes from the line of Tim Horan with Oppenheimer. Tim, please go ahead.

Speaker 3

Thanks, Dave. Back on the Wavelengths, in your conversations, how important is the redundant routes and new architecture? And what type of price discount do you think you need to get to capture share? And can you give us an update on maybe how much revenue you can get in Wavelengths now and what you're kind of still expecting in five years? Thanks.

Speaker 1

Yes. So, thanks for the questions, Tim. First of all, I would actually say route redundancy is actually the most important factor to potential customers. If we rank their concerns, it's route redundancy, data center coverage, provisioning time and pricing in that order. So price is probably not the most important factor, but it will help us close some business.

Speaker 1

In terms of redundancy, even for companies that have chosen to buy or build dark fiber, initially, you would think that demand out of the market, but because the services on either dark fiber or waves are an unprotected service, they actually value the redundancy even more. So it actually generates incremental demand for the same city payer on a unique route. We feel very comfortable about the target that we laid out in at the closing of the deal in May of 'twenty three and said within five years, we would be at a run rate of $500,000,000 annually in wavelength sales. We think that the demand that we have received, both in terms of order backlog and continued customer interest, gives us a great deal of confidence we're going to make that number, particularly as we prove to the market our ability to actually deliver. The fact that there have been some customers in the funnel for over a year that are still taking waves is to me a little surprising, but some of them had enough confidence in us and we have delivered.

Speaker 1

For others, I think we have to build credibility and the way we're going to do that is install these waves, but we're very comfortable with our $500,000,000 by mid-twenty eight target for Wavelength revenue.

Speaker 3

So can you just characterize how the sales efforts going right now? I mean, you're basically there now on provisioning and will be a couple of months from now you're there on coverage all the things we're talking about. Have the I guess the pitches ramp dramatically?

Speaker 1

They have. So as we turned the calendar on 2025, we sales force was empowered to go out and reach into the funnel of people that had already signed and convey that message, as well as reach out to new customers. And the cadence of getting new orders into the funnel has actually begun to accelerate. I think that cadence will accelerate even further as we end up with a ability to show that we can provision.

Speaker 3

Lastly, Dave, can you just give us some I know you're reluctant to do this and maybe you can't, some color on what we should expect for consolidated revenue and maybe consolidated EBITDA in total for this year? Obviously, there's a lot of moving parts.

Speaker 1

There are. And in 'twenty at the beginning of 'twenty four, we said that our EBITDA would be relatively equivalent to '23, and I think most sell side analysts did not believe that. And then we ended the year at 3.48 versus 3.52, so about $4,000,000 or 1% delta. I think going into the year, the kind of consensus was for about a 20% reduction in EBITDA due to the step down in payments from T Mobile. We have demonstrated our ability to take out costs.

Speaker 1

So, I think as we look at $25,000,000 we should deliver EBITDA effectively equivalent to $24,000,000 or $23,000,000 so around $350,000,000 dollars You're right, we don't like to give specific annual guidance. We also kind of addressed the various customer segments and the declines and when we expect each of those segments to have flushed through the grooming of the non core products. I would suspect that we will be delivering revenue that is slightly up for the full year due to wavelength sales.

Operator

And your next question comes from the line of Jim Schneider with Goldman Sachs. Jim, please go ahead.

Speaker 7

Good morning. Thanks for taking my question. Maybe wanted to kind of get the corporate revenue question in a different way, if we could, Dave. Maybe you just kind of think about it in terms of either corporate connections or on net connections and core customer trends. I mean, what is what's going to be required to get those sort of connections growing in a more positive direction over the next few quarters?

Speaker 7

And can you specifically talk to what's required in terms of sales force headcount and sales force productivity and how much productivity that needs to increase in order to get there?

Speaker 1

Yes. So, in terms of corporate connections, we need to groom those non core products that are sold to on net customers. So, there is going to be some connection, grooming that goes on. And we are also migrating customers from off net to on net. We've done a significant amount of that, but there are other cases where there were off net customers and on net buildings that were trapped in a group contract that we acquired from Sprint that we only migrate that customer once that contract has ended, so we can recognize that savings.

Speaker 1

So I think on a connection basis, we've got a couple of more quarters of headwinds and then positive. On a revenue base, it will be very similar as we think the ARPUs will be relatively flat. There is some price decline that is typically offset by migrations to larger connections. To address the sales force piece of it, roughly three ninety, three 80 seven of our salespeople focus on the corporate segment. That is the portion of the sales force that has the highest turnover.

Speaker 1

That is where we focus the majority of our normal training activities. As I mentioned earlier, we've diverted some of those to wave training to the NetCentric sales force, which is very stable. But we will be able to divert back training to the corporate team. And we do need the average number of connections sold per rep per month to go up. We're at 3.5 today.

Speaker 1

The long term average is just under five. We were at four the previous quarter. There is some volatility around that, but I do believe that we have the right number of salespeople, the right turnover, I'd always like turnover to be lower, and I think we will continue to see corporate on that growth. Now, the return to office environment is the backdrop we're working against. It has been tough.

Speaker 1

It's lasted much longer than we expected. And we're always seeing positive net office absorption turning in a dozen or so markets this quarter. But that is at least a sign that we have reached bottom and we are starting up. So, it's a combination of companies making a decision and companies occupying the space. But as I said to Mike's question, we feel comfortable that we're probably one to two quarters away from positive corporate revenue growth.

Speaker 7

Thanks. And maybe just a quick confirmation. I want to make sure that I understood what you said heard what you said before properly, which is the sustaining CapEx in the business should be $100,000,000 annualized run rate all in after all the noise is flushed out of the numbers?

Speaker 1

That's correct. And we should be at a run rate of roughly $100,000,000 by Q3 and Q4 of this year. We are at an elevated rate for the first half of the year and most of that incremental capital is being spent on the data center enablement program.

Operator

And your next question comes from the line of Christopher Scholl with UBS.

Speaker 8

Maybe just one on the under monetized assets. Dave, would you say there's a preference for leasing versus selling the data center and IPv4 assets at this stage? And as you think about maximizing value, do you believe this most likely will be achieved through a few large deals or more so through a series of transactions? Thank you.

Speaker 1

So, on the IPv4s, at this point, we are committed to leasing them. While they are liquid and could be sold, since Microsoft and Amazon are today not acquiring, at least in scale, we think that we would be leaving money on the table. The average price per address peaked at the end of 'twenty three at about $60 Today, blocks are trading on exchanges between $48 and $52 So that is about a 15% reduction. If prices trade back up and that is I think likely as you look at the long term appreciation, the first trades occurred in 2011 at $4 an address. And today, fourteen years later, they're at about 50.

Speaker 1

I think the long term trend is up, but we would consider being a seller of some of that address space. In terms of the data centers, we really are agnostic to whether it is a cash sale or a lease. We're allowing the market to tell us both which data centers they want and which of the two models they would prefer to use. I would say if I looked at the pool of letters of intent today, they're about 60% lease, about 40% purchased. So while there's a slight preference for leasing, it's not overwhelming.

Speaker 1

And that's out of after several hundred tours by different counterparties. There's almost 50 counterparties still actively working on these assets. We have been reluctant to accept any offers because the assets just are not ripe for monetization. That will happen over the next few months and that was to my point about calling for offers. If we decide to take a lease deal because the overall economics are better for Cogent, we would probably look to securitize that to raise cash off of those leases.

Speaker 1

So, therefore, the credit quality of the underlying tenant would be critical in our decision making process. And then the final part of your question, is it going to be a holistic deal or one off? While we have several offers for the entire portfolio, they do not maximize value on specific assets within the portfolio. Again, until we do a call for offers and can line everything up, I'm just not in a position to answer that. Now, I want to be absolutely clear with investors.

Speaker 1

This is something we haven't done before. We've got strong indications that our pricing is reasonable and there's strong demand, but we really want the market to answer the question for us.

Speaker 8

That's helpful, Dave. And then maybe just one more. You pointed to stable EBITDA in '25. Can you just remember you're contemplating with the step down in payments and your comfort level with the dividend policy as you await the uplift from growth initiatives? Thank you.

Speaker 1

Yes, we're very comfortable with our dividend policy. As we mentioned on the previous call, our LQA EBITDA troughed in Q3. On an LTM basis, that is going to trough in Q3 of twenty five. We are 5.07 today. We will get into the high fives, 5.758 in part due to the expenditures that we're making on the data centers and that drain on capital.

Speaker 1

We are comfortable with that because we also know that with the growth in EBITDA, we see a rapid delevering occurring starting in Q4 of this year and probably by sometime in mid-twenty seven, we will be actually below the midpoint of our target.

Operator

And your next question comes from the line of Nick Del Deo with MoffettNathanson. Nick, please go ahead.

Speaker 4

Sure. Good morning, guys. Just two quick ones given the time. I think you said traffic growth was 11% year over year. So I think it's the lowest you've ever had maybe aside from the quarter when you left MegaUpload back in 2012.

Speaker 4

What's going on there and what does it mean for NetCentric outlook? And then on the data center front, obviously, we're mostly focused on the facilities you're trying to spruce up for wholesale or for sale. But I guess, as you think about your retail assets, I think they've historically had utilization rates in the 30% range or so. I guess, should we expect that to go up in light of the broader supply demand dynamic in the data center space?

Speaker 1

Yes. So, first of all, on the traffic growth number, traffic was essentially sequentially flat. On a quarterly basis, it was up 11% year over year. But for the full year, it was up 16%. So, calendar year '24 versus full calendar year '23.

Speaker 1

In terms of what's going on, we are reaching a level of maturity in streaming in the developed world with roughly 53%, fifty four % of all video now being streamed. And that growth rate in streaming versus the hockey stick we saw post pandemic is moderating. I do think that we are going to see a new leg up in growth as AI matures and as inference models become more ubiquitous and more commonly used, I think that will drive a new leg of growth. And if we go back and look at Cogent's reported traffic growth over a twenty year history as a public company, there have been ups and downs. Yes, mega upload was a particularly abrupt shot, but we've also seen other slowdowns when YouTube's casual video business started to mature, that slowed down our traffic growth.

Speaker 1

When Napster's file sharing business matured. Now, these were off of much smaller basis. I think for our NetCentric IP business, I think we will continue to see growth at similar historic rates. That's kind of in a 9%, ten % rate. And there are ebbs and flows in quarterly traffic.

Speaker 1

I know that several of our CDN customers did have a pretty tough quarter in terms of their traffic volumes, and they are heavily dependent on us. But I don't think the Internet stopped growing. I think in aggregate, we're going to grow as fast or faster than the Internet gaining share and it's got a long way to go before it's matured. To your data center question, you are correct in the premise that our primary focus today is getting that excess space marketable, so we can monetize it. But we did add a lot of these smaller facilities, which are more focused on our retail base.

Speaker 1

The 55 edge data centers that we added average about 40 racks of capacity and about three fifty kilowatts, so a third of a megawatt in existing power. With this added footprint, our utilization rate for the retail side of our business has declined fairly materially. We brought a lot of supply on and haven't sold it. I think we will be in a position to increase occupancy in the retail portion. We've been a little reluctant to put retail into some of the data centers that were also have a significant amount of wholesale.

Speaker 1

And the reason for that is someone may want to take the whole facility and we may exit our retail footprint. Our retail footprint in those facilities typically is about 10,000 square feet and about one megawatt. And it didn't make sense to put someone in that 10,000 feet that was taking two or three cabinets and that could be an impediment two or three months from now when someone comes on and says, I want to take the whole facility. But I think in general, we are probably a couple of years away from getting back to 30% occupancy now. Hopefully, the inference phase and the geographic ubiquity of our footprint changes that and accelerates that, but today we don't have a lot of data around AI edge cases as a significant driver of colocation.

Speaker 1

Basically, our retail colo business has been aimed mostly at small corporates. And I think that's at least where we're focused today. That may change as some of the AI inference models evolve.

Operator

And your final question comes from the line of Brandon Nispel with KeyBanc Capital Markets.

Speaker 6

Just housekeeping questions, I suppose, given time. Dave, how many waves specifically did you groom out of this funnel?

Speaker 1

We groomed about 1,500 out of the funnel.

Speaker 6

Okay. 1,500. Were there any one time expenses, network expenses? I think last quarter you called out some data center costs.

Speaker 1

So, the answer is yes. We are spending elevated capital on the data centers and there was about $5,000,000 of COGS associated with some of the clearing of those facilities that is not capitalized. I've mentioned that in the Q3 earnings call. We spent that in the third quarter and we said we would spend that also in the fourth quarter, but that demolition component of spending would go away and that is a non capitalizable expense. So, yes, there was some direct costs for that effort.

Speaker 6

Perfect. And then lastly, is there any way you can quantify just with one number on enterprise, corporate and NetCentric, what the grooming activities were related to, so purposeful disconnects and or provide a churn rate that includes those disconnects and a churn rate excluding sort of the purposeful disconnects? Thanks.

Speaker 1

It is hard for me to give you a single number because there are really three things going on at the same time. You've got, well, four things. You're moving some people from off net on that you're keeping the customer, but there are other cases where you're turning off a low capacity corporate circuit that there's no fiber alternative for in North America. You're turning off enterprise circuits in international footprints where we are not licensed. And then finally, for both of those segments, corporate and enterprise, we're end of lifing these products.

Speaker 1

And we had about $1,000,000 headwind sequentially this quarter, $900,000 and we'll continue to turn that off. So, there's not a single number you really need to look at each of the sub components to kind of know what's going on. A kind of one headline number would be misleading.

Speaker 3

Thanks for taking the questions.

Speaker 1

Hey, thanks, everyone. I want to appreciate everyone listening. We did put our prepared remarks. We got done in less than an hour and a half. And thanks, everyone.

Speaker 1

Take care, and we'll talk soon. Bye bye.

Operator

This concludes today's conference call. Thank you all for joining. You may now disconnect.

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Earnings Conference Call
Cogent Communications Q4 2024
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