COGENT COMMUNICATIONS HOLDINGS, INC. Q3 FY2024 earnings call

• Cost savings from Sprint acquisition: Realized $165 million of targeted $220 million in annual cost savings, 75% of the target, initially expected to be achieved by May 2026.
• Revenue impact: Total revenue impacted by grooming low-margin off-net, eliminating non-core products, and T-Mobile commercial services agreement; excluding specific impacts, revenues would have increased.
• EBITDA: Increased sequentially by $8.7 million, EBITDA margin 13.9%; EBITDA as adjusted $60.9 million, margin 23.7%.
• SG&A: Decreased by $4.9 million sequentially, 7.5%, SG&A as % of revenue 23.4%.
• Cost of goods sold: Increased by $5.3 million due to conversion costs and vendor terminations, but down 7% year-over-year.
• Dividend increase: Quarterly dividend raised by $0.01 to $0.995 per share, 49th consecutive increase.
• Sprint integration: Expanded product offering to include wavelength services, 657 locations with connectivity/wavelength sales capabilities, 95 Cogent data centers with 169 MW capacity.

Total revenue for the quarter was $257.2 million. Corporate business represented 45.2% of revenues, with quarterly corporate revenue decreasing 3.5% year-over-year and 2.8% sequentially, having 47,613 corporate connections. Net-centric business represented 35.7% of revenues, decreasing 3.2% year-over-year but growing 0.8% sequentially, with 62,273 net-centric customer connections. Enterprise business represented 19.1% of revenues ($49.1 million), decreasing 18.2% year-over-year and 1.4% sequentially (excluding a specific impact, it would have increased 5.6%), with 16,447 enterprise customer connections. On-net revenue was $136.5 million for the quarter, up 5.8% year-over-year but down 3% sequentially, with 87,655 on-net customer connections. Off-net revenue was $111.3 million for the quarter, down 14.8% year-over-year and 0.1% sequentially, with 32,420 off-net customer connections. Wavelength revenue was $5.3 million for the quarter, up 45.8% sequentially and 76.7% year-over-year, with 1,041 wavelength customer connections. IPv4 leasing revenue was $12.8 million for the quarter, up 11.8% sequentially and 31.5% year-over-year. Non-core revenue was $4.1 million for the quarter, down 10.2% sequentially, with 5,217 non-core customer connections.

• Revenue growth: Combined business expected to achieve long-term average revenue growth 5%-7%.
• EBITDA margins: Expected to expand on average 100 basis points annually.
• Revenue and EBITDA guidance: Multi-year, not specific quarterly/annual.
• IP transit payments: Received $25 million under T-Mobile agreement, with 39 monthly payments of $8.3 million through Nov 2027.

• Contractual obligations: Continuing to groom non-core and low-margin services due to contractual obligations from Sprint acquisition.
• Provisioning cycles: Longer than targeted for wavelength services, potential for some orders not being installed.
• Foreign currency: Impact on revenues if exchange rates change, but estimated not significant.
• Customer concentration: Top 25 customers represented 19% of revenues, slightly down from 20% last quarter.

Q: Jim Schneider from Goldman Sachs asked about the wavelengths business, backlog, and network costs.

A: Dave Schaeffer responded on wavelengths provisioning, backlog growth, and network cost improvements.

Q: Greg Williams [TD Cowen] asked about on-net revenue, corporate sales, and data center sales.

A: Dave Schaeffer and Tad Weed discussed on-net revenue impacts, corporate sales performance, and data center sale timelines.

Q: David Barden [Bank of America] asked about IPv4 price elasticity and Lumen's comments on internet.

A: Dave Schaeffer addressed IPv4 price elasticity and countered Lumen's views on the internet's future.

Q: Walter Piecyk [BTIG] asked about data center sale timing and capital lease payments.

A: Dave Schaeffer discussed data center sale progress and capital lease payment run rates.

Q: Michael Rollins [Citi] asked about constant currency revenue breakdown and cost of service run rate.

A: Tad Weed and Dave Schaeffer provided insights on constant currency revenue and cost of service normalization.

Q: Nick Del Deo [MoffettNathanson] asked about data center conversion breakdown and wavelength sales force readiness.

A: Dave Schaeffer addressed data center conversion details and wavelength sales force preparedness.

Q: Tim Horan [Oppenheimer] asked about data center sale timing, EBITDA margins, and IPv4 pricing.

A: Dave Schaeffer answered on data center sale timelines, EBITDA margin expectations, and IPv4 pricing increases.