COGENT COMMUNICATIONS HOLDINGS, INC. Q4 FY2024 earnings call

Management Statement and Operational Highlights

• Sprint Integration: Realized over 90% of targeted $220 million in annual savings, with projected savings to continue through 2026 and exceed the initial target.
• Wavelength and Optical Transport: Ended Q4 with 808 wave-enabled locations in North America, sold waves in 280 locations, and had 2,700 orders in the wavelength funnel.
• Data Center Footprint: Reconfigured 115 Sprint facilities, added 55 Edge data centers, resulting in 159 data centers with 197MW of power available for customers.
• Dividend: Board approved a quarterly dividend increase to $1.05 per share, marking the 50th consecutive sequential increase.
• Salesforce: Focus on productivity, with sales force productivity at 3.5 units per rep per month in Q4, and turnover at 5% per month.

Segment Performance

• Total Revenue: Fourth quarter 2024 totaled $252.3 million, with full year 2024 reaching $1 billion, compared to $900,900 in full year 2023.
• EBITDA as adjusted: Fourth quarter 2024 was $66.9 million, full year 2024 was $348.4 million, with full year 2023 at $352.5 million. EBITDA as adjusted margin for Q4 was 26.5%, up 280 basis points sequentially.
• Wavelength Revenue: Q4 2024 grew 31.8% sequentially to $7 million, full year 2024 was $19.2 million, a 240% increase year-over-year.
• IPv4 Leasing Revenue: Q4 2024 increased 11.8% sequentially to $12.6 million, full year 2024 was $44.9 million, a 24.5% increase year-over-year.
• Network Traffic: Flat q/q, up 11% y/y; full year 2024 up 16% y/y.
• Customer Type Segments:
  • Corporate: 44.8% of revenues ($113.1M), down 10.7% y/y, 2.7% q/q decline due to low margin off-net.
  • Net-centric: 37.1% of revenues ($93.6M), up 0.5% y/y, 1.9% q/q increase due to video, AI, streaming.
  • Enterprise: 18.1% of revenues ($45.6M), down 12.8% y/y, 7.1% q/q decline due to non-core/low margin.
• Network Type Segments:
  • On-net: $128.8M, down 6.7% y/y, 5.7% q/q, impacted by T-Mobile agreement, FX, and low margin resale.
  • Off-net: $113.2M, down 8.5% y/y, up 1.7% q/q, due to margin improvement and customer migration.

Guidance

• Growth Projection: Anticipate 5-7% annual growth and EBITDA margin expansion by 100 basis points per year.
• EBITDA: EBITDA as adjusted for Q4 2024 was $66.9 million, with a margin of 26.5%. Full year 2024 EBITDA as adjusted was $348.4 million, with a margin of 33.6%.
• Targets: Revenue and EBITDA guidance are multiyear targets, not specific to quarterly or annual guidance.

Risks

• Provisioning Delays: Wavelength provisioning time was 30 days, aiming for 2 weeks, but some orders dropped out due to customer changes.
• Customer Grooming: Decline in corporate and enterprise revenues due to ongoing grooming of low margin and off-net services.
• Foreign Currency Impact: Foreign exchange conversion could negatively impact revenues.
• Leverage: Debt ratios could be affected by capital expenditures related to data center conversions.

Question and Answer

• Q: Update on customer verticals and growth opportunities A: Net-centric business expected to grow faster, corporate segment to continue grooming low margin/off-net services, and enterprise segment to see decline then flat growth over the next year or so.
• Q: Wavelength investments and provisioning A: CapEx run rate is expected to stabilize at roughly $100 million annually, with salesforce trained for wavelength sales, and provisioning time aiming to reduce to 2 weeks.
• Q: IPv4 revenue and wavelength backlog A: IPv4 revenue was adjusted for auditing purposes, and wavelength backlog declined due to grooming, but new orders are accelerating as provisioning capabilities improve.
• Q: Corporate revenue and EBITDA guidance A: Corporate segment expected to see positive revenue growth in 1 to 2 quarters, with EBITDA expected to be approximately $350 million in 2025.
• Q: Under monetized assets and dividend A: Preference for leasing or selling data centers and IPv4 assets is open, with comfort in the dividend policy despite short-term leverage considerations.