COGENT COMMUNICATIONS HOLDINGS, INC. Q1 FY2025 earnings call

Management Statement and Operational Highlights

• Wavelength Milestones: Offered in 883 data centers with 10-gig, 100-gig, and 400-gig capabilities. Provisioning time reduced to approximately 30 days. Backlog/funnel of 3,433 wavelength opportunities.
• IPv4 Leasing: Increased pricing due to scarcity of IPv4 addresses. Recovered addresses from customers violating acceptable use policies.
• Cost Savings: Realized $220 million in cost savings from the Sprint acquisition, with an expectation of at least another $20 million by Q2 2026. Gross margin increased 790 basis points to 44.6%.
• Data Centers: Connected to 3,500 on-net buildings. Converted several Sprint-acquired facilities to edge data centers, adding 28 megawatts of installed power. Total installed and available power across Cogent data centers is 211 megawatts.
• Stock Buyback: Repurchased approximately 100,000 shares for $5 million under the stock buyback program, with $17.4 million remaining available.
• Tariffs: No material impact of tariffs anticipated on business or CapEx projections.
• Dividends: Dividend increased to $1.01, 51st consecutive sequential increase. Board adjusting dividend growth rate due to increased leverage.

Segment Performance

• Wavelength: Revenue for the quarter was $7.1 million, a 114% increase year-over-year. Sequentially, wavelength connections increased by 18% and revenue by 2.2%. Sold in 329 locations, with a backlog and funnel of 3,433 wavelength opportunities. Anticipate 4%-5% of this funnel to be installed monthly, with the funnel expected to reach 10,000 by year-end.
• IPv4 Leasing: Revenue for the quarter was $14.4 million, a 14.8% sequential increase and 42% year-over-year increase. Average revenue per IPv4 address sold was $0.49, up from $0.30 at the start of the year. Recovered a significant number of addresses from a customer violating acceptable use policies.
• Revenue by Customer Type: Corporate business represented 44.9% of revenues, down 11.4% y-o-y and 2.1% q-o-q. NetCentric business represented 37.5% of revenues, up 0.7% y-o-y but down 1.1% q-o-q. Enterprise business represented 17.7% of revenues, down 11.3% y-o-y and 4.1% q-o-q.
• On-net vs Off-net: On-net revenue was $129.6 million, a 6.5% y-o-y decrease but a 0.7% q-o-q increase. Off-net revenue was $107.3 million, a 9.2% y-o-y decrease and 5.2% q-o-q decrease.

Guidance

• Wavelength: Anticipate 4%-5% of the wavelength funnel to be installed monthly. Expect the wavelength funnel to reach 10,000 unique opportunities by year-end.
• Revenue Growth: Adjusted long-term annual revenue growth rate to 6%-8% after resolving legacy revenue issues.
• EBITDA: Expect EBITDA margin to expand 150 basis points annually as cost savings continue to impact the bottom line.

Risks

• Tariffs: Minimal impact expected, but some network equipment purchases have tariff input costs.
• IPv4 Violations: Episodic disconnections of addresses due to violations of acceptable use policies could impact IPv4 leasing revenue.
• Leverage: Increased leverage due to Sprint integration and declining T-Mobile transit payments, requiring careful management of capital return to shareholders.

Question and Answer

• Q: Within the Waves business, any change in competition? A: Competitors have struggled with provisioning and lack Cogent's ubiquity of coverage. Cogent believes it has a significant advantage currently, though competition may improve over time.
• Q: Dividend growth outlook? A: Board is evaluating deleveraging to increase the dividend growth rate, with a commitment to continuing dividend growth at $0.05 per share per quarter.
• Q: Wavelength installation cadence? A: Anticipate 4%-5% of the wavelength funnel to be installed monthly. The funnel is being rebuilt, and with more experience, expect installation pace to improve, with the funnel expected to reach 10,000 by year-end.
• Q: IPv4 disconnections? A: Disconnections occur due to violations like government orders, copyright violations, or disruptive activities (e.g., web scraping). Episodic, but revenue still grew due to price increases.
• Q: Timing of data center sales? A: Progressing with parties in negotiation, but no firm timeline. Making good progress, but monetization depends on parties' ability to perform.