Cogent Communications Holdings, Inc. Q3 FY2025 earnings call

Management Statement and Operational Highlights

• Dividend Reduction: Quarterly dividend reduced to $0.02 per share to redirect capital for deleveraging. Intend to maintain until net leverage target of 4x EBITDA is reached.
• Data Center Divestiture: Entered a nonbinding letter of intent to sell 2 data centers for $144 million. Actively negotiating to monetize remaining 22 data centers.
• Wavelength Trajectory: Offered in 996 data centers, with revenue growth and a backlog of 5,221 opportunities. Aim for 25% of North American long-haul wavelength market in 3 years.
• Revenue Grooming: Near the end of grooming low-margin Sprint-acquired contracts. Expect total revenue growth by mid-2025, but Q3 revenue declined 1.7%.
• Network and Sales Force: Unified global network with completed integration of Sprint facilities. Sales force turnover rate 6.6%, focusing on NetCentric, corporate, and enterprise markets.

Segment Performance

• Revenue: Total revenue for the quarter was $241.9 million. Noncore revenues declined by $1.3 million, and USF revenues decreased by $800,000. On-net revenues increased by $2.9 million sequentially (2.2%), wavelength services revenue rose by $1.1 million (12.4%), and IPv4 leasing revenue increased by $2.12 million (14.1%).
• EBITDA and EBITDA as adjusted: EBITDA was $48.8 million with a margin of 20.2%. EBITDA as adjusted was $73.8 million with a margin of 30.5%.
• Segment Revenue Contribution: Corporate represented 43.5% of revenues, NetCentric 41.4%, and Enterprise 15.1%. Corporate revenues decreased year-over-year and sequentially, while NetCentric revenues increased. Enterprise revenues decreased.
• On-net vs Off-net: On-net revenue was $135.3 million (0.9% y-o-y, 2.2% q-o-q). Off-net revenue was $95.1 million (14.5% y-o-y, 6.9% q-o-q).
• Wavelength: Offered in 996 data centers, wavelength services revenue was $10.2 million (+93% y-o-y, +12% q-o-q) with a backlog and funnel of 5,221 opportunities.
• IPv4 Leasing: Revenue was $17.5 million (+14.1% q-o-q, +55.5% y-o-y). 14.6 million addresses were leased, with an inventory of approximately 38 million addresses.

Guidance

• Revenue: Long-term annual revenue growth expected to be between 6% and 8%.
• EBITDA as adjusted: Anticipate an increase in margins of approximately 200 basis points per year.
• Dividend: Maintain the reduced dividend until the net leverage target of 4x EBITDA is reached.
• Wavelength: Aim to capture 25% of the North American long-haul wavelength market.
• Deleveraging: Focus on reducing net leverage ratios through EBITDA growth, T-Mobile payments, and operational efficiencies.

Risks

• Leverage Fluctuations: Net leverage ratio was 6.65 this quarter, slightly up from 6.61 last quarter.
• Customer Acceptance: Wavelength services installed more than accepted; dependent on customer behavior for revenue recognition.
• Market Dynamics: Competition in wavelength provisioning windows may impact customer acceptance and revenue.
• Tax Implications: Data center sales may have tax consequences due to lack of tax basis in facilities.
• Bondholder Concerns: Secured bond trading performance influenced Board decisions on capital allocation.

Question and Answer

• Q: Dividend cut and return to $4 dividend? A: Dividend reduced to $0.02 per share; will maintain until net leverage target of 4x EBITDA is reached.
• Q: Data center sale valuation? A: Price per megawatt within anticipated range, but specific details not disclosed to avoid locking in benchmarks.
• Q: Wavelength run rate? A: Aim for $20-$25 million quarterly run rate, dependent on customer acceptance. Capable of 10-gig, 100-gig, 400-gig; 79% of sales at 100-gig, 10% at 400-gig.
• Q: IPv4 leasing vs selling excess addresses? A: Leasing strategy accelerated revenue; selling would have tax implications and softer market demand.
• Q: Legacy revenue churn? A: Aggressive grooming of low-margin Sprint-acquired contracts; near end of grooming, expecting margin expansion.