Yahoo Finance Cogent Communications Holdings, Inc. (NASDAQ:CCOI) Q1 2024 Earnings Call Transcript
Cogent Communications Holdings, Inc. (NASDAQ:CCOI) Q1 2024 Earnings Call Transcript May 9, 2024
Cogent Communications Holdings, Inc. misses on earnings expectations. Reported EPS is $-1.37731 EPS, expectations were $-0.8. Cogent Communications Holdings, Inc. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).
Operator: Good morning, and welcome to the Cogent Communications Holdings First Quarter 2024 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 on 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. Dave Schaeffer, Chairman and Chief Executive Officer of Cogent Communications Holdings. You may begin.
Dave Schaeffer: Thank you, and good morning to everyone. Welcome to our first quarter 2024 earnings conference call. I'm Dave Schaeffer, Cogent's Chief Executive Officer, and with me on this morning's call is Tad Weed, our Chief Financial Officer. Hopefully, you've had a chance to review our earnings press release. Our press release includes a number of historical metrics we present in a consistent manner each and every quarter. On May 2nd of this year, we closed the issuance of our $206 million IPV4 securitization notes at 7.9%. These notes mature in five years, but may be extended for up to a 30-year term. This securitization was the first ever of the securitization of IPV4 lease revenue. Cogent is the owner of approximately 38.8 million IPV4 addresses.
We acquired 28.8 million of these addresses when we purchased PSINet and various other acquisitions early in our history. We acquired an additional 9.9 million IPV4 addresses in May of 2023 with the acquisition of the Sprint network assets from T-Mobile. We are leasing approximately 12.2 million of these IPV4 addresses out for a monthly revenue run rate of approximately $3.4 million a month. We have securitized $3.1 million of that monthly leased revenue, and this represents revenue from 11.1 million lease addresses. We also included 1.4 million unleased addresses in the pool of the securitization. The IPV4 Internet addresses are a finite resource. The price of these addresses has substantially increased over the past several years. Now for an overview of our results.
Our combined Cogent business had a very good quarter. Our total revenues were $266.2 million in the quarter. This did represent a $5.9 million sequential decline. Our on-net revenues increased by 0.4% to 138.6 million. Our revenue under the commercial services agreement with T-Mobile declined sequentially by $5.8 million. Our non-core revenues declined by $1.2 million. Our wavelength service revenues increased sequentially by 7% to $3.3 million. All of the decline in our revenues was attributable to the decline in commercial services agreements and non-core services, as was expected. Our EBITDA as adjusted for the quarter was $115 million, an increase of $4.5 million sequentially or approximately 4.1%. Our EBITDA as adjusted margin for the quarter was 43.2%.
This is up 260 basis points from the 40.6% we reported last quarter. We received three payments from T-Mobile for a total of $87.5 million in the quarter. Our Sprint costs are reported separately and were $9 million in the quarter compared to $17 million last quarter. These costs include approximately $4.3 million of severance reimbursement in the quarter as compared to $16.2 million in severance reimbursements in the previous quarter. Despite the seasonally increased costs associated with SG&A in our first quarter, our SG&A did decrease by 6.4% from $74.9 million last quarter to $70.1 million this quarter. These SG&A numbers are net of that severance reimbursement that I mentioned earlier. Our SG&A as a percentage of revenues decreased to 26.3% for the quarter, down from 27.5% last quarter.
Our cost of goods sold decreased by 3.2% from the previous quarter. Traffic on our network increased by 1% sequentially and was up 20% year-over-year. Our gross debt to trailing 12-month EBITDA as adjusted and our net debt ratios both significantly improved in the quarter. Our gross debt to trailing last 12 months EBITDA as adjusted was 3.57 in the quarter, and our net debt ratio was 3.17, substantially below the range we have set historically as a target. We are in the process of realizing cost savings and synergies over the next three years. We will continue to receive the impact of these savings and achieve an aggregate of $220 million in savings. We anticipate additional SG&A and other cost savings and revenue synergies as well over the next several years.
Our recent progress in achieving these cost savings are very encouraging, and we intend to surpass our initial targeted savings goals. Our sales force performed well in the quarter. Our rep productivity in Q4 of 2023 was 3.3 installed orders per rep per month. This improved sequentially to four units installed per rep per month in the first quarter of 2024. Our sales rep productivity results do also include the impact of enterprise sales reps that joined us from the acquired Sprint business. These new enterprise sales reps are continuing to receive training of Cogent sales processes and methods and have not yet fully reached their maximum level of productivity. Now for our total headcount. In connection with the Sprint acquisition, we hired 942 total employees.
At quarter end, 718 of these employees remained with Cogent. During the quarter, our total sales rep count increased by 20 or a 3% net sequential increase in our sales force. Now for our new wavelength and optical transport service business. In connection with the acquisition of Sprint, we have expanded our offerings to utilize the Sprint network to sell wavelength services or optical transport services across that network. We are selling these services to existing customers to acquired customers and to new customers. These customers require dedicated optical connectivity without the capital cost and ongoing expenses associated with owning and operating their own transport network. We have connectivity and wavelength sales capabilities today in 419 locations.
However, these locations do require longer than acceptable sales provisioning cycles. We have sold wavelengths to date in a total of 104 locations. By the end of this year, we will be able to offer wavelength services in over 800 locations across North America with much more rapid provisioning cycles. Our wavelength revenue in the quarter increased sequentially by 7% to $3.3 million for the quarter. Our Sprint acquisition materially expanded our network footprint. To date, we have reconfigured 25 of the acquired Sprint facilities into Cogent data centers and added these data centers to our inventory of 1,586 third-party carrier-neutral data centers and 78 Cogent data centers, which today contain an operational 159 megawatts of power. We are in the process of converting an additional 23 of these facilities to Cogent data centers and optimizing our data center portfolio footprint.
In a market where we have a former Sprint data facility that we converted to a data center and a legacy lease Cogent data center, we decommissioned one leased data center in the quarter. Now for a comment on our dividend and buyback strategy. Our first quarter dividend was $45.8 million and was accrued at quarter end and paid on April 9th, due to our expanding the period for our sales call. Our Board of Directors, which reflected on the strong cash flow generating capability investment opportunities, including the additional opportunities afforded us by the integration of the Sprint assets decided to increase our quarterly dividend by yet another $0.01 a share, raising our quarterly dividend from $0.965 a share to $0.975 per share per quarter.
This increase represents the 47th consecutive sequential increase in our regular quarterly dividend and a 4.3% annual growth rate in dividends. Now for a couple of comments on our long-term goals. Now that Cogent is fully integrated and combined with the former Sprint network, we are anticipating long-term average revenue growth rate of between 5% and 7% and EBITDA as adjusted margin expansion of approximately 100 basis points annually. Our revenue and EBITDA as adjusted guidance targets are intended to be multiyear targets and are not intended to be used as quarterly or specific annual guidance. Our EBITDA as adjusted and leverage ratios are impacted by the $700 million IP Transit subsidy agreement that we received with T-Mobile in conjunction with the acquisition.
Beginning in June of 2024, these payments monthly will be reduced from $29.2 million a month to $8.3 million a month and then will continue for an additional 42 months. This reduction will impact our future EBITDA as adjusted or leverage ratios beginning in the second quarter of 2024, which are always measured on a trailing 12-month basis. We will also be looking to monetize other assets that were acquired in the acquisition. This will include excess data center space and power, additional monetization of our IPV4 address unleased inventory and dark fiber over the next several years. Now I'd like to turn the call over to Ted to read safe harbor language and give some additional operational performance metrics for the quarter. Following these remarks, we will open the floor for questions and answers.
Tad?
Thaddeus Weed: Thank you, Dave, and good morning to 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. 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 and non-core, and we analyze our revenues based on customer type. We classify all of our customers into three types, net-centric, corporate, and enterprise customers. Our Corporate business continues to be influenced by real estate activity in central business districts. We continue to remain cautious in our outlook for our corporate revenues given the uncertain economic environment and other challenges from the lingering effects of the pandemic. Our Corporate business represented 46.9% of our revenues for the quarter, and it decreased sequentially by 1.4% to $124.9 million due to the grooming of low-margin off-net connections and the elimination of non-core products.
We had 51,821 corporate customer connections on our network at quarter end. And for the quarter, the sequential impact of USF on our corporate revenues was not significant. Our Net-Centric business continues to benefit from continued growth in video traffic, streaming and wavelength sales. Our Net-Centric business represented 34.6% of our revenues for the quarter, and it declined sequentially by 1.3% to $92 million, and the decline was primarily due to the $5.4 million reduction in the commercial services agreement provided at T-Mobile that Dave mentioned earlier. We had 61,599 net-centric customer connections on our network at quarter end. Our Enterprise business represented 18.5% of our revenues this quarter and was $49.3 million. We had 19,463 enterprise customer connections at the end of the quarter, and our Enterprise revenue decreased sequentially by 5.7%, primarily due to the elimination of non-core products and the grooming of low-margin off-net services.
On revenue by network connection type. Our on-net revenue was $138.6 million for the quarter, a sequential increase of 0.4%. Our on-net customer connections were 87,574 at quarter end. We serve our on-net customers in our 3,321 total on-net multi-tenant office and carrier-neutral data center 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 and selected multi-tenant office buildings. Selling these larger connections has the impact of increasing our year-over-year on-net ARPU. Our off-net revenue was $118.2 million for the quarter, a sequential decrease of 4.4%. The sequential decline in our off-net revenue was partially impacted by our migration of certain off-net customers to on-net and the grooming of low-margin off-net contract.
Our off-net customer connections were 34,579 at the end of the quarter. Our wavelength revenue was $3.3 million for the quarter, which was a sequential increase of 7%, and that was 693 wavelength customer connections. Our non-core revenue was $6 million for the quarter, a sequential increase of $1.2 million or 16.8% due to our decision to end of life these non-core products. Non-core customer connections were 10,037 at quarter end, a decline of 16.2%. Some comments on pricing. Our average price per megabit for our installed base decreased sequentially by 5.8% to $0.26, but increased year-over-year by 5.9%. Our average price per megabit for our new customer contracts for the quarter was $0.11, a sequential increase of 5.1%. On ARPU, our on-net ARPU increased sequentially and off-net and wavelength ARPUs slightly decreased.
However, our year-over-year on-net and off-net ARPUs increased primarily from the impact of the Sprint business. Our on-net ARPU increased sequentially by 0.8% from 521 to 525. And year-over-year, our on-net ARPU increase was 12.6%, last year it was 467. Our off-net ARPU decreased sequentially by 1.3% from 1,120 to 1,106. And year-over-year, it was an increase of 21.5% last year, it was 910. Our wavelength ARPU was 1,638. Our sequential quarterly churn rate for our on-net and off-net connections of the combined business increased. Our on-net unit churn monthly rate was 1.4% compared to 1.2% last quarter, primarily due to the reduction in the T-Mobile CSA revenue and the associated connections. Our off-net unit monthly churn rate was 2.1% compared to 1.3% last quarter, again from grooming low-margin off-net contracts and the T-Mobile commercial services contract changes.
On EBITDA and EBITDA margin. We reconcile our EBITDA to our cash flow from operations in each of our quarterly earnings press releases. We incurred $9 million of Sprint non-capital acquisition costs this quarter compared to $17 million last quarter. Included in the $9 million of Sprint acquisition costs for the quarter are $4.3 million of severance costs. Included in the $17 million of Sprint acquisition costs last quarter were $16.2 million of severance costs. These severance costs are paid by us, but are fully reimbursed by T-Mobile. We will incur some additional severance costs in Q2 '24, but none thereafter. Under U.S. GAAP, these severance costs need to be reported as a receivable at the closing date. These severance costs are classified as post-acquisition cost and as a component of the bargain purchase gain.
On EBITDA as adjusted and margin. Our EBITDA as adjusted includes adjustments again for the Sprint acquisition cost and cash payments received under our $700 million IP Transit services agreement with T-Mobile. We billed and collected $87.5 million under the IP Transit services agreement this quarter and last quarter. All amounts billed under the IP Transit services agreement have been paid to us on time. Our EBITDA as adjusted for Sprint acquisition costs and payments under the IP Transit agreement was at $115 million for the quarter. That was a 43.2% EBITDA as adjusted margin. That was a sequential increase of $4.5 million in EBITDA and a 260 basis point margin increase over last quarter. Our first quarter has traditionally been a quarter when we experienced a decline in EBITDA margin due to cost of delivering -- cost of living salary increases, which again we have this year, the resetting of payroll taxes in the United States and our audit fees.
That did not occur this quarter. Our foreign currency impact. Our revenue earned outside of the United States is reported in U.S. dollars and was about 17% of our revenues this quarter, consistent with prior quarters. About 11% of our revenues for this quarter were based in Europe and 6% related to Canada, Mexico, Oceanic, South America and Africa operations. Our average euro to dollar rate so far this quarter is $1.07 and the Canadian rate of $0.73. Should these average foreign exchange rates remain at current levels for the remainder of this quarter, we estimate that the FX conversion impact on sequential quarterly revenues would be negative $0.4 million, and the impact year-over-year would be a negative $0.5 million. We believe that our revenue and customer base is not highly concentrated.
Our top 25 customers represented about 18% of our revenues for the quarter. Our quarterly capital expenditures were $40.9 million this quarter, down 6.3% from last quarter. 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 Cogent data centers. Our finance lease IRU obligations are for long-term dark fiber leases and typically have an initial term of 15 to 20 years or longer and often include multiple renewal options after the initial term. Our IRU finance lease obligations were $517.5 million at quarter end. This is inclusive of an uneconomic finance lease that we acquired from Sprint. We have a very diverse set of IRU suppliers, and we have IRU contracts with 328 different dark fiber suppliers across the world.
At quarter end, our cash and cash equivalents and restricted cash totaled $163.3 million. Our $44.8 million of restricted cash is directly tied to the estimated fair value of our interest rate swap agreement. Our operating cash flow results are materially impacted by the timing and amount of our payments under our TSA agreement with T-Mobile for transition services and the presentation of the payments of our $700 million IP Transit agreement. Payments under the IP Transit agreement under U.S. GAAP are considered cash receipts from investing activities and not classified as operating expense. Our operating cash flow was a positive $19.2 million for the quarter compared to a negative $48.7 million in the fourth quarter of last year. Payments under the IP Transit agreement again are reported as investing activities and were both $87.5 million this quarter and last quarter.
Debt and debt ratios. Our total gross debt at par, including our finance lease IRU obligations, was $1.5 billion at quarter end, and our net debt was $1.3 billion. Our total gross debt to last 12 months EBITDA as adjusted and our net debt ratio both significantly improved this quarter. Our total gross debt to last 12 months EBITDA as adjusted ratio was 3.57 at quarter end and our net debt ratio was 3.17. This compares to gross debt of the last 12 months EBITDA ratio of 4.07 last quarter end and a net ratio of 3.75. Our consolidated leverage ratio, as calculated under our note indentures was 3.51 and our secured leverage ratio was 2.33. Some comments on our swap agreement. We are party to an interest rate swap agreement that modifies our fixed interest rate obligation associated with our $500 million 2026 notes to a variable interest rate obligation based upon the secured overnight financing rate for the remaining term of our 2026 notes.
We record the estimated fair value of the swap agreement at each reporting period, and we incur corresponding non-cash gains and losses due to changes in market interest rates. The fair value of our swap agreement increased by $6.2 million from last quarter to a liability of $44.8 million. We are required to maintain a restricted balance with the counterparty equal to the liability. As of today, the value of our swap agreement is $35.5 million. Lastly, some comments on bad debt and days sales outstanding. Our days sales outstanding, or DSO, was significantly impacted at year-end by the conversion of all former Sprint customers to our billing system in November of 2023. Our DSO for worldwide accounts receivable significantly improved from year-end and is converting to historical norms.
Our DSO was 27 days at the end of the quarter versus 37 days at the end of last quarter to a 10-day improvement. Our bad debt expense was $2.6 million and 1% of our revenues for the quarter, and that's in line with historical performance. Again, I want to thank and recognize our worldwide billing and collection team members for a fantastic job in serving our Cogent customers. And with that, I will turn the call back over to Dave.
Dave Schaeffer: Thanks, Tad. Now for a few highlights on the strength of our network, our customer base and sales force. Our Net-Centric business continued to experience significant traffic growth in our business from streaming and other customers. We are a direct beneficiary of the continued migration of video to over the top. At quarter's end, we were on-net in 1,586 third-party carrier-neutral data centers and 78 of Cogent's owned data centers for a total of 1,664 data centers. This is more data centers connected by a network than any other carrier as measured by third-party research. The breadth of this coverage enables us to serve our Net-Centric customers and a larger number of locations and helping them reduce latency on their network.
We continue to expand our footprint and anticipate adding approximately a 100 carrier-neutral data centers to our network per year over the next several years above and beyond the additional 23 data centers that Tad mentioned earlier, that we are adding due to the conversion of the Sprint switch sites into data centers. We are continuing to experience extended provisioning cycles for wavelengths, but we now can offer wavelength services in 419 locations. By year-end, we will have over 800 carrier-neutral locations connected to our network throughout North America with substantially reduced provisioning cycles that will mirror the provisioning times that we are able to achieve with our transit services. At quarter's end, we were directly connected to 8,098 networks.
This collection of ISPs, telephone companies, cable companies, global operators and other carriers allow us to reach the vast majority of the world's broadband and mobile phone users. Cogent remains the most interconnected network in the world. Our Corporate customers are aggressively integrating new applications that become part of their working world, such as video conferencing. These usages will require higher speed connections both inside and outside of their promises. Our Enterprise customers continue to groom their networks and are focused on our core connectivity products of DIA and virtual private network services, including both VPLS and MPLS managed network services. Now for a highlight on our sales force. We remain focused on growing our sales force and increasing the productivity of those sales reps.
We continue to expand and modify our training programs, and we routinely manage out underperforming sales reps. Our sales rep turnover in the quarter was 5.5% per month, which was down from a peak of 8.7% per month at the peak of the pandemic and is in line with our historical averages, which have been at 5.6% of the sales force, leaving the company each month. We continue to train new reps as well as provide supplemental training for the reps that joined us from the Sprint business. Our sales rep productivity increased sequentially 23% to four installed units per rep per month. At quarter's end, we had a sales force of 284 sales professionals globally focused on the net-centric market, 379 sales reps focused on the corporate market and 14 sales reps focused on our enterprise market segment.
In summary, we remain very optimistic about our unique position to be able to serve the connectivity needs of small, medium and large businesses in major cities across North America in the central business districts. We have 1,861 on-net multi-tenant office buildings connected to our network with over 1 billion square feet of office space. We remain excited and optimistic about our enterprise customer base and the ability to provide connectivity services to those companies globally and our opportunity to repurpose assets acquired from Sprint. The repurposing of the network to sell wavelength or optical transport services is progressing well. And the conversion of former Sprint switch sites and to data centers is also progressing, increasing Cogent's data center footprint and available power.
We have a significant backlog and funnel of over 2,400 wavelength opportunities. However, due to these longer provisioning cycles, we are uncertain if all of these orders will remain with us through our ability to provision them. We will be able to reduce that provisioning cycle as we complete our network optimization and mirror the provisioning windows that we are able to achieve in our IP business. Key indicators show that office activity is improving. Workforce -- workplace re-entry and leasing activity remained substantially below pre-pandemic levels. However, many tenants are returning to offices and leasing activity for commercial offices has begun to improve in many areas. We are working diligently to continue to reduce costs and integrate Sprint assets.
We are optimistic about the cash flow capabilities of this combined business. Over the next three years, we anticipate continuing to achieve annual cost savings and exceeding our initial $220 million of annual cost synergies that were projected at the signing of our transaction with T-Mobile. We look forward to monetizing many underutilized assets, whether it be excess data center space, our IPV4 addresses or the substantial inventory of dark fiber that we have in our network. Our Sprint acquisition costs do not include separately identified integration costs related to the operating expenses associated with the integration. This has reduced our EBITDA and EBITDA margins as adjusted, but we felt that it was more appropriate to just include these in our standard run rate.
Finally, I want to take a moment to address question that several shareholders have raised with me, and that is my sale of a portion of my Cogent Holdings. Unfortunately, I have a large real estate portfolio outside of Cogent, and that portfolio has been under significant pressure. My stock sales are solely attributable to supporting that portfolio and have no reflection on my optimism of Cogent. In fact, I'm more optimistic today about Cogent's prospects to both grow its revenues and expand its profitabilities than I have been in Cogent's entire history. With that, let me open up the floor for questions. Operator?
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