So once again, everyone, thank you for coming out, and, you know, special thanks to Dave Schaeffer. Dave, great to see you again. You know, it's good to be covering the space and get reconnected with you and Cogent. So thank you once again for attending our conference.
Thank you. Hey, Anna. Welcome back to telecom from software. Hopefully, it's a little more exciting. As always, I want to thank Bank of America for a great venue, the opportunity to present, and I'd like to thank all the investors for taking time to hear a little bit about what we're doing.
Yeah, absolutely. Look, and getting the chance to catch up on what's happening at Cogent and, you know, yourself has certainly made it more interesting for me as I've ramped back up on the space. You know, I want to start by going back to last quarter and then, you know, maybe connecting some things to some previous guidance you gave about the full year or exit rates. If we can start on the wavelength business, and I'm gonna paraphrase, you know, my interpretation, and then, you know, please correct me if I'm wrong, but the installations in 2Q came in below Street expectations.
You said that, yes, but, you know, but the, but the backlog, right, is very large, and installations were lower because customers accepting delivery was less than you expected, and that was due in part because they were so conditioned to not expect or to not get delivery in the time frame that you were, that you were delivering, right? But I think your commentary remained positive, or, you know, you reiterated your exit rate expectation for the business, for 2025 , and I hope that I caught all that right. If I didn't, please correct me. So, you know, can you take that as, as a question and just kind of, you know, fill in what I, what I've missed and connect the 2Q with the exit rate for 2025 ?
Yeah. So the wavelength business is a new business for Cogent and also a new business with the Sprint network and Sprint assets. So when we announced the acquisition of Sprint three years ago, actually at this conference, when it was still in LA.
Y ou know, our plan was to wavelength enable the former Sprint long distance network, and we laid out a timeline and a path to do that. Probably the biggest disappointment during that process was our inability to sell a significant number of wavelengths between large data centers. So when we initially laid out a target of connecting 800 data centers, we said that would take us almost two years to complete post-closing. In fact, we did it in 17 months, and during that process, we concentrated our initial work on the largest data centers. While we did sell a small number of wavelengths and install them, the vast majority of the wavelength demand tended to be from smaller data centers to larger data centers.
And at the end of 2024 , we had fully enabled 802 sites to be able to deliver waves at one of three speeds: 10 gig, 100 gig, and 400 gig, and do that delivery in 30 days. This is an industry where waves have traditionally been installed on an as-needed bespoke basis, with generally 4-6 weeks to get a firm quote, and then another 2-3 months for install, with a significant number of waves that are quoted never installing due to issues with the service provider and their network availability. In Q1, we installed a significant number of waves, but virtually all of those waves were installed at the very last day of the quarter, and for that reason, there was a significant disconnect between our revenue and our unit number of wave installs.
We have not yet implemented a forced billing model, even though we have the right to do that for customers. Because we are a new entrant in the market with less than 1% market share, we have treaded lightly on pressuring customers. In the second quarter, we installed a significantly more waves than we ended up recognizing revenue for, and, you know, I believe that that gap will close over the next several quarters as we validate for customers our ability to actually meet the delivery windows that we have laid out. Even with that, albeit from a very small base, our revenue in the wave business grew sequentially 27% and 149% year-over-year. Now, our run rate in Q2 was a little above $36 million annually.
While the company does not give annual guidance in validating the reasons for the acquisition, we laid out a series of multi-year targets that included growing the Wavelength business to $500 million in a period that would be five years post-closing, and that would result in mid-2028, doing $500 million in wave revenue. We have built a significant funnel of wave opportunities. When we announced the transaction, we were expecting to sell to three customer bases: international carriers, regional carriers, and content distributors. A fourth group of buyers emerged, which quite honestly was not anticipated in September of 2022, which is AI training, and we think that will drive incremental growth for the aggregate market and help accelerate our ability to meet our revenue targets.
We have issued a number of KPIs that are designed to give investors some points to measure Cogent's progress, but ultimately, the only KPI that should matter is our GAAP-reported revenue. And I think over the next year or two, we will migrate away from these qualitative KPIs and focus on those GAAP numbers. We expect the cadence of installs to pick up, and we expect the lag between install and customer acceptance to shrink. We believe that the experience we've had in selling high-capacity internet and data centers is indicative of what we expect in the wavelength market. So while it is true the unit numbers were below expectations, the revenues were not materially below what we expected.
Okay. And just to boil it down, how I'm thinking about it, Dave, is, you know, you laid out that customers were conditioned to these kind of four to six weeks, you know, for delivery, and then sometimes it was never delivered. And so one thought that I had and asked you last quarter was, do you think maybe that these customers were just over-purchasing, right? Just ... That'd be a rational thing to do if their experience was that it takes a long time and sometimes it's never delivered. And then, have you seen an improvement in installations, right? Have you seen an improvement in customer acceptance, this quarter versus 2Q? Because I think to, you know, hit your target for your exit rate, you would have had to do something like 1,000 installs a quarter in 3Q and 4Q.
So have you seen improvement, and is my hypothesis about customers over-buying, is that on or off base?
So two very different questions. We have seen zero cancellations before install, so that indicates that customers were not overbuying, but rather were caught off guard, in part because they were conditioned by our competitors to believe that we could not install and that the quality of our service would not be what it has turned out to be. I think the fact that we have installed in 428 unique locations at the end of the quarter and have installed services now for several hundred unique customers, is helping us get the opportunity to bid on a larger portion of those customers' backlog of orders. You know, there are approximately 9,000 waves per month that come out of contract with the installed suppliers.
Because most of the waves are going through a capacity migration from 10 to 100 gig, and a small segment from 100 to 400, that means there is a new buy decision required in each of those waves as they come out of contract. So I feel that the breadth and depth of our funnel is a good proof point that we will hit metrics that we have laid out, both in the near term and, most importantly, in the longer term. So I think that we will continue to see the differential between install and customer acceptance shrink, but the sample set is too small, and we are too early in the Wave business.
You know, what is maybe a little hard for investors to fully understand is, while this business is important and it is the main justification of acquiring the assets from Sprint, from T-Mobile, it is a brand-new start-up in the public arena. So within Cogent, Waves represent less than 2% of our revenue. It is a brand-new product set, and one that we have to demonstrate credibility with customers. I think the fact that our ARPUs went up and our discounting has not been as extreme as we expected it to be at this point, is also a good indication of our ability to capture market share while maintaining price discipline.
Okay. I like to double-check sometimes that I'm hearing and understanding things correctly. So what I hear is that the longer-term opportunity is as large or larger than you thought when you initially did the Sprint transaction. There are, you know, a lot of customers coming off contract that create, you know, new growth opportunity for Cogent, right? So that hasn't changed. You know, maybe some of the near-term metrics or KPIs, or, you know, commentary that you gave to be helpful when you closed the deal are less relevant and might slip a little bit, 'cause it's a newer business, and it's hard to project growth and slope of growth early on in a new business. But the longer-term outlook is intact and still very positive. Is that... Am I encapsulating all that correct?
I think you are, Mike.
Okay. Okay, just wanted to make sure I understood.
You know, again, in understanding Cogent, you know, there are really three pieces to the thesis. The first piece is understanding the business that existed prior to the acquisition, and that business was impacted negatively by the pandemic. And while it has recovered-
The legacy on-net, off-net business.
It is the corporate and net-centric services sold both on-net and off-net.
Got it.
It is selling internet-based products that were two primary services, either dedicated internet or VPNs over the internet. But 100% of Cogent's revenues, pre-acquisition of Sprint, were coming from internet-based services. We had a very small IPv4 business, very small colocation business, both linked to the sale of internet, but we did not sell transport services or wavelengths.
Okay.
When we acquired Sprint, we acquired from T-Mobile a large enterprise, multi-service, managed services company that was delivering mostly VPNs and internet access, almost exclusively off-net, and was losing $1 million a day. That business was declining at 10.6% a year for the three years prior to the acquisition. We were paid $700 million over a 54-month period to take that business. We have received about 60% of those funds to date and T-Mobile will make the remaining payments between now and the end of Q1 2028.
That business was burning $1 million a day. We accelerated the rate of revenue decline, we purged unprofitable services, we cut costs, and we were able to get that business to neutral, not yet profitable, but neutral, and took out approximately $220 million of direct costs associated with that business. That business is still selling to a customer base that is in decline. Every enterprise service provider globally is shrinking. We are no different, although we now have mitigated that rate of decline, and it's probably in the low single digits, 1% or 2%. The primary reason for doing the acquisition was the acquisition of a $20.5 billion asset that was sitting idle.
It was the actual long-distance network of Sprint, 482 buildings, 1.9 million sq ft, 230 megawatts of inbound power, and 19,000 route miles of inter-city fiber, and 1,200 route miles of metropolitan fiber, all idle. Our thesis was that we had three significant competitive advantages in repurposing that asset. We had a metro network that would enhance the value of that long-haul network. We had a sales force that would help us sell services on that network, and we had the technical know-how to be able to repurpose that network for one, and only one purpose, and that is to sell wavelengths. So a considerable difference between us and the major competitors in the wavelength market is, we have built a network from the ground up to sell wavelengths. It is a business that Cogent was never in.
And we are very pleased with the progress we've made in the wave enablement of the network, at or ahead of schedule. We are very pleased with the aggregate level of demand for our services in the locations that we have chosen to serve. And while the pacing of revenue growth may not be exactly what investors modeled or expected, in general, we feel that the opportunity is larger than we expected, and it's important to remember, the opportunity was greatly de-risked by the payment stream from T-Mobile. Because we have cut the burn on the acquired business to zero, the remaining net present value of payments due from T-Mobile is $244 million. So effectively, we have a windfall, but we also have optionality on a new addressable market.
Let me thank you for the overview. My perception is that what investors in the market are reacting to is that, you know, you are in this phase where there is execution risk, tremendous opportunity, right, with the Sprint asset. But there's still, you know, execution risk and maybe some short-term metric shortfall, which is fine, to be expected in most businesses that are making large strategic transactions or initiatives. But you're also doing that while carrying a debt load, that net debt to EBITDA of what? Seven, seven and a half times, depending on how you're calculating it, and still paying out $200 million a year in dividend that at least today is not self-funded.
I know, I know you were saying that, you know, it's gonna be covered because, you know, EBITDA is increasing the free cash flow. And so I think it's that perilous state that the market is, at least in part, reacted to. So the question in my statement is, you know, do you support cutting the dividend to at least remove one of the pressure points from the bear argument that some investors might be making? Even if the initial stock reaction could be negative, at least puts the company on a more stable financial footing capital structure.
Cogent has returned in excess of $2 billion to investors. We have a history of growing our dividend, and we have a track record of periodically enhancing that return of capital through share buybacks. Our leverage today is at about 6.6 times net leverage. That is far above where Cogent is both comfortable with and where we have historically operated. So we have historically hovered around 3 times leverage while we were consistently growing the dividend. With the onset of the pandemic and our continued dividend growth, our leverage actually ratcheted up to 4.2 times, above kind of its historical norms, and we slowed down the rate of dividend growth from $0.025 a share to $0.005 a share per quarter.
We also rapidly delevered with the acquisition of Sprint from T-Mobile due to the front-end loading of the payment stream from them. So as a result, our leverage in the first year of the acquisition went from 4.2 - 2.7x net leverage. Now, our leverage has ratcheted back up because those subsidy payments ratcheted down. The headwind that we faced was $104 million a year. In the first year, we were able to cut costs fast enough to stay ahead of that.
And our EBITDA stayed effectively flat. So we were 352 in 2023, and 348 in 2024. While we are continuing to cut costs, and for the eight quarters that we have operated the combined company, we have averaged $5.2 million a quarter sequentially in underlying EBITDA improvement. So even though our top line on a combined basis was declining because of the acceleration of revenue burn-off from the undesirable revenue streams, our EBITDA, not just our margin, but the absolute dollars of EBITDA, were growing. We still have additional cost savings that we intend to extract from the combined company. We still have monies that we are spending on integration work that will taper off. We have the ability to both de-lever and continue to return capital, both at a dividend and a buyback. Now, it is clear that the market-...
which is an important constituency here, does not believe that, or our dividend yield would not have spiked to the level it's at today. So one must observe what others think. Whether it's correct or not, it's a fact. The market has spoken. Now, we have a clear path to delevering. If we maintain the current return of capital profile, which includes both dividends and buybacks, and dividends growing, with our growth in EBITDA, we should delever to five times leverage from six point six over the next six quarters. Now, that may not be sufficiently rapid, because even at five times, we are probably above what is optimal for Cogent. Now, it's highly dependent on the interest rate environment, but we, I think, have a great deal of flexibility. Now, the rate of revenue decline has moderated significantly for the combined company.
Q4 to Q1, revenues declined $5.4 million sequentially. From Q1 to Q2, the rate of revenue decline was only $800,000. We have said that we will be revenue neutral sometime in Q3. Now, also, I'll qualify that. I don't want people to leave with near-term guidance expectations. It may be insufficient to make us completely revenue positive for the quarter, but it will moderate, and beyond this quarter, we will inflect back to positive revenue growth. We also have a mix shift going on. We are installing much higher margin revenue than the revenue that we have intentionally disgorged. So as a result, we should be able to see the $5.2 million that we've sequentially improved probably do better on a going-forward basis.
Now, with all of that said, it is absolutely appropriate for the board, every single quarter, to evaluate what and how much, and in what mechanism we should return capital. If you read our press releases for the past fifteen years, they've always included a statement that said the board reviews this each quarter and evaluates it on a quarterly basis. But at this point in time, there is no plan to eliminate or change our return of capital strategy.
When does the board meet next?
The board meets regularly between quarters to address many events, and then always meets at least once a quarter. In general, our board meets about 10-12 times a year.
Okay, that's very helpful. We have about 12 minutes left, so I want to pivot a little bit. You know, other areas to potentially address the, you know, the debt and the balance sheet that have been discussed are, you know, sale of IPv4, right? Where you continue to have a very large inventory there, and/or, data center asset sales, and that was discussed quite a bit last quarter. So maybe just take those one at a time. You know, your thoughts on IPv4. I know that, you know, some of the market prices that we can track are, you know, certainly off a peak. And so, you know, what do you think your capacity is to raise capital from IPv4 sales, and then why hasn't that happened yet?
So while the sale price has declined, the two major buyers of those addresses have not been active in the market for the past year and a half. While the market is broad, it is not very deep. The volume of total addresses transacted is far below our inventory so we would be flooding the market without those buyers in the market.
Why do you think they haven't been in the market?
I believe they were very successful in building an inventory of addresses, and now they are in the process of monetizing them through leases. So the second thing that has happened.
Who are the other buyers, though, beyond those two?
Primarily Amazon and Microsoft.
But beyond the two, who are the primary buyers? Who are the other buyers?
Oh, there are hundreds of small buyers.
But they haven't been active in the space for a while.
No, there have been many, many small buyers, but they have not been able to absorb the types of volume that we would have. But the second point is that the lease revenue on addresses has gone up materially, both for Cogent and for the industry. So Amazon and Microsoft began leasing addresses at $3.60 an address. They have been followed by Verizon and Cox leasing at $4 an address per month. Cogent was leasing its addresses at approximately $0.20 a month. We have increased pricing on those leases and averaged $0.49 last quarter.
Sorry, how many addresses do you lease again?
Today, we lease about 14 million addresses out.
What's the general, you know, expiration term? Are these one- or two-year contracts with an expiration to reset higher?
The average contract at Cogent is about 30 months. We do not disclose contract by product type, but the churn rate on IPv4 leasing for the past nine years has been 0.7% per year. Compare that to our internet service churn rate, which is about 1.1% per month. This is a much more durable revenue stream.
Yeah. I'm just trying to figure out why, you know, why you haven't seen more of a lift in your leasing. You know, you said you went from, I forget the exact numbers, but you went from, like, $0.40-$0.60 or whatever, when you're saying the market rate is multiples of that. So I'm trying to figure out how the expiration time and then re-leasing spread to when you get to a market rate.
So I think there are two points. First of all, in the past 18 months, we've over doubled our effective price per address. That's a pretty steep rate of price increases. Secondly, our distribution method is very, very different. 85% of our leasing goes to other service providers. 100% of Amazon, Microsoft, Cox, and Verizon goes to end users. Each of those companies spends in excess of $1 billion annually on branding and advertising.
Okay.
We spend zero, so it's a different part.
More of a retail versus a wholesale business.
Yeah, it's a different part.
That's the difference in the business.
Yeah, and you know, I think we have the ability to lease more addresses and to raise prices. You know, we effectively were able to monetize the addresses while retaining control of them by doing an asset-backed securitization. We're the only company that has ever done that against IP address leasing revenue, and in fact, we accessed that market twice in an oversubscribed offering. It was challenging because we were not only a first-time ABS issuer, we were educating the market on what, in fact, an IPv4 address was and why it had recurring revenue associated.
Sure. Yeah, no, it's hugely... It's very interesting. But I guess what I'm hearing, too, is that, you know, given the two biggest buyers are out of the market and the others, just in aggregate, aren't enough to absorb capacity you could have to sell, that we're looking more at the potential to have positive re-leasing spreads drive value, right?
I think both.
That's what I'm... Okay. So it could be both.
We are going to explore t he sale option, but we want to maximize that value.
Sure. That makes sense. And, one more from me, and then if there are any from the audience, to make sure I didn't miss anything. I know there's a lot of ground to cover here. On the data centers last quarter, you know, you said interested buyers. Seems like more financial interest to me than operating. But, you know, some of the terms they were requesting, they weren't acceptable to you. Has anything changed? Have we made any progress? Are we any closer to hearing about a deal of the, of the data centers?
So the terms were acceptable. The amount of at-risk capital was unacceptable, meaning the economics were acceptable to us, but the counterparties were unable to post a large enough non-refundable deposit to have us take the assets out of the market.
Sure, 'cause I think they want... they wanted to actually see proof of leasing before they.
Some.
Some did, yeah.
Some did, some did not.
Okay.
Some actually were totally comfortable in taking the facilities empty, as is. And let's maybe turn the clock back again. Three years ago, at this conference in LA, we announced a transaction, and at that time, we described the 482 facilities we were acquiring, the 1.9 million sq ft, and the 230 megawatts of power. Our initial plan was to spend virtually no capital and put a one-megawatt, 10,000 sq ft colocation facility in 45 of the 482 facilities.
Sure.
As it became clear to us that there was significant demand for the power and space that we had, our thinking changed in two ways. One, we increased the number of facilities that we're converting from the original 45 to 125. So we almost tripled the number of facilities that we decided to turn into data centers. Today, we have roughly 180 data centers with 211 megawatts of power in them and about 2 million sq ft of colocation space. We also identified 24 of the largest facilities as unlikely for us to be able to fill up with our revenue model which is one or two racks at a time, typically to corporate end user customers, which is what Cogent had historically done in its preexisting data center footprint.
So not large block deals or cages, but single-rack deals. We then said, "Before we market these facilities, let's go out and talk to counterparties and see if, one, if they're interested in them. Two, what they would need to see modified in these facilities in order to buy them or lease them." We conducted a series of tours between April and June of 2024. We went out to 115 counterparties. That's grown to 160.
We conducted a couple of dozen tours in that first initial period, and what we heard categorically was we had to convert the DC -48V power plant to AC 120V to make these marketable, to improve the PUE for these facilities, and we then announced in June of 2024, based on this feedback, we were going to commence converting those facilities to AC. We would spend about $100 million over a twelve-month period enabling that conversion. That, in fact, ended at the end of June of 2025, exactly on plan. We continued to tour the facilities. We've had counterparties put in offers at our full ask. We've had offers for the entire portfolio, but no one has demonstrated the at-risk capital that we would require to take these assets off the market. We are still motivated to sell them. We believe they will sell.
Just as the Wavelength business is new to Cogent, we were very clear to outline that we had never sold a data center. We felt that there was latent value in these assets, and the process that we're running, both on our own and with the help of third-party facilitators, such as banks including BofA, has brought clients to the table, you know, is one that I think will maximize the value.
Okay, great. Thank you for the explanation. We have about one minute left, if there are any questions from the audience, that we might be able to fit in here. Okay, looks like we don't have any today. So Dave, I'm gonna end it there, 'cause I've had all the time for a full question to fit in. But Dave, thank you so much.
Hey, thanks, Michael, for having me.
It's always good to see you. Thank you.
Thank you very much. Thank you, all.