Cogent Communications Holdings, Inc. 2026 Q2 Earnings Call

Good morning. Welcome to our second quarter 2026 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. I'd like to focus on a few key events and significant matters that transpired in the quarter. I'd like to recognize these events and give you an update on these important matters. We have made significant progress in several areas: our data center monetization, our net leverage reduction, our cost reduction and completion of various integration projects that continued product rotation into more profitable on-net services, a reduction in our capital expenditures, a reduction in our capital lease payments, and continued progress in the sale of wavelength services. First, for data centers and leverage.

As we stated in our previous call, we intend to monetize 24 of the facilities that we acquired from the Sprint acquisition and converted into data centers, either through the outright sale or leasing these facilities on a wholesale basis. In June, we closed on the sale of 10 of these former Sprint facilities that we had converted into data centers for total proceeds of $225 million, paid in cash by the purchaser in the quarter. The sale of these assets resulted in a GAAP gain of $130.7 million. We intend to use the majority of these proceeds from the transaction to reduce both our gross leverage and our net leverage. We reduced our net leverage as adjusted inclusive of our payments from T-Mobile in this quarter to 6.23 times EBITDA from 6.79 at the close of last quarter and from 6.61 times in Q2 of 2025.

We continue to have multiple parties interested in the remaining former Sprint facilities that we have put up for sale. We are in negotiation for several letters of intent on these facilities. Our total cash and restricted cash balances at the end of Q2 2026 was $369.7 million. I'd like to touch on the amendment that we received to our 2032 secured note indenture. In June, we obtained approval from the majority of the holders of these 2032 notes to amend the note with a supplemental indenture. The key features included in this revision are an increase in maximum secured debt leverage ratio from 4 times to 4.75 times.

A commitment on our part to use at least $175 million in proceeds from the sale of these initial data centers that was then contributed from outside of the borrowing group into the borrowing group to be used for the repurchase of debt obligations at a discount. During the quarter, we repurchased $20.4 million of par value 2032 notes at an average price of 91.955, resulting in a gain in the quarter of $1.6 million. Continuing in July, we purchased an additional $118.4 million of par value notes at an average price of 90.071, resulting in an additional gain of $11.8 million, which will be recognized in the third quarter.

The total purchases of our 2032 notes to date have been $138.8 million of face value at an average price of 90.348, resulting in a cumulative gain of $13.4 million. We are making progress on the refinancing of our $750 million 2027 unsecured notes. Our $750 million unsecured notes mature in June of 2027. The make-whole period for our 2027 unsecured notes ended on June 15, 2026. These notes have become current, and we are in the process of completing our refinancing of these notes. We expect that transaction to be completed in the third quarter of 2026. For a couple of comments on our wavelength business. Our wavelength business continues to grow. At quarter's end, we are offering wavelengths in 1,137 locations with 10 gig, 100 gig, and 400 gig services available, and provisioning intervals in approximately 30 days, which do continue to improve.

Our wavelength revenue for the quarter was $14.8 million, an increase of 63.8% from a year ago, and a sequential increase of 9.2%. Our wavelength customers increased year-over-year by 66.4% and sequentially by 8% to a total of 2,445 customer connections. In addition, during the quarter, to the new installs that we have reported, we reprovisioned 77 existing wavelengths, converting them into higher capacity wavelengths. Most of these were conversions from 100 gig to 400 gig waves, as customers have become more confident in the quality of our network. At quarter's end, we have sold wavelength services in 608 unique locations, and we have sold those wavelength services now to a combined customer base of 546 unique customers. We still believe that we will capture 25% of the North American long haul wavelength market. We also, to date, still have only captured 3% of that market.

For a comment on our gross margin improvement. We continue to reduce costs. Our gross margins percentages increased on a year-over-year basis by 260 basis points and increased sequentially by 90 basis points to 47%. Our EBITDA as adjusted, and EBITDA adjusted margins also improved. We expanded our sequential EBITDA as adjusted margin. Our EBITDA as adjusted for the quarter increased sequentially by $900,000, or just under a million dollars, to $71.1 million. And our EBITDA as adjusted margin increased sequentially by 90 basis points to 30.2%. We also have worked diligently on the organizational optimization of our workforce. As we are completing various integration projects, we are evaluating the optimal size of all of our departments as the integration of these former Sprint assets into Cogent is now being completed.

We reduced our total head count to 1,682 at quarter's end, a reduction of 113 individuals from the end of the previous quarter and a reduction of 207 individuals from Q2 of 2025. This reduction represents approximately 6% of our workforce from the previous quarter. The expenses associated with these reductions have been recognized in the second quarter. I'd like to take a moment to talk about our long-term objectives and beliefs around targets. We expect our revenues to grow at between 6% and 8% over a multiyear period. We acknowledge our revenue growth in Q2 of 2026 was negative, we do believe that the decline in revenue from the acquired Sprint customer base is moderating.

We anticipate EBITDA margins to average over a multiyear period approximately 200 basis points a year Kind of mirroring the type of margin expansion that Cogent had experienced prior to the acquisition of Sprint. Our revenue and EBITDA guidances are not intended to be quarterly or targeted to a specific year, but rather a multi-year. I'd like to ask Tad to read our safe harbor language and provide some additional details on our operating performance for the quarter. I'll conclude with a few summary remarks, will open the floor for questions.

Tad? Thank you, Dave. Good morning, 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, 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 measurements in our earnings releases that are posted on our website at cogentco.com. Discussion of the results for the quarter the revenue mix since Sprint closing, which the full first quarter was Q3 2023 versus this quarter.

Despite our revenue decreases, we have been able to increase our margins. Our increases in our gross margin and our EBITDA margin have been driven by cost reductions and a rotation to our more profitable on-net products. Comparing our revenue by connection type from the third quarter of 2023, which again, was the first full quarter we were combined with Sprint Wireline, to this quarter illustrates the material changes to the composition of our revenues and the strength of the underlying Cogent classic business. Our on-net revenues were 47% of our total revenues in the third quarter of 2023. Our total on-net revenues, including on-net wavelengths, increased to 63.8%, so close to 64% of our total revenues this quarter, that was compared to 62.4% last quarter and 57.4% in the second quarter of last year.

Our off-net revenues were 48% of our total revenues in the third quarter of 2023, and are much less profitable. Our off-net revenues have decreased to 35.9% of our total revenues this quarter compared to 37.2% last quarter and 41.5% for the second quarter of 2022. 18% of our sales this quarter were for on-net services in the aggregate. Our non-core revenues were 5% of our total revenues in the third quarter of 2023, and they have decreased to less than $1 million and were about 0.4% of our revenues this quarter. Our total revenues for the quarter were $235.6 million. Our total revenue declined by $3.6 million to 1.5%. USF tax revenues had a negative impact on our sequential revenue results of $0.6 million and a negative year-over-year impact of $1.1 million.