Cogent Communications - Q2 2023

Transcript

Operator (participant)

Good morning, and welcome to the Cogent Communications Holdings Q2 2023 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 the same website when it becomes available. Cogent's summary of financial and operational results attached to its press release can be downloaded from the Cogent website. I would now like to turn the call over to Mr. Dave Schaeffer, Chairman and Chief Executive Officer of Cogent Communications Holdings. Please go ahead.

Dave Schaeffer (CEO)

Thank you. Good morning to everyone. I'm going to start by apologizing for the possible length of this call. There are a number of new topics that we are going to be chatting about, but we will try to be complete in answering everyone's questions. Welcome to our Q2 2023 earnings conference call. I'm Dave Schaeffer, Cogent's Chief Executive Officer. With me on this morning's call is Thad Weed, our Chief Financial Officer. Hopefully, you've had a chance to review our earnings press release and our 10-Q for the quarter. Our press release includes a number of historical quarterly metrics that we present on a consistent basis every quarter. We've included a number of additional metrics this quarter related to our acquisition of Sprint, and we will continue to provide these metrics each quarter going forward.

Our press release metrics now include corporate, NetCentric, and enterprise revenue, and customer connections and metrics related to the Sprint network assets. For a few summaries around our results. We closed our acquisition of the Sprint wireline business, purchased from T-Mobile on 1 May 2023. This transaction significantly expanded our network, our customer base, our employee talent, and materially increased the scope and scale of our business. We now have an annualized revenue run rate in excess of $1 billion. We acquired a number of large enterprise customers, many Fortune 500 companies. The customers are larger than the typical customers in Cogent's corporate customer base. We acquired a significant fiber network of owned assets and owned real estate facilities. We acquired a number of right-of-way agreements and relationships. It would have been virtually impossible to assemble this set of assets on our own.

We hired many valuable, experienced employees from the wireline business. The majority of these employees have been with the company for over 22 years. We acquired a network with a current value of over $1 billion for $1. We received a $700 million cash commitment from T-Mobile to help offset the operating losses of the business that we acquired. $350 million of this will be paid in the first year in monthly installments of $29.2 million per month. In months 13 through 42, we will receive monthly payments of $8.3 million per month, or approximately another $350 million. We're very optimistic about the cash flow generating capabilities of the combined operation. A recent analysis shows immediate and substantial cost savings will be achieved in multiple areas.

Many of these will exceed our initial expectations from the due diligence that we conducted prior to closing. Our legacy Cogent business had a very good quarter. Our total Cogent legacy revenues grew by 5.3% sequentially and 9% year-over-year. Cogent's legacy NetCentric revenues grew by 11.1% sequentially and 19.3% year-over-year. Cogent's legacy corporate revenues experienced growth of 0.7% sequentially and 0.6% year-over-year. Cogent's legacy EBITDA was a record $61.7 million for the quarter and an EBITDA margin of 38.1%. This is the first time in Cogent's history that its business has achieved EBITDA in excess of $60 million. A sequential EBITDA margin increase in the legacy business was 160 basis points.

Now for a couple of comments around the transaction and the purchase price. Under the purchase agreement, we paid $1 for the wireline business that we acquired. Under the working capital provisions in the agreement, we paid $61.1 million and were provided $47.1 million in acquired cash, for a total net payment of $14.4 million. Under the purchase agreement, we also will receive payments from T-Mobile for 50% of the assumed short-term lease liabilities in four equal monthly payments at the end of the IP Transit Service agreement period, this being months 55 through 58. Currently, those payments are estimated to total $57.1 million. This transaction resulted in a material bargain purchase gain.

In connection with the accounting for the acquisition, we recorded a gain on a bargain purchase of $1.2 billion, or approximately $24 per share. Included in the $1.2 billion gain is the discounted present value of the $700 million IP Transit Services Agreement with T-Mobile. We had initially expected to account for the IP Transit Services Agreement on a straight-line basis as revenue over the contract term. However, in consultation with our auditors and with the Securities and Exchange Commission via a preclearance process, we concluded in conjunction with the SEC in early August, it was determined we should report these as consideration from T-Mobile related to the acquisition, and therefore not as revenue, resulting in the purchase gain.

The acquired network, including the real estate assets, fiber routes, right-of-way agreements, and network equipment, was appraised by an independent Big Four accounting firm at a valuation of approximately $1 billion. The total fair value of the net assets acquired was $569 million. Including the net present value paid to us by T-Mobile under the IP Services Agreement of $596 million, the $569 plus $596 totals approximately a $1.2 billion bargain purchase gain. Now for a couple of comments on our anticipated synergies and cost savings. Over the next three years, we continue to believe that we will achieve annual cost savings in three areas.

Approximately $180 million annual run rate savings in the optimization of the North American network, a $25 million savings annualized on the Sprint international wireline network, and an additional $15 million in reduced operation and maintenance expenses for the legacy Cogent network. We also anticipate achieving additional SG&A savings and other cost and revenue synergies over the next several years. Our recent progress in achieving these cost savings is very encouraging, and we intend to surpass the targets that we have laid out. Now for a couple of comments on revenue and our new class of customers. Our revenue for the quarter increased by 56.1% to $239.8 million, and an increase by 61.5% on a year-over-year basis.

Revenue from the Sprint wireline business was $78 million for the two month period, from 1 May 2023, till 30 June 2023, the quarter end. All amounts related to the wireline business that we disclose on this call are for a two month period in the Q2 of 2023. Excluding the $78 million of revenue from the wireline business, our revenues would have increased 5.3% sequentially and 9% year-over-year. In connection with the Sprint acquisition, we are now reporting revenues for our enterprise customers. We've classified revenues we acquired from the Sprint wireline business as 52% enterprise, 32% corporate, and 16% NetCentric, using definitions that Cogent has historically used.

We define enterprise customers as large corporations, typically Fortune 500 companies, with greater than $5 million in annual revenue, running large wide area networks, which typically encompass from several dozen to several hundred sites. These enterprise customers typically purchase services in multiple locations on a discrete basis. Our sales force productivity substantially increased from the 4.0 we reported last quarter, that is, installed orders per full-time equivalent to 9.2 orders per FTE in this quarter. Included in rep productivity for the quarter were 9,000 units and $7.3 million of revenue sold to T-Mobile outside of the IP Transit agreement under a traditional commercial services contract. The revenues from these commercial services contracts are in addition to the $700 million IP Transit Services Agreement.

Adjusting for these units, our rep productivity would have been approximately 4 orders installed per rep per month, the same as last quarter. Rep productivity includes enterprise customer sales reps that we acquired and are still being trained on Cogent systems and processes. Sales force, size, and composition. In connection with the Sprint acquisition, we hired a total of 942 total employees. Inclusive in this are 75 quota-bearing sales reps and a total of 114 people in the sales organization. The wireline business included many talented, experienced, and dedicated employees. This represents a tremendous asset to the combined company going forward. The average tenure of these wireline employees has been over 22 years. During the quarter, we increased the number of our sales reps by 85, a 15% sequential increase in our sales force.

We ended the quarter with 647 sales reps, 567 full-time equivalent reps, a 5% sequential increase in our full-time equivalent sales reps. Now, for a comment on the sale of new products, our Wavelength and optical transport products. In conjunction with the acquisition of the wireline business, we have expanded our offerings to include optical Wavelength services and optical transport over our fiber optic network. We are selling these Wavelength services to our existing customers, the acquired customers of Sprint, and to new customers. These customers require dedicated, deterministic optical transport connectivity without a capital expense or ongoing operational expenses in owning and operating a network. Our Wavelength revenue for the quarter was $1.6 million, and there were 414 discrete Wavelengths connected in the quarter at quarter end.

We have sold these services in 35 discrete locations with shorter provisioning cycles. We have connectivity to approximately 200 locations that still have longer provisioning cycles. Over a two year period, we expect to be able to offer Wavelengths in over 800 carrier neutral locations in North America. Now for a comment on our expanded footprint. Our Sprint acquisition materially expanded our network footprint. We have added 18,905 route miles of owned intercity fiber, 1,257 route miles of owned metropolitan fiber. We will reconfigure 44 acquired Sprint facilities and add 44 new data centers to our footprint. We have already reconfigured one of those facilities. Our total carrier neutral footprint is 1,526 facilities, and there are 56 Cogent data centers in addition to that.

We have converted one of the legacy Sprint switch sites, we are in the process of completing those additional conversions. We also added approximately 11,400 route miles of intercity IRU fiber and approximately 4,500 route miles of metropolitan IRU fiber to the Cogent network. Some of these are redundant with fiber that we already have and will be eliminated as an area of cost savings. Now for a comment on the transition services agreement. On the closing date, we entered into a transition services agreement with T-Mobile for certain services in order to ensure the orderly transition of the wireline business. These transition services are related to information technology support, back office, finance, real estate, facilities management, vendor and supply chain management, including processing of invoices and paying wireline vendors on our behalf as costs and certain human resources services are consumed.

We are providing services under a reverse transition services agreement to T-Mobile that include information technology and network support, finance and back office, and other wireless business support. During the quarter, we recorded $118.8 million due to T-Mobile under the transition services agreement. These are primarily expenses related to the reimbursement of vendor invoices made on T-Mobile's behalf for the benefit of Cogent. We recorded approximately $7 million due from T-Mobile under the reverse transition services agreement. The amounts billed under the TSA and reverse TSA are due in 30 days from receipt of invoice. As of 30th June 2023, under these agreements, we owed T-Mobile $118.8 million, and T-Mobile owed us $7 million. For a comment on our dividend and return of capital program.

During the quarter, we returned $44.9 million to our shareholders through our regular quarterly dividend program. Our board of directors, which routinely reflects on our business and recognize the strong cash flow generating capabilities and investment opportunities, inclusive of the Sprint acquisition, decided to increase our dividend by another $1 per share this quarter, sequentially, raising our quarterly dividend from $93.5 per share to $94.5 per share. This increase represents the 44th consecutive sequential increase in our regular quarterly dividend, which is now growing at an annualized rate of 4.4%. A comment against our expectations.

Now that we are a combined company with the Sprint wireline business, we anticipate long-term annual revenue growth rates of 5%-7% for the combined business, and we expect EBITDA margin expansion to be approximately 100 basis points annually. Our revenue and EBITDA guidance targets are intended to be multi-year and should not be used as specific quarterly or annual guidance. Now, I'd like to turn the call over to Thad Weed, our CFO, to read the safe harbor language and provide some additional operating and specific metrics to our performance in the quarter. Following our remarks, we will open the floor for questions. Thad?

Thad Weed (CFO)

Yep. Thank you, Dave, 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. 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. Some comments on revenue by corporate, NetCentric, and now Wavelength and non-core.

We analyze our revenues based upon network connection type, which is on-net, off-net, Wavelengths services, and non-core services. We also analyze our revenues based upon customer type, and as Dave mentioned, we now classify all of our customers into three types: NetCentric, corporate, and enterprise customers. These customers are typically professional services firms, financial services firms, and educational institutions located in multi-tenant office buildings or connecting to our network through our data center footprint. Our NetCentric customers buy significant amounts of bandwidth from us in carrier-neutral data centers and include streaming companies, content distribution service providers, as well as access networks who serve consumer and business customers. Our enterprise customers generally purchase our services on a price per location basis, are typically larger than our legacy Cogent customer base.

On revenue classifications, reclassifications. In connection with the Sprint acquisition, we reclassified a small portion of legacy Cogent revenue to enterprise revenue and enterprise customer connections. We classified $300,000 of legacy monthly recurring revenue to enterprise revenue, 387 legacy Cogent customer connections to enterprise customer connections. Corporate business. Our corporate business continues to be influenced by real estate activity in central business districts. 2 key statistics, including the level of card swipes in buildings and leasing activity, indicate that year to date, the real estate market and leasing activity in central business districts where we operate, have seen some improvement, but has not returned to pre-pandemic levels in most geographic regions. We continue to remain cautious in our outlook for our corporate revenues, given the uncertain economic environment and other challenges from the pandemic.

Our corporate business represented 46.3% of our revenues this quarter. Our quarterly corporate revenue increased year-over-year by 30.2% to $111 million from the Q2 of last year, and was a sequential increase of almost 30%. We had 61,284 corporate customer connections on our network at quarter end, and that was a sequential increase of 37.5% and a year-over-year increase of 35.9%. Corporate customer connections from the wireline business were 17,571 at quarter end. Corporate revenue from the wireline business was $25.2 million. Legacy corporate customer connections decreased by 1.1% sequentially and by 2% year-over-year.

Legacy corporate revenue increased modestly by 0.1% sequentially and by 0.6% year-over-year. For the quarter, the sequential impact of USF on our revenues, which some is included in the wireline business, was a positive $6.8 million and a positive year-over-year impact of $7.6 million. The USF taxes related to the wireline business was $7 million for the two-month period in this quarter. On NetCentric. Our NetCentric business continues to benefit from continued growth in video traffic and streaming. For the quarter, our network traffic growth accelerated and was up 4% sequentially and up 21% year-over-year. Our NetCentric business represented 36.5% of our revenues this quarter and grew sequentially by 28.9% to $87.6 million. That was a 38.4% year-over-year growth.

We had 66,711 NetCentric customer connections on our network at the end of the quarter, an increase of 26.2% year-over-year, sequentially, and year-over-year, 31.6%. NetCentric customer connections from the wireline business were 5,607 at quarter end. The related revenue was $12.1 million. Legacy Cogent NetCentric connections increased by 15.6% sequentially and by 20.6% year-over-year. Our legacy Cogent NetCentric revenue increased sequentially by 11.1% and by 19.3% year-over-year. Our enterprise business was 17.2% of our revenues this quarter, and we had 24,435 enterprise customer connections on our network at quarter end.

Enterprise revenue from the wireline business was $40.7 million, and enterprise customer connections were 23,034. On revenue and connections by network type. Our on-net revenue was $127.7 million for the quarter, which was a 9.9% sequential increase and 14% year-over-year. On-net customer connections were 93,846 at quarter end. On-net revenue from the wireline business included 2,546 on-net customer connections and $4.1 million. Our legacy Cogent on-net revenue increased sequentially by 6.4% and by 10.3% year-over-year. We serve our on-net customers in 3,227 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 selected locations, which has the impact of increasing our on-net ARPU, which again occurred this quarter. Our off-net revenue was at $102 million for the quarter. That was a sequential increase of 173.5% and a year-over-year increase of 181.1%. Off-net customer connections were 38,762 at quarter end. Off-net revenue from the wireline business included 24,243 off-net customer connections at quarter end and was $63.9 million. Our legacy Cogent off-net revenue increased sequentially by 2.1% and by 4.9% year-over-year. Including the new off-net locations from the wireline business, we now serve off-net customers in over 28,000 off-net buildings.

These off-net buildings are primarily located in North America. Wavelength revenue was $1.6 million for the quarter and 414 customer connections. Wavelength revenue from the wireline business was 404 customer connections and $1.6 million. Lastly, non-core revenue. Our non-core revenue was $8.6 million for the quarter and 19,408 customer connections. Non-core revenue from the wireline business totaled 19,021 customer connections and was $8.4 million. Comments on pricing. The average price per megabit for our installed base increased sequentially by 12.3% to $0.28 and declined year-over-year, but by only 4.6%.

The average price per megabit for our new customer contracts for the quarter was $0.10, which was the same price per megabit for new customer contracts as last quarter, and a year-over-year price decline of 31%. Selling larger connections results in a change in our connection mix and can have the effect of lowering our average price per megabit at a greater rate than changes in our ARPU. With respect to ARPU, our on-net and off-net ARPUs for the quarter both increased. Our on-net ARPU increased sequentially by 3.5%, from 467 to 483. Our off-net ARPU increased sequentially by 42.2% from 910 to 1,294, primarily from the pricing impact of these off-net customers we acquired in the wireline business. Churn.

Our churn rates for our on-net and off-net customer connections for the combined business increased from the impact of the wireline business. Our legacy Cogent churn rates were relatively stable. Our on-net unit churn rate was 1.4% for the quarter, compared to 1% last quarter, and off-net was 1.6%, also 1% last quarter. On EBITDA and EBITDA margin. We reconcile our EBITDA to our cash flow from operations in each of our quarterly earnings press releases, and now incorporate a component from our cash flow statement. We incurred $0.7 million of Sprint acquisition costs during the quarter. Our EBITDA for the quarter, including Sprint acquisition costs and not including any payments from the IP Transit Services Agreement, decreased sequentially by $31.9 million and by $34.3 million year-over-year.

Our EBITDA margin decreased to 10.1%. Our EBITDA for the wireline business by itself for the two months was -$37.6 million. Excluding the negative impact of the wireline business, our EBITDA would have been $61.7 million for the quarter, so the Cogent legacy business EBITDA, which was a 10% sequential increase and a 6% year-over-year increase, and that margin would have been 38.1%. EBITDA as adjusted. Our EBITDA as adjusted, the past few quarters, includes an add back for Sprint acquisition costs and now includes cash payments received under the $700 million IP Transit Services Agreement we have with T-Mobile.

We billed for two months during the quarter, so $58.3 million under the IP Transit Services Agreement during the quarter, and only one cash payment was due, so we collected cash of $29.2 million during the quarter. Our EBITDA, as adjusted for the Sprint cost and the IP Transit Services Agreement, adding that was $54.1 million for the quarter, which was a 22.5% EBITDA as adjusted margin. In subsequent quarters, three monthly payments under the IP Transit Services Agreement will be included in our EBITDA as adjusted, and that will be a total of $87.6 million for the three payments. We had both of the payments, $29.2 million payments, included in the EBITDA as adjusted for the quarter, our margin would have been about 35%.

All amounts billed under the IP Transit Services Agreement have been paid on time. Some comments on foreign currency. Our revenue earned outside of the United States is reported in US dollars and was about 18% of our revenues this quarter. About 11% of our revenues were based in Europe, and 6% of our revenues were related to our Canadian, Mexican, Oceanic, South American, and African operations. Sprint's internet, the wireline business, international revenue was only about 3% of total wireline revenues. The average euro to US dollar rate, the average for this quarter so far, is $1.11, and the average Canadian dollar exchange rate is about $0.76.

If these averages continue for the remainder of the Q3, we estimate that our positive FX impact on sequential revenues will be about $500,000, and year-over-year, a positive $2.3 million. Customer connections. We believe that our revenue and customer base, or concentration rather. We believe that our revenue and customer base is not very highly concentrated, but it is more concentrated after the wireline business acquisition. Including that impact, our top 25 customers represented approximately 18% of our revenues this quarter. We acquired a number of larger enterprise customers with the wireline business. On CapEx, our quarterly CapEx was $37.4 million. Supply chain uncertainty caused us to shift our typical purchasing schedule for network equipment.

These anticipatory investments are designed to ensure that we have satisfactory inventory levels of network equipment to accommodate our growth plans, including the conversion of data centers to Cogent data centers, and including new Wavelengths product offerings from the Sprint acquisition, and the interconnection of our two networks together in multiple locations and to meet customer needs. Finance leases and lease payments. Our finance lease IRU obligations are for long-term dark fiber leases, and typically have terms of 15-20 years or longer on initial term, and often include multiple renewal options after the initial term. Our IRU finance lease obligations totaled $331.5 million at quarter end. There were no finance lease obligations acquired in the wireline business. We have a very diverse set of IRU suppliers and have IRU contracts with over 320 different dark fiber suppliers.

We acquired relationships with several new suppliers of dark fiber with the wireline business, and all of those IRU leases were treated as operating leases. Fiber and network. In connection with our Sprint acquisition, we acquired numerous right-of-way agreements across the United States. These right-of-way agreements represent a significant acquired asset and would be extremely difficult to obtain on their own. We also acquired 482 technical buildings. One of those technical buildings has been converted to a Cogent data center, and we will convert another 44 buildings to Cogent data centers. We acquired a significant amount of owned dark fiber and significantly expanded our network. We acquired 19,135 intercity route miles of owned dark fiber, 1,259 metro route miles of owned dark fiber.

Our network now consists of the following with respect to fiber: 72,694 leased intercity route miles of dark fiber, and that's 11,376 from Sprint and 61,318 legacy Cogent intercity route miles. 22,556 leased metro route miles of dark fiber. That's 4,527 Sprint metro route miles and 18,029 legacy Cogent, Cogent metro route miles. 240,430 leased intercity fiber miles of dark fiber. This includes 122,648 Sprint intercity fiber miles and 117,782 legacy Cogent intercity fiber miles.

Lastly, 74,577 leased metro fiber miles of dark fiber, and that's 32,346 from Sprint and 42,231 legacy Cogent metro fiber miles. It's a lot of miles. Cash and operating cash flow. At quarter end, our cash and cash equivalents and restricted cash totaled $244 million. Our $51.6 million of restricted cash is tied to the estimated fair value of our interest rate swap agreement at quarter end. Our operating cash flow was $82.7 million for the quarter, a 130% increase sequentially, and a year-over-year increase of a 140%. Including in net cash provided by operating activities was the amount due to T-Mobile under the TSA of $118.8 million. Some comments on debt and our debt ratios.

Our total gross debt at par, including our finance lease IRU obligations, again, none of finance lease obligations acquired with the wireline business. The total was $1.3 billion at quarter end, and our net debt was $1 billion. Our total gross debt to trailing last month's EBITDA as adjusted, was 5.63 at quarter end, and net debt ratio was 4.56. Our consolidated leverage ratio, as calculated under our note indentures, which is slightly different, interest income, is essentially counted under that calculation, it was 5.3 for the quarter, which was a decline from 5.42, and our secured leverage ratio, as calculated under the note indentures, was 3.45, an improvement from 3.50.

On our swap agreement and then restricted cash, 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 on the Secured Overnight Financing Rate for the remaining term of our 26 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. At quarter end, the fair value of the swap agreement increased by $1.3 million from last quarter to a liability of $51.6 million. We are required to maintain a restricted cash balance with the counterparty equal to this liability. On bad debt and day sales outstanding.

Our day sales outstanding for worldwide accounts receivable was 24 days. Most of the customers of the wireline business are billed in advance. However, they are billed in several billing cycles during the month. All legacy Cogent customers are billed monthly in advance. In the Q3, we will be converting the billing of the wireline business customers to the Cogent billing platform and under the Cogent legacy billing cycle. At this point, I should mention that this will be the last quarter we will be speaking of the wireline business separately. It will be a total combined operation in the Q3, and we won't be speaking about legacy Cogent and wireline business separately. It'll be all combined. Our bad debt expense was 2% of our revenues for the quarter.

Net bad debt expense related to the wireline business was $3 million. We were required under US GAAP and the accounting rules to record accounts receivable at their book value, absent any reserves. We had to reestablish those reserves, which was a unusual charge for bad debt related to the wireline business of $3 million for the quarter. If you exclude that impact, our bad debt expense would have been 1.1% of revenues, which is consistent with our historical trends. Finally, I want to recognize and thank our worldwide billing and collection team members, including our new billing and collection employees from the wireline business, for doing a fantastic job in serving our legacy Cogent customers and our new Sprint wireline customers and collecting from them. They're doing an amazing job. With that, I will turn it back over to Dave.

Dave Schaeffer (CEO)

Hey, thanks, Thad. I'd like to highlight a couple of strengths about our network, our customer base, and our sales force. Now, for some NetCentric details. We continue to experience significant growth in our legacy NetCentric business. We're direct beneficiaries of the continued acceleration in over-the-top video and streaming, particularly in international markets. At quarter's end, there were 1,526 carrier-neutral data centers and 56 Cogent-owned data centers directly connected to our network, for a grand total of 1,582 data centers. This is more than any other carrier, as measured by independent third-party research. The breadth of this coverage allows us to enable our NetCentric customers to better optimize their networks and reduce latency in connecting to their customers.

We expect to continue to widen our lead in this market and project to add an additional 100 carrier-neutral data centers per year to our footprint over the next several years. We also expect to convert an additional 44 of the Sprint technical spaces into Cogent data centers. To date, we have converted 1 of these facilities. As of today, we are selling Wavelengths with a rapid provisioning cycle in 35 carrier-neutral data centers, and with an extended provisioning cycle, we can sell Wavelengths in over 200 carrier-neutral facilities. By the end of 2024, we anticipate being able to sell Wavelengths in 800 or more U.S. carrier-neutral data centers with continued reduced provisioning intervals. We have significantly expanded our network footprint with owned fiber and additional IRUs, as well as right-of-way agreements.

At quarter's end, we are directly connected to 7,891 unique networks. This collection of ISPs, telephone companies, cable companies, mobile operators, and other carriers give us direct access to the vast majority of the world's broadband subscriber base and mobile phone users. At quarter's end, we had a sales force of 259 professionals solely focused on the NetCentric market. We believe this group of professionals is one of the largest, most sophisticated sales teams focusing on this market segment in the industry. The sales force will be primarily responsible for the sale of our Wavelengths that we continue to expand availability of. Now, for a couple of corporate observations. We're seeing positive trends in our corporate business. Our corporate customers are continuing to aggressively integrate new applications and become part of a world in which working includes the use of video conferencing.

This usage of video connectivity requires higher capacity connections, both inside and outside of their premises. Our aggressive push to lower bandwidth costs, provide greater coverage, has begun to boost the corporate demand for our products, which are typically bidirectional, symmetric, 1 gig and 10 gigabit interfaces. Corporate customers are increasingly buying connections and carrier-neutral data centers for redundancy to support their ad hoc VPNs to support remote workers. Now, for a comment on our sales force. We remain focused on growing our sales force and sales force productivity. We continue to improve our training programs and manage out underperformers. On a sequential basis, our total number of sales force reps increased by 85 to 647.

Our sales force turnover rate was approximately 5.6% per month for the quarter, down from a peak of 8.7% per month during the pandemic, and slightly below our historical average of 5.7%. In summary, we are extremely optimistic about our unique position in serving small and medium-sized businesses in the central business districts of major North American cities, with 1,844 multi-tenant office buildings and over 1 billion sq ft of rentable office space on net. We are excited about the addition of our large enterprise customers to our customer base, and we are very optimistic about our ability to sell optical transport services or Wavelengths, adding that product to our portfolio and expanding our network capabilities and expanding the Cogent-owned data center footprint.

Currently, key indicators for office activity, including workforce reentry, leasing activity, still remain below pandemic levels in many parts of the country. In many regions, we are seeing a return to pre-pandemic activity levels and pre-pandemic sales efficacy. We are encouraged to see that an increasing number of tenants are requiring employees to spend more time in the office. We also note that many corporates are downsizing their office requirements, ultimately resulting in our ability to have a larger addressable market, as we will have more discrete tenants per building, increasing our corporate opportunity. Under our indenture agreements, including the $250 million general basket, the cumulative amount of cash we have available at the holding company for dividends and buybacks actually exceeds cash on hand. We are diligently working to integrate the Sprint wireline assets.

We remain encouraged and optimistic about our ability to take costs out of these assets and achieve the annual cost savings and cash flow generation that we project. Over the next 3 years, we intend to achieve annual savings of approximately $180 million on the North American Sprint network, $25 million on the international Sprint network, and a $15 million savings on the legacy Cogent network. We also anticipate additional SG&A savings through headcount optimization, as well as system and office efficiencies. These revenue synergies should manifest themselves over the next several years. With that, I'd like to open the floor for questions.

Operator (participant)

Thank you. If you have a question, please press star one on your telephone keypad. To withdraw your question, simply press star one again. Your first question comes from the line of Philip Cusick with JPMorgan. Your line is open.

Phil Cusick (Managing Director)

Hi, Dave. Maybe we can start with NetCentric, and just maybe go through again what the organic growth is in NetCentric this quarter, both year-over-year and sequentially, and help us think about size of customers committing and things like that, that's going to drive revenue growth in that segment going forward? Thank you.

Dave Schaeffer (CEO)

Yeah. As, you know, we mentioned in the call, we saw an acceleration sequentially, both in traffic growth as well as a year-over-year improvement in traffic growth. We have seen strong demand organically from customers outside of the U.S., as well as having two additional benefits in this quarter. That being the benefit of selling NetCentric services to T-Mobile outside of the transit agreement.

These are primarily co-location services and VPN services, and we ended up acquiring a customer base of off-net and on-net Layer two services with T-Mobile. The traffic growth was approximately 11.1%, or excuse me, revenue growth of 11.1%, and that was from the legacy Cogent business, and 19.3%. Even if you netted out the additional services that we sold T-Mobile, the growth in that business was similar to Q2 of 2022, both on a sequential and year-over-year basis.

Phil Cusick (Managing Director)

Thank you. That's helpful. How do you think about the obviously, there's going to be another month of movement this quarter, but the organic go-forward growth in that business, is that, is that a sustained double-digit sort of annualized growth from here once everything is through, given all these other opportunities?

Dave Schaeffer (CEO)

Yeah. You are correct, Phil. We, we clearly will have an additional benefit in the Q3 because we will recognize a full three months of the commercial services that we are selling T-Mobile. Some of those services will wean away by design, but we think there is a very long tail to our ability to provide some of those non-transit services to T-Mobile. Independent of that phenomena, we also believe the underlying strength in the organic business, which has been about a 10% or 11% revenue growth rate year-over-year, continued in this quarter and will continue going forward. We're very encouraged by, you know, strong demand in international markets.

You know, to remind investors, our NetCentric business, over an 18-year history, has averaged about 9% growth. We went into the pandemic growing substantially below that trend line, at about 3% year-over-year growth. Growth skyrocketed at the beginning of the pandemic, all the way up to 26% year-over-year. It has slowly reverted closer to the average, but remains above that long-term average. As I said, we're growing about 11% now year-over-year, and we believe that NetCentric revenues for the combined company will continue to grow in low double digits for the foreseeable future.

Phil Cusick (Managing Director)

If I could follow up on one, one more. Any change in the size of customers buying? Last quarter, it was a lot of larger, this quarter. Any shift there?

Dave Schaeffer (CEO)

You know, we continue to actually see some strong demand from some of our large hyperscalers. You know, as Thad mentioned, our average new sale remained flat at about $0.10 per megabit. Actually, our installed base went up on a per megabit basis to $0.28, in part because of the acquired T-Mobile customer base. I think the big change in buying patterns we've seen, actually, over the last couple of quarters, has been a shift towards people buying for a new application, that being artificial intelligence and the collection of data.

What we have seen is some customers who had traditionally had traffic very asymmetrically skewed in the outbound direction, now collecting a significant amount of data in the return path, and that has driven more growth from some of the larger, you know, software and hyperscale companies, that I think are using that data to build their large language models and create generative artificial intelligence applications. We think we're only at the beginning of that trend, and, you know, that is an encouraging tailwind for the entire NetCentric business. Now, some of our smaller customers may catch up and start also exhibiting those types of patterns.

Most of our growth in small customers has really been in international markets from more regional access networks, who have really seen an acceleration in streaming video, much as we did here in the U.S. and Western Europe, maybe 18 months ago. There is a lag. You've got really two different things going on. The large customers are increasingly pulling information as opposed to pushing for their AI applications, and the smaller international customers are accelerating the pull of content.

Phil Cusick (Managing Director)

That's helpful. Thanks, Dave.

Dave Schaeffer (CEO)

Okay, thanks, Phil.

Operator (participant)

Your next question comes from the line of Frank Louthan with Raymond James. Your line is open.

Frank Louthan (Managing Director)

Great. Thank you. Just want to be clear, can you walk us through kind of what the run rate cash payments will be from T-Mobile going, going forward in each full quarter? Just to be clear, you're going to be recognizing EBITDA, the cash payments, adding back, not the straight line recognition that you'd previously thought that you, that you would be able to recognize.

Dave Schaeffer (CEO)

For the first 12 months of the agreement, we will recognize $29.2 million a month, or $87.6 million a quarter. This quarter, we recognized only one payment, even though we had billed for two. We are recognizing that on a cash basis. When we consulted both with the SEC and with our auditors, Ernst & Young, we concluded, in alignment with T-Mobile, that this should be a bargain purchase transaction. Even though we are providing the IP transit services, and they do meet many of the criteria associated under ASC 606 for revenue recognition, if they were treated as revenue, we would have recognized that revenue on a straight line basis because it is a unified contract.

The cash payment stream will actually step down in month 13 to $8.3 million a month and continue for the next 42 months. We will recognize $24.9 million a quarter on a cash basis after the first 1two month period. The reason for the change in accounting treatment was that T-Mobile made the decision to treat this as a bargain purchase. At that point, we had a customer saying that they were viewing this as a transactional cost and not as a services agreement.

Thad Weed (CFO)

Dave, if I just

Dave Schaeffer (CEO)

Yeah.

Thad Weed (CFO)

correct one thing. T-Mobile didn't treat it as a bargain purchase, that, that's our side.

Dave Schaeffer (CEO)

That's our side of the transaction.

Thad Weed (CFO)

They treated it at the end of 2022 as a loss on disposition of a business. That was their side. In terms of kind of matching the accounting-

Dave Schaeffer (CEO)

Our side.

Thad Weed (CFO)

We, we had the bargain purchase gain. Sorry to interrupt.

Dave Schaeffer (CEO)

Yeah, no.

Thad Weed (CFO)

I want to make that clear.

Dave Schaeffer (CEO)

That's why you're the accountant, Thad. We will recognize that and add the cash back each quarter, because it is cash, and we are reconciling that to our cash flow statement. Was that helpful, Frank?

Frank Louthan (Managing Director)

Okay, great. Yeah, no, that's great. On the customer side, I think you gave kind of the breakdown. What is the largest customer as a percentage of revenue, and is that a legacy Sprint or a legacy Cogent customer? What's the largest Sprint customer as a percentage of revenue, and what's kind of been the trend with that revenue?

Dave Schaeffer (CEO)

Yeah. Our, our largest customer is now a legacy Sprint corporate customer. They are, as a percentage of total revenues, about 4% of revenues. We did acquire a number of large Fortune, you know, kind of 500 companies, the largest of which I think, buy services from Cogent in approximately 1,600 locations around the world.

Frank Louthan (Managing Director)

Okay. All right. Great. Thank you.

Operator (participant)

Your next question comes from the line of Gregory Williams with TD Cowen. Your line is open.

Gregory Williams (Director and Senior Equity Research Analyst)

Great. Thanks for taking my questions. First question, you provided some nice insight on your Q&A here in the NetCentric business, you know, ex Sprint, in terms of customers connection and organic revenue growth. Can you do the same on corporate? You know, how much did the reclass of some of the Sprint customers and revenue impact, and what was the true organic growth on the legacy Cogent corporate business?

Second question is just on the Waves business, when, when does that really start to ramp to the 800 data centers and get those 259 sales folks up to speed, and you know, what's sort of the opportunity next year and the year after? You know, you have big ambitions there. Just lastly, if I could sneak in a housekeeping question. T-Mobile only paid one month to you guys. Are we going to see 4 months of payments next quarter, or is it typically going to be in arrears, and it's going to be three months next quarter? Thanks.

Dave Schaeffer (CEO)

I'll take the easy one first. We'll get three months next quarter. They pay us typically on the 2nd or 3rd of the month after we invoice them, and as Thad indicated, they had been extremely prompt in making those payments on time. Now, let me take your first two questions. On the corporate side, organically, Cogent grew sequentially 0.1%, and year-over-year, 6%.

Gregory Williams (Director and Senior Equity Research Analyst)

Six-tenths.

Dave Schaeffer (CEO)

0.6%, excuse me. 0.6%, so just under 1%, that was independent of any customers that were reclassed from the Sprint acquisition. As Thad said, going forward, we will treat all customers by type equally. They'll either be corporate, NetCentric, or enterprise, independent of whether they were organically sold by Cogent or acquired. We had customers moving in the other direction as well, as we took a small number of Cogent customers and reclassed them as enterprise. This would give us, I think, a good baseline so we can report consistently going forward. That sequential growth rate and year-over-year growth rate in the corporate business is an improvement from last quarter and indicates the last four quarters trend line of slow but fairly consistent improvement in the corporate business. Now, for the wavelength question.

All 259 of our NetCentric reps, as well as our enterprise and our corporate national account managers, can sell wavelengths. The vast majority of the wavelength market is NetCentric-type customers. The Cogent sales force has been engaged with existing wavelength customers, existing NetCentric transit customers, and wavelength opportunities that we have not had a previous commercial relationship with. I would say that our sales force has already engaged with the vast majority, probably 95%, of the potential market in discussing the wavelength opportunity. The challenge for us is to get the Sprint network connected to enough locations where that demand can be fulfilled, and then secondly, to streamline the provisioning of wavelength services. You know, there are two dimensions to that. In terms of connectivity, we're over a quarter of the way through our goal.

We today have 777 U.S. carrier-neutral data centers on net. That number is growing. We'll have north of 800 by year-end, U.S. carrier neutrals, and that number will continue to grow. Of those, we have 35 of those where we have sold Wavelengths and can provision in an acceptable period, but not our ultimate target. When we looked at Sprint and looked at their test sales of waves, they had averaged about 142 days in provisioning a Wavelength. In the 2 months that we have operated the business, we installed only 10 incremental Wavelengths. Now, some of the 404 that we acquired were actually sold by Cogent during the period where we were a reseller of Sprint Wavelengths, but they actually provisioned very late in the process.

That's why the run rate is actually slightly higher than the run rate we had announced when we acquired the business. For the Wavelengths that we installed, we averaged 62 days. A substantial improvement, but still not to our 17-day goal for a contractual minimum, and what we are looking to do is mirror our 9-day average transit port install window. We will be able to do that by the end of 2024 in all 800 U.S. carrier-neutral facilities. Again, there's two different things happening. One, we've got to go from 200 to a total of 800 facilities. We will report on that number every quarter. We expect to have that relatively linearly ramp over the next 5 quarters to give us that full footprint. Then secondly, we need to reduce the provisioning time.

To do that, it means staging transponder shelves in those locations and deploying OADMs in locations that will facilitate this rapid provisioning. We are in the process of doing that. That process will be complete for the combined network by the end of 2024. We anticipate the wavelength revenue to relatively linearly increase over a 7-year period from what is today, about a $10 million run rate to a $700 million run rate. Putting our run rate, not our trailing performance, but our run rate on a monthly basis by 1 year from closing, May of 2024, at about $80 million, meaning we will be selling about, you know, call it $6.5 million a month in wavelengths, and then growing that number pretty consistently.

At the beginning, we have a lot of pent-up demand that we can't fulfill. We are using those expressions of demand to help us prioritize the equipping of those 200 facilities. You know, if we are resource constrained, we can't turn them all on day one, as there are a number of foundational steps that need to be made. We're very comfortable that we will have the footprint in place to hit our Wavelength goals, and the demand base has actually been better than what we had anticipated.

Gregory Williams (Director and Senior Equity Research Analyst)

Great. That was very helpful. Thank you.

Dave Schaeffer (CEO)

Hey, thanks, Greg. Thanks for hosting me, and by the way, I've heard one of our wavelength competitors at your conference indicate they were gonna have, wavelengths available on a daily basis. The only way you can do that is pre-provision.

Gregory Williams (Director and Senior Equity Research Analyst)

Right. Good color. Thank you.

Dave Schaeffer (CEO)

Thanks.

Operator (participant)

Your next question comes from the line of Walter Piecyk with LightShed Partners. Your line is open.

Walter Piecyk (Partner)

Thanks. Dave, I want to go back to corporate. I think you've mentioned maybe two on this call that it was up sequentially. I just want to make sure that we're talking apples to apples, because when if I took the number pulled out, I think it's $12.9 for the Sprint contribution. Obviously, didn't look at non-core and took out USF. It looks like it was down, like, 3.7% sequentially, the corporate business, for a true legacy organic number. I'm guessing my math is wrong, and I'm just hoping you can give me. If we're not looking at the benefit that you had from USF, and we strip out Sprint, did it grow sequentially?

Dave Schaeffer (CEO)

It did grow sequentially. The USF benefit was actually very minimal. Most of that benefit came from the increase in USF for the Sprint customers. Again, to remind you, corporate includes both core and non-core products. I'm not trying to be coy here, but every product or every service gets 4 classifications. It gets on net versus off, it gets customer type, which is corporate, net-centric, and now enterprise. It gets geographic, which is US and rest of the world, and then finally, it gets product. The products include internet access, VPN services, colocation, now Wavelengths, and then finally, non-core services. When you look at the organic Cogent revenues for corporate customers, they grew sequentially, 0.1% and six

Thad Weed (CFO)

0.7.

Dave Schaeffer (CEO)

7, 7.

Thad Weed (CFO)

0.7.

Dave Schaeffer (CEO)

0.7.

Thad Weed (CFO)

0.7, sequentially.

Dave Schaeffer (CEO)

six tenths year-over-year.

Thad Weed (CFO)

Yeah, 0.6 year-over-year.

Walter Piecyk (Partner)

Got it. What was, what was specifically the USF contribution from Sprint? Because I know last quarter was $4.2, so what's the comparable for the legacy business on USF?

Thad Weed (CFO)

Sprint, USF contribution was about $7 million. It was the majority of any change in USF.

Dave Schaeffer (CEO)

Yeah. USF rate flagged.

Walter Piecyk (Partner)

Got it. Okay. Which goes, goes to the next question. Dave, you haven't grown corporate sequentially since, I think it's like September of 2020. That was a long run that's now finally inverted the opposite way. Can you, can you speak to the issues on, on why that happened? I know I have friends at our companies, that there's obviously a, a bit of a crackdown finally, maybe going into Labor Day. This is maybe this is the finally the Labor Day that, that your prediction will, will hit in terms of getting people back in the office. I mean, can you just speak to the issues on, on why corporate has finally inverted positive, and then how you expect, on a sequential basis, things to kind of play out over the course of the end of the year and into early 2024?

Dave Schaeffer (CEO)

Yeah. I do believe that many companies are taking a more proactive approach on getting employees into the office, at least on a part-time basis. Secondly, we have seen, market by market, a great deal of differences, and I think there is a trend that when we've seen markets like South Florida, Texas, Phoenix, kind of perform as if there was no pandemic, we think that kind of improvement will continue to spread to other markets. Now, if we looked at our worst-performing market, San Francisco, it's almost like there's been no recovery from COVID.

Walter Piecyk (Partner)

Shocker

Dave Schaeffer (CEO)

It is very, very geographically unequal. What we saw happen, starting in South Florida, has now spread into Texas and Arizona, and the markets like Atlanta are improving. They're not still quite to pre-pandemic levels, but we're tracking this on a market-by-market basis. I think the second thing that's happening is, companies can only procrastinate so long in making decisions as they need to deploy new tools and modernize and I think the three year hiatus in decision-making is starting to wane

And we appear to see improved sales efficacy and, you know, improved funnels in markets where we hadn't seen that maybe six or nine months ago. Again, you don't know until the customer actually signs the order, but it does appear that we're getting a lot more corporate activity, and we are on a path to recovery. Again, 0.6% growth year over year is not the 11% that we've historically grown. I know it's clear

Walter Piecyk (Partner)

Well, at least it's not, at least it's not, at least it's not negative though, Dave, so that was a good trend, you know, to finally break. You know I think, I guess my final question is more kind of a disclosure question, which is, you know, on a prior call, you kinda contested some derogatory terms I had for Sprint's business that you purchased. I mean, you didn't pay anything for it. You paid, you paid $1 for it. I don't think there's any question that this is maybe not a highly valued business. Yet corporate, historically, has been that kind of workhorse engine until we had this kind of COVID, multi-year COVID dip. Why wouldn't you provide investors.

Now, now that it's finally inverted positive, why wouldn't you provide this kind of legacy stat going forward to have people say, "Okay, let's look at, you know, they bought this crap" or, excuse me, "They bought this business, this not highly valued business for nothing," right? You're not gonna be able to print the revenue. Let's put it in a side bucket and see what, what, what expenses Dave can squeeze out of it and maybe get some revenue, revenue synergies. Then look at the core thing that really what drives your ability to, to grow the dividend and see how that's returning to growth. I don't understand why you wouldn't mash that stuff together, unless, like, other companies do that to hide a bad story. Like, if this is now a good story, why not present that to investors going forward?

Dave Schaeffer (CEO)

Well, first of all, I think we actually have multiple good stories to tell. Let me kind of disaggregate your question and statement. Let's start with the asset that we bought. We bought two different things. We bought a physical network. We actually hired a 3rd party, KPMG, to come in and evaluate that. Arm's length, we had no previous relationship, never used them as an auditor or for tax work. It just said, "Come in and do an appraisal on this asset." They realized that that asset was worth $1 billion. We paid $1 for it, but it's an asset that T-Mobile had no use for. It was a fiber optic network and a series of switch sites that were not strategic to their business. They viewed them as a liability. They had to pay taxes on them.

They were literally sitting empty, much like an office building that would have no tenants in it. We saw value in that and said, "We can repurpose that and create a growth business in selling high-capacity optical transport services and by selling colocation in that footprint." We are in the process of making that conversion practical. We're connecting it to the rest of the world. We're putting in the correct transponder equipment and OADMs to be able to provision wavelengths quickly.

We've actually I wish I could tell you I was so smart that I would've known the AI tailwind for optical transport and colocation was coming, but the reality is, there's been a huge uptick in the short term for demand for both of those services because of the need for high compute and high data transfer that is not easily done on the internet. We were at the right place at the right time.

Walter Piecyk (Partner)

David, let me just interrupt you, though. I mean, I respect the fact that you can argue that T-Mobile sold a $1 billion asset right before it was gonna take off because of AI. I certainly appreciate that. Even if that's true as a narrative, then why not put that in a separate bucket and show what you did with this business you bought, and then continue to show how the legacy business is doing, rather than mashing them all together?

Dave Schaeffer (CEO)

I'm gonna get there and answer the rest of your question.

Walter Piecyk (Partner)

Okay.

Dave Schaeffer (CEO)

The second part, the second part of your question is, we acquired a customer base that had a bunch of unprofitable services associated with them. When we looked at this business, initially, it was burning $300 million of EBITDA and $30 million of CapEx, nearly $1 million a day. That had nothing to do with the network. These were the services. The network was virtually fallow, sitting there empty. You know, to give you a sense, the data center or the switch sites that we acquired have 22,500 racks of dead equipment that hasn't been in service for at least a decade, sitting in them. We have to clear that stuff out.

On the business we bought, we knew we needed a additional stream of revenue to at least give us the time to end-of-life products and to move that traffic on net and fix it. We convinced T-Mobile to buy $700 million of transit services from us, with the payment stream that we disclosed, in order to mitigate the burn in the operating business. The third point is, we acquired a customer base. We were actually told that that customer base was enterprise. We only saw five of the 1,396 customer names prior to closing. That's fair. That's the way the FTC wants things in non-consummated transactions. Once we unmasked those customers, we quickly realized there were some corporate and there were some NetCentric customers in there, and we classified them appropriately.

We also said we should go the other way, and maybe there are some Cogent corporate customers that really fit the definition of enterprise. We've trued that up. We went through a customer-by-customer, port-by-port reconciliation for the 151,000 customer connections and made that true up. Now to your final point, which is: Why do you not report this as two separate businesses? The way we are going to get savings is put all the traffic on one network, converge the products, converge the billing systems, the sales organization. There are not people that work for Sprint and people that work for Cogent. They all work for one company. As Thad said, we are collapsing 20 billing cycles to two to mirror Cogent. We're doing that by pushing those customers into Cogent's systems. We're not gonna operate two separate databases, two separate networks, two separate customer bases.

It will be impossible to disaggregate. Now, what we will report consistently, which will actually be a headwind to our growth, is we will report all corporate customers. In that, we've got legacy Sprint corporate customers, which have had a higher churn rate than legacy Cogent corporate customers. We understand that we're signing up for a greater headwind, it makes absolute sense to treat these all the same, since they're buying the same products, they're gonna be paying the same thing, and they're gonna be riding the same network. It would be misleading to try to say that we've run two separate businesses. We're gonna run one network, one customer base, one set of products.

Walter Piecyk (Partner)

Roger that. Thanks, Dave.

Dave Schaeffer (CEO)

Thanks, Walt.

Thad Weed (CFO)

Walt, just real quick, I do wanna give you the actual USF numbers before we close view. Sprint was $7 million of the USF sequentially, and total USF went up $6.8 million. Cogent Classic USF was down $200,000 sequentially.

Walter Piecyk (Partner)

Is there a mix of corporate and enterprise in that, or is that just... Are you just giving that as a total number?

Thad Weed (CFO)

No, that's all corporate.

Walter Piecyk (Partner)

That's all corporate.

Thad Weed (CFO)

That's all corporate.

Walter Piecyk (Partner)

Okay, thank you. Got it. Thanks, fellas.

Dave Schaeffer (CEO)

Thanks, Walt.

Operator (participant)

Your next question comes from the line of David Barden with Bank of America. Your line is open.

David Barden (Research Analyst)

Hey, guys. Nice to talk to you again. Thanks for all the detail, Dave, as always. We've spent a lot of time kind of noodling on the Wavelengths and, and the lit services, and, and some of the cost savings opportunities. I think something you, you, you kind of have referenced today, you know, these, these 40 technical facilities, one of which you converted into a Cogent data center. Could you elaborate a little bit on, on this opportunity?

Is this purely a way to expand your reach? with a more on-net approach to some of these products we've already talked about? Or is there an actual distinct data center strategy where you're gonna be putting, you know, X capital to work per technical facility to generate X megawatts of capacity that could generate, you know, Y incremental dollars of revenue? Could you just share with us a little bit on your thinking there?

Dave Schaeffer (CEO)

Yeah. Hey, thanks, David, for the question. The only thing I'm going to dispute is the need to suspend incremental capital to do this. Sprint built a fiber optic network that terminated in tandem switch sites. These switch sites were designed to allow connectivity to l. This was a design back in the 1980s and early 1990s. That network carried exclusively voice traffic until the late '90s. Then carried some proprietary data and a little bit of internet traffic. That network is virtually empty today, almost no traffic on it. It terminates in these former switch sites. There are 482 technical buildings owned fee simple. There's actually 1.6 million sq ft in those facilities.

In addition to that, there's nearly 300,000 feet of leased technical space that we will be exiting as part of our cost savings initiatives, that project is well underway. As we can exit those leases, that is a big part of the way we can save that $180 million run rate in North America, the $25 million internationally. For the old facilities, we looked at the largest of those. There were 45 of them that comprised 1.3 million sq ft and already have 160 megawatts of power to those facilities, that are today generating no revenue, sitting empty with no connectivity to the rest of the world, other than to the Sprint backbone and to ILEC in their territory for TDM interfaces, which are no longer applicable. We are doing four things.

One, we are physically connecting those networks to our metro footprint. We have two reasons to do that: one, to make the data center marketable. two, we need to extend the Sprint network into carrier-neutral data centers, so we can sell Wavelengths. The second thing we're doing is cleaning these facilities out. It's like your attic that's full of old things that you forgot about, and you go buy something new. You got to have a place to put it. You go up there and clean the old junk out. Well, in our case, we want to turn these into data centers, and those 22,500 racks are in the way. They need to come out, and we're going to do that house cleaning, and that's well underway. The third thing that we need to do is go into these facilities and convert the power plants.

Telephone central offices, and that's what these were, are negative 48 volt power plants. Data centers run on positive 120 AC, not DC. You put an inverter in, a relatively modest capital expense to invert that power and turn it into AC. We're doing that at all of these facilities. The final thing we're doing is taking the active network equipment that we will need to operate and put it in one small cage in the corner. Pop in the corner, is what our program is called, and as a result, we will have completely empty, marketable, 160 MW of power and 1.3 million sq ft of space spread across 45 incremental facilities. That's additive to the 55 facilities that Cogent operated pre-acquisition with 70 MW of power. We are going to take those data centers and do two things.

We're gonna take one data hall and turn it into a Cogent data center, meaning retail, sales, one or two racks at a time. There are typically three or four independent data halls in each of these facilities. Those will be sold or leased to either other data center operators on a wholesale basis, or perhaps hyperscalers or AI companies to put equipment in to do compute. That is a very large incremental opportunity. In our business case going forward, we did not anticipate the accelerated demand for edge computing and for AI compute capacity. We were assuming that we would only derive a similar revenue mix from legacy Cogent products, which is about 3% of revenues. If you looked at Cogent Classic, about $20 million a year is coming from our colocation business.

We kind of assumed another, you know, 3% or so of the Sprint revenues could come from colocation. You know, another $15 million to $20 million. I think our thinking has changed, and we do think there is a significant incremental opportunity to monetize that in place, 160 megawatts of power. We will do that over the next year. It is gonna take us at least a year to get these things to be commercially viable, but the demand set that we've seen from some of our larger customers encourages us that I think we'll do a lot better than 3% of revenues with this colo opportunity. We think there may be another $30 million or $40 million of incremental revenue that's not today baked into our forecast. Hopefully, that was helpful.

David Barden (Research Analyst)

Thank you. Yeah, perfect.

Operator (participant)

Your next question comes from the line of Brett Feldman with Goldman Sachs. Your line is open.

Brett Feldman (Managing Director)

Hey, Dave. Two questions, if you don't mind. You talked about this target of getting to $700 million of Wavelengths revenues over a multi-year period. I think that's higher than what you had discussed before. Correct me if I'm wrong, but I'm just curious, what's giving you some confidence in that outlook? Then, you know, obviously, the business is positioned to delever going forward. You're, you know, clearly above your current target range. How are you thinking about your current comfort level with operating closer to the higher end or lower end of that range? Then how does your trajectory of delevering ultimately factor into evolution in capital returns? Meaning, when might you start raising the dividend at a faster pace, or how would you think about buybacks as an alternative? Thanks.

Dave Schaeffer (CEO)

Let's start with the wavelength market. We took the initial view that the market was going to be static at a $2 billion scale. There have been independent third-party studies that indicate that market is gonna grow at about 7% a year. We have said that we will get to 25% market share over a 7-year period. The $700 million number just represents the same 25% market share of a slightly larger market. What appears to be driving the growth in that market seems to be these AI applications for large data replication that do not sit well on the public internet. Let's be very clear, a wavelength is less flexible and higher cost per bit than using the public internet.

The public internet is the majority of traffic in the world, and it's where the majority of growth is coming from. There now is a new driver for this premium service of Wavelengths, and we feel uniquely positioned to be able to capture that. We think our growth is gonna be relatively linear. We're gonna get to a 25% market share, and right now, we believe that market appears to be growing, and that's a positive for us. Now, to the leverage question.

Brett Feldman (Managing Director)

Hey, hey, Dave

Dave Schaeffer (CEO)

There is

Brett Feldman (Managing Director)

Dave, sorry, if you don't mind, if you don't mind, just to follow up on the wave question before we get to leverage. Can you just give us your, your, the update, how are you pricing in the wave market right now? How much of a discount? You, you talked about how it's a premium price market, but are you, are you coming in saying, "Well, it's not premium price if you, if you buy with Cogent because you have such a low cost base?

Dave Schaeffer (CEO)

We have four distinct levers to pull in winning business. I think the most important is the uniqueness of the routes. They weren't available in the market before, and people want routes that we have for diversity. Secondly, it will be the ubiquity of the number of data centers that we are offering services. Part of Cogent's strategy is to go wide and have the ability to provision quickly transit, and now Wavelengths, in every data center where there is demand. The third thing that we have is the ability to offer an end-to-end solution. In many situations today, a customer has to buy a metro wave from one vendor and an inner city wave from a different vendor. We will have a holistic end-to-end solution with seamless provisioning. The fourth thing, which is critical, is to being able to actually deliver what you sell.

What we have heard consistently from the marketplace is that many of our competitors fail to deliver or don't deliver in a timely manner. It is critical that we replicate our service delivery quality for Wavelengths as we have delivered on transit. Now, with those four advantages, we will use price. My goal is not to destroy the market, but it is to capture market quickly. We will discount, but we have an established brand, we have an established sales force, and because of that, I don't think we will need to be as aggressive as we were in the transit market.

We will, if necessary, go there, because as Walt said, "I got a network for $1." That's great, but I don't want to sell it cheaper than I have to. If it takes price to clear the market, we'll use it, and we feel very comfortable that our market share targets and revenue scale are definitely achievable. Now, I'll switch to your leverage question.

Brett Feldman (Managing Director)

Thank you.

Dave Schaeffer (CEO)

Arithmetically, we are going to delever very rapidly because of the payments from T-Mobile and the ramping of this incremental high margin revenue stream. You know, the cost of capital is higher today than it was two or three years ago. We could not replicate our debt at its current levels today. Rates may come back down, windows to refinance will open, but I think in the short term, we are committed to bringing leverage down. We also don't want to hoard cash. We don't want an inefficient balance sheet, so we will opportunistically add debt when it makes sense, and we intend to maintain that leverage within the range that we've laid out. You know, a 2.5-3.5 times net covered target. We're above that now. We're going to come down and be in that range.

What we do with that extra capital is going to be market driven. We are committed to not hoarding capital. We are committed to doing no bad M&A. Hopefully, this transaction shows investors the discipline that we've applied to 825 targets and how we view them when we do M&A. you know, there's no deal worse than a bad deal, and we're not going to do a bad deal. That means we're going to have extra cash, and it probably means we'll be raising the rate of dividend growth when appropriate, or we will supplement it with buybacks. The commitment our board has made and we're making is, we are going to return the capital. We're going to look to make sure shareholders are rewarded for being with Cogent.

Brett Feldman (Managing Director)

Thank you.

Operator (participant)

Your next question comes from the line of Timothy Horan with Oppenheimer & Co.. Your line is open. Tim, your line is open.

Timothy Horan (Managing Director and Senior Analyst)

Sorry, you guys have got a major improvement in net centric pricing. Do you think that's sustainable, and what, what do you think is driving that? Then I just had some basic questions on the, on the go-forward guide.

Dave Schaeffer (CEO)

Yeah. In terms of net-centric pricing, there are really four factors that weigh into that pricing: how much a customer buys, how long they buy for, and in what geography they are buying. You layer on top of that, existing customers that tend to look to extend their commitments each and every quarter. You know, we typically see about 2,500 customer connections a quarter that end up doing a reprice and extend. This quarter was no different. I think when we layer those overall pricing disciplines onto our customer base, we are going to see a slight moderation in the rate of price decline for net-centric. More of the growth is coming from international markets. More of the growth is coming from smaller customers in general.

We are seeing, however, large customers also having this new use case that they didn't have before and driving some growth. When we kind of layer that together, you know, the 23% long-term decline in price per megabit is probably moderating a little bit, maybe reducing down to, you know, a 20% rate of decline. The price of transit is going to continue to come down for two reasons. The market is sufficiently competitive. We are not a monopolist. I wish we were, but we're not.

Then secondly, that the underlying technologies to produce routed bit miles continue to improve at pretty consistent rates. You know, whether it be optically interfaced, routing, improving at about a 40% per year CAGR or, wave division multiplexing, improving at about an 80% compounded improvement, those underlying trends are going to continue. I think it would be naive to think that net-centric prices will ever plateau, but I think the rate of decline will moderate.

Timothy Horan (Managing Director and Senior Analyst)

If the rate of decline is 500 basis point improvement, but you're seeing a lot of improvement from geo, from geographic, diversification, from customer diversification, and now, you know, new use cases. It'll look better than the 20% decline for a while because of these?

Dave Schaeffer (CEO)

That's right, Tim. That, that's exactly right.

Timothy Horan (Managing Director and Senior Analyst)

Then on the, just on the guide, the, the, the guidance for the 6% revenue growth long term and 100 basis points improvement, can you just give us the base that that's off of? I guess related to this, can you give us some sense of what the revenue and EBITDA are, are gonna look like for the Q3? I, I know you don't give guidance, but, you know, we have a, a ton of moving parts here. I know both of these are related. Thank you.

Dave Schaeffer (CEO)

Well, this is a much longer call than I think most people would like, but I think it is critical for foundational reasons to give all of this background. To be clear, the revenue guidance is a range of 5%-7%. You pick the midpoint of that over the next multi-year period. The base that is off of is the combined revenue of the company, and within that base, there are multiple components. There are non-core revenues that we want to go away and go down. There are corporate and NetCentric revenues, to Walt's question about reporting, that are now combined. There are enterprise customers that are combined, and then there is the new product of Wavelengths that will be reported independently. The Wavelengths, like any other on-net product, carry the absolute highest incremental margin.

We also have T-Mobile as a customer, above and beyond their transit purchase from us for other services, that we know will decline over time as they wean their wireless network's dependence on the transport network that we acquired. These were intermeshed assets. When we put all of those pieces together, we will be building off of a revenue base of about $1.1 billion, $1.2 billion a year, growing at 5%-7%.

When we look at the mix of products that we will have on-net and off-net, we will be able to deliver about 100 basis points a year of margin expansion. In the Q3, because we will have three payments from T-Mobile, not one, and in Q2, we had two months of expense and only 1 month of payment from T-Mobile. In Q3, we'll have reduced expense in three months. We should have margins in, you know, inclusive of the T-Mobile transit payment in the mid-thirties.

Timothy Horan (Managing Director and Senior Analyst)

The 100 basis points guide, is that off that, that mid-30s range?

Dave Schaeffer (CEO)

It is. Remember, over a multi-year period, that T-Mobile payment for the $700 million transit agreement is gonna step down. You know, you know.

Timothy Horan (Managing Director and Senior Analyst)

I mean, also, I mean, 10 years from now, the goal would be 45% off that 35%, roughly. Extremely roughly.

Dave Schaeffer (CEO)

Yeah, I think that's a fair way to think about it, Tim.

Timothy Horan (Managing Director and Senior Analyst)

Great job. Thanks, Dave. Good luck.

Dave Schaeffer (CEO)

Hey, thanks.

Operator (participant)

Your next question comes from the line of Nick Del Deo with MoffettNathanson. Your line is open.

Nick Del Deo (Managing Director)

Hey. Morning, Dave. Just want to confirm that the revenue from the commercial agreement with T-Mobile is being allocated entirely to NetCentric.

Dave Schaeffer (CEO)

yes, it is entirely NetCentric. It is predominantly on-net. There is a small component of it that is off-net, and it is for two primary services: Layer 2 VPN services and colocation.

Nick Del Deo (Managing Director)

Okay. Now I think you said earlier. I forget who asked the question, but I think you said that if you deducted the commercial agreement from the NetCentric results in Q2, you got growth rates that were similar to Q2 of a year ago.

Dave Schaeffer (CEO)

Yeah.

Nick Del Deo (Managing Director)

When I adjust for it I get numbers that are, you know, slightly up sequentially. Just want to confirm, you know, what you said, because I'm trying to figure out how to allocate these, you know, these changes appropriately.

Dave Schaeffer (CEO)

Yeah, I think that's right, Nick. Last year, in Q2 of 2022, I think our sequential NetCentric growth was roughly 0.3%. You know, it tends to be not the biggest traffic growth quarter, you know, because of the heavily dependence on students and the fact that people start to go outside more. I think, you know, it clearly was much better sequentially because of the sale to T-Mobile, of these non-transit services, predominantly on-net. They are counted as bad central.

Nick Del Deo (Managing Director)

Okay. Okay, got it. Thanks for that. Then, you know, second, just thinking about EBITDA. Yeah, can you talk a bit about, you know, costs that may have weighed on the bottom line this quarter, you know, that are deal related, that you're not specifically breaking out? Like, I remember in, in his remarks, and I think in the queue, you mentioned, you know, some bad debt expense for Sprint. That seems like it's sort of a one-time initial thing. I'm wondering, is there, you know, severance or termination costs you're not breaking out, over time, other inefficiencies? You know, stuff like that, that we should consider when looking at the bottom line results.

Dave Schaeffer (CEO)

Yeah. Thad did mention the need to reestablish a bad debt reserve for the acquired business, 'cause there wasn't one previously in our accounting, and that was a $3 million SG&A hit that was one time to this quarter. We also have the inefficiencies of processing payments through T-Mobile under the Transition Services Agreement. The, you know, $118 million that we have to send them is primarily for them to send to vendors. You know, while those payments are handled remotely, we will not have the ability to be as disciplined as I think we are in terms of auditing them and being, you know, very aggressive with our vendors. We fully intend to bring that in-house quickly.

As it turns out, we were expecting to transition the IS infrastructure from T-Mobile to Cogent and run it in parallel for a year. We have been unable to do that due to some of the security concerns that T-Mobile is, you're dealing with. We have accelerated our timeline to move all of the customers, all of the network tools and monitoring into Cogent systems in the Q3. By year-end, the legacy Sprint and T-Mobile systems, the roughly 220 software tools that they use, will only be for archival purposes. With that, we absolutely expect to get some additional benefits and cost savings that we have not fully quantified, that, you know, we just said they are probably better than our models project.

We also, in terms of headcount, you know, when we started looking at this business, there were almost 1,800 employees. When we signed our purchase agreement last September, there were 1,320 employees. We ended up acquiring 942 of those employees. You know, we understand that we will probably have some more headcount that doesn't fit well in the Cogent model. We, as part of our total agreement with T-Mobile, have the ability to pay severance to those employees and have that severance funded by T-Mobile. We don't anticipate that being an additional drag, and we do expect that there will be, both through realignment, retirements, as Thad said, the average employee has been here 22 years.

We'll probably see another 100-150 people on the operation side eventually exit the combined company, resulting in additional incremental SG&A savings. We have office consolidations underway that are part and parcel of those savings numbers. I think there are some additional SG&A benefits that are not fully baked into our model. We kind of focused on the network first.

Nick Del Deo (Managing Director)

Okay. Just to be clear, with, with respect to severance, you know, from an accounting perspective, is that reported on a gross basis, you know, when you get reimbursed by T-Mobile, or is it reported on a net basis? How should we think about that?

Thad Weed (CFO)

The entire cost of the severance would not hit our P&L since it's reimbursed by T-Mobile. It would be, you know, our cash out the door when it's paid and then billed to them on the next month, and then we would be reimbursed. When you see the amount due from T-Mobile under the RTSA, a lot of that will increase in, in, after June because of severance amounts that were paid. We have no P&L impact on that.

Dave Schaeffer (CEO)

Right. We can't report that as revenue when it's expense.

Thad Weed (CFO)

It's not revenue, and it's not expense. It's, it's just a cash transaction.

Nick Del Deo (Managing Director)

Okay. Okay, got it. You know, last, just kind of quickly, sorry for, for dragging this out. Yeah, what was behind the decision to treat the transit payments in EBITDA, or, or rather to include them based on when they're paid rather than when they're billed or accrued?

Dave Schaeffer (CEO)

We had to reconcile to the cash flow statement, and you can't reconcile accruals to that. You know, EBITDA is a non-GAAP measure. We felt that it was critical that investors understood this money was coming in and how it impacted our ability to pay our bills and meet the cash burn of the acquired operating business, and it made the most sense to reconcile it to the cash flow statement. As such, you can only recognize it as you receive it, not as you bill it.

Nick Del Deo (Managing Director)

Okay, got it. Thanks, guys.

Dave Schaeffer (CEO)

Okay, thanks.

Operator (participant)

Your next question comes from the line of Brandon Nispel with KeyBanc. Your line is open.

Evan Scott (Investment Banking Associate)

Hey, guys, it's Evan on for Brandon. I guess first question, with the 100 basis point margin expansion, is that based off of the mid-thirties that we're at from 2Q? Just trying to gauge where we're gonna end up for the EBITDA at the end of the year. I was just wondering if you guys have had any more learnings about dark fiber? It seemed like you were still not quite sure what the market was looking like or what the demand would be like. Just wondering if there's been any developments with that. Thank you.

Dave Schaeffer (CEO)

Hey, Evan. I'll take those in reverse order. We are absolutely committed to monetizing the assets we have, and that includes selling dark fiber. We need to better understand the inventory and the demand set on a route-by-route basis. We have had a number of requests for dark fiber. We are not in a position to start selling that because we don't have a complete enough view of the demand set, the pricing we could achieve, and the overall inventory that we have. We will be in a position, probably in about a year, to really consider those dark fiber sales. They are not baked into our model at all. There is nothing in there, it is, again, something that is 100% margin and completely additive.

We wanna be, I think, thoughtful before we sell that long-term asset or lease it on a long-term basis. To your question around margins, the overall trend is to see 100 basis points a year of margin expansion over, say, the next decade or so. The inclusion of the payments from T-Mobile are in that, but we also know those payments will be stepping down. You know, I think you need to look at it on a long-term basis, rather than try to use that 100 basis points and divide it into a 25 basis point improvement every quarter sequentially.

As I said, over a 10-year period, answering Tim's question, we will achieve those types of goals. You know, there's gonna be a lot of moving parts here, whether it be these incremental sales and margin opportunities that we've discussed, whether it be incremental savings, and also the decline in both commercial services to T-Mobile, as well as ultimately the sunsetting of their transit payment to us. Really think of these as long term. You're not gonna trick us into giving you a year-end EBITDA number.

Evan Scott (Investment Banking Associate)

Okay, I'll try. Thanks.

Dave Schaeffer (CEO)

All right, thanks, Evan.

Operator (participant)

Your final question comes from the line of Michael Rollins of Citigroup. Your line is open.

Michael Rollins (Managing Director)

Thanks, and, and good morning, and, and thanks for fitting the questions in. Two more, if I could. First, when you look at the contracts of the acquired customer relationships, what's the pacing that you'll be able to manage each of these relationships over to either push them into a product menu that's good for Cogent or ask the customer to consider alternatives, you know, given the direction of focus for Cogent and the acquired assets? Then the second question would be on just CapEx. If you can give us an update of how to think about the heritage pacing of CapEx through the rest of this year and, and next year, as well as the opportunities to invest that capital you're describing to do the integration and augment the assets that you purchased to enable all the new products and services that you want to offer. Thank you.

Dave Schaeffer (CEO)

Yeah. Hey, thanks. Thanks for sticking around so long, Michael, to ask the question. Let's start with the customer contracts. You know, probably the longest duration customer contracts that we acquire from Sprint run through the end of 2026. I would say the average remaining term on the contract is about 18 months. The contracts, though, are very custom, very bespoke, and they fall into two primary categories. One is for the services as they exist today. The second is for incremental services going forward. Virtually all of these customers are continuing to do moves, adds, and changes, so therefore, incremental services. Each time one of those requests for new services are originated, we have the opportunity to have a discussion about modernizing the products.

Finally, these customers have been notified by T-Mobile as part of the purchase process and have been reminded by Cogent about sunsetting certain products and end-of-lifing them. Those are those 19,000 non-core products and the $8.4 million of revenue in the quarter that came from those non-core products. We will continue to manage those out. There have been some customers said, "Please give us a little more time," and we've addressed those on a customer-by-customer basis. For the moves, adds, and changes, there are three changes that customers are being informed of. one, our desire only to sell services delivered over fiber. Therefore, we are sunsetting local access loops that are delivered over copper, coax, wireless, or satellite.

You know, we're not religious about this in the sense that, yeah, we'll accommodate a customer if there's no other alternative in a short term, but long term, we are looking for quality of service purposes and scalability only to use fiber. The second big change is international sales in countries that we are not licensed. We today have licenses in 55 countries. We're operational in 54 of those 55, and we serve customers that are based in about 180 countries. The method that Sprint used to procure loops in those non-licensed markets is not something we are comfortable with. I don't believe it technically fits in what the country is trying to do in its licensing regime. For that reason, we have altered the way in which those customers can buy services in those non-licensed markets.

These are places like Yemen, Uruguay, even China, where it is very difficult for a U.S.-based company to get a license. There are only 2 countries in the world where customers have to have a license to buy. There are 200 countries where service providers have to have a license to sell. What we are requiring is, for some of those exotic locations, that we will purchase, on behalf of the customer, that tail circuit, but they will get 2 bills, one for Cogent, for the port in a country where we're licensed, and the second will be a loop from that provider in that country where they are in direct contract. That will be a difference for those services in those markets.

The final change, which is a little different than we had anticipated when we first looked at the asset and even at closing, is our ability to support MPLS over a longer timeframe. We firmly believe that the customers should migrate to a VPLS platform, and we are encouraging them to do that. When talking to customers, what we have found is there is a huge desire for them not to have to go through that forklift upgrade for... Like I said, one customer had 1,600 sites. We came up with a technological way, using equipment that we have pulled out of the Cogent network. We have nearly 3,000 routers sitting on the shelves that we viewed as obsolete, that can support MPLS.

A very positive message we've delivered to our customers is our willingness to support those MPLS circuits for up to a decade. That has been very well received by those customers and, you know, the majority of the pain is coming in these non-core products. We actually think there will be more ability for us to retain and even grow some of the incremental business from those customers than we had initially expected. Now, to your CapEx question, you know, there are four buckets of CapEx. There is the Cogent core, $35 million of maintenance CapEx.

There's about $30 million of Cogent expansion CapEx. There is about $30 million of maintenance CapEx inside of the acquired business of Sprint. Then finally, we had a $50 million number for integration CapEx. We've spent a little over $30 of that. There's about $20 more to spend. We don't anticipate that changing. I think, you know, on a run rate basis, investors should expect roughly a $95 million to $100 million combined CapEx number. Maybe slightly elevated for the remainder of this year due to the completion of those integration projects, but I think that run rate should be pretty good going forward.

Michael Rollins (Managing Director)

Thanks, Dave.

Dave Schaeffer (CEO)

Hey, thanks, Mike.

Operator (participant)

There are no further questions at this time. I will turn the call back to Mr. Dave Schaeffer for closing remarks.

Dave Schaeffer (CEO)

Well, thank you all very much. Hopefully, this was not too confusing. We tried to be as transparent and consistent as possible. I want to thank everyone for their patience, for being on this call. If you had to predict, the one surprise I didn't hear anyone ask is how we reported $24 of EPS in a quarter. You know, I can assure you we won't repeat that again next quarter. Take care, everyone. Stay well, and we're available to answer follow-on questions. Thanks.

Operator (participant)

This concludes today's conference call. Thank Thank you for joining. You may now disconnect your lines.