CCOI Q2 2024: 62% of $220M Savings Boost Margins Despite $40M Headwind
- Robust Cost Synergies and EBITDA Margin Expansion: Management highlighted strong cost control and further cost‐saving opportunities—already achieving 62% of its targeted $220 million annual cost savings—with expectations of continued margin improvements as integration progresses.
- Accelerating Wavelength Business Growth: The company is aggressively ramping up its wavelength enablement, expanding from 574 to a target of 800 wave-enabled data centers by year‑end with a substantial backlog of over 2,700 wavelengths, targeting $500 million in wave revenue by 2028.
- Enhanced Pricing Power and Asset Monetization: Executives emphasized plans to raise pricing on its legacy IPv4 leasing base—from an average of $0.30 to $0.51 per address—and benefit from asset monetization through accelerated data center conversions and improved ARPU on on‑net services.
- Dependence on declining T‑Mobile payments: The step‐down in IP Transit cash payments—increasing the headwind by approximately $40 million—raises concerns that lower operating cash flow could pressure margins and delay EBITDA growth.
- Execution challenges in the wavelength rollout: The slow conversion of the current 156 sold locations out of 574 wave-enabled centers, with ambitious plans to reach 800 by year-end, indicates potential delays or execution risks that may postpone margin improvement from higher‑speed wavelengths.
- Risks from corporate churn and non‑core service exit: The intentional shedding of unprofitable, non‑core, off‑net services and low‑margin corporate products—while aimed at improving margins—could reduce recurring revenue if core new sales fail to offset this churn.
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Margin Outlook
Q: EBITDA margins expected to improve?
A: Management believes that EBITDA classic margins will improve as cost cuts and higher‐margin wavelength services help offset the headwind from lower T‑Mobile payments, supporting ongoing margin expansion. -
Cost Savings
Q: How close to cost targets?
A: They have already achieved 62% of their $220M cost saving target and expect additional reductions that will drive positive EBITDA growth starting in 2025. -
Wavelength Growth
Q: When will wavelength reach target?
A: The plan is to enable wave services in 800 data centers by year-end, with a robust backlog of 2,700 circuits that should boost ARPU through higher-capacity offerings. -
Corporate Revenue Trends
Q: What’s driving corporate revenue change?
A: Management explained that corporate on-net revenue is growing as unprofitable Sprint off-net contracts and non-core products are phased out, leaving a healthier, higher-quality customer mix. -
IPv4 Pricing Strategy
Q: Why raise IPv4 pricing?
A: They increased the average price to $0.51 per address for new sales to better capture the scarcity value of IPv4 assets, with plans to adjust legacy rates as market demand strengthens. -
Dark Fiber Enablement
Q: When will dark fiber sales start?
A: The sales team anticipates initiating modest dark fiber deals in Q3, with full capability expected by year-end once network wave optimization is completed. -
Customer Churn & Mix
Q: What are the churn trends?
A: Corporate churn remains low at around 1.2% per month, aided by the strategic removal of low-margin, non-core contracts and a shift toward higher-capacity, profitable connections.