Cogent Communications Holdings, Inc. (NASDAQ: CCOI) today announced service revenue of $257.2 million for the three months ended September 30, 2024, a decrease of 1.2% from the three months ended June 30, 2024 and a decrease of 6.6% from the three months ended September 30, 2023. On the closing date of the Sprint acquisition, Cogent and T-Mobile entered into a commercial agreement, for colocation and connectivity services. Revenue under the Commercial Agreement was $4.1 million for the three months ended September 30, 2024, $5.9 million for the three months ended June 30, 2024 and $8.0 million for the three months ended September 30, 2023. In July 2024, we terminated an uneconomic resale agreement. Our on-net revenue and enterprise revenue from this resale customer acquired in connection with the Wireline Business was $1.7 million for the three months ended September 30, 2024, $5.1 million for the three months ended June 30, 2024 and $5.1 million for the three months ended September 30, 2023.
On-net service is provided to customers located in buildings that are physically connected to Cogent’s network by Cogent facilities. On-net revenue was $136.5 million for the three months ended September 30, 2024, a decrease of 3.0% from the three months ended June 30, 2024 and an increase of 5.8% from the three months ended September 30, 2023.
Off-net customers are located in buildings directly connected to Cogent’s network using other carriers’ facilities and services to provide the last mile portion of the link from the customers’ premises to Cogent’s network. Off-net revenue was $111.3 million for the three months ended September 30, 2024, a decrease of 0.1% from the three months ended June 30, 2024 and a decrease of 14.8% from the three months ended September 30, 2023.
Wavelength revenue was $5.3 million for the three months ended September 30, 2024, an increase of 45.8% from the three months ended June 30, 2024 and an increase of 76.7% from the three months ended September 30, 2023.
Non-core services are legacy services, which Cogent acquired and continues to support but does not actively sell. Non-core revenue was $4.1 million for the three months ended September 30, 2024, $4.6 million for the three months ended June 30, 2024 and was $12.8 million for the three months ended September 30, 2023.
GAAP gross profit is defined as total service revenue less network operations expense, depreciation and amortization and equity-based compensation included in network operations expense. GAAP gross margin is defined as GAAP gross profit divided by total service revenue. GAAP gross profit decreased by 34.9% from the three months ended September 30, 2023 to $9.8 million for the three months ended September 30, 2024 and decreased by 67.5% from the three months ended June 30, 2024.
GAAP gross margin was 3.8% for the three months ended September 30, 2024, 11.6% for the three months ended June 30, 2024 and 5.5% for the three months ended September 30, 2023.
Non-GAAP gross profit represents service revenue less network operations expense, excluding equity-based compensation and amounts shown separately (depreciation and amortization expense). Non-GAAP gross margin is defined as Non-GAAP gross profit divided by total service revenue. Non-GAAP gross profit decreased by 6.0% from the three months ended September 30, 2023 to $96.1 million for the three months ended September 30, 2024 and decreased by 8.1% from the three months ended June 30, 2024.
Non-GAAP gross margin was 37.4% for the three months ended September 30, 2024, 40.2% for the three months ended June 30, 2024 and 37.1% for the three months ended September 30, 2023.
Net cash used in operating activities was $20.2 million for the three months ended September 30, 2024, $22.2 million for the three months ended June 30, 2024 and $52.4 million for the three months ended September 30, 2023.
Total Sprint acquisition costs were $0 for the three months ended September 30, 2024, $12.4 million for the three months ended June 30, 2024 and $0.4 million for the three months ended September 30, 2023.
IP Transit Services Agreement
On May 1, 2023, the closing date of the Sprint acquisition, Cogent and T-Mobile USA, Inc. (“TMUSA”), a Delaware corporation and direct subsidiary of T-Mobile US, Inc., a Delaware corporation (“T-Mobile”) , entered into an agreement for IP transit services (the “IP Transit Services Agreement”), pursuant to which TMUSA will pay Cogent an aggregate of $700.0 million, consisting of (i) $350.0 million paid in equal monthly installments during the first year after the closing date of the Sprint acquisition and (ii) $350.0 million paid in equal monthly installments over the subsequent 42 months. Amounts paid under the IP Transit Services Agreement were $25.0 million, $66.7 million and $87.5 million in the three months ended September 30, 2024, June 30, 2024 and September 30, 2023, respectively.
Earnings before interest, taxes, depreciation and amortization (EBITDA), as adjusted, for Sprint acquisition costs and cash paid under the IP Transit Services Agreement, was $60.9 million for the three months ended September 30, 2024, $106.2 million for the three months ended June 30, 2024 and $131.4 million for the three months ended September 30, 2023.
EBITDA as adjusted, for Sprint acquisition costs and cash paid under the IP Transit Services Agreement margin, was 23.7% for the three months ended September 30, 2024, 40.8% for the three months ended June 30, 2024 and 47.7% for the three months ended September 30, 2023.
Basic and diluted net (loss) per share was $(1.33) for the three months ended September 30, 2024, $(0.68) for the three months ended June 30, 2024 and $(1.20) for the three months ended September 30, 2023.
Total customer connections decreased by 8.5% from September 30, 2023 to 126,333 as of September 30, 2024 and decreased by 1.9% from June 30, 2024. On-net customer connections decreased by 0.7% from September 30, 2023 to 87,655 as of September 30, 2024 and increased by 0.3% from June 30, 2024. Off-net customer connections decreased by 12.2% from September 30, 2023 to 32,420 as of September 30, 2024 and decreased by 1.0% from June 30, 2024. Wavelength customer connections were 1,041 as of September 30, 2024, 754 as of June 30, 2024 and 449 as of September 30, 2023. Non-core customer connections were 5,217 as of September 30, 2024, 7,883 as of June 30, 2024 and 12,403 as of September 30, 2023.
The number of on-net buildings increased by 167 from September 30, 2023 to 3,424 as of September 30, 2024 and increased by 38 from June 30, 2024.
Quarterly Dividend Increase Approved
On November 6, 2024, Cogent’s Board approved a regular quarterly dividend of $0.995 per share payable on December 6, 2024 to shareholders of record on November 22, 2024. This fourth quarter 2024 regular dividend represents an increase of $0.01 per share, or 1.0%, from the third quarter 2024 regular dividend of $0.985 per share and an annual increase of 4.2% from the fourth quarter 2023 dividend of $0.955 per share.
The payment of any future dividends and any other returns of capital will be at the discretion of the Board and may be reduced, eliminated or increased and will be dependent upon Cogent’s financial position, results of operations, available cash, cash flow, capital requirements, limitations under Cogent’s debt indentures and other factors deemed relevant by the Board.
Continued Impact of Changing Office Occupancy Rates on Corporate Results
Cogent continues to witness lower office occupancy rates overall in the buildings it serves in central business districts in North America, largely attributable to remote work policies originally instituted during the COVID-19 pandemic. Since the end of the pandemic, and despite some improvement in certain markets, Cogent continues to see office occupancy rates that do not approach pre-2020 levels. Because of the rising vacancy levels and/or lower numbers of lease initiations or renewals resulting in fewer tenants, Cogent has experienced a slowdown in new sales to its corporate customers, which has negatively impacted its corporate revenue results. This overall trend is not uniform throughout North America; Cogent has seen declining vacancy rates and increasing office occupancy rates in some cities, including in the three months ended September 30, 2024. Moreover, as the option to fully or partially work from home becomes permanently established at many companies, Cogent’s corporate customers are integrating some of the new applications that were part of the remote work environment into their everyday use, which benefits Cogent’s corporate business as these customers upgrade their Internet access infrastructure to higher capacity connections. These factors have helped mitigate the impact of lower office occupancy rates and during the three months ended September 30, 2024, Cogent continued to see these positive trends in its corporate business in some markets. If and when companies eventually return to the buildings in which Cogent operates, whether existing tenants or new tenants, Cogent believes it will present an opportunity for increased sales. However, the exact timing, path and spread of these positive trends remains uncertain, office occupancy rates in some markets may not recover, and Cogent may continue to see increased corporate customer turnover, fewer upgrades of existing corporate customer configurations and fewer new tenant opportunities, which would negatively impact Cogent’s corporate revenue growth.
These and other risks are described in more detail in Cogent’s Annual Report on Form 10-K for the year ended December 31, 2023 and in its Quarterly Reports on Form 10-Q for the quarterly periods ended June 30, 2023, September 30, 2023, March 31, 2024, June 30, 2024 and September 30, 2024.
About Cogent Communications
Cogent Communications (NASDAQ: CCOI) is a multinational, Tier 1 facilities-based ISP. Cogent specializes in providing businesses with high-speed Internet access, Ethernet transport, and colocation services. Cogent’s facilities-based, all-optical IP network backbone provides services in 260 markets globally.
Cogent Communications is headquartered at 2450 N Street, NW, Washington, D.C. 20037. For more information, visit www.cogentco.com.
