Good morning, and welcome to the Cogent Communications Holding Third Quarter 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 Cogent’s 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.

Thank you, and good morning, everyone. Welcome to our third quarter 2023 earnings call. I’m Dave Schaeffer, Cogent’s CEO. With me on this morning’s call is Tad Weed, our Chief Financial Officer. Hopefully, you’ve had a chance to review our earnings press release. Our press release includes a number of historical quarterly metrics, which we present in a consistent manner each quarter. Now, for a few comments on our results. We closed our acquisition of the Sprint business on May 1, 2023. This transaction significantly expanded our network, our customer base, and materially increased the scope and scale of our business. Our annualized revenue run rate now exceeds $1 billion. We acquired a number of large enterprise customers, many of which are Fortune 500 companies. Customers that are typically larger than our typical Cogent corporate customer base. We acquired significant owned fiber optic roots and facilities. We acquired numerous right-of-way in relationships with the underlying landowners, which represent over tens of thousands of route miles of dark fiber. These assets and relationships would be virtually impossible for us to assemble on our own. We hired many valuable experience Sprint business employees. Many of these sprint business employees had an average tenure with the company of 22 years prior to the acquisition. We acquired a network with an appraised value of over $1 billion for $1. We will receive a total of $700 million from T-Mobile to offset operating losses for serving enterprise customers and for providing T-Mobile IP Transit Services. $350 million in the first year for $29.2 million in monthly installments, and then $350 million over the next 42 months for a monthly installment of $8.3 million per month. We are very optimistic about the cash flow generating capabilities of the combined operation. Our recent results show we achieved…

Thank you, Dave, and 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. If 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. We analyze our revenues based upon network connection type, which is on-net, off-net, wavelength services, and non-core services. And we also analyze our revenues based upon customer type. We classify all of our customers into three types, net-centric customers, corporate customers, and enterprise customers. Our corporate customers buy bandwidth from us in large multi-tenant office buildings or in carrier neutral data centers. These corporate customers are typically professional services firms, financial services firms, and educational institutions located in multitenant office buildings, or connecting to our network through our carrier neutral data center footprint. Our net-centric customers buy significant amounts of bandwidth from us and carrier neutral data centers, and include streaming companies and content distribution service providers, as well as access networks who serve consumer and business customers. Our corporate and enterprise customers generally purchase our services based upon a price-per-location, and our net-centric customers purchase our services based upon price-per-megabit. Comments on the corporate business. Our corporate business continues to be influenced by real estate activity in central business districts. Two key statistics including the level of…

Hey, thanks, Ted. I’d like to highlight a couple of strengths of our network, our customer base and sales force. We continue to experience significant revenue and traffic growth in our legacy, net-centric business. We are direct beneficiaries of increased streaming over-the-top video and other streaming applications, particularly in international markets. At quarter’s end, we were on-net in 1,528 carrier neutral data centers and 60 of Cogent-owned data centers for a grand total of 1,588 data centers, more than any other carrier as measured by independent third-party research. The breadth of our coverage enables our net-centric customers to better optimize their network and reduce legacy. We expect that we will continue to widen this lead in the market and project to add approximately an additional 100 carrier neutrals per year to our network footprint over the next several years. We expect to convert an additional 41 of the former Sprint technical facilities to new Cogent data centers. To date, we have converted four of these facilities. As of today, we are selling wavelengths in 50 carrier neutral data centers with reasonable provisioning windows, and we are selling wavelengths in 250 additional locations with a prolonged ability to install those services. In the next 14 months, we expect to be able to sell wavelength services in 800 U.S. carrier neutral data centers with substantially reduced provisioning times. Our network traffic growth accelerated in a quarter. Our traffic growth increased by 6% sequentially and 26% year-over-year. We expanded our footprint and have additional IRUs and owned fiber and right-of-way agreements. At quarter’s end, we are the most interconnected network in the world with 7,971 networks directly connected to Cogent. This collection of ISPs, telephone companies, cable companies, mobile operators, and other carriers allow us to reach directly the vast majority of the…

[Operator Instructions] Our first question comes from Greg Williams from TD Cowen. Your line is now open.

Great. Thanks for taking my questions. Dave, I was hoping you can unpack the EBITDA beat by a little bit. I know you’ve integrated the Sprint business with Cogent, but the way so the investors are looking at it is in the core EBITDA for Cogent, typically around $60 million. You’re going to add another $87 million to the T-Mobile payment. And then we’re subtracting the EBITDA burn from the Sprint GMG business. And it sounds like you cut more from Sprint GMG than we appreciate it. So I guess the question is, typically you said you’re at a run rate when you close the business at $180 million burn. Where’s that run rate today? And the second question then is, if you are cutting more than we expected, do you still anticipate breaking even by year two – or end of year two? Or could that be accelerated to breakeven faster? Thanks.

Yeah. So as Tad mentioned, we’re no longer segregating the customer. So the acquired Sprint customers are now fully integrated in the Cogent, and are part of our single accounting and single billing platform. We are ahead of schedule in terms of reducing the expenses of that business, probably the most significant savings comes from the immediate elimination of gross margin negative products. The nearly 9,000 SIP services that we were able to eliminate in the quarter allowed us to improve margins. That termination did not occur until the end of the quarter. So it was a September 30th termination. These customers were given notice of end-of-life of these products a year-ago, when the initial transaction was signed with T-Mobile in early September of 2022. As part of that agreement, T-Mobile agreed to end-of-life a number of products. The SIP product was the largest of those products. The 24 products that we identified for elimination carried negative gross margins. So there are either direct costs or direct employee involvement in those products that we’ve been able to eliminate. We are not in a position today to modify or breakeven 2 years post-closing, but we do feel right now we are running ahead of schedule on those cost synergies and should be able to continue to achieve better cost reductions. There are other non-core products beyond SIP that are also being eliminated. You saw that in the 1,233 products that were eliminated for corporate customers in the quarter that were non-SIP products. Not all of that reduction was non-core, but the majority of it was. So what we’re trying to do is as quickly as possible manage customers away from these unprofitable products. But also, as part of our agreement with T-Mobile, we are going to honor each customer’s contract. And customers have various contractual provisions that require us to provide some of these services through the end of 2026. So it is why we were so definitive in our ability to schedule out the reduction in cost. Now in some cases, we’ve been able to convince customers to allow us to terminate these products early, and that is an added benefit to us in helping us reduce the cash burn.

Got it. Thank you.

Hey, thanks, Greg.

Our next question comes from David Barden from Bank of America. Your line is now open.

Hi, good morning. You got Alex [ph] on for Dave. Dave, maybe just first question here, just in terms of wavelengths, I think it came in a little bit lighter than our expectations. And can you just kind of frame the opportunity and where you think you could be in wavelength revenues at the end of 2024? And then secondly, on SG&A, sorry if I missed it on the call, but can you talk a little bit more about what drove the decrease quarter-over-quarter? And then what kind of the run rate we should expect here for SG&A heading into the next year? Thanks.

Yeah. So I’ll take those in order. On wavelengths, as we commented on the previous earnings call, we had a very narrow set of locations where we can provision within a 60-day window and a larger, but still not adequate set of locations where we can provision within a 120-day window. We have increased the number of locations, where we can provision within that shorter window. We’ve also partially reduced that window down from 60 to about 50 days, still not the 17-day SLA target that we give our transit services. We have over a 1,000 unique wavelength orders either in provisioning or in our sales funnel. That would meet all of our growth objectives, and there will be additional orders being added to that funnel on a daily basis. I want to caution though that some of these orders will have 120- to 130-day provisioning, and as a result some of those orders may not ultimately get installed, customers may be frustrated. While we are trying to manage those expectations, we have a number of foundational steps that we’re taking to streamline our provisioning of wavelength services. We’ve already provisioned this quarter about 150 additional wavelengths just since the close of last quarter. So basically one-third of what we had in the base just got provisioned in the past 6 weeks. We expect that pace to continue to accelerate. We also believe that we will be on a revenue run rate of close to $100 million in wavelength sales post-closing. So in May of 2024, the monthly run rate for wavelength sales should be in the order of about $8 million a month. And our sales funnel, I think supports that and the continued interest that we’re seeing due to the uniqueness of our routes and the ubiquity of locations we wish to serve, I think, are all indications that we’ll do better. On SG&A, some of it is headcount reduction, some of it is facilities consolidation. Those are the two main areas that we’ve been able to achieve SG&A improvements.

There was also a substantial improvement in bad debt expense quarter-to-quarter. That was a $4 million reduction. So we were less than 1% of revenues this quarter. Our typical bogie is about 1% of revenues. So we outperformed on that and bad debt expense was abnormally high last quarter, as we had to reestablish some reserves.

I think we’re at three-tenths of a percent this quarter, which I think is the lowest bad debt expense we’ve had in the company’s history.

Thank you, both.

Our next question comes from Frank Louthan from Raymond James. Your line is now open.

Great. Thank you. I want to talk about the outlook for the business if return to office doesn’t really improve. So how much of that long-term guide that you’ve given out is kind of dependent on an improvement in the return to office environment and what level of occupancy do we kind of need to hit over the long-term to achieve that? And then what are your options if that doesn’t happen to still kind of hit that long-term guidance goal? Thanks.

Yeah, so our long-term growth targets of 5% to 7% are predicated on office occupancy and corporate performance being similar to the current levels that they are at today. Again, we have diversified our total revenue base, now having three discrete segments, being less exposed to pure corporate growth. Our enterprise customers tend to be much more global in their footprint. Just to remind you, 44% of total revenues are corporate, 34% are net-centric, 22% are enterprise. Our net-centric business has actually continued to outperform long-term averages and our ability to have a total revenue growth rate in that 5% to 7% range is possible with vacancy rates remaining elevated at about 15% in central business districts. While we believe that vacancy number will come down, we can achieve our growth rate and our guidance targets at these elevated levels. And our guidance is also predicated on our net-centric business moderating, which it continues to accelerate, as you saw in the traffic stats that we provided sequential growth growing from 4% sequentially last quarter to 6% year-over-year growth growing from 21% to 26%. So material improvements in that business continuing longer. And then, finally, we are very optimistic about our wavelength opportunity based on the breadth of our sales backlog.

And you mentioned on the waves at an $8 million run rate for sales, what is sort of a quarterly run rate of conversion to that from sales to kind of what you’ll be able to recognize in the quarter?

So obviously, the growth rate we achieved in this quarter on waves of 88% sequentially is not sustainable. That growth rate will moderate. I would say that for the, I guess, second quarter of 2024, wavelength sales will probably be in the $20 million range for the quarter, but building throughout the quarter.

All right. Great. Thank you, Dave.

Our next question comes from Walter Piecyk from LightShed. Your line is now open.

Hey, Dave. Just some questions on corporate. I know there’s a lot of moving parts now that you have that Sprint T-Mobile business in there, but it looks like on a pro forma basis, it was down sequentially. I’m just curious when you expect that to grow on a sequential basis.

Actually, I would disagree with it being down. I think the majority of what was down in corporate was the elimination of the SIP product and other non-core products. We did acquire corporate customers from Sprint as well as enterprise customers. If we looked at our MTOB footprint, we actually saw the number of connections grow. So I would kind of disagree with the premise of your statement.

I’d be great if you actually reported, I know, Tad in his prepared remarks gave pro forma sub-growth type numbers, but maybe providing pro forma revenue and EBITDA would have been more helpful. So if we look at the fourth quarter then, is there going to be a similar type of excuse in terms of the shutdown at the end of the fourth quarter? Or should there be actual sequential growth in the fourth quarter?

Well, as we have said, there are still non-core products that we are trying to eliminate as quickly as we possibly can. These products carry negative gross margin. They were a significant contributor to the losses at T-Mobile, and SIP was the largest of these products. But, the run rate...

So what is the baseline that for corporate of non – like, can you give us some type of comparable? So we don’t always have the excuse of like, oh, we just churned off non-core stuff like what is the baseline in corporate revenue of stuff that’s generating gross margin?

So we report the non-core products separately, and we had a run rate of those non-core products of about $11 million. That will go to zero, or it’s as close to zero as possible.

So is that $11 million in the $120 million from the quarter for corporate revenue, that was reported? Any of that $11 million?

$11 million is non-core revenue.

But non-core counts corporate, yes. So the majority of that is in corporate.

So your baseline in corporate is effectively basically one, whatever it is, $120 million minus $11 million, and we’ll just have to get an update on the $11 million every quarter, and then we’ll figure out where your true organic growth rate is? I would suggest maybe you actually just put that in the press release and provide that as a pro forma number to give better transparency to what’s going on in the business. I also have a question on the lease expense. So you moved, I think it was like $12.5 million out of OpEx, so you boost your EBITDA by $12.5 million into CapEx. So if I look at that lease number on CapEx, I think that was like $40 million.

It’s not in CapEx, it’s in principle payments, because it is a lease payment. It is not a CapEx payment.

Got it. Now I understand. So whenever I do this for the telcos, telcos always like to try and exclude that from CapEx, I consider that CapEx. So that’s fine. But bottom line as you moved it, you helped EBITDA and you moved it onto the cash flow statement, fine. Is that a recurring $12.5 million? Is that like how do we look at that number, because obviously free cash flow is ultimately everything that matters?

Right. Yeah, that’s the change in the accounting. So it will continue until the lease expires.

And as we indicated, in the appraisal for the acquired assets, there was approximately $150 million of uneconomic lease obligations that reduced the appraised value to get to the $1 billion value for the network. And the majority of that was associated with this lease. And this lease, in fact, met all of the criteria to be treated as a financing or a capital lease as opposed to an operating lease. This was just a correction, but it will continue until that lease expires.

But the capital lease principal payment, I guess, is how you’re calling it, was $41 million. So of that $41 million, only $12 million was moved out of OpEx helping your EBITDA. Is that, do I have that right?

Yeah, that about right.

That’s correct.

Okay. So what was the other, because last quarter was $8 million. So what are the other $30 million or $25 million payments that are capital leased? And is that an ongoing payment that’s going to pinch your free cash flow?

So we have a total of 315 different suppliers and over 3,000 unique IRUs. Those IRUs fluctuate, some are paid annually, some are paid quarterly, some are paid monthly, some are paid upfront. And you can go back and look at the principal payment on capital lease run rate that we’ve had and see a fair amount of sequential volatility based on the existing [ph] quarter or annual, but you can take the annualized rate and extrapolate that and add this additional $12 million a quarter and that would get you to a...

So what is the annual rate? Because legacy obviously didn’t include Sprint. So if I’m adding $12 million, what is the legacy? Because I look at 2022 and you had $45 million. So you’re saying that it’s basically going to be $50 million.

This is the only finance lease with the acquired business.

This is the only incremental lease.

Got it.

Only finance.

So we’re talking like $60 million on a go forward basis for what you call principal payments, what I call CapEx, but whatever you want to call, it impacts the free cash flow.

That’s correct.

Got it. Awesome. Thank you, Dave.

Yeah.

Our next question comes from Tim Horan from Oppenheimer. Your line is now open.

Thanks a lot, guys. Dave, can you just level set where you think EBITDA margins will be 4 or 5 years from now? Also maybe where you think the wavelength revenue run rate will be at that time? And then just a clarification on your $20 million of sales of wavelength in the second quarter next year. Is that bookings or is that recognized revenue? I mean, will it take another quarter or two to recognize that revenue? Are you talking about actually sales bookings or you actually, when you use the word sales, [that revenue will cost?] [ph] Thanks.

We’re actually talking about revenue run rate recognized installed revenue. And, again, to be clear, we anticipate this backlog that we have as well as additional sales to begin to install with shorter and shorter provisioning windows. But we expect to be doing about $20 million of reported, not bookings, but reported. And, the idea of presenting a backlog number is something, and a bookings number is something that we historically don’t do and probably will do for the next couple of quarters until investors see a consistent cadence in our growth and wavelength revenue. And at that point, we will only be reporting actual revenue, not pipeline and funnels and provisioning cues. But I think in the short-term, that’s necessary. And then to go to answer your question around a 5-year target, and I’m going to use 5 years from closing, so May of 2023 to May of 2028. We anticipate being on a run rate for wavelength sales of approximately $500 million, and a total run rate for the combined business in excess of $1.5 billion, up from the [$1.1 billion of $1.1 billion, $51.2 million] [ph] that we’re running at right now, and EBITDA margins in the mid-30s. And that will be, well, actually, it’ll probably be a little bit above that, because we will still be getting a payment stream from T-Mobile, which will be counted, but will be going away probably by year 6.

Very helpful. And just the way to big market, can you give us just a little bit more color, what’s going on, do you think with the overall growth in that market and volumes and pricing and the competitive dynamics, now that you’ve had more time to be in that market?

Yeah, I mean, we did a fair amount of customer outreach during the period between signing and closing, and since closing, we’re actually taking orders, and the backlog I’ve mentioned is a good indication of that. The demand set seems robust. The list of data centers that people want connectivity to is long. It is fortunate that we’re already in those facilities but are not yet wave-enabled in those facilities. So there’s kind of two steps. One, can we even sell a wave in the facility? And then two, can we provision it in a much more expeditious way? We are working on both fronts. In terms of the demand set, we’re seeing it from some of our larger content companies, hyper-scale type customers. We’re seeing it from a broader set of content players, and a number of regional and international access network operators. And we are seeing a small, but growing set of AI-centric businesses that had traditionally not been wavelength buyers approaching us to buy wavelengths in some of these data centers. So we’re seeing four discrete buckets to three net-centric buckets I’ve just spoken about, and then finally some enterprise customers, who historically had bought waves from Sprint and other enterprise customers who are constructing private networks that are independent of the Internet. A wavelength is more expensive than transit on a per-bit utilized basis. However, it has the three positive attributes of being able to support large file transfers, having predefined latency, and complete diversity from the Internet for greater security. Those are the reasons why companies will pay a premium per bit mile for a wavelength.

I can do.

Our next question comes from Nick Del Deo from MoffettNathanson. Your line is now open.

Hi, good morning, guys. I didn’t catch all the Tad’s comments regarding the TSA change, or at least how that’s recorded. It looks like the balance sheet value in terms of what you owe T-Mobile went down quite a bit. Just to review, is that just a function of getting off their platforms faster? And I think you noted the drop their billing system effective now. What’s left to do on that front?

Yeah, the TSA is entirely associated with paying vendors. So initially they were paying 100% of the vendors we assumed with the Wireline Business on our behalf, and that has been winding down. In the second quarter, we were billed for May and June, however, those payments were not due yet. So we made no payments in the second quarter. That resulted in those charges being cash flow from operating activities of about $118 million. In this quarter, we have made three monthly payments, similar to the IP Transit, but on the cost side instead of the revenue side. So that’s why you see the large swing in that line item if you look at the cash flow statement. At the end of the corner, we still owed $69 million under the TSA agreement, which is essentially 2 months of activity. As we sit here now, we have migrated most of the vendors to our accounts payable systems, and we anticipate having all of the vendors migrated by the end of the year. The long pole and that 10 [ph] has no one would be surprised are some of the circuit vendors, which just take longer based upon their nature to get those migrated.

Right. And then complex to that T-Mobile had consolidated its circuit spends for its wireless business in many instances with the Wireline Business. So not only do we have to migrate that vendor, we have to segregate, the portion of the bill that’s attributable to the business we acquired. And T-Mobile’s been very cooperative in helping us do that, but it is an arduous task with hundreds of vendors. I mean, there are a couple of dozen that really matter in terms of scale. But, I’m actually very pleased that we’re as far along in transitioning our accounts payable into our own systems and being able to pretty confidently say, we’ll have virtually all of them within Cogent systems by year end, and equally impressive, I think, is the fact that we have migrated the billing platform to our platform and will be billing with Cogent bills going forward, actually shutting down the acquired platform that Sprint is used. Just as a point of reference, we still actually get off-net circuit bills from Verizon that say MCI on them. And it’s been probably over 15 years since Verizon acquired MCI. The bill does not say Verizon. It says MCI.

That’s fine. But, again, good work. I’m going to get your system grew over that quickly. Sort of separate question, on the data center front, you converted a few more facilities this quarter, because are you finding that the broader supply pinch in certain data center markets is increasing interest in your data center facilities, whether it’s old Cogent ones or the ones that you’re converting from Sprint? Or is there size and locations and other attributes, power densities, et cetera., I mean they might not necessarily be benefiting from that new supply dynamic?

Yeah, so I’m going to segregate the two groups of data centers, because they are substantially different. The Cogent data centers are all in leased facilities and tend to be smaller both in size and power. Today, we have in the Cogent footprint, including the facilities that we’ve converted, 109 megawatts of power available in those facilities. We still have 41 facilities to convert and we anticipate about another 100 megawatts coming from those facilities. So we concentrated on the facilities that had the biggest footprint of rack space and power. The second challenge we’ve had is that these facilities were occupied by unused telecom equipment. As I had mentioned on our previous call, there were over 22,500 bays of equipment that are not in service, but physically sitting on the floor. We’re removing those right now at the pace of about 400 a week across the footprint. I mean, that’s going to take a year. We’re trying to accelerate that. We have a footprint today that will support a little over 40,000 bays of equipment. So the challenge has been not the interest in our data centers, but really not disappointing customers in making promises that we can’t keep in terms of when these facilities will have vacant space and power that customers can use. The demand set has been strong. There is, at least for now, a short-term crunch in power availability. I think the locations of our facilities are of interest to companies, who are trying to have a more decentralized component to their data center model. So for the largest consumers of data centers space, they currently have kind of a two-tier hierarchy. They’re around proprietary, very large-purpose built facilities, and then a footprint and carrier neutral facilities for connectivity to the greater internet. Most of those customers are looking to add a third-tier, which would be something between those two extremes, and our data centers are very interesting to them. We are in discussions around wholesale capacity in our centers, but again, we’re just not in a position to sell at this point.

Okay. Great. Thanks, Dave.

Our next question comes from Brandon Nispel from KeyBanc Capital Markets. Your line is now open.

Great. Thanks for taking the questions. Did you just go through the corporate, net-centric and enterprise connection that adds this quarter, excluding the SIP impact? That I was hoping you could give us what the revenue impact of the SIP shutdown could be, because it did sound like was a September 30th shutdown. And then can you help us sort of bridge from 3Q to 4Q from a revenue standpoint across the three customer segments? And we talked already about the 11,000 non-core connections that you still have. How much of that will be end-of-life at the end of next quarter would be helpful to get the trajectory of revenue, right? Thanks.

Yeah, so I’ll start by taking those in reverse order, Brandon. The first one is the 11,000 non-core connections that we have are across 23 product categories. They will go away much slower. SIP was the largest of these categories. It was the one that also had the most notice requirement, because it was regulated. At least one customer protested to the FCC that the 1-year notice that they received was inadequate and wanted an extension, which was not granted. But, out of the 19,000 non-core connections, we went after the biggest group first, the SIP, and then for the others, products are much more heterogeneous and the path will be much longer. I would suspect we’ll see a reduction every quarter, but it’s probably going to take until the end of 26 till these non-core products are completely eliminated. It is a major component of our cost savings.

I can repeat the customer connections for you. So the SIP connections were 8,486 at the end of last quarter. Those are all non-core connections. When you look at corporate, net-centric, and enterprise of the 8,486 connections, 5,006 were corporate, 1,088 were net-centric, and 2,392 were enterprise. And that’s the numbers at June 30, 2023, and obviously at 930 those numbers are zero.

Yes, so for the remaining 11,000 non-core connections, they are spread across all three customer types. I will say that there’s less net-centric even than there was for SIP. So, it’s probably roughly 80% of it is in the enterprise base and corporate base, and less than 20% of it would be in net-centric.

Did I just follow-up? Did you guys say that these products were end-of-life at the end of September, and so there’s a revenue impact in the fourth quarter? I think that’s what I’m trying to get at, because obviously this quarter, I mean trends were below expectations and it doesn’t make sense that it was the SIP in fact that that was shut down at the end of the quarter. So just trying to understand sort of where we should be going and looking for in terms of total revenue next quarter? So there isn’t sort of a big headline [in this stage.] [ph]

Yeah, I might disagree with that statement, but we ended up pushing these customers on almost a weekly basis reminding them this product was going away. So the stragglers were shut off at the end of the quarter. So the product is completely gone. It is end of life. But the revenue was declining ever since we acquired the business, actually it was declining under T-Mobile’s ownership, and it was a big contributor to why the revenue run rate at signing was $560 million and was down to about $485 million at closing 9 months later, a lot of it was runoff in these non-core products and in SIP, in particular. We, I think, pushed even more aggressively. So while the unit count was down materially, the revenue impact from these end-to-life products in the third quarter was not very material.

Got it. Can I just do one more of the thousand in wavelength in terms of backlogs? What percentage of those were signed during the quarter and then what’s the average sort of provisioning timeline on the thousand that you have in backlog? Thanks.

So I would say the majority of them were signed in the quarter. Some were actually signed in the previous quarter on Q2 right after closing. And an average is very misleading on provisioning times, because it’s dependent on the two data centers that need to be connected being wave enabled. It is why I tempered, my backlog comment on saying some of these may never install because people may get frustrated. They are not going to wait 14 months till we have all of the data centers wave enabled. We increased the number of wave enabled facilities by about 25% in the quarter. I think, we’ll see that pace accelerate. If you looked at an average, it’s probably more than 150 days, because you’ve got a subset that are in the kind of 50-day provisioning window, both ends are insights we can do today. Some are more like 120 days, meaning one site is in the shorter window and one site is in the longer window. And then we’ve got waves to sites that are not yet wave enabled. Now, we’ve told customers we’re working as quickly as we can. They’ve still wanted to sign orders, but some of those may not install, because I’m not convinced the customer’s going to wait 6, 7 months to get a wave. And there could be a subset of those that take that all.

All right. We don’t hear any responses from Brandon. So for now we’re going to move on to Phil Cusick from JPMorgan & Chase. Your line is now open.

Hey, Dave, this is Jerome [ph] on for Phil. A couple of follow-ups if I could. You mentioned that corporate grew this quarter. Could you quantify that for us? Has there really been any change in trajectory? Could you talk about customer conversations and corporate? Or are the weaker markets starting to come along? Now should we think about the potential for growth to pick up? Second, could you just talk about the level of SG&A in 3Q and how that should look in 4Q? Given some of the cost cutting that’s going on, how should we think about overall margins heading into the fourth quarter and into 2024? Thank you.

Yeah, so on corporate growth, I would say it was very similar to the growth rates that we’ve had in Q2. That’s kind of an underlying kind of same-store growth rate of about 1% year-over-year far less than the kind of 10% to 11% that we had long-term average. We are seeing slow, but consistent improvement in corporate buying cycles and expect that corporate growth to continue to improve. The non-core services in answering Brandon’s question that are heavily weighted towards corporate and enterprise will continue to decline, but probably not nearly as precipitously as they did this quarter. So you may see a low customer connection count, but you will see, I think, revenue growth probably continued to be positive. From this point forward since SIP was the largest of these non-core products. And then in terms of SG&A, as Tad mentioned, we had record low bad debt expense. I think we’re probably expecting that to revert back to historical norms. And then, we are continuing to continue to grow in headcount and expect to see some underlying improvement. Tad?

Yeah, so the Q3 run rate is about reflective of our current run rate as we exit at the quarter.

Okay. Thank you.

Our next question comes from Michael Rollins from Citi. Your line is now open.

Thanks, and good morning. Just a couple of questions going back to some of the comments from earlier in the call, and then just one on the business. So, first, in the same way you just a couple questions ago, recapped the breakdown of what happened with the SIP product? Could you do the same with the T-Mobile commercial services agreement in terms of just recapping and summarizing in total? What happened, which customer verticals that volume came out of and what’s left going forward for that? And then secondly, with respect to the reclass of the operating leases to the capital lease. If I’m doing the math right, it looks like it’s about 3 years in terms of the change in the cost of the lease versus how much you increase the balance sheets accounts by? And just curious if that’s something that once it expires, it goes away, or is this something that needs to get renewed? Like, how should we be thinking about what needs to happen for this lease after you get through the next few years of the balance that you’ve increased? And then I have an operating question I’ll follow up with.

That’s actually a very good question, Mike, and you did your arithmetic quickly. That lease ends at the end of 2026. It will not be renewed. It does not need to be replaced. It is completely uneconomic. And it is for an IRU that is not even fully in use and is totally redundant to fiber that we have today is something that Sprint signed almost 35 years ago and had CPIs. The end of the lease is our first – what we have the ability to exit it in about 3 years at the end of 2026, and we’ll exit it as quickly as possible. The lease is way out of market, as I indicated, and we indicated on the previous earnings call, there’s about $150 million of uneconomic value, and that means it’s about a lot of market, and it was a reduction in the gain in our purchase of the assets. It’s just something we had to take, and I’m sure, as T-Mobile would say, that’s why we’re paying them $700 million. It took some bad stuff, and that’s probably the single worst item. It clearly meets the test to be a capital lease. It is for fiber. And it’s something that will not be replaced.

I’ll take the CSA. So under the commercial services agreement with T-Mobile, and this is just like the regular customer, not under the IP Transit Services Agreement. So the revenue was $7.3 million in the second quarter and $8 million in the third quarter. The connections, this is all net-centric revenue, the connections were $8,028 at the end of the second quarter and $4,661 at the end of the third quarter. So the revenue was about the same, and the connections dropped about 50%.

And Mike, to give you a little more granularity, there are really two primary services that are not covered by the transit agreement. The first is co-location, these are T-Mobile bays or racks that are located in our facilities that we are removing at the request of T-Mobile. But there’s a long tail on those. And then the second are the VPN services, the Ethernet point-to-point services that are providing backhaul for T-Mobile through our network. And they are grooming those circuits as well. So we would expect the unit count to continue to come down. We also do expect the revenue to eventually come down. But I think what has been going on in the short-term has been grooming units more than a revenue focus.

And so, even though the volume fell significantly quarter-over-quarter, would you expect as you’re describing a more measured roll-down of this over the next few years?

I don’t have visibility that far out. That would really be a question you need to ask T-Mobile, because they can cancel these with 30-day notice. I do have visibility this quarter and it looks very similar to Q3. Q4 should be similar to Q3 in terms of revenue, but with fewer units.

And just moving to the operating side of the business and thanks for all that detail. You made a comment earlier in the discussion about how customers on the net-centric side are really pushing to much higher levels of switching? I think you mentioned 100-gig, 400-gig, and as customers are moving up to these higher port speeds. What does that mean in terms of volume being a lesser indicator of revenue, because customers are pushing more volume, they’re just doing it through fewer connections. And is this a short-term blip, where this type of grooming or optimization happens quickly on the volume side? Or do you see for whatever the reason that there might be an ongoing difference between the way the revenue in net-centric performs and the way volume performs, because more customers across more ports adopt these higher speeds?

Yeah. So we’ve been through two similar grooming exercises in the past 20 years. The primary driver of these exercises is to reduce cross-connect costs. So when you say volume, there are really two different volumes. Volume of connections may actually go down as people consolidate 100-gig ports into 400-gig ports, and the remnant of the 10-gig to 100-gig consolidation continues. And then the second volume measure is the number of bits flowing. So the average price per bit is declined for the 23 years, almost 23.5 years at Cogent, since we’ve been in business and will continue to decline. But the big volume growth has outpaced that, allowing us to achieve an average of about 9% net centric revenue growth in a flat addressable market. I think what will continue to happen over the next couple of years is we will see an acceleration in the 100- to 400-gig conversion, because it cuts your cross-connect costs by 75%. And the cost of those 400-gig portable optics has come down meaningfully in the past year and, today, I would say only a couple of percent of net-centric ports are at 400-gig. So we have a long way to go in this grooming cycle that will depress the number of connections or port sold, but will not depress revenue. We literally had the same exact phenomena, when we went from multiple 10-gigs to a lot fewer 100-gig interfaces, and I think that’s happening. We’re also seeing on the wavelength side, customers looking to take 400-gig wavelengths. Our network is equipped to be able to support that. We will be selling those. We have some of those in the funnel that I had described. And, I think customers increasingly are sensitive to cross-connect expense.

Thanks very much.

That concludes our question-and-answer session. I’d now like to hand back over to Mr. Dave Schaeffer, for any closing remarks.

Well, thank you all very much. We’ll be chatting as anyone has any follow-up questions. And we’ll talk soon. Thank you all very much. Take care. Bye-bye.

Thank you for attending today’s session. You may now all disconnect to the line.