Cogent Communications (NASDAQ:CCOI) CEO Dave Schaeffer said the company has made progress integrating the former Sprint wireline business but acknowledged that revenue growth from its wavelength services and stabilization of the acquired customer base have fallen behind initial expectations.
Speaking at a KeyBanc communications services event, Schaeffer graded Cogent’s execution of the acquisition a “B.” He said the company had exceeded its cost-cutting targets, successfully integrated customers into its systems and network, and converted the legacy TDM voice network to a wave-enabled network.
Wavelength revenue grows, but pace trails expectations
The wavelength business grew 9.2% sequentially and 68% year over year, according to Schaeffer. However, he said the overall scale of the business remained disappointing relative to Cogent’s expectations. The company had expected to reach 25% of the North American intercity wavelength market within three years of selling the service, but Schaeffer said that goal would likely take longer at the current pace.
“Going from zero to a run rate of $65 million is impressive in a year and a half, but it is still not $500 million,” Schaeffer said.
He attributed some of the slower growth to constraints faced by customers, including equipment availability, supply-chain limitations, data-center space, power availability and customers’ evolving business models. Schaeffer said data centers currently operating are running at more than 99% power utilization, limiting customers’ ability to add capacity.
Cogent is pricing wavelength services at roughly a 20% discount to the market on average, Schaeffer said, but he does not believe more aggressive pricing would materially increase customer uptake while customers remain constrained by shortages of GPUs, pluggable optics, server memory and power.
The company has seen evidence of increasing customer confidence, he said. During the latest quarter, 77 existing wavelength services, or nearly 4% of the base, were upgraded to larger services. Those customers had initially purchased 10-gigabit or 100-gigabit services and later upgraded to 100-gigabit or 400-gigabit capacity without a pricing-model change, according to Schaeffer.
Acquired enterprise base remains in decline
The acquired enterprise customer base generated $485 million in revenue at the time of the transaction and had been declining 10.9% annually, Schaeffer said. It was also about 93% off-net and included approximately 10% non-core products.
Cogent moved to discontinue non-core services and unprofitable offerings while seeking to convert customers to on-net service. Schaeffer said the effort improved the acquired business’s margins from negative 60% to breakeven. But the revenue run rate has declined to about $150 million.
The company’s actions accelerated the rate of revenue decline to nearly 25% annually for several years, from about 11% before the acquisition, he said. More recently, Schaeffer said the decline rate appeared to be moderating to roughly 17% to 18%.
“There is a reason why Sprint, under T-Mobile’s ownership, was burning $1 million a day,” Schaeffer said, referring to the acquired business. He said some customers left after Cogent imposed profitability discipline at the product, location and service level, with certain service terminations made intentionally and others occurring as collateral effects.
Legacy business faces a changed corporate market
Schaeffer said Cogent’s legacy business was negatively affected by pandemic-era changes in office occupancy and employee work habits. The business, which historically grew at an average annual rate of 10.2%, is now closer to a 5% growth business, he said. Its annual rate of margin expansion has slowed to about 100 basis points from roughly 200 basis points.
The corporate segment represents about 40% of Cogent’s on-net business and is unlikely to accelerate without a shift in office occupancy and employee in-office behavior, Schaeffer said.
By contrast, he said Cogent is seeing accelerating traffic growth in its net-centric business, which is 90% on-net. Schaeffer cited agentic artificial intelligence as the next major driver of internet traffic growth following streaming. He said broader internet traffic growth had risen to about 8.5% from a trough of around 7% a year earlier, citing third-party measures including OpenVault and Cisco Visual Networking Index.
Cogent’s net-centric growth accelerated to 3% sequentially during a typically slow seasonal period and reached 16% year over year, Schaeffer said.
Despite the challenges in the acquired enterprise business and wavelength ramp, Schaeffer reiterated Cogent’s multiyear objective of delivering 6% to 8% total revenue growth. He said the company will continue its practice of providing long-term guidance rather than quarterly guidance.
About Cogent Communications (NASDAQ:CCOI)
Cogent Communications (NASDAQ:CCOI) is a multinational Internet service provider specializing in high-speed Internet access and data transport services. The company operates one of the largest Tier 1 IP networks in the world, offering wholesale and enterprise customers reliable, low-latency connectivity. Cogent’s core services include dedicated Internet access, Ethernet transport, wavelength services, and MPLS-based IP Virtual Private Networks, all delivered over its privately owned, fiber-optic backbone.
In addition to network connectivity, Cogent provides data center colocation and managed services designed to support businesses with demanding bandwidth and redundancy requirements.
