Cogent Communications NASDAQ: CCOI Founder and CEO Dave Schaeffer said the company remains focused on deleveraging, expanding margins and monetizing portions of its data center portfolio following its 2023 acquisition of Sprint’s fiber assets.
Speaking at a JPMorgan communications sector event hosted by analyst Sebastiano Petti, Schaeffer said the conversion of the Sprint network into a wave-enabled network has largely proceeded as expected. Cogent initially planned to wave-enable 800 data centers, but Schaeffer said the company is now in 1,107 data centers. He said aggregate demand for wavelength services has exceeded expectations, partly because of an incremental use case tied to AI training, though customer acceptance of waves has been slower than anticipated.
Schaeffer said Cogent now operates in more than 1,920 data centers across 57 countries and 306 markets. He described the backdrop for the company’s core Internet-based services as strong, noting that 84% of revenue comes from those services and that traffic growth has reaccelerated to about 14% year over year, up from 10% in the prior quarter.
Data Center Sales Remain a Key Focus
Schaeffer said Cogent originally did not plan to invest capital in the 482 buildings it acquired through the Sprint transaction, which had 230 megawatts of gross inbound power capacity. About 18 months after the acquisition, he said the company concluded that existing power capacity had become a scarce commodity and announced plans to convert 125 of those buildings into data centers.
Cogent now has a total data center footprint of 185 facilities, 2.1 million square feet and about 213 megawatts of power, according to Schaeffer. The company has identified 24 of its largest facilities for divestiture, with 10 under a letter of intent and another 14 earmarked for sale.
Schaeffer said the buyer for the first 10 facilities is a well-capitalized infrastructure fund with $35 billion under management globally. He said the fund has completed due diligence and that Cogent has negotiated a purchase and sale agreement. Once the agreement is fully executed, Schaeffer said Cogent will file an 8-K disclosing the counterparty, the 10 data centers involved, the purchase price and the expected closing date. He said the company remains confident the transaction will close in early summer.
Proceeds Expected to Support Debt Reduction
Schaeffer said proceeds from the first 10 data center sales will be contributed entirely into Cogent Group, the company’s borrowing group, and will not increase restricted payments capacity. He said Cogent expects to use a significant portion of the proceeds to repurchase current secured debt if it continues to trade below par.
After that, Schaeffer said the company expects to issue new secured debt to replace its 2027 unsecured debt. He said holders of more than 65% of Cogent’s current secured bonds have agreed to allow the company to increase secured capacity, which would let it refinance the entire unsecured tranche with secured capital and potentially lower its cost of capital.
Schaeffer said Cogent’s net leverage is currently 6.7 times and that the company will continue focusing on deleveraging until it reaches 4 times. He said the data center sale would be a “material step” toward closing that gap, though he did not disclose the expected proceeds. He also said Cogent expects continued EBITDA growth to contribute to deleveraging, noting that underlying EBITDA has grown by slightly more than $5 million sequentially per quarter on average since the Sprint transaction closed.
Margins Supported by On-Net Mix Shift
Schaeffer said Cogent’s EBITDA margins, excluding subsidies from T-Mobile, are about half of where they were before the Sprint acquisition, but have expanded at an annual rate of about 800 basis points over the past two and a half years. He said the company expects long-term margin expansion to continue at a more moderate rate of about 200 basis points annually, rising from roughly 21% today to above 40% over time.
He said the company’s on-net revenue mix is central to that margin expansion. Before the Sprint acquisition, Cogent was 76% on-net and 24% off-net. After the acquisition, the mix fell to 47% on-net but has since improved to 62%. In the most recent quarter, Schaeffer said 83% of sales were on-net.
Schaeffer said each incremental dollar of on-net revenue carries about 90% incremental margin, compared with about 45 cents of incremental margin for each dollar of off-net revenue. He said future growth should come from Cogent’s organic sales, while Sprint-related revenue, now 16% of total revenue compared with 42% at the time of the acquisition, continues to decline.
Revenue Declines Moderating
Asked about the company’s revenue trajectory after a first-quarter decline, Schaeffer said the rate of revenue decline has moderated sequentially for five straight quarters. He said the decline was caused entirely by the Sprint customer base, while organic Cogent revenue has grown 28% in the 10 quarters since the acquisition.
Schaeffer said he expects the rate of decline to continue moderating and said aggregate revenue could turn positive “over this quarter or the next several quarters,” though he did not provide a specific target.
He also said Cogent continues to receive subsidy payments from T-Mobile, which lift reported margins from about 21% to about 31%. Those payments are expected to continue for just under two more years and total about $200 million. Schaeffer said reported EBITDA should expand, but the rate of EBITDA growth may flatten in 2028 as those subsidies lapse.
Wavelength Business and AI Demand
Schaeffer said Cogent has built a wave-enabled network across the Sprint footprint, including nearly 30,000 route miles of intercity wave network connecting more than 110 markets and more than 21,000 route miles of metro fiber. He said line systems, ROADMs and transponder shelves are installed, and the company has an adequate supply of pluggable optics for incremental wavelengths.
Cogent has sold wavelengths to 492 unique customers across 581 of its 1,107 facilities, Schaeffer said. He said the company installed more wavelengths during the quarter than it recognized in revenue, because some customers have faced constraints accepting services. Those constraints include power limitations in data centers, access to server equipment because of memory shortages and access to pluggable optics.
Schaeffer said hyperscalers have driven most of the incremental wavelength demand, particularly for moving data from locations where it is stored to data centers where power is available for AI training. He also said Internet transit traffic is accelerating as data collected over the Internet gains value for training large language models.
Despite a slower ramp in waves, Schaeffer reiterated his view that Cogent can ultimately capture 25% market share. He cited five competitive advantages: more endpoints, faster installation, unique routes, higher reliability per route mile and lower prices.
On capital returns, Schaeffer said Cogent has returned nearly $2 billion to equity holders through dividends and buybacks, but has substantially paused returns to focus on deleveraging. He said the company will commit to returning capital to shareholders as it approaches 4 times net leverage, with the mix of buybacks and dividends depending on the market price of Cogent securities at the time.
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.
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