CCOI Q3 2024: Rapid wavelength growth to 800 sites drives margin gains
- Strong growth in the wavelength business: The company is rapidly expanding its wavelength service network—from 657 sites to an expected 800+ sites by year-end—and is building a robust backlog of over 3,400 wavelength opportunities. Their trained sales team and proven provisioning process support accelerated revenue growth in this high‐margin segment.
- Operational efficiency and margin improvement: The discussion highlighted sequential EBITDA increases and ongoing cost reductions (such as the elimination of noncore products and low-margin off-net circuits), which support a disciplined cost structure and pave the way for sustainable margin expansion.
- Attractive asset monetization opportunities: The company is well positioned to unlock additional cash flows through the monetization of non-core assets, including converting 48 data centers—with 21 suitable for wholesale monetization covering 88 protected megawatts—and leveraging its large IPv4 inventory, which may further enhance free cash flow and deleverage the balance sheet.
- Wavelength business risk: The backlog includes orders that have been pending for several months, raising concerns that if customers lose patience, those orders may be canceled or later written down, which could hurt future revenue growth.
- High capital expenditure risk: The ongoing data center conversions and network reconfiguration are leading to elevated CapEx that may persist for several quarters, potentially straining cash flow and increasing debt if monetization of these assets does not occur as planned.
- Revenue volatility from contract terminations: The termination of key low-margin and unprofitable contracts (such as the tri-party contract) resulted in significant sequential revenue declines, indicating uncertainty in sustaining revenue levels from both heritage and acquired segments.
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Leverage & Dividend
Q: Are dividends sustainable with rising debt?
A: Management emphasized that despite the reduced T‑Mobile subsidy, Cogent’s strong cash flow—over 100% of EBITDA historically—supports both the continuing dividend and strategic use of debt, with expected steady capital lease payments around $5M per quarter ( , ). -
Cost Efficiency
Q: What is the normalized cost of service run rate?
A: Management indicated that once one‑off expenses, like the contract termination costs, are removed, the cost of goods sold should revert to levels similar to Q2, with a continued downward trend as operational noise diminishes ( ). -
Revenue Mix
Q: How did heritage versus acquired revenues change?
A: The response highlighted that Cogent’s core corporate revenue—which now includes a blended Sprint base—is growing about 4% annually, while the NetCentric segment is growing around 10%, even as noncore and inherited contracts shrink ( ). -
Asset Monetization
Q: What return can we expect from asset sales?
A: Management is evaluating three monetization buckets—data centers, IPv4, and dark fiber—with data centers deemed most promising; however, no precise target dollar value or date was provided given the many moving parts ( ). -
Data Centers
Q: What is the breakdown between retail and sale sites?
A: They clarified that out of 48 data center conversion sites, 21 are candidates for wholesale sale or long‑term lease, representing 88 protected megawatts out of a total 169MW, with potential slight increases in both figures ( ). -
Wavelength Provisioning
Q: Are wavelengths provisioning times improving?
A: Management noted significant progress by boosting endpoints to 657 sites and targeting over 800 by year‑end, with rapid provisioning improving the backlog throughput and customer confidence steadily increasing ( ). -
On‑Net Revenue
Q: Why did on‑net revenue decline sequentially?
A: The decline was mainly due to a $1.8M drop in T‑Mobile service and a $3.5M hit from a terminated contract, which when adjusted shows on‑net revenue would have grown modestly—demonstrating management’s focus on shedding unprofitable business ( ). -
IPv4 & AI
Q: How is IPv4 pricing holding up?
A: After a short-term volume shock from price increases, management believes strong fundamentals remain as Cogent leverages its record‑size contiguous IPv4 block, and the broader market and AI demand continue to bolster pricing for larger block sales ( ). -
Data Center Timing
Q: When will the first data center deals be announced?
A: Management expects initial transactions—whether leases or sales—from converted sites to materialize before mid‑2025 as some facilities near completion, though timing will depend on market customization needs ( ). -
DC Customization
Q: Can customization accelerate data center sales?
A: They stressed that while no facility is yet fully ready for immediate deployment, several are close; if counterparties request system modifications, deals may be expedited as work continues on tailored upgrades ( ).
Research analysts covering COGENT COMMUNICATIONS HOLDINGS.