Executive Summary / Key Takeaways

• Cogent is nearing the completion of its complex Sprint Business integration, shedding low-margin legacy revenues and realizing significant cost synergies, positioning the company for a return to positive top-line growth by mid-Q3 2025.
• The company's core technological advantage in operating a highly efficient, packet-optimized network, combined with its expanded fiber footprint and strategic investments in wavelength capabilities and data center conversions, underpins its competitive positioning and future growth potential.
• Key growth drivers include the rapidly expanding wavelength business (targeting $500M annual run rate by May 2028 and 25% North American market share), continued monetization of a vast IPv4 address inventory (seeing significant ARPU increases and revenue growth), and a projected return to mid-single-digit growth in the core Corporate segment.
• Despite increased leverage peaking in Q3 2025 due to the step-down in T-Mobile transit payments, Cogent maintains a commitment to returning capital to shareholders through a consistent quarterly dividend growth policy (51 consecutive increases) and opportunistic share buybacks, supported by expected future EBITDA growth and potential asset monetization.
• Investors should monitor the execution of the wavelength ramp-up (conversion of funnel to installs), the timing and economics of data center monetization efforts, the trajectory of leverage reduction post-Q3 2025, and the impact of competition and macroeconomic conditions on demand and pricing.

Setting the Scene: A Network Built for Speed and Scale

Cogent Communications Holdings, Inc. ($CCOI) operates as a facilities-based provider in the dynamic and increasingly bandwidth-hungry telecommunications sector. From its inception, Cogent carved out a distinct niche by focusing on building and operating a low-cost, high-speed network specifically optimized for packet-routed data – the lifeblood of the modern internet. This foundational strategic choice, centered around the efficient Ethernet protocol and leveraging a vast portfolio of acquired dark fiber leases, allowed Cogent to become a significant player in the Internet transit market, eventually achieving Tier 1 status with settlement-free peering arrangements globally. This early history of disciplined network build-out and strategic acquisitions, including the valuable IPv4 addresses gained from PSINet, established Cogent's reputation for delivering high capacity at aggressive price points.

The company's position within the industry landscape underwent a transformative shift with the acquisition of the U.S. long-haul fiber network and related assets of Sprint Communications from T-Mobile (TMUS) in May 2023. This wasn't merely an expansion; it was a strategic pivot aimed at leveraging acquired assets to accelerate growth, realize significant cost synergies, and expand into new, adjacent markets like optical wavelength services and a broader enterprise customer base. The integration of Sprint's network, including owned fiber and data center facilities, with Cogent's existing infrastructure is central to the company's current narrative and future potential.

At its core, Cogent's technological differentiation lies in its network architecture. Unlike many legacy providers operating networks built on older circuit-switched technologies, Cogent's network was designed from the ground up for IP traffic. This optimization allows for greater efficiency in transmitting data, contributing to lower operating costs and higher throughput. The strategic decision to standardize on Ethernet further enhances this efficiency, simplifying operations and leveraging the cost benefits of widely available equipment. The acquisition of Sprint's network added a crucial layer of owned fiber, complementing Cogent's extensive leased dark fiber footprint. This hybrid approach provides route diversity, enhances network control, and allows Cogent to connect to a vast addressable market spanning 3500 buildings across 292 metropolitan markets globally.

The Sprint acquisition also brought significant technological expansion, particularly in the realm of optical transport. Cogent is now actively deploying wavelength services over the acquired fiber network. This capability allows the company to offer dedicated, high-bandwidth connectivity (from 10 Gbps up to 400 Gbps) directly between data centers and other key locations. Management highlights that their architecture for wavelength deployment is designed for rapid provisioning (targeting two weeks, currently around 30 days) with minimal field dispatches, a significant advantage over competitors whose typical installs can take 90-120 days and require multiple site visits. This technological capability is crucial for serving bandwidth-intensive Net-centric customers and represents a key growth vector. Furthermore, the acquired IPv4 address inventory, totaling nearly 38 million addresses, represents a scarce and valuable digital asset that Cogent is actively monetizing through leasing, providing a high-margin revenue stream.

In the competitive landscape, Cogent positions itself as a cost leader, particularly in the Internet transit market, where it carries a significant portion of global traffic. Its primary competitors include large, diversified telecommunications companies like AT&T (T), Verizon (VZ), and Lumen (LUMN), as well as other fiber and network providers like Zayo (ZAYO) and the recently combined Crown Castle (CCI)/Zayo entity. While larger rivals possess greater scale and broader service portfolios (including wireless and consumer services), Cogent's focused, optimized network provides a competitive edge in terms of efficiency and cost per bit. This allows Cogent to offer aggressive pricing, particularly to bandwidth-intensive customers in data centers. However, Cogent's smaller scale can present challenges in areas like customer acquisition costs and may limit its reach compared to the extensive legacy footprints of some competitors. The strategic response to this is to leverage its core strengths – cost, network performance, and targeted market focus – while expanding its product set (wavelengths, data centers) and customer base (enterprise) through the Sprint assets.

The Integration Journey and Current Performance

The period since the May 2023 Sprint Business acquisition has been one of intense integration and strategic realignment for Cogent. The acquired business, while bringing valuable assets, also came with a negative growth trajectory and a portfolio of low-margin and non-core services that were dilutive to Cogent's profitability. Management's strategic response has been to intentionally "groom" or terminate these undesirable revenue streams while simultaneously integrating the networks and realizing significant cost synergies. This process has temporarily impacted top-line revenue growth but has been crucial for improving the overall profitability and efficiency of the combined entity.

Recent financial performance reflects this transitional phase. For the three months ended March 31, 2025, total service revenue was $247.0 million, a decrease of 7.2% compared to the same period in 2024. This decline was primarily driven by the planned cancellation of low-margin and non-core customers acquired from Sprint, as well as a reduction in revenue from the Commercial Agreement with T-Mobile ($0.7 million in Q1 2025 vs. $3.2 million in Q1 2024). This impact was partially offset by growth in Cogent's core customer base and the ramping wavelength business.

Breaking down revenue by customer type for Q1 2025: Corporate revenue decreased by 11.4% year-over-year to $110.7 million, largely due to the grooming of acquired low-margin off-net connections and non-core products. Net-centric revenue saw modest year-over-year growth of 0.7% to $92.6 million, benefiting from underlying network traffic growth and wavelength sales, despite the reduction in T-Mobile commercial agreement revenue. Enterprise revenue decreased by 11.3% year-over-year to $43.7 million, also impacted by the reduction in non-core and low-margin acquired business, including the cancellation of a $5.1 million per quarter resale customer contract that ended in July 2024.

By network connection type, on-net revenue decreased by 6.5% year-over-year to $129.6 million, affected by the T-Mobile commercial agreement reduction and the resale customer cancellation, but showing sequential growth (+0.7%) as underlying on-net business performed. Off-net revenue decreased by 9.2% year-over-year to $107.3 million, primarily due to the intentional termination of low-margin off-net contracts. Wavelength revenue, a key growth area, surged by 114% year-over-year to $7.1 million, demonstrating significant traction from a small base. Non-core revenue declined sharply by 49.9% year-over-year to $3.0 million as these services are phased out.

The integration efforts are clearly visible in the expense structure. Network operations expenses decreased by a substantial 18.6% year-over-year to $137.4 million in Q1 2025, primarily reflecting the successful reduction of costs associated with the Sprint Business, such as leased circuits and facilities. Selling, general, and administrative (SGA) expenses also decreased by 3.7% year-over-year to $73.9 million, driven by lower compensation and third-party service costs related to the acquired business. The realization of these cost synergies contributed to a significant improvement in gross margin, which expanded by 790 basis points to 44.6% in Q1 2025 compared to Q1 2024.

EBITDA as Adjusted, which includes the cash payments from the T-Mobile IP Transit Services Agreement, was $68.8 million in Q1 2025, down from $106.2 million in Q2 2024 due to the scheduled step-down in payments ($25.0 million received in Q1 2025 vs. $66.7 million in Q2 2024). However, the underlying operational improvements led to a sequential increase in EBITDA as Adjusted margin to 27.8% in Q1 2025 (+130 bps from Q4 2024). Depreciation and amortization expense increased by 7.3% year-over-year to $76.0 million, reflecting the assets acquired in the Sprint transaction. Interest expense rose by 17.3% to $34.2 million, primarily due to new debt issuances (IPv4 notes, Mirror Notes) in 2024.

From a liquidity perspective, Cogent had cash, cash equivalents, and restricted cash totaling $184.0 million as of March 31, 2025. Net cash provided by operating activities was $36.4 million in Q1 2025. The company's total indebtedness at par was $2.0 billion at quarter-end, including $568.5 million in finance lease obligations. The total gross debt to last 12 months EBITDA as adjusted ratio was 6.69 at quarter-end. While leverage has increased during the integration and investment phase, management points to the IP Transit Services Agreement payments ($75.0 million expected in the remainder of 2025) and expected future EBITDA growth as key factors for delevering. The indentures governing Cogent's notes impose limitations on restricted payments like dividends, but as of March 31, 2025, $187.2 million was unrestricted and permitted for such payments.

Strategic Initiatives and Outlook

Cogent's strategic focus is now firmly on leveraging the integrated network and acquired assets to drive profitable growth and enhance shareholder returns. Several key initiatives underpin this strategy:

The Wavelength business is a primary growth engine. Building on the acquired Sprint fiber network, Cogent is rapidly expanding its wavelength sales capability. As of March 31, 2025, wavelength services were offered in 883 data centers across North America. Provisioning times have been significantly reduced to approximately 30 days, with a target of reaching two weeks. The sales funnel and backlog stood at 3,433 unique wavelength opportunities at quarter-end, and management anticipates converting 4% to 5% of this funnel into installed orders each month. Based on sales activity, the funnel is expected to grow to 10,000 opportunities by year-end 2025. With a provisioning capacity of 500 waves per month, Cogent is well-positioned to capitalize on this demand. The long-term ambition is to capture 25% of the North American wavelength market within three years, targeting an annual run rate of $500 million by May 2028. The average ARPU for wavelengths is projected to be around $1,900 to $2,000, reflecting a mix of 10, 100, and 400 gigabit services.

IPv4 monetization continues to be a high-margin revenue source. Cogent owns nearly 38 million IPv4 addresses and is actively leasing them. Due to the scarcity of this asset, the company has been able to significantly increase pricing. The average revenue per IPv4 address sold reached $0.49 in Q1 2025, a 63% increase from the installed base average at the start of 2024. IPv4 leasing revenue grew by 14.8% sequentially and 42% year-over-year in Q1 2025 to $14.4 million. Despite episodic churn events (like the recent take-down of 600k-700k addresses due to AUP violations), management expects to return to a gross add rate of over 500,000 incremental addresses per quarter. The company has also utilized this asset for financing, issuing $206 million in IPv4 notes in May 2024 and an additional $174.4 million in April 2025, secured by the IPv4 Address Assets.

Data center monetization is an emerging strategic focus. Cogent is repurposing suitable acquired Sprint facilities into commercial data centers and edge data centers. As of March 31, 2025, 52 Cogent data centers and 79 edge data centers have been converted from former Sprint sites, adding to Cogent's existing footprint for a total of 180 data centers with 211 MW of power. Driven by high market demand for power availability, Cogent has accelerated this conversion program. Over 100 MW of power across 24 facilities are earmarked for sale or long-term lease, with four Letters of Intent progressing to contract negotiations. This initiative requires elevated capital spending in the first half of 2025 but represents a potential source of significant cash inflow and delevering.

The grooming of undesirable revenues is expected to conclude soon. Management anticipates being "nearing the ending of grooming" by mid-Q3 2025, which should allow the underlying growth in core businesses to drive a return to positive total top-line revenue growth from that point forward.

Based on the progress in integration, cost savings realization, and the momentum in growth initiatives, Cogent has updated its long-term outlook. The company now targets an annual revenue growth rate of 6% to 8% and an annual EBITDA as adjusted margin expansion of 150 basis points over a multiyear period. These targets reflect increased confidence in the growth potential of the combined entity. Specifically, the Net-centric segment (including IP and wavelengths) is expected to grow north of 10%, while the Corporate segment is projected to grow in the mid-single digits (4-5%) after the grooming is complete. Enterprise revenue is expected to be effectively flat long-term after a longer grooming period.

Regarding capital allocation, Cogent remains committed to returning capital to shareholders. The Board approved the 51st consecutive sequential quarterly dividend increase to $1.01 per share, payable in June 2025. While the rate of sequential increase has been adjusted ($0.05 per quarter), the commitment to growth remains. Management acknowledges that aggregate leverage is expected to peak in Q3 2025 due to the step-down in T-Mobile payments but anticipates delevering to begin in Q4 2025, supported by organic EBITDA growth and potential asset monetization. The company also continues its opportunistic share buyback program, with $17.4 million remaining under the current authorization through year-end 2025. Capital expenditures are expected to remain elevated in the first half of 2025, primarily focused on data center conversions, before normalizing to a sustaining run rate of approximately $100 million annualized by Q3/Q4 2025.

Risks and Challenges

While Cogent's strategic direction and growth initiatives present a compelling investment case, several risks and challenges could impact its execution and financial performance.

A primary concern is the company's leverage profile. With total gross debt to LTM EBITDA as adjusted at 6.69x as of March 31, 2025, and leverage expected to peak in Q3 2025 due to the T-Mobile payment step-down, Cogent faces increased financial risk. While management expresses confidence in its ability to service debt and access capital, the ability to refinance maturing debt on favorable terms or execute asset monetization plans (data centers, IPv4) in a timely manner is crucial for delevering.

The impact of changing office occupancy rates remains a significant uncertainty for the Corporate segment. While some markets show positive trends, others, particularly in major cities like those in California and Washington D.C., continue to experience high vacancy rates. A long-term shift towards remote or hybrid work could negatively impact demand for on-net services in multi-tenant office buildings, potentially affecting revenue growth and customer turnover despite grooming efforts.

Execution risk exists in the wavelength business ramp-up. While the funnel of opportunities is growing and provisioning times are improving, converting the large backlog and funnel into installed revenue at the anticipated pace (4-5% monthly conversion) requires flawless operational execution and customer readiness. Delays or lower-than-expected conversion rates could impact the projected growth trajectory for this key segment.

Competition remains intense across all segments. In Internet transit and wavelength markets, Cogent competes with scaled players like AT&T, Verizon, and Lumen, who may leverage their existing infrastructure and customer relationships. While Cogent emphasizes its cost and efficiency advantages, competitors could respond with aggressive pricing or accelerate their own network upgrades and service offerings, potentially pressuring Cogent's margins or market share gains. The integration efforts by rivals like the Crown Castle/Zayo combination, while potentially years away from full synergy, could eventually create more formidable competitors.

The monetization of data center assets carries uncertainty regarding timing and economics. While there is market demand for power and space, converting LOIs into binding contracts and completing the necessary facility upgrades on schedule and within budget are critical. The actual sale prices or lease terms achieved may differ from expectations, impacting the potential cash inflow and delevering benefits.

Finally, macroeconomic conditions could influence demand across all customer segments. Economic instability, including recessionary pressures or continued inflation, could lead businesses to reduce IT spending, impacting sales cycles, customer upgrades, and overall revenue growth.

Conclusion

Cogent Communications is navigating a pivotal phase defined by the integration of the Sprint Business acquisition and a strategic pivot towards leveraging its expanded network assets for renewed growth and profitability. The core investment thesis rests on the successful execution of this integration, the realization of significant cost synergies, and the ability to capitalize on key growth vectors like wavelength services, IPv4 monetization, and the recovery of its core Corporate business.

While recent financial performance reflects the intentional shedding of low-margin acquired revenues, the underlying operational improvements are driving margin expansion. Management's updated long-term targets of 6-8% revenue growth and 150 bps annual EBITDA margin expansion signal confidence in a return to positive top-line growth by mid-Q3 2025, fueled by the momentum in wavelengths and IPv4, and the expected stabilization and growth in the Corporate segment. The company's differentiated network technology, emphasizing efficiency and cost leadership, provides a competitive moat against larger, more diversified rivals and positions it favorably in bandwidth-intensive markets. Despite increased leverage during this transition, Cogent's commitment to returning capital, supported by expected future cash flow generation and potential asset monetization, remains a key aspect of the shareholder value proposition. Investors should closely monitor the pace of the wavelength build-out and funnel conversion, the progress and economics of data center sales, and the trajectory of delevering as the company moves beyond the peak leverage period in Q3 2025.