Executive Summary / Key Takeaways

• Cogent Communications is entering the final phase of its Sprint (S) integration, having realized over 90% of targeted cost savings, but revenue growth remains elusive due to aggressive grooming of low-margin contracts acquired in the $1.40 billion bargain purchase.
• The Board's decision to slash the quarterly dividend to $0.02 and suspend buybacks signals a decisive capital allocation pivot, prioritizing balance sheet repair over shareholder returns until net leverage reaches a 4x EBITDA target.
• Emerging growth engines are scaling rapidly but remain small: wavelength services surged 93% year-over-year to $10.2 million in Q3 2025, while IPv4 leasing jumped 55.5% to $17.5 million, yet combined they represent just 11% of service revenue.
• The company's competitive moat rests on its deep, reliable Sprint fiber network and 996 wave-enabled data centers, but execution risks loom large in capturing 25% of the North American long-haul wavelength market by mid-2028.
• The investment thesis hinges on management's ability to return to positive revenue growth by early 2026 while maintaining its trajectory of 200 basis points of annual margin expansion, a balancing act that leaves little room for execution missteps.

Setting the Scene: From Low-Cost ISP to Fiber Infrastructure Play

Cogent Communications Holdings, founded in 1999 as a facilities-based provider of low-cost, high-speed Internet access, has spent the past two years executing one of the most transformative acquisitions in telecom history. The May 2023 purchase of Sprint's U.S. long-haul fiber network for $1, plus a $700 million IP Transit Services Agreement with T-Mobile (TMUS), fundamentally altered the company's scale and strategic options. What began as a niche provider serving bandwidth-intensive businesses in 57 countries has evolved into a fiber infrastructure platform with 3,537 on-net buildings, 996 wave-enabled data centers, and a war chest of 38 million IPv4 addresses.

The Sprint integration represents more than network expansion—it is a complete business model reset. Cogent inherited a sprawling, low-margin enterprise customer base that management immediately began "grooming," a euphemism for jettisoning unprofitable contracts to focus on high-return opportunities. This explains why service revenue declined 5.9% year-over-year in Q3 2025 despite underlying growth in core net-centric customers. The company is sacrificing top-line momentum to build a more profitable, focused business.

Industry dynamics both support and complicate this strategy. The explosion of AI is creating unprecedented demand for data center connectivity and wavelength services, with Cogent's 214 megawatts of installed power positioning it to capture a slice of this growth. However, the IP transit market remains brutally competitive, with pricing pressure driving a 31% year-over-year decline in average price per megabit. Office occupancy trends create a bifurcated landscape: declining vacancy rates in some markets boost corporate demand, while persistently high vacancies in California, Washington D.C., and the Pacific Northwest dampen growth. Cogent's strategy must navigate these crosscurrents while managing a heavy debt load inherited from the Sprint deal.

Technology, Products, and Strategic Differentiation

Cogent's core competitive advantage lies in the quality and architecture of its fiber network. The Sprint network was deployed with deeper buried cable than typical IRU fiber , resulting in 7x fewer fiber cuts and significantly higher reliability. This matters because enterprise customers increasingly view network uptime as a non-negotiable requirement, particularly for AI training workloads and real-time streaming applications. The reliability advantage translates directly into pricing power and customer retention, as evidenced by the 2.6% year-over-year growth in net-centric connections despite intense competition.

The wavelength services offering represents Cogent's primary growth vector. Available in 996 data centers across the United States, Mexico, and Canada, the service provides 10-gig, 100-gig, and 400-gig capabilities with provisioning times reduced to approximately 30 days. This speed advantage is critical: management notes that roughly 79% of wave sales are at 100-gig, and the company has a backlog and funnel of 5,221 wavelength opportunities. The ability to support all three speeds at 100% of sites—while competitors struggle with partial coverage—creates a tangible differentiation that supports the ambitious goal of capturing 25% of the North American long-haul wavelength market and achieving a $500 million annual run rate by mid-2028.

IPv4 leasing has emerged as an unexpected monetization engine. With approximately 38 million IPv4 addresses, Cogent leased 14.6 million at the end of Q3 2025, generating $17.5 million in quarterly revenue. Management modified its strategy to allow subleasing, accelerating inventory depletion and creating a recurring revenue stream that helps finance ABS capital at attractive rates. While average revenue per leased address declined to $0.31 due to larger wholesale deals, the overall revenue growth of 55.5% year-over-year demonstrates the strategy's effectiveness.

The on-net service model remains the foundation of Cogent's profitability. Services offered exclusively through Cogent's own facilities deliver higher margins, greater control over service levels, and faster provisioning times. With 87,767 on-net connections generating $135.3 million in quarterly revenue, this segment provides the stable cash flows that fund network expansion and debt service. The 0.1% year-over-year growth in on-net connections masks underlying strength: legacy Cogent customers continue to grow, offsetting intentional terminations of low-margin Sprint-acquired customers.

Financial Performance & Segment Dynamics: The Grooming Pain

Cogent's Q3 2025 financial results tell a story of deliberate transition. Service revenue of $241.9 million declined 5.9% year-over-year, but the composition reveals strategic intent. Corporate revenue fell 9.5% to $105.2 million as management canceled low-margin contracts, yet the underlying Cogent corporate on-net business grew in low-single digits. Enterprise revenue plunged 25.7% to $36.5 million, reflecting the most aggressive grooming of off-net, unlicensed market customers. These declines were partially offset by net-centric revenue growth of 9.2% to $100.3 million, driven by increased network traffic from legacy customers.

The wavelength segment's performance provides the clearest evidence of future potential. Revenue surged 92.5% year-over-year to $10.2 million, with connections up 68.1% to 1,750. While still representing only 4.2% of service revenue, the segment's $2,108 ARPU significantly exceeds the $515 on-net ARPU and $1,225 off-net ARPU. This premium pricing reflects the specialized nature of wavelength services and validates management's focus on this market. The challenge lies in scaling: the company has installed several hundred wavelengths that remain unbilled due to customer acceptance delays, a temporary revenue recognition headwind that should resolve as customers complete their equipment preparations.

Cost discipline has been exceptional. Network operations expenses declined 18.5% year-over-year as the company realized over 90% of its $220 million annual cost savings target. Selling, general, and administrative expenses increased 4.1% due to the termination of T-Mobile transition services fees. This was accompanied by a 29.6% decline in depreciation and amortization as acquired Sprint equipment reached the end of its useful life. These savings flow directly to EBITDA, which management expects to grow sequentially each quarter.

The balance sheet tells a more concerning story. Total indebtedness stands at $2.3 billion, with net leverage at 6.65x EBITDA as of Q3 2025. The company issued $600 million in 2032 Notes in June 2025, using proceeds to redeem $500 million in 2026 Secured Notes and release $14.1 million in restricted cash. While management believes leverage peaked in Q2 2025 and will fall below 5x over the next six quarters, the high debt burden limits strategic flexibility and prompted the dividend cut.

Outlook, Management Guidance, and Execution Risk

Management's guidance frames a multi-year transformation story. The company targets long-term annual revenue growth of 6-8% and 200 basis points of EBITDA margin expansion, goals that are explicitly multi-year rather than quarterly targets. This framing acknowledges that the Sprint grooming process will continue to pressure revenue into early 2026, with enterprise segment declines likely lasting longer than corporate. The underlying Cogent corporate on-net business is growing at 3%, and net-centric aggregate growth is expected to exceed 10%, providing the foundation for eventual overall growth.

The wavelength opportunity represents the most ambitious bet. Management aims to capture 25% of the highly concentrated North American long-haul wavelength market within three years, targeting a $500 million annual run rate by mid-2028. This implies growing the current $10.2 million quarterly run rate by over 12x, a feat that requires converting the 5,221-opportunity funnel at a 4-5% monthly installation rate. The company has provisioning capacity for 500 waves per month, suggesting the infrastructure is in place. Success depends on competitive dynamics: management notes that other providers have responded by shortening provisioning windows, which actually helps condition customers to accept services more quickly.

Capital allocation priorities have shifted decisively. The Board reduced the quarterly dividend to $0.02 per share in November 2025, citing bondholder concerns about aggregate leverage and equity holder skepticism about dividend sustainability. The stock buyback program is temporarily suspended. Management intends to maintain this policy until net leverage reaches 4x EBITDA, after which it plans to resume capital returns at historical levels. This pivot reflects a pragmatic assessment that deleveraging must precede shareholder returns, even if it means near-term multiple compression.

Data center monetization provides a catalyst. Cogent is marketing 24 acquired Sprint facilities for sale or long-term lease, entering a non-binding LOI in October 2025 to sell two facilities for $144 million. Management expressed satisfaction with the price per megawatt, believing it validates valuations for the remaining portfolio. However, due diligence contingencies remain, including utility verification of power availability and buyer financing commitments. Successful monetization could accelerate deleveraging and enable earlier resumption of capital returns.

Risks and Asymmetries: What Can Break the Thesis

The most immediate risk is execution failure in the wavelength business. While the funnel appears robust, several hundred installed but unbilled wavelengths create uncertainty about customer acceptance patterns. Management acknowledges it is "several quarters away" from implementing forced billing policies, fearing that aggressive collection could alienate customers and limit market share gains. If acceptance delays persist or competitive pressure forces price concessions, the path to $500 million run rate could extend materially, undermining the growth narrative.

Leverage remains a structural vulnerability. At 6.65x net leverage, Cogent has limited cushion against operational setbacks or interest rate increases. The company has $601.8 million in finance lease obligations and faces $140 million in annual cash expenditures for capital leases and CapEx. While management projects leverage falling below 5x over six quarters, this assumes consistent EBITDA growth and successful data center sales. Any delay in revenue inflection or monetization could pressure the balance sheet and limit strategic options.

Customer concentration and policy violations present operational risks. The company experienced instances of IPv4 address blocks being reclaimed due to acceptable use policy violations, including copyright infringement and government orders. While revenue continued growing due to price increases, repeated violations could deplete the 38 million address inventory faster than anticipated or trigger regulatory scrutiny. Similarly, the T-Mobile IP Transit agreement, which provides $25 million quarterly payments through Q4 2027, represents a significant revenue concentration that will need replacement.

Data center sale execution is uncertain. Management noted that prospective buyers struggle to secure capital commitments, offering "de minimis deposits" that Cogent finds unacceptable. The non-binding LOI includes contingencies for utility power verification and definitive agreement negotiation. If buyers fail to secure financing or due diligence reveals issues with dormant facilities, the expected $144 million proceeds could be delayed or reduced, slowing deleveraging.

Valuation Context

At $23.26 per share, Cogent trades at an enterprise value of $3.66 billion, representing 3.52x trailing twelve-month revenue of $1.04 billion. The EV/EBITDA multiple of 23.85x appears elevated but reflects temporarily depressed EBITDA during the Sprint integration. For context, Lumen Technologies (LUMN) trades at 8.21x EBITDA and 1.91x revenue, while Equinix (EQIX) trades at 23.74x EBITDA and 10.22x revenue. Cogent's multiple sits between these peers, appropriate for a business transitioning from traditional ISP to infrastructure provider.

The company's negative operating margin of -9.24% and profit margin of -21.46% are artifacts of integration costs and non-cash charges, not core operational weakness. Gross margin of 46.93% remains healthy, and the 2.02 current ratio indicates adequate liquidity. With $226 million in cash and $79 million in restricted cash that becomes available based on improving leverage ratios, Cogent has sufficient runway to execute its strategy.

The 13.11% dividend yield at the old payout rate was clearly unsustainable, and the market's reaction to the cut validated management's decision. The new $0.08 annual dividend represents a modest 0.34% yield, aligning with the company's deleveraging priorities. For investors, the key valuation metrics are enterprise value to revenue and the trajectory of EBITDA margin expansion, as these will determine both leverage capacity and eventual multiple re-rating.

Conclusion

Cogent Communications is executing a textbook strategic reset, trading near-term revenue and shareholder returns for long-term business quality and balance sheet strength. The Sprint integration has delivered over $200 million in annual cost savings while creating new growth vectors in wavelength services and IPv4 leasing. However, the company remains in transition, with revenue declines expected to persist into early 2026 and leverage at 6.65x EBITDA limiting financial flexibility.

The investment thesis rests on two critical variables: management's ability to convert the 5,221 wavelength opportunities into consistent revenue growth, and successful monetization of the 24 acquired data center facilities to accelerate deleveraging. If Cogent can achieve its target of 25% market share in long-haul wavelengths and reach the 4x leverage target by 2027, the current valuation could prove attractive for patient investors. Failure to reignite revenue growth or delays in asset sales would likely pressure the stock further, making execution the only story that matters for the foreseeable future.