Cogent at JPMorgan Conference: Strategic Growth and Challenges

On Tuesday, 13 May 2025, Cogent Communications Holdings Inc (NASDAQ:CCOI) presented at the 53rd Annual JPMorgan Global Technology, Media and Communications Conference. The company shared its strategic outlook, highlighting both promising growth targets and ongoing challenges. CEO Dave Schaefer discussed the integration of the Sprint Global Markets business and the repurposing of its network to meet AI-driven demand for optical transport services.

Key Takeaways

• Cogent aims for a long-term revenue growth target of 6-8% and an annual margin expansion of 150 basis points.
• The company is nearing completion of exiting undesirable Sprint revenues, expecting positive top line growth by mid-Q3.
• Cogent’s wavelength services, bolstered by AI demand, show significant growth potential.
• The company’s dividend growth outlook has slowed, with a focus on reducing leverage and returning capital to shareholders.
• Cogent has become the largest provider of internet traffic globally, with a 25% market share.

Financial Results

• Q1 2024 results were described as "mixed," with a strategic shift towards long-term growth.
• Cogent’s organic business has seen an 18-year compounded revenue growth of 10.2%.
• The Sprint Global Markets business, acquired from T-Mobile, was previously losing $1 million a day.
• Cogent’s EBITDA increased from $260 million in 2022 to $352 million in 2023, with a projected EBITDA of $348.2 million for 2024.
• The company has returned approximately $1.6 billion to shareholders through dividends and buybacks.

Operational Updates

• Cogent is repurposing Sprint’s long-distance voice network for optical transport services.
• The expanded network now connects to 883 carrier-neutral data centers.
• The company has developed the capability to provision 500 wavelength orders per month.
• As of the quarter’s end, wavelengths have been installed at 329 facilities.

Future Outlook

• Cogent expects to meet its 2025 EBITDA goals, with high contribution margins from wavelength services.
• The company’s leverage is expected to peak in Q3 2025 and subsequently decline.
• A data center conversion program is nearing completion, with significant capacity ready for use.

Q&A Highlights

• Discussions covered factors influencing revenue growth and margin expansion.
• The company explored the competitive landscape and strategies for increasing market share.
• Adjustments to the dividend growth outlook were explained, alongside potential asset monetization.

Cogent’s presentation at the conference provided a comprehensive view of its strategic direction and financial health. For more detailed insights, readers are encouraged to refer to the full transcript below.

Full transcript - 53rd Annual JPMorgan Global Technology, Media and Communications Conference:

Sebastiano Petty, JPMorgan Communications Sector Analyst, JPMorgan: Good morning. My name is Sebastiano Petty, I cover the communications sector here at JPMorgan. It’s my pleasure to introduce Dave Schaefer, founder and CEO of Cogent Communications. Dave, thanks for joining us today.

Dave Schaefer, Founder and CEO, Cogent Communications: Hey, thank you for inviting me, Sebastiano. I’d like to thank all the investors for taking time to hear a little bit about Cogent. And as always thank JPMorgan for a great venue.

Sebastiano Petty, JPMorgan Communications Sector Analyst, JPMorgan: Awesome. Well thank you. And Dave, Cogent reported mixed 1Q results last week.

Dave Schaefer, Founder and CEO, Cogent Communications: You’re kind.

Sebastiano Petty, JPMorgan Communications Sector Analyst, JPMorgan: Yeah. But you increased your long term revenue growth target to six to 8%, margin expansion target to 150 basis points annually. We’ll certainly dig into the details of the quarter and business trends momentarily, but can you unpack what underlies the confidence in the improving long term growth trajectory?

Dave Schaefer, Founder and CEO, Cogent Communications: Yeah, so I think there are two components to that growth trajectory. The first being top line revenue growth, the second being margin expansion. And on the revenue growth side, we are near the end of the burn off of revenues that we intentionally wanted to exit as part of the Sprint transaction. Just to remind investors, when we acquired the Sprint Global Markets business from T Mobile, it was really two conjoined transactions. We acquired a money losing services business that was doing $565,000,000 in revenue and burning $1,000,000 a day in cash.

We were paid $700,000,000 to take that business. And when we took that business, it was experiencing a 7.4% compounded annual decline in revenues for the three years preceding the transaction. We actually did two things to that revenue trajectory. One helped and one hurt. The first thing we did was tried to terminate services that were gross margin negative.

Many of those services were governed by contracts. And while we have exited the majority of those, there is still a tail. We also were able to go into the revenues that we wanted to keep and increase pricing on those services. Cogent’s revenue growth coming into the transaction had decelerated due to the vacancies and offices as a result of COVID. So while Cogent’s organic business for eighteen years had a compounded top line revenue growth of 10.2%, all organic year over year.

At the point of the transaction, the twelve months previous to the transaction, we were growing at 2.1%. You blend those two growth rates together, we would have a negative 1.8% growth rate, which is a little bit worse than what we have actually done since the transaction closed. But with the end of those undesirable revenues, we should return to positive top line growth by the middle of third quarter of this year, nearly a year earlier than we expected. The second thing on revenue is the demand for wavelengths, which is the second part of So in acquiring gMG from t mobile, we acquired an operating business, but we also acquired a network that was effectively fallow. It was a long distance voice network that was built at a capital cost of $20,500,000,000 and there was virtually no revenue on that network.

In fact, 93% of the revenues that we acquired never touched the Sprint network. And for those 7% that did, it was usually only at one location. So we were able to repurpose that network to sell optical transport or wavelength services. The demand set for those services turned out to be stronger than we anticipated, in large part because of AI, which is a key incremental driver of optical transport demand. As a result, we were comfortable in adjusting our revenue growth rates for the blended company from 5% to 7% to 6% to 8% for about 100 basis point improvement at the midpoint.

Still lower than Cogent’s organic growth rate has historically been, but in line with what we anticipate the blended company to be able to deliver. In terms of margin expansion, we have actually exceeded 300 basis points a year in the two years that we have been operating the combined business far better than the 100 basis points that we were projecting. With the high contribution margins of wavelength services, we feel comfortable that the combined company should be able to deliver 150 basis points, still 70 basis points below where Cogent’s contribution margins and growth rate had been prior to the acquisition. So this was just an acknowledgement of the learning that we’ve had post closing.

Sebastiano Petty, JPMorgan Communications Sector Analyst, JPMorgan: Got it. Okay. That’s helpful context there. As we think about the first quarter from a Waves perspective, revenue and installs came in a little bit light with the installs concentrated towards the back half of the quarter. I think you attributed the shortfall to customers falling out of the backlog or just others perhaps not being able to accept the new services.

Can you maybe double click on that for us and unpack some of the drivers there?

Dave Schaefer, Founder and CEO, Cogent Communications: Yeah. So Sprint had not been in the wavelength business. Its network was designed to support its long distance voice business, which had been turned down in 2015. When we acquired Sprint, we acquired the network assets for $1 and we outlined a program to convert those assets into something that would generate demand in today’s environment. And that included two things, repurposing the physical fiber network for optical transporter wavelength services.

The second being repurposing a subset of the central offices into data centers. For the wavelength opportunity, we needed to extend the Sprint network to touch carrier neutral data centers across North America. The Sprint network terminated in 23 data centers. We have expanded that footprint to eight eighty three data centers. So Sprint did not have a metropolitan fiber network.

We had to repurpose the physical long haul fiber and then integrate it into our metro footprint. When we announced the deal in September of twenty two, we closed in May of twenty three, and we outlined a program that would take till the end of ’twenty four to enable 800 data centers. We actually ended up with eight zero two. We had deployed about 1,000 wavelengths on a custom installed basis between closing and the enablement of the network. In that period, we garnered about 4,000 potential orders from customers starting in September of ’twenty two and extending through December of ’twenty four.

Most of those orders fell out due to the fact that customers could not wait that long and we were unable to provision services. As we got clear line of sight to being able to deliver those wavelength services, we started to book new orders. We booked approximately 900 in the fourth quarter, about another 2,400 in the first quarter. We typically install about 5% of orders in our backlog per month. We have developed the provisioning capabilities to be able to provision 500 orders a month.

And as we started to contact customers who had orders, many of them said we are still interested but not ready now. We actually grew our wavelength business sequentially by 18.2% unit number of orders, but only 2.2% by revenue due to the fact that virtually all of that revenue installed the last couple of days of the quarter.

Sebastiano Petty, JPMorgan Communications Sector Analyst, JPMorgan: Got it, okay. And in terms of installations, you hope to scale Waves installs to 500 per month early this year. However, now you expect to convert about 4% to 5% of your funnel each month based on the call last week or about call it 160 waves or so based on today’s backlog of 3,443 waves. So first, what’s your confidence in being able to convert to 4% to 5% of the funnel each quarter? Why not go faster?

You have this sizable backlog. What’s the limiting factor there?

Dave Schaefer, Founder and CEO, Cogent Communications: So first of all, we have developed the install capabilities. This is field services and service delivery coordinators to be able to install 500 wavelengths per month. The network architecture that we have deployed allows us to do that install in a much shorter time frame than industry norms. Today, the wavelength market is about 145,000 wavelengths. It is dominated by two other vendors with average install times of ninety to one hundred and twenty days with a nearly 50% fallout rate from order to installation.

We were able to start with a clean slate and architected a network very different than that of our competitors. We can install in those eight eighty three sites in a thirty day window. We will ultimately get that installation window down to two weeks. In the IP business, we can deliver IP services in 1,700 data centers in 57 countries, typically in nine days. In an industry that was characterized with ninety day delivery windows.

So that’s on our capability side. For the demand side, customers need to become comfortable that we can meet those delivery windows because they oftentimes have other capital expenditures associated with the use of these wavelengths. We are continuing to take in new orders at a faster rate. We have already installed wavelengths at three twenty nine of those eight eighty three facilities at quarter’s end. And as we have demonstrated our ability to provision quickly, we are beginning to see a larger percentage of the customers waive opportunities.

Cogent is the largest provider of internet traffic in the world, carrying about one and a half exabytes a day of traffic. We have 25% market share in that segment. And we anticipate getting to a similar market share within three years in the wavelength business. We have an existing sales force. We know who the customers are.

And what we have to do is convince those customers that we can deliver the way we have outlined we can deliver after those customers have been accustomed to having delays and inability from their current providers. So while our wavelength unit growth met our targets, our revenue growth did not due to the fact that most customers did not accept that service till the end of the quarter.

Sebastiano Petty, JPMorgan Communications Sector Analyst, JPMorgan: And just sticking with that last point, I mean if you have your ability to provision orders is in excess of your customers’ ability to accept them. Just thinking about the thirty day provisioning going down to seventeen days, I mean, is that really an area differentiation if customers are not necessarily accustomed to installing services that quickly, or is this more about your last point of educating the not necessarily educating, but getting customers more comfortable with your abilities on the wave side and the faster provisioning. Just trying to think about that area of differentiation and how it materializes from here.

Dave Schaefer, Founder and CEO, Cogent Communications: So it is absolutely an area of differentiation. And it is something that customers will value a fit as available to them. So the use cases for wavelengths fall into three primary categories. Regional networks tying together islands of traffic. International carriers and content providers extending their networks transcontinentally.

And then finally, AI training tying databases to GPUs. In each of those use cases, because of the long lead times of our competitors and the inability to actually install 100% of the orders, the customers have become accustomed to living with long lead times. Not because they want to, but because they had to. And secondly, oftentimes multi sourcing knowing that it was likely that one of their providers could not meet their requirements. If we are able to demonstrate ubiquity of coverage and quick installs with high reliability, that will be valued.

And it’s probably the way as a new entrant we gain market share. One of the other learnings that we’ve had in this short period that we’ve actually been provisioning is the fact that we did not have to, at least to date, be as aggressive on pricing as we thought we would have to. So again, to just remind investors, we gained market share in our primary business, internet connectivity, by guaranteeing to under price the market by 50%. So we shortened the provisioning windows, broadened the number of locations customers could connect to us, and then finally drove down the cost per bit and gained the largest market share of any provider in the world. That process took us nearly twenty years to complete as an unknown company without a sales force and a much broader universe of competitors.

As we enter the wavelength market, we have an established sales force of about six twenty five quota bearing reps. Roughly half of those focus on the wholesale customers in the wavelength market. Three quarters of those customers are already using Cogent as their internet service provider. And what we need to do is port that credibility that we have on IP to wavelengths. If we are able to do that, we believe that we will continue to gain share without having to use the lever of price.

But because we have a much lower capital basis in our network, we do have the ability to be more aggressive

Sebastiano Petty, JPMorgan Communications Sector Analyst, JPMorgan: Great. And so what underlies the confidence, I guess, in growing the backlog to 10,000 unique waves by the end of the year and the install rate of about 500 per month? Yeah, explain. Maybe also as part of that, take a step back and help explain what it means to actually be in the funnel and some of the different moving pieces around that.

Dave Schaefer, Founder and CEO, Cogent Communications: So let me start there and then go to the cadence of building that funnel. The funnel is comprised of two types of orders. Those that are actually signed, which means there’s a specific pair of endpoints, a specific throughput, and a specific price with a specific date to install, firm order commitment date. Typically customers are allowed to push those dates out up to three times. And for orders that fit that category type in our IP business, about 91% of those orders ultimately install.

About 9% of those orders fail for a variety of reasons. Usually it’s credit or abuse issues on the IP side. Those are probably less of an issue on wavelengths. It’s a more concentrated market. So instead of 13,000 potential customers, there’s probably 200 meaningful customers and 200 smaller customers.

So less than 500 total customers, the customers tend to be more sophisticated. The second thing that would be in the backlog is a verbally committed order. That means it has not actually gone to contract execution. But again, the two endpoints are agreed to. The delivery window is not set.

And there is a general agreement on a price range. But there is typically a final negotiation to get to a final price point and terms and conditions. Obviously a much higher fall out rate of those orders that are verbally committed than those that are committed in writing. Now, in terms of the confidence to build that funnel. In the first quarter, this is the first quarter that we could actually install and scale.

And as I said, we installed roughly 200 orders in the quarter, albeit back end loaded. We built a funnel of nearly 2,400 incremental orders. That pace of funnel additions appears to be accelerating due to the ability to actually deliver. You have to build credibility with your customer base. And I think, again, we’ve done that on the IP side and this is a new product for Cogent.

Sebastiano Petty, JPMorgan Communications Sector Analyst, JPMorgan: Great. And then maybe shifting gears to just financials and 2025 EBITDA outlook. On the call, you said that you would you expect to achieve the goals we’ve outlined in regard to the 2025 EBITDA expectations. I guess in the past you had described that as similar, right, or stable year on year. I guess what gives you confidence, I guess, in an improving EBITDA trajectory sequentially over the balance of the year?

And you talked about the revenue expectations for the third quarter with sustained growth thereafter. Just help unpack that or tell us more about that.

Dave Schaefer, Founder and CEO, Cogent Communications: Yeah, so first of all we have spent the first twenty five minutes talking about something that represents today about 2% of Cogent’s revenues and 89% of our revenues are in our IP business, which has continued to grow. We also have been able to demonstrate for the past year a reduction in top line as a result of that attentional grooming that I described, yet a growth in actual EBITDA, not just an expansion in margin, but a growth in EBITDA every quarter. We anticipate that growth to continue. Our payment stream from T Mobile was bifurcated. In the first twelve months, the subsidies equaled $29,100,000 a month.

And then for the next forty two months, those payments stepped down to 8,300,000.0 a month or 25,000,000 a quarter. So in the first year we acquired Sprint, we acquired it in May of twenty three, Cogent’s EBITDA for ’23 versus ’22 went from roughly $260,000,000 to $352,000,000. That payment stream stepped down mid year twenty three, from ’23 to ’24. And as a result, our EBITDA for full year ’24 was 348,200,000.0. And looking at calendar year ’25, we have a $104,000,000 headwind to overcome from that step down payments.

To help us offset that we have been cutting costs, growing EBITDA and will become total revenue growth positive mid Q3. We also know that our wavelength revenue carries very high contribution margins. Our on net services typically have a 90 plus percent contribution margin. With the acceleration of that business, we will see an acceleration in absolute EBITDA reported. We had said that our EBITDA will be relatively equivalent in twenty five to twenty four.

Now, I somewhat softened my statement based on the $68,800,000 or $69,000,000 we did in Q1. We need that EBITDA to grow to get to that roughly three fifty range. If our wavelength business accelerates beyond kind of its current pace, we will easily achieve that. If it hits our current projections, we will fall slightly short of that. If we are able to pull in more orders to the funnel and improve the install cadence, we can easily achieve the guidance that we laid out.

The underlying IP business, which is selling internet access and VPN services, continues to grow in mid single digits absent the non core services that we are shredding from T Mobile’s acquisition.

Sebastiano Petty, JPMorgan Communications Sector Analyst, JPMorgan: Got it. And then last week, Cochin slowed its quarterly dividend growth outlook to half a penny from a penny. I mean why does it make sense to continue to grow the dividend given the leverage concerns and what we’re kind of discussing? And then how are you thinking about I guess the return to a more comfortable leverage ratio?

Dave Schaefer, Founder and CEO, Cogent Communications: So last quarter we actually supplemented the dividend with additional purchases of stock due to the stock volatility. Cogent has returned approximately $1,600,000,000 in a combination of dividends and buybacks. Roughly $240,000,000 in buybacks and about 1,350,000,000.00 in dividends. We’ve also been able to characterize the majority and in fact 100% last year of our dividend as return of capital, making it extremely tax efficient for the recipient, reducing their basis but not paying taxes on that distribution of capital. We have grown the dividend for fifty two quarters sequentially.

We have grown the dividend because of both the growth in EBITDA and the capital efficiency of our business. We have ratcheted leverage up. The step down in payments from T Mobile have resulted in our leverage going above the range that we said we would be comfortable with. We know that leverage will peak in Q3 of this year and begin to decline just because we lapped that step down in those payments. And it is an LTM test.

If you did it on an LQA basis, our leverage has already been improving for the past two quarters. In our use of capital, our primary objective will initially be to reduce leverage back into the comfort zone that we have outlined. Two, to then accelerate the return of capital to shareholders. We have not been a company prone to doing a large number of acquisitions that could potentially destroy value. Rather we give that money back to shareholders and that intends to be our plan.

So priority one is to reduce leverage. Priority two is to continue to accelerate the return of capital. Because of the short term increase in leverage, but the longer term view of the growth prospects, it made sense to reduce the rate of growth in dividend from 1p a share sequentially to a half a cent a share. We will supplement that with buy backs and then as we delever over the next year and a half to two years, getting back down to the total leverage target that we have outlined, we will then be in a position to accelerate the return of capital. And we’ll then judge whether it makes sense to either reaccelerate the pace of growth or to be more aggressive on buybacks.

Sebastiano Petty, JPMorgan Communications Sector Analyst, JPMorgan: Got it. And I guess one area of opportunity as you think about the balance sheet and leverage is the data center monetization efforts. So following the acceleration in the data center conversion program, it sounds as though monetization efforts are progressing. And I think you said you’re moving towards initial contract negotiations with four letters of intent. However, I think we may not necessarily get a deal announcement mid year.

Can you help us, I guess, give us a little bit more color on why that might be the case and how that, the complexities of that and timing?

Dave Schaefer, Founder and CEO, Cogent Communications: So all of the forward looking statements that I’ve made do not anticipate the monetization of surplus assets. We actually have three groups of assets that are non revenue producing today. The first of those are our data center footprint. When we announced the acquisition of Sprint, we acquired four eighty two fee simple owned pieces of real estate with 1,900,000 square feet and two thirty megawatts of inbound power. Those facilities were primarily telephone central offices spread across the country.

We had initially identified 45 of those facilities that we would convert into low density data centers at minimal cost with no major capital expenditure. We were gonna take 10,000 feet per facility. So about a quarter of the total footprint and operate kind of a one megawatt 10,000 square foot data center. Looks much like the 55 data centers that Cogent had prior to the acquisition with the difference that of the 55, we only owned two of them fee simple and the other 53 were leaseholds. When we looked at the Sprint footprint and then realized the demand for space and power, the data center market change, we elected to spend $100,000,000 convert 24 of our initial 45 into much larger data centers with greater power density.

And we expanded the number of data centers that we would convert to about 125. That process is almost complete now. Of those data centers, we have a total of 109 megawatts in 24 facilities with 1,000,000 square feet that is completely fallow but ready for use. We do not believe we are equipped to fill those facilities up. So we’re either looking to sell them or lease them on a long term triple net basis.

The second bucket of assets that we have that are potentially monetizable are our IP address spaces. We have approximately 38,000,000 addresses. We have leased out approximately 13,000,000 of those addresses. We have approximately 2,000,000 addresses that were given to customers before those addresses had real value at no charge. So 15,000,000 up to 38,000,000 are in use, 23,000,000 set fallow.

Those addresses have changed hands in open markets for between $40 and $60 an address. We are continuing to figure out what is the best way to monetize those. Of the 13,000,000 addresses that have customers, we took 12,000,000 of them and securitized them. We have raised $380,000,000 against the stream of revenue from those addresses in an asset backed securitization. And then the final asset we have that could potentially be monetized is surplus fiber.

So we typically are using one pair of fibers for Cochin’s IP network. And we have abandoned some IRU fiber that was originally used in our network. Secondly, we are typically using four fibers for our wavelength network. The cross section of the Sprint network ranges from 24 to 144 fibers and we would look to potentially monetize by selling off some of that excess fiber. So there are three asset categories that potentially could raise capital.

These are asset divestitures, not recurring businesses, and they are not baked into our financial projections.

Sebastiano Petty, JPMorgan Communications Sector Analyst, JPMorgan: Okay, well Dave, that’s a great way to end it. Thanks everyone for joining us. Dave, thank you for joining us today, and everyone have a great day.

Dave Schaefer, Founder and CEO, Cogent Communications: Hey, thanks, Pasciano.

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