Cogent at TD Cowen Conference: Strategic Adjustments in Focus

On Wednesday, 28 May 2025, Cogent Communications Holdings Inc (NASDAQ:CCOI) shared key strategic insights at TD Cowen’s 53rd Annual Technology, Media & Telecom Conference. The company’s management discussed both challenges and opportunities, including a temporary reduction in dividend growth and the evolving strategy for its data centers and Waves business.

Key Takeaways

• Cogent reduced its dividend growth to manage increased leverage from the Sprint integration.
• The company is marketing 24 data centers, exploring sales and leases to maximize value.
• The Waves business aims for a $500 million annualized revenue run rate by mid-2028.
• Installation times for Waves are being reduced, with a current target of two weeks.
• Cogent has returned $1.7 billion to investors and plans to reaccelerate dividend growth post-deleveraging.

Financial Results

• Dividend Growth Cut: Cogent’s dividend growth has been reduced to $0.005 per share, a strategic decision to manage leverage after the Sprint asset integration and a decrease in subsidy payments.
• Capital Allocation: The company has returned $1.7 billion to investors through dividends and share buybacks, with 10.8 million shares repurchased, representing over 20% of the float.

Operational Updates

• Data Center Sales Strategy: The company is marketing 24 data centers, with plans to monetize power capacity due to AI demand. Negotiations are ongoing, with four letters of intent in contract discussions.
• Waves Business Progress: Cogent is focusing on reducing installation times for its Waves services, aiming to build credibility and meet customer expectations. The company targets a significant increase in revenue from this segment.

Future Outlook

• Deleveraging Plans: Cogent aims to reduce leverage and reaccelerate dividend growth after achieving financial stability. The company plans to continue opportunistic share buybacks.
• Waves Revenue Targets: Cogent is committed to achieving a $500 million annualized run rate for Waves revenue by mid-2028, with an intermediate target of $100 million by Q4 2025.

Q&A Highlights

• CEO Dave Schafer emphasized the temporary nature of the dividend growth reduction, focusing on deleveraging as a priority.
• Schafer acknowledged the challenges in data center transactions, highlighting the company’s inexperience in this area but emphasizing the importance of maximizing value.

In conclusion, readers are encouraged to refer to the full transcript for a more detailed account of Cogent’s strategic plans and financial outlook.

Full transcript - TD Cowen’s 53rd Annual Technology, Media & Telecom Conference 2025:

Greg Williams, Analyst, TD Cowen: Let’s get started. Good morning. Welcome to day one of Cowen’s fifty third annual TMT conference. My name is Greg Williams. I cover Cable, Wireless and Telco here at TD Cowen.

I’m joined for this session by Dave Schafer, CEO of Cogent. So Dave, thank you for joining us.

Dave Schafer, CEO, Cogent: Thank you, Greg. Thanks for hosting me. Thanks TD Cowen for a great venue and most importantly, thank investors for getting up early and being in the room.

Greg Williams, Analyst, TD Cowen: Sure. So we want to start off with probably the biggest topic since the print was the dividend growth cut. You know when I look back at Cogent, you started a regular dividend and it was a $02 growth like every quarter and then it went down to $01 growth every quarter and that seemed to be the permanent cadence. Now you’re up to $05 growth. Is that a permanent cadence like we saw in the past?

Or do you feel like when you get back down to deleveraging, possibly sell some data centers, you bring that back up to a penny growth? How do you think about that?

Dave Schafer, CEO, Cogent: Yeah. So Cogent has returned about 1,700,000,000 to investors. We initially did that exclusively through buybacks and we bought back about 10,800,000.0 of our outstanding shares or a little over 20% of our float. We implemented a dividend in 2010 and have now consecutively grown that dividend for 52 sequential quarters. Actually the initial growth rate in the dividend was a penny a share.

It then was increased to $02 and then ultimately 2.5. We reduced that during COVID to a penny a share and in recognition of the increase in leverage that we’ve had due to the integration of the Sprint assets, we’ve reduced that growth rate to a half a cent a share. Our leverage is beyond kind of the comfort zone that we have targeted. That is because of the step down in subsidy payments that we receive from T Mobile. We anticipate delevering relatively quickly.

On an LQA basis our leverage peaked in Q3 of twenty four. On an LTM basis it will peak in Q3 of ’twenty five and then begin down. We may further delever through the divestiture of some non core assets although that is not critical to our delevering. So I think in use of free cash from operations, first objective is to bring leverage back down to opportunistically buy back shares. Last quarter we bought back about $10,000,000 worth of stock and we’ll continue to try to take advantage of market fluctuations.

And then finally I think we will be in a position to reaccelerate the growth rate in the dividend. So I view step down to a half cent a share growth as temporary during this period of delevering.

Greg Williams, Analyst, TD Cowen: Got it. But you mentioned share buybacks and with the stock down here at this point how do think about capital allocation?

Dave Schafer, CEO, Cogent: You know we think that supplementing the dividend with buybacks do make sense. We are also focused on leverage. You know we have chosen not to further slow down the dividend growth rate and take a more balanced approach. But you know

Greg Williams, Analyst, TD Cowen: I do think we are committed to continuing to return capital to our equity holders. Got it. And part of the deleveraging could be the sale of data centers, which you’ve messaged for quite some time. But I feel like the data center sales timing has shifted over time. You know, originally the impression was you’d have 23 data centers ready by the June time frame.

Recently that tone seemed to have shifted. Now it’s 24 facilities, not 23. But you said on the call it could be closer to six months from now. So the way I look at that, I mean that could take us to November. So what’s changed where we thought we’d see transactions maybe this summer to maybe now this fall?

Dave Schafer, CEO, Cogent: So let me step back to the announcement of the acquisition of Sprint. Prior to acquiring Sprint, Cogent operated 55 data centers, two of which were fee simple owned and 53 of those were in leaseholds. Those facilities represented 634,000 square feet and approximately 69 megawatts of power. When we announced the acquisition of Sprint, there were four eighty two fee simple owned buildings comprising 1,900,000 square feet and two thirty megawatts of power. Our initial plan was to take 45 of those four eighty two facilities, put a 10,000 square foot data center with lower power density in a portion of those buildings and leave the remainder of that asset fallow.

In early ’twenty four, it became clear to us due to AI that the power that we had was a scarce resource and we could monetize that. In April of twenty four, we tested the market by identifying 23 initial data centers and you are correct, we’ve added one more based on customer feedback. We went out initially to 115 counterparties that has since grown to about 150 counterparties that we’ve talked to. We conducted tours of the facilities and analyzed the feedback that we got from customers. In June of twenty four, we made decision to spend $100,000,000 over the next twelve months implementing a number of the recommendations that customers wanted to see if they would either buy or lease these facilities on a wholesale basis.

We still have about 50 active parties talking to us. Four of the parties that have given us LOIs have progressed to contract negotiation. We anticipate all of the 24 facilities being in a marketable state with the changes that we are implementing as a result of customer feedback completed by the June. You know, it is difficult for us to say how quickly we will move from, you know, contract negotiation to a binding agreement with a firm deposit. You know, of the four parties that we’re speaking to today in contract discussions, I think there are three of the four are for purchase, one is for lease, one is for the entire footprint, two are for multiple facilities but not the entire footprint, and then finally one is just for a single facility.

And we’re continuing to accept LOIs. There are tours going on almost on a daily basis. And we’re just looking to maximize value. You know, we are not experienced in transacting on these and, you know, it’s difficult for us to predict when an LOI will actually go to a binding contract. In my view, you know, while these are still in discussion, until there’s an earnest money deposit off with no contingencies, they’re just discussions.

Greg Williams, Analyst, TD Cowen: Got it. You sort of answered my next question of narrowing down the 150, you know, participants down to the four LOIs, but it sounds like you’re entertaining any and all options, know, whether it’s the entire portfolio, portion of the portfolio, lease some, sell some, so you’re still in that sort of exploratory phase and seeing the LOIs come in, is that right?

Dave Schafer, CEO, Cogent: Yeah, and there’s actually been more LOIs, been probably close to 20 LOIs, but of those, four have progressed where there’s enough substance and maybe enough congruency in our valuation thoughts that made sense to start talking about a binding contract. And there are other parties that are still, I think, in price discovery and are not yet at a hurdle rate that we feel is acceptable.

Greg Williams, Analyst, TD Cowen: Okay. And, you know, it would be a taxable event if you sold the data centers versus if you lease them, it might be more favorable from a tax perspective. And so, you know, I think you try to want to avoid paying taxes, but I’m sure you’re in an NPV on both leasing versus selling. But, you know, I guess the question is help us with your thinking about whether you want to sell them versus lease them and, you know, could it be seventythirty sale lease or fiftyfifty?

Dave Schafer, CEO, Cogent: You know, I think what we want to do is maximize the value. You know, there’s clearly an advantage to the certainty of a sale, and there is a tax consequence associated with that. While Cogent has not been a significant cash taxpayer to date and still has significant number of NOLs in Europe, its U. S. NOLs are almost completely completed.

So if we received a significant windfall from the sales, absent the capital we’ve invested in modernizing the facilities, the remainder would be viewed as a capital gain and would be taxed as such. If we did lease them, we would be very focused on the credit quality of the tenant, and we would probably look to securitize that stream of rental income as a way of raising cash because ultimately the goal is to allow leverage on the balance sheet to come down and then accelerate the return of capital to equity.

Greg Williams, Analyst, TD Cowen: Right. And speaking of leverage and your desire for leverage to come down, there’s a fear out there on valuation that you might not be able to fetch the $10,000,000 a megawatt price given a pressing need to sell these things. Can you help us, you know, ease those concerns about potentially selling lower than

Dave Schafer, CEO, Cogent: the message 10,000,000 per megawatt? So we have never sold a data center. As we tried to come up with a valuation of those data centers, we looked at comparable public trades and data that was available. What we saw was a lease rate of about $1,400,000 per megawatt per year on a triple net basis and sale prices of about $17,000,000 a megawatt. Now there are significant differences in these facilities.

These facilities were not purpose built, their power densities are lower and they are not as large. Now on the positive side, they’re very attributed. Those have value, some purchasers having a wide distributed footprint. A million dollar sale price or a million dollars as a straw man have had offer ranging far below that to actually full ask price. But again, we have to vet the credit worthy counters and you know, until there is a deal done, I can’t tell you what we are going to get for them.

I can tell you that they are non core to Cogent. As we look at our ability to fill up the data centers, we have increased Cogent’s data center footprint to approximately 180 facilities with about two ten megawatts of power across that footprint, a total of about 1,920,000 square feet. So these are both the leased and owned facilities, both core and edge locations. You know, we’ve carved out 109 megawatts in the 24 facilities and 1,000,000 square feet as surplus or something that we cannot expect to fill up. The remainder of that footprint I think fits with the general cogent data center model of leasing out one or two racks at a time to retail customers.

Greg Williams, Analyst, TD Cowen: Got it. Wanted to switch gears and talk about the Waves business. Okay. It’s obviously very top of mind. Cogent’s off to a slow start on the Waves business.

You know, this time last year we were talking about it. And you are looking to at least increase the backlog to 10,000 orders and then install four to 5% of the backlog a month, is four to 500 circuits per month. But like this time last year, you’re saying by January, you’d have 500 installs a month. So, you know, tell help us with what really happened. I mean, mentioned that your sales funnel ended up being stale in the fourth quarter and cleaning that up.

Were you busy cleaning up a stale funnel? You know, what really happened between last time we spoke to on the stage to today on the waste business?

Dave Schafer, CEO, Cogent: Well, we do have the capability, meaning we have field services and provisioning team to be able to install 500 orders a month. Just to go back and refresh memory, when we announced the Sprint transaction, we said it would take between a year and a half and two years to repurpose the Sprint network to sell wavelengths. We closed that transaction in May of twenty three. We set a target of having 800 data centers wave enabled where we could provision a wave on demand with an any to any data center connectivity by the end of twenty twenty four. We ended the year with eight zero two data centers.

And in that intervening period, we had manually provisioned approximately a thousand waves. And those waves that we did provision were done much the way other providers do it as opposed to a more automated process. We have built a funnel. The majority of that funnel sat and waited and we were unable to deliver. We did deliver 1,000, but probably 80% of that funnel eventually fell out.

And some of that funnel carried over. As we entered 2025, we had built a newer funnel in the fourth quarter of twenty four and continue to build that funnel in Q1 of twenty five and continue beyond that. We know that customers are accustomed to a three to four month installation window with other vendors and have been skeptical around Cogent’s ability to do this in ultimately two weeks. Today we’re doing it in thirty days. What we saw in the first quarter is we actually grew our installed base by roughly 18% sequentially or better than 200 waves.

But almost all of those waves were installed at the end of the quarter because customers were not ready. Not because Cogent could not install them, but we also have to wait for customers to be able to accept those services. Now with our IP based services, we have a twenty year experience and we know that about 4% of our on net funnel installs every month and about 50% of that funnel ultimately installs. We allow those customers in transit services three opportunities to extend their install. And at the end of that, we then force bill them based on a firm order date.

We have not done that yet for waves in large part because Cogent did not have the ability to deliver. And it’s unfair to go back to the customers and say, well, we’re ready now. You have to take them whether you’re ready or not. I think over the next several months, we will continue to build credibility with customers. We will continue to build a funnel, and we will continue to increase the pace at which we are installing.

The ultimate goal is to get the orders to install ratably over the quarter and to meet our 500 wave capability. If we in fact see that we are getting greater demand than that, our expectation is we can increase that service delivery capability. Today we install about 3,000 IP ports a month and it did not make sense for us to add more than about 500 waves a month of service delivery capability until we’ve proven that out. You know, I think in terms of pacing, you know, we’ve been pleasantly surprised by the aggregate size of the market. AI is an incremental use case that we were not anticipating when the deal was announced.

And then secondly, I think another positive surprise to us is how much customers dislike their current supplier choices.

Greg Williams, Analyst, TD Cowen: And can you talk about the cadence as we almost approach June here as you mentioned that the end last year saw an acceleration. Did that cadence continue?

Dave Schafer, CEO, Cogent: Yeah. I think we are not yet at our full capability, but we’ve seen better improvement in units installed in both April and so far in May, each month doing better than the pacing we achieved in the first quarter.

Greg Williams, Analyst, TD Cowen: Got it. And I’m a little confused. If you’re provisioning waves in days, thirty days and getting down to two weeks, you know, why build such a big backlog of 10,000 orders? It feel like to me, you know, you order it by the time you get another order in the backlog, you’re already provisioning and installing. And if customer behavior

Dave Schafer, CEO, Cogent: acted that way, we would not need a backlog of that size and we would be immediately adding to our service delivery capabilities. Again, I’m drawing experience from our transit business where we know one, the install is even quicker than our wave target And two, customers generally do avail themselves of multiple extensions from the firm order date. So in a transit order, we take the order, we commit to a date of seventeen days. We actually average nine days to install. The majority of customers do not accept those orders initially on the install date because the data center is not able to give them the cross connect.

They may not have their equipment. But they’ve got an expectation that Cogent will install quickly and they typically push those out in a few week increments and eventually take that order in thirty to sixty days. In the wavelength market, customers are accustomed to 50% of their orders never installing with the other vendors. And for those orders that do install, it takes three to four months. So Cochin as a new entrant to that market really is coming in with some pretty bold claims saying we’re going to do this and deliver in thirty days and the customers say I’ll believe it when I see it.

Greg Williams, Analyst, TD Cowen: Right. So you’re not the bottleneck then if there’s

Dave Schafer, CEO, Cogent: We are not the bottleneck whether it be number of locations or speed to deliver. The only limitation that we currently have and we’ve been clear about that and it will be gone in the next probably sixty days is in certain data centers, we were in 883. One hundred percent of that footprint we can deliver ten and one hundred gig waves in every direction. And about 80% of the facilities, we can deliver 400 gig waves in every direction. And in a subset or 20% of the data centers, so call it roughly 150 or so data centers, there are certain directions where we do not have 400 gig capability.

Since 400 gig represents less than 5% of the market, this is not an issue in terms of our ability to meet

Greg Williams, Analyst, TD Cowen: customer demand. Group is not the issue. So maybe talk about the demand set. You said that AI is an incremental use case. What are the other typical use cases?

What are the type of customers? What are the order types? Sounds like it’s not 400 gig wave yet. And then maybe you can talk to the AI opportunity. You know, is that probably more in the inference phase for you versus, you know, we’re sort of the training phase, if you will?

Dave Schafer, CEO, Cogent: So today, the primary use cases are regional networks linking their networks together, international carriers extending their networks. So examples would be someone like a frontier or a metro net or a zipline that have islands of traffic and want that traffic linked together into a homogeneous network and then connected back to major aggregation points. A second extension would be for a subsea or international carrier like a Telefonica, a telecom Italia, a British telecom in Orange that would want to extend their network across North America. The second major use case is for content delivery and delivery of replicated content to multiple sites. That would include companies like Meta and Amazon, a Microsoft, a Netflix.

Caching content. Caching content, but it will also include companies like a Fastly or Akamai hosting companies like a Rackspace or an OVH. And a fairly fragmented market of smaller data center operators and hosters. The incremental use case for wavelengths is actually for AI training today much more than inference. And that is extending the data center where content exists to the data center where the training is occurring.

Typically the training facilities are not co resident where the data is stored. Today there’s over 900 zettabytes of stored data that have been collected over the internet in the past thirty years. And it is that data that is used for building large language models. The training data centers tend to be large, very power intensive, and remote. Wavelengths are used to move that data back and forth.

While a wavelength is about two and a half times more expensive than using transit to move that data, Because over 50% of the cost of that training facility is in the GPUs, the training data center operator wants those GPUs to operate at full efficiency without buffering. And for that reason they purchase wavelengths. Dark fiber is also used for that purpose. It tends to be even more expensive than wavelengths. But there are certain customers who value that control and that requirement to go to very remote locations.

For the last part of your question around inference, we’re just beginning that. And I think inference will do two things. It will drive incremental internet usage and it will occur across a much more distributed set of facilities that will probably use wavelengths to distribute certain large language model outputs to those facilities. And then also in those facilities have much more narrow sets of data in which the neural networks will be applied to come up with specific inferences that will be delivered over the Internet.

Greg Williams, Analyst, TD Cowen: Right. And you mentioned that customers are disliking their current wave provider. And you mentioned or alluded to the fact that provisioning for some of them could take three months, six months, or even never. You can do it in thirty days. However, when we speak to some of these competitors, know, Xeo and Lumen own half the Waves market, they’re investing heavily in Waves.

You know, we have Lumen speaking later today and speaking about waves. So I presume they’re cutting down their provisioning time. They’re pushing that service as well. So, you know, you still have unique routes. You can price it better.

But do you feel the competition can step up?

Dave Schafer, CEO, Cogent: You know, I would hope they would. You know, I’m again use our experience in the transit market. You know, when we entered the market, there were 200 providers and the average time to deliver a high capacity IP circuit was ninety days. Within a decade, the market has shrunk to 12 providers and Cogent’s provisioning time was at nine days when the market average was thirty. You know, our competitors operate heterogeneous networks and have a more limited set of endpoints.

I know one of our competitors for the first time in their history put out a press release that said they had 47 data centers where they could deliver a wavelength within thirty days. They had never made that claim before.

Greg Williams, Analyst, TD Cowen: Right.

Dave Schafer, CEO, Cogent: You know, maybe that was in response to us. Maybe their business is just changing. What I do know though is when you look at those 47 data centers, there were actually only 22 data centers with extended cross connects to the other 25.

Greg Williams, Analyst, TD Cowen: Okay.

Dave Schafer, CEO, Cogent: So it was a much more limited set than their press release led you to believe. Interesting.

Greg Williams, Analyst, TD Cowen: And then just on the revenue targets, my last question for Waves. You know, when you merged with Sprint, you mentioned you’d reach a $300,000,000 run rate in revenue by 2026. That’s clearly off the table now with these delays. So maybe is there an updated target of when you hit that run rate? And then the longer term run rate was $500,000,000 in revenue run rate by 2028.

Is that also subsequently delayed?

Dave Schafer, CEO, Cogent: No. We still firmly believe that by mid twenty twenty eight, we will be doing a annualized run rate of wave revenue of $500,000,000 It is true that the wave market is more diffused than we had originally expected. We’ve actually increased the number of data centers that we are targeting. We were at eight eighty three at the end of last quarter, up from the eight zero two at the beginning of the year. That number will increase.

That gives us over 10 to the twenty first hundredth power number of wave path combinations. We also have reiterated the fact that by the end of this year, will have some intermediate proof on our wave cadence and should be generating around twenty to twenty five million in quarterly revenue getting us to close to a $100,000,000 annualized rate by fourth quarter of twenty five.

Greg Williams, Analyst, TD Cowen: Got it. And with that David, we’re just about out of time. So thank you very much.

Dave Schafer, CEO, Cogent: Thank you very much Greg. Take care.

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