Cogent Earnings: Slow Start to the Year, but Sprint Wireline Business Is the Bigger Wild Card

Narrow-moat Cogent CCOI had a disappointing first quarter, with its corporate business continuing to struggle and its netcentric business slowing a bit. Margins were also weak. However, the firm closed its deal with T-Mobile on May 1 to acquire Sprint’s wireline business, and we think that business will have a much greater influence on Cogent’s performance in the short and long term. If some of management’s projections for stabilization and growth of the Sprint business come to fruition, Cogent has significant upside, but that business is currently burning cash and is in decline, so it carries risks even considering the $700 million T-Mobile is paying Cogent in the first couple of years to subsidize the business’ losses. We don’t anticipate major changes to our $65 fair value estimate after fully incorporating the Sprint transaction.

Total service revenue was up 3% year over year, with the corporate business declining again and netcentric revenue growing at its slowest year-over-year rate since the onset of the pandemic.

Corporate revenue declined 0.6% year over year and 0.2% sequentially, as the business continues to shed customers with corporate office building vacancy rates remaining high. The customer base contracted 0.6% in the quarter, and despite management saying there was improvement in the first quarter in both office vacancies and Cogent’s trends, we expect the corporate business to remain under pressure.

Netcentric revenue grew 7.8% year over year, though it was up 10% in constant currency. It’s certainly not surprising that the growth rate has returned to normalized levels after being supercharged in the period following the pandemic’s onset, when global video streaming and the need for digital communications spiked the growth rate for internet traffic above trend. However, Cogent had been relying on the netcentric strength to offset corporate weakness, and the corporate business’ slower return to normal will likely weigh on results of the core business.