Cogent Earnings: We Anticipated These Results, but Postacquisition Margins Better Than We Expected

The biggest source of volatility in Cogent’s CCOI second-quarter financial results was another reversal in how the firm will recognize the $700 million it is receiving from T-Mobile as part of Cogent’s Sprint wireline acquisition, which closed in May and led to a big noncash gain in the quarter while reducing the revenue we expected. Cogent’s legacy corporate business continues to struggle as corporate office attendance in the U.S. has yet to recover, and the legacy netcentric business remains strong. However, the new baseline for EBITDA margins appears to be higher than we anticipated after Cogent acquired the cash-burning Sprint wireline business. After adjusting our margin projections, we’re raising our fair value estimate to $70 from $65.

Cogent’s second-quarter adjusted EBITDA margin was 22.5%, in line with our expectations. However, we anticipated margins in the mid-20s would become the new baseline. Management said that due to timing issues in the quarter, it sees the new baseline in the 30s (including payments from T-Mobile that will no longer be recognized as revenue). Cogent still expects to achieve about 10 percentage points of margin expansion over the next 10 years. With less than a full quarter of owning the wireline assets, there are still many unknowns, and we’re not yet comfortable projecting such large expansion, especially since we think the firm’s projection of 5%-7% annual average sales growth over the next decade is a bit optimistic. However, the materially higher margin baseline is encouraging.

Cogent’s legacy business generally kept with recent trends, with corporate revenue treading water and the netcentric business thriving. Corporate revenue was up less than 1% organically year over year, but connections again declined both sequentially and year over year. Management said it’s seeing positive trends that more workers are returning to offices, but we doubt this business line will return to growth rates Cogent was accustomed to, prepandemic.