Cogent’s Corporate Business Remains Stalled; T-Mobile Wireline Acquisition Now Expected in Q2

Cogent’s CCOI fourth quarter was disappointing, as its corporate customer base remained stalled, and the EBITDA margin was under pressure due primarily to inflationary costs. Also, Cogent now expects its acquisition of Sprint’s wireline business from T-Mobile—for which Cogent essentially will receive $700 million—to close in the second quarter. We expect the transaction will lead to more volatility and uncertainty in results, but it doesn’t change our $65 fair value estimate.

Fourth-quarter revenue—up more than 3% year over year—was decent, as corporate sales growth accelerated a bit and netcentric revenue growth remains solid despite continuing currency headwinds. However, the corporate business again shed customers. We had been expecting a return to corporate customer growth by now on the back of a bigger return of workers into corporate offices. We expect the current atmosphere to generally persist in 2023, leading us to push our projections for customer growth out to 2024 and lower our long-term customer growth rate. Rather than expecting a return to normal, we think there’s more uncertainty about what a new normal will be in Cogent’s buildings.

Growth in the netcentric business—where Cogent delivers internet traffic—has decelerated from the pandemic spike but has remained strong. Fourth-quarter netcentric sales growth was about 10% year over year (15% in constant currency), and traffic on Cogent’s network was up another 25%. We see these as normalized results for Cogent, where ever-increasing internet traffic can offset the deflationary pricing inherent in the business.

Cogent’s EBITDA margin contracted by more than a full percentage point in the fourth quarter and was flat for the year, inconsistent with the annual expansion the firm has achieved since 2015. We don’t see this as indicative of an end to margin expansion opportunities, as the firm ramped hiring and paid one-time inflation-based bonuses (a 1-percentage-point margin headwind) in the fourth quarter.