CCOI Q1 Earnings Call: Wavelength Expansion and Revenue Transition Define Quarter

Internet service provider Cogent Communications (NASDAQ:CCOI) missed Wall Street’s revenue expectations in Q1 CY2025.

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StockStory’s Take

Cogent's first quarter performance reflected the ongoing effects of business transformation following the Sprint acquisition, with leadership emphasizing continued progress in data center integration and cost savings. CEO Dave Schaeffer highlighted the rapid ramp-up in wavelength service availability, stating, “We are now offering wavelength services in 883 data centers with 10-gig, 100-gig, and 400-gig capabilities.” Management attributed year-over-year revenue declines primarily to the ongoing grooming of low-margin and non-core Sprint-acquired contracts, as well as the impact of lower payments from a key transit agreement with T-Mobile. At the same time, gross margin improvement was driven by realized cost reductions and the elimination of less profitable services.

Looking forward, management expects a return to top-line revenue growth by mid-third quarter 2025 as the company completes the churn of undesirable Sprint-acquired revenue. The leadership team outlined confidence in the growth trajectory of wavelength and NetCentric services, with Schaeffer projecting that “the funnel [of wavelength opportunities] will reach 10,000 by year-end.” The company also aims to increase the pace of data center monetization and expects continued improvement in EBITDA margins, citing ongoing cost savings and operational efficiencies. However, management acknowledged that elevated leverage and the winding down of T-Mobile payments will continue to affect financial flexibility until later in the year.

Key Insights from Management’s Remarks

Management attributed the quarter’s results to continued integration of Sprint assets, a growing pipeline for wavelength services, and the strategic exit from low-margin contracts.

• Wavelength services ramping up: Cogent expanded its wavelength offering to 883 data centers, with sequential connections up 18%. Most installations occurred late in the quarter, impacting immediate revenue recognition, but management expects more consistent growth as the sales funnel matures.
• Data center conversion and monetization: The company accelerated the conversion of former Sprint facilities into Cogent-operated and edge data centers, with 180 locations now offering 211 megawatts of power. Several data center assets are being prepared for sale or lease, with active negotiations underway.
• Cost savings realized from Sprint integration: Cogent achieved targeted $220 million in cost synergies and expects to realize at least $20 million more through mid-2026. These savings improved gross margins despite the revenue decline.
• IPv4 leasing growth: Management cited a significant increase in IPv4 leasing revenue, up 42% year over year, driven by both price increases and asset scarcity. The company maintains the largest pool of IPv4 addresses among peers.
• Strategic contract churn impacts revenue: The ongoing removal of low-margin and non-core Sprint contracts continued to weigh on corporate and enterprise revenue segments, but this process is expected to conclude by mid-2025, paving the way for resumed growth.

Drivers of Future Performance

Cogent’s outlook for the coming quarters centers on further expansion of wavelength services, continued cost reduction, and monetization of data center assets, alongside the completion of legacy contract churn.

• Wavelength pipeline expansion: Management expects the funnel of wavelength opportunities to triple by year-end, aiming for 10,000 potential installs as customer confidence grows in Cogent’s provisioning capabilities. This is expected to materially boost NetCentric segment growth.
• Data center asset monetization: Active negotiations to sell or lease surplus data center capacity could provide a source of capital for deleveraging and future investment, although the timing of these deals remains uncertain.
• Headwinds from payments and leverage: The reduction in monthly payments from T-Mobile and temporarily elevated leverage will pressure financial flexibility. Management anticipates that as legacy Sprint contract churn concludes and new services scale, revenue and margin trends will improve from late 2025 onward.

Catalysts in Upcoming Quarters

In the coming quarters, the StockStory team will monitor (1) the pace at which Cogent converts its wavelength sales funnel into recurring revenue, (2) progress on data center asset sales or leases as a means to reduce leverage, and (3) the successful completion of contract churn from legacy Sprint customers. Additional attention will be on cost controls and EBITDA margin trends as new services gain traction.

Cogent currently trades at a forward EV-to-EBITDA ratio of 6.5×. Should you double down or take your chips? See for yourself in our full research report (it’s free).

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