Cogent’s Network Transformation
Introduction
When Cogent closed its acquisition of Sprint Wireline, it expected to generate $100 million of annualized run-rate Wavelength revenue by May 1, 2024. The company missed that target by ~85%, materially raising investors’ skepticism in the company’s long-term ambitions of generating $500 million in run-rate revenues by mid-2028. $500 million of revenue at 95% incremental margins is the single biggest swing factor in Cogent’s future equity value. Every $50 million of incremental Wavelength revenue equates to nearly $1.00/share of pre-tax free cash flow. This matters a lot.
Understanding why Cogent missed its guidance has significant downstream implications on its future equity value. Can it not serve this market well? Is customer demand below expectations? Or was something else going on? The quote below helps set the stage for the rest of this Insight.
“There are nearly 10,000 discrete work projects and nearly 1,000 of our 1,900 employees are involved in these reconfigurations. It will all be complete by year-end. We are able to provision wavelengths today, but each wavelength takes custom engineering and will take 90 to 120 days.
Each of these custom designs slows our reconfiguration work gap. So while we’ve installed about just under 800 wavelengths and we have about 2,400 in the backlog, we are trying to focus on doing this foundational work, and therefore, be in a position to clear the backlog and accelerate sales early next year. So I think the way to think about the cadence is slow between now and the end of the year, some incremental proof points, but then a material acceleration in our wave deployment.”
There is a tension between selling and provisioning Wavelength services and completing the reconfiguration work. In our conversations with the company, it became clear that Cogent de-emphasized selling Wavelengths earlier this year, preferring to focus its efforts on the foundational reconfiguration work instead of disappointing customers with delays. In doing so, it sacrificed current revenue and backlog growth.
We’ve written about Cogent in the past, specifically about Cogent’s business opportunity in Wavelengths and its “hidden” assets (part 1, part 2). Most of what we’ve written has been an attempt to quantify upside potential (from Wavelengths) and downside protection (from Cogent’s non-core assets). This post will attempt to consolidate our thoughts and our work on the network transformation and reconfiguration that is underway, as mentioned above in Dave’s quote. It will be divided into two sections: (1) Cogent’s long-term network and go-to-market strategy and (2) how that applies to the wavelength network.
This summarizes some of the work we’ve done over the past 12-18 months, but especially in the last few months as it became clear that Cogent would miss its $100 million run-rate revenue target. We’ve worked hard to understand the dynamics that contributed to such an egregious guidance miss, and if we should have longer-term concerns about Cogent’s growth potential in the Wavelength market (long story short, we do not).
With that, let’s dive in.
