29 Feb Cogent cashes in on OTT video tailwinds
Cogent Communications’ focus when it was founded 19 years ago on providing dedicated internet access continues today to boost its bottom line.While Cogent’s founders most likely didn’t envision the explosion in internet bandwidth consumption related to streaming video and other new services, the launch of new streaming services, such as Disney+, has been a boon.
“We think over the next several years, the majority of minutes of video will be consumed via streaming services,” said Cogent co-founder and CEO Dave Schaeffer, according to a Seeking Alpha transcript. “Those streaming services are also becoming higher resolution. So we feel very comfortable that this single application will continue to drive compounded growth for the internet and therefore Cogent, as the low cost provider, will disproportionally capture that growth and grow even faster. And in fact, our (traffic) growth rate year-over-year at about 35% indicates that.”
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Cogent divides its customers into two buckets. The “corporate” bucket includes small businesses all the way up to Fortune 100 companies while “NetCentric” is comprised of carriers and service providers as well as application and content providers whose businesses rely primarily on internet access.
“Our corporate business, which represents 69% of our total revenues for the fourth quarter, has been growing above our targeted guidance, long-term full-year range of 10%, and in fact grew 10.1% from the fourth quarter of 2018,” Schaeffer said. “Our NetCentric business, which represents 31% of our revenues, has been under-performing compared to our historical averages and declined by 1.4% from the fourth quarter of 2018.”
Cogent owns data centers that are operating at approximately 31% capacity, which gives the company a long runway for providing additional bandwidth. In 2019, Cogent added two data centers to its footprint for a total of 54 data centers by the end of the year.
As of the fourth quarter, Schaeffer said Cogent had 957 million square feet of multi-tenant office buildings in North America directly connected to its network. Cogent’s network consists of over 35,520 metro fiber miles and over 57,600 intercity route miles.
“The Cogent network remains the most interconnected network in the world with direct connectivity to 6,950 networks,” Schaeffer said. “Less than 30 of these networks that connect to Cogent are settlement-free peers, with the remaining over 6,920 networks, being paying Cogent transit customers. We’re currently utilizing approximately 29% of the bandwidth capacity in our network.”
That amount of capacity will not only serve more OTT services going forward, but also bandwidth-intensive video applications that have augmented reality or virtual reality embedded in the streams. The NetCentric part of Cogent’s business could be headed for a turnaround due to OTT services and applications.
“It is these higher resolutions (video) that I think will provide yet another next leg in internet traffic growth,” Schaeffer said. “So we remain extremely positive on the long-term prognosis for accelerating traffic growth. And as we’ve seen competition de-emphasize transit as a product, we’re increasingly gaining market share.”
NetCentric’s prospects this year could also improve due to the transition from 10G ports to 100G ports, but 400G is still a few years away, according to Schaeffer.
On the downside, Schaeffer said Cogent’s sales force turnover came in at 4.9% in the quarter, which was an improvement over long-term sales rep turnover rate of 5.6%. While Cogent has put a bigger focus on training and adding additional sales reps this year, customers need fewer 10G ports than 100G ports, according to Schaeffer.
“Our sales rep productivity was impacted by the decline in our average rep tenure, and significantly impacted by the fact that we’ve been selling a significantly larger number of large ports, allowing customers to aggregate traffic and not have as many lower capacity ports in a given location,” Schaeffer said.
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According to an earnings brief from Credit Suisse, Cogent’s “position as a low-cost pure-play internet provider, with revenue per connection that most competitors can’t match allows it to perform relatively well, even in turbulent environments.”
For the fourth quarter, Cogent had quarterly earnings of 25 cents per share, beating Zack Consensus Estimates of 21 cents per share. A year ago, Cogent posted earnings of 16 cents par share.
For the quarter that ended in December, Cogent had revenues of $140 million compared to year-ago revenues of $132 million.
Cogent also announced another two cents sequential increase in its regular quarterly dividend from $0.64 a share per quarter to $0.66 per share per quarter, which was its 30th consecutive sequential increase to the company’s regular quarterly dividend.