Key Takeaways:
Cogent Communications Holdings, Inc. (CCOI) saw its stock fall after reporting a 0.6% sequential revenue decline to $239.2 million for the first quarter, prompting an investigation by law firm Holzer & Holzer into the company's compliance with federal securities laws.
"The negative growth in Q1 largely reflects the shrinking Sprint wireline base and that the pace of decline is moderating, positioning the business for cleaner growth comps over time," management stressed on the earnings call.
The results highlight a company in transition, with the erosion of its acquired Sprint business masking underlying strength in its core on-net and wavelength services. Investor focus now turns to the company's ability to execute its deleveraging plan, which includes the sale of 10 data centers expected to close in early summer, amid rising capital expenditures and persistent supply-chain pressures.
The slight contraction in Cogent's total revenue was driven by the continued decline of the wireline business acquired from Sprint, which saw its revenue run rate fall 67% to $39 million since the deal closed. In contrast, the legacy "Cogent Classic" business grew its run rate by 28% to $198 million over the same period, reflecting a strategic shift toward higher-margin services.
Wavelength services were a standout performer, with revenue surging 90.8% from a year ago to $13.6 million. The company has expanded its wavelength offerings to 1,107 locations and now serves 492 customers. This growth is central to Cogent's strategy to capture up to 25% of the North American long-haul market, up from its current 3% share.
Despite the top-line pressure, profitability improved on an annual basis. The adjusted EBITDA margin expanded by 150 basis points to 29.3% year-over-year, aided by cost controls and a richer product mix, with on-net services now accounting for 62% of total revenue. However, adjusted EBITDA fell sequentially by $6.6 million due to higher seasonal operating expenses.
Leverage remains a significant risk for investors. The company reported net debt of approximately $2.0 billion, with net leverage at a high 6.79 times adjusted EBITDA. Management is taking steps to address the balance sheet, announcing a letter of intent to sell 10 former Sprint data centers and planning to refinance $750 million of unsecured notes after mid-2026.
Looking ahead, Cogent is navigating operational headwinds, including vendor price hikes and supply-chain delays that have extended equipment delivery times to 9-15 months. This has forced the company to increase capital expenditures, which reached $46.2 million in the first quarter.
The guidance for 6% to 8% average annual revenue growth and 200 basis points of yearly EBITDA margin expansion was reiterated by management. The successful monetization of data center assets and the refinancing of its debt are the next major catalysts for the company as it seeks to stabilize its financial profile and focus on its high-growth segments.
This article is for informational purposes only and does not constitute investment advice.
