Cogent Communications (NASDAQ: CCOI) offers on-net internet access to corporate customers located in 2,884 buildings, including 1,783 large multi-tenant office buildings, that are physically connected to its network. Cogent Communications’ on-net service consists of high-speed internet access and private network services at speeds ranging from 100 megabits per second to 100 gigabits per second. Specifically, the company provides these services to both i) Corporate and ii) Net-Centric customers.

Cogent Communications – Corporate Customers

Cogent Communications’ Corporate segment comprises the majority of the company’s revenue, at 67% of total revenue, as of September 30, 2020. Additionally, it is the Corporate segment where growth is significantly decelerating. This is being driven by the deteriorating commercial real estate market and its tenant base.

Specifically, Cogent Communications’ Corporate segment grew only 1.3% year-over-year, from $94.4m in Q3 2019 to $95.7m in Q3 2020. Moreover, the company’s Corporate segment actually declined by 1.3% quarter-over-quarter, from $97.0m in Q2 2020 to $95.7m in Q3 2020. Indeed, both of these metrics compare to Cogent Communications’ Corporate segment growth of 10.6% during 2019.

Within its Corporate segment, Cogent Communications offers services to two types of customers: i) on-net and ii) off-net.

On-Net Service – Primary Offices

Cogent Communications’ “on-net” Corporate customers are located in 1,783 large multi-tenant office buildings. Specifically, these customers include firms in the industries of law, financial services, advertising & marketing, and other professional services.

The 1,783 large multi-tenant office buildings that connect to Cogent Communications’ network are primarily located in commercial business districts of major U.S. cities. Indeed, major cities such as New York, Chicago, Atlanta, Houston, and Los Angeles, comprise 41% of the company’s on-net corporate office buildings.

Off-Net Service – Satellite Offices

Cogent Communications “off-net” Corporate customers are not located in buildings directly connected to the company’s network. Specifically, off-net service is primarily for Corporate customers using other carriers’ circuits. In turn, off-net service provides the “last mile” portion of connectivity from the customer’s premises to Cogent Communications’ network.

Cogent Communications – Challenges

During 2020, Cogent Communications has seen Corporate customers reduce new configurations and speed upgrades of their internet lines. Additionally, this trend is being exacerbated by a reduction in demand for connecting smaller, off-net, satellite offices.

Challenges and uncertainties brought by the COVID-19 pandemic are slowing Cogent Communications’ Corporate customer purchasing decisions. One of the key drivers of this slow down has been the work-from-home (WFH) dynamics. These have become the status quo during COVID-19.

Commercial Real Estate Market Implications

Cogent Communications’ Corporate segment is experiencing pressure from the deteriorating commercial real estate market, particularly of office buildings, that the company services. Specifically, rising vacancy levels and falling lease initiations and renewals at office buildings, is resulting in fewer sales opportunities for Cogent Communications’ salesforce.

As a result, during 2020, the company is experiencing a significant slowdown in new sales to Corporate customers. In turn, this is negatively impacting the company’s Corporate segment revenue growth. Indeed, Cogent Communications is experiencing higher Corporate customer churn, fewer upgrades of existing Corporate customer configurations and fewer new tenant sales opportunities.

Disproportionate Drag on Satellite Offices

A reduction in demand for connecting smaller, off-net, satellite offices, is particularly decelerating Cogent Communications’ growth. Indeed, these smaller satellite offices disproportionately face challenges and uncertainties from the COVID-19 pandemic. In turn, Cogent Communications’ off-net Corporate customers are either closing their satellites offices or hesitating to upgrade and install services at these office locations.

Cogent Communications – Future Prospects

Overall, Cogent Communications believes that large, Class A, office buildings in major cities will eventually return to a more normal occupancy rate. Following the COVID-19 pandemic, this higher occupancy rate, will mean a higher usage rate for the company’s services. However, concerns remain about the viability of smaller satellite offices in secondary markets.

Furthermore, the concern about the outlook for offices, is particularly evident in industries that can operate entirely remotely. Indeed, many businesses may permanently embrace the work-from-home (WFH) approach for their satellite office employees. In turn, these trends could prove to be a headwind to Cogent Communications’ business. Particularly, because the Corporate segment comprises 67% of the company’s total revenue.

READ MORE: T-Mobile Offloads Wireline Business to Cogent

Jonathan Kim covers Fiber for Dgtl Infra, including Zayo Group, Cogent Communications (NASDAQ: CCOI), Uniti Group (NASDAQ: UNIT), Lumen Technologies (NYSE: LUMN), Frontier Communications (NASDAQ: FYBR), Consolidated Communications (NASDAQ: CNSL), and many more. Within Fiber, Jonathan focuses on the sub-sectors of wholesale / dark fiber, enterprise fiber, fiber-to-the-home (FTTH), fiber-to-the-premises (FTTP), and subsea cables. Jonathan has over 8 years of experience in research and writing for Fiber.


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