As it continues integrating the former Sprint wireline assets into its fold, Cogent sees a new service: dark fiber.
Dark fiber, a service that traditional Tier 1 providers are usually reluctant to sell because it could enable a competitor, means that the fiber cable is “unlit.” Unlike lit fiber, dark fiber isn't managed by the network provider.
Speaking to investors during Cogent's second-quarter earnings call, CEO Dave Schaeffer said that the company sees a “significant opportunity” to sell dark fiber.
“We know that our network has excess capacity for dark fiber,” he said. “We are willing and expect to sell dark fiber on our routes, i.e., sell our inventory where the return is infinite because we have a negative cost basis in that fiber.”
But Schaeffer admits dark fiber is not a fit for everyone. “For many customers, dark fiber makes no sense because of the upfront capital and the ongoing operational support expense,” he said. “For others, it may make sense.”
For now, Cogent is still optimizing the wavelength services network. However, Schaeffer said the company’s sales force is getting “multiple requests from customers for specific routes” for dark fiber.
“We will show a couple of very modest dark fiber sales this quarter in the third quarter, really to help certain customers in specific situations,” he said. “Each request questions whether we jeopardize the bigger opportunity to optimize the wavelength network. By year-end, that optimization project will be complete, and we can then free up people to do that provisioning.”
Wavelength service potential continues
While Cogent is still reconfiguring the Sprint wireline network into its fold, its wavelength services installed at customer sites are yielding some success.
Cogent’s wavelength revenue increased “modestly” by 9% sequentially quarter-over-quarter to $3.6 million, representing a 128.7% increase year-over-year. At the quarter's end, it had 754 wavelength connections, up 8.8% sequentially.
“We expect wavelength revenue to materially accelerate starting in early 2025 as we will complete the network integration and optimization for wave services by year-end,” Schaeffer said.
However, he added that service activation time remains a challenge. “Our provisioning cycles remain elongated at about 90 days,” Schaeffer said. “We intend to substantially reduce that provisioning time as we complete the network optimization programs by year-end.”
As of the end of the second quarter, Cogent had connectivity and wavelength capability services in 574 locations and sold wavelengths in 156 locations. By year-end 2024, Cogent expects to offer wavelength services in over 800 North American locations with shorter provisioning cycles.
“We have a significant backlog and funnel of wave opportunities, representing over 2,700 unique wavelengths,” Schaeffer said.
As Cogent added, it said a modest number of wavelength service customers' ARPU rose by 2% sequentially in the quarter.
Schaeffer noted that the wavelength backlog is skewed towards 100 and 400 Gbps waves rather than 10 Gbps. “This probably means the ARPU of what's in that backlog is slightly larger than the ARPU of the installed base,” he said. “A big part of our effort is to ensure we can support all these speeds across the footprint.”
To satisfy higher bandwidth applications from hyperscaler data center providers and others with more connectivity, customers are transitioning from 10 Gbps to 100 Gbps, with 400G and higher speeds on the horizon.
“Over the next year or 2, 400-gig will be the dominant form of wavelengths, bringing ARPU up,” Schaeffer said. “Beyond that, there will be a migration path based on our installed equipment to support 800 and 1.6 Tbps waves.”
On-net revenue boost
Cogent reported that its overall revenue for the second quarter was $260.4 million fueled by an uptick in on-net revenues.
The competitor saw growth mainly in its on-net services section. On-net revenues increased sequentially by 1.5% in the quarter to $140.8 million. Revenues from its commercial services agreement with T-Mobile increased sequentially by $2.7 million to $5.9 million in the quarter.
At the end of the quarter, Cogent’s on-net customer connections were 87,387. From its on-net network, it continues to succeed in luring new customers with 100 and 400G services.
Cogent’s enterprise business represented 19.1% of its revenues this quarter, $49.8 million. At the end of the quarter, it had 18,356 enterprise customer connections, and enterprise revenue increased by 20.8% year over year and sequentially by 0.9%.
Our on-net revenue was $140.8 million for the quarter, a year-over-year increase of 10.3% and a sequential increase of 1.5%.
“We continue to succeed in selling larger 100-gigabit connections and 400-gigabit connections in carrier-neutral data centers, and we also sell 10-gigabit connections in selected multi-tenant office buildings,” Schaeffer said. “Selling these larger connections has increased our on-net ARPU, which occurred again this quarter.”
However, Cogent’s off-net revenues did decrease sequentially by 5.7% to $111.5 million due to the continued elimination of these low-margin services. Our off-net customer connections were 32,758 at quarter end.
“The sequential decline in our off-net revenue was partially impacted by our migration of specific off-net customers to on-net and, more importantly, the continued grooming and termination of low-margin off-net customer contracts,” said Thaddeus Weed, CFO of Cogent.
The company’s corporate business represented 45.9% of our revenues for the quarter. Our corporate revenue grew by 7.7% year over year but decreased sequentially by 4.3%. Cogent said the sequential decrease was due to the continued grooming of low-margin off-net connections and the elimination of non-core products.
Cogent’s NetCentric business continues to benefit from continued growth in video traffic, activity related to AI or artificial intelligence, streaming and wavelength sales.
The NetCentric business represented 35% of its revenues this quarter. It grew by 4% year over year and by 4.5% on a constant currency basis but declined sequentially by 0.9%. Cogent’s network had 61,736 NetCentric customer connections.
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