Cogent mines wavelength and colocation opportunities from its Sprint network purchase

Aug. 20, 2023
The service provider puts Sprint’s former wireline assets to advance its wholesale and business services on its fiber network.

Cogent mines wavelength and colocation opportunities from its Sprint wireline network purchase The service provider leverages the acquisition of Sprint’s wireline assets to advance its wholesale and business services reach.

Cogent wastes no time putting the former Sprint wireline assets to work that it purchased from T-Mobile in May. The business and wholesale-centric provider sees the assets of the former wireless and pioneering long-distance voice pioneer as a foundation to expand its network reach.

By acquiring Sprint’s wireline network facilities, Cogent added 18,905 route miles of owned intercity fiber and 1,257 route miles of owned metropolitan fiber. Cogent plans to also reconfigure 44 Sprint into its facilities.

David Schaeffer, founder, chairman, CEO, and president of Cogent, told investors during its second-quarter earnings call that the Sprint asset acquisition “significantly” expanded its network, customer base, employee pool, and scope and scale of its business. “We acquired several large enterprise customers, many of which are Fortune 500,” he said. “We acquired a significant fiber network of owned assets, owned real estate facilities and several right-of-way agreements and relationships. It would have been virtually impossible to assemble the assets independently.”

He added that Cogent also hired “many valuable experienced employees from the wireline business, the majority of which have been with the company for over 22 years.”

Additionally, Cogent received a $700 million cash commitment from T-Mobile to help offset the operating losses of the business that it acquired. The company said that $350 million will be paid in the first year in monthly installments of $29.2 million. “We're very optimistic about the cash flow generating capabilities of the combined operation,” Schaeffer said.

Enhancing wavelength services

Given T-Mobile’s focus on providing wireless services, the legacy wireline network it acquired when it purchased Sprint was not strategic to its business. Sprint’s wireline network included a fiber network and a series of switch sites—assets Schaeffer saw the potential for enhancing Cogent.

With the Sprint wireline assets, Cogent can enhance its reach in the optical wavelength and colocation service segments. “The Sprint wireline assets were sitting empty, much like an office building that would have no tenants in it,” he said. “And we saw value in that and said, we can repurpose that and create a growth business and selling high-capacity optical transport services and by selling colocation in that footprint.”

The service provider equips the network with transport and OADMs to rapidly provision wavelength services.

Schaeffer sees these assets as a jumping-off point. “I wish I could tell you it was so smart that I would have known the AI tailwind for optical transport and colocation was coming,” he said. “But the reality is there's been a huge uptick in the short term for demand for both of those services because of the need for high compute and high data transfer that is not easily done on the Internet.”

Following the Sprint acquisition, Cogent expanded its optical wavelength and optical transport services over its fiber network. Cogent is selling these wavelength services to its existing customers, Sprint customers and new customers who require dedicated optical transport connectivity without the capital and ongoing expenses associated with owning and operating network infrastructure. Wavelength revenue was $1.6 million for the three months ended June 30, 2023. Wavelength revenue from the Wireline Business was $1.6 million from May 1, 2023 (the closing date of the Sprint acquisition) to June 30, 2023.

Cogent reported that second-quarter wavelength revenue was $1.6 million for the quarter and 414 customer connections. Wavelength revenue from the wireline business was 404 customer connections and $1.6 million.

Schaeffer said the optical wavelength efforts are paying off and that it plans to extend wavelength services to more areas. “We have sold these services in 35 discrete locations with shorter provisioning cycles and have connectivity to approximately 200 locations that still have longer provisioning cycles,” he said. “Over two years, we expect to be able to offer wavelengths in over 800 carrier-neutral locations in North America.”

A key focus for Cogent going forward will be to reduce the provisioning timelines on wavelength services. While Cogent has reduced the provisioning timeline from 142 days when Sprint oversaw the business to an average of 62 days, the service provider is working to mirror its 9-day average transit port install window. Cogent said it will be able to do that by the end of 2024 in all 800 U.S. carrier-neutral facilities.

“2 different things are happening,” Schaeffer said. “We've got to go from 200 to 800 facilities, which we expect to have that relatively linearly ramp over the next five quarters to give us that full footprint. Secondly, we need to reduce the provisioning time.”

Staging transponder shelves in those locations and deploying OADMs in areas that will facilitate this rapid provisioning can reduce turn-up time for wavelength services, which it is in the process of doing. “The combined network will complete that process by the end of 2024,” Schaeffer said. “We anticipate the wavelength revenue to increase relatively linearly over seven years from what is today about a $10 million run rate to a $700 million run rate.”

Growing netcentric business

Ramping up managed optical wavelength services aligns well with Cogent’s growing net-centric business. The customers in this segment include over-the-top video streaming content providers that purchase Cogent’s transport services.

Cogent is targeting the wavelength market by engaging with existing customers, existing NetCentric transit customers and pursuing opportunities with other targets with which it did not have a previous relationship. “Our sales force has already engaged with the vast majority, probably 95%, of the potential market and discussing the wavelength opportunity,” Schaeffer said. “The challenge for us is to connect the Sprint network to enough locations to fulfill that demand. And then, secondly, to streamline the provisioning of wavelength services.”

He added that regarding connectivity, Cogent is a quarter through its goal. “We today have 777 U.S. carrier-neutral data centers on-net,” Schaeffer said. “That number is growing. We'll have north of 800 by year-end U.S. carrier-neutral data centers and that number will continue to grow.”

Part of the carrier-neutral data center growth will include adding 100 carrier-neutral data centers per year to its footprint over the next several years. Additionally, Cogent plans to convert another 44 Sprint facilities into Cogent data centers. So far, it has converted one of Sprint’s facilities.

“Today, we are selling wavelengths with a rapid provisioning cycle in 35 carrier-neutral data centers,” Schaeffer said. “And with an extended provisioning cycle, we can sell wavelengths in over 200 carrier-neutral facilities. By the end of 2024, we anticipate being able to sell wavelengths in 800 or more U.S. carrier-neutral data centers with continued reduced provisioning intervals.”

As part of transforming Sprint’s data center assets, Cogent can offer a series of new services it can sell directly to its customers and data center providers.

“We are going to take those data centers and do two things,” Schaeffer said. “We will take 1 data hall and turn it into a Cogent data center, meaning retail sales, 1 or 2 racks at a time. But there are typically 3 or 4 independent data halls in each facility. Those will be sold or leased to either other data center operators on a wholesale basis or perhaps hyperscalers or AI companies to put equipment in to do compute.”

Another key potential area of growth is hyperscale providers. Over the past few quarters, Cogent has seen a shift towards other providers purchasing services to support intelligence and data collection. “We have seen some customers who had traditionally had traffic very asymmetrically skewed in the outbound direction, now collecting significant data in the return path,” Schaeffer said. “And that has driven more growth from some of the larger software and hyperscale companies that are using that data to build their large language models and create generative artificial intelligence applications.”

Schaeffer added, “We're only at the beginning of that trend, which is an encouraging tailwind for the NetCentric business.”

On-net, Off-net revenue rises

Cogent reported that its enterprise business accounted for 17.2% of its revenues this quarter and had 22,435 Enterprise customer connections on its network at the end of the quarter. Enterprise revenue from the wireline business was $40.7 million and Enterprise customer connections were 23,034.

During the second quarter, Cogent saw gains in on-net and off-net revenues in its wireline business services segment.

On-net service, provided to customers in buildings physically connected to Cogent’s network, grew by 14 percent. Wireline business on-net revenue was $4.1 million from May 1, 2023 (the closing date of the Sprint acquisition) to June 30, 2023.

Off-net revenues included customers in buildings directly connected to Cogent’s network using other carriers’ facilities and services to provide the last mile portion of the link from the customers’ premises to Cogent’s network, was $102.0 million. The service provider had 38,762 off-net customers at the end of the quarter. Cogent reported that off-net revenue from its Wireline Business was $63.9 million from May 1, 2023 (the closing date of the Sprint acquisition) to June 30, 2023.

Cogent serves its on-net customers in 3,227 total on-net multi-tenant office and carrier-neutral data center buildings.

Thaddeus Weed, CFO of Cogent, said it continues to see success in selling high bandwidth connections. “We continue to succeed in selling larger 100-gigabit connections and 400-gigabit connections in selective locations, which has the impact of increasing our on-net ARPU, which again occurred this quarter,” he said.

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