Cogent Communications, one of the world’s largest ISPs, is carrying more traffic on its network than most incumbent telcos. During its most recent earnings report, Cogent said its quarterly traffic growth came in at 10%, while year-over-year traffic growth hit 44%.   Let’s break that down into on-net and off-net services/customers:

On-net service is provided to customers located in buildings that are physically connected to Cogent’s network by Cogent facilities. On-net revenue was $93.0 million for the three months ended June 30, 2018; an increase of 0.7% from the three months ended March 31, 2018 and an increase of 8.7% over the three months ended June 30, 2017.  Cogent’s more than 65,000 on-net customer connections and its nearly 2,600 on-net office buildings and carrier-neutral data centers send traffic over its all-IP-over-DWDM network, protected at Layer 3, using Ethernet as its network interface.  On-net customers are obviously the most profitable customers for Cogent.

Off-net customers are located 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. Off-net revenue was $36.1 million for the three months ended June 30, 2018; the same amount as the three months ended March 31, 2018 and an increase of 6.3% over the three months ended June 30, 2017.

Total customer connections increased by 13.8% from June 30, 2017 to 76,193 as of June 30, 2018 and increased by 3.1% from March 31, 2018. On-net customer connections increased by 14.1% from June 30, 2017 to 65,407 as of June 30, 2018 and increased by 3.2% from March 31, 2018. Off-net customer connections increased by 12.3% from June 30, 2017 to 10,480 as of June 30, 2018 and increased by 2.3% from March 31, 2018. The number of on-net buildings increased by 161 on-net buildings from June 30, 2017 to 2,599 on-net buildings as of June 30, 2018 and increased by 58 on-net buildings from March 31, 2018.

Cogent classifies all of their customers into two types:  NetCentric customers and Corporate customers.

1. NetCentric customers buy large amounts of bandwidth from us and carrier neutral data centers and our Corporate customers buy bandwidth from us in large multi-tenant office buildings. Revenue in customer connections by customer type.  There were 33,520 NetCentric customer connections on our network at quarter-end, which declined from last quarter due to significant circuit grooming, consolidating multiple 10 gig circuits to fewer 100 gig circuits at the same location from some of our larger NetCentric customers.
2. Corporate customer revenue grew sequentially by 2.7% to $83.3 million and grew year-over-year by 11.9%. We had 42,673 Corporate customer connections on our network at quarter-end. Quarterly revenue from our NetCentric customers declined sequentially by 3.4% and grew year-over-year by 1.4%.

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CEO Dave Schaeffer’s Earnings Call Remarks:

The size and scale of our network continues to grow. We have over 927 million square feet of multi-tenant office space on-net in North America. Our network consists of over 31,900 metro fiber miles and over 57,400 intercity route miles of fiber.

Cogent remains the most interconnected network in world, where we are directly connected with over 6,360 networks. Less than 30 of these networks are settlement-free peers. The remaining over 6,330 networks are paying Cogent transit customers.

We are currently utilizing 27% of the lit capacity in our network. We routinely augment capacity in sections of our network to maintain these low utilization rates. For the quarter, we achieved sequential quarterly traffic growth of 10% in what is traditionally a slow seasonal period for traffic growth and we saw a significant improvement in our year-over-year quarterly traffic growth to over 44%.

We operate 52 Cogent-controlled data centers with 587,000 square feet of space and we are operating those facilities at 32% utilization. Our sales force turnover rate in the quarter was 4.8% per month, again better than our long-term average turnover rate of 5.7% per month. And I think a testament to the training and retention programs that we’ve put in place. We ended the quarter with 438 reps selling our services.

Cogent remains the low cost provider of internet access and transit services. Our value proposition to our customers remains unparalleled in the industry. Our business remains entirely focused on the Internet and IP connectivity and data colocation services. Our services provide a necessary utility to our customers. Beginning at the start of Q2 and April 1st, we began selling our SD-WAN services. We do not expect a material contribution from these services for the next several quarters.

We expect our annualized constant currency long-term revenue growth to be consistent with our annualized guidance of 10% to 20%, and our long-term EBITDA margin expansion rates to remain approximately 200 basis points per year for the next several years.

We expect to grow the sales force at between 7% and 10% per year for the next several years, while we expect operational head count growth to be slower at probably 2% to 3%. So the mix will increasingly become more sales-centric. Because of the efficiencies in running our business and the standardization of our products and the systems that we’ve deployed, we can sustain 44% traffic growth, 20% growth in unit number of connections and do that with a increase in operational and overhead employees of only about 2% to 3% per year. The sales force, however, is the engine that will drive accelerating revenue growth. And investing in that sales force has been and continues to be our major focus.

Analysis:

Cogent is trying to provide the most bandwidth at the lowest possible price, which means it’s in a race to run its network at the lowest possible cost, which means it’s in a race to take every advantage of new optical networking and routing technologies, as soon as they’re available.

“We divide the network into four big technology regions — edge routing, core routing, metro transport and long-haul transport,” Schaeffer told Light Reading. “In all of those functional areas we are on our third generation of equipment — we’ve done two complete forklift upgrades in 19 years — and, you know, I’m sure we’ll go to a fourth generation soon,” he added.

Webcast Replays:

The KeyBanc Capital Markets 20th Annual Global Technology Leadership Forum was held at the Sonnenalp in Vail, CO. Dave Schaeffer will be presenting on Monday, August 13th at 10:00 a.m. MT.  Investors and other interested parties may access the live webcast of the presentation by visiting the webcast page.

The Oppenheimer 21st Annual Technology, Internet & Communications Conference was held at the Four Seasons Hotel in Boston, MA. Dave Schaeffer will be presenting on Wednesday, August 8th at 1:05 p.m. ET.  Investors and other interested parties may access the live webcast of the presentation by visiting the webcast page.

The Cowen 4th Annual Communications Infrastructure Summit was held at the St. Julien Hotel and Spa in Boulder, CO. Dave Schaeffer will be presenting on Tuesday, August 7th at 3:30 p.m. MT.  Investors and other interested parties may access the live webcast of the presentation by visiting the webcast page.