Cogent at Morgan Stanley Conference: Strategic Moves in AI and Network Monetization

On Tuesday, 04 March 2025, Cogent Communications Holdings Inc (NASDAQ: CCOI) participated in the Morgan Stanley Technology, Media & Telecom Conference. The discussion highlighted strategic initiatives and challenges, focusing on AI, network integration, and asset monetization. CEO Dave Schafer expressed optimism about future growth, despite flat financial performance in 2024.

Key Takeaways

• Cogent is leveraging AI for increased data transmission and optical transport.
• The integration of Sprint's network has reached breakeven, reducing negative cash flow.
• Cogent aims to capture a significant share of the $7 billion global wavelength market.
• IPv4 address leasing has increased, with prices rising 40%.
• Data centers acquired from Sprint are being repurposed for new revenue streams.

Financial Results

• 2024 Revenue: Approximately $1 billion, flat year-over-year
• 2024 EBITDA: $348.4 million, slightly down from $352 million in 2023
• Capital Expenditures: $150 million, with $50 million for network integration and $100 million for data center repurposing
• Mid-2028 Projections: Revenue of $1.5 billion and EBITDA of $500 million
• IPv4 Leasing: Cash flow increased from $32 million to $47 million by the end of 2024

Operational Updates

• Sprint Network Integration: Achieved breakeven by February 2025, with plans for a 20% positive margin
• Network Repurposing: 19,000 route miles of intercity fiber and 1,200 route miles of metropolitan fiber repurposed
• Data Centers: 104 buildings converted, with 23 facilities offering 109 megawatts of surplus power
• IPv4 Addresses: 13 million out of 38 million addresses leased, the third-largest inventory globally

Future Outlook

• Wavelength Market: Targeting 25% of the $2 billion North American intercity market
• Data Center Monetization: Facilities marketed with options for triple net lease or outright purchase at a discount
• IPv4 Strategy: Evaluating leasing versus selling excess inventory, with potential for further securitizations

Cogent's strategic initiatives and future growth plans were thoroughly discussed. For further details, refer to the full transcript below.

Full transcript - Morgan Stanley Technology, Media & Telecom Conference:

John Greenberg, Managing Director in Investment Banking, Morgan Stanley: Good morning. So I'm John Greenberg, Managing Director in Investment Banking at Morgan Stanley here with Dave Schafer from Cogent, CEO, President, Chairman and Founder, I believe. Quick disclosures, for important disclosures, please see a Morgan Stanley Research Disclosure website at www.morganstanley.com/researchdisclosures. If you have any questions, please reach out

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Dave Schafer, CEO, President, Chairman and Founder, Cogent: to your Morgan Stanley sales representative. Good morning, Dave. Good morning, John. Thank you for hosting me. I'd like to thank the investors for taking time out getting up early.

Always thank Morgan Stanley for a great venue. And I think you get the first. This is the first time I've been interviewed by the son of someone who interviewed me almost twenty five years or twenty eight years ago when your dad was covering research.

John Greenberg, Managing Director in Investment Banking, Morgan Stanley: Well, we were just waiting for me to become of age, right? Right.

Dave Schafer, CEO, President, Chairman and Founder, Cogent: So, I'm showing my age, one of the two things here. But let's jump into it.

John Greenberg, Managing Director in Investment Banking, Morgan Stanley: Let's get into it. So 2024 felt like the year of artificial intelligence or at least it's big party coming into our industry. And so maybe starting there, how do you think AI is going to impact Cogent? Maybe starting on the customer perspective, but then getting into the OpEx perspective?

Dave Schafer, CEO, President, Chairman and Founder, Cogent: I think AI is like many other buzz phrases often used and seldom fully understood. And I think it does make sense to take a moment and do a little bit of definitional work around it. I think it's one of the technologies that is transformational and it is just beginning. It is very poorly named and it's not what I think most investors think of when they think of artificial intelligence. So artificial intelligence, no matter which large language model you use, kind of always functions the same way where it takes large data sets, poses a question to those data sets and then discerns the pattern that the program uses to come up with the correct answer.

It does that repeatedly and eventually takes those patterns and projects them into new faxes. The primary application of that inference will be the transformation of the way software is produced and impacts people. So initially software for the first thirty years was all about computational efficiency. Software then for the next fifty years was all about process codification and improvement. And really what we're doing now is substituting capital and machines for people coming up with very agile code that can be applied in very specific situations, very customizable and very flexible.

And I think that is going to transform the world. For Cogent, we benefit three ways from AI. First of all, the raw material to create AI is information collected over the Internet. And in the Internet's thirty year history, it has stored about 800 zettabytes of data and it's adding to that pool now at the rate of about 200 zettabytes a year. So the information that is transmitted and collected on the Internet now has value when it didn't And that's a positive for Cogent as the world's largest Internet carrier.

We carry approximately 25% of the world's traffic. The second benefit is to our optical transport business or wavelength business. Typically, the large language model training occurs at locations that are distant from where the data resides simply because of the power intensity of those processes. And as a result, you need to move the bits between their storage point and the location where that training is happening. The best way to do that is with either wavelengths or dark fiber.

While the Internet is cheaper because the Internet is latency indeterminate, it means your GPU utilization would decline if you were moving that traffic via the Internet. So it's actually a positive driver for a relatively new part of Cogent's business. And then the third leg will be the ultimate inference phase, taking those patterns and projecting them into smaller datasets for very customized workflows and processes. And that will all be done over the Internet. And I think it will drive a new wave of Internet traffic growth, much like video or social media had driven previous waves of growth.

John Greenberg, Managing Director in Investment Banking, Morgan Stanley: What do you think the time horizon is on that? Because there's a ton of momentum right now, it feels like on the power component of this in terms of these large data center campuses for learning, which is obviously going to create its own sense of fiber demand. But then the inference stage, which I think is more where you were focused on and pushing that more towards the edge, feels like that's still many years to come.

Dave Schafer, CEO, President, Chairman and Founder, Cogent: I think we're at the beginning of the process, not even out of the first inning. I think there is a rapid evolving process of improving large language models. And there was one thesis that once you trained through the full 700 or 800 zettabytes of data, you were done. But the reality is each model comes up with a different neural network. So I think that process is going to be ongoing and continuous as those new large language models are evolving at the rate of about a new version every four months.

Secondly, we have only started using the inference tools in very narrow subsets like CHAT, GPT or GROC. I think there's going to be much more widespread embedding of that inference in every process and service that we use. I think this could actually be an existential threat to the traditional software industry. Just as the Internet destroyed the telecom industry, I think it's likely that AI will do the same to traditional software. And then I think there are two large questions that have yet to be answered.

The first of those is, is the economic value of the output greater than the cost of producing the inputs for that output? And I think the answer right now is unclear, but probably no. But I think the costs will come down quickly. The second and probably more important question is, is there a business model to capture that economic value? And I think the Internet is a great example of how that value gets distributed to end users and it's very difficult for service providers to figure out how to monetize it.

I think the same thing is going to happen with AI.

John Greenberg, Managing Director in Investment Banking, Morgan Stanley: And we've talked a lot about the demand side in terms of your business and your ability to generate revenue off of this. But on the cost side, you spoke a lot on your earnings call about your sales to install cycle and the ability to provision customers quite quickly. You think AI is supportive of that longer term and your ability to keep addressing the customer?

Dave Schafer, CEO, President, Chairman and Founder, Cogent: So AI today is a small driver of our total revenue streams. 89% of our revenues come from selling Internet based services. Now some of those services do result in the data collection for AI, but it's co mingled with many other services and processes. So if for example, you're using Uber to get a car, you're using that particular application riding over the Internet using Cogent's backbone, but at the same time, they're collecting data for their next generation of AI and training. So the application and the data collection are commingled.

We have been growing our Internet business consistently and gaining market share due to the network optimization that we did twenty five years ago and have continued to perfect to result in the lowest cost interface routed bit mile. I know that sounds like a mouthful, but that's really what someone is using when they use the Internet. We had the opportunity to repurpose the former Sprint voice network and 2024 was a year of transformation where we completed the repurposing of that network to sell optical transport or wavelength services. These are point to point committed services that are typically sold in three speeds, 10 gig, 100 gig and 400 gig. And we can offer those now in more locations across North America than any other provider.

We have unique routes in 90 of the cases. We can produce very accurate GIS mapping for those routes. We can provision those routes much more quickly. And because we have no real cost basis in the Sprint network, we can price aggressively. With the acceleration of AI training and the nearly $2,000,000,000,000 that has been committed to capital programs for that over the next five years, the use of this optical transport will only increase exponentially.

And I think we're in a position to capture a large portion of that growth.

John Greenberg, Managing Director in Investment Banking, Morgan Stanley: Great. So let's get into business performance and 2024 was a pretty transformational year. The Sprint integration is largely complete at this point. Maybe can you just talk about $24,000,000 to $25,000,000 and EBITDA and how we should think about the different levers between organic growth versus operating leverage versus the remainder of the synergies to extract and then the wind down of the subsidy payments?

Dave Schafer, CEO, President, Chairman and Founder, Cogent: Yes. I think I almost have to go back to '22 to fully answer that question, John. I'm not trying not to answer your question. Cogent was a standalone company that had not done any acquisitions for eighteen years. In our early formative period, we did a number of acquisitions, stopped in February.

And for the next eighteen years, we executed on integrating those assets into the world's largest IP network and became the largest carrier of Internet traffic. Our business was dealing about $600,000,000 in revenue, $260,000,000 of EBITDA with top line growing in mid single digits and actually decelerated because of the pandemic and our margin expansion had slowed to only 100 basis points a year sequentially from our average of 200 basis points a year. We then had the opportunity to acquire Sprint's business from T Mobile. This is the original long distance wireline business that originally was being sold to MCI in 02/2002 for $129,000,000,000 and blocked by the Justice Department. Ultimately, T Mobile paid us $700,000,000 to take that business.

And when we took that business, we really acquired two very different things. We acquired a customer base of large enterprise companies that were buying a myriad of products of which VPN services based on MPLS and TIA were the majority, but a lot of managed services and that business was burning $1,000,000 a day negative cash flow. We also acquired a physical network that was built at a capital cost of $20,500,000,000 We were paid $700,000,000 to take that business. Our revenue stepped up to $1,000,000,000 in revenue, $940,000,000 in 2023, and our EBITDA stepped up to $352,000,000 in large part because of the subsidy payments that we were getting from T Mobile. Over the next eighteen months, we worked feverishly to reduce the burn on that acquired enterprise base.

And by the time we held our earnings call in February of twenty twenty five, we had gotten that negative $300,000,000 of burn down to zero. So effectively breakeven. And that was through product rationalization, moving traffic from off net to on network practical and eliminating non core products and services that were uneconomical. We still have some work to do. That business will eventually be about a 20% positive margin business, but with little or no growth associated with it.

Based on the nature of the customers and the long term product substitution of Internet access for VPN services. But the real upside came in our ability to take that long distance network 19,000 route miles of intercity fiber, 1,200 route miles of metropolitan fiber and four eighty two data centers that comprise two thirty megawatts of power and 1,900,000 square feet and repurpose those assets. We've been working feverishly to turn that into to an optical transport network. We connected it to our metro network. Today, we're in eight eighty data centers across North America where we can provide a wavelength from any data center to any data center and do that with a thirty day provisioning window.

We are repurposing those physical buildings. So we've identified 104 of those buildings that we've converted into data centers. And finally, we identified 23 of the largest facilities where we have 100 megawatts of excess power and 1,000,000 square feet that we're trying to market and sell as data centers. We have been working diligently on that process. The network reconfiguration is complete.

The data center configuration project is substantially complete. And by the end of second quarter, all of those data centers will be converted. We are in the process of marketing those assets and trying to see if they fit for AI or other applications.

John Greenberg, Managing Director in Investment Banking, Morgan Stanley: Where do you see CapEx settling out once you're through with the data center? We

Dave Schafer, CEO, President, Chairman and Founder, Cogent: spent about $150,000,000 of extraordinary CapEx, about $50,000,000 on the network integration and about $100,000,000 on the data center repurposing. On a steady state, Cogent's CapEx should be around $100,000,000 a year. That is for direct capital expenditures both for maintenance and modest network expansion. We will also spend about $40,000,000 in capital principal lease repayments. So these are leases on our balance sheet that have about $500,000,000 of value and we amortize those or pay those off at about a rate of $40,000,000 a year.

And then probably another $10,000,000 or so for new capital lease inclusions or expansion opportunities. So kind of all out the door about $150,000,000 of capital in those three different places on the cash flow statement. And then for EBITDA, our EBITDA was flat year over year. So we went from three fifty two in 2023 and 2024 we were three forty eight point four and we'll have similar EBITDA this year. Our revenues will also be flat at roughly 1,000,000,000 But as these new growth initiatives kick in, we shall resume growth and margin expansion.

And we've laid out a plan to be at $1,500,000,000 in revenue, dollars 500,000,000 in EBITDA by mid year twenty twenty eight and that's driven heavily by our growth in the wavelength market. The wavelength addressable market globally is about $7,000,000,000 It's approximately $3,500,000,000 in North America split into a $1,500,000,000 metro wavelength market and about a $2,000,000,000 inner city market, which is the primary market we're focused on. And we believe because of the superiority of the network, the uniqueness of the routes, we can capture 25% share kind of mirroring our success on the IP market.

John Greenberg, Managing Director in Investment Banking, Morgan Stanley: You touched on the uniqueness of the routes, but the waves market is a competitive market. There are other operators out there that have substantial network that's targeting that customer segment. Can you talk about what your competitive advantage is in in terms of targeting those customers?

Dave Schafer, CEO, President, Chairman and Founder, Cogent: So the suppliers of Wavelength have changed over time. Originally, the two suppliers were AT and T and MCI. That then they withdrew from the market twenty years ago and level three Global Crossing, Williams, many of the companies that make up Lumen began to dominate that market. And then Zayo as an aggregator became the second largest player in that market. All the companies that focus on the wavelength market sell a myriad of other products and they have not architected a network that is optimized for wavelength service.

So they have less endpoints available. Each of those major competitors has about three fifty endpoints as compared to our eight eighty. Two, the way in which they provision a wave is custom on each wave and it comes out of a network that's already in service delivering other products, typically requiring six field visits and about three months to provision. We stepped back and took a very different approach. We had a dark fiber network that was built forty years ago, had been sitting dormant for a decade and we could architect in any way we want.

So what we did was built a network that can provision a wave more actually and more ubiquitously. And it's virtually impossible to pre provision the capacity because of the number of permutations between facilities. With eight eighty facilities, you have over 10,200 power number of possible combinations of wavelength paths. No way you can build those in advance, but you need to have a foundation that can deploy those waves quickly. In building a wavelength optimized network, you have two very different design goals.

The first goal is to use your long haul spectrum as efficiently as possible. The second is to minimize the number of optical to electrical to optical conversion points that are incremental capital expense and incremental points of failure. We took those two design goals and built a network that achieves the optimal deployment in a way that our competitors don't. So we understand in every business we operate, we have competitors. In the IP transit business, there were 200 global competitors all larger than Cogent.

And over a 25 period, we caught our way to the number one position by having a more efficient network, a lower price point, less capital efficiency and a ability to provision quickly. We're taking those exact same learning lessons that allowed us to become the primary provider to hyperscalers around the world and project that into our wavelength market. So while we expect competition, we think that our solution is superior in many dimensions.

John Greenberg, Managing Director in Investment Banking, Morgan Stanley: You have an increasingly diverse set of assets that you can monetize these days. We've talked a bit about the fiber. You also have the IPv4 assets and then of course the data centers. Maybe shifting to IPv4 for a moment, you've monetized them in two ways. One is price increases and another is the IPv4 securitization.

And so can you just talk about the future of that collection of assets? How you see the pricing trends going? And is there more securitization on the comp?

Dave Schafer, CEO, President, Chairman and Founder, Cogent: Yes. There are three assets that don't really show up on Cogent's balance sheet. The dark fiber that we have, the buildings that we own that we acquired for $1 that we're converting to data centers and IP addresses that we've acquired over the years. We have 38,000,000 IPv4 addresses. And for a general investor, you go, what does that how does that have economic value?

And Morgan Stanley did help us securitize that through an ABS. And in that first meeting, we had to explain to the bankers why this had value and why it was an asset that warranted being able to raise capital against it. So when the Internet was first architected, there were three foundational technologies, TCPIP which is how two computers talk to one another BGP how two networks communicate and the third, IPv4 as a unique addressing scheme. And at the time, it was thought there would be plenty of addresses with 4,300,000,000 addresses available on IPv4. It's two to the thirty second power addresses and arranged in hexadecimal sequences that are unique to each location on the Internet.

Was the Internet became very successful, it became obvious that wasn't going to scale and we needed a new technology, IPv6, which has 2,128 power addresses. So it alleviates the constraint, but it's never been widely adopted. So as a result, the address is that we own $38,000,000 it is the third largest assemblage in the world has economic value. We began leasing those out, markets developed to buy and sell those addresses. In fact, Amazon and Microsoft have spent collectively nearly $5,000,000,000 buying addresses over a decade.

We chose not to sell, but rather lease. And we've had the ability to increase pricing as those addresses are a scarce resource and we took that cash flow and securitized it. When we initially did this, we had $32,000,000 of annualized cash flow in March of twenty twenty four. By the end of the year, that cash flow was annualized up to $47,000,000 dollars and we're looking to do some additional securitization against that incremental cash flow.

John Greenberg, Managing Director in Investment Banking, Morgan Stanley: And how about the pricing trends that you're seeing?

Dave Schafer, CEO, President, Chairman and Founder, Cogent: Yes. So I'm going to discuss sale and leasing. On the sales side, there are two public exchanges for the purchase and sale of addresses. Prices have increased from the first trades in 2011 at $4 to a peak at the end of twenty twenty three dollars of $60 in address. And today, the trading range is between $48 and $52 an address and fairly stable.

Low volumes, but lots of small trades. On the leasing side, we were unique. We were the only people leasing. Few cable companies had small leases to retail customers, but not an organized program. Amazon and Microsoft had been a rapacious buyer for eleven years and then began leasing at a price that was substantially higher than Cogent's lease.

At the time, Cogent's average lease was $0.29 per address per month. Microsoft and Amazon both coincidentally launched a price point of $3.6 per address per month. With that pricing umbrella, we were able to go in to our base and raise prices. So we have taken prices up by 40% from $0.29 to $0.49 and we have continued to sell out incremental addresses. So today we have leased out $13,000,000 of our $38,000,000 inventory and we're continuing to evaluate, does it make sense to sell off some of that excess inventory?

Or does it make sense to just keep moving forward with additional leasing and perhaps additional securitizations?

John Greenberg, Managing Director in Investment Banking, Morgan Stanley: And for others out there who, like me, have heard a lot about IPv6, but it doesn't seem like there's much out there to more talk than action.

Dave Schafer, CEO, President, Chairman and Founder, Cogent: Can you talk about the threats that exist with the to the extent that you see them on IPv6? So there are three challenges to IPv6 being widely adopted. So the standard came into play in 1998 and in twenty seven years has only gained 7% market share. The limitations are all equipment needs to be IPV6 compatible and 10 for the path of the package travel. That's becoming more common.

It's still not the case today, but probably over the next five years, I think that limitation will go away. The second limitation is probably the most important and that is when you use the Internet, you want to reach all of the endpoints. And if an endpoint is only visible on IPv4, V six can't see it. So as a result, if you elect to use V six, you today only get 7% of the public Internet and 93% of it remains dark to you. And given that choice, almost everyone says, I'll pay an extra $0.5 a month to be able to see the whole Internet.

And third issue, which is the ultimate process of transition, is very problematic because it has to happen all at once and there's a fair amount of labor involved in going to each device and changing the number. It's kind of like the WIG2K problem on steroids where every device needs to be touched and upgraded to V six, but it all has to happen instantaneously. And because of the complexity, ubiquity and importance of the Internet, I don't think that's practical today. So it's probably another couple of decades before we see widespread ubiquitous use of these sites.

John Greenberg, Managing Director in Investment Banking, Morgan Stanley: And then another hidden asset on your balance sheet that you talked about the data center central office portfolio. How do you think about monetizing those over time?

Dave Schafer, CEO, President, Chairman and Founder, Cogent: Yes. So some of those buildings are just too small or too remote locations that I think have great marketable value. We have converted 104 of them to data centers, 55 of them are smaller data centers, 59 are larger. In those 59 larger data centers, we excuse me, 49 larger data centers, we identified 23 of them that have a substantial surplus power beyond what we are going to need. There's actually 109 megawatts of existing in place power today coming into those facilities with 1,000,000 square feet of space.

Now when we took over these facilities, they were full of old telephone switches, TDM voice switches. We initially thought we would just clear out a corner and run a small retail data center. Our thinking has evolved. We've gone in and depopulated these entire facilities. We have tested and upgraded the fire suppression systems, the generators, the battery plants, those perimeter security system.

And we have converted these sites from negative 48 DC power distribution to AC 120, which is what data centers, particularly those running AI would require. So that process is ongoing. It should be complete in about the next four months. And with that, we've actually gone out to the market to over 140 counterparties, probably had about 50 in active discussions that are interested in them. Literally tours are going on every day and we hope in the next month or so we'll be in a position to call for offers on those facilities.

Even though they won't be completely converted, they'll be substantially enough along that we can fare it out who's going to own them or lease them. And we've offered these facilities on two different economic models. You can either lease them on a triple net basis for $1,000,000 a megawatt or you could purchase them outright fee simple for $10,000,000 a megawatt. Both of these pricings represent about a 40% discount to the current market price.

John Greenberg, Managing Director in Investment Banking, Morgan Stanley: Dave referenced a tremendous number of numbers during this conversation for those reading the transcript. No notes. You were referencing no notes.

Dave Schafer, CEO, President, Chairman and Founder, Cogent: That's okay. I've been doing this a long time. I can make one mistake. My 59 was 49. It's okay.

I caught my myself.

John Greenberg, Managing Director in Investment Banking, Morgan Stanley: Thank you very much for coming to the conference. I think there's a lot of exciting things to happen with Cogent over the next year and we're hopeful to see you back here in a year.

Dave Schafer, CEO, President, Chairman and Founder, Cogent: Thank you very much. Thanks Dave. Thank you all very much.

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