Cogent Communications Holdings, Inc. Oppenheimer 29th Annual Technology, Internet & Communications Conference
Review the key takeaways and the transcript of this earnings call.
- Cogent experienced a tough year with revenue decline due to the acquired Sprint business runoff and increased capital intensity to repurpose assets, resulting in increased net leverage and degraded enterprise value.
- Internet traffic growth accelerated from 12% year over year in Q1 to 16% in Q2, driven by AI embedding into internet applications, increasing traffic volume and changing traffic directionality.
- Cogent's wavelength business grew 9.2% sequentially and 68% year over year but remains only 6% of total revenues, approximately $60 million, which is not large or fast enough to satisfy investor expectations.
- Cogent has sold wavelengths to 548 unique service providers across 608 locations, gaining about 3% market share in the wavelength market within six quarters.
- Cogent's internet transit business carries about 25% of the world's internet traffic with 20.5% of global traffic flowing on Cogent's network, showing strong market position and traffic growth double the rate of the internet overall.
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Transcript
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Hi, everybody. Tim Moran, the communications analyst here at Oppenheimer. My pleasure to have Dave Schaeffer, the CEO of Cogent. Sorry for the brief delay here. Dave, it's been an interesting year in many ways. We'd like to get down to the details, but I'd like to just maybe start at a really high level, if that's okay with you, and I know you've done a few of these here this week. We're hearing that the demand for AI infrastructure, for both networking and compute, is incredibly strong at the moment. There's a shortage of GPUs, shortage of compute, that AI tokens, I guess the utility that people are using them for, they're getting very good returns. So they want a lot more compute. There could be other drivers of this, obviously. But you're right in the thick of things.
You're talking to all the people that are basically building out this compute and networking. Can you give us a sense of what you're hearing and seeing out there for overall demand?
Yeah. Sure, Tim. First, thanks for inviting me to your conference. I'd like to thank investors for their time and Oppenheimer for this venue. Cogent is in the middle of that infrastructure revolution for two distinct reasons. One, we are the largest carrier of internet traffic in the world. AI is possible because of the internet, AI will be distributed over the internet, and it will be integrated into the internet. We have actually seen internet traffic growth begin to accelerate. In the most recent quarter, year-over-year growth accelerated from 12% in the first quarter to 16% in the second quarter. That acceleration in traffic growth follows a pattern of many other applications, whether it be streaming or gaming, where a particular application drives demand. We are now at the very beginning of agentic AI being embedded into everything. That will change the internet two ways.
It will create more traffic, and it will also change the directionality of traffic, as users will have to upload data to then be tokenized and run through LLM for inference. The second part of the AI revolution impacts our wavelength business. That is optical transport. Oftentimes, the development of an LLM is in a different location than where the data is being stored. Because the GPU represents about 60% of the total capital cost in that data center, you want to make sure that those GPUs are being utilized 24 hours a day, seven days a week at peak efficiency. While the internet is cheaper on a per bit-mile basis, it inherently has no defined latency and will require the processor to buffer those bits. The premium that is charged for wavelengths of about two and a half times as much per bit-mile is easily justified.
While there has been a historic demand for private line or wavelength services from international carriers, regional carriers, content distributors, cloud providers, we are now seeing a surge in that demand from AI training, either by hyperscalers or by neoclouds. You are correct, Tim, there has been $1 trillion of capital deployed to date. There is another $6 trillion that has been announced for deployment. Much of this demand is still being developed. There is an acute shortage of power. There is an acute shortage of data center space. There is a shortage of processing. At the end of the day, what you are trying to do is produce the most number of teraflops at the lowest amount of power input and the lowest amount of cost.
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