Cogent says tax reform won’t impact net-centric, business service lines, cites VPLS, SD-WAN potential

Cogent says it does not expect the new tax laws to impact how it will approach the way it serves its wholesale and business customers because bandwidth demands continue to rise.  

Dave Schaeffer, CEO of Cogent, told investors during his company's fourth-quarter earnings call that while the Tax Act is positive for businesses, the service provider will serve its customers and shareholders as it always has.

Dave Schaeffer, Cogent
Dave Schaeffer

“I think while the Tax Act is clearly a positive for business, it is not going to change the way we approach the market either to our customers or to our shareholders,” Schaeffer said during the earnings call, according to a Seeking Alpha transcript.

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As Cogent looks to return capital to shareholders, Schaeffer said it “will continue to try to be thoughtful about returning capital as opposed to issuing taxable dividends and using buybacks when appropriate.”

VPLS, net-centric demands rising

Regardless of the new tax codes, Cogent is still seeing traffic demands rising from its corporate business customers and net-centric internet service provider customers for bandwidth and IP-based services.

On the business services side, Cogent is starting to see more of its business customers migrate off MPLS to VPLS as well as other over-the-top strategies.

“We are absolutely seeing an acceleration in VPLS business, our VPN business,” Schaeffer said. “Today, it’s about 25% of the corporate base, about 17% of total revenues.”

Schaeffer added that Cogent’s eventual SD-WAN service debut will fuel further growth in its VPN service base. The service provider, which has tested various SD-WAN solutions in its lab, expects to roll out a product in the next few quarters.

“We think that will further accelerate the VPN part of our corporate business because now customers will have two choices of technology as opposed to just the VPLS choice that we offer today,” Schaeffer said.

At the same time, Cogent said net-centric traffic and revenues will continue to come back as the furor around the new net neutrality proposals dies down and the remaining service providers continue to upgrade their network ports.

“Internet traffic growth is beginning to rebound for the whole industry and clearly for Cogent it’s rebounded,” Schaeffer said. “So, while we grew 29% year-over-year, the industry is only growing at about 20%. We’re not at that 27%, 28% industry growth rate yet and we’re not at the high 40s average Cogent growth rate.

On-net, off-net gains

During the fourth quarter, the service provider reported that in the business segment it saw gains in both its on-net and off-net service revenues. Here’s a breakdown of Cogent’s key fourth-quarter metrics:

On-net revenues: Revenue was $89.4 million for the quarter, which was a sequential quarterly increase of 1.7% and a year-over-year increase of 7%. For the year, on-net revenue was $346.4 million, up 7.1% over the full year 2016.

Cogent said its on-net customer connections increased sequentially by 3.3% and by 16% year over year. The service provider ended the year with 61,300 on-net customer connections on its network in its 2,506 total on-net multitenant office buildings and carrier neutral data center buildings. During the year, Cogent added 133 new on-net buildings.

Off-net revenues: Off-net revenue was $35.7 million for the quarter, which was a sequential quarterly increase of 2.3% and a year-over-year increase of 11.9%. Off-net revenue was 137.9 million for the year, which was an increase of 12.7% over last year. Cogent said its off-net customer connections increased sequentially by 2.4% and increased by 15.8% year over year.

Churn: The service provider reported churn levels were stable during the quarter. Cogent’s on-net churn rate was 1.1% this quarter compared to 1% last quarter and its off-net churn rate was 1.2% this quarter compared to 1.1% last quarter.

Financials: Cogent reported service revenue of $125.2 million for the quarter. Service revenue was $485.2 million for the year ended Dec. 31, 2017, up 8.6% from the year ended Dec. 31, 2016.