Falling demand for office space and less VPN are growing concerns for Cogent

Cogent Communications could be adversely impacted by falling demand for commercial office space, which would mean less demand for corporate VPNs.

Cogent highlighted those concerns during Thursday's second quarter earnings results. The Covid-19 pandemic led to less demand for corporate VPNs in Q2 due to millions of employees working remotely.

Cogent's largest customer base is served primarily in its multi-tenant buildings, but it cautioned that corporate customers could reduce the number of locations "due to adverse economic conditions or new working configurations which may adversely affect Cogent's number of corporate connections and service revenues."

Cogent CEO and Chairman David Schaeffer said his company has seen three main impacts related to the Covid-19 pandemic. The first was selling more bandwidth due to the increase in remote workers.

"The second trend is a negative trend," he said. "Roughly half of our corporate customers take a second product, a virtual private network to connect offices running either SD-WAN or VPLS over that connection. Because many of our customers have shuttered their remote locations, those offices sit empty, and there's no need for VPN concentration in those offices, we've seen a reduction in the sale of our VPN services.

"Now there is still a very large base of MPLS-based VPNs that will be replaced and will migrate to these lower cost, more flexible technologies. But I think in this environment, we are selling less VPNs than we did 6 months ago. We think that is a temporary trend, not a permanent change as we think, over time, these remote offices will be reopened and a MPLS or SD-WAN solution will be a far better solution than the MPLS that many of these companies have in place today."

RELATED: Cogent sees spike in corporate bandwidth demand due to WFH

Schaeffer said while Cogent has more salespeople and is in more customer conversations, customers have a higher level of caution due to Covid-19 when it comes to making buying decisions, which marked the third trend.

"We think that is a transitory phenomena," he said. "And we think that the greater number of salespeople, coupled with the greater number of conversations that those people are having with potential customers will result in accelerating sales."

During Q2, Cogent experienced a decline in salesforce productivity, particularly in sales to its corporate customers. With uncertainty related to government restrictions due to Covid-19, Cogent is cautious about its future.

"We may see slowdowns in new customer orders, find it difficult to collect from customers who are experiencing financial distress, encounter difficulties accessing the buildings and locations where we install new customers and serve existing customers or have difficulties procuring shipping or installing necessary equipment on our network," said Cogent CFO Sean Roberts on the earnings call.

Cogent's Q2 numbers

Cogent reported revenue of $141 million in Q2, which was up 4.6% year over year, but below Wall Street analyst projections of $143.4 million.

While Cogent saw an uptick in the demand for corporate bandwidth from customers due to Covid-19 in the first quarter, traffic growth was slower in the second quarter, although it was still above Cogent's historical growth rates.

"We continue to see strong growth in traffic across our network as quarterly traffic growth accelerated from 36% year-over-year in the first quarter to 49% this quarter, and sequentially, traffic grew from the first quarter of 2020 to the second quarter by 10%," Schaeffer said. "The rapid growth in traffic was driven by increased streaming applications, a full quarter of the work-from-home phenomena and gaming and other applications that have seen an increase in usage due to the pandemic."

Cogent divides its customers into two categories. The "corporate" bucket includes small businesses all the way up to Fortune 100 companies while "NetCentric" is comprised of carriers and service providers as well as application and content providers whose businesses rely primarily on internet access.

On-net revenues increased to $103.8 million from $97.5 million a year ago. On-net service is provided to customers located in buildings that are physically connected to Cogent’s network by its facilities. The number of on-net buildings increased by 117 year over year to 2,854 as of Jun 30.

Cogent's off-net revenues decreased to $37 million from $37.2 million a year ago. Off-net customers are located in buildings directly connected to the company’s network using other carriers’ facilities.