Cogent Communications (CCOI) Q3 2025: Wavelength Revenue Jumps 93% as Capital Allocation Shifts to Deleveraging
Cogent’s Q3 marked a decisive pivot, with a sharp dividend cut and buyback suspension redirecting capital to debt reduction, as wavelength services surged 93% year-over-year and data center monetization accelerated. Management’s focus on higher-margin growth levers and operational streamlining is reshaping the business model, with deleveraging and top-line inflection now central to the equity story. Investors face a transition period as the company works through legacy churn and executes on its $500M long-haul wavelength ambition.
Summary
- Capital Allocation Reset: Dividend slashed and buybacks paused to prioritize rapid debt paydown.
- Growth Engine Shift: Wavelength and IPv4 leasing now anchor margin expansion as legacy revenues decline.
- Top-Line Turnaround: Management signals imminent revenue growth as non-core drag nears exhaustion.
Performance Analysis
Q3 results reflected a business in strategic transition, with total revenue down 1.7% as ongoing churn in low-margin Sprint-acquired and non-core contracts continued to weigh. However, the core growth engines—wavelength services and IPv4 leasing—delivered robust performance. Wavelength revenue soared 93% year-over-year and 12% sequentially, reaching $10.2 million, while IPv4 leasing revenue jumped 55.5% year-over-year and 14.1% sequentially, aided by new wholesale agreements.
EBITDA and margins improved, with EBITDA as adjusted margin up 70 basis points sequentially to 30.5%, as product mix shifted towards higher-contribution services and cost reductions from the completed Sprint integration took hold. Capital expenditures dropped sharply, down 35.5% sequentially, reflecting the completion of major integration and facility repurposing projects.
- Margin Expansion Lever: Higher-margin on-net, wavelength, and IPv4 leasing now drive EBITDA gains despite revenue headwinds.
- Legacy Revenue Drag: Off-net and non-core Sprint contracts continue to decline, but management indicates the bulk of this drag is nearly exhausted.
- Data Center Monetization: Initial $144M LOI for two facilities validates asset value and supports deleveraging.
Traffic growth and improved churn metrics signal underlying demand strength, while the sales force is being actively managed for productivity as the company targets a return to aggregate revenue growth in Q4 and beyond.
Executive Commentary
"We have refined our capital allocation priorities to strengthen our financial flexibility and accelerate our de-levering strategy. The decision to reduce our quarterly dividend to two cents per share per quarter was made after careful evaluation. It will allow us to redirect capital towards reducing leverage while remaining a disciplined approach to shareholder returns."
Dave Schaefer, Chairman and Chief Executive Officer
"Our revenue for the quarter was $241.9 million. Our EBITDA as adjusted was $73.8 million for the quarter, an increase of $0.3 million, and our EBITDA as adjusted margin increased sequentially by 70 basis points to 30.5%."
Tad Weed, Chief Financial Officer
Strategic Positioning
1. Capital Allocation and Deleveraging
The board’s decision to cut the dividend and suspend buybacks marks a structural shift in capital allocation, with all surplus capital now earmarked for debt reduction until a net leverage target of 4x EBITDA is reached. This reflects both bondholder concerns and a recalibration after volatility in the stock and secured bonds, aligning financial strategy with stakeholder priorities and market realities.
2. Wavelength Services as Primary Growth Vector
Wavelength services, long-haul fiber connections for high-capacity data transfer, are now Cogent’s flagship growth product. The company is aggressively targeting a 25% share of the $2 billion North American long-haul market within three years, leveraging unique Sprint-acquired routes, rapid provisioning, and a growing backlog of over 5,200 opportunities. The mix is rapidly shifting to higher-value 100G and 400G sales, with capability to scale to 1.6Tb as customer demand evolves, largely driven by AI and hyperscaler use cases.
3. IPv4 Leasing Monetization
IPv4 leasing, monetizing legacy internet address inventory, has accelerated through more flexible wholesale agreements, expanding addressable market and cash generation. With 14.6 million addresses leased out of a 38 million pool, and average revenue per address at $0.31, this business provides a recurring, high-margin cash stream that supports debt reduction and operational investment.
4. Data Center Asset Monetization
Cogent is actively monetizing repurposed data centers from the Sprint acquisition, with a $144M LOI for two facilities and additional sales or leases in negotiation. Management expects pricing to remain robust across the portfolio, with proceeds directly supporting balance sheet repair and capital discipline. Due diligence is focused on power availability and utility confirmation, with minimal tax leakage due to bonus depreciation.
5. Margin Focus and Product Mix Shift
Strategic pruning of low-margin off-net and non-core contracts, while painful for top-line growth, is driving margin expansion and a more resilient business model. The company’s operational focus is now squarely on scalable, high-contribution services, with legacy drag nearing completion and the path clearing for sustainable growth.
Key Considerations
This quarter’s results underscore a business in the midst of a high-stakes transformation, balancing short-term revenue pressure with long-term value creation through asset monetization and margin expansion.
Key Considerations:
- Deleveraging Pace: The speed at which asset sales and cash flows reduce leverage will determine when capital returns can resume.
- Wavelength Acceptance Timing: Revenue recognition on installed but unaccepted waves remains a gating factor for top-line acceleration.
- Legacy Churn Exhaustion: With only $1.4M of non-core revenue left, the end of legacy drag is in sight, setting up for a clean inflection.
- AI and Hyperscaler Demand: AI-driven demand is now the primary growth engine for wavelength services, with potential for outsized gains if adoption accelerates.
- Competitive Response: Market leaders like Lumen are compressing provisioning timelines, but Cogent’s unique route diversity and reliability remain differentiators.
Risks
Execution risk remains elevated as the company navigates the transition from legacy revenue to new growth vectors and manages customer acceptance timing for high-value services. Competitive pressure from larger incumbents, potential delays in data center monetization, and sensitivity to AI demand cycles could impact both top-line and deleveraging trajectories. Tax exposure on asset sales is mitigated by depreciation, but remains a consideration as sales progress.
Forward Outlook
For Q4, Cogent expects:
- Return to aggregate revenue growth as legacy churn subsides and new services scale.
- Continued EBITDA margin expansion driven by product mix and operational efficiencies.
For full-year 2025, management reiterated multi-year targets:
- Annual revenue growth of 6% to 8%
- EBITDA as adjusted margin expansion of ~200 basis points per year
Management highlighted the inflection to positive growth in late Q3, the near exhaustion of non-core drag, and strong momentum in wavelength and IPv4 leasing as key drivers of the forward narrative.
- Wavelength backlog and funnel remain robust, but revenue timing depends on customer acceptance.
- Deleveraging will dictate the timing and magnitude of future capital returns.
Takeaways
Cogent is executing a high-conviction pivot, trading immediate capital returns for long-term balance sheet strength and scalable growth.
- Growth Engines in Focus: Wavelength and IPv4 leasing are now the primary drivers of margin and cash flow, with AI demand providing a powerful secular tailwind.
- Legacy Drag Nearing End: Non-core and low-margin Sprint contract churn is almost exhausted, setting up for a cleaner growth trajectory ahead.
- Watch for Capital Return Resumption: The pace of deleveraging and asset monetization will be the key to unlocking shareholder returns and re-rating the equity.
Conclusion
Cogent’s Q3 was defined by a decisive capital allocation reset and clear progress in new growth vectors, even as legacy headwinds persisted. With asset monetization underway and margin expansion levers firing, the next phase hinges on execution—both in deleveraging and in scaling high-value services to offset the final legacy drag.
Industry Read-Through
The surge in wavelength demand—driven by AI and hyperscaler workloads— signals a secular shift for the fiber and data infrastructure sector, with route diversity and provisioning speed emerging as critical differentiators. Cogent’s aggressive asset monetization and margin-first approach may serve as a blueprint for peers navigating similar legacy-to-growth transitions. Competitive responses from incumbents like Lumen highlight the intensifying battle for long-haul market share, while the evolving dynamics of IPv4 monetization and data center divestitures will be closely watched by infrastructure and REIT investors alike.