Detailed narrative
Data Center Monetization & Deleveraging
Cogent successfully sold 10 former Sprint facilities converted into data centers for $225 million in cash, realizing a GAAP gain of $130.7 million. The majority of these proceeds are being used to reduce gross and net leverage, which improved to 6.23x EBITDA from 6.79x last quarter.
The company repurchased $138.8 million par value of 2032 notes at an average price of 90.348 cents on the dollar, resulting in a cumulative gain of $13.4 million. Multiple parties are interested in the remaining 14 data centers, which are expected to be sold in chunks, potentially in early 2027 for North American sites to optimize NOL capacity.
Refinancing of 2027 Notes
The company is in the process of refinancing its $750 million 2027 unsecured notes, which became current in June 2026. This transaction is expected to be completed in Q3 2026. An amendment to the 2032 secured note indenture increased the maximum secured debt leverage ratio from 4x to 4.75x, and committed $175 million from data center sale proceeds for debt repurchases.
Management's primary objective is to shrink the size of the new offering to mitigate higher capital costs.
Wavelength Business Growth & Market Position
The wavelength business continues to grow, with revenue increasing 63.8% year-over-year to $14.8 million and sequential growth of 9.2%. Wavelength customers increased 66.4% year-over-year to 2,415. The company re-provisioned 77 existing wavelengths to higher capacities (mostly 100 gig to 400 gig).
Cogent still targets 25% of the North American long-haul wavelength market, currently holding 3%, and expects installations to accelerate, though reaching the target will take several years. Customer constraints (equipment, power, data center space) are noted as impediments to faster adoption.
Margin Expansion & Cost Reduction
Gross margins increased by 260 basis points year-over-year and 90 basis points sequentially to 47%. Adjusted EBITDA margin expanded sequentially by 90 basis points to 30.2%. This was driven by cost reductions, including a 6% sequential reduction in headcount (113 individuals) as integration projects are completed.
Further headcount reductions are expected in Q3 at a more moderate rate. The company has achieved the vast majority of its targeted $240 million in annual cost savings from the Sprint integration.
Product Rotation & Traffic Growth
There's a continued product rotation into more profitable on-net services, which now represent 64% of total revenues (up from 57.4% a year ago). 82% of all new sales in Q2 were on-net services. IP network traffic grew 3% sequentially and accelerated to 16% year-over-year, driven by over-the-top video, AI activity, streaming, and gaming trends.
Cogent's IP network is 27% utilized, providing substantial inventory for sale without incremental capital. The company notes a shift towards more symmetric network traffic due to generative AI, which is expected to correlate with revenue growth over time⏳.
Sprint Wireline Integration & Cogent Classic Performance
The acquired Sprint Wireline revenue base, which was 42% of total revenue at closing, has declined to 15% this quarter, representing an $84 million reduction in quarterly revenues (71% decline) since the deal closed three years ago. In contrast, the Cogent Classic revenue base increased 29% from $155 million to $200 million per quarter over the same period.
The company has been managing out underperforming sales staff, including former Sprint salespeople, leading to a 6% workforce reduction in Q2.