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Cogent Communications Earnings Erode During ISP Price War

Summary

This ISP is positioned to serve small and medium-sized businesses with internet connectivity.

Cogent is aggressively investing to expand its customer base as per-customer income gets squeezed by price declination.

If Cogent can maintain its position as a low-cost operator, investors may earn great returns. Only one specific problem is telling me not to pull the trigger.

Today's article reviews last-mile ISP Cogent Communications (NASDAQ:CCOI).

Intends to Leverage The "On-net" Infrastructure By Adding More Customers

Last February company management reiterated its effort to develop sales by investing in sales and marketing efforts.

"Increasing our number of sales representatives, implementing strategies to optimize sales productivity and expanding our on-net addressable market by adding service locations to our network."

-2015 10-K

The company's selling efforts appear to be working. During 2015, Cogent gained 14.3% on-net customer connections. But the average revenue per customer was down by 19.1% due to the introduction of new discounts. The price that Cogent can charge customers for internet connectivity has declined and remaining a low-cost operator will help them continue providing services.

Consumer ISP's Intense Competition is Weighing on Profits: Revenue per mega-bit of data access sold down 19.1% YoY.

Source: Author, ycharts

This graphic displays the eroding profit margins of Consolidated Comms Holdings (NASDAQ:CNSL), Cogent Communications, Frontier Communications (NASDAQ:FTR), and Cable One (NYSE:CABO). The most recent five-year period is charted. The line indicating CCOI's reported profit margins is displayed in the color orange.

Competition in the consumer connectivity space is going to continue pressuring the price Cogent and other ISPs get for their services. Cable One's management, also conducting business as an ISP, mentioned facing up to the price challenges in their most recent Annual Report.

Throughout its business materials CCOI reiterates their focus on delivering services at a low cost. The graphic displayed above reveals that efforts in cost control have helped their profit margin hold up among similarly situated peers.

Does CCOI Belong On Your Stocks to Buy List?

It strikes me as rather bold when I think about it.

The business is going through a period of declining prices in their marketplace and yet chooses to continue to expand their customer base by adding small and medium business subscribers. If the company successfully controls cost while growing their subscriber base, they are more likely to be in an...


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