Max Grigoryev
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Max Grigoryev in Fundamentality,

Cogent Communications Holding: Curious Trends

Cogent Communications Holding provides the low-cost, high-speed Internet access and IP communications services. The company has a designed and optimized platform to transmit data using IP. Key clients are SMBs and communication service providers. 

Key operating metrics of such business are:

  • Number of customers / connections
  • ARPU - average revenue per unit

Cogent Communication Holding has the on- net (Internet access and IP connectivity) and off- net services ("last mile" access service lines obtained from other carriers). Key highlights of the business at the moment:

  1. ARPU is dropping down rapidly. Cogent's ARPU decreased 4.2% for on- net and 9.0% for off- net services as of December 2014 in comparison with 2013 fiscal year. The company kept the same trend in 2015: as of June ARPU decreased 8.9% and 7.9% (versus June 2014) for on- net and off- net services respectively. Generally, such companies (some kind of subscription revenue flow) have a dropping trend of ARPU when the business needs to grow futher and attract more clients. Current ARPU is around $580 and $1,365 for on- net and off- net services respectively.
  2. Number of clients is growing:
    • On- net services: number of connections increased 14.8% as of December, 2014 vs December, 2013; it also increased 12.3% as of June, 2015 vs June, 2014. Number of connections is 42,002 as of June, 2015.
    • Off- net services: number of connections increased 19.4% as of December 2014 vs December 2013 and increased 20.0% as of June, 2015 vs June, 2014. Number of connections is 6,583 as of June, 2015.
  3. Average price per Megabit. This operating metric is also declining around 20% each year. I think that some time this rate will drop to around 10% per year, because the price per megabit at the moment is rather small - around $1.63.

The customer acquisition cost increased 12% in 2014, however, why this business has a huge upside opportunity, the company decreased this cost by 50% as of June, 2015. If they keep this level of customer acquisition cost, the company will have a significant growth in EBITDA.

According to this information, we can make the following conclusion: number of customers growth rate is higher than ARPU decrease, the company is optimizing its marketing costs this year. Therefore I think that Cogent has a high upside potential.