Cogent’s Schaeffer: Business’ migration from MPLS to SD-WAN, VPLS is a significant opportunity

cogent service map (Cogent)
Cogent CEO Dave Schaeffer told investors during its second-quarter earnings call that the transition away from MPLS architectures could provide a growth engine for its corporate services business where it sells low-priced Ethernet-based internet access.

As more businesses look at migrating to SD-WAN or VPLS, Cogent Communications sees an opportunity to steal incumbent providers’ MPLS market share.

Dave Schaeffer, CEO of Cogent, told investors during its second-quarter earnings call that the transition away from MPLS architectures could provide a growth engine for its corporate services business where it sells low-priced Ethernet-based internet access.

Dave Schaeffer, Cogent Communications
Dave Schaeffer

“The huge opportunity for us on the corporate side is this migration from MPLS VPNs to either over-the-top SD-WAN or VPLS—that all represents a significant opportunity for Cogent,” Schaeffer said during the earnings call, according to a Seeking Alpha transcript. “So we anticipate our corporate business continuing to grow.”

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Schaeffer said that incumbent service providers that built their business service revenue bases on VPN and MPLS will be challenged due to the higher cost per bit.

I think the incumbent providers have a real challenge in that they have built their businesses on VPN technology based on MPLS,” Schaeffer said. “That MPLS complexity results in a much higher cost per bit. In fact studies have shown somewhere between 15 and 20 times as much for cost of an MPLS bit, as an internet bit. And these open architectures of VPLS and SD-WAN are replacing them.”

Since Cogent does not have an existing MPLS business to cannibalize, the service provider said it has been able to scale its VPN business to be a larger part of the company’s corporate business and total revenues.

“The legacy providers are kind of stuck,” Schaeffer said. “They got a high cost structure and they have a customer base that needs lower prices, and more flexibility, and because we have no embedded MPLS business, we've been able to capture shares, why our VPN business is now 25% of our corporate business and 17% of total revenues in a few short years.”

Schaeffer added that incumbents are “getting a second blow to their businesses as MPLS revenue migrates to over-the-top revenue, which is where Cogent is uniquely positioned to take advantage of, and why we have in fact as many connections sold per building, as we continue to see an accelerating rate of market share gain.”

Here’s a breakdown of Cogent’s key metrics:

Cogent reported that it saw gains in second-quarter off-net revenue, outpacing off-net revenue during the quarter. Analysts said that while Cogent’s second-quarter Net Centric growth was encouraging, future growth could be challenging.

“CCOI reported 2Q17 results slightly below expectations although Net Centric growth ex FX improved 120bp to 4.5% Y/Y,” Cowen and Company said in a research note. “While growth continues to outpace comps we continue to believe it will be difficult for CCOI to achieve >10% top-line growth ex FX in an environment where traffic growth remains weak.”

On-net revenue: Cogent reported that on-net revenue was $85.6 million, up 7.6% year over year over $79.5 million in the second quarter of 2016. On-net service is provided to customers located in buildings that are physically connected to Cogent's network by Cogent facilities.

“We actually saw our on-net revenue growth outpace our off-net revenue growth, and that carries higher contribution margins,” Schaeffer said.

Off-net revenue: Off-net revenue was $34 million, up 12.7% year over year. Off-net customers are located in buildings directly connected to Cogent's network using other carriers' facilities and services to provide the last-mile portion of the link from the customers' premises to Cogent's network.

Financials: Cogent’s service revenue was $119.8 million, up 8.9% year over year from $110 million from the first quarter of 2016.