Cogent could deliver double digit Q1 2016 revenue as lower-cost Ethernet services grow, says BTIG

Cogent Communications may have faced a number of challenges in recent years, but BTIG Research has forecast that wholesale services and business services could drive double digit revenue growth in the first quarter of 2016, marking the first time it has done so since the second quarter of 2014.

BTIG said that it expects that trend to continue for Cogent throughout 2016.

Among the two main growth engines that could help Cogent in 2016 and into next year are providing wholesale Ethernet services to Netflix (NASDAQ: NFLX)  and other over-the-top (OTT) video players and traditional business Ethernet services.

Already a major provider to Netflix and other OTT players, Cogent is in a good position to take advantage of consumers' growing appetite for online video services, according to BTIG. Specifically, the growth of OTT services will provide more revenue benefits for its Net Centric business.

"We continue to expect Cogent to benefit from the transition of video consumption to over­ the­ top from broadcast," BTIG said in a research note. "New business models continue to emerge and existing Pay TV service providers have started to shift their models."

No less compelling is its business services growth. BTIG noted that Cogent's business services division has been an ongoing growth contributor, adding that its ability to generate "3 percent sequential revenue growth, still translates to mid­ teens annual growth."

Interestingly, Cogent also has the opportunity to lure more of AT&T (NYSE: T) and Verizon's (NYSE: VZ) large enterprise customers with its cheaper Ethernet-based Internet access products.

"AT&T and Verizon's enterprise customers continue to offer easy pickings for Cogent's lower ­cost offering, either as a redundant internet pipe, but also as a potential replacement as the customer becomes comfortable with their service and high quality levels," BTIG said. "We expect Cogent to reduce the number of new buildings it enters each year as revenue growth becomes more focused on adding additional tenants in existing buildings, a strategy that should have a positive impact on our ARPU estimate."

The service provider will release its first quarter earnings on May 5.

BTIG said it expects Cogent to report that gross margins will expand by 60 basis points to 57.7 percent in 2017, but suspect there could be upside to this margin expansion target.

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