Yet Another Value Podcast - Recurve Capital's Aaron Chan on Cogent $CCOI

Episode Date: June 11, 2025

In this episode of Yet Another Value Podcast, host Andrew Walker returns with Aaron Chan from Recurve Capital to explore Cogent Communications (CCOI). Aaron breaks down the legacy internet business, the Sprint wireline acquisition, and the complex financial transformation underway. The conversation highlights CEO Dave Schaeffer’s strategic vision, market dynamics in enterprise telecom, and the network’s long-term potential. They analyze network architecture, discuss operational efficiency, and evaluate capital allocation under heavy leverage. The episode closes with thoughts on competitive threats, structural advantages, and what the future may hold post-Dave.________________________________________________________[00:00:00] Podcast and guest introduction[00:02:22] Aaron introduces Cogent business overview[00:06:51] Legacy network setup and strategy[00:10:19] Competition and service differentiation[00:14:36] Sprint network acquisition background[00:20:35] Challenges with Sprint integration[00:27:59] Wave business compared to Lumen[00:35:40] Missed expectations and market reaction[00:40:17] Dave’s control and RE leverage[00:48:49] Dividend vs. buyback strategy[00:53:41] Dave’s succession and exit plan[00:59:00] Traffic deflation and usage trends[01:03:17] Pricing strategy and competitive risks[01:07:54] Cogent's share strategy explained[01:10:12] Competitive positioning against Lumen[01:13:29] Core infrastructure value and demand[01:16:44] Future growth expectations and risks[01:20:18] Final thoughts on investment case[01:25:30] Closing remarks and sign-offLinks:Yet Another Value Blog: https://www.yetanothervalueblog.comSee our legal disclaimer here: https://www.yetanothervalueblog.com/p/legal-and-disclaimer

You're about to listen to the yet another value podcast with your host, me, Andrew Walker. Today's podcast is a deep, deep dive into Cogent. The ticker there is CCOI. It's with Aaron Chan from Recurve Capital. He has done some incredible work on the name. I'll include a link to some of his write-ups in the show notes. You should definitely check them out. We dive really deep into the name.

It's a really interesting stock. A lot of my different friends who run the gamut of concentrated value investors, hedge fund, people looking for an inflection point. everything are really interested in the name because it's just done some incredible deals. It's got a really interesting CEO. I think you are really going to enjoy this podcast and learn a lot. So first, a word from our sponsors and then Aaron Chen. Today's podcast is sponsored by Dilupa.

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That's the Lupa, D-A-L-O-O-O-P-A dot com slash demo. All right, hello and welcome to the yet another value podcast. I'm your host, Andrew Walker. With me today, I'm happy to have one for the second time from Recurbed Capital, Aaron Chan. Aaron, how's it going? I'm doing great. How are you? I'm doing great.

I'm super excited for this podcast. So before we get there, a quick disclaimer, remind everyone, nothing on this podcast is investing advice, full disclaimers at the end of the podcast. I'll disclose, I have a small position in the stock we're going to talk about today, so people can keep that incentive in mind. That out of the way, Aaron, company we want to talk about is cogent. The ticker is CCOI, probably the most interesting stock in telecom outside of maybe the looming disaster, corporate restriction that is ECOSAR slash dish.

But I'll just turn it over to you. What is cogent and why are all of my hedge fund friends so interested in them? Well, I didn't know all of your hedge fund. Friends are so interested in it. But first of all, thank you for having. me on again. I had a great time last time. And this one is even more complicated than Carvana. So it'll be fun. So, you know, it's easy to get drawn into the weeds on Codent. So I'll try to keep it very high level. I'll probably fail, but I'll try. It's just an internet provider.

The legacy business is an internet provider. They basically built a global internet network that reaches almost all the IP addresses in the world. This is Legacy Codent. We can talk about the new stuff later. And they connect into about 34, 3,500 buildings and they sell internet to corporate customers and skyscrapers, and they sell internet to wholesale customers and data centers. And so they've kind of taken all these legacy assets that they bought out of distressed bankruptcies and all of that in the early mid-2000s and reassemble them into this narrow footprint of single purpose, just internet network, very scalable, very efficient, and very profitable at fail. So, you know, they kind of brought, they were the first telecom that I encountered that

admitted and kind of leaned into the idea that they're a dumb pipe. You know, everyone else is running specialized services. They think their voice is differentiated, their videos differentiated, these other products are differentiated. Dave Schaefer, the founder and CEO, his vision was that nothing's differentiated. The internet is the lowest cost network of all of them. And so everything should ride over the top. You know, when he started the company in 1999, that was not consensus. It's now consensus, right? So for the company that had that vision 26 years ago, back when everything was kind of a special purpose network, that was pretty disruptive. It was pretty, it was like a maverick mentality to this market. And I think,

I think he used that to buy out all the competitors on the cheap, tear them apart, reassemble them into something that was growthy and scalable and efficient, which if you think about telecom, basically nothing, that doesn't describe telecom whatsoever, right? All the wireline companies have been suffering forever. Codent's got the highest rate of organic revenue growth in all of wireline. All the growth went to wireless just from subscriber growth. you achieve kind of maturity on subscribers, what growth is there? Like everyone's on all you can eat a limited plan.

There's nothing left. I mean, you can maybe, if you have the right competitive dynamics, you can maybe squeeze a little price, but look at what happened in like residential broadband, right? Like you add another competitor, suddenly the economics get just, you know, not destroyed, but they get impaired for everyone. So Dave had this kind of radical view at the time that the internet was just going to take all the share over time, over decades. And he went about assembling, you know, purpose-built assets just to address the growthy parts of the market.

He's like, okay, well, the internet's going to win. So that's the growthy part of the market. Let's build a network that's special purpose and the kind of purpose built just for that application. So in a nutshell, that's cogent. And now they've kind of tacked on Sprint Wireline, which is, you know, the oldest fiber network in the U.S. It was the first one that was built nationwide. But he's deploying the same strategy that he did with the Internet to this kind of optical transport or wavelength market.

It's the same playbook, taking a distressed asset, distressed seller, desperate to get it off their books, repurpose it, reconstitute it into a growthy story with like purpose-built infrastructure just to support that growth market. So at a high level, that's what cogent is. You know, Dave Schaefer is the smartest guy in any room, like a certified genius. And so you don't question his logic and his brain power on this stuff. He's also ruthlessly parsimonious.

His, you know, he runs a very tight ship. If you visit the offices, it's Spartan, you know. They drink water out of styrofoam cups. Like, it's, you know, they drink bad coffee. That's all they often there. So I'll pause there, but that's kind of, you know, in a nutshell, what coach it's all about. That's perfect. Let's start with the legacy business real quick, just so people can get a feel for what they do.

You know, it's funny because when you review the financials and you review the earnings releases, you're like, oh, my God, especially post the Sprint acquisition, which we'll obviously talk about, like, oh, my God, these are the most complicated sets of financials I've seen, maybe not in my lifetime, but probably, you know, this month, this quarter. They're pretty complex. The press release runs 20 pages and there's lots of adbacks and stuff. But then I was struck. I was reading an expert call to prep for this with a former management member.

And he was just like, it's the simplest business you've ever seen. They sell like two products basically, right? And my friend, it's a Chetty, he didn't interview that struck me. He said, look, these are the most complete, hardest to replicate fiber assets in the country on the legacy side. So in my rate, the legacy side is basically they've just got a ring of fiber around a metro area and they're connecting to office buildings, right? So you've got a law firm that has 10 firms.

They're going to come in and give you fiber and say, hey, here's 100 gigs. Here's perfect, pristine, super low latency fiber. Like, you have nothing to worry about what we plug in. Is that kind of thinking about it correctly? Yeah, so they basically have like hubs in every city and then they run rings around the hub. And it's, I think it averages like three or four buildings per ring. So they have a lot of built-in redundancy. And so like if one ring of the, if one, if you talk about like three buildings on a

ring, you know, maybe building, there's a cut at building one going from the hub to building one. The other side of the ring can still provide service. So they kind of have low latency, very high redundancy. They have healthy redundancy. It's, you know, they architected the whole thing to be super efficient operationally to execute on and to maintain. I would say one of the things that, one of the nuances that Dave picked up on early and in leverage, for cogent's advantage was just like you don't need to own this fiber. They have 377 dark fiber providers around the world that run the legacy cogent network.

And now that's going to evolve because they're going to put some of the cogent network on the Sprint network. But historically, they've leased the fiber from others because there was so much excess fiber from the telecom boom in like the late 90s, early 2000s. And so there's just been, there's been a lot of competition in the metro area. So it's been relatively easy for them to build these rings. things outside of the, that connect their hubs. And then they have, like, they have foundational long-haul,

historically least fiber, now owned fiber that connects each city to the others. And that's kind of how they assemble the network. They have long-haul fiber that connects the big cities and then all the different kind of hubs. Then they run rings from the hubs. And they just, from there, they can then connect to every other network essentially. I think they reach like 98% of IP addresses globally running that playbook. So it's kind of cool.

you can reach the entire internet or offer the entire internet from really it's 3,400 buildings. But I mean, if you're talking about the data center business, it's like 1,400 buildings. You can reach 98% of all global IP addresses just from that pretty narrow footprint. And if you think about like a Lumen or someone else, they connect to tens or hundreds of thousands of buildings. And they obviously connect, they bring the same, I guess, ubiquity of service and, like, access to a global IP network, but they just do it on a much, much bigger footprint, which is obviously a much more expensive to maintain. And just sticking with the legacy business, you know, when you talk about connecting

a giant office or whatever, obviously they're not doing home broadband, but Comcast, I've talked a lot about cable in this podcast, Comcast, Charter, or if you're looking at the legacy telecom, I'm in New York City, Verizon Fios, right? You can get one of the legacy telecom providers if you're a kind of big building. they can connect to you too. So why do building the owners choose to do, like, why does this exist? Why isn't the cable company, the local cable company just connecting all these and saying, look, we've already got all this fiber laid out to connect the homes.

It's just a little bit of an extension to go connects the office building. Why is CoGent so successful in capturing these large kind of enterprise style customers? Well, again, like the strategy is to pre-build a purpose-built network and then scale it. The telecoms have ubiquity of service, right? They can, and the cable companies don't have ubiquity of service. Like, they may cover the residential neighborhood, but not the downtown business district all the way with 100% ubiquity. What cogent pre-built, so the answer is they can theoretically offer service.

I mean, there's always going to be an incumbent telecom in every skyscraper. There's usually at least one other competitive provider could be a cable company, but there's always going to be cogent and the really big ones. And the really big ones are kind of an average of, I think, 450,000-ish square feet, 50 floors. So they're kind of going for the cream of the crop. It's 10 basis points of the building count, but 11% of the space in corporate office in the U.S. So they're really going for like outpunching as much as they can on each building. Cogent pre-wires every building through the elevator shaft or the riser. So when they, that costs about $10,000 a floor

to pre-wire, it's strange because it doesn't feel like this should have happened, but like the telecom, the incumbents don't pre-wire. So when, if someone on floor 44 wants service and they've never connected that suite before, they've got to run cables up that riser. And it takes time and it costs capital for them to do that. So they just don't have this kind of, the network isn't as scalable as what Cogent has already sitting in the ground. So when Cogent, when the customer on 444 wants service, Cogent says, great, we can give it to you, they guarantee you like two weeks, but they average nine days.

If AT&T of Verizon, if you ask them, it might take them 90 days and it might cost you some capital to wire that floor. It's almost a construction project. Exactly. Yeah. So like it's not that they can't do it. It's just that like Codent's got it already pre-built and that that's what makes them disruptive. It turns out most of the time, you know, you can buy the services. You can buy like

a T3, which is, I think it's 10 megabits per second symmetrical dedicated access from a, from an 18T of Verizon. They might charge you $1,000 a month for it. Cogent will charge you like $700 a month ish for one gig service symmetrical dedicated. So they often kind of price that parity, but give you many multiples of the capacity. And I've also I've also heard their networks are dedicated. So, like, AT&C might promise you, hey, you're getting, you know, 100 megs per second or something, like a great thing.

But what it is, it's on a shared. So if floor 44 and floor 45 both start downloading, like, 20 Netflix shows because, you know, they've got 50 employees or something, you might experience a lot of lag. Whereas with Cogent, the network, your strand is your strand. So you download, you're not going to have any latency. Okay. Yeah, that's true.

That's especially true for cable companies. I mean, they kind of cable companies are HFC, right? fiber to the node and then coax to the in the last mile, all the coaxes that feed into that node are shared infrastructure on that, on that one strand of fiber or that fiber node. So it's not always a problem, but sometimes it can't be at peak hours. That's great on, I think we've done a great job explaining the legacy side. I've got so many questions to go to, but why don't we quickly, I mean, we'd be doing this service. The big deal here is they announced from T-Mobile, they bought the legacy Sprint Network.

So why don't we just quickly give an overview of what they bought with the Legacy Sprint Network, how that's really made the financials complex and why that might be setting up kind of the opportunity here? Yeah, you know, you're right. The financials are as messy as they can be. It's partially, I would say, a communication issue, but we'll get into that. So the deal was to buy the Sprint Wireline Network from T-Mobile. You know, this is a network that T-Mobile got as part of Sprint merger. How much do they pay for it?

How much did Cogent pay for the Sprint network that they bought from T-Mobile? They paid a dollar for the network, and they're getting paid $700 million to take on the money losing services business that was attached to that network. So the story there, as far as I can understand it, I've heard a couple different versions of this, so I'll tell the one that I think is the most accurate. Sprint Wireless was using the Sprint Wireline backbone to run the wireless business. and then when T-Mobile bought Sprint, they kind of migrated everything off of that network,

and it left kind of the anchor tenant or anchor customer, or it took away the anchor customer from that network. So then you have a very unprofitable set of, like, external customers that were no longer subsidized by the one, like, massive internal customer. So that's why it suddenly looked like there's huge losses, even though it was kind of serving its purpose for Sprint and then, you know, initially for T-Mobile, it kind of you turn off the anchor customer and suddenly you just you're burdened with all of that

like bad revenue and like too much off-ex against it. So the idea, you know, T-Mobile is motivated to get this off the balance sheet because it's not strategic obviously to the wireless business. It's tiny compared to the whole enterprise. It was not, it's, they weren't using it and it was burning, you know, over $300 million of cash flow, like more like $400 or $500 million of cash flow per year when they started this process. And they weren't. wanted to go with a partner who could basically not just shut it down. I think they were worried about the PR around the Sprint T-Mobile merger and like, okay, if you sell this thing off and then that buyer just fires all the customers,

fires all the employees, it's kind of bad press for T-Mobile and maybe add some scrutiny from a regulatory perspective or something like that. If somebody's going to buy it, fire all the employees, fire all the customers, like what are they going to do with the network, right? It's not like you can cash flow, maybe they've got alternative uses, but that's a tough sell. Well, like if you were selling it to Amazon or Microsoft, who want to make a long-haul network, they could repurpose the whole thing for themselves, and we'll get into that later, I'm sure. But that would be kind of a logical thing to do if you were a strategic buyer that wanted the long-haul fiber network,

because there's so a few long-haul networks out there, right? So Dave kind of comes in and says, okay, we can restructure the customer base, the cost structure. They had mapped out, as far as I understand it, before they signed, they had mapped out day by day what every wholesale, like, contract they had in the book was on the cost side. So they mapped out for like three or four years when they could turn off these unprofitable, like really expensive contracts that they had on the cost side on the conglast side. on the Kong side. They also kind of knew where they overlaps with like, let's say it's a customer that Sprint was

servicing with an off-net provider. Maybe they were using Verizon to kind of service that customer. But Cogent's in that building. They could switch it from a Verizon, which has like a low margin to a Cogent, which has essentially like 95% margin. So they knew, they kind of knew,

they mapped out what they could do on the cost side. They mapped out where they could switch from off-net services to on-net services, which like immediately was massive. creative. That, I think, has gone pretty well. It's really opaque and it's difficult to discern in the financials on a consolidated basis. But like, this is, Dave is legendary at this stuff. I don't worry about that at all. I think they're making good progress there. He's got, you know, there's stories that I've heard over the years about like, you know, in the 2000s, he'd bring people

into an auditorium. He'd buy a company and say, welcome to Codent, you're all fired. Or maybe he can keep like one or two people and that was it and just take the assets, repurpose them and move on. So, you know, he's doing not as, it's not as draconian this time around because they need to retain some of this workforce to maintain the physical network. They're still going to retain a bunch of this business. It's not going to turn the revenues to zero. I think one of the challenges in the report of financials is that he had communicated early

on that, you know, this business was going to bleed off a little bit of revenue, but then stabilize in the 400s. and I think it's going to stabilize like a hundred million plus below where he had communicated, but he hasn't really said it publicly all the way. But if you kind of put owner-oriented people in the same room and you look at the contracts that he's been looking at, I think we would all agree that those remedies should go away because they're like negative margin. So that's why you've seen like negative top line at a consolidated level for several

quarters in a row sequentially, but you see EBITDA going up because, you know, if you you turn off $100 of revenue, but you turn off $200 of cost, you would do that all day along if it's direct costs associated just to that contract. So I think there's a bunch of that going on. And so, like, this acquisition has two components. There's a services business, which is not interesting. It's kind of a necessary evil to swallow that, turn that from a very money-losing business into a slightly profitable business, but it's not, there's not a lot of, like, juicy terminal

value attached to that business that they acquired. The whole reason you take that on is to buy the network for a dollar and to repurpose it, invest in it, reconstitute it, re-architect it, and turn into a growth engine, kind of like what Codent has done with the internet business over the last 20, 25 years. So I'll pause there, but we can jump right into that if you want. No, that's great. So look, at this point, hopefully listeners at least have an overview of the legacy coaching business and the sprint business, maybe we haven't fully driven into the long haul fiber.

there, but at least what they bought for the Sprint business, what they paid, you know, they paid a dollar, they get $700 million in payments for TMO. Well, we didn't even talk about the $500 million that IP4 addresses, all this sort of stuff. But let's pause there. I want to ask my favorite question. So we've done the overview. Hopefully people know what Cochin is. When you look at this company, yes, the financials are very complicated. The story with the sprint is moving. But this company is very well covered by the sell side. And more than that, Dave, the CEO, he really smashes the conference circuit, right? Like, you can go on any transcript you can find.

And he is fantastic at laying out the story. He tells you what's going on. He tells you the complications. Here's why we're doing it. Here's what we think the long-term value is. You know, he's laid out $2,000, $500 million of EBIT and the cash flow from this business is very good. So you've got a CEO.

Companies very well covered. There's complexity, but the CEO's laying out very well. I guess when I put all that together and say the CEO's spoon feeding everyone this, what is the market missing that you think you're seeing that makes this, or what is the market just skeptical of, that you're not a skeptical of, that makes this a kind of risk-adjusted alpha opportunity? Well, this is a great question. I think Dave's communication has been not great about this.

He's a great communicator, but he's not been great about communicating the playoff play of how this would go, and he's missed a few pretty big milestones along the way. Dave's communication around this deal has been to map his experience in transit, the internet business, to what he expects for this wavelength business. And that mapping has been incorrect the entire time. And he's known that. But his mentality is, well, it's the biggest data set I have. I don't have data on how this should go. I'm going to use my playbook from before and just assume we'll will map to that and it's been wrong and i've had a i've had a lot of conversations with him about this and he's like well i don't have the data so like what do you want me to do i was like

how about you don't give specifics that you're just going to go miss you know um so so i think like this is my view my view is the hardest part is behind us but it's not yet visible to the market because it hasn't yet translated into the acceleration the acceleration was communicated or he expected it to show up about a year ago. It didn't really happen because the network wasn't done yet. And again, I think if you take an owner-oriented group of people and you say, okay, should we kind of do all this custom engineering in a non-scalable way to get the revenues in earlier, or should we finish the scalable network,

the purpose-built scalable network so that once we're done with it, we can just fly with this business. I think most people would say, take the six months, let's build it, make it scalable, and let's go grow over the next five. to 10 years. I think everyone would kind of choose that. The problem was that he communicated that they should be at like around $100 million run rate a year ago, which they whiffed badly. I mean, very bad. It rifts around to 100% miss. Yeah, I mean, it's like embarrassing. And it's because he thought there would be, again, this is mapping transit to waves. He thought the first,

if they connected to the first 50 data centers for the top 50 to 100 where they do most of their traffic in the transit business, that if he connected those to the wave, like that work and did some pre-configuration of those, that would be enough to attract $100 million a run rate. The reality is there are way too many permutations in the wave business that you have to, and you can't just do a little bit. You kind of have to do essentially all of it in order to make it scalable. And I think they found that it's just too much custom engineering and bespoke work on a

customer by customer basis to validate going to do all that work and kind of pull resources away from doing the building the scalable thing. So I think, again, he was mapping. When you gave that guidance, he thought it would emulate the internet business where, like, if you just connect the top 50 to 100, you know, the strong 80-20 rule in that business, right? Didn't, did not apply. If you look at, I think retrospectively, look at the data,

I think the number is they have waves going between 329 data centers, and it's still a small business. So if a small business is doing 329 endpoints, you're way beyond the 50 to 100, right? So I think his mapping was incorrect. I think his mapping on, you know, the second thing that he missed badly was, oh, we can install 500 a month. We'll have that capability and it should turn on pretty quickly. And I think the mapping, again, was to an internet mentality where internet customers just plug in kind of anywhere. It's not that big of a deal.

And they're used to transacting in a pretty quick modality. In waves, they're not used to that whatsoever. If you do any customer channel checks with like fiber engineers, network architects and buyers of these products and services, you hear, I've heard, I've probably done like, you know, 30, 40, 50 of these calls over the years. The feedback is always the same. Nobody is consistent on their installation times. They say six months. It's nine months.

They say nine months. It's 13 months. They don't even know where their network is. You know, someone goes to, you hear all the whole. stories about Zayo. Someone's asking for service in a data center that Zayo's in. And Zayo says, we don't have service there. And the guys like FaceTiming with the Zayo sales rep saying, I'm looking at your rack. You have service here. And that's what causes, I mean, we'll get into some of that maybe later, but they're used to horrible service where it's not

turnkey. And so when Cogent goes from 18 months of we can't install you and we can't promise you anything to you flip a switch, we can install you within 30 days, that's all well and good, but nobody believes you, number one, number two, nobody transacts in that market on that timeline because everyone is used to these significant delays. Again, he's mapping his expectations to the internet. In both cases, both the 100 million kind of the revenue ramp and the, I would say, the kind of customer ramp, they're both incorrect mappings because he's, he's drawing on the only data set he's got, but he knows it's been the wrong one the whole time, but he doesn't have anything better.

So I think, from my perspective, why do I think it's different? Or what's my view on everything? I think if you just, if you ignore his commentary and his communication of all things that mapped the internet, and just think about it from first principles, okay, we have a working wavelength network.

It's novel. There's never been anything built like this in all of telecom. It analogizes most closely for me to Starlink launching a full constellation in one shot, and it's unloaded. Like, that, the risk is behind us because the network works. It's there. It's more ubiquitous.

It's got tons of capacity. It installs faster. There's a lot of different attributes that customers care about, but it, this thing should play in the market and, you know, just forget about timing for a second, and it should, I think it will work out. That's kind of my view. Let me forget about timing for a second to ask you. I believe the dominant player in this space.

is Lumen, right? And I think calls have revealed that Lumen might have, it's Lumen and Zayo, and I think Lumen has like the overwhelming market share here. So when you say they've launched the Starlink, you know, global network, and they one shot launched it with this. And what is the difference between what they offer versus Lumen? Because to my dumb, dumb understanding, it's like, hey, cool, maybe they can get new customers hooked up a lot faster, which is great and should let them take share of new share. But, you know, it's there, It's fiber from, you know, D.C. to Seattle, like, how much is their network, the Starlink versus the fiber that's already been laid out? Yeah.

I mean, it's, so the thing is, you have to remember, like, yeah, you can Starlink, Starlink is one player. You can also get connectivity from Viassat, right? Or from Echo Star. Allegedly. Allegedly. But it doesn't make those. First of all, it's telecom. So, like, there's competitive products and competitive capabilities.

and they're relatively undifferentiated. I would say wavelengths is probably one of the more differentiated products in the market, so we'll get to that in a second. But fundamentally, you have fiber connecting all these different facilities. It's theoretically, of course, possible, and it happens all the time, that others do these services too. They're not the only one that can deliver these services. The difference is in the purpose-built nature of this network.

Everyone else has kind of heterogeneous products and services running on top of common fiber architecture, infrastructure. They have a mix of legacy products. They might still have voice and video and other things running. They may have modern. Of course, they have modern stuff too. But that mix of business and supporting older hardware, newer hardware, older customers, newer customers, you know, old cost structures, new cost structures. It's like this hodgepodge of all this different technology running on top of glass, like, you know, all this glass distributed across the country into all these different facilities in between these different cities. I think the difference here is that cogent basically has none of the legacy stuff because there's

essentially no business on this network. They put the modern, the newest technology on it, that's scalable and efficient. That alone is pretty nice to have. It doesn't really mean anything competitively. Okay, so great, you have like the modern technology. Lumen also buys all the latest technology and that exists in their network. it's not necessarily differentiated. I think what makes it differentiate

is that they pre-configured enough of this network just for this application, just for wavelengths, in a way that makes it much more scalable. And how do you gain market share? What are the dimensions of value that customers care about? Price is the last one, I would say. It's important, but it's the last one. It's first, do you bring diversity to my network?

And these are non-exclusive connectivity contracts. This is a nuance that most, When I talk to other investors about Cogent, a lot of them default to the residential broadband analogy where it's like, okay, it's either Comcast or it's AT&T, and one of them wins that contract. That's not true in this market. They multi-source everything for resiliency and diversity. It might be a data center with a billion dollars of Nvidia GPUs in there depreciating over, let's call it 12 months, so 100 million of depreciation every month.

If that data centers offer a month, for a day because of $25,000 a year wavelength thing is offline, that's a disaster. So, yeah, they'll provision four of them if there are four different ones that connect. Right. So absolutely. Yeah. Cogent can add like another nine of resilience to these. I love that quote. So I think they'll win share just because of that.

You don't need the purpose built network in order to do that, but it makes it a lot of better business for Cogent in order because they can offer that. nine of resilience for essentially like almost zero incremental cost to cogent. So like the free cash flow characteristics of cogent's wave network are better than everyone else's because they can do it in a very capital light way and in a very operationally lightweight. Whereas everyone else is kind of taking, they might take six months, they might send all these field techs into the, or technicians into the field and physically rearrange the network in a way to provision that service. Cogent has it pre-wired.

It's just like the office building. They have these, yes, AT&T can pull fiber up there, and it might take them 90 days, and they can give you a gig of service, but Cogent can do it in nine days because it's pre-wired. It's the same analogy over and over again for Cogent. So it's not technically, they're not doing anything that's impossible for others to achieve. They're just doing it in a much better business model, and they're doing it in a way where it's possible that the time to install is competitively differentiating. I would say from my conversations of people that buy in this market,

the consistency of delivery is much more important than the actual time because I don't think any customers, this is a very technical sale, right? You're going from a specific building on a specific route where there's a very specific latency to another specific building.

It's not plugging into the internet. So that, arranging all of that and having a customer get ready for that takes more time than nine days or 17 days, usually. They're not usually ready on Codent's timeline. Codent can do it, but I don't know if it matters so much as saying when we give you a date, we can deliver on that date as promised.

Whereas I talked to a Zayo, former network operations guy, and he said the best stat he ever saw for on-time delivery within 30 days is 50%. But the industry average is more like 10 to 20. So like if Codent's at 100%, that can be kind of never mind just adding a nine of resilience. If you can guarantee service within that time frame, that's a that's potentially disruptive to the market and as we said you know Amazon might bring in a hundred million dollars of GPUs based on thinking they're going to have connection from this data center to that data center and if there if you're

doing it 50% of the time well cool even if it's four days late 100 million dollars of depreciation that's a huge issue if CCOI is guaranteeing 100% and they can trust that then they there's a the network's just a lot more efficient so let me go back I know we said timing and we've got a ton of other stuff to talk about but I want to posit something to you. I think one of the reasons the opportunity might exist is last summer when a lot of my friends who got interested in the name, we're talking about all the stuff you were talking about, right? They said, hey, the sprint integration stuff, we're getting long in Q2 of 2024, Q3 of 2024, because we're about to hit the switch, right? The sprint

is about to go from huge money loser to break even to eventually profitable. We're about to see the fruits of all the labor. We're hitting the switch. I think if we were, not that the stock price tells everything, but if you look at the cogent stock price from the summer to the end of year, it goes from 50 to 80. And then as we're talking, say, it's gone basically round trip, right? It's 80 back to 50. And I think the reason is this Sprint network hasn't flipped. It hasn't filled up for a lot of those reasons you're talking about.

But I think it's also more than that. You know, the data center opportunity. They got a bunch of data centers in the Sprint sale. People were thinking, hey, it's like 130 megs of data center power in there. They were thinking, hey, look at what's happening with AI. Look at what core we've seen. There might be a billion dollars value here. We might see that by the end of the year.

I think Dave was even pushing people. In July, he went to a conference and said, we're going to sell this thing. You and I are sitting here June 2025. They say they've got a lot, but we still haven't seen any movement. So I think people are just starting to question not just the timing, but hey, they haven't really delivered any of the stuff we're talking about. I think the story's just getting hearing and Harry.

Like, what would you kind of say to that? I think it's, I mean, completely fair. He's been laid on everything. I think, you know, back in August of last year, I think is when they communicated on the Q2 call that they're going to invest $100 million of KAPX into the data centers and get them ready. I think he had a hope, honestly,

that he could sell a really crappy shell and have it like a house that basically had plans but nothing else or no kitchen, no cabinets, no flooring, no nothing, and get top dollar for it. And I think he realized that the price for that was significantly lower than what he thought. And if you invested the $100 million,

there would be a pretty easy payback. I think we're kind of ending the completion of that $100 million investment. It's kind of a weird process if you think about the sales process. They're offering it, they're basically saying, we'll accept any kind of offer you want to bring us.

If you want the whole portfolio, we're interested. If you want a partial portfolio, we're interested. If you want a single facility, we're interested. So, like, if you run that and you know that not everything is ready yet, and some are, they're at varying degrees of completeness, right? But it's kind of an odd, it's not really an auction. Like, how do you compare a whole portfolio at 5 million a megawatt to a partial, two partial portfolios somewhat overlapping that might be at 8 million a megawatt?

Like, how do you kind of sort through these different offers? I think they're kind of just going through that process. And, you know, the thing that I, I talked to Dave about this like a couple weeks ago, but the thing I worry about is that Dave is so focused on maximizing. value that I told him. I was like, I'm worried that you might have an offer for $500 million for the whole portfolio and you might hold out for 18 months to get $550 million. And it's like, that's not, that's not like a great use.

That's not a great setup for equity guys because you're, you're allowing, he's allowed the balance sheet to get over levered, which we can talk about. He's put in capital, you know, there's. There's kind of both OPEX and CAPEX and balance sheet issues for why leverage looks bad, extra bad right now. I call it like levered, over levered but not risky because he could in the end just like probably take one of the low bids out there pretty easily and raise a couple, at least, you know, three to 500 million dollars, like not overnight, but pretty close.

So I think it's, I think it's just he had a thought that like the AI market was so hot. it's like a shark feeding frenzy, but not for those facilities. And like these are not AI compute centers, right? These are like, these are edge facilities. They're like a lot of, most of them are like five megawatts. A few more bigger than that. They're not going to be like filled up with tons of GPUs and and run for like AI compute. So I think there are plenty of operators in the market that have an appetite for this,

for these kind of facilities, especially because they often are a G. or closely situated to some of the bigger compute centers out there. And I think the, you know, the whole data center market has been like Ashburn and Silicon Valley and like these tier one markets when it was the telecom footprint. I think the AI footprint is going to be very different because it's going to have to migrate to places with much more space and power availability at much lower cost. those are there's some overlap there but I think cogent's footprint is actually okay for being adjacent to these new compute centers that are in like secondary and tertiary markets historically for the for the data center market of data center topology so I think like for instance I've heard that the Cheyenne facility they have I think it's like two and a half megawatts but it's apparently one of the more in demand facilities because there's big big kind of proprietary facilities by Microsoft and meta very close by. There's a few of those examples in the portfolio, but I think it's kind of just an awkward process.

I think he thought they could like really sell into that momentum last year, but people wanted things closer to turnkey, not where they have to go then spend a year on retrofitting them to what they needed. So I think Dave recognized that like, okay, maybe we can get $250 million from these as is, but maybe if we spend $100 million, we can get $700 million. Yep. So we should go do this at that. And I think that's kind of how I think about it for myself.

Let's talk Dave real quick, because as I've seen, you've done, if I've done three, you've done 300 expert calls on this. But the consistent thing I hear from people when you talk cogent is Dave is cogent. This is his baby. He's got, what, like 40 direct reports? Like it borders on micromanage. And everyone I hear says, well, there's one thing you know, Dave is the smartest man in anywhere he's in.

And he's a fantastic entrepreneur. You can talk about the taxi, wherever you want to go. But on one side, you've got this literal genius who has a PhD at, like, 15, 17, I can't remember, graduates high school at 12, if I remember correctly, like literal genius, best entrepreneur a lot of people have ever worked with running this company. But on the other hand, I would say, hey, the history of not just telecom, but in general, general, the history of smartest man in the room with a lot of leverage. And that would imply in two ways here, right? That implies to cogent, as we mentioned, over levered, but a little bit. I don't

think it's risky. I agree with you. I think it's over levered on stats because of the sprint, but maybe, you know, not necessarily, but also over levered on a personal basis. And we can talk about that. But the history is over levered smartest man, leverage plus smartest man in the room does not end well. It ends in tears. And I would point to dish slash Charlie Ergen at Echo Star dish, like that has not gone well. And plenty of other examples. That's just, the telecom one. So I hear these two dynamics and then I see, hey, you've got a CEO who for the past 12 months has kind of like stepped on a rake multiple times and just miss and miss miss. And my biggest worry when I see this is like kind of this is the Dave show. But when I

see smartest man in the room plus leverage, like I actually kind of get nervous. So I'd love to just talk all aspects, Dave. Yeah, I mean, I think you summarized it well. I've known Dave for now probably 12 or 13 years and I've talked to them. I don't know how many times over those those years. He's brilliant. He's obviously brilliant. I think he's extremely insightful. And I think you can you can see that in Kodgen's organic revenue over the last 20 years compared to everyone else in this market. He's a little bit dumb for choosing telecom to be his market. I had that thought I was like, man, I just got into. Why didn't you choose like, you know, SaaS in 2002 or something, you know. But I think I think the part of the reason what telecom appealed to Dave is that he's competing

against these like this sunk cost base of legacy providers that like never really acknowledge the reality of their situation. And so he could use his talents disproportionately to expose and exploit them over time. And I think that I think he loves competing against these these old legacy companies that can't do much because they have a cost structure and a capital base that was supporting prices that were true 20 years ago, but are like 1% of what they were 20 years ago. So I think that's why he's chosen that playground for himself and stayed because I think he really loves disrupting it in slow motion.

I think he, you know, I asked him a couple years ago in an interview that I published on my website, like did how has this gone relative to your expectations? And he thought that if he offered best service, lowest price, he would, get 25% market share within a couple of years, but it took, it took a lot longer than that. It took decades. And he thought he could disrupt a lot faster, but there's a lot of inertia in these customers. But I think it's been not so slow that he's been kind of, you know, he would move on from it, but not fast enough to be as disruptive as he, as his hypotheses would have indicated. So I think, I think Dave is, you know, I see this a lot also. Like, you know,

some of these entrepreneurs and owner operators are like they're pretty they're naturally more aggressive than most people are um i think dave is a pretty aggressive guy but i think he also has a lot of outs he gives himself a lot of outs with cogent what's funny is that he's he's kind of a forced seller because of his commercial real estate portfolio do you want to discuss that because i i think the first question anyone gets is you say cogent they pull up the insider transaction and they see The smartest guy in the room for the past 18 months has been just a consistent net seller of shares. So you just want to discuss what's happening there? Yeah, he had like Silicon Valley Bank collapsing was really kind of the catalyst to force him to start selling because all the regional banks started pulling out of commercial lending or rebalancing their books.

I think the way he's described just to me is that he had a portfolio that was worth about $1.1 billion. It's probably worth about $600 million now. he had I think at the time like around 50% LTV on it and now it's like I want to say like 65%. So he's using his stock sales. First of all, he takes no salary. He just gets stock and he gets his dividends. And he has around 4 million shares. So the 4 million shares are about 16 million of dividends that he gets mostly return of capital,

if not exclusively return of capital. So he's deferring his taxes personally on that a lot. But when he sells, in order to kind of the banks, the way he tells it, and I don't want to air all his dirty laundry, but the way he tells it is the banks are kind of forcing him to amortize on an accelerated basis, the loans, the principal, or else they may force him to do an LTV test, which would trip a covenant, and then he would, you know, lose the assets, essentially. so he's paying these off as slowly as he can with stock sales but when he sells stock and he has negative bases in it he has a big tax obligation too so it's kind of picked up the pace especially in the last month or two it looks really bad I totally agree what's funny about it to me is that no one is more motivated than Dave to monetize data centers desperately and like get the leverage question off the, off his plate, you know, like, if he, if he brought in 500

million, even if he thought he could get a billion, if he got in 500 million of proceeds from a data center sale, it would probably, I mean, it would solve a lot of the, or ease a lot of the concerns on dividend strategy, the leverage ratio, all of that. It would probably send the stock higher, right? Which means he would have, he would not have to sell as many shares to accomplish what he needs. So no one is more motivated than a for-seller to get the stock higher. And yet, he seems to be

still optimizing for the long-term value. Or you could look at the other way and say, well, maybe not. Maybe he is optimizing for short-term, and it's still failing. And so... That's the worry. Totally valid, totally valid, but, like,

you know, knowing Dave, I guess, I would question that logic or that conclusion. I understand the logic makes total sense. I don't know if I agree with the conclusion. I completely. And look, that's the tough thing, but again, it's just like the biggest risk to me. Now, we should talk wavelength deflation and a lot of others up. But the biggest risk to me is the smartest mean in the room with leverage at cogent,

which I don't think leverage at cogent is too bad, though. I want to talk capital allocation, but then leverage on an office portfolio resulting in foresight. I'm like, I see that. I'm like, oh, yeah, that is the story. Tale is old as time. It doesn't end super well. I don't want to do. I think we discussed that enough.

People can like, Dave actually talks about it a little on the calls too. You can see how he ended the Q2 call. Let me ask one more question, though. And this does not relate to per se, Dave's leverage, but the capital allocation, right? You have a company here that is quite leopard. I think the headline is like 6.6x leverage. I think that will peak in Q3 and then come down, maybe sooner if they get an asset sale done. they're paying out a large dividend.

You know, the dividend yield, as we speak, is roughly 10%, like it rounds to 10%, dollar per share per quarter on a $48 stock. They've grown it 54 quarters in a row or something crazy. But I guess I would ask you, the dividend strategy here, you know, would it make more sense to, you have an owner-operator who still owns almost 10% of the company? Does the dividend strategy make sense? Like, they bought back a little bit of stock after Q1.

Would it make more sense to just shut the dividend off? D-Lever, use the excess cash flow to buyback stock on the cheap, and then when this works, like this could really work. And I would have that question, I would sprinkle in a little bit of, hey, is the capital allocation and dividend strategy being run for Dave's cash flow needs, not for what's the best of the company? Yeah, that's a good question. I think, you know, whether it's levered buyback or levered dividend strategy, they both require,

you know, the John Malone playbook works until it doesn't, and then it's a really bad thing. I've learned that the very hard way several times. And what Dave, I would say Dave's twist on the John Malone playbook was that he was doing return of capital dividends. So kind of deferring the taxes, not necessarily adding the buying power in the stock in the market to boost it higher, but returning the capital anyways in a tax-sufficient wage to shareholders. I think that fundamental to the view of them continuing on this policy is the

believe that revenue acceleration is around the corner and the cash flow growth of the business is going to support that. I think, you know, he says it's not on their business plan to monetize these data centers, but obviously the board's not going to green light a hundred million dollar capax program for a thing that's not on your business plan. So like, it's obviously in the business plan to monetize these. Otherwise, you wouldn't have spent the capital, right? You would have just taken the price a year ago at whatever the number was, even though it was lower than they wanted. So I think, I think, you know, Dave doesn't make bad capital allocation decisions on that

front. He doesn't speculate with that much capital, $100 million of data center retrofits. So I think like the way I think about it is I think we're sitting at kind of peakish leverage. We're getting hit because of the, the CAPEX that they've had to absorb to do the Sprint network that's not yet monetizing the waves to the level it should and will to do the KAPX retrofit or the Davis Center retrofits. And then on the other side, you've had to absorb all this negative OPEX from Sprint, Core Sprint, and then you have like, you know, I wrote about this on my website. They have this like 50 to $60 million op-x item that's going

to bleed down through the end of 2026. He's disclosed at one time on a public call, but I've talked about it over time since it's shown up because it's really hard to make the numbers reconcile if you don't have that in your model. So I think we're kind of getting hit on higher net debt than they should have, and that should normalize whether the data center sales or cash flow going forward and or cash flow going forward,

and then you're getting hit on the OPEX. So I think you have an elevated numerator and a depressed denominator that are affecting net leverage I think if you kind of, if you fast forward a year or even six months and like they haven't sold anything, waves aren't accelerating, I would expect the board and Dave to to revisit the dividend strategy. And I doubt that they would cut it, although I think, sorry, eliminate the dividends to spend the dividend. I think they would cut it to like a lower level for some period of time to get to kind of get it under control and bring some more operating cash flow into the business

and deliver like you talked about. I think he's pretty married to the dividend growth path because it's something that he's promised people and I think he really values that consistency of like so many quarters or years in a row, 54 quarters in a row of dividend growth. I think he knows a lot of investors depend on that and expect that

and a deviation from that would be pretty damaging to credibility and reputation. And I think I've talked to him in the past about this and he's said he's been willing if the opportunity presented itself to suspend the dividend temporarily and just plow everything to buybacks if the opportunity was there. And I was like, you know, Dave, you're borrowing it six and a half. Your dividend is yielding eight and a half. It's crazy when that's true. You know, like you should take out, you should do, this is when you should be buying back stock, right? Like you're taking out a lot of dividend

then liability if you buy back the stock today at these kind of valuations. And he gets it, but like it only happens when people have a concern about the balance sheet. So if he does that, if you were to buyback stock, you know, they just did a refy, right? 600 million of new notes to refy 500 million of 2026. If you took the 100 million or 80 million of excess proceeds or something and did a buyback with it, you know, just leveres the balance sheet even more. So do you want to do that optically when you're already at this kind of leverage, even if it's very creative in the medium term, I would say probably not if it were me, but, you know, if Dave, if Dave knows the waves are ramping and they're going to be exiting this year

with a hundred million run rate, then it would be a great trade. So just on Dave, Dave is about 70, I think. And as I mentioned earlier, whenever you talk to anyone associated with the company, Dave is cogent, right? I've heard. people say borders on micromanager, which generally means micromanager, and I don't mean that in a bad way. There are plenty of fantastic companies run by like founder entrepreneurs who are absolutely micromanagers. But it does, he's at 70. But what is the end game here, right? Like the Titans are living forever, but there has to be an end game. What is the post-date end game? Is it, hey, four years from now, this company looks great to an infrastructure private equity firm

and they sell to private equity. And Dave maybe stays on for another two years, gets some PSU struck. moves on or like how do you see this company post they've evolving i think he'll never i think he'll sell the company before he leaves and i think he's out he's out he's not going to stay on and run it for someone else um so i think i think the end game is that he will sell and it's you know there's so many digital infrastructure players out there this is a pretty unique asset it probably in the hands of someone else it probably would need to be split up like i would split the wave business from the internet business. Oh, interesting, because they've kind of been arguing there's the synergies between the two

sides, but you think they'd be easily split? I think the fiber network, if it were to trade on its own, like, let's say, cogent infrastructure, which is how they structured this deal, I think that probably has very high strategic value to, I don't know, anyone in tech, not really any of the other telecoms, but it has high strategic value to the tech community. because it has it's one of like the five or six long-haul networks that's out there yep um you can see at microsoft being like hey we're just or in amazon we're going to control our own destiny right like we we own this network we never have to rely on someone else saying hey

we'd like you to connect seattle to chicago and they say we we don't want it amazon owns it amazon does it right right exactly so i think i think that that physical network has strategic value i think it would probably be worth like five billion plus on its own um the way it's been reconstituted I think nobody wanted to take it on with the sprint business, of course. I like, that's a, Dave has really had to disentangle this really crappy company. And it was a mess. And it's like disentangling it, reconstituting it, making it is something that's actually attractive. If it's attractive to cogent and it works, which it does, it'll, it's attractive to others,

which is why I think the wavelength business is going to start scaling, you know, timing could be anything. But I think we'll know, we'll know before the end of the year how it's going for real. And then the internet stuff, I think it's more of a niche business. Like, these are smaller TAMs. The wavelength TAM is multiples larger than anything else that they've been operating in. So it's a narrow, it's U.S. only or North America only. It's physical infrastructure that's pretty scarce. And I think that has really nice value on its own on a standalone basis.

I think the corporate kind of the cream skimming internet business and the corporate skyscrap is like, maybe it's a private equity-owned business that could cash flow, but it will ever stand independently, I don't know. The transit business, it could probably, it probably couldn't be rolled into one of the other big guys. But maybe that has strategic relevance and importance and value to a tech guy also, because, you know, Codent's a tier one internet company, which means they get to peer with everyone settlement free, which means all of their internet traffic is free to, you know, globally.

If Amazon got that or Microsoft or Google or whoever, like, you know, you could justify, you know, I'm sure they pay a lot of the internet costs, right? Like, if they get to, if they get a trade traffic settlement free with everyone globally, like, you know, maybe that's interesting to them. Plus, they get some customer traffic on that too. Let me. So all of their businesses are Moore's law businesses, right? The cost to deliver a data bit over the internet is going, goes down at Moore's law historically, right? it goes down at 30%. Now, this is always been countered by the fact that data demand go up, right? I do look at this and I say, hey, I've never bet against Americans' ability to watch more TikTok videos,

but video is pretty well penetrated. AI, I don't think it's really resulted in a spike in data usage yet. Now, that might change with inference, and I know I'd love to talk about CCOI as a AI beneficiary as well. But one of the things when I'm talking to like my really smart friends who do, what you do, super concentrated investing, deep research. They say, hey, outside of the messiness and the day varies, the thing that's really hard for me to do is you have a Moore's law business, so it's always deflationary.

And I worry what happens if that data usage just always isn't going up, right? What if one day you go to someone and saying, hey, you're paying us $1,000 per month? Last year you were getting 10 gigs. We're free upgrading you to 25, but we're going to keep charging you $1,000 per month. What happens to the time when you go to someone and to say, actually, don't bring me from 25 to 50. Keep me at 25 and I'm going to pay you $500 per month because I don't have any more data use. So how do you think about that deflationary risk if I explained it well and if all of that makes sense?

Yeah, I think there's, depending on the end market, there's a different answer. I would say, you know, first of all, Codin's been the one leading a lot of this price deflation in the market. They've been the price leader by far. And they have a standing offer to undercut anyone by 50% on the wholesale business. The contracts work in a way where there's like a volume toggle. There's a volume and price toggle. So if the volume doesn't show up, the prices don't deflate. So that price deflation you're talking about is reliant on the volume growth being really healthy.

When it doesn't show up, the price compression is a lot more moderate. I actually just talked about this with Dave last week because they've had two quarters in a row of sequential flat traffic growth, which hasn't happened like ever. And they're at like, what, 8 or 9% year-of-year growth in traffic, which is as low as it's ever been, I think. They may have had one quarter after mega-upload, but I think when I looked at my numbers, it was like a 9% year-of-year. So in their worst quarter ever, with the most disruptive customer turned off, they still grew 9%, and that's kind of where they are now. I think we're kind of in this maturation phase of streaming video where, like, you know, there's a lot of mobile video consumption, which means your bit rates are constrained. you're not going from 4K to 8K TVs in mass, which means all of this kind of IP traffic

has been historically driven by human attention, whether it's just consuming content, text content originally, then pictures, then video, then higher quality video, HD, 4K, whatever. But when you're in a mobile device and you have like a small screen, you don't need to keep upgrading the video quality because you can't see the difference anymore.

So it becomes linear, like when you have stable, you had a multiplicative effect of having more minutes of use per day times higher bit rate or increasing bit rate. I think that story has, to a larger be played out. You know, the internet, if you go to, if you believe that there's like, I don't know, metaverse kind of stuff that's on the way, VR, AR, you get a pretty big multiplier effect. I'm a believer that like as we go into this kind of world of AI, there's going to be a lot more machine and machine chatter where they exchange information without the human involved and where it's not a minutes of use times bit rate per minute equation anymore,

it's going to be more of a completely disassociated from the human, and maybe not completely, but largely disassociated from the human engagement. If we get into that world, then I think there can be much bigger long-term volume growth in that business. So I think there's kind one layer of protection in place, which is that the volume toggles and the contracts prevent all this massive price deflation if the volume doesn't show, if the volume growth doesn't show up. That's in the wholesale business. And the internet provider business, so like the skyscrapers, I don't think anyone is motivated

to cut price. So, and I think pricing there has been relatively stable. It's, you know, Cogent's been offering $700 a month for like all of essentially. And they have upgraded the circuit size. But, you know, I would be, I think, I think those will be manageable curves. That's more of a utility. All You can eat service anyways. Can I just come back to the wholesale real quick? You mentioned Cogent has a standing offer will undercut anyone by 50% on price, right? And I always thought this, it relates to the Moore's Law, but it was an interesting risk factor to me. Like, that works when you're the small

I'll start competing against AT&T, Zeo, whoever it is, right, to a point. But eventually, if you cut, like, these are fixed cost business, right? You lay the fiber, and then there's basically no other costs as you throw people on that. Eventually, if you take enough share, you're going to provoke a competitive response because AT&T is going to say, oh, we have no, or Lumen, we have no one left on our fiber. We have to go start selling fiber basically for free just to try and start filling this thing up, right? So how have they been able to sustain that 50%? And do you worry at some point there's a competitive response,

particularly if the data usage, as we just talked about, really starts flattening out? Yeah, you know, it's, again, this is a multi-source product. Nobody's sole sources, their transit provider, the wholesale market. So there's some amount of just inherent balance in that market because of that dynamic. I think that the way it works is they already have all the customers, right? The logos are already there.

I mean, there's some new logos that pop up here and there. but it's they still can win new business from Amazon by saying okay Amazon like you know let us help you on this these pads and through the internet we're kind of lower share if you give us more share we'll undercut your price that you're paying the coup you know whoever is 18t lumen a relian whoever by 50% on the on the growth you know you're right when you're small it's disruptive I think what I've heard is that there I think the offer is still out there, but I think they're using it. I think it's actually being used

less and less in the market, because I think they are, when they're 25% market share, they're starting to emulate the internet, the overall pie more and more, and there's less reason to be that disruptive. I think it's a great strategy to go from zero to 25%. It's probably

not the strategy you need to go from 25% to 50% if they can get there. So I think they are starting to be more I guess less drastic on the price aggression in that business. And I've picked up on that a little bit over the years, the last couple of years especially, as traffic has started to slow down.

I think what they've tried to do, actually, one of the cool things they've done is they kind of analyze, they don't know with perfect vision, like what's happening on the internet network, but they can kind of analyze traffic in such a way where they say, okay, Netflix is sending a movie from L.A. to Paris. And the way it's routed today is it goes Netflix to AT&T. AT&T hands it off to Codent for free because it's a settlement-free peer. Cogent takes it transatlantic, terminates in Paris.

Orange takes it from Cogent to the end customer. Let's say that's the workflow. Cogent will say, okay, we see that there's traffic going between L.A. and Paris. Orange is a customer because on a Tier 1 network. AT&T is not a paying customer. Why don't we go to Netflix and Orange and say, you know, you guys are both paying for this traffic, we'll cut your price on both sides to get, you know, let's say Codin's making, maybe the customers are totally paying, in total paying $200 for that, just a rough numbers. Codian is making $100 of it. AT&T is making $100 of it.

Codian will say, okay, why don't we structure this so we can make $150? And you guys both pay $75 instead of $100 on each side. So they've been doing more of that, which is kind of a clever way to stay. deal share. It is cutting price, but it's like very accretive to Cogent. So if you look like five years ago, about half their traffic was terminated with customers or originated and terminated with customers. So it's a paying customer to a paying customer using Codient in between. Now it's like 75 to 80% because they've kind of gone in and done some of that, you know, data gathering around the traffic patterns of the network. So they can offer, they can offer just up the pricing, but also

to take more revenue. When they're cutting 18T out, would it cogent then go build, like, you know, that last like 100 foot or something to the Netflix facility to cut them out? Or is there different? They're already there. They're already there. Okay. They're already there. Okay. They're already there. Let me ask one last question. And then again, my notes, I've got so many notes. And we've already been super generous our time. I'm kind of like Charlie Day smoking the cigarette in that famous meme. I've got so many notes. But I want to ask one last question before I just let you talk about anything. One thing I think investors might say is, hey, Andrew, Aaron, this is great, really interesting, founder-led, you've got a hairy story with a lot of others said.

Somebody I say, hey, is this really worth the brain damage? You know, I think they've said 2008 EBITDA will be about 500 million. There'll be cash flow between here and then, hopefully. But 500 million in 2020 EBITDA, as you and I are speaking, the enterprise value is, let's just make it easy. 400 million enterprise value, $200 million of debt, $2 billion of. of market cap, right? So I say, hey, we're playing for 2028. That's eight times EBITDA in 2020.

Is there a lot of upside here? Like, these guys are talking a lot about fundamental research, big position. Is there that much upside when you're talking a telecom player? AT&T and Verizon trade for seven times EBITDA, seven and a half right now. Same with the cable players. Cable player trading three-year-out EBITDA eight times. Like, is there that much upside here? Yeah, you know, it's kind of a question.

of what does growth look like between here and there? Obviously, if they get there, there's a lot of fundamental growth. And what does it look like when you're at that launching point, right? And I think what I would say is if you believe in the fundamentals of this network, if you believe that the wave network works and that it's scalable and operation scalable and financially scalable in the way that it should be, and the way that has been communicated, And the way that I believe it actually is already showing,

it's just not showing enough to like really move the needle on numbers yet. I think there's no reason that the revenue should stop there. There's no reason that EBITDA should stop there. There's also the top down versus bottom up math. So like the 500 million is very top down number that Dave has given the bottom up. If you do the math, it would suggest, you know, much higher than that. I think a lot of people are penciling out as I talked to other investors

are penciling out like cogent achieving over $10 a share fee cash flow. So, you know, in the context of a under $50 stock, that's more interesting. You get to collect a lot of dividends between here and there. So if you look at it on a total return basis, if you believe that they won't cut the dividend, you'll collect all those dividends. They're going to pay out over 100% of the dividend when they get to $10 a share free cash flow because that's what Dave does. You know, are they paying a $12 dividend?

Are you getting a, are you trading at like a 25% dividend yield on a organic growth story in telecom with? you know, high recurring revenues, high incremental margins, and all the reasons to believe that it should continue scaling from there. That's how I would articulate the upside. It's not hard to get to big numbers when you look at it that way. The question is, how do you look at the downside? And if we're wrong, what does that look like and all that?

And we can talk about that. But I think it's plenty cheap if you look at it on a free cash flow per share basis and they achieve what he's laid out on a bottom-up basis. Let me just push back on that slightly. I think the only real push I have is this is 50% debt to equity, right, if we're using the numbers. A lot of that upside is the fundamental growth that, again, I think the two pushbacks would be a lot of that upside, they're going from about $350 and trailing EBITDA to $500.

And people might be saying, hey, they're over a year behind. They've kind of stalled out if you're just looking at the headline number. Now, a lot of that is T-Mobile payments going away. But, you know, they thought they'd be further along. They would admit that. They thought be it for, so I'm bet. on an organic growth story, and that's in question based on the past year, to 18 months. And a lot of that free cash flow number that Aaron's starting on is because this is quite

levered. So you get the organic growth, which I'm questioning, and you're getting on a decent bit of leverage basis. So yeah, the free cash flow to equity story looks great. But, you know, when you start doing it on an EV basis and factoring in that risked organic growth, doesn't quite like look the same like you really, you really need things to work out well there. So I guess that would be the one pushback. I understood. Yeah, it's levered. I don't disagree with that, but, you know, that's the leverage cuts both ways and, you know, they're kind of hurting for it right now. I think the interesting thing about Cogent is that it's basically just a call on,

is this business going to work or not, right? If it doesn't work, there are reasons to believe there's some downside protection from the fallow asset portfolio, whether it's IP addresses or the data centers, the fiber network. Like, if they can't build a wave business and they sold the fiber network to an Amazon or Microsoft or just auction it off as the long-haul network and what they've reconstructed, they said,

it turns out we don't know how to address this market properly ourselves. So we're going to put it on the auction block. Let's say, you know, it's worth several billion dollars. First of all, the path between here and there would be really painful. You could say the fundamental value would be

you have plenty of downside support, but the actual trading dynamics would be pretty terrible because it would be an admission that the growth doesn't show for Cogent. You'd have a dividend cut. Yeah. Then you're wondering like, okay, if they can't make it work, who thinks there's value

here, blah, blah, blah, right? And so it may be that there's very limited downside, except you will eat a lot of downside as an owner of the stock as that happens. So I'm well aware of that. I think reasonable people can disagree at this juncture because the stock right now is essentially a levered call on, is this wave network? real, is it going to attract customer demand? If so, it should, the leverage will work in your favor.

And so like, that free capital per share number will probably be the driver, right? If it doesn't, then that leverage becomes a bigger anchor on the stock and a big problem for the stock. So, you know, it's, it's a, it's funny because these are not like, the tracks are pretty well worn in these end markets. It's not like you're having to reinvent the wheel here. They reinvented the network strategies and novel network strategies they're putting into the market. But the wavelength market is large, it's growing, it's one of the healthier things in all

of telecom, one of the growthier things in all of telecom. There's plenty of demand for it. I think they would pick up 15% or 20% share just to add a nine of resilience for a lot of customers. They could just do the same thing that Lumen and Zeyer are doing, but add a different path, and they would probably pick up a decent amount of share. The fact that they're doing these other things also is like 90% Rout uniqueness, faster installation times that are consistent and reliable, you know, lower price. All of those things will help them maybe get there faster and extend them far beyond

those, you know, where the steady state market share would be for just another nine of resilience. But we're sitting in a place where the wave opportunity has not developed as advertised by by Dave and not as communicated by Dave is taken longer. Everything is taken longer. Everything I would say except the Sprint synergies has taken longer. So the data center sales is taken longer. The wave revenues have taken longer. The wave network did not take longer.

I think we are there. They kind of hit the things that were most in their control. I was about to say that. Yep. The things in their control, they hit. The things outside of their control had been slower. And maybe they should have known that because things in telecom. or slow, but what they could control, they basically executed on plan.

It seems to me. Last question, and then I'd love to just give your... You mentioned, hey, the fiber network, if they said, we're not the ones to run it, they could put it for sale. Have there been any other recent transactions selling, like, wholesale fiber networks? I mean, you have like the Zeo Crown Castle thing, but that's like, it's not a direct, direct comp to this. These, there's only, I mean, the long-haul networks in the country are,

Zeyo, Lumen, AT&T, Verizon. And then now cogent. So there's like five of them. There's like regional ones that like can kind of play for a lot of the country, a big chunk of the country. You have like Windstream, Frontier, Crown Castle. Now Crown is going to be part of Zeo. So not anymore.

But we haven't seen anything quite like this come to the market because they're all kind of been rolled. They've been rolled up into those big companies. Perfect. Look, you have done, I'd love to just, been super generous with your time. I'd love just last thoughts. Again, I like Charlie Day with notes all over.

You've done such great work, and I'll link to some of them. You've just got these super extensive notes on Cogent on the website. My favorite would probably be the most recent one, Investor FAQ back in April, but there's some of anything that I should have been asking or thinking about or listeners should be thinking about

that we kind of didn't hit so far? No, I think you're spot on on the questions. I think these are all the right questions to be asking. I think, you know, the biggest challenge for everyone is why is everything late? You know, it's the most valid question that there is. The thing that I think really has blown me away, if I'd take a big step back and take away my annoyance with the timing and like the path of this, which, you know, I'm very annoyed by the timing and the path of this.

It's been, it's been like excruciating to have to. live through Dave's bad communication on this. As such a great communicator, the optics are just really messy. And so I hate every earnings release because it's like really impossible to discern what's actually going on. It's hard to pick apart the numbers. It's like you said, it requires a lot of brain damage. At the end of the day, every single story has to come down to every single good equity

story has to evolve around some or revolve around some nice growth story. There has to be something there. I'm not a sum of the parts guy. I'm not a deep value investor looking for like cigar butts. I wouldn't be interested in that. If this is just a matter of selling up IP addresses and selling up data centers and making 20, 30, 40 percent, I would not be interested whatsoever. I'm here for the growth story.

Like there's no question about it. From my perspective, what they did last year was insane. When they, the biggest risk to cogent was what they did last year. with the network. They popped so many data centers last year. A good, when I've talked to people about like Windstream and Frontier and other wholesale wavelength providers, and they say, like, in a good year, we'll do 20 data centers. We'll add another 20 data centers for the network. Cogent did like 700. You know, like, it's just built differently. And like, I don't know, there are all these ways you can articulate why. But they, the way they, the way they

build scalable networks is just different from everyone else, which is why I kind of analogize it to Starlink. It's built with a completely different architecture in mind. It's launching ubiquitous service like from day one, which is pretty crazy. And it's, and it works. There's big customers. They can turn on 10 terabits of capacity between point A and point V within 30 days in a timeline and a consistency that nobody else can even touch.

And like the hypers are buying it. You know, there's like, you know, the rumor was, and I think it's confirmed at this point, that Amazon bought a lot of capacity between like, you know, two data centers and, you know,

the most differentiated route and CoGES Network is Seattle to Chicago. Everyone, if you talk to Cogent, due to customer check, they all want that route because that northern crossing, East West, is very underserved. And they're kind of the only game in town

when it comes to that path. with that latency. So Amazon has bought out an entire line of fiber from them already on that route. And who knows if there's more to come. That was like their first order was to buy out an entire route of capacity, entire strand of fiber of capacity. You know, there's, if it's the story I heard about that was that Amazon tested every single circuit for latency, for the round trip time, all of that, like 425 of them or something.

and they pass with flying colors, their KPI's, their SLAs are like, you know, they're hitting all their SLAs, they're better. So if the network is performing and it's been rigorously tested by the biggest and best in this business, the network risk is gone. It's behind us. So now it's an operational risk. It's a sales execution risk. And Codent Salesforce, you know, there's a lot of stories about, you know, they have

six, seven percent monthly churn in the sales force. but the guys selling to these customers are not those guys. They're not the high-turn guys. If you look at the kind of a lot of the senior people at Cogent and the biggest sales leaders, these are the guys that have been at Codent for 10, 15, 20 years. They're very seasoned. They know these customers really well.

They can compete against the biggest and the best of the other companies as well. And these are the strategic accounts, premier accounts, sales reps, not like the guys that are churning through calling every law firm in New York, turning to the internet service, you know. So I think the big, to me, the biggest fundamental risk is, was that the network was not going to work as designed, like, because it was novel. Now we kind of know that it works. So that's pretty cool.

And it's like, what can you do with it? And can this, can this cogent team go monetize and execute on it the way that that it deserves, given what it is? You know, I hear the feedback I hear from the other guys that they're freaking out that Cogent has this. Because if you're ZAO and you can do, Codent can turn on 20 terabits in 30 days and you can do it in nine months, what's going to happen to your business? It's not just what's it going to happen to the growth of that business. They can also steal your share pretty easily, right? And it's not going to be a big, a heavy lift for anyone to steal your share. So I think it could be

disruptive on incumbent revenues and disruptive on growth. No, Zayo, which just, if memory serves, they got bought out for like, and I just pulled up their proxy, they got bought out for like 15 times EBIT or something. So you've got a company that, you know, might be, I don't want to see dead because they've got a ton of physical assets to the ground longer, like not dead, but a company that's probably going to be giving up significant share as things go forward to Cogent that, yes, it was six years ago, so a lot, a completely different real, but, you know, 15 times EBITDA and you go and you look through the, I'm looking at their proxy, peers, 25 times, 25. five times, 22 times, 20 times, 10, 20 times.

Like I said, hey, you know, we're trading it eight times three year out EBITI if you believe their numbers and you probably think they're higher. What's the brain damage worth is, hey, every peer is 15 to 20 times. So you're talking about double the multiple I talked about. And by the way, all that accrues the equity on a significantly over sort. Anything else we should be chatting about Aaron? I don't think so. I think we covered it pretty well.

Look, I appreciate that. a lot of brain damage, but it will, you know, it's going to simplify. The cool thing is that if it works well, it should simplify to a really nice growth story with high incremental margins. The sprint impact of financials is going to decline, you know, hopefully, you know, hopefully it will be negligible impact by next year. And, and all the kind of financial characteristics will start turning up as they should. If this works the way it should, that's what should happen. And then it should be a pretty, pretty compelling growth story in telecom, which, and it does feed the AI ecosystem. You know, like, who's a buyer of wavelengths? It's not,

it's not like, wavelengths are very specific, highly technical connectivity service. It's not just plugging into the internet. You know, it's, it's facilities, specific facility within a city to another specific facility. And the guys that, what you're using wavelength protocols to transfer data. These are massive files. You need guaranteed latency. You need that connectivity. It's a higher end service. It's a bigger end market. And it is what a lot of the hyperscale guys are going to grow with. And the AI industry is going to grow with when it comes to their connectivity needs. Everyone wishes they had dark fiber, but there's only a handful of dark fiber providers. And even if Lumen is going to open up the network to sell dark fiber to these guys,

everyone still needs multiple providers. It's not a sole source market. So, you know, one thing we haven't touched on is can they monetize their dark fiber? Because that's another potential monetization angle on Cogent. I am skeptical that they'll get anywhere material on that because I think if we see Amazon buying out an entire line of fiber on the first order, I don't think if I were cogent, I would be motivated to sell out any dark fiber if I could light it up for customers and get much more monetization out of it. So maybe here or there, they'll do some, but probably I wouldn't expect any material

monetization of dark fiber because if it's true that there's that much demand for the wave network, you would want to hold back that inventory for the wave business. Correct me wrong, but dark fiber is you're, you sell it to Amazon, so it's a one-time sale and now Amazon controls that you don't get that ongoing revenue, whereas you do the waves, they're basically renting, right? So you're switching between, is Amazon going to own it or are you going to own it and Amazon just rents it from you and you get the ongoing revenue stream? Well, the way it would work is usually a big upfront check, and then you get ongoing maintenance.

So it's like maybe a nationwide contract would be $500 million, but then you get $25 million of annual maintenance on that contract. Yeah. There is some ongoing recurring component. But if you did a nationwide wave, if you monetize all the waves in that nationwide network, that would be, you know, probably a billion dollars of revenue or something. So there's a big. value gap between dark fiber and waves. Perfect, perfect. Cool.

Aaron, it's so much fun having somebody who I can come on with a Charlie Day set of crazy notes on a name that should be simple, but is really complicated and just get awesome answers to all of them. So Aaron Chan from Recker put some great stuff on cogent and a bunch of other stocks. I mean, you only have like four or five stocks, but there's great stuff on Royal Caribbean, which I'm always fascinated by. Ever since post-pandemic, I saw someone call themselves like a rat addicted to cocaine when it came to cruising. I've been obsessed with the cruise line. Obviously, Carvana, Cogent,

but this has been awesome. Thank you so much for coming on for a second time and looking forward to the third. Thank you so much, Andrew. I enjoyed it. Thanks. A quick disclaimer. Nothing on this podcast should be considered an investment advice. Guests or the hosts may have positions in any of the stocks mentioned during this podcast. Please do your own work and consult a financial advisor. Thanks.