Cogent Munches Midwestern ISP
The buy raises questions that have haunted Cogent's other deals. First: how does this acquisition fit with Cogent's business plan?
FNSI has about 400 customers, which Cogent says were transferred to its own management this morning. It specializes in commercial Internet access, xDSL, ATM, and Frame Relay services for businesses in Cleveland, Akron, Canton, Columbus, Dayton, Cincinnati, and Toledo, Ohio; Detroit and Southfield, Michigan; Pittsburgh; and Chicago. FNSI's leased fiber connections to California will be canceled and replaced with Cogent links. "Several" of its 25 employees will be offered jobs, according to Cogent spokesman Jeff Henriksen.
But Cogent's battle cry has been "100 Mbit/s for $1,000 a Month!" And what's that about DSL? Isn't that the very service Cogent's been waging war against? (See Cogent Tenders DSL-Killer.)
It's all a fit, Henriksen insists. He says Cogent's aim is to be an Internet access provider, period. While the carrier initially offered Fast Ethernet access as a replacement for T1, it took a fork in the road when it purchased the assets of PSINet Inc. for $10 million back in April 2002 (see Cogent Acquires PSINet). That acquisition enabled the carrier to start selling T1 (1.544 Mbit/s) and T3 (45 Mbit/s) in addition to its "classic" Ethernet links.
The strategy seems to be working -- for now. In a market where Ethernet access is still a novelty for many business customers, Cogent has managed significant revenue growth (more on that in a minute).
There's even an indication Cogent may tolerate DSL in its network -- for awhile at least. When asked if Cogent will attempt to switch FNSI's DSL customers to fiber, Henriksen says: "We don't have to make a decision on that right now."
But at least one analyst questions whether getting into multiple access types doesn't split Cogent's focus, even though it helps pay the bills. "They see themselves as an ISP, but they have two different ways of doing that... Of course, they need to grow revenues to make everything sustainable," says Nick Maynard, senior analyst with the Yankee Group.
Which raises another key question: How can Cogent afford to keep buying companies in order to expand its business? After all, it's a down market, and Cogent isn't yet profitable. It's already bought major assets of five companies: NetRail Inc., for which it paid $11.7 million in September 2001; Allied Riser, which it bought in an undisclosed stock and debt acquisition deal in February 2002 (see Cogent's Reverse Prognosis); PSINet and OnSite Access, for which it paid $10 million and an undisclosed sum, respectively, in April 2002 (see Cogent Buying Binge: Another Bubble? and Cogent Bags Bankruptcy Scraps); and FiberCity Networks, for which it paid an undisclosed sum in September 2002 (see Cogent Acquires FiberCity Networks).
Maynard says Cogent's gotten good deals on all these acquisitions. "It's paid pennies on the dollar. These are relatively cheap assets Cogent can service with its current personnel." As a result, Cogent's increased its customer base, its access to buildings, particularly in the New York City area, and its ability to offer a broader range of services -- all for a bargain. With the Allied Riser deal, Cogent also managed to go public.
Still, Cogent's financials show lots of room for improvement. They remain a puzzling mix of good and bad news that points to a reckoning in about two years' time.
On the plus side, the carrier's revenue growth is impressive: In the first three quarters of 2002 (the fourth quarter, which closed December 31, will be posted March 31), Cogent report over $38 million in net revenue, compared with $3 million for all of 2001. That clearly shows Cogent's effectively building sales.
Cogent's also got solid backers, including Erel N. Margalit and Jerusalem Venture Partners, Oak Investment Partners, and WorldView Technology Partners.
On the down side, Cogent's net loss for the first three quarters of 2002 was $67.9 million, compared with $66.9 million for all of 2001. While Cogent has expanded its number of common shares outstanding, reducing its net loss per share year-over-year, those are still big losses.
What's more, Cogent is joined to its primary vendor Cisco Systems Inc. (Nasdaq: CSCO) through a complex series of covenants that amount to a loan of over $400 million, which starts coming due in March 2005 (see Cogent Conundrum Continues).
Bottom line? Cogent needs to get those revenues up over its costs in order to survive long term. To do that, it needs to harness the tactic of buying up loosely related assets into an effective long-term strategy.
Yankee Group's Maynard thinks Cogent's got a good shot. "Cogent's a survivor... They're one of the few left standing... It's not like they're buying apples and oranges... and the acquisitions they're making aren't going to make or break them." But he foresees tough times ahead, in which alternative ISPs like Cogent and rival OnFiber Communications Inc. will face a further market shakeout.
"They have some breathing room," he says. "Can they pull it off? That still remains to be seen."
— Mary Jander, Senior Editor, Light Reading