Deep in the labyrinthine accounting details of Cogent Communications' recent earnings calls, a hidden treasure lies waiting to be unearthed. It's not the wavelength business, struggling to gain traction despite a burgeoning backlog. Nor is it the tantalizing prospect of repurposed data centers, promising future riches but currently entangled in negotiations. No, the real story, the one whispered only in the hushed tones of accounting footnotes, is Cogent's astonishing hoard of IPv4 addresses and its potential to either single-handedly save the company's dividend... or hasten its demise.

Cogent, you see, is an accidental dragon, guarding a mountain of digital gold. These IPv4 addresses, the unique identifiers essential for every device connected to the internet, are a finite resource. As the internet's insatiable growth consumes the remaining pool, their value has skyrocketed, turning Cogent's unassuming hoard into a potential financial weapon.

The story begins in 2002, when Cogent, a brash young upstart, acquired the aging giant PSINet for a mere $12 million. Among PSINet's fading glories was a massive stash of IPv4 addresses, acquired in the internet's primordial era when they were practically given away. Fast forward two decades, and these forgotten addresses are now worth their weight in digital gold, their value exceeding that of many entire companies.

Cogent, realizing the potential of this accidental windfall, began leasing out these addresses in 2015. Initially, this was a modest side hustle, generating $40 million annually, a rounding error in Cogent's larger bandwidth business. But as the price of IPv4 addresses climbed, reaching a staggering $55 per address, the potential of this revenue stream became impossible to ignore.

Then came Amazon, the internet's behemoth, entering the IPv4 leasing market in 2022. But Amazon, being Amazon, disrupted the game, pricing their addresses at a staggering $3.60 per address per month, **twelve times** Cogent's rate! This, coupled with Microsoft's similar pricing strategy, created a pricing umbrella, a clear signal to the market that IPv4 addresses were worth far more than previously realized.

The impact of this pricing revelation was immediate. Cogent's IPv4 address valuation, previously languishing at zero on its balance sheet, was abruptly recognized at $458 million, boosting the company's bargain purchase gain from the Sprint acquisition by $254 million.

Here's where things get interesting. Cogent currently leases out 11.4 million of its 38.8 million addresses, generating roughly $3.4 million per month. A 2-3% sequential growth rate, coupled with the ability to significantly increase prices, could transform this revenue stream into a cash flow geyser, easily covering the company's $45 million quarterly dividend and fueling future growth.

But there's a catch. Cogent, known for its relentless pursuit of growth and its steadfast commitment to its dividend, may be facing a difficult choice. The company's EBITDA, bolstered by the temporary $700 million subsidy payment from T-Mobile, is set to plummet by $63 million per quarter beginning in June 2024, leaving a gaping hole in its financial structure.

Cogent has several options: Sell its data centers, lease out its dark fiber, or even issue more debt. But the real ace up its sleeve, the wild card capable of either saving its dividend or hastening its demise, is its IPv4 address hoard.

Hypotheses for Cogent's Future

Will Cogent choose to aggressively monetize this asset, raising prices and potentially selling addresses to shore up its finances and preserve its dividend? Or will the company, reluctant to abandon its growth-at-all-costs philosophy, cling to its addresses, hoping to ride out the EBITDA cliff and risk a potential dividend cut? The answer, hidden in the arcane language of future earnings calls, could determine the fate of this accidental dragon and its digital goldmine.

Aggressive Monetization

Cogent raises IPv4 lease prices significantly, potentially reaching 50% of Amazon's rates, generating an additional $7 million in monthly revenue. The company also sells a portion of its unleased inventory, generating a one-time cash infusion. This strategy would likely preserve the dividend but potentially limit future IPv4 revenue growth.

Cautious Approach

Cogent raises prices modestly, focusing on organic lease revenue growth. This approach preserves the long-term potential of its IPv4 assets but may necessitate a dividend cut in the short term as the T-Mobile subsidy payments expire.

Hybrid Strategy

Cogent pursues a combination of price increases and asset sales, balancing short-term dividend needs with long-term growth potential.

Cogent's EBITDA Margin Over Time

The following chart shows the growth of Cogent's EBITDA margin since Q3 2022. It will be interesting to see if Cogent can maintain their stated goal of 100 basis point annual EBITDA margin growth. The expiration of T-Mobile subsidy payments will likely have a significant impact.

The ultimate decision will reveal Cogent's strategic priorities and its confidence in its ability to navigate the looming EBITDA cliff. The eyes of the market will be watching closely, eager to see if Cogent will slay the dividend dragon or be consumed by its fiery breath.

"Fun Fact: The IPv4 address space is so limited that there are actually more transistors in a single high-end computer chip than there are IPv4 addresses in existence. This mind-boggling disparity highlights the incredible value of Cogent's accidental hoard."