Okay, thank you everyone. We'll get started. I'm Jason Kim. I'm pleased to welcome Dave Schaeffer from Cogent Communications to our conference. Dave is the founder and CEO of Cogent. Dave, thank you so much for being here today.
Thank you for hosting me, Jason. I'd like to thank the investors for taking time out of their day to hear a little bit about us, and Goldman for a great venue again.
Let's start with the broad business trends you're seeing in the two business segments, corporate and NetCentric. Now, Cogent has had a long track record of consistent growth for a long time. During the pandemic, the two business segments did see some diversions in performance. To set the stage, talk about some of the recent trends you've seen in your two business segments, and we'll get the other journey as well.
Yes. Cogent is a bit unique as a service provider in that we've had organic growth averaging approximately 10% per year for the past 17 years, compounded since going public with no M&A. 58% of our revenues are derived from selling to corporate end users in the central business districts of major U.S. and Canadian markets. We are selling Internet access into skyscrapers and then selling the tenants within that footprint. That business has performed poorly during the pandemic. It traditionally grows at about 2.5% sequentially or nearly 11% year-over-year. Since going public, 63 quarters ago, we had two negative quarters of corporate growth in late 2008 and early 2009, and we've now had eight consecutive quarters of negative growth in our corporate segment due to the pandemic. Many companies have closed offices.
They have slowed down their network reconfigurations and have been reluctant to replace legacy networks with IP networks during the pandemic due to a lack of clarity around what their final network architectures would look like. We can report, however, that that slowdown has moderated. Last quarter, we were effectively flat on a sequential basis in our corporate segment. We have seen our sales force productivity increase. We have seen customers increasingly architect their new networks and ready to make buy decisions. I think we're still a couple of quarters away from getting back to that historical 2.5% sequential growth rate, but I do think we will see continued improvement in our corporate segment. Now for the second segment of our business, which is a global business that accounts for 95% of the traffic on the Cogent network and 42% of our revenues.
We connect to 1,450 data centers in 50 countries around the world. We are selling bulk Internet connectivity to two major customer bases. We have approximately 7,600 regional access networks that buy their upstream Internet connectivity from Cogent. We're the second-largest carrier of Internet traffic globally, carrying about a quarter of the world's traffic on our backbone. We also sell to about 5,000 content-generating companies. These are household names like Google, Facebook, Netflix, Microsoft, that are pushing applications out onto the Internet. That business actually accelerated throughout the pandemic. Historically, our NetCentric or wholesale business has been a bit volatile and has only averaged about 9% top line growth. Last quarter, we grew nearly 18% year over year, and throughout the pandemic we were growing above trend line. This is driven by three major factors.
One, the fact that we are carrying mostly streaming video content, and while there has been some underperformance of certain streaming operators, the general migration of video from linear to over-the-top streaming continues. Going into the pandemic, about 18% of all video globally was streamed. Today, that's about 44% of all video consumption is streamed. We're gonna continue to see that growth in that application. Secondly, we have benefited from the fact that we are very international. Our footprint covers over 220 markets in 50 countries. We actually serve access networks in over 170 countries that then meet us in the 50 that we are operational in. Because the internet is becoming increasingly internationalized, we have been a disproportionate beneficiary of that internationalization.
We benefit because we connect both content with access networks, and we have seen the percentage of traffic that we get paid by both sender and receiver increase from about 50% of traffic to 73% in the last quarter. Even though the average price per megabit continues to decline at about 22% per year, we've seen outscale performance in our wholesale business. Putting these two segments together, our total growth rate has decelerated. It was 3.5% last quarter, and while we traditionally deliver about 200 basis points a year of EBITDA margin expansion, in this most recent quarter, it was only about 80 basis points, driven by that lower growth rate.
That's the great intro to not only the business but also the recent trends. Maybe we can hone in on the corporate segment to start. What are some of the forward-looking indicators that you pay close attention to, and what are they telling you in terms of demand stabilization? Maybe on the back of that, as we come back to more normal working environment, but we're also adapting to a more hybrid working environment. How does the future of work connectivity look to you, and what do your customers tell you, and how does it all impact Cogent?
Yeah. I think early in the pandemic, companies sent employees home and were anticipating this was a very temporary transition, and they would return to work as it existed pre-pandemic. After two years, I think most companies realized that a portion of their workforce is going to be remote, almost on a permanent basis. Second, I think employees have used increased bargaining power and have conflated three different concerns. The first is true public health safety with the pandemic, the second being a desire for work flexibility, and the third, an ultimate desire to have a shorter work week. You know, my personal opinion is that over the next couple of years, we will continue to see companies transition in white-collar environments to something resembling a four-day work week.
Now, with that all said, what we have seen from customers is an acceptance of this reality and a decision to rearchitect their network. Cogent has approximately 1 billion sq ft of multi-tenant office space connected to our network and fiber all the way up the riser in those buildings to serve the individual businesses within that footprint. Prior to the pandemic, that footprint had been running at about 96% occupancy. Today, that occupancy rate has fallen to about 86%, so a significant uptick in vacancy. Companies are grooming office locations. Typically, if they have multiple locations within the same MSA, they are consolidating them. However, they are continuing to support locations across multiple MSAs. The average tenant is shrinking its lease space by approximately 20%.
Pre-pandemic, the average building that Cogent connected to had 41 discrete, 41 stories tall, 51 discrete businesses, was about 550,000 sq ft, with the average tenant taking about 11,000 sq ft. We've seen that average tenant size decline. I think with that, our total addressable market will actually increase. What we are seeing from customers beginning last summer was a increase in their desire to rearchitect their networks. More proposals being written, more salespeople engaged with customers. With the combination of the Delta variant and the Omicron variant, there was a delay. Starting this spring, we've seen customers kind of just say, "We're done with COVID," and we've seen many of those proposals begin to turn into actual orders and be installed.
We've also seen an increase in companies deciding to have a second point of VPN concentration for their work from home employees. Previously, a work from home architecture would support a couple% of the workforce on an ad hoc basis. Now it's being architected to support 30% or 40% of the workforce permanently. Because that single point of failure, that VPN concentration point is so critical, we're seeing many customers add a second location. With these changes in the marketplace, we believe our corporate business is gonna continue the momentum it delivered in the first quarter and then return to more traditional growth.
As you think about your competition, obviously, when you go head-to-head, you guys have always done well against competition. Does that win rate change over time? Also, as we think about this new environment, you talked about the delays in decision-making on the part of the customers while they thought about what their future looked like from a connectivity standpoint. As those decisions begin to get made, how do you think about the competitive environment changing? Does it change how your competitors may behave against Cogent? Like, how do you think about that?
Enterprise and SMB telecom spend peaked at about $80 billion a year. Today, it's about half of that. What we are seeing is three different trends. One, the virtual disappearance of all competitive providers. Most of enterprise spend is concentrated today in three companies: AT&T, Verizon, and Lumen. Very few small competitors. The second trend we're seeing is product substitution. For the first decade after the telecom meltdown, we saw voice revenues disappear. Voice revenues were about $40 billion a year at peak. Today, traditional POTS voice to enterprise is a sub-$5 billion-dollar addressable market. The second product that had driven most of the revenue from legacy carriers were office-to-office private networks constructed on MPLS. That technology is very expensive, very rigid, and very difficult to manage. The MPLS market was in decline pre-pandemic.
It had shrunk from about $45 billion to today about $30 billion in revenue. Customers are doing one of three things. They're either migrating to an over-the-top solution, and there are two of those, SD-WAN and Virtual Private LAN Service. Second, they may just eliminate the need for that network in its entirety. Third, they will move to a pure internet model. For the legacy providers, which had been experiencing kind of a 3% per year revenue decline, during the pandemic, that accelerated to about 7% year-over-year. This is not vendor or competitor specific, but across all of the competitors, and probably will accelerate further coming out of the pandemic as these re-architectural trends end up becoming the new norm. When traffic moves to the internet, the price per bit generally declines by about 15x.
Cogent is a net beneficiary of these trends because we've never sold those legacy services. I think many of our competitors have given up. They've gone and done something else. AT&T and Verizon really have two businesses at this point. They have a nationwide wireless business, and they have an end footprint consumer broadband business that they're investing in. The two companies have different strategies and timelines. In Lumen's case, they are still a significant player in enterprise, as well as now attempting to overbuild a subset of their rural footprint with fiber. For the traditional enterprise market, the customers are expecting more efficiency and the migration to the internet, and the legacy networks are not well-equipped to handle that. We've seen cable emerge as a viable competitor in suburban small business segment.
They have not been able to really gain market share in larger companies or more urban footprints based on their plan and their business models. The competitive market for Cogent, I think, is actually better today than it has been.
Interesting. Switching gears to the NetCentric segment, which has seen tremendous growth during the pandemic. Clearly, the proliferation of new streaming services has helped the business. Obviously, streaming is here to stay and grow even more. More recently, we have heard from some of the bigger streaming platform providers of perhaps moderating subscriber growth, and that could in turn lead to some tightening of how they manage costs. From your perspective, how do you see the demand sustainability of a NetCentric business that has, you know, stayed so strong over the past couple of years?
Streaming has changed. It's gone from basically a single player market to now having multiple streaming platforms. Second, the majority of streaming growth has been outside of the U.S. The U.S. has become a somewhat saturated market. Third, to the point of cost, a streaming operator looks at really two dimensions in their network design. One, they wanna be certain of quality and control. Second, they want the lowest cost. To refresh investors' mind, we were the primary provider for Netflix beginning in 2013, and by 2015, we were caught in the middle of what became known as a fight around net neutrality. It was access networks blocking content.
For that reason, some of the streamers have gone and entered into direct access agreements with the access networks, but pay a higher price than they would for transit, the product that we sell, which is more ubiquitous, easier to use, and lower cost. As companies begin to look at their aggregate network cost structure, I think the percentage of traffic that will be on a transit provider will actually increase. The final point to make is that the net neutrality issues have pretty much gone away. They, we saw a regulatory backlash. The regulatory landscape is still uncertain. With federal position stuck in limbo, we first had under the Obama administration Title II classification under the Wheeler FCC to then be reversed by the Pai FCC with complete deregulation.
Replacing that has been 33 states led by California implementing their own net neutrality and then five years of litigation around that. Only in the past month have we seen, you know, the legacy access networks give up on that litigation, having lost in the appeals court 15-0 in an en banc ruling from the appeals court and decided not to pursue a Supreme Court appeal. In addition, you know, the Biden administration has stated they wanna codify through legislation and regulation the Open Internet Order and net neutrality. That's been challenging because we're stuck with a 2-2 FCC, and unless Commissioner Sohn is ultimately confirmed or a replacement is put up, you know, we're still in this limbo of a deadlock.
You know, the state regulations have been sufficient that none of the providers are blocking, and that should help streaming lower their costs and continue to accelerate market share gains against linear.
Inflation and supply chain disruptions are very much areas of focus right now for the market. As far as inflation is concerned, can you touch on how you have been managing costs at Cogent in this environment and, you know, where we are seeing a lot of wage pressures? On the supply chain side, what's gonna impact to Cogent? What are your vendors telling you in terms of their ability to deliver products on time?
You know, I hope someday I'll be able to come to a conference like this and say internet prices have stabilized or are going up, but that would be misleading. The internet has experienced 23% per year compounded deflation in the price per bit for the past 30 years. That trend is probably going to continue because the underlying technologies of wavelength division multiplexing and optically interfaced routing continue to improve. So the underlying product that we sell is going to go down in price. Now, some of the other inputs that go into our production are not declining, such as labor cost.
Mm-hmm.
We are highly efficient. Today, Cogent's just under 1,100 employees, and 750 of them are in revenue acquisition and sales. The operation of the network is highly automated, highly efficient, and does not require the huge amount of human capital. I think for the foreseeable future, internet prices will decline, volumes will increase, and the total addressable market will remain effectively flat. We will grow by gaining market share due to our focus, strategy, and the way we win customers. Now on the corporate side, we're delivering a product nine times faster than our competitors because we pre-wired the building. Because it's on a ring, it tends to be three times more reliable, and then maybe most importantly, it delivers 30-60 times the throughput.
On the wholesale side, our advantage is we go to a facility that is a supermarket for bandwidth and undercut our competitors by 50%. It is these strategic advantages in our two segments that have allowed us to gain market share. Now to your equipment question. We are running a network that at peak utilization in the most congested part of the network averages about 28% utilization. We were lucky in that we architected a network from the ground up that could capture the advances in technology more effectively than our competitors, and that has allowed us to continue to scale. We constantly relocate equipment from the densest portions of the network to the more peripheral locations, and then deploy the newest generation equipment at the core. We have four basic technologies. Edge routing, core routing, metropolitan wavelength division multiplexing, and long-haul wavelength division multiplexing.
In each of those four areas, we're actually on our fourth generation of equipment in 22 years. We made a decision to be sole sourced to a single vendor, Cisco. We continue that strategy. I will say that there have been significant supply chain and equipment availability issues that has actually forced our CapEx to go up, not because the price of equipment has gone up, but because we have to order equipment with an indeterminate delivery date. We have to warehouse excess equipment because the equipment we deploy is modular. You order a complete kit, but you end up getting 80% of it immediately, and 20% of the components are on delayed delivery. As a result, you've got 80% of your capital sitting on the shelf unusable.
It does not appear that the supply chain issues are ending anytime soon, and it appears this level of capital disruption and equipment, you know, kind of uncertainty is probably gonna continue at least for another 12 months.
We're about out of time, but I did want to ask a question about the balance sheet. You have a 2.5x-3.5x net leverage target, and you finished first quarter just above the high end of the range. As we sit here today, the capital market conditions have become more volatile and rates are rising. At the same time, you have a very defensive business model generating healthy and growing amounts of free cash flow. As a last question, talk about your approach to balance sheet management at this point in the cycle and how that fits into your capital allocation strategy.
First of all, I know I'm at a debt conference, and I'm sure investors don't want to hear the fact that we've increased our dividend to our equity holders 39 consecutive sequential quarters. You know, we built our company debt-free. The debt that we took on was designed to help us accelerate return of capital. We've bought back 22% of our float, and we've now had this nearly 10-year period of sequential growing dividends. We still have a modest level of debt. We will most likely refinance our euro-denominated debt. It'll help us crystallize the gain we made in those euros. While we will pay a higher interest rate, we can lock in some additional term, and we can bring our covenant package in conformity with our senior secured covenant package. Today, there's really two separate covenant packages.
In terms of leverage, you know, we're pretty comfortable about the growth in the market, our ability to gain market share, and our ability to grow free cash flow. You know, we've averaged about 13% free cash flow growth over the past decade, and that almost exactly mirrors our dividend growth rate. We also have some natural de-levering that occurs just because of the multiplier effect in the arithmetic. As a result, we're pretty comfortable with where we're at on leverage. We continue to monitor it, and we look at opportunistically being able to use the market volatility to maybe accelerate our equity buybacks when it makes sense.
That's great. We're about out of time. Good talk. Good place to land, Dave. Thank you so much for joining us today.
Jason, thank you for hosting me, and thank you all for your time.