All right, I think we'll get started. Hello, everyone. My name is Chris Schoell . I'm on the Communications and Media Research team here at UBS. And today we're pleased to have Dave Schaeffer, Chief Executive Officer of Cogent Communications, here with us. So, Dave, thank you for joining us.
Hey, Chris, thanks for hosting me. I'd like to thank UBS for a great venue, and I'd like to thank all the investors in the audience for taking some time to hear what we're up to.
Just quickly, before we get started, I have to read a quick disclosure statement. So, as a research analyst, I'm required to provide certain disclosures relating to the nature of my own relationship and that of UBS with any company on which I express a view today. The disclosures are available at www.ubs.com/disclosures. Alternatively, please reach out to me, and I can provide them to you after the presentation. So, Dave, given the time of year, maybe you can start off by talking about what you saw as the key developments over the past year for Cogent and the priorities as you look out into 2026.
So, Cogent has definitely been a mixed past year. You know, I think we've made some tremendous strides in terms of expanding our wave network and converting the assets that we acquired from Sprint into assets that can now be monetized. We took the former Sprint long-distance voice network and converted it into a network to sell optical transport or waves. That network now serves over 1,000 data centers, and we can provision a wave from any data center to any data center in 30 days or less. We have converted 125 of the former switch sites into data centers. We have earmarked 24 of those facilities with 109 MW of inbound power for sale to divest of them and unlock value. Our core business has actually continued to improve and is probably growing slightly faster than it was prior to the acquisition.
Now, on the negative side, the business that we acquired from Sprint that is selling internet access and MPLS VPNs to corporate end users had been previously declining at 10.9% a year for the three years prior to the acquisition and post-acquisition in the nine quarters that we have reported. It has declined at 24.2% year- over- year. That accelerated rate of decline was intentional. We wanted to groom non-core products. We wanted to migrate off-net services to on-net. And for the remaining off-net services that we keep, we wanted to improve margins. During that period, we have grown our EBITDA, absent the subsidy payments from T-Mobile, from about 1% margins back up to 20%. So, prior to the acquisition, our margins were 40.5% in the quarter immediately preceding the transaction.
Our margins fell in the quarter immediately after the transaction to 1% and are now back at slightly above 20%. We have received over half of our $700 million subsidy payment from T-Mobile for taking over this money-losing and declining business. But due to the capital expenditures and the operating losses, our aggregate leverage has increased to 6.6 x. As a result of that increase in leverage, we have decided to reduce our dividend by 98%. We've taken a fair amount of pain for that. Now, we do expect our underlying EBITDA to continue to grow and our margins from this point forward to continue to expand at about 200 basis points a year.
That's a great overview. Maybe starting with the wave business, I think last earnings call you had talked about, you still believe by 2028 you can get to this $500 million revenue goal for the wave business, which would be roughly 25% of the market. It does imply that that business needs to scale faster than it is today. What gives you confidence that that can be done, and what still needs to be done to accelerate the core trends there?
So, just to reiterate, the total North American wave business is about $3.5 billion. The intercity portion of that is $2 billion, and our goal is to be at 25% market share run rate by mid-year 2028. That implies a $500 million revenue run rate, and our current revenue run rate is about $40 million after the reporting of third quarter. So, in the initial period from acquisition in May of 2023 through December of 2024, we were working on repositioning that network. We initially configured 65 data centers where we could provide wavelengths. We were successful in selling about 1,000 wavelengths in that limited footprint. That is less than we had originally anticipated. Since the beginning of the year, we've effectively grown that business in three quarters by 80% and are doing about $10 million a quarter, $10.1 million in Q3. That revenue number has to accelerate.
We have seen a building of our sales funnel, a faster rate of installs, and an improvement in the rate at which customers are accepting service. That needs to accelerate further. We will win market share based on three factors. One, we're lucky. The market is growing because we had originally anticipated a market of either regional networks, international carriers, or content delivery, and did not anticipate the incremental demand from AI, which has allowed the market to grow. Secondly, we have a superior value proposition. What does that exactly mean? Most consumers equate value with price, and that is an important component. But there are multiple dimensions in which we offer a better service than our competitors. We're in more data centers, 1,000, versus our competitors that are in 300 or less. Two, we can provision more quickly. Three, we have unique routes in 90% of the instances.
That's extremely important for a service that is unprotected, and therefore having diversity is critical to reliability. Fourth, because we acquired these assets for $1, they had a cost basis of $20 billion, $500 million, and T-Mobile sold the physical network to us for $1. We have the flexibility to price more aggressively. Today, we're pricing at about a 20% discount to market on a route-by-route basis. And then finally, we have greater reliability. We have greater reliability because of the physical installation of the fiber that we own. It's buried deep beneath railroad tracks and an armored cable, as opposed to plastic conduit near the surface, near public highway right-of-way. As a result, it's had less cuts per kilometer and will have less cuts going forward.
So, I think those five competitive advantages, coupled with the fact that the aggregate market is growing, should easily allow us to hit our goals.
We've seen some of your main competitors, like Lumen, AT&T, announce faster provisioning timelines. They're expanding their own wave networks. Do you worry that this takes away some of your competitive edge when you go to market?
One should always be worried about their competitors. You can never be complacent. In the case of those two companies, there were a number of asterisks in those announcements, limiting the number of sites, limiting the paths between those sites. The network that we have built is solely designed to carry wavelengths. It can support an any-to-any configuration, which represents over 10 to the 2,500th power number of permutations. It is impossible to pre-provision those many routes to be able to have capacity waiting for the customer. You do it in response to the customer. We took a very different approach to the market than our competitors. We are not selling remnant capacity off of a multipurpose network, but rather we built a network from the ground up solely to deliver wavelengths. We are the largest carrier of internet traffic in the world.
We have built a separate network in order to deliver IP transit in more data centers, nearly 1,900 data centers in 58 countries. We provision faster than anyone else, and we price at half of the competitive market price. That has allowed Cogent to dominate that market and become much larger than AT&T or Lumen in that space. I think those same lessons will be translated into our wavelength business. You win business one customer at a time, and for each of those customers, you just need to deliver a better value proposition than your competitors, and you'll win. We can't manufacture demand. What we can do is offer a better solution to those customers who are demanding the service.
One of the challenges you cited was it was taking time for customers to adapt to this faster provisioning. Have you seen much improvement on that front here in Q4?
Chris, we've seen a slight improvement. But we came to a market where the norm from legacy providers was three to four months to install with a 50% failure rate on installs, meaning they took an order and the order was never provisioned for the customer. We came to market saying, one, we'll do it in 30 days. Two, we'll do it across this footprint of 1,000 sites. The market, rightly so, did not believe the claims we made and were slow to accept the services that we are delivering. As we have now delivered services in 500 locations and we have delivered services to over 200 unique customers, we are beginning to build credibility. Cogent has a reputation of being an IP transit provider. We are now in the process of building that reputation as a wavelength provider.
I would suspect over the next several quarters, that time from install to customer acceptance is going to continue to shrink.
We've seen more headlines about these AI-related power investments in more remote locations. Can you just help frame for us, is that an opportunity for your wave business? I think in the past on some of these greenfield network builds, you've kind of downplayed the returns that maybe some of your peers were seeing on these. Has your calculus there changed at all?
So, we have made a conscious decision not to deploy capital into single-tenant locations because we would then be beholden to that single customer, whether it's a corporate endpoint or a purpose-built data center. However, we have three ways in which we can serve those locations. One, when companies are building proprietary data centers in a greenfield, they will typically secure dark fiber back to a carrier-neutral location. At that location, they will then interconnect to transcontinental networks such as our own, and we will be able to sell services using a combination of customer-supplied dark fiber and our own intercity network . The second case would be where we go out and buy dark fiber to go into one of these greenfield builds. We will only do that if we can buy the dark fiber under a contract term that's matched to the customer commitment.
What we don't want to do is find ourselves with a stranded asset. And then the third permutation would be to buy lit services, effectively selling a compounded wavelength that uses a combination of our own network and another network. Our competitors do that routinely. The margins degrade, and the fact that we're in over 1,000 data centers means that we will do it less. But it is likely that if there are single-tenant locations that require waves, we will end up using some off-net techniques to get to those locations.
Maybe pivoting over to your corporate business. The declines there have been elevated as you have gone through the grooming process on the Sprint assets, which I believe those revenues were either low or almost zero margin. How much of that is still left to work through, and when can we see that piece of the business return to sequential revenue growth?
In our acquisition of Sprint's business from T-Mobile, there were actually two separate transactions that just happened to occur at the same time. The first was we took over a declining business selling a combination of non-core products, MPLS services, and internet access services, of which 93% of those services never touched the Sprint network. They were off-net in their entirety. We have groomed the non-core products by 90%, taking the run rate from about $60 million a year down to below $6 million. Our ultimate goal is to get that to zero as quickly as possible as those are negative gross margin services. Secondly, we are selling access services, whether it be for MPLS or DIA, off-net. The enterprise base, which is entirely acquired from Sprint, is today 88% off-net, 12% on. That carries low margins, and we have identified a number of locations that were not viable.
We will only deliver off-net services using fiber. We don't want to use fixed wireless, coax, or twisted pair, as it is unreliable and does not have adequate throughput. We also identified locations and markets that we are not licensed. Cogent operates its physical network in 58 countries around the world, and every one of those countries, we have a license to sell internet and VPN services. We recently entered India as a new market. That was our 58th market with those types of licenses. We have been grooming away Sprint business in markets where we do not have a license. Some Sub-Saharan African countries, some Central Asian countries are good examples of this. As a result, our enterprise business and our corporate business has declined, and it's primarily been in off-net services. That off-net rate of decline was $7.1 million sequentially last quarter.
That was a peak as we jettisoned the majority of that remaining business. We would expect that our enterprise business will continue to decline at a couple percent a year. We would expect that the acquired Sprint corporate business will decline also at a couple percent a year, but the corporate business that is organic Cogent will probably grow at around 6%-8% a year, returning that total corporate business to growth. It's also important to remember the mix of on-net versus off-net. So, prior to the acquisition, in the last quarter we reported in Q1 of 2023, Cogent had 76% of its revenues on-net, 24% off-net, and our EBITDA margins were 40.5%. After we acquired Sprint, margins fell to 1%. The mix fell to 47% on-net and 53% off. In the nine quarters since the acquisition, we have returned to 61% on and 39% off.
It has been this rotation from off-net to on-net and the grooming of these unprofitable services that has allowed us to grow EBITDA for nine sequential quarters while top line has declined on average 2.4% a year.
You mentioned the legacy corporate business growing 6%-8%, driving total corporate back to growth. What's the timeline look like for that?
Total revenue growth at Cogent, which includes NetCentric and enterprise, will probably be this fourth quarter. In the corporate specifically, we may be a quarter or two behind as our NetCentric business is growing faster and our enterprise business is certain to decline at a couple percent. Enterprise today represents roughly 15% of total revenues.
And then maybe moving over to NetCentric, I think traffic growth is the main driver in that business. It's been around 8%-9% in recent quarters. It used to be at a double-digit clip. Is it fair to say that this level of traffic growth persists until you see AI be more of an uplift? How are you thinking about that trajectory?
Our revenue growth has actually been above historic averages, even though traffic growth has been below historic averages because of the internationalization of traffic. Today, roughly 55% of our traffic is ex-U.S., whereas 20 years ago, less than 15% of traffic was outside of the U.S. We typically get higher revenue per bit in international markets, which is helpful to us. We have seen aggregate internet traffic growth slow to about 7% from a historical average of about 22%. Cogent's traffic growth has slowed to about 9% against a historical average of about 25%. While we are still gaining share, we're doing so at a moderate rate. It is difficult because we are already the largest provider in the world with a quarter of global traffic. The drivers of growth have historically changed over time.
Initially, email, file transfers, casual video, professional video, and now we're at the cusp of AI driving another leg of global internet traffic growth. You know, AI exists because of the internet. The roughly 1,000 ZB of data that have been collected and stored is the raw material for building large language models and AI training. The inference that will come out of those models will be distributed around the world and accessed via the internet, not via closed networks, and as AI gets more integrated into applications, you will see aggregate usage per minute go up and number of minutes of usage go up, so just as streaming movies drove a decade of internet traffic growth, we're now at the cusp of AI driving that growth.
Have you seen any tailwinds yet, or it's still too early to say?
We have seen in some cases, we've seen three things. We've seen, one, data that is generated over the internet increasingly being stored so it becomes useful for AI training. Two, we're seeing AI inference locations be established in peripheral locations around the internet, closer to end users with lower latency. And third, we are at the very early stages of seeing end users being able to put information into those inference models. That data will actually be uploaded to those edge sites, processed against those large language models, and the results will be distributed back to those users. That process today is fairly early on, and we have just started to see in certain limited business models AI be integrated into their core offering. I think as general AI becomes more pervasive, it will become embedded in every application that we use.
And then putting it all together, you've talked about growing EBITDA sequentially each quarter, putting the T-Mobile payments aside. Can you just update us as to how you're thinking about 4Q and maybe an early look at 2026 as to what you see as the big drivers of EBITDA into next year?
We try to give multi-year guidance. Our guidance is that we will grow top line revenues 6%-8%, and we will expand EBITDA margins by about 200 basis points a year. We still have a net present value of payments due from T-Mobile to Cogent of about $224 million. We are receiving $25 million a quarter from them. With those supplemental payments, our EBITDA margins today are about 31%, still below the 40% that we had pre-acquisition, but growing faster than 200 basis points a quarter. We expect fourth quarter and then throughout next year to continue to show an improvement in top line growth, an expansion in margin, a growth in EBITDA that'll be mid-double digits, and the ability to reach our net leverage target of four times. At that point, we can resume the increase in our dividend.
We had 52 sequential quarters of growing our dividend and dividending it out more than 100% of cash flow by levering up incremental EBITDA. Cogent organically grew for 18 years as a public company with no M&A at 10.2%, with an average of 220 basis points a year of margin expansion. We took a one-time step back, which was not unexpected. We are now actually in a point where top line is growing, and we'll continue to see that 200 basis points of margin expansion.
Just on the dividend, can you just help frame for us what changed in the thought process relative to earlier this year?
I think there were two key drivers, Chris. One, prior to reporting Q3, it was clear that our dividend had become decoupled from our share price. Our dividend yield was nearly 11%, and therefore we felt that investors did not believe in the durability of the dividend. Two, our aggregate net leverage had increased to a peak of 6.6 times. We felt it was necessary to be able to demonstrate to debt holders that we were serious about returning to the net leverage that we had operated in for 13 years prior to Sprint. From 2010 through 2023, we were generally between three and a half and four times levered and growing our dividend. Now that our leverage is at 6.6, we need to demonstrate a commitment to delevering. We also preserved flexibility for buybacks. We made two carefully worded statements.
One, that we were going to reduce our dividend by 98% and keep it at that reduced level until we reach four times leverage, and then two, we would be willing to do buybacks on an opportunistic basis after a short pause or a temporary pause. We have lifted that pause, so we do have the ability to do buybacks opportunistically.
So, it's fair to think that you can be out there in the market ahead of the four times leverage target?
We could be doing buybacks subject to the limitation of a $105 million cap, which is all that is authorized by the board. We did not intend to increase that cap until we reach the four times leverage.
Got it. And then this past quarter, you disclosed you had the letter of intent on two of your large data center facilities. Just where does that process stand, and what does the timeline look like for monetizing those other data center assets that you've repurposed?
So, we have a non-binding LOI with a credible party for two of the 24 data centers that we have earmarked as surplus. Those surplus data centers represent 109 MW of power, 1 million sq ft of data center or raised floor space. We have four other letters of intent that we're negotiating with parties. I think we will be successful in selling many of these facilities. Again, to just remind investors, when we acquired Sprint as part of the acquisition, we got 482 fee simple-owned buildings that totaled 1.9 million sq ft and had 230 MW of inbound power. These were primarily long-distance switch sites. We had initially anticipated taking 45 of the larger facilities and putting a one megawatt, 10,000 sq ft retail colo in them and leaving the remainder of the power fallow.
We then pivoted as it became clear to us that power was in short supply. We decided to invest $100 million converting the negative 48 DC plants to AC and repurposing these facilities. And that work was completed in the end of June of 2025, and that has allowed us to get to the letters of intent that I spoke about. You know, the counterparty to that one that was announced indicated they want to close in Q1. It is a non-binding letter of intent. So, I want to be clear, you know, we don't have an absolute lever over them. While they have an earnest money deposit, it is refundable.
You also sit on a large portfolio of unused IPv4 addresses. Why not sell those to delever faster?
If we sell the addresses, we get dollar-for-dollar benefit. We have no basis in them, so we would have some tax friction in that. If we lease the addresses out, they carry virtually 100% incremental margin, and we get $4 of delevering if our goal is 4 - 1 for each dollar of recurring revenue. We have seen a meaningful acceleration in our IPv4 leasing business. That business in 2022 was about a $12 million annual run rate. As of last quarter, that business was about a $65 million run rate. In three and a half years, we've grown it from 12 million - 65 million. We expect that business to continue to grow. We do have a total inventory of 38 million addresses. Approximately 13 million of those are securitized today, and we've raised $380 million against them.
I think the ability to raise ABS is a better use of those addresses than selling in this market when the two largest buyers of address space have not been buying and are, in fact, competing with us in the leasing market at a price that is at a significant premium to the rate at which we're leasing.
And maybe just one last one. You're coming off a period where you had been investing in either repurposing the Sprint wireline assets for the wave business and then the data center facilities. You've talked about this $100 million of core CapEx being a good run rate. Is there anything else on the horizon that we should be mindful of that could cause CapEx to tick up relative to that $100 million?
The answer is no. Although I do want to remind investors, we do spend about $40 million in addition to that on principal payments on capital leases. The allocation of capital lease and straight CapEx is dependent on the nature of the asset. You should think about $140 million just appearing in two different line items on the cash flow statement: $100 million of straight CapEx, $40 million of principal payments on capital leases.
I think that's all we have time for. Thanks Dave for being with us today.
Thanks, Chris, for hosting me. Thanks. Like I said last year, I got the big room. I'm honored.