All right. Good afternoon. Thanks everybody for being here. My name's Frank Louthan. I'm the Senior Wireline Telecom Analyst here at Raymond James. I'm really pleased again to have Dave Schaeffer back another year at the conference down here. Dave, why don't you kind of start out and give a couple opening comments. Tell us a little bit about Cogent, how you fit into the sector, and anything else.
Sure. First of all, thanks for hosting me, Frank. Thanks Raymond James for a great venue, and maybe most importantly, thanks for investors taking time out of their day to hear a little bit about what we're up to. Cogent is a global provider of connectivity services. Globally, we offer Internet connectivity in 1,900 data centers, 57 countries around the world, carrying about 25% of the world's Internet traffic. In addition to that, in North America, we have two extra businesses. We deliver Internet connectivity in about 1.1 billion sq ft of multi-tenant office space, where we are the ISP selling directly to end users.
Most recently, we've added a wavelength service or optical transport service between 1,096 data centers across the U.S., Canada, and Mexico, where we offer connectivity at either 10 GB, 100 GB, or 400 GB speeds with 30 days or less provisioning time.
All right, great. You know, walk us through kind of what, you know, things have changed a little bit the last 12 months. Walk us through kind of where you are today, what's different from the last 12 months, and the near term outlook.
I think there are three important messages for investors to understand about Cogent. One, that we have returned to organic top line growth. We had grown organically for 18 years at over 10% a year with no M&A. We acquired the declining business of Sprint Global Markets Group from T-Mobile, and as a result, for the past nine quarters, we've averaged about 5.5% negative year-over-year revenue growth. That has inflected, and Cogent is now on a trajectory to continuously have organic growth in our business, even with the decline in the revenues from the acquired Sprint customer base. To remind investors, we were paid $700 million to acquire that business. Those payments are spread over 54 months, and we have approximately two years left in that payment stream. Secondly, we have been able to consistently expand our margins.
Last year, we expanded our EBITDA margins year-over-year 800 basis points. That margin expansion came predominantly through cost-cutting, but there was also a contribution of high margin on-net services. Cogent had historically been a predominantly on-net business, with 76% of its revenues being on-net, 24% off. Immediately after the closure of the Sprint transaction, which was predominantly an off-net business, we fell to 47% on, 48% off, and 5% non-core. We are back today to 61% on-net, 39% off-net, and less than 1% of non-core services. This has allowed us to grow our margins. Going forward, we anticipate top line growth of 6%-8%, with at least 200 basis points a year of margin expansion. The third topic I'd like to touch on is concerns around our balance sheet.
We had historically delivered growth and dividends for 52 consecutive quarters, returning just under $2 billion to shareholders through buybacks and dividends. We reduced that dividend policy dramatically by 98% in order to delever. Cogent had historically operated in a leverage band of between 3.5 and four times net leverage. Because of the capital we spent associated with the Sprint transaction and the asymmetry of the payment stream from T-Mobile, we have seen our leverage creep up to 6.6 times net leverage. We have two outstanding instruments. We have a $600 million secured debt instrument that matures in 2032, and we have $750 million of unsecured debt that matures in 2027.
I would like to take a moment and explain to investors what our plans are and the mechanism we're gonna use to be able to refinance that unsecured debt with secured debt. Cogent today operates in two silos. The public company is a holding company with no employees and no debt. Underneath of that company is Cogent Group. This is the operating company. Today in Cogent Group, there are three sleeves of debt. There is the $600 million of secured debt, there is $750 million of unsecured, and $623 million of capital lease obligations or IRUs. Sitting parallel to that entity is Cogent Infrastructure. Infrastructure is the entity that acquired the physical assets of Sprint, but had no employees and no revenue, but approximately a $140 million of carry cost associated with it.
To partially alleviate some of that carry cost, we have developed an IPv4 leasing business that sits under the infrastructure entity, but the value of that cash flow is fully securitized with $380 million of asset-backed securitization. What we intend to do is take inside of Cogent Group and create a subsidiary for our IRUs. That subsidiary will have the $623 million of IRUs and the associated assets with those. In that subsidiary, it will be divided between those IRUs associated with Western Europe and North America, and then the rest of the world. There is approximately $569 million of debt associated with those developed world IRUs. We will do a divisive merger, so we will effectively separate those IRUs and the associated most senior secured debt from the borrowing group, Cogent Group.
We intend to merge that entity into Cogent Infrastructure. In doing so, we take $569 million of the most secured debt off of the group's balance sheet and free up capacity to raise more than the $750 million of secured debt. We would also have capacity at the group level to raise at least another $750 million of unsecured debt as well, which we have no intention of doing. Our debt coverage ratio will be well above two. Our secured leverage, inclusive of the refinancing of the secured debt, will be approximately 3.9 times on a prospective forward basis. In order to effectuate the removal of the most senior secured debt from the borrower group, we will provide an operating lease from Infrastructure for all of those various IRU routes.
They will be 10 years in duration, and under U.S. GAAP, they will be counted as operating leases. As a result of that, the prospective EBITDA of group goes down, but the debt goes down by even more. We have been rapidly replacing that EBITDA with the margin expansion that I addressed a few moments ago, and we expect that to continue. As a result of these steps and realigning our corporate structure, we free up the capacity to raise $750 million of secured debt at the group level. We will effectively fund the use of the IRUs through an operating lease, approximately $69 million a year, reducing EBITDA prospectively, but also growing that EBITDA rapidly and probably within one to two years have completely replaced that.
This gives us substantial incremental financing flexibility coupled with taking the most secured debt that stood even senior to the other classes of secured debt off of the group balance sheet, helping the quality of the credit of the secured debt. The new debt that we will place will have a longer duration than the current secured debt that has a remaining term of approximately six years. We expect that new debt to have a seven-year tenor. Then to finally enhance the credit quality at group. All of the assets that sit in infrastructure came from the Sprint acquisition. We had previously announced a potential sale of two of those data centers for $144 million.
When we did our earnings call about a week ago, we announced that we canceled that transaction, not over a dispute on price, but over the fact that the potential acquirer had changed the terms of the letter of intent and intended for us to provide them owner financing, which was not what we intended when we entered that agreement. We pivoted to some of the groups that were in a backup position. We have entered a new non-binding letter of intent, but we do believe it will close. That new letter of intent is for the sale of 10 data centers at substantially more proceeds than the initial sale of the first two. The reason we could not enter that deal until the first deal was canceled is that at least one of these facilities was critical to the use for the new purchaser.
The purchaser is a global infrastructure fund with an excess of $35 billion under management. We feel confident that they have completed a substantial amount of diligence and should be able to close. We are further enhancing the credit quality at Cogent Group by pledging to contribute 100% of the proceeds of this transaction to the borrower group. It was not a requirement. It sat outside of the borrower group. We have ample restricted payments capacity in the borrowing group and felt that this additional contribution would further enhance the value of the assets that our lenders are going to lend against, lowering our cost of capital.
A lot to absorb, a lot of moving pieces, a fairly complicated realignment of corporate assets, allowing us to have all of the network infrastructure in the infrastructure entity, all of the operations in the operating group, converting most senior secured capital or finance leases into operating leases at the group level and providing a substantial increase in financial flexibility. With that, Frank, maybe you have a question or two.
Maybe. Dave, as always, for the benefit of those on the webcast, Dave just did all of that with no notes, all off the top of his head, and I'm sure if anyone wants to quiz him down about four decimal places, he can probably tell you the answer. I got two questions. Where does that leave you on with the data centers? Maybe start on the kind of in reverse order. You know, what does that give you there and what's left? Maybe a broader picture. Give us. How does this, the changes in the capital structure and so forth, how is that helping? What does that do for you going forward as far as your ability to operate the business?
Let's take the data centers first, Frank. We initially acquired Sprint and did not plan to spend any significant capital or do any major repositioning of the former switch sites and the data centers. We had said at the initial acquisition announcement, that was September of 2022, we had initially planned to take 45 of the 482 facilities and put in those facilities a 1 MW, 10,000 sq ft retail colo. When it became clear to Cogent in early 2024 that there was an acute shortage of existing power in data centers, we realized the 230 MW that we had acquired of existing power was a scarce resource. We went out to the market and tried to assess what we would have to do in order to make that power marketable to data center operators.
From that, we made the decision in June of 2024 to embark on a one-year program to convert 125 of the 482 facilities in the data centers and to invest $100 million, most of that going into the 24 largest facilities. That project was complete at the end of June of 2025. When it was complete, we had 109 MW of power and began in earnest talking to counterparties about either buying or entering into long-term triple net leases. Within a couple of months, we quickly signed our first LOI for two of the facilities, and that represented $144 million in proceeds. That LOI had timed out.
It was time to convert that into a binding agreement, that's when the counterparty came to us and said, "We'll stick with the price, but we want you to provide financing." Because we had acquired a number of backup offers, we said, "Thanks, but no thanks," then immediately began negotiating with those counterparties and entered into this agreement, 10 facilities and a substantial uptick from the 144. The counterparty did not wish to have the exact amount announced, what I can say is it's substantially more. While those proceeds could remain outside of the borrower group, because of the concerns we had heard from lenders, we thought it made absolute sense for us to pledge that those proceeds would go into the borrowing group. Now, in terms of financing, we have seen our secured debt trade at a discount.
I think there was concerns with the 17-month maturity window that our incremental cost of capital would substantially go up. I think with these three enhancements that we've made, one, the removal of $569 million of senior secured debt from the borrower group that is actually standing above the current secured lenders. Two, the guarantee that any new debt would be both secured and longer duration. Then most importantly, these pledge of proceeds being injected, that should substantially lower our cost of capital and give us the flexibility that we need. While we have commitments from several banks to backstop or buy this deal, we really are gonna measure how the market reacts to this incremental news to determine what is the optimal path forward and the lowest cost of capital.
All right. Great. Usually I wait till more towards the end, given we've got some real-time news here, if there's someone in the audience has a question, like, go ahead. Yeah, go ahead.
Hey, Ed.
Hey, how's it going?
Speak up so everybody can hear you.
To help me understand, it sounds like EBITDA is gonna be... Like, from a headline numbers perspective, is EBITDA being removed from the group and the debt also removed from the group? Like, when you report, will effectively $69 million be taken out of EBITDA? Yeah.
Let me walk closer so I can hear all of your questions.
Oh. Here, take. Go ahead. Take it away, Dave.
What is the effect of this, the debt movements to the headline reported numbers when they come out? For example, next time you report, for the annuals, will $69 million be removed from reported EBITDA? Will $500 million, $750 million, $500 million be removed from the financial balance sheet?
The answer is no.
Yeah
at the public company level, because all that is happening is an intercompany payment between the borrower group, Cogent Group, and Cogent Infrastructure as an operating lease. At the public company, the holding company level, which is the public reporting entity, nothing would have changed. This is very important to the lenders to the group level, because what they see is a reduction of $569 million of the most senior secured debt in the capital structure and the replacement of that with a operating lease. To the public equity holder, there should be no visible change.
All right. Any other questions? By hands? No? Okay.
Want to make sure people on the webcast hear.
Oh, here we go. Yes, here we go.
Can you share the square footage of the 10 data centers compared to the two that were under the original letter of intent?
It is larger, but we are not disclosing either the exact power or square footage at this time. What I can say is at an aggregate, it represents less than half of the total of the portfolio, which is the full 24 facilities.
All right. Anybody else?
Well-
Yeah, Eric.
Yeah. I can say What is the timing, Dave, when you'll be able to layer all that in and then maybe be able to announce more details? In terms of market, as you were speaking, when we walked in, you were trading up around 9% or 10%, and now your stock is up maybe 15%.
I can't comment on.
They appear to like it. I'm merely making a statement. The question is timing of everything, you know, when it layers in and when you can give more details.
Two very different answers to your question. I'll start with the data centers. It will be probably several quarters until that transaction hopefully closes. I do wanna temper the disclosure by, again, emphasizing it is a credible counterparty, it is for 10 facilities, it's substantially more than the previous offer, but it is still in the form of a non-binding letter of intent subject to confirmatory due diligence. While we have every expectation that we will get to closure, it's not a done deal till the check's in the bank, and that's probably a couple of quarters away at least.
In terms of the refinancing, which is more immediate, while we have 17 months to go before we have to do a refinancing, we are concerned that if we do not refinance by June, the current $750 million of debt shows up on our balance sheet as a current liability and not a future liability, which I think would have a negative perception among equity holders. For that reason, we are very focused on probably trying to get this done over the next several months. We do have a wider window than that. We're going to measure how the debt markets react to this incremental enhancement of their credit. The other point that we made is that our current $750 million unsecured debt has a make-whole provision.
If we pay that debt off before mid-June, it costs us an incremental $13 million. This is embedded in the structure of the note. We would most likely start a transaction before then, close into an escrow account, and then break that escrow account at the time at which the make-whole goes to zero. It does not make sense to pay $13 million for two months of incremental flexibility. I believe that structure is fairly common among high-yield issuances that have a similar make-whole provision in them.
Any other questions? All right.
I'm gonna quiz everybody on all the steps. There will be a slide posted to our website, or actually a couple of slides, that will give all the arrows, and it will be an eye chart when you see everything moving to each of the different boxes. The idea here was to come up with a structure that would enhance the credit quality of the current bondholders, give the company the flexibility that it would have both more unsecured and secured capacity available than it intends to use, and ultimately extend the maturity and lower our cost of capital. The proceeds that we would receive from this data center sale or other data center sales are technically in the infrastructure entity, which has no debt. We have been funding the burn at that entity level with the restrictive payments capacity that we have in the borrower group.
We still have that capability, the idea is by putting it into the borrower group for this transaction, we are sending two messages. One, we want to enhance the collateral pool. Two, it is our intention to continue to de-lever till we get to four times net leverage. Cogent operated for roughly 13 and a half years in a band between three and a half and four times net leverage. When we acquired the T-Mobile Sprint assets, our leverage actually fell to under three times because of the front-end loading of the payments that we received from T-Mobile. That was by negotiated contract. After 12 months, those payments then stepped down and as a result, our leverage ticked up because while we were taking costs out, we did not take them out fast enough to offset the decline in the subsidy payments.
Last year, we suffered a EBITDA headwind of $104 million in direct payments and an additional $23 million in payments for other payments that T-Mobile made to us, primarily severance payments. As a result, even though we grew underlying EBITDA by $70 million year-over-year, 800 basis points of margin expansion, our headline EBITDA number went down from $348 to $292. Now, we have two more years of stable payments and we wanna make sure that we can hit that four times net leverage goal as quickly as possible, so we can then resume a return of capital program such as the one that we operated for 15 years.
Great. One last quick question. IPv4 assets, will those go into the infrastructure group? Will they stay where they are? How, or are those doing anything?
The answer is, the ones that currently have ABS securitization sit under infrastructure and are fully borrowed against. The other addresses actually sit within group today and will remain there and not in infrastructure.
Great. All right, folks. Well, thank you very much, Dave. Really appreciate it. Thanks for the news. We got a breakout session after this if you wanna go through this any more. Thank you very much.
Thank you all very much.