For those of you I haven't met, I'm Mike Rollins, and I cover communication services and infrastructure for Citi. Just before we begin, disclosures are available at the registration desk. It's a real pleasure to welcome back to the conference Dave Schaeffer, CEO of Cogent. Dave, thank you so much for being with us. It's great to see you.
Hey, Mike. Thanks for hosting me. Thank you, Roberta. Thanks, Citi, for a great venue. Thank investors for hanging around late in the day. I'm here to try to answer some questions for you.
Great. I also want to introduce my colleague, Roberta Versiani, and we're going to co-host today's session. Maybe to kick us off, Dave, when you look at the outlook over time, you look at the growth trajectory, how much comes from the more recent product expansions? Wavelengths, I put IPv4 into that bucket versus your traditional transit and-
VPN
VPN businesses, whether it's net-centric or corporate.
Yeah. 84% of Cogent's revenues come from our legacy product set. That group of products is continuing to grow and has grown organically since the company began selling services in 2002. For 24 years, we've experienced organic growth. Our DIA business is focused on large multi-tenant office buildings. That business had grown historically for an 18-year period at about 11.2% per year. When the pandemic hit, the growth rate in that corporate segment decelerated to a negative growth rate of 9%. It has subsequently rebounded to about a 3% growth rate. We today have about 35% market share in the 1.1 billion square feet that we have directly on net where we are an ISP. The two primary products we sell are internet access and VPN services, mostly based on a VPLS platform, some based on legacy MPLS platforms. We also have a transit business.
We operate in 310 markets around the world, 58 countries, and 1,950 data centers. I was actually asked a question earlier today, what is the power footprint of that universe of data centers? It's about 17.5 gigawatts of power in that footprint. Our primary product in that market is selling metered internet access. It accounts for 98% of the traffic on Cogent's IP network. It is a business that today in revenue is growing about 8%. It is a business that traditionally is driven by a specific application at a point in time. Even though internet traffic has grown at a compounded rate of 23% per year over the internet's 30-year history, it's been very lumpy, and you can look at six discrete waves of growth. We're actually experiencing acceleration in that traffic growth now coming from agentic AI.
In the past two quarters, we have seen traffic growth accelerate from 8% year-over-year to 15% year-over-year, allowing us to drive that high single-digit revenue growth. Now for the newer parts of Cogent's business. We've leased out IP address space since 2015. Between 2015 and 2022, we only leased addresses to companies that bought bandwidth from us, and it was a relatively small business. In 2022, that business did about $20 million in revenue. Because of the headwinds we were facing from the pandemic, we lifted the restriction on selling addresses only to customers that bought bandwidth from us, and we saw a rapid acceleration in that business. Our IPv4 leasing business today is about 7% of total revenues. It is roughly a $70 million business.
We have leased out about 40% of the inventory of addresses that we have, and it's a business that last year, on a year-over-year basis, grew 18%. We recently entered the wavelength business. Prior to acquiring Sprint was not in the wavelength business, Cogent was not in the wavelength business. We saw this as an adjacent market where our technical acumen, coupled with our sales and customer relationships, would allow us to address a new $2 billion total addressable market for North America. We spent nearly two years reconfiguring the legacy Sprint Global Markets Group network that was built to carry TDM voice into a wavelength network. In earnest, we began selling those services in January of 2025. With that sale, we have seen our wavelength business grow, and today it is about a $65 million run rate business, about 6.5% of Cogent's total revenues.
It grew on a year-over-year basis 62%, and in the last quarter it grew 9.2% sequentially. To round out our product portfolio, we have a co-location business. It has always been a small part of Cogent's revenues. It represents about 2% of our revenue base. We today have 170 data centers representing 1.3 million square feet and roughly 150 megawatts of power. We have 14 of those data centers up for sale. Last quarter, we completed the sale of 10 of these surplus data centers. That sale resulted in $225 million of cash proceeds. The actual transaction costs were less than $1 million. We were able to effectively shelter that gain from taxes and used $175 million of those proceeds to reduce our leverage.
Great. One more on just the top line trends, before we get more into the products and details. What's your latest thoughts on when Cogent can return to sequential revenue growth and then year-over-year revenue growth?
For 18 years prior to acquiring Sprint, but after going public in June of 2005, Cogent's total business grew at a compounded average rate of 10.2% a year with no acquisitions. We acquired the Sprint business, which represented 42% of the revenues of the combined company. Cogent represented 58%. Sprint's rate of revenue decline was 10.9% a year for the three previous years prior to deal closing. We actually took that 10.9% rate of decline and accelerated it to over 20%. In the 12 quarters post-transaction, the combined company has had an average growth rate of a negative 5% top line growth. The Sprint revenues have declined from 42% of combined company's revenues to 15% of revenues, and the aggregate rate of revenue decline in that acquired base in three years has been 69%.
During the same period, the organic Cogent business has grown from 58% of revenues to 85% of revenues and had a compounded growth rate over that three-year period of 29%. We were encouraged last fall when we actually had two out of three months and a quarter of positive growth. But we then had some more churn coming from the acquired Sprint customer base. We have been able to inflect the margin on that acquired base from a negative 60% EBITDA margin to zero. When we lose a dollar of that acquired revenue, it no longer has any impact on our margin. But as we sell organic Cogent services, they carry much higher contribution margins. In the most recent quarter, 82% of our sales were on net, 18% of sales were off net.
For the blended base, which still does include that acquired Sprint off-net base, we were 62% of on-net revenue, 38% off. As a result of this, the rate of revenue decline of the entire company is declining. It is difficult for me, Mike, to be able to give you a specific target date, but it does feel like that within the next year or two, for sure, the Sprint business will be so de minimis and the organic Cogent businesses will be large enough that we will be able to return to total top line growth. Even with that 5% negative top line growth, we have been able to grow EBITDA, not just in margin, but in absolute terms in 11 of the past 12 quarters.
The rate of margin expansion over the past three years has averaged almost 800 basis points a year, far better than Cogent's historical average. We expect that rate of margin expansion to begin to moderate and revert back to the roughly 200 basis points a year that Cogent has historically delivered.
Great. On asset monetization, what is the status of your process to monetize your remaining data center assets? Are there any other assets that you might be looking to monetize in the future?
Roberta, first of all, we inherited 482 buildings that comprise 1.9 million square feet and 230 megawatts of inbound power. None of these were data centers. Cogent had 54 data centers, 52 of those 54 were in leaseholds, and they had a total of 634,000 feet of raised floor and 69 megawatts of power. We initially did not plan to convert the Sprint switch sites to data centers, but by January of 2024, it became obvious to us that the asset power that we had in place had value to the market. We then initiated a program in June of 2024 that ran one year, spent $100 million, and converted 125 of those facilities into data centers. We identified 24 of the 125 as being large enough and geographically located in desirable locations, we should sell them.
We placed those assets in the market, and on June 29th of this year, we closed the sale for the first 10 at $4.3 million a megawatt, resulting in the $225 million in proceeds, $125 million was a direct gain. The remaining 14 are still in the market for sale. We have two LOIs that we have received from credible counterparties. We have not yet chosen to move forward. Thank you, Roberta. I do think we will be selling most, if not all, of those 14. Above and beyond that, we have other data centers that may be for sale. Many of them smaller and more geographically dispersed, but could be interesting for edge applications. A second asset that we could elect to monetize is our excess IPv4 address space. As I mentioned, we have leased out 40% of our inventory. We have 38 million addresses.
We have approximately 15 million of them under lease. We took that leased revenue and securitized it with two asset-backed securitizations at a cost of capital of about 6.8%. We may elect to either sell or securitize revenues from the remaining 23 million addresses. Finally, we have an inner city and metro dark fiber network. We are typically using three pairs or six fibers on those networks. We have strand counts from 24 to 144 fibers, and we may elect to sell some dark fiber. We have already done a handful of dark fiber sales, but to date, our primary focus has been on the data center monetization.
Dave, maybe just focusing on corporate for a moment. Historically, you and I have had a conversation about the marketing strategy, and you've outlined the importance of keeping it simple, keeping it low cost of acquisition, and just driving penetration in your buildings with your internet product and your VPNs. As that business sounds like that from our conversations, the penetration is maturing. Do you go to this next phase of trying to then sell more services into these customers. Are there services that you could sell to try to expand the TAM for the customers that you have versus the motion of just trying to deepen share in these corporate buildings?
The answer is no, and I know that is against conventional wisdom. Part of what got Sprint into trouble was as its corporate and enterprise business declined, their solution was to sell more and more products to those customers further and further away from their core competency and eroding margins. T-Mobile realized that that was a losing strategy and evaluated either shutting down the business or selling it. While they paid Cogent $700 million, their all-in cost to divest of that asset was about $1.3 billion. I would attribute most if not all of that as a result of product diversification. Now, we do have the opportunity to upsell customers to larger connections.
When you started covering Cogent, I guess Roberta was in elementary school at that time, and we were selling 100 MB connections that were viewed as far bigger than a customer could ever use, with the average corporate customer using only about 1.2 megabits, or less than 1.5% of the connection. In the late 2018 or 2019 timeframe, we began a program to upgrade those customers, and virtually all of our customers now take a one gig connection, 10x what they originally had, and that gave us the ability to uplift ARPUs. You have two different things going on simultaneously. Price per unit falling but bundle size is growing, pulling ARPUs up but at a more moderate rate. We have begun another round of capacity augmentations. We have enabled all 1,865 of our multi-tenant office buildings to also sell 10 gig connections.
While today only about 4% of our corporate base uses those 10 gig connections, they generally result in about 2.5x as much revenue per connection. Now the utilization rates fall even lower, but there is a subset of the market that just wants the best connection that money can buy. That is a far better strategy than us becoming a security provider, a hosting company, a managed service provider, a network-as-a-service service provider, which I still struggle to fully understand what that means.
Great. Let's talk a little bit about Wavelengths again. Are there any catalysts in the next 12 months that could accelerate the pace of Wavelengths in volume and revenue dollars?
I believe so, Roberta. We spent two years building a Wave optimized network out of a former TDM voice network. To do that, we had to reconfigure our metropolitan networks in over 110 cities. We deployed over 200 Wave rings in those markets and deployed about 110 reconfigurable optical add-drop multiplexers. We had initially hoped that we could sell Wavelengths in only the largest data centers. We quickly found out that the Wave demand was far more dispersed. We saw one of our competitors, a major household name phone company, announce a program to sell inner-city Wavelengths in eight data centers, and we haven't heard anything else about that after the press release came out. In fact, the market is far more spread out. Initially, Cogent did not have brand recognition or credibility on Wavelengths.
The fact that we have now sold Wavelengths in 608 locations, we have 548 unique customers using Wavelengths, and in the last quarter, 3% of our Wave base or 77 Wavelengths upgraded their services. I think we have crossed the credibility threshold. We have the footprint. At the end of the day, the customer buys based on value. Most investors hear the word value and they think price. But in a Wave, value is more multidimensional. It is the ubiquity of footprint, the speed to deliver, the diversity of the route, the reliability of the route, and price. Each customer values one or more of those five attributes different than others. Cogent has a superior value proposition compared to our national wave competitors in all five dimensions. We have gone from being a non-player to 3% of the market in six quarters.
We have an ultimate goal to get to 25% of the market. I think the successes we've had and the testimonials from customers will help us get there. Now, there is a headwind, and that headwind is somewhat out of our control, and not only affecting Cogent, but every company in the space, and that is supply chain constraints. Investors get excited when they hear companies say there's $7 trillion earmarked to go into AI training. That's a true statement. $1 trillion of that $7 trillion has been spent. $6 trillion is still to be spent. But that's created massive supply chain shocks. Many data centers that are announced are not yet completed. Many facilities need power upgrades. There's a shortage of GPUs. There's companies who build their whole business model on arbitraging GPU supply chain availability. There is a shortage of memory.
I'm sure that was discussed at your keynote speech today, with Marvell. There are shortages of routing equipment, server equipment, pluggable optics. For the first time in over 50 years, we are seeing technology prices rise. That does not mean Moore's Law is over. That just means this is a temporary aberration. These constraints have forced many customers to push out the acceptance of Wavelengths. We believe that many of these constraints will be ameliorated over the next year or two, and the latent demand that we have been able to secure will then manifest itself in our revenue. And I'm sure Mike's going to ask me a question, can I predict what quarter that's going to happen in? And the answer is no, but I feel comfortable that the trends are here.
So maybe going to the free cash flow side of the equation. If we count in CapEx or free cash flow, the CapEx and the principal payments on your leases, what's the path to positive free cash flow and sustaining positive free cash flow for Cogent?
There are four factors that impact that. The most important of those is growth in EBITDA. Our EBITDA actually accelerated due to the subsidy payments that we received from T-Mobile. When those payments stepped down, our EBITDA remained above what it was pre-acquisition, inclusive of the carrying cost of the empty Sprint network. On a going forward basis, more of our EBITDA growth is going to come from high margin revenue growth and less from cost savings. We have been able to expand margins and grow EBITDA. We know that in a little less than two years, that $100 million annual subsidy from T-Mobile will go away. We have announced about $50 million in cost savings initiatives. That gets us half the way there, and then the growth of our on-net services.
We are quite comfortable that our EBITDA will exceed the EBITDA today in two years without the payments from T-Mobile. The second impact is CapEx. Our capital expenditures pre-acquisition were running around $70 million. Sprint was spending about $30 million. That led us to forecast $100 million in CapEx. We knew that for a couple of year period, capital would surge as we repositioned the data centers and reconfigured the network. We saw a material reduction in our capital intensity. In fact, our CapEx came down last quarter, $18 million sequentially. It is still running above the $100 million. It is running at about $140 million. We have experienced seven price increases this year to date from one vendor, three from another, and three from another vendor. We will asymptotically trend to that $100 million, but the path to get there will take longer.
The third component has been principal payments on capital leases. There we have been able to come in pretty much right on plan at about $10 million a quarter. We are paying down existing capital leases, but extending leases and signing new ones in new markets. Most significant new market for us has been India, but we will continue to grow our footprint in the less developed world. We added Thailand recently to the network. We are doing some expansions in the Middle East, so there are new markets that are new revenue opportunities as the internet becomes more globalized. It is not relevant to our Wavelengths business, which is only U.S., Mexico, and Canada. Then finally, there is interest expense. We have paid down roughly $190 million of face debt.
We bought back $138.9 million of our secured debt in the open market at a discount, and we also bought back $50 million of our unsecured debt, taking off about $190 million off of the total debt load. Offsetting that, though, is the fact that our 2027 debt is maturing in June of 2027. That debt has had a 7% coupon unsecured. The underlying base rates have gone up 150 basis points since we issued that debt, and Cogent's aggregate leverage is up from 3.8x to 6.2x . That debt is going to be more expensive. We anticipate the increase in coupon effectively negates the savings that we got from gross reductions, and that our cash interest load will be relatively equivalent to where it is today at about $180 or $190 million.
Putting those four factors together and layering on top of that the roughly $180 million that we still have due to us from T-Mobile and the cash that the company has on its balance sheet, we feel very comfortable in our capital and liquidity position.
Great. I guess to wrap up then, is there anything else you'd like investors to focus on as it relates to Cogent's story right now?
Roberta, believe it or not, the Cogent story is a simple one. In many ways, it's probably the simplest company that you and Mike cover. For whatever reason, we're shrouded in a veil of complexity. Our capital structure is complex. We're very transparent in our reporting metrics. In doing that level of transparency, we get investors who get fixated on a specific product or a specific market segment and then impute that across the entire business. When we see traffic growth grow at 15% year-over-year, that's very relevant to our transit business. It has no impact on our wavelength business. It has no real impact on our corporate business. But investors conflate these different levels of disclosure and oftentimes get confused. It really is a simple business with a fairly simple cash flow story.
My advice to investors is step back, look at the reported data, and see how well we have done over the past 21 years as a public company, and try to ignore the complexity and noise associated with the Sprint transaction, and you'll get much more comfortable with Cogent as an investment.
Dave, on behalf of both of us, thank you so much for joining us. It's great to see you, as always.
Thanks, Mike. Thanks, Roberta.
Thanks.
I got two analysts, not one.