Cogent Communications Holdings Inc (CCOI) 2015 Q4 法說會逐字稿

Good morning and welcome to the Cogent Communications Holdings Inc. fourth-quarter and full-year 2015 earnings conference call. As a reminder, this conference call is being recorded, and it will be available for replay at www.cogentco.com. I would now like to turn the call over to Mr. Dave Schaeffer, Chairman and Chief Executive Officer of Cogent Communications Holdings.

Thank you and good morning to everyone on the call. Welcome to our fourth-quarter 2015 earnings conference call. I'm Dave Schaeffer, Cogent's Chief Executive Officer. With me on this morning's call is Tad Weed, our Chief Financial Officer.

We are pleased with our results for this quarter and the full year and are optimistic about the strength of our business and the outlook for full-year 2016. We achieved annual revenue growth on a constant currency basis of 10.8% for the full year, and quarterly revenue growth on a constant currency basis of 12.1% year over year from the fourth quarter of 2015. For the quarter, we achieved our year-over-year quarterly traffic growth of 38% and sequential EBITDA is adjusted margin expansion of 150 basis points and a 5% increase in our sales force rep productivity to 6.3 units per full-time equivalent rep per month. This is the highest level of rep productivity in the company's history.

During the quarter, we returned over $16 million for our shareholders through our regular quarterly dividend. As posted on our website, 100% of our $66.3 million of dividends in 2015 should be treated as a return of capital and 0% should be treated as taxable dividends for US federal income tax purposes. At year end, we had a total of $47.8 million available in our stock authorization buyback program, which is authorized to continue through December 2016.

We continue to remain confident in the growth potential and cash generating capabilities of our business. As a result, as indicated in our press release, we announced another sequential increase in our regular quarterly dividend, from $0.35 per share to $0.36 per share on a quarterly basis. This is our 14th consecutive increase in our regular quarterly dividend.

Our constant currency basis, our revenue growth from the fourth quarter of 2014 to fourth quarter 2015 was 12.1%. And growth from the third quarter 2015 to fourth quarter 2015 was 2.5%. On a constant currency basis, our full-year 2015 revenue growth accelerated from 2014 to 2015 to 10.8%.

During the quarter, our network traffic grew sequentially by 11% from the third quarter of 2015 and by 38% on a full year-over-year basis in the fourth quarter. Our sales rep productivity increase from six units installed per full-time equivalent rep up per month to 6.3 units per full-time equivalent rep per month. That is significantly above our long-term historical average, which has been trending up, and now sits at 4.8 units per rep per month. Again, this is the highest productivity of our sales organization in the company's history and I'd like to absolutely congratulate Jim Bubeck and the entire sales team for doing a great job. Our sales rep turnover also was down, at 4.2% per month, a rate that is significantly better than our long-term historical average of turnover in our sales force of 6.1%.

Throughout this discussion, we will highlight several operational statistics. I will review in greater detail certain operational highlights and trends, Tad will provide some additional details on our financial performance, and following our remarks, we will open the floor for question and answers. Now I would like Tad to read the Safe Harbor lines.

Thank you, Dave, and good morning everyone. This earnings conference call includes forward-looking statements. These forward-looking statements are based upon our current intent, beliefs and expectations. These forward-looking statements and all other statements that may be made on this call that are not historical facts are subject to a number of risks and uncertainties. Actual results may differ materially.

Please refer to our SEC filings for more information on the factors that could cause actual results to differ. Cogent undertakes no obligation to update or revise forward-looking statements. If we use any non-GAAP financial measures during this call, you'll find these reconciled to the GAAP measurement in our earnings release, which is posted on our website at cogentco.com. I will turn the call back over to Dave.

Hey, thanks, Tad. Hopefully you have had a chance to review our earnings press release. Our earnings press release does include a number of historical metrics that hopefully you will find helpful.

We continue to anticipate that our full-year revenue growth for 2016 versus 2015, on a constant currency basis, will be well within our long-term guidance range of 10% to 20% annual revenue growth. On a constant currency basis, our quarterly revenue growth increased year-over-year by 12.1% from the fourth quarter of 2014 to the fourth quarter 2015, and for full-year 2015 versus full-year 2014 by 10.8%. Our EBITDA as adjusted increased by 6.9% from the third quarter of 2015 to the fourth quarter to $36.8 million. Our EBITDA as adjusted margin increased from the third quarter of 2015 to the fourth quarter of 2015 by 150 basis points sequentially, and was 34.9%.

Our gains on equipment transactions in 2015 were $5.4 million, consistent with an expectation of about $5 million and compared to gains in 2014 of $11 million. Gains on equipment transactions in the fourth quarter were $2 million, as compared to $1.2 million in the third quarter of 2015, and $2.8 million in the fourth quarter of 2014. We anticipate that our equipment gains for 2016 will be less than 2015, and we will return to 200 basis points year-over-year EBITDA margin expansion, as adjusted, for 2016 over 2015.

Our revenue and EBITDA guidance are intended to be long-term in nature and not intended to be used as specific quarterly guidance. Our EBITDA as adjusted is impacted by amounts of equipment gains and our legal expenses related to net neutrality. Now Tad will cover some additional financial details as our results for the quarter.

Thanks again, Dave, and good morning to everyone. I'd also like to thank and congratulate the Cogent team for their results and their continued hard work and efforts during another busy quarter and also a very busy year for the company.

On corporate and NetCentric revenue, we analyze our revenues based upon product class, which is On-Net, Off-Net, and non-core, and we also analyze our revenues based upon customer type. We classify all our customers into two types, NetCentric customers and corporate customers. Our NetCentric customers buy large amounts of bandwidth from us in carrier neutral data centers, and our corporate customers buy bandwidth from us in large multi-tenant office buildings.

Revenue from our corporate customers grew by 3.3% from the third quarter to $62.6 million, and grew by 17.9% from the fourth quarter of last year. Revenue from our NetCentric customers increased from the third quarter by 0.3% to $42.5 million, and decreased by 2.5% from the fourth quarter of last year. This NetCentric year-over-year decrease was primarily due to the $3.3 million year-over-year negative impact of foreign exchange on our fourth-quarter revenues.

Our European revenue is almost entirely NetCentric revenue, and accordingly, is particularly vulnerable to the impact of variations in foreign exchange. If you calculate our NetCentric revenue growth on a constant currency basis, it grew by 5% from the fourth quarter of last year to the fourth quarter of this year.

Revenue in customer connections by product class. Our On-Net revenue was $76.5 million for the quarter, which was a sequential increase of 1.9%, and an increase of 7.3% from the fourth quarter of last year. Our On-Net revenue was $294.8 million for the year, which was an increase of 4.6%. Our On-Net customer connections increased at an accelerated rate, and increased by 4.9% sequentially from Q3 to Q4 and increased by 14.3% from the fourth quarter of 2014. We ended the quarter with over 45,400 On-Net customer connections on our network, in our 2,251 total On-Net multi-tenant office buildings and carrier neutral data centers.

Our Off-Net revenue was $28.4 million for the quarter, which was a sequential quarterly increase of 2.6%, and an increase of 13% from the fourth quarter of last year. Our Off-Net revenue was $108.4 million for the year, which was an increase of 11.9%. Our Off-Net customer connections also increased at an accelerated rate for the quarter, and increased sequentially by 5.5% from Q3, and increased by 19.8% from the fourth quarter of last year. We ended the quarter and the year serving over 7,270 Off-Net customer connections and over 4,700 Off-Net buildings. These buildings are primarily in North America.

Comments on pricing. Consistent with historical trends, the average price per megabit of our installed base decreased for the quarter but the average price per megabit for our new customer contracts actually increased slightly. Average price per megabit for our installed base declined, but it was at a slower rate and declined by 3.5% from $1.57 for Q3 to $1.52 for this quarter. And declined by 16.1% from $1.81 for the fourth quarter of 2014.

The average price per megabit for our new customer contracts was $1.02 this quarter, which was actually a 2% increase from the $1.00 price per megabit for new customer contracts that were sold in Q3 2015 and it was a 16.6% decline from the $1.22 price per megabit for new customer contracts that were sold in the fourth quarter of last year. These average year-over-year price changes are also impacted by FX rates as approximately [50%] of our network traffic is located in Europe.

Comments on average price per unit. Our On-Net and Off-Net ARPUs decreased sequentially as they have done historically on a quarterly basis. Our On-Net ARPU, which includes both corporate and NetCentric customers, was $574 for the quarter, which is a decrease of 2.1% from $586 for the third quarter. Our Off-Net ARPU, which is comprised predominantly of corporate customers, was $1,337 for the quarter which was a decrease of 2.4% from $1,369 for the third quarter.

Churn rates. Our churn rate for On-Net customers increased slightly during the quarter and our Off-Net churn rate was stable. Our On-Net unit churn rate was 1.1% for the quarter, compared to 0.9% last quarter. Not a material change. Our Off-Net unit churn rate was the same. It was 1.3% for this quarter which was the same as Q3.

On gross margin, our gross profit margin increased by 20 basis points from the third quarter, and our gross profit margin was 56.5% for the quarter and 57% for the year. Excise taxes included in our cost of networks operations expense, were $1.7 million for Q4 and $3.6 million for the year. EBITDA as adjusted, as David mentioned, when we reconcile our EBITDA as adjusted to our cash flow from operations in all of our press releases, EBITDA is adjusted, again includes gains related to equipment transactions and includes all net neutrality fees. Our EBITDA as adjusted was $36.8 million for the fourth quarter and $133.6 million for the year. Our EBITDA as adjusted margin improved sequentially by 100 basis points to 34.9% for the quarter and the margin was 33% for the year.

Net neutrality fees and asset related gains do have a material impact on our EBITDA and EBITDA as adjusted calculations and can also vary materially from quarter to quarter and year to year. Our legal fees associated with defending net neutrality were $0.6 million for the quarter and our equipment gains were $2 million. Our net neutrality fees were $3.7 million for this year and our equipment gains were $5.4 million.

Seasonal factors that typically impact our SG&A expenses, and consequently our EBITDA and EBITDA as adjusted, include the resetting of payroll taxes and benefit rates in the United States at the beginning of each year. The cost of our sales meeting held annually each January, annual cost of living, or CPI increases, and the timing and level of our audit and tax services, which are typically more in the first quarter. These seasonal factors typically increase our SG&A expenses in Q1, as they have in prior years, and again will increase our SG&A expense from the fourth quarter to our first quarter.

EPS. Our basic undiluted income per share was $0.06 this quarter compared to $0.07 for the third quarter, largely due to increase in income tax expense, deferred income tax expense, not cash income tax expense. We had a loss of $0.01 for the fourth quarter last year. Our basic and diluted income per share was $0.11 for the year compared to $0.02 last year.

Some comments on expected foreign currency impact. The impact of foreign currency has reduced the proportion of our business reported in US dollars outside of the United States to now at about 22%. About 17% of our fourth-quarter revenues were based in Europe, and about 5% of our revenues related to our Canadian, Mexican and Asian operations. Continued volatility in foreign exchange rates can materially impact our quarterly revenue and financial results. Average euro to USD rate for the fourth quarter 2015 was $1.09. The average euro to USD rate for the third quarter of 2015 was $1.11. The average euro to USD rate for the fourth quarter of last year was substantially greater at $1.25.

As a result, the foreign exchange impact on our revenue from Q3 to Q4 of this year resulted in an $0.4 million decrease to our reported revenue. From the fourth quarter of last year to the fourth quarter of this year, foreign exchange impact on our reported revenue was much more significant and was a negative $3.3 million. For the year, the foreign exchange impact on our reported revenue was very material and was a negative $16.6 million.

The average euro to USD rate so far this quarter, so the first quarter of 2016, was about $1.10, and the average Canadian dollar exchange rate is about $0.71. Should these average rates remain at current levels for this quarter, we estimate that the FX conversion impact on sequential quarterly revenues, so from Q4 2015 to Q1 2016, will be a negative impact of about $0.2 million. The average euro to USD rate for the first quarter of last year, 2015, was $1.13 and the Canadian dollar was higher at $0.81. Should the average rates again remain at current levels for this quarter, first quarter 2016, we estimate that the FX conversion impact on year-over-year quarterly reported revenues will be a negative foreign exchange impact of about $1.1 million.

Customer concentration. We believe that our revenue and customer base is not highly concentrated for the fourth quarter of 2015 and full-year 2015. No customer represented more than 2.2% of our revenues, and our top 25 customers represent less than 8% of our fourth-quarter revenue and full-year 2015 revenue.

CapEx for the quarter was $5 million and $35.6 million for the year, as compared to $60 million last year. Capital lease principal payments are for long-term dark fiber IRU agreements. These payments were $3.3 million for the quarter and $20.2 million for the year as compared to $18.2 million last year.

Some comments on balance sheet items. At year end our cash and cash equivalents totaled $203.6 million. And for the quarter, our cash decreased by $3.7 million, as we returned $21.7 million of capital to our stakeholders through our quarterly dividend and our debt interest payments. For the full year our cash decreased by $84.2 million, as we returned $135 million of capital to our stakeholders.

During the quarter, we paid $16 million for our fourth-quarter 2015 dividend payment and $5.6 million was spent on interest payments on our debt. For full-year 2015 we paid $66.3 million for our four quarterly dividend payments, $39.4 million was spent on stock buybacks, $29.3 million was spent on interest payments on our debt.

Our cash flow from operations was $22 [point] million increased by 14.7% to $83.8 million for the full year. Capital lease IRU obligations again are for long-term dark fiber leases and typically have initial terms of 15 to 20 years or longer, and they often include multiple renewal options after the initial term. Our long-term and short-term capital lease IRU fiber obligations totaled $136 million at year-end.

On some debt ratios, our total debt, including capital lease obligations, was $607.2 million at December 31 and our net debt was $403.6 million. Our total gross debt to trailing 12 months EBITDA as adjusted ratio was 4.55 at year end, and our net debt to trailing 12 months EBITDA as adjusted ratio was 3.02.

Lastly, our bad debt expense for this quarter was again less than 1% of our revenues, and was only 0.8% of our revenue and actually the same for the year, 0.8% of our revenue for the year. Our day sales outstanding for worldwide accounts receivable was again at historically low levels and was only 24 days at year end. Once again I want to thank and recognize our worldwide billing and collection team members. They do a fantastic job on customer service and collections. With that, I will turn the call back over to Dave.

Hey, thanks Tad. I'd like to take a moment and chat about the scale and size of our network. It continues to grow. We have over 821,000,000 square feet of multi-tenant office space in North America directly connected to our network with in-building riser facilities. Our network consists of over 28,100 metro fiber miles and 56,000 route miles of intercity fiber.

The Cogent network is one of the most interconnected networks in the world, with direct connectivity to 5,580 other networks. Approximately 30 of these networks are settlement free peers. The remaining 5,550 networks are actually Cogent paying customers. We currently are utilizing about 30% of the lit capacity in our network. We routinely augment portions of our network to maintain these low utilization levels. We operate 51 Cogent controlled data centers, with approximately 565,000 square feet of raised floor space.

In summary, we believe that Cogent, as a low-cost provider of Internet access transit services, our value proposition to our customers remains unmatched in the industry. Our business remains completely focused on the Internet and IP connectivities and data center co-location services. And these services provide a necessary utility to our customers. We expect our annualized constant currency long-term revenue growth rate to be within our historical rate, and that is to be 10% to 20% revenue growth. And our long-term EBITDA margin expansion rates to continue to be approximately 200 basis points per year.

We have incurred material legal and economic analyses fees related to net neutrality, and we spent $600,000 in the fourth quarter of 2015 and $3.7 million for the full year supporting net neutrality. Nearly 100 basis points of EBITDA went to our legal expenses. We believe that we will continue to incur some fees in 2016 but we also expect these fees for 2016 to be less than full-year 2015.

Our Board of Directors has approved yet another regular increase in our dividend to $0.36 per share per quarter. Our dividend increase demonstrates our commitment to the business and our optimism around the cash flow generating capabilities of our business.

We will be opportunistic about the timing and purchase of our common stock. At the end of the quarter, we had $47.8 million remaining under our current buyback program, which runs through December 2016. But may be limited due to certain debt covenants that we have until our gross leverage falls below 4.25 to 1. We are committed to returning increasing amounts of capital to our shareholders on a regular basis. The nearly $106 million that we returned in 2015 I think demonstrates that commitment.

With that, I'd like now to open the floor for questions.

(Operator Instructions)

Eric Pan, JPMorgan.

Hey, guys. Thanks for taking the question. I just wanted talk a little bit about the sector revenue. It was down slightly quarter over quarter. Can you give us some color on the slowdown? Given an expected increase on the AT&T and Verizon port upgrades in 3Q?

Yes, sure, Eric. It is Dave. The revenue growth on a year-over-year basis was very similar to the previous quarter at 5%. 48% of that traffic lies outside of the US. The biggest impact was the continued FX pressure that we've had.

Our average price per megabit declined but at a more moderate rate than historically. Our traffic growth sequentially was consistent with the previous quarter, at 11% quarter over quarter, and on a year-over-year basis the 38% was effectively equivalent to the 39%. It was literally a second decimal place difference in the growth rate.

So net net, we believe that we are on the path to returning to historical average growth rates in our NetCentric business. We have never said it would be a quick or easy process. As we add port capacity under our various interconnection agreements, the two parties in each of the agreements try in good faith to estimate how many ports are necessary. We install those ports. Fortunately for Cogent, our provisioning times are much quicker than that of our counter party, so we oftentimes have to wait on them to provision there ports and then traffic begins to flow.

We have seen that in the first several rounds of augments with our initial peers, the ports immediately filled up. At that point, we analyze the traffic. We sit down under the agreements that are in place and in good faith negotiate the next round of augments. It is an iterative process, and as we've commented publicly, a couple of the peers have achieved completely congestion free status in all locations. That being Comcast and AT&T.

Some of the others such as Verizon, CenturyLink, and Time Warner cable, while agreements are in place, and we remain confident we will become congestion free, in the initial round of augments those ports immediately filled up and in some markets ports remain congested even as additional ports are being added.

The net takeaway here is that we will return to our historical growth rates but it will probably take several quarters. The 5% year-over-year growth rate is a material improvement from the negative growth rate that we were experiencing at the maximum point of port congestion, and is still not yet at the 10% year-over-year average that we've historically been able to achieve.

So with Comcast and AT&T having been able to get the congestion free within a quarter, do you feel like some of the operators are dragging their feet?

I want to hope that everyone is operating in good faith. There are typically deadlines included in our agreements. I don't think they may be intentionally doing that.

Quite honestly, many of the larger companies have a very Byzantine and cumbersome process for turning up high capacity interfaces. I think this is not just for peers, but I've heard that from customers who buy from those companies too, that they are often frustrated. Remember at Cogent, we guarantee every customer nine days to turn up -- or 17 days to turn up service and we actually achieved nine days. We are very unique in the industry. I think it is more their process, then necessarily malicious on their part.

Got it. And then maybe you can give us an update on your negotiations with Orange and Telefonica and your lawsuit with Deutsche Telekom?

Sure. Just quickly, we've gotten some additional ports with Orange. We are in negotiations but there is still no agreements. On Telefonica, we have a letter of intent and we believe that will be converted to a binding agreement shortly.

And then finally, with Deutsche Telekom, we actually have a settlement free peering agreement that requires them to upgrade, and they have breached the agreement. We chose to sue them in federal court and that court, that suit is in process in front of the court. While we would like them to honor the agreement and turn up capacity as the agreement dictates, we will withdraw the suit. So far we've seen no motion. So we think this will probably be fully adjudicated.

Got it. Thank you for taking the question.

Hey, thanks Eric.

Colby Synesael, Cowen and Company.

I was hoping you could give us a little bit of color on your expectations for CapEx in 2016 and beyond. I know there had been an expectation that CapEx over a long term would continue to come down. But quite honestly, CapEx is lower in 2015 than we were anticipating.

And then also part of that, what your expectations are for capital lease principle payments? You mentioned in 2015 they are about $20 million, curious where that could potentially go in 2016?

And then my other question, the $12 million of quarterly distribution, the optionality if you will, sometimes you can than a dividend and sometimes you've done than a buyback. Obviously that was paused as it relates to the leverage requirements in terms of your various debt baskets. When do you think that it might be turned back on and how much of a priority is that for both the Company and the Board to do so? Thanks.

Sure, Colby. Thanks for the questions. You've got three of them there.

So in terms of CapEx, you really do need to look at both CapEx and principal payments together and look at the totality of that number. It did come down year-over-year and I think it will be down again in 2016. I think the principal payment portion of the total will be approximately the same, roughly about $20 million. But in aggregate, we think the long-term trend line is down for both CapEx and principal payments of capital leases.

Now with regard to the guarantee commitment to buyback, first of all, we've had buybacks long before we had a guarantee commitment to buyback and used those on a regular basis. We also had this $12 million commitment to shareholders and often exceeded it in a quarter. Last year for example, there was one quarter we spent over $19 million in the quarter.

We returned nearly $400 million to investors since implementing a buyback and a dividend program. That return has been roughly $220 million in buybacks and about $175 million in dividends. We are committed to the dividend strategy, particularly encouraged by the tax efficiency of it, with 100% of our 2015 dividend being tax-deferred and being treated as a return of capital.

With regard to improving our gross leverage, we do believe we will do that so sequentially over this year and some time in 2016 we will be below the 4.25 to 1 limitation that then allows us to access our builder basket. We have about $115 million in that basket today. We have $203 million of cash and aggregate. That basket will probably build over the next several quarters to about $140 million or so.

As soon as we fall below that 4.25 to 1 at the operating company level, we will transfer that money internally to the holding company, which removes it from the builder basket and then gives us greater flexibility in terms of dividends and buybacks. I think the commitment to return capital has been demonstrated with a 10-year history of doing that. That exact mechanism I think the Board will look at and that will include the magnitude and timing of a quarterly commitment to buybacks.

Great. Thanks.

Thanks, Colby.

Michael Bowen, Pacific Crest.

Thanks a lot for taking the question. Good morning, Tad and Dave. A couple of things. I was wondering if you could help us frame what you think is driving productivity. With the sales reps, obviously a record quarter, but can you give us some thoughts on productivity per rep from a revenue standpoint if you've look at that?

And then second question, with regard to the 200 basis points EBITDA increase, we haven't seen that really since 2013 over 2012, if I recall correctly. A couple sub questions there. Which exact measurement are you talking about for EBITDA? Is that with asset sales, without, so you kind of get where I'm going with that. And then if that is the case, where should we think about where that will be driven from? What line items should we be looking to adjust to get that margin increase? Thanks.

Okay. Those were excellent questions, Michael. Thanks.

With regard to productivity, I think it's a combination of factors. As ours with underlying demand for our services, which continues to be very robust. Two, it has been a dramatic improvement in our training programs, and it has then the segmentation of the sales force to allow reps by appropriate tenor to focus on the correct accounts.

All of those initiatives, and the detailed focus on productivity that Jim spreads throughout the team, has been very helpful in helping us increase our productivity on a unit basis. When you look at it on a dollar basis, we remain the lowest cost to revenue acquisition model in the industry and pretty close to our historical trend lines, with On-Net corporate and On-Net NetCentric revenue acquisitions costs at about $2.00 (inaudible) monthly recurring revenue and our Off-Net costs are higher than that. We expect those trends to continue, even though ARPUs will decline.

With regard to EBITDA, I will take part of it and Tad will take part of it. First of all, we're talking about EBITDA as adjusted. We will sell some equipment, but less this year than last year, just as we sold less in 2015 than we did in 2014. The margin expansion comes from the operating leverage in our business. On-Net has very high contribution margins, 95%, Off-Net about 45%.

Just to remind you, for nearly a decade, from 2004 to 2012, our margins consistently increased at least 250 basis points a year. For the past four years, we've seen a much more modest rate of margin expansion, more like 50 basis points on average.

There been really three large impacts to our business. The first was the shut down our largest customer at that time, Megaupload, which accounted for 11% of our NetCentric revenue, 5.5% of total revenues, and nearly 25% of our EBITDA at the time they were shut down.

Secondly, this material movement in foreign exchange, and then the onslaught of a group of last mile network operators constricting capacity and the need to spend money on net neutrality. While revenues were under pressure, we also had increased legal expenses. All of those extra factors are reverting back to normal. I think you saw that in the 150 basis point margin expansion this most recent quarter, on a sequential basis, and I think we will see it going forward.

Tad will talk a little bit about some of the other specific factors.

So driving the margin expansion as Dave said, we will hit 150 basis point improvement this quarter, but it can be lumpy. And the items that have the most variability, the revenue growth is pretty much consistent on a constant currency basis.

The level and timing of legal fees associated with our efforts on net neutrality can vary. We do expect it to be less this year than last year. It is somewhat of an unknown.

The asset gain transactions we expect to be similar to last year but slightly less. But again the timing of that can vary. Those are the items that are going to impact EBITDA as adjusted calculation, which again includes all of the legal fees and includes any gains from asset related transactions.

All right. Thanks.

Nick Del Deo, MoffettNathanson.

Hey, guys. Thanks for taking my question. Circling back to NetCentric growth, given the pace of port augmentations you are seeing from the big access networks, about how long do think it's going to be before the US is mostly or entirely cleaned up on that front?

Sure, Nick. Again, it is this iterative process. Quite honestly, we've gone to every one of the counter parties with a projection of what we thought and in every case, they thought we were too optimistic and after multiple rounds of augments, we were actually probably too conservative, and it's just because our traffic growth is so much stronger than the industry average.

I think you will see four out of the five completely resolved by the end of this quarter. I think the only access operator in North America that will still have meaningful congestion in certain markets by the end of this quarter will be CenturyLink. They have, I think some of the slowest turn up processes of any of the five companies.

As I said, AT&T and Comcast are free now. I think Verizon and Time Warner are working in good faith and we are in the third of fourth round of projections and augments. It took a little while for them to gear up from a standstill, but I think we will get there for four out of the five this quarter and then hopefully Century will be sometime early in Q2. They have been a little slower.

Okay. And then, as you think about the growth acceleration you expect in 2016, to what extent is that a function of the Internet connection capacity online versus better sales performance within your NetCentric sales force?

You know, I wish I could disaggregate and give you the exact answer. The answer is it is somewhat iterative in that, as we have more capacity, the sales force is able to go to new and existing customers and warranty that traffic going to certain of those networks will perform with better metrics.

I do think that both the addition of extra NetCentric salespeople and the training and account segmentation are meaningful in helping us. But unless there is resolution to the congestion, it would only help with a portion of the traffic. So the answer is it is both.

I clearly acknowledge that we've improved from where we were, but 5% is not 10% growth. And while we are comfortably in our growth targets for the whole business, it has really been the corporate business that is carrying the bulk of the load and we expect that to continue very strong. I do think you will see improvement over the next several quarters and return that NetCentric growth back to historical norms.

Okay. And then maybe one last follow-up. You talked about consolidation from 10 gig to 100 gig ports. Did that play a role at all in the sequential growth or is that just not material?

It actually did. So if you notice, Tad mentioned that unit turn on Net ticked up slightly? We've actually had a couple of other fairly material customers that had a large number of 10 gig ports consolidate down to fewer 100 gig ports.

We are constantly trying to encourage customers to do that to reduce their cross connect costs. It is kind of neutral to Cogent. It does help in traffic management and oftentimes it gives the customer additional headroom for growth. Actually, this quarter we had nearly 6,700 ports that were matched or changed that increased their total contract commitment to Cogent by $65 million. And a lot of that was this consolidation of 10s to 100s.

Okay. Great. Thanks for all that color, Dave.

Okay. Thanks, Nick.

Frank Louthan, Raymond James.

Great. Thank you. Talk to us a little bit about the pricing in the quarter. It was fairly stable.

Does anything change in your strategy for getting customers? Can you comment a little bit on the customer account accelerating? Where exactly were you seeing more success in the quarter? Thanks.

Sure, Frank. First of all, on taking the three kind box of customers, our corporate On-Net ARPUs remain very consistent. Customers do consistently take longer-term contracts, that's pulled the ARPUs down slightly, and there's been virtually no change in our price list or the level of discounting for our corporate On-Net customers.

We continue to benefit Off-Net from lower loop prices, which we pass on to our customers, particularly as cable has competed in the Off-Net footprint with the incumbent telco as provided a good tension and allowed us to drive loop prices down while still maintaining our margin.

Our corporate growth rates have benefited from more salespeople, better account segmentation, and a reversion back to our normal pace of hiring from the surge in hiring we did about a year and a half ago and therefore, our rep tenure is increasing. All of those things are I think resulting in our 6.3 units per rep per month. And our corporate On-Net penetration rate is growing from 14 units per building to 14.5 out of the 51 tenants.

On the NetCentric side, it's a combination of these port augments and account segmentation. We've probably done a little less hiring on the NetCentric side than we did on the corporate side and we're starting to catch up now. I think that also a tie in back to Nick's question about how we expect that growth rate to accelerate.

Okay. Great. Thank you.

Thanks, Frank.

James Moorman, D.A. Davidson.

Just a follow-up on the earlier NetCentric question. So you said you expect four of the five to be all clear. As we start moving to, I guess, if you could give a little more comment on over-the-top, where you think that can start to have an impact?

As that does become a factor, are we going to have to have positives where they have to upgrade the port capacity or should there be enough port capacity to even handle the uptick? If you could give a little more color on equipment gains. It sounds like you expect them to continue as long as you still get legal expenses? Thanks.

Hey, Jim. Two things. First of all, on the port upgrades. We would take many X times the number of port upgrades that we have and we think we could use them. The other side has a much more conservative view of the rate of aggregate industry traffic growth then we experienced.

So we end of negotiating around a target. We install them. And then we talk to our existing customers and new customers of where capacity is available, quickly filling it up.

It is a stair step, steps become further apart because we are trying to build more cushion in, and I think we've demonstrated with the counter parties, that our growth rate is closer to what we say it is than what they thought it was. I hope it smoothes out.

I can't say that there's never going to be a situation where one peer will have some congestion. I think we're building in enough headroom that there will be adequate capacity for consumers to continue to download more movies and increase their OTT consumption from the roughly 25 minutes per day per capita today to hopefully a couple of hundred minutes a day. That will take a few years but I think these issues are receding. It's not a light switch but they are being resolved.

With regard to the equipment gains, quite honestly, we were of the opinion we would not be able to get rid of any more of this equipment due to some of it technological limits. We've actually been able to convince others to take some. We are encouraged and we do think we will sell less than $5 million this year. And that reduction is a bit of a headwind, but with that we still feel comfortable with their margin expansion target.

Perfect. Thanks.

Hey, thanks, Jim.

Thank you and our next question comes from the line of Walter Piecyk, with BTIG.

Thanks, Dave. Did Netflix grow faster than the corporate average sequentially in this quarter?

They absolutely grew faster than our corporate customers. When you say the corporate average -- (multiple speakers)

I'm sorry, I meant the company average. What about the NetCentric? Any way you want to slice it. Is Netflix growing faster? Any issues with that customer?

No issues whatsoever. They did grow slightly faster than the average. Much of that growth was outside of the US.

And remember, the US growth shows up as a pure number. The foreign growth, at least on a dollar term, shows up on a currency translated basis. Therefore it is somewhat muted. I think if it was on a constant currency basis, they would have probably increased as a percentage of our revenues.

Any notable new activity from a new mobile or an over-the-top service provider?

We have literally hundreds of mobile and fixed line OTT business models and I wish every single one of them success. I want them all to succeed. I just have no real visibility as to which ones are doing better than others.

I will tell you it does seem like Facebook's video strategy has picked up a lot of steam and really increased their bit volume consumption more materially than it had been growing.

Got it. And then historically when you talked about your, the cost of your business and you say hey, I've got these handful of strands, and we are only using X percent of the capacity, which I think was 30% to 40%. It was very low.

As our business grows, we don't really need, our fiber expenses are not going to go out. Why it did your IRU go up to $20 million from $18 million? What is that incremental expense?

It is two things. One, we added some new route miles in the year. We also bought some replacements, we jettisoned some and we replaced some. We talked about that earlier. Finally, they were a couple of IRUs that we actually extended the term based on the counter party being interested in longer-term and getting some concessions for that.

But when you extend the term, is there some type of up front payment? That is a 10% increase. I'm assuming your route miles didn't increase by 10%. So when you renewed that term, are they charging you more money for the renewal?

The rate did not go up. We may have paid some discounted amount for that extra term, but it would be discounted back. In other words, we have 15 years left and they said we want to take it to 25. We may have paid them a number but it would have been discounted back. It would be a fairly minimum number. Most of the increase was actually for additional mileage.

Okay. So how much did you increase your mileage, in percentage terms or any way you want to express it?

I think mileage ended up increasing by about 6% to 7%.

And where are those miles and where is that increase happening?

Mostly in Europe, a little bit in the US but much more in Europe.

So you have like some NetCentric customer that you have to get some more fiber to get to that NetCentric customer because he's in a different location or a different country or a different part of Europe that you don't have any fiber to?

It's not so much a specific customer as there has been probably a more rapid expansion of the number of data centers, carrier neutral data centers in Europe than the US. We are in 815 carrier neutral data centers today. We added about 70 to the network last year. We will probably at least that many this year.

Many of those require new fiber to get to them. In some cases they are in the same market that we are in, and in other cases, they can be in a city that's 40 or 50 miles away from where our network is, so we acquire fiber to get to that market.

Okay. Last question. Was Zayo the company used to extend the route miles?

They are one of the 211 suppliers that we have. They are a significant one.

I was specifically asking you about that particular expansion that occurred. Was that with Zayo or did you expand with 200 different people? I doubt you expanded with 200 different people.

I think we probably entered new mileage agreements with 40 or 50 over the year.

All right. Cool. Thanks, Dave.

Thanks, Walt.

Michael Rollins, Citigroup.

Hey, Dave. Good morning. Just a couple quick questions if I could. The first one is in regards to the dividend payout. Just some commentary in terms of recognizing that you do have some covenants.

Can you give us some sensitivities and perspectives of how you are looking at the continuity of your return of capital to shareholders? Secondly, if you could talk a little bit about how you perceive your positioning in the industry strategically, and if any of the evolution in some of your competitors changes your perspective of your competitive positioning or strategic aspirations? Thanks.

Sure, Mike.

First of all, let's take the capital return. We are very pleased we returned $606 million last year to our equity holders. We expect over the next several years to continue to return more capital. We also care about returning it in an efficient manner and the fact that our dividend was treated as a return of capital, we viewed as very beneficial to our shareholders.

With regard to buybacks, we are committed to doing those. We do have, today, limitations of how much cash is sitting at the holding company level, and we did not want to necessarily accelerate the use of that cash and find ourselves in a situation where cash was trapped at the operating company level and we couldn't meet our regular dividend commitment.

We are comfortable with our delevering rate. We feel that we will get access to that builder basket in 2016. We believe we will return accelerated amounts of capital.

You know, you saw our net leverage target was effectively unchanged, it went from 2.98 to 3.02 so it was effectively flat. We would expect to stay within the 2.5 to 3.5 net leverage range, probably drifting up toward the higher end of the range. All in all, we expect to return more capital each year than we did the previous year. And to do it through both techniques.

With regard to industry, I think our position is a great one. We have a business that sells the right products. We have a network that goes to the right locations. We have a sales force that's got the lowest cost of revenue acquisition, and most importantly, we are growing faster and generating real free cash flow. That's something that most of the other companies are struggling with.

We are committed to working at things if they make sense for us to acquire. We are committed to be willing to sell our business if people pay us a premium to our intrinsic value. But we expect we will be on a call like this a year from now, as a standalone entity, probably with a pure business model just because that's where we've been.

Thanks very much.

Hey, thanks, Mike.

Louis Depalma, William Blair.

Good morning, Dave and Tad. Thanks for taking my questions. First for Tad, what was constant currency corporate growth?

It is virtually identical to the reported number, Louis, and only that about 6% of corporate revenues come out of Canada. It was a de minimis impact, whereas, there is virtually no European component, whereas, on the NetCentric side, 48% of that revenue is international. For all intents and purposes, 100% of the impact is on the NetCentric business.

And what was that corporate growth rate then in US dollars?

It was 3.4% sequentially, 15.1% year-over-year.

Great. And over the long term, do you think that the growth profile is more favorable for NetCentric, given your long-term expectations for data center growth and Internet traffic growth?

So we're optimistic about both growth trends. If we look at the 12-year history, where we have public data out, the corporate business has grown at an average of about 15%. The NetCentric business has grown at an average of 10%.

I think both will continue at about the same rate. I think there is a lot of runway in both businesses, and clearly the NetCentric business, because of the greater dependence on On-Net, has better contribution margins. But net net, we feel good about both addressable markets.

Thanks a lot.

Hey, thanks, Louis.

Colby Synesael, Cowen and Company.

Sorry to extend the call but I just want to go back to a topic that Walt brought up about the suppliers. So you have 211 suppliers of fiber. Obviously you mentioned that you're more dependent on some than others.

Is there any concentration risk, where there is one or two suppliers, or one or two specific contracts or leases that you have with those suppliers, that we need to be more sensitive to in terms of coming up? If you think about it, a lot of the businesses that you acquired back in the early 2000s, had structured some of those agreements around that time period. And if you think about that 15 to 20 year lease termination or expiration period, one could argue that now and then over the next few years there could be some of the bigger key routes that you had signed back at that time that could be expiring.

I'm just trying to get a better sense. Is that something we should be more thoughtful to as we go forward the next two years and is there is a chance we get the those routes actually getting re-rated perhaps to today's prices versus what would have been paid or structured 15 or 20 years ago? Thanks.

Sure. A few questions in there. First of all, our two largest suppliers were Williams, which is now by Level 3, and the second, Metropolitan Fiber Networks, MFN, which now became AboveNet, now part of Zayo. Those original agreements are actually filed publicly. They have been extended and Zayo has been a very acquisitive company, I think acquiring 37 companies, most of which we had fiber agreements with.

We've done a good job, and they've been a very cooperative partner in working with us, to consolidate those agreements, standardize them, and extend them. We have no significant maturity issues with either of those two vendors or any of our other vendors.

We feel comfortable on our ability to mirror their right of way and in terms of payments, many of our agreements have been upfront payments. Some have recurring payments. Most of our agreements do not have a CPI in the actual IRU. I don't think any do, actually.

In terms of maintenance, we typically capped the CPI on the maintenance portion of IRU. We just don't see any material risk over the next 8 to 10 years to IRU issues at all. Quite honestly, the average remaining maturity is still nearly 20 years. We just don't have an issue in terms of either re-rating or step up in prices.

Great. That's super helpful. Thank you.

I'm showing no further questions at this time. I would like to turn the conference back over to Mr. Dave Schaeffer for any closing comments.

Thanks a lot, everyone. We did manage to get it to just over an hour which I think is quite an accomplishment. We appreciate all of the great questions, all of the great support. We think we are on the path to continue revenue expansion and growth rates that will return to our historic norms. Take care, everyone. Thanks.

Ladies and gentlemen, thank you for participating in today's conference. This does conclude the program. You may all disconnect. Everyone have a great day.