Cogent Communications Holdings Inc (CCOI) 2016 Q4 法說會逐字稿

Good morning and welcome to the Cogent Communications Holdings' fourth-quarter 2016 and year-end 2016 earnings conference call.

(Operator Instructions)

I would now like to turn the call over to Mr. Dave Schaeffer, Chairman and Chief Executive Officer of Cogent Communications Holdings.

Good morning, and thank you all for joining us on the call today. Welcome to our fourth-quarter 2016 earnings conference call. I'm Dave Schaeffer, Cogent's CEO. Along with me on this morning's call is Tad Weed, our CFO.

We are very pleased with our results for the quarter and for the year, and remain optimistic in the strength of our Business and the outlook for full-year 2017. We achieved our annual revenue growth on a constant-currency basis goal and we grew at 10.8% year over year. And our quarterly revenue growth on a constant-currency basis, quarter over quarter from last year, was 10.2%.

For the quarter, we achieved our year-over-year traffic growth of 37% and a sequential increase in traffic from the third quarter of 11%. Our sales force productivity increased by 7% from the third quarter to 6.1 units of installed services per full-time-equivalent rep per month, a productivity rate that is significantly above our long-term historical average of 5 units per full-time-equivalent rep per month.

Excluding the impact of a $2.9 million SG&A charge in the quarter related to a settlement of a class-action, wage-and-hour claim for certain of our current and past sales representatives, our EBITDA increased by $2.8 million or 7.5% from the third quarter of 2016, and an increase of $5.2 million or 15.1% from the fourth quarter of 2015. Our cash flow from operations increased by 48.4% sequentially to $33.9 million, an increase by 28.8% for the year to a record of $108 million. Both of these numbers represent records in cash flow for the Company.

During the quarter, we returned $18.2 million to our shareholders through our regular quarterly dividend. As we posted on our website, 78.7% of our $68.2 million in total dividends in 2016 should be treated as a return of capital and, therefore, tax-deferred, and 21.3% should be treated as taxable dividends for US federal income tax purposes.

During the fourth quarter of 2016, we purchased 80,000 shares of our stock under our buy-back program at a cost of $2.8 million at an average price per share of $35.11. At the end of the year, we had a total of $43.3 million available under our stock buy-back program, which has been authorized by our Board to continue through the end of this year.

In December, we issued $125 million of senior secured notes, adding capital to our balance sheet. Our gross leverage at the end of the quarter was 4.73 times EBITDA and our net leverage was 2.9 at year end. We ended the year with a total of $274.3 million of cash on our balance sheet. Of this cash, $142.6 million is held at our holding company, Cogent Holdings, and is completely unrestricted, and available for use for dividends and buybacks.

We continue to remain confident in the growth potential and cash flow-generating capabilities of our Business. As a result, we have, as indicated in our press release, announced yet another increase in our quarterly dividend. We are increasing our dividend by $0.02 a share quarterly from $0.40 per quarter to $0.42 per quarter. This actually represents the 18th consecutive quarterly increase in our regular quarterly dividend.

Throughout this discussion, we will highlight several operational statistics that we feel are important. I will review in greater detail these operational highlights and trends. Ted will provide some additional details on our financial performance, and then, following the prepared remarks, we will open the floor for questions and answers. I would now like to turn it back over to Tad to read our Safe Harbor language.

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, belief, 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, and 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 will find these reconciled to the GAAP measurement in our earnings release, which is posted on our website at cogentco.com. I'll turn the call back over to Dave.

Thanks, Tad. Hopefully you have had a chance to review our earnings press release. Our press release includes a number of historical quarterly metrics.

Now I would like to take a moment and talk about expectations against guidance targets. We anticipate our full-year revenue growth for 2017 over 2016 on a constant-currency basis will be within our long-term guidance range of 10% to 20%. On a constant-currency basis, our revenues increased by 10.8% for full-year 2016 over full-year 2015. Excluding the impact of a total cost of $3.1 million in our class-action, wage-and-hour settlement -- our SG&A charge that we incurred in this most recent quarter -- our EBITDA as adjusted margin would have increased by 140 basis points to 34.4%.

Our gains on equipment transactions for 2016 were $7.7 million as compared to $5.4 million of equipment sale gains for 2015. We anticipate our equipment sale gains for 2017 will continue, but will be slightly less than that of 2016, and we will return to our long-term trend and guidance of 200 basis points year over year of EBITDA margin expansion, as adjusted.

Our revenue and EBITDA guidance are intended to be long-term goals, and are not intended to be used as specific quarterly guidance. Our EBITDA as adjusted is impacted by amounts such as equipment gains, seasonality in certain SG&A expenses, and the legal fees spent in our defense of net neutrality. Now Tad will cover some additional operational and financial details from our quarterly results.

Thank you again, Dave, and good morning, everyone, again. I would also like to thank and congratulate the entire Cogent team for the results we achieved, and their continued hard work and effort to turn another very busy year and a very productive quarter and year for the Company.

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

Revenue from our corporate customers grew sequentially by 2.9% from the third quarter to $70.5 million, and grew by 12.5% from the fourth quarter of last year. We had 32,439 corporate customer connections on our network at year end. Revenue from our Net-centric customers increased sequentially from the third quarter by 1.3% to $45.1 million, and increased by 6.1% from the fourth quarter of 2015. We had 29,383 Net-centric customer connections on our network at year end.

Revenue and customer connections by product class: Our On-net revenue was $83.5 million for the fourth quarter, which was a sequential increase of 2%, and an increase of 9.1% from the fourth quarter of last year. Our On-Net revenue was $323.6 million for the year, which was an increase of 9.8%. Our On-Net customer connections increased by 3.5% sequentially, and increased by 16.3% from the fourth quarter of last year. We ended the quarter with over 52,800 On-Net customer connections on our network in our 2,373 total On-net multi-tenant office buildings and carrier-neutral data center buildings.

Our Off-Net revenue was $31.9 million for the quarter, which was a sequential increase of 2.9%, and an increase of 12.1% from the fourth quarter of last year. Our Off-Net revenue was $122.3 million for the year, which was an increase of 12.9%. Our Off-Net customer connections increased sequentially by 4.1%, and increased by 18.1% from the fourth quarter of 2015. We ended the quarter serving over 8,590 Off-Net customer connections and over 5,400 Off-Net buildings, and these buildings are primarily in North America.

Some comments regarding pricing: Consistent with historical trends, the average price per megabit of our installed base and for our new customer contracts decreased for the quarter. The average price per megabit for our installed base declined by 2.4% from $1.28 for the third quarter to $1.25 for the fourth quarter, and declined by 17.5% from $1.52, which we had in the fourth quarter of last year. The average price per megabit for our new customer contracts was $0.72 for the quarter, which was a 30.4% decrease from the $1.03 we had in the third quarter and a 29.1% decline from the $1.02 that we had price per megabit for our new customer contracts that were sold in the fourth quarter of 2015.

Some comments regarding ARPU: Our On-Net and Off-Net ARPUs both decreased sequentially, consistent with historical trends. Our On-Net ARPU, including both corporate and Net-centric customers, was $536 for the quarter. That was a decrease of 1.5% from the $544 from the third quarter. Our Off-Net ARPU, which is comprised of predominantly corporate customers, was $1,260 for the quarter, and that was a decrease of 1% from the $1,272 from the third quarter of 2016.

Churn rates: Our churn rates for our On-Net and Off-Net customer connections customers were relatively stable during the quarter. Our On-Net unit churn rate was 1.4% compared to 1.3% last quarter. And our Off-Net unit churn rate was 1.1% this quarter compared to 1% last quarter.

We offer discounts related to contract term to all of our corporate and Net-centric customers. We also offer volume commitment discounts to our Net-centric customers. During the quarter, certain Net-centric customers took advantage of our volume and term discounts, and entered into long-term contracts for over 2,100 customer connections, and increased their revenue commitment to the Company by over $18.6 million.

Comments regarding gross margin: Our gross margin, excluding depreciation, decreased by 20 basis points from the third quarter of 2016, and decreased by 30 basis points for the year. Our gross margin was 56.8% for the quarter. It was 57% for the year.

Excise taxes, that is included in our cost of network operations expense and, therefore, impacting gross margin, were $2.5 million for the quarter and $9.1 million for the year. Excluding the impact of the increase in excise taxes year to year, our gross margin for the year would've increased by 40 basis points, as opposed to the 30-basis-point decline, and would've been 57.9%.

Comments regarding EBITDA: Our EBITDA, and EBITDA as adjusted, is reconciled to our cash flow from operations in all of our press releases for all periods. Our EBITDA as adjusted includes gains related to our equipment transactions. Our EBITDA as adjusted was $37.1 million for the quarter and $150.6 million for the year, and our EBITDA as adjusted margin was 32.7% for the quarter and 33.7% for the year.

Net neutrality fees, class-action claim settlement expenses, and asset-related gains have a material impact on our EBITDA and EBITDA as adjusted calculations, and these amounts can also vary materially from quarter to quarter and year to year. Our legal fees associated with defending net neutrality were about $400,000 for the quarter and $3.3 million for the year, and these were primarily due to our ongoing peering litigation with Deutsche Telekom and from the fees associated with the calculation of the size of our claim for damages against [D&T].

Our equipment gains were $700,000 for the quarter and $7.7 million for the year. As Dave mentioned, we also incurred a $2.9 million class action settlement SG&A charge in the quarter, and that amount was $3.1 million for the year, as we had $200,000 incurred prior to the fourth quarter regarding this issue.

Seasonal factors that typically impact our SG&A expenses, and consequently our EBITDA, include the resetting of payroll taxes in the United States at the beginning of each year, annual cost of living, or CPI, increases, and also the timing and level of our audit and tax service including our annual audit and filing our annual report. Earnings per share: Our basic and diluted income per share was $0.09 for the quarter compared to $0.08 last quarter and $0.06 for the fourth quarter of last year, and our basic and diluted income per share was $0.33 for the year compared to $0.11 last year.

Some comments regarding foreign-exchange: The impact of foreign currencies has reduced the proportion of our Business reported in US dollars outside of the United States to about 21%. About 16% of our fourth-quarter revenues were based in Europe, and the remaining 5% were related to our Canadian, Mexican, and Asian operations.

Continued volatility in foreign currency exchange rates can materially impact our quarterly revenue and financial results. The average euro to US dollar rate for the fourth quarter declined to $1.08 from $1.12, which was the rate for the third quarter. The average euro to US dollar rate for the fourth quarter of last year was $1.09, so a $0.01 decline.

The foreign-exchange impact on our sequential revenue from the third to the fourth quarter resulted in a $700,000 decrease to our reported revenue. And from the fourth quarter of last year to the fourth quarter of this year, foreign-exchange impact on our reported revenue was a negative $300,000. For the year, the foreign-exchange impact on our reported revenue was a negative $900,000, so, close to $1 million.

The average euro to US dollar rate so far this quarter, so, the first quarter of 2017, is about $1.06, and the average Canadian dollar exchange rate is about $0.76. Should these rates, average rates, remain at the current levels this quarter, we estimate that the FX conversion impact on sequential quarterly revenues from the fourth quarter to this quarter, the first quarter of 2017, will be a negative impact of about $200,000, and we estimate that the impact year over year, so, Q1 2016 to Q1 2017, will also be negative and will be about $500,000.

Customer concentration: We believe that our revenue and customer base is not highly concentrated, and our top 25 customers represented less than 7% of our fourth-quarter revenue, and also less than 7% of our revenues for the year.

Our CapEx for the quarter was $7.2 million and was $45.2 million for the year. Our capital lease principal payments are for long-term dark fiber IRU agreements. These payments were $2.8 million for the quarter and $12.5 million for the year, and that was compared to $20.2 million last year, so, a decline. Capital lease principal payments, if you combined that with our capital expenditures, were $10 million this quarter compared to $11.1 million for the third quarter and $8.2 million for the fourth quarter of last year. And for the full year, if you combined capital lease payments with our CapEx, the total was $57.7 million, compared to $55.8 million for last year.

Dave mentioned cash flow. At year end, our cash and cash equivalents totaled $274.3 million. For the quarter, our cash increased by $126.2 million as we returned $26.3 million of capital to our stakeholders, and we received net proceeds of $124.3 million from our add-on offering of $125 million par value of senior secured notes.

During the quarter, we paid $18.2 million for our fourth-quarter dividend. We spent $2.8 million on stock buybacks, and $5.3 million was spent on interest on our debt.

For the year, our cash increased by $70.7 million, and we returned $97.2 million of capital to our stakeholders. For the full year, we paid $68.2 million for our four quarterly dividend payments, $4.5 million was spent on stock buybacks, and $24.5 million was spent on interest payments on our debt.

Our cash flow from operations was an all-time Company cash flow record of $33.9 million for the quarter, and another all-time Company cash flow record of $108 million for the full year. These represented increases of 48.4% and 28.8%, respectively, demonstrating the operating cash flow leverage and cash flow-generating capabilities of our Business.

Our capital-lease obligations again are for long-term dark fiber leases, and typically have initial terms of 15 to 20 years or longer, and often include multiple renewal options after the initial term. Our long-term and short-term capital lease IRU fiber lease obligations totaled $142 million at year end.

Debt ratios: Our total gross debt, including capital lease obligations, was $711.7 million at year end, and our net debt was $437.4 million. Our total gross debt to trailing last month's EBITDA was 4.73 at year end, and our net debt ratio was 2.9.

Bad debt expense for the quarter and for the year, again, were less than 1% of our revenues. Our bad debt expense was only 0.7% of our revenues for the quarter, and was only 0.6% of our revenues for the year, which was an improvement from 0.8% we incurred last year.

Lastly, our days sales outstanding or days sales accounts receivable was, again, at historically low levels and was only 23 days at year end. And I want to again thank and recognize our worldwide billing and collections team members for continuing to do a fantastic job on customer service and customer collections. I will now turn the call back over to Dave.

Again, thanks, Tad. I would like to take a moment and speak to the scale and scope of our network. Our network continues to grow. Today we have over 860 million square feet of multi-tenant office space in North America On-Net. Our network consists of over 29,500 metro fiber miles and over 57,200 intercity route miles of fiber.

The Cogent network is one of the most interconnected networks in the world. We directly connect with over 5,940 networks. Approximately 30 of these networks are settlement-free peers. The remaining 5,910 networks are Cogent transit customers.

We are currently utilizing approximately 29% of the link capacity in our network. We routinely augment capacity along sections of our network to be able to maintain these low utilization rates. We added another Cogent-controlled data center to our network, representing 32,000 square feet of raised floor space. Cogent now operates 52 Cogent data centers with an aggregate total of 595,000 square feet, and these centers are operating at an average utilization of 30%.

Our sales rep turnover decreased substantially in the quarter and was 3.8% for the quarter, far less than our long-term average of 5.9%. We ended the year with 422 quota-bearing sales reps, the most in our history.

Cogent remains a low-cost provider of Internet transit and dedicated Internet services. Our value proposition in the industry remains unparalleled. Our Business remains completely focused on the Internet and IP connectivity and data center colocation services. These services are a necessary utility for our customers.

We expect our annualized constant-currency revenue growth to be consistent with our historical rates, and be within the 10% to 20% constant-currency range, and our long-term EBITDA as adjusted margins should expand at approximately 200 basis points per year.

We've incurred material legal and economic analyses fees in our fight for net neutrality. We spent $400,000 in the fourth quarter of 2016 and $3.3 million for the full-year 2016 in support of this effort. That is lower than our expenditures in both 2014 and 2015. We expect these fees to continue to decline. We do, however, expect that we will spend some monies in 2017, but at a lower level than 2016.

Our Board of Directors approved yet another increase in our regular quarterly dividend of $0.02 a share, bringing that quarterly dividend to $0.42 a share. These dividend increases demonstrate our continued optimism, as well as the continued actual increase in the cash flow capabilities of our Business. We remain opportunistic about the timing and purchase of our common shares.

At the end of the quarter, we had $43.3 million remaining under our current buy-back program, and that program remains in effect through the end of the year. We are committed to returning increasing amounts of capital to our shareholders on a regular basis. With that, I would like to open the floor up for questions.

(Operator Instructions)

Colby Synesael, Cowen and Company.

Great, thank you. Two, if I may.

First off, on CapEx: CapEx was a little bit higher than the quarter than we were anticipating, about $4 million or so. I was wondering if you could share with us your expectations for CapEx in 2017, including cap leases and any potential vendor financing that you may use during the year? And then also, there's the $2.9 million settlement; you mentioned it was $3.1 million, I think in total, thus far. Is there anything else we should expect? Or is that really the end of it? More broadly, any other potential one-time things going on that could impact 2017? Thank you.

Sure, thanks for both questions, Colby. Let me go ahead and start with the CapEx question.

We anticipate that our CapEx for both capital lease payments and straight capital, whether that capital is CapEx or installment sales capital, will decline in 2017 to a lower level in 2016. Our capital spending was slightly higher in the fourth quarter than we had originally anticipated, in large part because of the refurbishment in bringing on line of the additional data center. That data center was in Seattle. We had, had customer demand for that market, and quite honestly, our sales office in that market was very small and needed to be expanded. So we opportunistically took advantage of that and we were able to get a substantial portion of that capital expenditure, even though it is recorded as CapEx by us, reimbursed by the landlord as we took over that center that was originally a corporate facility that had been vacant.

So we expect our general capital expenditures to continue to decline, both for CapEx as well as principal payments on capital leases.

Now with regard to our wage and hour settlement claim: this has been an ongoing issue for several years for Cogent. We have disclosed this to shareholders, and it was a series of class actions that were brought around the country by employees who claimed that they were not exempt employees but should be treated as hourly employees. That goes against industry standards. We felt strongly that these employees are exempt employees and would not be covered under the Fair Labor Standards Act as hourly employees. We actually prevailed in litigation in several states and won.

In the state of California, we had two adverse rulings. The first of those rulings were that these employees could in fact form a class. We believe there were enough differences between the employees that they should not be a class. Secondly, our employees are governed by arbitration agreement; and under well-settled federal law that has actually been adjudicated to the Supreme Court, these arbitration agreements should inoculate the Company from the ability of employees to form a class. The district court and the appeals court, the Ninth District Court in California, ruled against us. In light of those two adverse rulings, but still feeling confident in our position, we felt that we were absolutely right, we made an economic decision, rather than to substantially ramp up our legal spending, to just go ahead and settle the case.

So as Tad indicated, we had originally reserved $200,000 for legal. It looked like our legal was going to mushroom to several million dollars with that appeals court ruling going against us. We still feel we are right on the issue. This does put this to an end and we have gone ahead and reclassified all Cogent salespeople in the US as hourly employees. While we think that is wrong, that is a further inoculation against any future actions. There are no other material legal actions and we do not anticipate any other unique or one-time charges going forward. So hopefully that answered your question.

Great, thank you.

Nick Del Deo, MoffettNathanson.

Hey, Dave, good morning.

So Dyn recently put out its Baker's Dozen list for 2016, and you guys were near the top as usual. But the associated commentary noted that you lost Apple as a customer in the quarter but picked up a lot of new business in Asia. Are those observations correct? And if so, how should we think about the relative revenue contributions of those factors?

So two things: first of all, we have continued to grow our Asian customer base. We have network points or presence in Hong Kong, Tokyo, and Singapore. We also have increased our sales to Asian carriers both in Europe and North America, and today we are actually ranked as the third largest Asian provider in the world.

Apple has been a customer of Cogent for a long time. They continue to purchase services from us. I don't want to comment on specific changes in their network architecture, any specific customer, but we continue to be the leading transit provider for every major content provider globally, and we will continue to do so. Some of these companies have been in the process of building their own content-delivering networks and in some cases that will reduce the amount of transit purchased. In some cases it actually increases it. But we've actually had a couple of our larger customers get a little bit concerned about us mentioning their name, so we are trying to steer away from specific names.

Okay. Fair enough.

And then maybe one clarification based on Colby's question. Should we anticipate any change in your ongoing SG&A because of the settlement and reclassifying employees? For example, having to refigure pay policies, or anything like that, on a go-forward basis?

The answer is no, we do not expect any change in SG&A or employee compensation. What we had to do is, rather than treat employees as exempt employees and therefore give them an annual salary and a commission plan, we had to take their average compensation, divide it into a 40-hour week, and effectively pay the employee the same thing but on an hourly basis, and then put a reporting system in that will inoculate us from employees working more than 40 hours a week. And in particular, in the state of California, it is a two-part test. It is not only 40 hours a week, it can't be more than eight hours in any given day.

So we are very conscious of that. We put in place a monitoring system. There really was no real wage in our claim here; it was just a classification. And it all hinged around the question about how much time the employee spent out of the office versus in the office on the phone. We still feel strongly that they do fit within the definition of an exempt employee, but rather than fight to be right, it was cheaper to go ahead and settle.

Sure, that make sense. Thanks, Dave.

Thanks, Nick.

Scott Goldman, Jefferies.

Hey, good morning, Dave. A couple questions if I could. I guess a follow-up on some of the previous questions.

Maybe you could help us parse out the margin expansion opportunity in 2017. I think historically you've done or talked about half coming from gross margin, half coming from SG&A. Gross margin has been relatively flat of late, so just wondering if that is still the view on how we should think about the margin expansion? And whether or not changes in net neutrality and asset gains play a role? You expect them to play a meaningful role the 200 basis points in 2017?

And secondly, a lot of chatter of late around cable competition. And obviously I think AT&T embarked a few years ago on delivering fiber to multitenant office buildings; talks of Charter doing the same. Was wondering whether you're seeing any change in cable competition and how you think about your value proposition against what cable may be delivering? Thanks.

Thanks for the questions. Let me start with the margin question.

We have historically over a 15-year period delivered slightly better than 200 basis points a year of margin expansion, and roughly half of that expansion has come from gross margin expansion and half has come from SG&A efficiency. If we look at this most recent year, our gross margin expansion was depressed and actually was negative because of the inclusion for a full year of USF fees which carry no contribution margin and are a direct pass-through. So we would have seen a gross margin expansion of about 70 basis points as opposed to the negative 20.

So we believe that the operating leverage of the business continues to flow through on the gross side. Our gross margins have also been depressed by the rate of network expansion, the cogs associated with new fiber routes, new buildings on that, and in particular, new Cogent data centers. We did add one data center, it was a fairly large one in the Pacific Northwest, this most recent quarter. But the pace at which we have been adding them has been slower than it had been over the past several years and we expect that to continue. So as a result, we expect our gross margins to expand at roughly 100 basis points a year.

Now to the SG&A efficiency, that comes from the efficiency of the sales force. As we have seen, their productivity has continued to increase. It also comes from the growth in our scale and our ability not to increase our overhead. And as a result of that, we expect our SG&A efficiency to also contribute roughly 100 basis points a year of margin expansion, getting us to that 200 basis-point margin expansion. We will have a bit of a headwind this year, as we indicated that our asset sales, which count in EBITDA as adjusted, will actually be lower. Even inclusive of that headwind, we feel comfortable that we will return to our 200 basis points year-over-year margin expansion.

So the operating leverage has shone through the business and the record cash flow. We did take a significant SG&A hit in this quarter for the wage and hour settlement that, again, I still feel is wrong, but it was the right business decision to make. And we do not anticipate any of these additional expenses.

And then finally, with the regulatory environment, I think two things: one, we have contracts in place and are completely congestion-free with seven of the eight providers that were historically blocking traffic. We don't believe that there will be a significant change in regulation even though there is a lot of noise around that. I think there will be a lot of titular changes, but not functional changes in net neutrality rules. But we are actually governed by contract, and as a result of that, our expenditure on these legal expenses will decline substantially in 2017 and probably, hopefully, be eliminated by 2018. So I think that will also help us on our margin gain.

I'm going to now switch to cable -- even your broader question, you'd mentioned one of the incumbent telcos in the competitive landscape as well. Cogent has 860,000,000 square feet of On-Net multitenant office space, just about 1,600 buildings. That's a small number of buildings but a large amount of square footage, representing 9% of the market. And in that footprint we are truly unmatched; and our definition of On-Net is actually very different than cable or telco in that we have full fiber infrastructure throughout the building and can distribute to every customer on every floor.

We have 90 Off-Net providers. We only use fiber to connect off-net customers so we do not use ethernet over copper, fixed radio, or any other technology. No coax, only fiber. We have approximately 325,000 On-Net buildings that are in our Off-Net [coding] tools. So they are On-Net for one of our 90 Off-Net providers. Those buildings on average are about 1/25 the size of a Cogent building. In that footprint we absolutely see cable and some incumbent telco competition, but those companies are typically focused on selling a bundle of services. They are still over-subscribing the services, and their services are not symmetric.

You may have realized that, at least in New York, the Attorney General has filed suit against now Spectrum, a Cogent customer, formerly Time Warner Cable, for fraud, for misleading its customers, stating two things: one, they sold bandwidth knowing that they couldn't actually deliver it, so the average customer was sharing the bandwidth with 325 customers in the state of New York. Secondly, the modems that were installed were incapable of supporting the bandwidth that was sold. And then finally, during the period of this investigation, there was conclusive proof that there was port congestion leading to the greater Internet, and I'm not sure it's a badge of honor, but Cogent was the most congested of those providers in Attorney General Schneiderman's litigation. As a result of all of that, I think cable has proven itself to be in inferior product. It does compete with us, but we continue to win against it. In fact, you saw our Off-Net growth rate continue at roughly 13% year over year, which is historical rates.

Hopefully that was a good answer to your question.

Yes, that's really helpful.

Just one quick follow-up: are you seeing any cable competition in the 1,600 buildings that you mentioned earlier?

We do not, and I think there are three reasons for that. One, the cable plant tends to be in other geographies. Two, they have been unwilling as cable operators to enter into license agreements with the building owner and prewire the building speculatively. And therefore, when they come in to compete with us, if they are in the area, they have to use the tenants' right of entry and have to home run to each tenant, with the average cost of construction being about $1,000 a floor. The average Cogent building being 41 stories tall, so the average tenant, say, is in the middle of the building, on the 20th floor, that creates a nonrecurring charge to the customer of about $20,000 by the cable company, which makes them uncompetitive. Finally, the cable operators, both residentially and to their business customers, have been very reluctant to sell just Internet. They want to sell a bundle of services; and increasingly, the customers want just that dumb pipe. And for all those reasons, we see no significant cable competition in our On-Net footprint.

That's great. Thanks so much, Dave, appreciate it.

Thanks, Scott.

Frank Louthan, Raymond James.

Great, thank you.

Can you give us an idea on the sales force -- the quota-bearing heads are up, but can you give us an idea of what the mix is between the NetCentric and corporate side? NetCentric growth was a little slower than what we were looking for. What is the possibility of ramping that sales force up? And is that sort of the key component to getting that rate of growth higher?

So first of all, Frank, our NetCentric growth in the quarter accelerated on a year-over-year basis. It was 5.5 last quarter. It was 6.1 year over year this quarter. That 6.1 also includes some FX headwind, so FX-adjusted NetCentric growth on a year-over-year basis was actually about 6.3; so that's a fairly material acceleration in NetCentric growth. We clearly have work to do. We are not in our long-term average of 10% growth.

Our corporate business continues to perform at historical levels and productivity remains high. As we look at the sales force, it is still dominated by corporate reps. Corporate reps make up roughly 305 of the 422 total reps. We are continuing to hire additional NetCentric reps globally, both here and in Europe. I think will continue to see improvement in that NetCentric business. The NetCentric business is highly susceptible to FX, is over half of that business now, 51% of that business is outside of the US. And then secondly, there is seasonality in that business. So while understanding the corporate business on a sequential basis makes a lot of sense, because there is very little seasonality, looking at that NetCentric business on a year-over-year basis, is probably the most meaningful way to measure it.

And quite honestly, we are very pleased with the improvement in performance and the rebound in growth. Remember, we had a number of major last-mile networks who did substantial damage to the Internet knowingly, willingly, and were tried for it and now some are actually facing litigation for it. And it takes a while for that to recover, but we feel pretty pleased with the rebound in the NetCentric business and we also are adding more sales reps and probably a disproportionate number of those hires are NetCentric versus corporate.

Got it. Okay. Thank you.

I'm showing no further questions at this time. I would like to turn the call back over to Mr. Schaefer for closing remarks.

Again, I want to thank everyone for following Cogent, their questions and support. We feel very good about the progress in our business and we will talk to you on our next earnings call for Q1. Take care, everyone. Thanks

Ladies and gentlemen, thank you for your participation in today's conference. This concludes the program. You may now disconnect. Everyone have a good day.