Cogent Communications Holdings Inc (CCOI) 2017 Q1 法說會逐字稿

Good morning, and welcome to the Cogent Communication Holdings First Quarter 2017 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.

Welcome all for joining.

Welcome to our First Quarter 2017 Earnings Conference Call.

I'm Dave Schaeffer, Cogent's CEO and with me on this morning's call is Tad Weed, our Chief Financial Officer.

We're encouraged by our results for the quarter and continued to be optimistic about the strength of our business and the outlook for the remainder of 2017.

We achieved on a year-over-year, quarterly revenue growth constant-currency basis, 8.7% growth.

Our sales rep productivity was 6.1 units per full-time equivalent rep per month.

A productivity rate that's significantly higher than our historical average of 5 units per full-time equivalent per month, and we had a record number of full-time equivalent reps in the quarter.

Our EBITDA as adjusted increased by $2.1 million or a 5.6% sequential increase, and an increase by $4.2 million or 11.9% from Q1 of 2016.

Our EBITDA as adjusted margin increased by 130 basis points sequentially to 34% and an increase by 110 basis points from Q1 2016.

Our gross margin improved sequentially -- improved year-over-year and our churn rates were reduced and therefore improved.

During the quarter, we returned $19 million to our shareholders through a regular quarterly dividend.

At the end of the quarter we had $43.4 million available in our stock purchase plan with an authorization that will continue through December of 2017.

Our gross leverage was 4.64 and our net leverage was 2.94 at the end of the quarter.

We ended the quarter with $263.2 million in cash on our balance sheet.

On this cash, $124.1 million was held at the holding company.

At Cogent Holdings this cash is unrestricted and available for use for dividends and/or stock buybacks.

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 yet another increase of $0.02 per share in our regular quarterly dividend, increasing that dividend from $0.42 a share to $0.44 per share per quarter.

Representing our 19th consecutive quarterly increase in our regular dividend.

Throughout these discussions, we will highlight several operational statistics.

We will review in greater detail certain operational highlights and trends.

And Tad will provide some additional detail on our financial performance.

And following our prepared remarks, we will open up the floor for questions and answers.

Now I'd like to turn it 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

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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'll find these reconcile to the GAAP measurement in our earnings release, which is posted on our website at cognetco.com.

And I'll turn the call back over to Dave.

Hey, thanks, Tad.

Hopefully you've had a chance to review our earnings press release.

Our press release includes a number of historical quarterly metrics on a consistent basis.

We anticipate that our full-year revenue growth for 2017 over 2016 on a constant-currency basis will be within our guidance range of 10% to 20%.

Our EBITDA as adjusted margins for the quarter increased by 110 basis points on a year-over-year basis to 34%.

We anticipate that will return to the 200 basis point year-over-year margin expansion and EBITDA as adjusted and will deliver 200 basis points for full year 2016 over -- 2017 over 2016.

Our revenue in EBITDA guidance targets indicate or intended to be long-term goals and are not intended to be specific quarterly guidance.

Our EBITDA as adjusted is impacted by the amount of equipment gains and seasonally by certain SG&A expenses as well as Universal Service fees.

Tad will now cover some additional details of our results for the quarter.

Thank you, Dave, and again good morning, everyone.

And I would also like to thank and congratulate the entire Cogent team for their results and continued hard work, and their efforts to another very busy and the productive quarter for the company.

On Corporate and NetCentric revenue, we analyzed our revenue is based upon product class, which is on-net, off-net and noncore.

And we also analyze our revenue is based upon customer type.

We classify all of our customers into 1 of 2 types, either NetCentric or 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 multitenant office buildings.

Revenue from our corporate customers grew sequentially by 2.7% to $72.4 million, and year-over-year grew by 12%.

We had 34,318 corporate customer connections on our network at quarter end.

Revenue from our NetCentric customers increased to year-over-year by 2.6% and 3.8% on a constant-currency basis.

We had 29,925 NetCentric customer connections on our network at quarter end.

Our NetCentric revenue growth experiences more volatility than our corporate revenues due to the impact of foreign exchange and also seasonal factors.

In particular, related to usage revenue.

Revenue and customer connections by product class.

Our on-net revenue was $83.6 million for the quarter, which is a sequential increase of 0.1% and a year-over-year increase of 6.2%.

Our on-net customer connections increased by 3.7% sequentially and 16% year-over-year.

We ended the quarter with over 54,800 on-net customer connections on our network.

And our 2,406 total on-net multitenant office buildings and carry a neutral data center buildings.

Our off-net revenue was $33.4 million for the quarter, which was a sequential increase of 4.8% and a year-over-year increase of 13.7%.

Our off-net customer connections increased sequentially by 5.3% and 18.3% year-over-year.

We ended the quarter, serving over 9,050 off-net customer connections and over 5,700 off-net buildings.

And these buildings are primarily in North America.

Comments on pricing.

Consistent with historical trends, the average price per megabit of our installed base and our new customer contracts, actually increased for the quarter and the install base decreased.

The average price per megabit for our installed base declined by 4.4% sequentially from the fourth quarter to $1.19 and that decline was 18.7% on a year-over-year basis.

The average price per megabit for new contracts was $0.73, a slight increase of 0.7% sequentially from the contracts that were sold in the fourth quarter, and a 27% decline from new customer contracts that were sold in the first quarter of last year.

On -- comments on ARPU.

Our on-net ARPU decreased sequentially from the fourth quarter and our off-net ARPU was flat.

Our on-net ARPU, including both Corporate and NetCentric customers, was $518 for the quarter, which was a sequential increase of 3.4%.

Our off-net ARPU, which is comprised predominantly of corporate customers was $1,261 for the quarter, unchanged from the fourth quarter.

As Dave mentioned, we had improvement in our churn rate.

And our unit churn rates for both on-net and off-net customers both improved during the quarter.

Our on-net unit churn rate was 1.2%, down from 1.4% last quarter or an improvement, and our off-net unit churn rate was 1%, which also improved from 1.1% last quarter.

We offered discounts related to contract terms to all of our Corporate and NetCentric customers.

And we also offered volume commitment discounts to our NetCentric customers.

During the quarter, certain NetCentric customers took advantage of our volume in term discounts and entered into long-term contracts for over 2,500 customer connections and increased their revenue commitment to Cogent by over $21.8 million.

Our gross margin, excluding depreciation, increased sequentially by 10 basis points and year-over-year improved by 40 basis points.

Our gross margin was 56.9% for the quarter.

Excise taxes included in our cost of network operations expense, including USF fees, were $2.6 million for the quarter.

If you exclude the impact of the $600,000 year-over-year increase in these excise taxes, our gross margin for the quarter would have increased by 70 basis points instead of the 40 basis points from the first quarter of last year, and would have been 58.2%.

Our EBITDA and our EBITDA as adjusted is reconciled to our cash flow from operations, all of our press releases in the table.

Our EBITDA as adjusted includes gains related to our equipment transactions.

And our EBITDA as adjusted increased by $2.1 million or 5.6% sequentially to $39.9 million, and increased year-over-year by $4.2 million or almost 12%.

Our EBITDA as adjusted margin increased sequentially by 130 basis points to 34% and 110 basis points from the first quarter of last year.

Our equipment gains, which is included in our EBITDA as adjusted, were $2.1 million for the quarter.

Seasonal factors that typically impact our SG&A expenses in particular, and consequently impacts our EBITDA, EBITDA as adjusted include the resetting of payroll taxes in the United States at the beginning of each year; annual cost of living or CPI increases including salaries; the timing and level of our audit and tax services; and also annual benefit plan increases.

Each of these factors did increase our SG&A expenses in the first quarter from the fourth quarter of last year.

On EPS, our basic and diluted EPS was $0.09 for the quarter, the same as the fourth quarter, and a slight increase from $0.08 in the first quarter of last year.

Some comments on foreign currency.

The impact of foreign currencies has reduced the proportion of our business reported in U.S dollars outside of the U.S. to about 21%.

About 16% of our first quarter revenues were based in Europe, and the remaining 5% of our international revenues are related to our Canadian, Mexican and Asian operations.

Continued volatility in foreign exchange rates can materially impact our quarterly revenue and financial results.

Foreign-exchange impact on our sequential revenue resulted in a $200,000 decrease, to our reported revenue.

And from the first quarter of last year to the first quarter of this year, the foreign exchange impact in our reported revenue was a negative $500,000.

These changes in foreign exchange rate, primarily impact of our NetCentric business, which is international.

The average euro to U.S. dollar rate so far this quarter is about $1.07 and the average Canadian dollar exchange rate is about $0.74.

If those average rates remain at the current level, our second quarter 2017 revenue -- they were not be material FX impact sequentially.

However, we estimate that the impact on a year-over-year basis will be a negative $1.2 million, since the average euro rate last year in the second quarter was $1.13, and the average Canadian dollar exchange rate in the second quarter of last year was $0.78.

So a material decline in the rates.

We believe that our revenue and customer base is not highly concentrated, and our top 25 customers represented less than 6.2% of our first quarter revenues.

Our CapEx for the quarter was $12.2 million, which was a reduction from the $15 million in the first quarter of last year.

Our capital lease principal payments are for long-term dark fiber IRU agreements.

These payments were $3.9 million for the quarter.

Capital lease principal payments, if you combine that with our CapEx, declined in the year-over-year basis, and that total was $16.1 million this quarter compared to $18.4 million for the first quarter of last year.

Some balance sheet comments.

At the end of the quarter, our cash and cash equivalent totaled $263.2 million.

For the quarter, our cash decreased by $11.1 million as we returned $29.1 million of capital to our stakeholders.

As Dave mentioned during the quarter, we paid our $19 million first quarter dividend.

And we also paid $10.1 million on our interest payment on our debt during the quarter.

Our capital lease obligations are for long-term dark fiber leases.

And typically have initial terms of 15 to 20 years longer.

And often include multiple renewal options after the initial term.

Our long-term and short-term capital lease obligations were $145.1 million at quarter end.

Our total gross debt, which includes capital leases, was $718 million at quarter end.

And our net debt was $454.8 million.

Our total gross debt to trailing last month's EBITDA as adjusted ratio was 4.64 at March 31, and our net debt to trailing last 12 months EBITDA as adjusted was 2.94.

Our bad debt expense again was less than 1% of our revenues and our bad debt expense came in at 0.8% of revenues for the quarter.

Lastly, our day sales outstanding, or DSO, for worldwide accounts receivables was, at again, at historical low and tied a record for the company at 22 days at quarter end.

And our billing -- worldwide billing and collection teams continue to do a great job.

So I want to congratulate them.

And I will turn the call back over to Dave.

Hey, thanks, Tad.

Now for a couple of comments on the scale and reach of our network.

We have over 864 million square feet of multitenant office space in North America, directly connected to our network.

Our network consists of 30,190 miles of metropolitan fiber and over 57,200 miles of intercity fiber.

The Cogent network is one of the most interconnected in the world with direct connectivity with over 5,940 networks, approximately 30 of these networks are settlement-free peers.

The remaining 5,910 networks are in fact Cogent transit customers.

We are currently utilizing approximately 25% of the lit capacity in our network.

We routinely augment capacity in portions of our network to maintain these low utilization rates.

For the quarter, we achieved sequential traffic growth of 3% on our network.

And on a year-over-year basis, traffic grew by 25%.

We added another Cogent control data center to the network and now operate 53 Cogent data centers, with 603,000 square feet of raised floor space operating at approximately 30% capacity.

Our sales force turnover was 4% in the quarter, significantly better than our long-term average of 5.9%.

We ended the quarter with 432 reps selling our service, the greatest number of quota-bearing reps in the company's history.

Cogent is a low-cost provider of Internet access and transit services with a value proposition that is unmatched in our business.

But business remains completely focused on Internet and IP connectivity and data center colocation services.

We provide a necessary utility to our customers.

We expect our annualized constant-currency revenue growth to be consistent with our historic norms, and be within the 10% to 20% constant-currency guidance that we've outlined.

We expect our long-term EBITDA as adjusted annual margin to expand by approximately 200 basis points.

We've incurred legal and economic fees in supporting net neutrality.

These fees were in fact minimal in the quarter.

We expect to incur some additional fees in 2017, but at a substantially lower level than in 2016.

Our board has approved yet another increase in our regular quarterly dividend, increasing that dividend by $0.02 per share per quarter to a quarterly rate of $0.44 or an annualized basis of $1.96 a share.

Our dividend increase demonstrates our continued optimism regarding our cash flow generatings.

We would be opportunistic about the purchase of our common stock.

At the end of the quarter, we had 43.3 million remaining under our buyback authorization and ample capital at the holding company level to execute that strategy.

That authorization remains in effect right through the end of the year.

We are committed to returning increasing amounts of capital to our shareholder in a methodical and a regular way.

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

(Operator Instructions) Our first question Colby Synesael of Cowan.

Two questions, if I may.

First off, the gain on equipment sales was $2.1 million in the first quarter.

I was wondering if you could just give us a quick update on what's your expectations are for the rest of the year?

Secondly, when I look at your gross margins, I just looked quickly at the last 5 quarters, including the first quarter.

They've been roughly flat.

And when you think about the 200 basis points of margin expansion, as we go forward, on a year -- annual basis.

Is it all expected to come from SG&A?

Or do you still think that there is more gross margin improvement to be had?

And if there is, why haven't we seen in the last, I guess, 4, 5 quarters?

Sure, Colby.

Let me take a stab at the both of those.

First of all, with regard to equipment sales, we expect to continue those throughout the year.

We do expect the aggregate volume for 2017 to be below that of 2016, where we had an extraordinarily large amount of sales mid-year last year.

But I think the rough run rate that we had in this quarter is not unreasonable to continue for the next several quarters going forward.

Now with regard to gross margin, probably the biggest impact on our gross margin over the past 2 years has been the imposition of Universal Service fees on our off-net and on-net layer 2 or the VPN services, which represent approximately 16% of our aggregate revenues.

And those services are subject to a tax, which is a straight pass-through of approximately 18%.

As Tad mentioned in the quarter, on a year-over-year basis, we saw an additional $600,000 of taxes with no contribution margin, retarding our gross margin expansion.

Even with that, we were able to demonstrate gross margin expansion of 40 basis points.

It would have been 70 basis points, if we did not have these additional taxes.

And the increase in taxes was due both to the increase in the VPN business as well as an increase in the underlying rate.

We do expect to continue to see operating leverage in our business and deliver 200 basis points a year of margin expansion.

We did deliver a 110 basis points.

And we expect to be able to continue to see that improve.

We saw 130 basis points of improvement on a sequential basis.

And I think as we look forward, you should expect about half of the 200 basis points to come from gross margin pick up, about half from EBITDA.

And I hear you that the last couple of years hasn't shown that, but remember that why we're taking impact of these USF fees, which have had an average about 90 basis points drag.

Our next question comes from Matthew Niknam of Deutsche Bank.

Just 2, if I could.

First, on the NetCentric business.

Maybe, Dave, if you can talk to what drove the slowdown in both the traffic and revenue growth this quarter?

And how we should think about growth on a go forward basis?

And then secondly, on capital allocation.

Just trying to get a better sense of how you're thinking about comfort zones with leverage, and the balance between the buybacks and dividends, especially as you're sitting at maybe a little bit below the midpoint of your target leverage range.

Thanks, Matt, for both questions.

So you are correct that our NetCentric business, which is a lumpy business, did not do as well this quarter as it has been doing.

And we have had basically 6 consecutive quarters of improvement.

And this quarter, the business decelerated, the NetCentric portion of it.

In the past, we were experiencing port-congestion due to certain ISPs blocking traffic.

Those issues have been completely resolved and Cognet's network has no port blockages with the exception of Deutsche Telekom, which we are in active litigation on.

Traffic growth did decelerate to only 3% sequentially from 11%, and on the year-over-year basis to 25% down from 37%.

And it was wide-spread across a broad swath of our customer base.

Now the bulk of our traffic remains NetCentric.

It's 95% of the traffic on our network.

And the majority of that traffic -- nearly 90% of it comes from video sites.

We have a very widely diversified base of video distributors, most of the major household names that distribute video either live streaming or a store forward, casually produced as well as professionally produced video, all utilized Cogent.

As well as a number of content delivery networks that in turn resell our bandwidth.

We saw a broad decline in the rate of growth in that video traffic.

I have no specific answer, because it's not attributable to any 1 customer or any particular pattern.

I do believe that Internet traffic growth will continue at historical rates and Cogent will continue to gain market share by outperforming the growth rates of other providers.

And I know at least 1 of our customers does disclose their CDN traffic growth rates which were much more anemic than ours.

So I think that's an indication that we are continuing to gain share.

I do think that there has been some noise around net neutrality rules that probably has -- I think maybe had some of the NetCentric customers be a bit concerned about launching new products.

I think that's temporary.

I also believe that our contracts are sufficient to guarantee that we not only have adequate capacity today, but we'll continue to increase capacity as our customers need it.

So I do think the 3.8% constant-currency year-over-year, which is lower than the 6.7% year-over-year growth rate we experienced last quarter, is more of a temporary than rather a permanent phenomenon.

And I think for our NetCentric business looking at it on a year-over-year basis is the most rational way, whereas in our Corporate business is a little volatility and sequential analysis makes sense.

Now switching to the capital question.

We are below the midpoint of our leverage guidance range.

We have the good fortune of still experiencing industry-leading growth and margin expansion.

We do feel comfortable that we will be within our guidance range for both margin and revenue growth for the year.

With that, there will be some natural delevering, even with a continued increase in our dividend.

So we will be opportunistic and will evaluate what we need to do to return more capital.

We will use a combination of both buybacks and dividends, but want to be opportunistic about buybacks.

Recently, we've skewed more towards dividends.

But we view the buybacks as more discretionary, the dividend as more mandatory in nature.

But we are committed to continuing to disgorge cash off the balance sheet and try to maintain or even increase over net leverage ratios.

Our next question comes from Nick Del Deo of MoffettNathanson.

The NetCentric performance in the quarter, I had couple of follow-up questions to that.

First, there is some press release -- press reports in the quarter that you had to block access to Pirate Bay and some other sites during the quarter.

Was that a factored all in the performance?

And second, I was wondering if you could comment on -- the fact that you added only 22 ASs is in the quarter, which is well below where it’s been historically.

Is there anything worth noting there?

Yes, sure.

So 2 very different questions.

Let me take the traffic question.

So first of all, we remain absolutely committed to supporting net neutrality.

And Cogent as a policy blocks no traffic for any customer or site.

We had a situation where we had Pirate Bay as a direct customer for a number of years.

And ultimately terminated them as a customer of Cogent once receiving a court order ultimately adjudicated at the Swedish Supreme Court.

They then shifted and became a customer of one of our CDN customers.

And that CDN customer continued to grow with us.

We then received a court order -- actually this time in Spain to block a company associated with Pirate Bay, but not Pirate Bay directly.

What that particular CDN had done was co-mingled Pirate Bay and its associated companies IP address space with a number of innocent customers who really had no hand in this at all.

We had no choice but to honor the court order in Spain.

And unfortunately the routing that that particular CDN exhibited, left us no choice but to terminate more traffic than Pirate Bay.

And that did have some impact, not a material impact, but some impact.

We then worked with that content delivery network.

And they pretty quickly renumbered their customer base allowing the innocent customers to continue to pass traffic.

And only terminate or [black hole] the traffic for the site that was particularly covered by the Spanish court order, which remains in effect today.

We've also experienced fairly significant increase in takedown orders for a number of our Turkish customers since the attempted coup earlier in the year.

And again we honor a court order from any legitimate government, but at the same time remain committed to an uncensored and open Internet.

Now with regard to the AS additions.

We continue to add ASs.

I think there are probably 2 factors that created a slightly lower number of incremental ASs in the quarter.

One, we consistently have seen companies that operate multiple autonomous systems to groom their traffic and reduce the number of ASs because each AS needs its own cross connect and has some incremental cost.

And there is generally no network benefit to operating a exorbitant number of ASs.

So we've encouraged customers to do grooming just as we have in grooming traffic from 10 gig ports to 100 gig ports for our NetCentric customers.

Secondly, the rate at which ASs have been issued has actually decelerated somewhat as well.

I think that maybe a temporary phenomenon, but I also think as a lot of companies in NetCentric are already [multi-herming] and have an AS, they don't need more.

So, yes, there are 55,000 ASs that have been issued, the reality is that 49,000 of them are effectively somewhat dormant.

And that they represent only a handful of IP addresses.

Our next question comes from Frank Louthan of Raymond James.

Talk just little about the off-net acceleration related to on-net.

And how that will impact your margin growth going forward?

Okay, great.

So off-net is sold in conjunction with our on-net services.

Cogent does not seek to sell off-net as a standalone product.

We also have been successful in negotiating with many of our 90 off-net providers and getting lower access prices.

And we expect that trend to continue.

As Tad indicated, we have 9,050 off-net connections and approximately 5,700 physical buildings that are not on the Cogent network, but are fiber connected or on-net for one of our off-net vendors.

Those 90 vendors actually have approximately 585,000 buildings that they have connected fiber to.

And we have fixed rates to sell those services.

So as our on-net customers will have branch offices, we have a large opportunity to sell off-net services.

They do carry a lower margin.

The second point is that VPN services, and there's been a lot of talk in the industry about SD-WAN as the next wave in these VPN services.

Increasingly, our customer base is migrating away from a MPLS based or frame relay legacy-type VPN architecture to either the VPLS service that we offer on our network as a service provider oriented system or as a CPE-based solution using SD-WAN.

And with that, our VPN services have increased to 16% of aggregate revenues, up from 15% last quarter, and over a free period, up from 0 to 16%.

As a result of this, we are selling more off-net.

As Tad indicated, ARPUs were flat for that service.

Typically, these carry a 45% contribution margin.

Our aggregate contribution margin for the quarter was around 44% and that was driven by the fact that most of our sales were off-net in our Corporate business.

And that is still above our current margins.

So we did see margins expand.

We expect to see reacceleration in the NetCentric business, which is predominantly on-net.

And we also expect our corporate on-net and off-net business to grow over the long run at effectively the same rate.

With that, we actually expect our contribution margins to continue to remain above historic norms and even expand further.

And that will drive our aggregate margin improvement by the 200 basis points a year.

You have the ability to see any improvement in cost on that 45% to make it possibly that more palatable for the customers?

Because, I understand you kind of have to pass on what your costs are, but are you able to get any lower access cost there on the off-net?

So the answer is, short-term we can see improvement in margin because we get cost for circuits that are in place with contracts that are in place.

But then for new customers or at the end of the contract, we would typically offer the customers lower prices in order either to get more business from those customers, win you customers or retain the ones we have.

So we do believe there will be a consistent downward pressure on pricing.

And I think that's been driven in part by the vigorous competition between cable and the traditional telcos in that off-net footprint as well as the proliferation of competitive fiber builds.

I've commented before that we had in somewhat of Golden age of local fiber with small cell becoming an anchor tenant that is causing many providers to build a much more robust footprint.

And we then lever that footprint to get better pricing on off-net circuits.

It also becomes an opportunity for us to expand our on-net footprint, but only in the buildings that meet our criteria.

So that's why our average size for multitenant building has not decreased even though we have been adding to the footprint of Cogent on-net buildings.

Our next question comes from Timothy Horan of Oppenheimer.

Dave, can you still hit that 10% on-net revenue growth with -- if traffic volumes stay low like this?

I mean, there are other ways to adjust pricing hit that 10%.

And I guess, what gives you the confidence that the [vines] can re-accelerate?

Maybe talk about what you've seen so far this quarter or other indications as you talk to customers.

Sure.

So let me take them both.

So first of all our constant-currency growth this quarter was 8.7%.

And our Corporate growth, which is almost all domestic, with a little bit in Canada about 5% or 6%, grew 12% quarter-over-quarter.

So we have absolutely no concerns about the growth rate of the corporate business.

And that's a very granular business and we'll continue to grow at very consistent levels.

And the 2.7% sequential growth that we experienced was very much in line with our historic norms for the past decade.

The NetCentric business, as Tad commented, tends to be a volatile business.

The constant-currency growth rate decelerated from 6.7% year-over-year to 3.8%.

That is clearly below our long-term average of 10%.

We think that we will continue to grow market share, I think that is occurring.

You can see that in the few other companies that do report their growth rates.

You can see that Cogent's rates remain above them.

Two, I think that this short-term pause in growth for the industry is only a short-term pause.

And I think the [inexorable] shift in video to over the top from linear distribution is going to continue.

It's very difficult to predict on a quarterly basis, whether its things like a Spanish court order, that Nick asked about, or a change in content that's made available by one of our customers at a given quarter or sporting events.

There's just a lot of factors because this business is really a consumer business.

Even though we don't sell to the end-user consumer, that's who's driving the demand.

The death of the Internet has been greatly exaggerated many, many times.

And I feel very comfortable that the Internet will continue to grow at historic rates and we will grow at approximately double that rate.

And as I talk to customers, most of them seem optimistic.

I will say, some customers have expressed concerns and reservations based on the regulatory climate.

And I think that has dampened maybe some of their product rollouts.

But I also think as the noise begins to subside, and the principles of net neutrality are reaffirmed by both Republicans and Democrats, people will get more comfortable.

I think what is being proposed is a change in the enforcement mechanism.

And because of our contractual situation, I think we can convey to our customers with a great deal of confidence that we can handle their traffic.

And this is probably a unfounded concern.

Because it's kind of broad-based, I mean, could it be either something maybe that we're shifting more to -- people using small devices and LTE on wireless?

Or maybe is it the large hyper-scale internet companies that are taking more traffic in-house?

Because I don't think -- most people, I know, aren't using the Internet less or use it less.

It seems like it's all kind of growing from an end-user perspective?

So first of all, I agree with you, Tim.

And it did grow.

So in other words, this is not a situation of negative growth.

It's a situation with the second derivative is negative.

That is the rate of increase in the growth is slow.

But it is still growing.

Two, there really are shifts and patterns, more mobile, which does consumed less bits.

Mobile does grow faster.

But I don't think that's the phenomena.

And then also, when you talk about the hyper-scale providers, all of those providers are in fact Cogent customers.

So even though they may be building their own CDNs and they're own hosting infrastructure, hurting some of our third-party CDN customers, they continue to buy transit from Cogent.

Our value proposition to anyone, whether they are a direct producer of content or an aggregator of other people content is that we are the lowest cost transit solution.

And transit is a lower-cost solution than using a third-party to carry your content, or also a lower-cost solution to building out your own global network.

So again, I wouldn't read too much into one quarter.

And you'd ask the question about what we're seeing.

I think we're still obviously less than halfway through this quarter, but I think historical trends are what we're seeing.

Our next question comes from Brandon Nispel of KeyBanc Capital Markets.

Dave, I guess just when you guys renegotiate pricing for some of these NetCentric customers, how long do you think it takes for them to make up for the revenue with increased traffic?

And then, could you share what percentage of revenue your largest customer represents?

Okay.

So 2 different questions.

The first 1 is -- it's all over the board.

Normally what happens is, our customers sign a multiyear agreement for a fixed commit.

The more term and the more volume they commit to, the lower the price.

Usually, somewhere in the -- before that term has expired, usually, probably about the midpoint of the term, they are now exceeding their commitment level and they pay a penalty for that burst or usage-based traffic that is above their commitment.

When that happens, the sales force goes to them and typically re-ups them on another multiyear contract that will be at a lower price per-meg because of a greater volume, because it's a later point in time.

And people expect lower pricing but volumes go up.

So in some cases, there is an immediate increase in revenue from the customer.

In some cases, the monthly recurring revenue can actually go down, but the total committed revenue to Cogent on a take-or-pay basis goes up.

And as Tad had indicated, it is about $21 million in this past quarter of increased contract value from 2,500 customer ports.

Some of those increased their monthly spend, some of them did go down on a monthly spend, but the total commitment always goes up.

If not, we have no incentive to lower price or let them out of contract.

Now with regard to our largest customers, I've actually gotten a lot of heat from several of my large customers for being too specific.

So I've committed to them that we will lump our customers together.

And we do feel it's an obligation to report to shareholders how concentrated we are, and our top 25 are 6.2% of revenues.

But I'm reluctant to name any specific names or even give a specific number that people can impute to a specific name.

Okay.

And that's helpful.

Can you share how many customers, and not just ports that $21 million represents.

And I guess, is this the $21 million, a different batch of customers than the -- I think it was $18 million than you renegotiated last quarter?

Yes.

It is absolutely a unique base.

Meaning it doesn't include customers that were renegotiated last quarter or even the quarter before.

And if we look at that base, probably on average, those customers have 4 or 5 ports per customer.

Our next question comes from Mike Rollins with Citi.

Dave, I was wondering if you could talk, first, what's the risk that some of the competition in increasing fiber availability spills over into the Corporate segment and put some price pressure on what the customers in the skyscrapers that you serve pay for Internet service.

Yes.

Sure, Mike.

So, as I indicated earlier, we are in kind of a renaissance of fiber availability.

And there are a variety of reasons these fibers are being constructed.

Some are mandated, some are speculative builds, some are being built to serve the mobile industry for small cell and backhaul.

And others are being built for things such as B-ray -- e-ray, b-cap and CAF-II.

Subsidized bills, which tend to be more rural.

Also, we have continued to broaden our base of suppliers.

So that means, if there's a building we want to go to, there is typically fiber in front of it that we can buy and serve that building in build a ladder and compete.

So that's the good news.

The bad news is will someone come in and compete with us in our on-net footprint.

And we have actually not seen that for several reasons.

One, you need to enter an agreement with the landlord.

And most of the competitive providers have been reluctant to enter into these long-term landlord agreements.

Two, it is expensive to build into those buildings because not only do you have to build in, but because our average building is 41 stories tall.

You have to construct an infrastructure in the building, typically that in-building infrastructure cost about $1000 a floor, it's about $40,000 install, that's purely speculative.

And what we have seen is the other providers typically coming into the building under the utility access clauses is in the customers' leases.

What that means is 2 things.

One, they don't pay the building owners, that's good for them.

But 2, they don't have a centralized distribution system in each floor is a home run.

So it makes the installation both lengthy and expensive.

And for those reasons, they become prohibitively expensive in buildings that we have prewired.

Finally, we have seen that our pricing model and value has somewhat inoculated us from competition in that I've talk to other competitive providers and they kind of say, if we're there, they do want to be there to compete directly with us.

So we continue to sell just a dumb pipe.

Those providers also are trying to sell a bundle of services, not just a dumb pipe.

And therefore, they are differentiated and they are also reluctant to become that dumb pipe company to compete with Cogent.

So for all those reasons, we have not seen significant pressure in our corporate on-net footprint.

Now conversely, it's been a great opportunity.

And the buildings that we proactively elected not to build into, where we can now use those providers and that's why we sell over 9,000 off-net circuits to 5,700 buildings.

If you look at the circuits per building, you're at about 1.7 circuits per building off-net, whereas on our on-net buildings we're at 17.5 circuits per building.

Its apples and oranges.

So I think again, part of our success has been our discipline to pick the right addressable markets.

And Dave, let me ask 1 other question.

As your business continues to mature you get closer to that -- mature number of buildings that you want to reach out to.

You've described some of the issues that are going on with the internet [ecology] in the NetCentric business.

And you have maintained your goal to grow 10% to 20% revenue for a long time.

Is that still the right range that investors should be anticipating?

And how would you frame the maturing aspect may be of your end market relative to the growth that you're aspiring to reach?

So I'm going to give you 3 different parts to that answer.

First of all, we did continue to add buildings.

We added about 4 million square feet to our footprint.

33 total buildings in the quarter, only about -- I think 9 of them were multitenant the rest were data centers.

But we do continue, but at a slower rate.

Two, we continue to add incremental customers in existing buildings at the same rate that we have.

So in the past, customers who have said no, now will say yes, as they have new applications that need more bandwidth.

But I think it's actually this third point, that's maybe the most important in answering this question, and that is the broadening of our products set.

So I'm a guy who's been very focused on a narrow product set, but 3 years ago we began to sell VPN services.

And now that represents 16% of aggregate revenues and 24% of our corporate revenue base.

This is a expanding opportunity for Cogent.

So the corporate, dedicated Internet-access market in North America in all buildings -- all our commercial buildings is a $9 billion addressable market.

And we continue to gain share in that market.

But we're also now focusing on the private network market, which is a $45 billion addressable market.

Now, in all fairness, the DIA market has been flat, but the VPN market is actually shrinking.

But because our market share is so low, and because the services that we offer either with SD-WAN or VPLS based IP VPNs are so much more cost effective, so much more reliable, so much faster to install, so much easier to use, we will continue to grow in that business.

And yes, that will end up probably having us grow some additional off-net locations.

But we're benefiting from a robust universe of locations that others have built into.

Whether those providers get an adequate return on capital or not is kind of their business.

For us, it's a great opportunity.

So I think that our ability to continue to grow that Corporate business, and at 12% to 13% range is going to continue.

And then on the NetCentric side, while that's a flat market, that's really not impacted by this kind of end-user fiber into Corporate buildings, with a small benefit in that some of those competitive providers and cable companies are in fact our customers.

And they have not built out their own global backbone.

So they actually buy from us.

That's a slight positive.

But I don't see that market growing.

There are no further questions at this time.

I would like to turn the call back over to Dave Schaeffer, for any closing remarks.

Hey, first of all, I want to thank everyone for taking the time.

We did hold it to an hour.

We, I think have a great business.

We're focused on the right segments of the market.

We have the right products.

And we will continue to grow within the guidance range that we've laid out.

And with that growth, we'll deliver the margin expansion.

Maybe most importantly, we are doing that with low capital intensity, and we're returning capital to shareholders.

So with that, we'll talk soon.

Take care everyone.

Ladies and gentlemen, thank you for participating in today's conference.

This does conclude the program, and you may all disconnect.

Everyone have a great day.