Cogent Communications Holdings Inc (CCOI) 2006 Q4 法說會逐字稿

Welcome to Cogent Communications fourth quarter 2006 earnings conference call. As a reminder, this conference 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. Please go ahead.

Thank you Laurie. Thank you and good morning to all. Welcome to our fourth quarter 2006 and year end 2006 earnings conference call. I'm Dave Schaeffer, Cogent's Chief Executive Officer. With me on today's call is Tad Weed, our Chief Financial Officer.

We are extremely pleased with our results for the quarter, as well as our results for 2006. I'd personally like to take this opportunity to thank the entire Cogent team for their efforts in helping us achieve these results. Throughout this discussion, as we have done in the past, we will continue to focus the results and impact of our On-Net business, which is really Cogent's growth driver.

As a reminder, our On-Net services are provided to customers located in buildings that are physically connected to our network, the most complete definition of On Net. We will also highlight several operational statistics that we believe will continue to demonstrate our increasing market share, expanding scale and most importantly, the operating leverage of our On Net business.

I will start today's call with a review of certain operational highlights. Tad will provide additional details on our financial performance. Tad will walk you through our expectations for the first quarter of 2007 and an update and reaffirmation of our expectations for fiscal year 2007. Following our remarks, we will open the floor for questions. Now I'd like to turn it over to Tad Weed to read our safe harbor language.

Thank you Dave, and good morning to everyone. This fourth quarter 2006 and year end earnings 2006 report and this earnings conference call discuss Cogent's business outlook and contain forward-looking statements. The specific forward-looking statements cover Cogent's expectations for revenues, EBITDA as adjusted, gross margin at our operating results and net loss, and net loss per share for the first quarter of 2007 and fiscal year 2007.

These particular forward-looking statements and all other statements that are being 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.

You should also be aware that Cogent's expectations do not reflect the potential impact of mergers, acquisitions, other business combinations, or financing transactions that may be completed after today. Cogent undertakes no obligation to release publicly any revision to any forward-looking statement made today, or otherwise update or supplement statements made on this call.

Also during the call if we use any non-GAAP financial measures, as defined by the SEC in Regulation G, you'll find these reconciled to the GAAP measurements in our earnings release, and also on our website at www.cogentco.com. I'll turn the call now back over to Dave.

Thank you Tad. First of all I'd like to start by highlighting some of the key drivers from our fourth quarter as well as year end. Hopefully you've had a chance to review our earnings press release. As with previous quarters, the press release includes a number of historical quarterly metrics. These metrics will be added to our website. Hopefully you will find these metrics informative and helpful in understanding the results and trends in our operations. as always, if you have any additional suggestions for metrics to be added or refined, please let us know.

Our revenue EBITDA, as adjusted, loss per share for fourth quarter are all within the range of our guidance that we had given on our previous earnings call. Our fourth quarter 2006 revenue of $40.5 million was at the midpoint of our guidance range, which was between $40 million and $41 million. Our EBITDA, as adjusted, of $8 million was also at the midpoint of our guidance range of $7.5 million to $8.5 million. We continue to be very pleased with the growth of our On-Net business. Our continuing diligent investment in our sales and marketing efforts, as well as our network expansions, are leading Cogent to gain market share and drive the increasing On-Net revenues, which grew over 9% sequentially quarter-over-quarter Q3 2006 to Q4 2006.

Our total revenue for Q4 2006 of $40.5 million versus the $38 million of Q3 2006 was a 6.7% sequential quarter-over-quarter growth. Total revenue for 2006 of $149.1 million versus the $135.2 million for full year 2005, was an increase of over 10%. Traffic on our network grew sequentially quarter-over-quarter Q3 2006 to Q4 2006 by over 25%. Traffic growth on our network for full year 2005 to full year 2006 grew by greater than 100%.

We believe that these traffic growth statistics are important in demonstrating the success of Cogent's business model as well as the fact that Cogent is able to gain market share by being the industry's low cost and low price provider, and therefore continuing to provide value to our customers. We believe that these are important metrics to continue to lay out for investors, and we will continue to provide traffic growths as a leading indicator of revenue growth on forward-looking conference calls.

Our net revenues exhibited strong growth for the quarter. sequential quarter revenue growth grew by $2.5 million or roughly 9.1% sequentially quarter-over-quarter. On comparable quarters, Q4 '05 to Q4 '06, On-Net revenue grew by greater than 42%, in fact 42.8%, and year-over-year our On-Net revenues grew by 34.4%. On-Net revenues continue to increase as a percentage of our total revenue, growing from 72.4% of revenues in Q3 of 2006, to slightly over 74% in Q4 2006. Approximately 80% of all of our new sales going forward are attributed to our On-Net products, approximately 20% are Off-Net services, and as a reminder, we do not sell our non-core products going forward.

On-Net customer connections grew by 12.4% for the quarter, growing from approximately 6,900 at the end of Q3 to over 7,800 by year end. Revenue from our legacy Off-Net businesses increased by 1.5% for the quarter. Total customer connections were 12,315 as of December 31, 2006, a 23% increase from year end 2005. Cogent's pricing policy remains unchanged. Cogent is committed to being the undisputed industry price leader. We believe that this an important factor in our gain in market share and our increased profitability.

Our pricing for our most widely sold product remains $1,000 per month for a 100 megabit connection when sold on a month-to-month basis, $900 a month when sold on a one year contract, and $800 a month when sold on a two year or longer contract. On-Net customer connection growth for the quarter of 12.4%, which did exceed our revenue growth of 9.1% for the same period, shows a shift in our net centric customers where, through the additional sales resources, we are now able to focus on smaller service provider customers.

On-Net RPU was $1,360 for Q4 2006 versus the $1,412 for Q3 2006, a decline of approximately 3.7%. This was less than the decline we experienced on a percentage basis from Q2 to Q3 in 2006. As we continue to add sales individuals, we are particularly focusing on smaller net centric customers, which are driving this lower bandwidth per connection. Off-Net RPU was essentially unchanged from Q3 2006 to Q4 2006, at approximately $810.

EBITDA, as adjusted, of $8 million for Q4 2006 represents an increase of 16.2% sequentially from the $6.9 million for Q3 2006. EBITDA increased largely due to the gross margin expansion and the increase from our On-Net businesses. Our incremental On-Net gross margins continue to be approximately 100% with incremental EBITDA margins of approximately 95%. EBITDA, as adjusted, was $22.6 million for full year 2006, double the $11.4 million we experienced in 2005. And as a reminder, our EBITDA, as adjusted, for 2005 included a $3.4 million gain from the sale of a building and excluded a $1.3 million restructuring charge. EBITDA, as adjusted, for 2006 includes an asset sale gain of only approximately $250,000.

Our gross margins continue to expand. Our gross margins increased from 49% in Q3 2006 to almost 50% in Q4 2006. Our gross margins for full year 2006 increased to 46.3% from the 36.5% that we experienced in 2005. The tremendous operating leverage of our business, the incredible margins that we achieve in our On-Net business and the growth of that business relative to the other portions of our business, have been driving our EBITDA expansion as well as the expansion in our gross margins.

Cogent anticipates crossing another corporate milestone and inflection point in the first quarter of 2007. We anticipate being true free cash flow positive on a quarterly basis for the first time in the company's history in Q1 2007. We define cash flow positive in the strictest meaning of the definition, meaning we have more money in the bank at the end of the quarter than at the beginning of the quarter, with no financing activities or fluctuations of working capital accounts.

In fact we have recently been true free cash flow positive for certain months, but now expect to be true free cash flow positive on a quarterly basis in Q1 of 2007, and expect that to continue.

Now Tad will cover some additional details of our Q4 2006 and fiscal year 2006 results. Tad will also provide expectations for Q1 2007, as well as an update and reaffirmation of our expectations for full year 2007. Now I'd like to turn it over to Tad Weed, our Chief Financial Officer.

Thanks Dave, and again good morning to everyone. I'd also like to thank the Cogent team for their incredible hard work in the fourth quarter and also for fiscal year 2006.

Fiscal year 2006 was the second year that we were also required to complete the Sarbanes-Oxley internal control audit work in addition to our usual corporate and statutory audit requirements, and I'm proud to announce that the work is completed, and our auditors will be issuing an unqualified or clean SOX opinion for 2006.

As many of you on this call are familiar with, SOX requires a tremendous amount of work and we're very pleased again with the results and the performance that we've achieved. We'll be filing our 10K by the March 16 deadline, which will include these opinions.

Loss per share, our loss per basic and diluted common share was $0.21 for the fourth quarter that was compared to a loss per share of $0.24 for the third quarter of 2006. Our net loss per share was within our guidance range of $0.20 to $0.25 for the fourth quarter, provided on our last call. Loss per basic and common diluted share for the year 2006 was $1.16 compared to $1.96 for 2005.

Our weighted average common shares increased by almost 12 million, 11.9 million shares, from 34.4 million for 2005 to 46.3 million for 2006. The increase in shares is due to the 4.4 million shares we sold in our June 2005 secondary offering that was outstanding for all of 2006, while only being outstanding for approximately half of 2005.

The weighted average shares from the third quarter to the fourth quarter were essentially unchanged at 48.5 million shares. And, as of the end of the year, we had 48.8 million common shares outstanding.

Statement 123R, which we adopted in the first quarter of 2006 and requires us to expense the impact of stock option grants, increased our fourth quarter loss by about $300,000. That increase to our net loss for 2006 was approximately $700,000.

On foreign currency impact, quarter-over-quarter, it positively impacted our comparable revenue by about $100,000, with the Euro average about $1.27 for he third quarter and about $1.29 for the fourth quarter. And as a reminder, approximately 20% of our revenues are in Europe and approximately 5% of our revenues are in Canada.

Regarding capital expenditures, we added 13 buildings to the network in the fourth quarter and we have a total of 1,107 buildings on our network at the end of the year. Cap Ex for the fourth quarter was $3.6 million. That was below our estimated quarterly run rate of about $5 million per quarter. And for the total year, Cap Ex was $21.5 million. And as a reminder, while we give an average quarterly run rate, we do experience seasonality in our construction activities. Typically, in the fourth quarter, there's less activity due to construction moratoriums. And, we continue to expect to add about $1 billion per week to the network in 2007.

On cash debt in the balance sheet; as of year end, our cash and equivalents were $42.7 million. We still have a $20 million credit facility. No amounts were borrowed under that during the quarter, and it expires on April 1, 2007. Given our projection on cash flow positive, we do not anticipate renewing this line of credit. Our true debt remains at $10 million, and there are 7.5% allied riser notes that we will be paying off in June, [inaudible] [2007].

Our capital lease IRU fiber lease obligations are about $88 million at year end and about $6 million of that amount is a current liability. And, as a reminder, we pay these obligations out over a remaining weighted average life of approximately 13 years.

Day sales outstanding and accounts receivable were about 43 days at the end of the year, as compared to 41 days at September 30. That was above our target of 40 days and that was attributed to the calendar where the last two days of the year fell on a weekend. That $2.5 million in customer cash came in the first week of January, 2007 as opposed to the last week in 2006, so we are back in line with our target of 40 days of DSO.

Operating cash flow; positive cash flow from operations was $460,000 for the fourth quarter and $5.3 million positive operating cash flow for 2006. That compares to negative cash flow from operations of $9.1 million for 2005.

Regarding our first quarter of 2007 guidance, and we're providing this to you based upon our current and expected run rates of our business and expectations for sales rep productivity, an increase in sales and marketing programs and network expansion. Revenue; we expect Q1, 2007, revenue to be between $43 million and $44 million.

The components of that revenue; we expect, On-Net revenue to grow sequentially, quarter-over-quarter, over approximately 10%. We expect Off-Net revenues, quarter-over-quarter, to decline by approximately 5%. We expect our non-core revenues to decline, quarter-over-quarter, by approximately 10%.

We expect our gross margin percentage to expand to the low 50%. We expect EBITDA [inaudible], for the first quarter, to grow to between $9.5 million and $10.5 million. We expect SG&A to be slightly less than 30% of our revenue, and as a reminder, this SG&A amount excludes equity based compensation expense, which, if you look at our public filings, is classified as SG&A for the SEC P&L format. That amount was about $1 million for the fourth quarter of 2006, and it's disclosed parenthetically on the face of our income statement and also provided in the metrics on the press release on our website.

Equity based compensation expense for the first quarter, including option expense, is expected to be between $1.7 million and $2 million. Depreciation and amortization for the first quarter is expected to be between $16 million and $16.5 million. This results in expected loss per share of between $0.20 and $0.25 for the first quarter. And that loss per share assumes 49 million weighted average shares outstanding for the quarter.

I will reiterate our 2007 guidance, which is unchanged from our last call and, as a quick reminder, these amounts are as follows: Total revenue to be between $180 million and $190 million, with On-Net revenue growing to between 35% and 40% sequential growth; Off-Net revenue declining by 7.5% to 10% and non-core revenue declining by between 25% to 30%; gross margins expanding to the mid to high 50s and EBITDA, as adjusted, to be between $45 million and $50 million; SG&A to be between 30% and 32% of our revenue, and again, that excludes equity based compensation expense, classified as SG&A for the SEC format.

Equity based compensation expense for the year is to be between $3.5 million and $4 million; depreciation and amortization to be between $70 million and $75 million, resulting in expected loss per share of between $0.55 and $0.85 and that assumes 48.8 million weighted average shares outstanding for the year.

As Dave mentioned, we anticipate becoming true cash flow positive on a quarterly basis for the first time in our history in the first quarter of 2007 and now I'll turn the call back over to Dave.

Thank you very much, Tad. As we'd mentioned earlier, we intend to continue to expand our footprint by adding approximately one building per week to the network. In 2006, we actually exceeded this goal by adding 67 buildings to our network. Today, we have over 30 addition buildings under construction and have approximately 490 million square feet of On-Net corporate space today, directly connected to our network, representing over 7.5% of all rental office space in North America.

Our sales force productivity remains high. As of March 1st, we had a total of 143 quota bearing representatives. This equates to 127 full-time equivalent representatives under our ramping protocols. We began the fourth quarter of 2006 with 120 reps and ended the quarter with 134 reps at year end, which equated to 118 full-time equivalents at the end of the quarter, under that same ramping protocol. Our sales force productivity remains high, with the reps achieving over five units of installed revenue per rep, per month, which is ahead of our plan. We believe, as we add additional sales people, we will be able to grow our On-Net revenue and traffic and achieve the revenue goals and profitability goals that we have laid out.

We continue to expand our footprint as well. We have over 9,800 miles of metropolitan fiber. We have over 23,400 route miles of inner city metro fiber. We remain the second most connected network in the world, connected to over 2,050 other networks, in which 370 of those networks are settlement-free peers and approximately 1,680 of those networks by connectivity from Cogent.

We believe our network has substantial capacity to absorb additional growth, as we continue to gain market share as the price leader. We're utilizing approximately 15% of our [lift] capacity at the end of the year.

Our business remains entirely focused on the Internet. We believe this strategy differentiates us from any others in the market, allowing us to focus on the fastest growing segment of the market. We benefit directly from a number of key trends that are driving Internet traffic growth.

The Internet has continued to reinvent itself and the applications that people are utilizing over the Internet continue to change. We have seen an increase from our social networking sites and video file sharing sites that have driven substantial traffic growth. We remain, however, very diverse in our revenue streams with no great customer concentration.

Many of our competitors sell products that are based on legacy applications that are under tremendous pricing pressure where we, at Cogent, remain the price leader for Internet traffic. Our On-Net revenues will continue to grow, approximately 9% to 10%, quarter-over-quarter and continue to be an increasing percentage of our revenue. We expect the On-Net revenue to drive gross margin expansion and EBITDA margin expansion that we have guided to for Q1 as well as for full year 2007, continuing to demonstrate the operating leverage of the business. And, I think, achieving the milestone of being true free cash flow positive, puts Cogent on a trajectory to continue to gain market share and continue to be a dominant provider of Internet connectivity.

With that, Tad and myself would like to open the floor up for questions. [Lorrie], if you could share with us the first question.

[OPERATOR INSTRUCTIONS].

We'll go first to Scott Goldman, with Bear Stearns.

Hi, good morning, guys. A couple questions, if I could; first, you talked a little bit about seasonality impacting, you know, the Cap Ex and coming in a little bit lower there. Can you talk about what impact seasonality may have had on the On-Net business? Customer connections seemed to be down a little bit, sequentially, relative to the third quarter, so, I wonder if you were prohibited from doing some business there, just as customers held off until the first quarter?

Secondly, I wanted to just see if you guys could talk a little bit about the increase in network expense that we saw. I think it was about a $1 million increase in network expense in the fourth quarter. And finally, if you could talk about [inaudible] tech, a pretty sharp drop off in equity based compensation for the quarter, if you could address that as well. Thanks.

Sure, Scott. Let me start with the seasonality question. You know, in the fourth quarter, on our construction efforts, we typically see a drop off in capital expenditures as a result of our inability to continue to build in many markets. In terms of sales, there is not a great deal of variability seasonally within our business.

However, we typically see a slight slowdown in new sales in the month of December, because of vacation schedules, as well as in August. These are historical trends that we've seen each year. But overall, the guidance that we've given accounts for that. And, because of the kind of lag in the installations and the fact that they don't always sit in the, you know, for the full quarter, the effect of this in any one quarter is fairly minimal.

Now, with regard to the network expense and compensation expense, I'll let Tad touch on those two topics.

Good morning. The network operation expense, excluding the classification of deferred comp, increased about $980,000 quarter-to-quarter. The change is largely attributed to the net change in disputed charges that we recorded on a quarter-to-quarter basis. Our disclosed policy is even if we are billed an amount, which unfortunately in many cases is incorrect, from some of our service providers, we record the entire amount as a charge and then dispute that, reverse that dispute once the dispute is either won or we've negotiated that away. So it's kind of out of our control in some respects as to how much disputed charges are recorded from our circuits on a quarter-on-quarter basis. And when you look at Q3 to Q4, the net change was about $.5 million of that quarter-to-quarter change. With the other amounts, nothing of material nature to point out.

On the comp expense, we had some restricted shares that were granted back in 2003 that became fully vested in September of this year, and that was about $800,000 in comp expense on a monthly basis. The end of that amortization resulted in about a $1.6 million decline in Q3 to Q4 of amortization of comp expense. I would point out that in the first quarter of '07 we granted shares to our directors which resulted in about a $900,000 charge in the first quarter, so that amount was included in the guidance I provided so we can have some variability in comp expense, largely attributed to the stock price.

Great, and just to touch on that disputed charge, is there any impact there when you talk about that kind of thing on bad debt expense for the quarter?

It has no impact at all on bad debt expense because the disputed charges are coming from our vendors and the bad debt expense is on the customer side. Since you mentioned that, I might point out the bad debt expense was about 2% for the quarter, which is just fantastic, even though we had that $2.5 million in cash come in January as opposed to December. We're really seeing excellent performance on the bad debt side.

Great, thanks guys.

We'll go next to James Breen with Thomas Weisel Partners.

Thanks guys, good morning. I was wondering if you could just talk about the Off-Net business a little bit. It seems like the revenue's actually up sequentially and higher than where we had it. Are you seeing some changes there in terms of the trends as well as that you sign up customers that are requiring more Off-Net connections? Thanks.

Sure Jim. You know at some point we anticipated an inflection in our Off-Net business. As a reminder, approximately 70% of the Off-Net base that we have today came to Cogent through acquisitions. Off-Net remains approximately 20% of our sales. The acquired customers experienced churn really in two ways, one by losing customers, many of those customers had been kind of passed around from acquisition to acquisition. Many of the companies we acquired were in fact roll ups of smaller ISPs. Also many of those customers were paying above market prices. We chose to reprice those customers down to market. That repricing is behind us. So what we have seen now is the 20% of our sales going forward actually being Off-Net, and therefore we have hit that inflection point where the Off-Net revenues are stabilizing.

In terms of RPU for those Off-Net customers, there are really two countervailing trends. One is some further price reduction on a per circuit basis, but also a tendency of some of those Off-Net customers to buy higher cap circuits, being either T-3s, which are 45 megabit circuits as opposed to T-1s, which is the smallest Off-Net circuit we sell, at 1.54 megabits. And then finally our ability to actually use some of the point-to-point Ethernet services offered by the two major RBOCs here in North America, and be able to sell 100 meg Off-Net services. So for those reasons we've seen a slight up tick in RPU.

We think long term that our revenues will continue to trend toward that 80/20 split that we've guided to.

Great, thank you very much.

And we'll go to Nick Netchvolodoff with Lehman Brothers.

Hi Dave. I just had a quick question about working capital. What do you expect your needs to be over the next couple of quarters? It seems like you're sort of expecting an increase.

Nick, it's Tad. We have an expected increase in working capital, as we kind of pointed out with the timing of cash receipts from customers. Fortunately the business is really growing, but we bill on a monthly basis so the results for the last few days in the quarter can cause some swings depending upon the money comes in the last day of the month and also on the calendar.

If you look at the guidance provided on the press release, we reconcile to the cash flow statement for the quarter and for the year as to how we expect EBITDA, as adjusted, come in, and that will provide you the figures that we expect for those periods.

Okay. Are you still expecting 180 sales reps by the end of the year?

That is correct.

And also the five units per month, was that on a per FTE basis or total reps?

That is on a per FTE basis.

Okay, do you have the number for just total reps?

I'm not going to say that we don't, but I think the way to think about it is on a per FTE basis, because for an example if a rep was hired this month we don't expect any productivity out of that rep. So I think the ramping is a very important calculation in forecasting the productivity.

And as a reminder that zero percent, or zero productivity in the first month, 1/3 the second, 2/3 the third, and then 100% productivity which would be the average of five units per rep in the fourth month.

Okay, just one more, I won't take any more of your time. What about On-Net and Off-Net churn? Are they stable?

It has stabled and it has been improving. Off-Net churn is about 3.5%, that's actually part of the reason why the performance was a little bit better than what we expected on the Off-Net side. On-Net churn has been relatively consistent at about 1.5%.

Okay, great. All right thanks guys, great quarter.

[OPERATOR INSTRUCTIONS]

We'll go next to Jurgan Usman with Wachovia Securities.

Thank you very much. A couple of questions, first of all it looks like foreign exchange negatively impacted your EBITDA by $.5 million. Can you give a little bit of color on that?

Actually foreign exchange positively impacted revenues by about $100,000 quarter-to-quarter, less of an impact on EBITDA because most of the EBITDA is generated from the U.S. operations currently. But it wasn't a material change quarter-to-quarter. Q3 was about $1.27 and Q4 was about $1.29. So it actually slightly helped.

Slightly helped because Europe is EBITDA positive as all of our operating theaters are, and probably maybe a little less positive on a margin basis, but the difference was diminimous.

Okay and then the second one is that the bulk of the change in EBITDA divided by the change in revenue sequentially; I'm getting a number in the mid 30%. This is a lot lower than your previous run rates of up to 130%, I guess on average about 60% - 65% or so. Why is that?

I think the main reason is attributed to the disputed charges that we talked about, the difference between Q3 and Q4 that were recorded, since that flows right through, unfortunately, the EBITDA. Maybe an example will help. If we should be billed $800 by a vendor and we happen to be billed $1,000 in error, we actually record that $1,000 and then reverse the $200 after our team has resolved the issue with the vendor. So the timing and nature of our ability to resolve that, in a lot of instances is actually out of our control. We have some variability in that.

Okay so by the same token I guess you'll be helped by this effect in Q1. Another question is who's the largest contributor of your traffic growth so far? I mean I know YouTube is probably your biggest customer right now. Where is YouTube in this regard right now?

Sure. Jurgan this is Dave. We've seen a continued surge in traffic from a number of social networking sites and video sites. YouTube is a very significant customer for Cogent. I think they have emerged, by the end of the year, as our largest single customer. But it's important to remember that we have no great customer concentration with no customer accounting for more than about 2% of our revenue, and also the fact that our top 50 customers account for less than 20% of our revenue.

We have a number of sites that have different business models that share video content, and I think you'll continue to see substantial growth being driven by those video sites. The fact that Cogent remains the price leader in the market, many of these sites, which are extremely bandwidth intensive, and have models that are advertising based, have chosen to use Cogent as their primary provider. So I think it's fair to state that we capture a disproportionate amount of this growth.

And then within that base there's huge variability. We've had some customers grow their bandwidth consumption with Cogent over their life cycle with us by over 500X. Others grow at much more modest rates, but in aggregate it's reflected in that 25% quarter-over-quarter traffic growth number.

Okay. One last question, you grew your traffic 25% quarter-over-quarter in Q4 and in the past two quarters the rates were 20% and 14%. Do you expect to continuously grow at a much higher rate quarter-over-quarter?

Well again our traffic growth is driven by two primary factors; one is the overall growth of the internet. Because all of our services are internet based we are, in large part, a beneficiary of the continued surge in traffic on the internet. Independent third parties have pegged that growth at anywhere between 60% and 75% on a year-over-year basis. Our traffic growth at 25% quarter-over-quarter is substantially ahead of that pace. Our growth comes both from our existing customers growing at the rate of the internet as well as our capture in market share.

Our corporate customers continue to grow their traffic consumption probably a little bit faster than the rate of the internet, but that does not necessarily drive additional revenues to Cogent since they generally buy 100 meg connections and are now utilizing those connections more fully.

On the service provider side, many of our customers buy in 100 meg increments. There is a much closer linkage, not a perfect linkage, but a closer linkage, between traffic growth and revenue growth. And I think that has been demonstrated in our over 9% sequential quarter-over-quarter traffic growth, or revenue growth, in large part driven by traffic growth as well as gain in share.

I think you will see Cogent, going forward, continuing to grow faster than the underlying internet, but we cannot predict with great certainty seasonality variations, particularly among our university customers. So I think the 100% that we grew year-over-year demonstrates how we're gaining share.

All right, thank you very much.

And we'll go to Jonathan Atkin with RBC Capital Markets.

Thanks for taking the question. Your 2000 (sic) compared to the last call, and I just wondered whether there's any key parts of the business that look any different compared to when you first issued guidance has anything changed in terms of where you see the corporate or net centric demand coming from. I know your previous answer kind of touches on that, but if there's any more flavor on the key parts of the '07 outlook that look any different. And then I've got one follow up.

Sure Jon, its Dave. With regard to On-Net versus Off-Net, our indications remain in line with what we were experiencing when we put our forecast together. What Tad and the team do is look at a rolling six month trend line of drivers of growth, and give us confidence based on sales force productivity, the sales funnel, what we see in terms of being able to feel comfortable with that guidance.

On-Net versus Off-Net is critical for margin and gives us the confidence that we have in our EBITDA and cash flow guidance's that we have given. Now within On-Net, the mix between net centric and corporate may change quarter-over-quarter and even within that net centric base we see some changes in terms of the size of those net centric customers. I think we have seen a slight up tick in the percentage of our business that is being driven by our net centric customers over the past quarter. but we expect, in the long term, that those numbers remain pretty constant with what we've seen over the past two to three years.

You know, as we look forward in our funnel, we have over 33,000 prospects that the sales team is actively working at this point in time. And, while we can't predict any one of those prospects with any great degree of certainty, we have a pretty good statistical basis under which we feel comfortable with guidance and kind of the growth drivers that we've given.

We've also experienced better than expected churn, as Tad had mentioned previously, which has also helped us, particularly since our NetCentric customers have typically churned at a higher rate than our corporate customers.

Okay. And then, in the verbal commentary, you referenced 9% to 10% On-Net revenue growth per quarter, during '07. And, if I'm doing my math right, that actually results in an On-Net revenue number for the full year '07 that's north of the 35% to 40% year-over-year ramp that you're guiding to. So, is it fair to say that your '07 guidance has had a little bit of conservatism built into it, in terms of where the top of the range is?

I think that's very true, Jon. You know, what we've tried to do in the press release is give you the historical trends. And, as you can see, the 9% to 10% that we have guided to for Q1 is very indicative of what we've experienced in the past couple of quarters.

If we are able to sustain just that same rate, with no inflection or benefit from the additional sales people that we're planning to add, you are right that we will probably see total On-Net revenue growth exceeding our full year guidance, which would have an upside of more margin and EBITDA guidance as well as cash flow for the year.

But, we've really strived to be fairly conservative. And, I think you've seen that in how accurate our guidance was this quarter, in terms of trying to steer people right to the mid point and doing just that.

Great. Thank you very much.

We'll go next to Colby Synesal, with Merriman.

Hi guys, thanks for taking my questions. Just real quickly, I was hoping to talk more about Europe and the - both the demand and the competition that you're seeing there, maybe compared to the U.S. and what your opportunity might be there to either invest more heavily in that market or, potentially, make some acquisitions there as well. We've seen some of your competitors, note that they're looking to do. Thanks.

Okay, sure, Colby. Europe remains an important part of Cogent's business. It represents about 20% of our revenues. About 5% of our revenues are in North America, outside of the U.S. and Canada. And there, we have recently announced our expansion in Canada into Montreal. Previously, we had only served the Toronto market.

In Europe, we continue to look at expansion opportunities based on demand. We have a number of large customers, PTTs that rely exclusively on Cogent. Many of those are further east in Europe. Today, our network terminates in Vienna, Austria. That's as far east as we go.

We have looked at expanding routes, utilizing equipment that we have and securing fiber to extend further into Eastern Europe, further into southern Europe, and, as well, further into the Nordics. These are all regions that are currently under evaluation by Cogent.

We also continue to add additional carrier-neutral facilities to our footprint in Europe, as some of these facilities are being reactivated. Many of them had been dormant for several years.

We have seen traffic growth in Europe greater than we have in North America; so therefore, we are focusing on trying to put capital resources into our European footprint. We also are expanding both our inter city and intra city networks by adding additional wavelength and capacity to those networks, to accommodate that demand.

The competitive dynamic remains vigorous. Typically in each country, we compete with the incumbent PTT. We also have several pan-European operators. Many of them do not have global Tier 1 networks and purchase upstream connectivity from companies such as Cogent or others.

You know, I think, just like the competitive dynamics here in North America, many of these providers have much higher cost networks and find it extremely difficult to compete with Cogent at Cogent's price point. We also, in Europe, remain the price leader and continue to gain share faster than our competitors.

To the point about acquisitions, you know, Cogent has probably been one of the most aggressive acquirers in the industry at a point in time when those acquisitions made sense. As we look forward, we have evaluated, now, over 45 acquisition opportunities since we have done our last acquisition in December of '04. We have not even conducted any serious due diligence on any of those acquisition opportunities based on kind of the pricing in the market for those targets.

We've remained extremely disciplined about our strategy, in terms of being very cognizant of not deluding our shareholders unnecessarily. I think we will most likely expand in Europe organically, as opposed to through acquisition. We don't want to rule any particular opportunity out.

And also, here in North America, outside of the U.S., we are looking south into Mexico and other regions in Latin America as well as we have a number of Latin American customers who are helping kind of drive our investment decisions, going forward.

Thank you; that was very helpful.

[OPERATOR INSTRUCTIONS].

And there are no other questions. Mr. Schaeffer, I'll turn it back to you for any additional or closing comments.

Okay. Thank you very much Lorrie. Well, I'd like to thank everyone for attending today's call. Hopefully, Tad and the entire team have been transparent in answering your questions and giving you the data you need to understand the performance of Cogent's business.

And, we look forward to continuing this dialog in some conferences coming up. And, anyone who has any follow up questions, don't hesitate to give us a call. Take care; talk to you later. Goodbye.

And this does conclude today's conference. Thank you for your participation. You may disconnect at this time.