Cogent Communications Holdings Inc (CCOI) 2007 Q1 法說會逐字稿

Good morning and welcome to the Cogent Communications Group first quarter 2007 earnings conference call. As a reminder this conference is being recorded and will be available for replay at www.cogentco.com.

I would now like to turn the call over to Mr. Dave Schaeffer, Chair and Chief Executive Officer of Cogent Communications. Please go ahead, Sir.

Thanks Pat. Thank you all and good morning. Welcome to our first quarter 2007 earnings call. I'm Dave Schaeffer, Cogent's Chief Executive Officer. With me on this morning's call is Tad Weed, our Chief Financial Officer.

We are extremely pleased with the results of this quarter, in particular, becoming [true] free cash flow positive for the first time in our corporate history and generating over $5.5 million in cash in the quarter. I again want to personally thank the entire Cogent team for their efforts in achieving this important milestone and the general success that we have achieved in the quarter.

I would also like to take a moment and thank three of our former Board members who have recently completed their service with us. [Ed Glassfire] of Oak Investment Partners, Mr. [Jean Jaffe Bertrand] of BMP (inaudible) and Mr. [Ken Peterson] of Columbia Ventures. All deserve much of the credit for our success and we are grateful for their service, support and counsel over the years.

Throughout this discussion, as in the past, we will continue to focus on the results and impact of our on-net business which in fact is Cogent's growth business. We will also highlight several operational statistics we believe will continue to demonstrate our increasing market share, expanding scale and the significant operating leverage of our on-net business.

I'll start today's call with a review of certain operational highlights and also outline some of our expansion plans and opportunities. Tad will provide some additional details on our financial performance. Tad will also walk you through our expectations for the second quarter of 2007, as well as the updates and reaffirmation of our expectations for 2007.

Following our remarks, we will open the floor for questions and answers.

Now I would like to turn it over to Tad to read our Safe Harbor language.

Thank you, Dave, and good morning, everyone.

This first quarter 2007 earnings report and this earnings conference call discuss Cogent's business outlook contain forward-looking statements within the meaning of Section 27A and 21E of the Securities Act. Forward-looking statements are based upon our current intent, belief and expectation. 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.

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 revisions to any forward-looking statement made today or otherwise update our supplement statements made on this call.

Also during this call if we use any non-GAAP financial measures as defined by the SEC in Reg G, you'll find these reconciled to the GAAP measurement in our earnings release and on our website at cogentco.com. Now I'd like to turne the call back over to Dave.

Thanks Tad.

Hopefully you have had a chance to review our earnings press release. As with previous quarters, this press release includes a number of historical quarterly metrics. These metrics will be added to our website. Hopefully you'll find these metrics informative and helpful in understanding our financial results as well as trends in our operations. As always if you have any suggestions for additional metrics or refinements to these metrics, please let us know.

Our first quarter 2007 revenue was $43.6 million above the midpoint of our range of guidance of $43 million to $44 million. EBITDA as adjusted was $10.1 million above the midpoint of our range of guidance of $9.5 million to $10.5 million. We continue to be pleased with the growth of our on-net business. Our continuing investment in sales, marketing and network expansion has continued to lead to increasing on-net revenues.

Our on-net revenues grew an impressive 10.6% sequentially quarter-over-quarter (technical difficulty) Q4 2006 to Q1 2007. Our total revenue for Q1 2007 was $43.6 million. This represents a 7.7% increase over the Q4 2006 revenue of $40.5 million and a 26.6% increase over Q1 2006, where revenue was $34.4 million. Traffic on our network grew by approximately 22% sequentially quarter-over-quarter from Q4 2006 to Q1 2007. And over 106% annually from Q1 2006 to Q1 2007.

We believe that this continued growth in traffic above the rate of growth in the market continues to demonstrate our ability to capture market share and that, in fact, our strategy of being the low-cost and low-priced provider in the industry is a significant contributor to this growth.

Our on-net revenues continue to exhibit strong growth. On-net revenues grew by $3.2 million or 10.6% sequentially quarter-over-quarter Q4 of 2006 to Q1 2007. On-net revenues grew by $10.5 million or 46.1% on an annual basis from Q1 2006 to Q1 2007. Our net revenues continued to increase as a percentage of our total revenues, growing from 74% of all revenues in Q4 2006 to 76% of all revenues in Q1 2007.

80% of our new sales for the first quarter of 2007 were on-net services. On-net service connectors -- service customer connections grew by 10.1% sequentially quarter-over-quarter from 7778 at the end of fourth quarter 2006 to 8565 at the end of Q1 2007.

Revenues from our off-net businesses essentially were unchanged and our noncore revenues declined sequentially approximately 5%. Total customer connections increased by 5.1% to 12,939 as of the end of Q1 2007 as compared to 12,315 customer connections at the end of Q4 2006.

With regard to our pricing, our pricing policy remains unchanged. We are continuing to commit ourselves to being the industry price leader. A pricing of our most widely sold product is a 100 Mb connection for $1000 a month when sold on a month-to-month basis. To remind you that product is also priced at $900 a month when sold on a one-year contract and $800 a month when sold on a two-year or longer contract.

Our net ARPU was $1352 for Q1 2007 versus $1360 for Q4 2006. The decline is less than half of 1%. This was significantly less than the rate of decline that we experienced Q3 2006 to Q4 2006, when that decline was approximately 3.7%. Off-net ARPU was essentially unchanged between fourth quarter of 2006 and Q1 of 2007 at approximately $815.

EBITDA as adjusted was $10.1 million for Q1 2007 which represents an increase of 26.3% sequentially from the $8 million of adjusted EBITDA at the end of Q4 2006. Our EBITDA and EBITDAR margins continued to expand significantly due to the growth in our on-net business. Our EBITDA margins expanded 340 basis points from 19.7% in Q4 2006 to 23.1% in Q1 2007.

We believe this continues to show the advantages of our operating model.

Our gross margins increased by 200 basis points from 49.8% in Q4 2006 to 51.8% in Q1 2007. Direct incremental or net gross margins continued to be approximately 100% with direct incremental on-net EBITDA margins of approximately 95%.

Now that we have reached positive cash flow, we are -- and we are expecting increasing cash flows, we are comfortable in increasing and doubling our building expansion plans for 2007. We now expect to add approximately 100 buildings to our network in 2007, doubling our pace from one building per week to nearly two buildings per week. As a result we will be increasing the discretionary capital expenditures of the Company. This will increase our total capital expenditures to approximately $28 million.

Just to remind you, we spent approximately $12 million annually on maintenance CapEx. We had previously been spending about $8 million in discretionary CapEx which that number now is doubling to $28 million.

We have also secured additional fibers to extend our network. We recently have begun construction and will complete this quarter the extension of our network in Italy from Milan in the North over to Florence, Venice, and Rome in the south of Italy.

In the Nordics we are expanding our network from Stockholm, Sweden northward to Oslo, Norway and here in the United States we are expanding our network from Los Angeles into Las Vegas. We are also reviewing a number of other network expansion opportunities that we will be able to discuss at greater length in the future.

Tad will now cover some additional details concerning our Q1 2007 results. Tad will also provide our expectations for Q2 2007 as well as an update and a reaffirmation of our expectations for full year 2007.

Now I would like to turn it over to Tad.

Thanks, Dave, and again good morning to everyone. I also would like to thank our entire team for the great quarter for us and especially achieving the milestone of becoming cash flow positive.

Regarding our loss per share, our loss for basic and diluted common share was $0.19 for the first quarter compared to $0.21 for the fourth quarter of '06. That was $0.01 better than our range of guidance of between $0.20 and $0.25 for the first quarter of '07.

At the end of the quarter on March 31, 2007, we had approximately 49 million shares outstanding. Non-cash equity-based compensation expense -- which includes the impact of option expensing under 123R -- increased our first quarter 2007 loss by about $1.6 million or about $0.03 a share. Our guidance for that amount was about $1.7 million to $2 million for the quarter. So it was slightly below the guidance.

Regarding the impact on foreign currency on the quarter, foreign currency positively impacted our sequential revenues by about $80,000. And as a reminder, consistent with prior quarters about 20% of our revenues are based in Europe and about 5% of our revenues are based in Canada.

Regarding capital expenditures, capital expenditures for the quarter were $7.6 million -- and that was an increase from the $3.6 million we experienced during the fourth quarter of '06 -- are partly due to an increase in building additions we added 22 buildings to the network in the fourth quarter and also expansion-related activities. This demonstrates I believe, also, that we experienced some quarterly seasonality in our network construction and expansion activities with typically the fourth quarter being below us.

Regarding the balance sheet, as of March 31, 2007, our cash and cash equivalents were $48.3 million; and no amounts were borrowed under our credit facility during the quarter. Now that we have achieved cash flow positive status, we allowed that facility to expire on April 1, 2007.

Our true debt remains at $10 million. These are 7.5% Allied [roger] notes that are due and will be paid next month in June 2007. We will continue to generate cash in Q2 but we will need to use cash towards the repayment of these notes, cash and interest.

Our capital lease, higher use fiber lease obligations totaled $88.1 million at March 31, 2007, and about $6.5 million of that amount is a current liability. As a reminder these obligations are paid out over the remaining weighted average life of about 12.5 years.

Due to outstanding collection efforts by our worldwide team of building and finance professionals, our day sales outstanding for Worldwide Accounts Receivable was 37 days at the end of the quarter. That was compared to 43 at the end of the fourth quarter and better than our target of 40, through an outstanding effort on customer collections.

Positive cash flow from operations was $13.6 million for the first quarter, substantially increased from $460,000 for the fourth quarter due to an increase in EBITDA, AR collections, and payables management.

Regarding guidance for the second quarter, or providing Q2 2007 guidance based upon the run rates of our business and the planned increase in sales and marketing programs and network expansion and the guidance is as follows. Regarding revenue we expect Q2 2007 revenues to be between $45 million and $46 million and we expect on that revenue quarter-over-quarter to grow between 9 and 10%. We expect off-net revenue to decline quarter-over-quarter by approximately 5% and we expect noncore revenues to decline quarter-over-quarter by approximately 10%.

We expect continued expansion in our gross margins and that -- for that to increase by between 100 to 200 basis points quarter-over-quarter. We expect EBITDA [of net] adjusted to grow to between $11 million and $12 million. We expect SGA expenses excluding the amounts that is classified as non-cash equity-based comp expense. If you look at our Q you see that included in that amount, but it is parenthetically disclosed so you can identify that amount. We expect SG&A to be between 28 and 29% of revenues for the second quarter. We expect non-cash equity-based comp expense in total to be between $2.5 million and $3 million for the quarter. This includes the impact of non-cash comp expense of shared rents we made on April 30 of this year.

On April 30 we granted shares to all Cogent employees who were hired prior to January 1, 2007. That is about 1 million a month for about 24 months of non-cash comp expense.

We expect Depreciation and Amortization to be between $17 million and $17.5 million for the quarter and our loss per share to be between $0.20 and $0.25. The loss per share assumes 49 million weighted average shares outstanding.

On the 2007 guidance, the following is being reaffirmed. Total revenue to be between $180 million and $190 million and on that revenue growth between 35 and 40%. Off-net revenue to decline by 7.5 to 10%. Noncore revenues to decline by between 25 to 30%. Those are all the annual rates.

And anticipate gross margin percentage expanding to the mid to high 50%. We expect EBITDA as adjusted to grow to between $45 million and $50 million. SG&A to be between 30 and 32% of our revenues and again that amount excludes equity-based comp expense which is being updated and I will provide shortly.

We expect Depreciation and Amortization to be between $70 million and $75 million.

For the following guidance, previously provided guidance for 2007 is being amended. Due to the additional non-cash equity-based comp expense with the April share grant, that amount will increase for the year to approximately $11.5 million to $12 million. The previous amount was $3.5 million to $4 million. That changes our loss per share expected to be between $0.70 and $1 from the previous estimate of $0.55 to $0.85.

So the impact of the non-cash comp expense is about $0.15 a share on 2007. And, again, that assumes 49 million weighted shares outstanding.

I would just point out that the additional share grants are not counted in the denominator of earnings per share until they vest and those shares do not vest until April 2009.

I will turn the call now back over to Dave.

Thanks, Tad.

I would like to take a moment and just outline a little bit more about our footprint expansion. We added 22 buildings in the first quarter of 2007. As of March 31, 2007, we had 129 buildings on net, 25 additional buildings in process to be connected to our network.

We achieved in the quarter a true milestone connecting over 0.5 billion square feet of corporate footprint to our network. These are multitenant office buildings in which corporate end-users reside in North America. It represents approximately 7.5% of all principal square footage in North America.

Now that we have become true free cash flow positive and we expect that cash flow to continue to increase, we have elected to double the number of buildings and the pace at which we add buildings to our network 2007. Salesforce productivity, as of May 1st we had 140 sales reps, 122 full-time equivalents as of May 1, under our ramping protocol. We've begun the first quarter with 134 reps and actually ended with 129 quarter bearing reps.

This is in part due to the fact that we increased the number of managers and promoted internally a number of our reps which I will speak about in a moment.

We began the first quarter with 118 full-time equivalent sales reps and actually ended the quarter with 127 full-time equivalents. During the quarter, we decided to divide our sales territories to ensure that we had proper management coverage for future expansion. Our experience has told us that maintaining a rep to manager ratio of 7 to 1 is optimal. We started to see this number degrade so we elected to promote a number of our better performing reps to management positions, further dividing the territories and giving us the appropriate management span of controls while we were working for it.

This did reduce the number of quota bearing reps in the quarter, but if will build the foundation for (technical difficulty) as an accelerated future growth. We continued to remain comfortable with our revenue plan and our salesforce hiring plan.

[Rep] productivity eroded slightly to about 4.5 per month below our target of five. Again as a result of promoting some of the best performing reps within the Company into management positions. But we do expect to see a rebound to our targeted five orders per rep per month. Certain reps enclosed larger accounts which also impacted our rep productivity by unit count but was responsible for the relatively modest decline in our ARPU.

We continue to remain very disciplined about our monitoring of reps productivity and (inaudible) removing those reps that do not meet our criteria.

We continued to expand our footprint and at the end of the quarter had over 9850 Metro fiber miles. We had over 23,500 fiber route models on in intercity basis. Touch it was connected to over 2100 other networks around the world, approximately 365 of those our settlement free peers and the remaining 1735 our touching customers buying their upstream connectivity from cogent.

Our network expansion also includes the migration of capacity at various locations around our network. We believe we have substantial idle capacity in our network for future growth and do not anticipate any major backbone expansion capital being required.

Our network business remains completely focused on the Internet and we have been a direct in the sharing of the tremendous growth in Internet traffic. Traffic continues to increase on our network at a faster rate than the rate of traffic growth on the Internet in general. Our revenue from our gross nest that being all on net business is growing at better than 10% quarter over quarter and continues to increase as a percentage of our revenue.

We continued to experience expanding gross margin and EBITDA margins which we expect to continue for some time into the future demonstrating the operating leverage of our on-net business. It also achieved an unprecedented revenue per employee at Cogent which I think is also a direct result of our operating efficiency generating over $450,000 per employee. This is in conjunction with hiring a number of newer employees for our sales organization.

We anticipate increasing our market opportunity unit further by doubling our footprint expansion plans in terms of number of buildings added to our network.

Finally as many of our shareholders have recently asked about our plans for cash flow generation, after we [pay] the remaining $10 million of outstanding debt this quarter, we intend to invest our additional capital in growing our salesforce and expanding our network and increasing the number of buildings, therefore increasing our addressable market.

We also intend to strengthen our balance sheet before we consider any share buybacks or dividends which I think are somewhat premature at this point in time.

Now I would like to open the floor for questions. Thank you.

(OPERATOR INSTRUCTIONS). (Jonathan Akin). RBC Capital Markets.

Wondering if you could repeat briefly the markets that you are adding as a result of the long haul fiber expansion that call Las Vegas and a few of the Nordic markets. Wondered if you could repeat that?

Sure. The three markets that we announced on the call today are the expansion in Italy from Milan to Florence, Venice and then ultimately to Rome in the south of Italy. In the Nordics expanding from Stockholm to Oslo and, then, in the U.S., expansion from Los Angeles into Las Vegas.

We are also considering some other markets in Eastern Europe and we will hopefully be in a position to talk about those next quarter.

You mentioned capacity utilization is still quite low, not needing to sink much capital into your existing network. Can you kind of quantify where you are percentagewise?

Sure. You know we measure our network capacity in four discrete points. We look at edge router capacity, Metro optical transport capacity, core routing and then, finally, backbone capacity. We are running between 15 and 20% utilization of the network and feel that we have substantial capacity going forward that we do not have to expend any significant capital on the backbone. Or Metro backbones.

Then finally on the '07 guidance that's unchanged, but I'm just curious whether there is any piece parts of the business, any different segments that you are seeing more or less momentum out of, that are surprising to you, relative to what you were expecting earlier in the year. And then in the past you've talked to think about 9 to 10% sequential on-net revenue growth.

And then if I bake that into my numbers coupled with the very high operating leverage gets me to a number above the high end of your EBITDA guidance. Is that still kind of a sound thought process?

Good morning, Jonathan. It's Tad. I hate to be boring, but I really have not experienced anything substantially different than as we've laid out our plan. I think the farther we've gotten from some of the acquisitions we've done, we've had a greater level of precision in our forecasting. So that's why we have not changed the annual guidance, albeit we are being -- becoming more comfortable with it as we get farther along during the year.

With regard to operating leverage, we have experienced and have continued to experience the approximately 100% incremental gross margins and 95% incremental EBITDA margins in our on-net business. We have tried to be very conservative in the guidance that we have laid out and the fact that we, this quarter, exceeded our on-net revenue growth growing at 10.6% sequentially quarter-over-quarter, we continue to feel comfortable with that kind of 9 to 10% sequential growth even though the base is getting larger.

[Tom Watts]. Cowen & Co.

Congratulations on the quarter. It looked like there was some pretty substantial working capital gains in achieving the cash flow number. And were those more one-time benefits or can these -- is it possible to achieve those going forward?

Yes. There's substantial increase in working capital from about $500,000 to $13.6 million in terms of operating cash flow. Obviously some of that was for the increase in EBITDA. We just have -- we had fantastic customer collections for the quarter. I think I mentioned the DSO down to 37 and also some payables management that we formed at the end of the quarter.

I don't see a substantial difference going forward. What can happen, however, is you can't always count on getting that level of customer collections in cash.

For example, some days in our lockbox in the U.S. we can get approximately $2 million in cash. Depending upon how the calendar falls and the ability to get that you can have a swing of that level.

Also, Dave, you had mentioned additional expansion in Europe. I assume the CapEx for that is included in your $28 million in guidance?

That's correct. We have, in our guidance, tried to be as accurate as possible. That guidance includes the addition of additional end buildings which is where the majority of that capital is spent. For example the routes that we have recently announced on this call, all were done with equipment out of our warehouses. And we would suspect that additional expansions in Europe that we are contemplating could also be achieved with equipment that we currently have on hand.

Then if could you just comment on what and how the European market characteristics are different from what we're seeing in the U.S.? Also in the past you'd had said that at least in the U.S. market, you didn't see any opportunities for acquisitions, given current valuations.

But is it -- how would you view Europe and would you consider an acquisition to expand there or elsewhere outside the U.S.?

You know, we remain very focused on value when we look at acquisitions. While the Company has continued to look at acquisitions and looked at over 60 opportunities since we have done our last acquisition, we have not seen any opportunities that represent the kind of value that we've achieved in the past and, therefore, have not decided to move forward.

I think as we look at Europe as a market to expand in, we are looking to go further east, farther north and further south in those markets. In our footprint in Spain, in France and in Germany, our network really has unprecedented ubiquity in terms of number of cities served. Probably a greater number of markets served than any of the other pan-European network operators.

As we look at expanding we have -- we today own fiber that is not let, that Cogent will continue to [wait] as market opportunities arise. We also have found opportunities to just acquire fiber at very reasonable cost on routes in which we don't already own fiber. So there is ample supply of fiber available. We generally have equipment available whether it be routers or optical transport equipment to light those additional routes. And it is unlikely that we would look to acquire whole businesses in Europe. simply because the majority of the revenue that we would end up acquiring would not be Internet revenue.

The final point and kind of (technical difficulty) the European market and all of the markets that we are looking to expand into, we are looking at markets that are experiencing traffic growth rates and revenue growth rates that are above the U.S. rate. And the Internet has been predominantly a U.S.-centric phenomena, it's becoming more of a global phenomena. Particularly as additional companies go into Eastern Europe, I think there's even a greater number of opportunities, but it will be done most likely through organic efforts.

One final question. You had a very good traffic growth. Over 100% year-over-year. Can you comment to what extent you think that that is a function of IP video and also any new activity or new relationships you see on the media front?

The Internet has continued to transform itself and the fact that the Internet is continuing to grow at better than 70% for a year, yet our traffic is better than 100%, is a direct result of the Internet, becoming a video distribution network. I would suspect that, in terms of traffic, over half of our traffic growth is coming from video sites. Some like I said had historically been static sites are now embedding a much greater amount of video, as well as a number of new business models coming to the Internet. YouTube remains a significant customer of Cogent as do a number of other video-sharing sites, whether they be traditional media companies like CBS or NBC or some of these Europe business models.

I think the ultimate business model for video distribution over the Internet is still being formed, but what is clear is that for the next several years we should experience significant traffic volume increase as the amount of video content that becomes available to broadband users continues to increase over the Internet. And because we at Cogent are so committed to being the low-cost provider, we have demonstrated, I think, the ability to capture more than our fair share of that video growth.

Scott Goldman. Bear Stearns.

A couple of questions. First on the on-net ARPU. Obviously you made mention that it held up pretty well, I think, relative to previous trend. Just wondering if you could comment what we are seeing there? Whether it's greater impact from net-centric customers on a net basis or something like that, contributing to that growth or stabilization?

Second, I wanted to talk about the building expansion, doubling the number of buildings added as well as the additional expansions in Europe and the U.S. What does that do as far as your market size goes? Dave, you've been pretty forthcoming about how many buildings you thought were on your network that you could add over the coming years. What does that do to that number going forward? And then what is the timing of the expansion of the doubling of the buildings? Should we see any of that in '07 and would that impact guidance in '07?

Sure. Let's start with the ARPU question, Scott. We have been successful in selling some larger accounts, particularly back to Tom's question about video accounts. That has had an impact on ARPU and also the continued increase in net-centric, relative to our corporate business has also pulled up our on-net ARPU.

We are approximately 55% net-centric, 45% corporate. That continued increase in the net-centric part of our business has increased ARPU. Quite honestly some of our existing customers have bought larger connections, which has also pulled up our ARPU.

With regard to buildings, we had previously been growing our addressable market at about 5% per year. We are looking to increase that rate of growing our total addressable market to about 10% per year for the next several years.

You know, we feel comfortable that our sales efforts are very effective and that the Company's cash flow generation prospects are going to continue to improve. It seems prudent at this point in time for us to deploy that capital into expanding our footprint rather than just strengthening our balance sheet. That pace can continue for several years.

In North America, there are probably another 250 or so corporate buildings that fit our demographic criteria in terms of size, proximity to fiber, and diversity of tenant base. Rather than bring this on at the pace of maybe 40 a year, we'll be looking to bring on more like 80. So therefore try to get through that market in a shorter period of time.

The other 20% of our on-net footprints expansion is the Data Centers and what we have seen are two trends. One, new Data Centers being built for the first time; secondly, a number of Data Centers that have previously been mothballed are being now brought back into service. We also see Data Center operators expending a tremendous amount of capital, increasing their power, therefore building the foundations to accommodate uses within those centers that generate more bandwidth per square foot. So roughly 20% of our expansion opportunity is additional net-centric facilities, Data Centers and we expect that to continue.

With regard to Europe, particularly as the EU has continued to expand the inclusion of some of the faster growing Eastern European countries and a number of our customers have pulled us further to the east and further to the north. So an example would be someone like [Turk] Telecom who has (inaudible) to expand Istanbul.

Now while we are not there today, we are evaluating opportunities that will get us closer to those markets.

Just a follow-up. On the acceleration of the buildings added, are we likely to see any of that turned into revenue in '07? And, then, I guess as far as the impact on guidance there and along the same lines if I look at the off-net business you had another quarter of sequential revenue growth there -- which I am assuming is driven probably by higher speeds, people looking at ethernet and DS-3 or T-#s where they made them (inaudible) T1s before on the off-net side outpacing declines in customer adds.

Is that something that could also contribute to some guidance upside in '07?

Yes, let me try to take both of these. Because we don't have perfect visibility to exactly when these buildings will come on in the quarter, we have kept our revenue guidance intact. If we are able to bring some of these buildings on at a faster pace earlier in the quarter, that could potentially be some upside. And we will be in a position to talk about that probably on the next call.

With regard to the off-net business, we do continue to see a increasing speed among our off-net customers where they are going for the higher capacity circuits. We also are seeing greater ubiquity of off-net, ethernet services being offered by Verizon and AT&T which gives us the ability to sell these ethernet-based services off-net.

Again, we try to be pretty conservative in our guidance. We've guided to some slight decline in that off-net business. But, obviously, if the trend continues we will adjust going forward.

Then, finally, we have been a little bit surprised to the positive on the reduction in churn in our business where, today, our churn numbers as measured in the most gross measure has continued to follow successively in each quarter to today -- just over 1.5% monthly down from the over 2% we were experiencing last year.

James Breen. Thomas Weisel Partners.

Just a couple of questions. One with respect to just the first quarter in general. Do you see -- does it seems to be a weaker quarter in terms of sales just coming out of the fourth quarter spending? Then a little bit on the last -- a little bit of color on the last question.

You talked about 9, 10% top line growth on that sequentially. Is that something now that you are building out two buildings a week versus one that you'll see extend further out into '08 and '09? Thanks.

Sure. With regard to seasonality, our business is a recurring revenue business. There is not a great deal of seasonal fluctuations. Clearly, things like traffic growth are impacted when some of our universities are shut down and students come back. We get a little bit of an uptick. Also, people are back at work and are able to focus on new orders. We continue to experience an ever-increasing amount of sales each month over the previous month so in the last quarter of the three months we achieved record sales, greater than we had ever done previously.

I don't think I attributed that so much to seasonality as to the maturity of the sales force and the ability to generate those sales off of our on-net business. The 9 to 10% sequential growth, while the base is getting larger, we can expect to see that same type of growth rate going forward.

This quarter we did a little better then that coming in at 10.6%. While one quarter is not enough to give us comfort in raising our guidance going forward, we feel very comfortable about those historical rates continuing beyond the end of '07.

While the Company hasn't given any firm guidance for the top line or EBITDA for '08 or beyond -- and, again, we will probably be in a position in the next call or two to touch on those topics -- we see that 9 to 10% sequential on-net growth continuing pretty much as far as management has visibility to see.

Tim Horan. CIBC World Markets.

Just to get some more clarification on the guidance, the CapEx guidance for the year would it work out to around $40 million. Is that what you're trying to say?

No. No. No.

No. The CapEx guidance, previously, we had said about $5 million a quarter on average and with some quarters being less than others. We have now raised it to 28. So we have taken the $8 million of discretionary CapEx for the year and doubled that to 16.

Okay. I got it.

16 plus 12 is 28 for the year.

And the maintenance CapEx that all the incidentals to keep the core network running remains unchanged but we did elect to accelerate the rate of network expansion.

Sorry, I was adding the 28 plus the 12. I see what you are saying. And that is probably a good rate going forward for a couple of years?

Yes. Yes, it is. And we think embedded in that rate will also be our ability to add selectively some additional routes as well as the buildings. Simply because much of the equipment to light these routes is equipment that we currently have in stock.

Great. Then on the revenue guidance, you (inaudible) maintain what you are showing. You are showing quite a bit of a sequential slowdown but you are really not seeing that going into the second quarter. Is that correct?

No, we expect to see our on-net revenue growth continue in that 9 to 10% sequential rate. As I said, we did a little better than that in Q1 at 10.6 but we didn't want to infer just from one stronger than expected quarter any acceleration.

Remember we are growing off of a larger base. But we expect to see that on-net revenue continue to grow at that same sequential rate as the base gets larger, therefore, giving us kind of an annual rate of 35 to 40% growth in that on-net business and then the corresponding greater than 100% growth in EBITDA and cash flow that is a result of the operating leverage.

I'm just coming in a lot higher than your guidance. Depending what happens off-net obviously but off-net right now, it sounds like you are pretty comfortable with it staying relatively stable here?

Yes. I think Tad gave a little guidance for it to go (technical difficulties) but we've got a couple of quarters now of basically stable or slightly increasing off-net revenue. So, again, we -- I think we are going to not read a lot into one or two quarters of trend, but if that trend continues, you may see us modify up our guidance on that part of the business.

And on the Data Center side, I guess you probably have better visibility than anybody into expansions. Are you seeing a real meaningful step up in buildouts at this point?

Yes. You know in the Data Center space, we've actually seen in key markets, some of our customers frustrated because while there is space in the Data Centers -- meaning floor space -- there is inadequate power. So that has really been addressed two ways.

One, new centers being activated and many customers being incented to go into these new centers. Most of these are centers that were previously built or at least partially built that are being brought back online.

Secondly, we see a number of Data Center operators spending significant capital to increase their power in D.C. plant to therefore allow customers to purchase more power in those facilities. Which is really a prerequisite to increase in the amount of bandwidth generated per square foot. We think that the continued trend of 70 to 80% industrywide traffic growth will require a number of these Data Centers in congested markets to go through expansion.

In our footprint, we operate 28 of our own Data Centers and remain below 40% utilized in that footprint. But a number of these carrier-neutral facilities which -- whom we connect to are experiencing power. And therefore there has probably been a bit of a plateau in some of those centers until those power upgrades are in place.

If you don't mind, I was looking at (inaudible) on your building expansion. 80 new buildings in the United States. It would seem, then, that you are not really adding much in Europe based on that guidance.

Our footprint is about 80% North American, 20% European; and we don't add corporate buildings in Europe simply because there aren't many buildings that fit our characteristics. So virtually all of the expansion in Europe is into carrier-neutral allocation facilities. And when we go into a new market like Rome or Oslo, we'll find that a number of the local access providers will meet Cogent at our Data Center to buy global connectivity.

So most of the expansion in Europe is to those carrier-neutral co-location facilities.

And have you had problems getting long haul transport capacity in Europe? Are prices -- are they -- it sounds like you don't have many problems, but I didn't think that in the per free markets there were a lot of excess capacity. Maybe you can just talk about the prices that you are paying now versus a couple of years ago?

Sure. Our long haul expansion comes, really, two ways. One, there are fiber routes that Cogent has owned for some period of time that came to us through various acquisitions that we elected not to light previously that now, based on increased end-user demand, we are starting to light.

Secondly, there are a number of suppliers of fiber that are available. Many of the buy places where Cogent buys its dark fibers that expands and where we don't already have pre-existing fiber are less conventional sources like gas pipelines, electric utilities, cable operators. We typically don't buy fiber from other telcos in Europe. But we have not experienced any significant issues in terms of identifying market and then not being able to find fiber to serve those.

So in Italy, for example, there was a company, [Readalit], a public company that built fiber in conjunction with the Road Network which is actually a for-profits business in Italy. They had dark fiber available and while we looked at possibly acquiring at one time the whole company, it seemed to make a lot more sense for Cogent to just acquire fiber from them to expand our network, as opposed to necessarily taking over the whole company.

But once Cogent secures the fiber, we can use the Wave Division multiplexing equipment we have to provide virtually unlimited capacity to any of these markets.

Very helpful. Great quarter, Dave. Thanks.

Tom Seitz with Lehman Brothers.

Couple of quick housekeeping ones first. Can you talk about the competitive pricing environment? You know, whether anybody is starting to close the gap between their previous pricing and your pricing?

Then, can you confirm the on-net and off-net churn? Then, I guess not to beat a dead horse, but with respect to your guidance I guess maybe we will put it a different way. One of the -- one of your larger Denver-based competitors says that Internet traffic is growing 80 to 100%. I think you might have just said around 70%. Either way a very big number.

You are taking share; net-centric revenues are becoming a greater part of the mix and pricing -- your pricing shouldn't change much. So I'm just wondering in light of that, if the 40% roughly year-over-year revenue guidance is overly conservative?

Sure. I will try to take them in order and thanks for the questions.

Pricing gap. We at Cogent have a very transparent pricing model, pricing our services at $10 a mg on a month-to-month basis. $9 a mg on a one-year contract and $8 a megabit on a two-year or longer contract. These prices are obviously adjusted for foreign currency in each of the markets in which we serve.

We have also had a policy, really since our inception, to take an invoice from any of our competitors. If the customer shows us a legitimate invoice from any competitor offering the same service, we will undercut that invoice by 50%. That offer continues to stand.

What we have seen is some of our competitors dropping prices -- not to Cogent's level but maybe a 50% premium to Cogent -- if an account is particularly strategic, and they can get perhaps some press release value. We at Cogent have been very reluctant to announce customer wins and generate excitement around specific names that are viewed as hot or fast growing.

Some of our competitors have taken a more aggressive approach on that and have been willing to price aggressively to get some of that business. But I think what we have heard in the market is most of our competitors' networks are running at much higher rates than our utilization and our network.

We, I think, have demonstrated the ability to add capacity without really depleting our inventory of excess capacity; and I think, if necessary, we would lower price if we saw a need to, but we have no need to. So our prices remain constant. I think the rate of decline among our competitors has slowed and the number of competitors has also continued to shrink.

Finally, in terms of traffic growth, people are talking about 80 to 100% growth; yet at least at one Denver-based company I think you are referring to, only grew at 5% or 4% the last time they publicly indicated their traffic routes. We continue every quarter to get that number and think it is very meaningful.

The overall Internet's growth is really measured more accurately by independent third-party research organizations; and we really rely on them as opposed to our number and then do our comparison to that.

On the churn question, I'm going to hand it over to Tad and let him give you a little more clarity on that.

Sure. For beyond that business for the -- both the fourth quarter of '06 and the first quarter was less than 2%. It was just about the same level. If you get a little more granular on that the big corporate customer churns, less than 1%, and the net-centric customer churn is higher than 1%, but the blended average is less than 2. And it was pretty much about the same quarter to quarter.

Off-net churn actually declined and that was a slight upside for us although it is a smaller part of the business. So it has less of an impact. But that was about 3.5% in the fourth quarter and about 3% in the first quarter. So that decline slightly helped us.

If you look at the entire customer base, average churn rate on a blended basis was about 2.5.

Jurgan Usman with Wachovia Securities.

First question on the salespeople hiring. Do you still target to 180 by the end of this year or do you double that, as well?

No, I don't think we could double that one, Jurgan. We are still today targeting 180. We feel very comfortable with that number. As I said earlier, we really tried this last quarter to build the foundation to support that and even a larger number of ultimate quota-bearing reps by making sure we had the right management in place. We promoted a number of individuals from within the Company into these management roles. We divided our sales territory and we feel very comfortable with the 180 number.

The rate of growth for the year was 50. We feel that's kind of the appropriate rate at this point in time. Probably taking a look at the sales management, and seeing how it seasons over the next quarter, we will probably be in a position to trust that number again on the next quarter's call. But we really need to see how these managers do as we put them in these new roles.

On the sales productivity, obviously lower than your target of five deals per month per sales rep obviously due to the (inaudible) that you just mentioned. How soon can you ramp it up again to at least five? Are we going to see that in the next quarter meaning Q2? Or is it going to take longer?

I think there is kind of two parts to that answer, Jurgan. I think the first one is that because ARPU did better than we expected, actual revenue productivity for these reps was a little better than we had expected. Even though the unit sales were a little below, we were able to sell at a higher dollar value based on some of these larger sales.

I would suspect that as these top performers now become managers and they are able to train others on their skills, we should see that increase in sales productivity. We are not concerned about the slight dip from roughly 5 or 4.5 in unit productivity because the revenue productivity because the revenue productivity remains ahead of where we said it would be. And then, also, we expect that with additional sales training and sales support, we should quickly get back to where we need to be.

So our cost of revenue acquisition is right in line with where we expect it to be.

Last quarter, you mentioned your (inaudible). I don't think you mentioned that this quarter. Where is that number now?

Our sales funnel last quarter was just about 33,000 opportunities out of our addressable market that are not today coaching customers. Our addressable market on net is about 95,000. It is just slightly over 33,000. Again what happened is for those individuals that got promoted into management their funnels were then reassigned to reps that had direct quota responsibility.

We should expect to see that number start to increase the next quarter as we get additional sales people on board.

But this quarter was really the reassignment. So only a slight increase over the 33,000 that we were at last quarter.

One last question. You know, like this customer which I think that you believe -- I mean you said that increase their requirement by 500 X to 50 gigabits I guess over the last two years. I think the owner a couple of weeks ago mentioned that they are seeing ancillary growth over there. Can you give us an update on this particular customer?

Sure. I think you are probably referring to YouTube. They have (inaudible) increased their commitment now to [coach and tow] for over 60 gigs. They continue to experience phenomenal growth.

We see that growth also from a number of other video-sharing sites. And as we mentioned earlier in the call, we think this is part of the natural evolution of the Internet as it becomes a more cost-effective way to distribute video content, particularly that content that could be time and location shifted. We will see, I think, accelerating growth from all of these various video business models.

At this time we have no further questions. I will turn the call back over to our speakers for any additional or closing remarks.

Thank you, Matt. I would just like to thank everyone for joining us on the call. I'd like to thank all the shareholders for participating at our annual meeting by a proxy and supporting the Company management's recommendations and, again, your support and interest for Cogent is great. We have been able to rotate our shareholder base.

Today, the Company is virtually entirely held by institutional public shareholders. Our private equity investors have exited the Company; and we saw that with the board rotation, and we expect to continue to deliver good results going forward.

Thank you all very much for your support.

That does conclude today's conference call. Thank you for your participation. You may disconnect at any time.