Cogent Communications Holdings Inc (CCOI) 2007 Q4 法說會逐字稿

Good morning and welcome to the Cogent Communications Group fourth-quarter and fiscal-year 2007 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 conference over to your host, Mr. Dave Schaeffer, Chair and Chief Executive Officer of Cogent Communications. Please go ahead, sir.

Thank you and good morning. Welcome to our fourth-quarter 2007 and year-end 2007 earnings conference call. I am Dave Schaeffer, Cogent's Chief Executive Officer. With me on this morning's call is Tad Weed, our Chief Financial Officer.

We are very pleased with the results for the quarter and the results for full-year fiscal year 2007. Our fourth-quarter and full-year revenue EBITDA and loss per share were either within the guidance or better than the guidance ranges that we had given. As part of our second $50 million stock buyback program, we have returned a total of $22.7 million to our shareholders since September of 2007.

Under this program, we have purchased a total of 1.1 million shares in the open market at an average price of $20.01. I should point out that this is in addition to the $50 million share buyback program that was completed as part of our June 2007 $200 million convertible transaction.

During the quarter, we continued to expand our EBITDA and gross margins demonstrating the tremendous operating leverage of our on net business. For the fourth quarter 2007, our gross margins expanded by 360 basis points to 55.2%; our EBITDA margins expanded by 170 basis points to 26.7%.

During the quarter, we continued to increase our footprint as well. We added another 28 buildings for our network during the fourth quarter bringing our 2007 total to 110 additional buildings, ten more than our targeted additions of 100 buildings.

Finally, we again continued to exceed our on-net provisioning service level guarantee of 17 days by delivering our on-net services with an average provisioning cycle of 10 business days. Again, I'd personally like to thank the entire Cogent team for their efforts in achieving these excellent results.

Throughout our discussion as in the past, we will continue to focus on the results and impact of our on-net business which today is over 80% of our business and it is the growth driver of our business going forward. We will also continue to highlight several operational statistics that we believe will demonstrate our continuing increasing marketshare, expanding scale and tremendous operating leverage of our on-net business.

I will begin review certain operational highlights and also outline some of our continuing expansion plans and growth opportunities. Tad will provide additional details on our financial performance. Tad will also walk you through the guidance for first-quarter 2008 and an update and reaffirmation of our guidance for full-year fiscal year 2008. Following our remarks, we will open the call for questions and answers.

Now I'd like to ask Tad to read our Safe Harbor language.

Thank you, Dave, and good morning to everyone. This fourth-quarter 2007 and fiscal 2007 earnings report and this earnings conference call to discuss Cogent's business outlook can contain forward-looking statements within the meaning of Section 27A and Section 21E of the Securities Act. The forward-looking statements are based upon our current intent, belief and expectations. These forward-looking statements and all the statements that will 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 prefer 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 and 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 our supplement statements made on this call. Also during the call, if we use any non-GAAP financial measures as defined by the SEC and Reg G, you'll find these reconciled to the GAAP measurement in our earnings release and on our website at cogentco.com.

I'd like to turn the call back over to Dave.

Thanks, Tad. Now for some highlights from our fourth-quarter and year-end results. Hopefully you've had a chance to review our earnings press release. As within previous quarters, our 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 our financial results and the trending of our business operations. As always if you have any additional suggestions on the metrics we may either add or refine to these press releases, please let us know.

Our fourth-quarter 2007 revenue was $50 million, at the top end of our guidance range which was between $49 million and $50 million. Our EBITDA as adjusted of $13.3 million was within our guidance range of $13 million to $14 million. Our loss per share of $0.15 was better than our guidance range of between $0.17 and $0.22 with less shares outstanding. We continue to be pleased with the growth in our on-net business. Our continuing investment in our sales and marketing organization along with our network expansion activities is leading to an increase in our on-net customer connections and on-net revenues.

Our on-net revenues grew by 7.6% sequentially third-quarter 2007 to fourth-quarter 2007. This was 90 basis points better than the growth we had demonstrated sequentially of 6.7% in the second to third quarter in 2007 and above the midpoint of the targeted revenue growth of sequentially between 7% and 8%. Our on-net customer's connections increased 6.6% from the third quarter to the fourth quarter which was less than the 7.4% that we had experienced in second quarter to third quarter. On average, our salesforce was able to focus on selling to larger accounts during the quarter as their sales funnels continue to mature.

This change in customer mix has led to an increase from third quarter to fourth quarter in our on-net ARPU, or average revenue per user, as compared to the decline of 3.5% which we experienced second quarter to third quarter. During the quarter, we again extended the average contract term by another 1.3%. This was less than the roughly 5% contract duration extension that we had experienced in Q2 to Q3 of 2007. Today most of our customers are under one-year contracts and our average contract length remains at about a little over 11.7 months.

We again continued to sell more extended term contracts with contract discounts and more customers are continuing to express their confidence within Cogent by signing up for these longer-term commitments.

Now some overall trends and highlights of revenue growth and traffic growth. Our total revenue for Q4 2007 was $50 million. This represented a 6.4% increase over the third quarter and a 23.3% increase year-over-year as compared to fourth quarter 2006. Our total revenues for 2007 were $185.7 million versus the $149.1 million for fiscal year 2006, an increase year-over-year of total revenue of 24.5%.

Traffic on our network grew at an accelerated rate in fourth quarter and grew by approximately 14% sequentially third quarter to fourth quarter. This traffic growth was a significant increase from the 2% traffic growth that we had experienced in Q2 to Q3 2007. For fiscal year 2006 to fiscal year 2007, network traffic grew by 75%. We continue to see strong traffic growth into 2008. Our monthly sequential traffic growth from December of 2007 to January 2008 was approximately 6% month-over-month.

On-net revenue and on-net customer connections also continued to increase. On-net revenues increased sequentially 7.6% quarter-over-quarter and an increase of 39.3% full-year fiscal year 2007 from full-year fiscal 2006. On-net revenue continues to increase as a percentage of our total revenue growing from 80.2% of total service revenue in third quarter to 81.1% of our total revenue in fourth quarter 2007. Over 90% of our new sales in fourth quarter 2007 were for our on-net products. Revenues from our off-net business also increased 2.7% for the quarter and non-core revenues declined by 5.1% for the quarter.

Cogent's pricing policy remains unchanged and we continue to be committed to being the price leader. Our pricing for our most widely sold product remains $1000 a month for a month-to-month 100 megabit connection or $10 a megabit. We do offer discounts for longer-term contracts. We also continue to guarantee a on-net provisioning cycle of 17 days or less. In 2007, our on-net services were provisioned well within this guarantee with an average provisioning cycle of 10 business days.

Our on-net ARPU increased for the first time in over three years. On-net ARPU increased for the fourth quarter over third quarter from $1245 in fourth quarter, up from $1238 in third quarter. This was a result of our salesforce continuing to mature and being able to focus on larger customers.

Our off-net ARPUs also increased for the quarter going from $841 in Q3 2007 to $884 in Q4. This is a result of a greater availability of off-net Ethernet based circuits and the ability of our salesforce to sell these higher capacity and therefore higher revenue off-net circuits.

Churn, our total on-net churn remained constant at approximately 2%. This was the same rate of churn that we have been experiencing for the past two years. Off-net churn decreased from approximately 3.5% in third quarter to approximately 2.5% in fourth quarter as our customer base continues to mature.

Our EBITDA as adjusted was $13.3 million for the quarter, an increased of approximately 13.6% from the $11.7 million of EBITDA that we demonstrated in third quarter 2007. Our EBITDA and EBITDA margins continued to increase largely due to the gross margin expansion due from the continued to growth in our on-net business. Our EBITDA margins expanded by 170 basis points from 25% in third quarter to 26.7% for fourth quarter 2007. EBITDA as adjusted for full-year fiscal year 2007 was $46.2 million, better than doubling the EBITDA that we had demonstrated for full fiscal year 2006 of $22.6 million.

Our EBITDA margins expanded by 970 basis points during the year expanding from 15.2% for fiscal year 2006 full year to 24.9% for full fiscal year 2007. Our gross margin substantially increased by 360 basis points for the quarter continuing to demonstrate the operating leverage of our on-net business. Our fourth-quarter gross margins were 55.2% compared to the 51.6% for third quarter. Our gross margin increase of 650 basis points for the full fiscal year 2006 to full fiscal year 2007, where our margins in 2006 for full year were 46.3% and 52.8% for fiscal year 2007.

As Tad will quantify, we anticipate further gross margin and EBITDA margin expansion to continue sequentially throughout 2008. Our direct incremental on-net gross margins remain approximately 100% with direct incremental EBITDA margins in our on-net business of approximately 95%.

We added 28 buildings to our network in Q4 2007 bringing our total 2007 on-net building increase to 110. This was 10 more than the stated goal of 100 buildings. For 2008, we expect to see continued expansion in our on-net footprint adding buildings at approximately the same pace adding another 100 buildings to our network in 2008.

We have secured additional fiber and construction is underway in expanding our network even further into new markets. We are expanding into the Ukraine within the former Soviet Union to Kiev to Sophia in Bulgaria and here in North America, an extension into Des Moines Iowa, Minneapolis, Minnesota and Detroit, Michigan, all new markets to the Cogent network. We continue to evaluate additional fiber routes both in Europe and North America.

Now I'd like Tad to cover some additional details related to our fourth-quarter into full fiscal year 2007 results. As well Tad will provide some additional guidance for first-quarter 2008 and update and reaffirm our guidance for fiscal year 2008. Let me turn it over to Tad.

Thanks, Dave, and again, good morning to everyone. And I would like to also thank and congratulate our entire team on their very hard work and performance not only for the quarter but for the entire year of 2007.

2007 was the third year that Cogent was required to comply with the Sarbanes-Oxley Section 404 internal control work. And that effort is obviously in addition to fulfilling our usual day jobs and statutory and corporate audit requirements. And I'm once again proud to announce that the work is completed and our auditors will be issuing unqualified or clean SOX opinion for 2007.

SOX certification and that compliance that comes along with that is a tremendous amount of work especially for a growing operation such as Cogent. We're very pleased with the results. And in particular, I'd like to thank and recognize our entire finance team and our IT and IS team for their efforts in helping us complete this important project.

Loss per share, our loss per basic and diluted common share as Dave said was $0.15 and that was $0.02 better than our range of guidance for the quarter between $0.17 and $0.22. Our loss per basic and diluted common share for the year was $0.65, that was compared to a loss for last year of $1.16. This was at the better end of our guidance range of between $0.65 and $0.75 a share.

Weighted average shares decreased by about 200,000 shares from the third to the fourth quarter as a result of shares purchased under our stock buyback program. We purchased an additional 250,000 shares in the fourth quarter and subsequent to year end from January 1 through yesterday, we purchased an additional 689,000 shares under our stock purchase program.

At year end, we had 47.9 million common shares outstanding. I should point out that shares that are granted to employees are counted as shares outstanding. However, for the calculation of earnings per share, they are not counted until those shares actually vest.

Non-cash equity based comp expense increased our fourth-quarter net loss by about $3.10 million or about $0.07 a share and non-cash equity based comp expense increased our net loss for 2007 by about $10.4 million or $0.22 a share.

Foreign currency impact. The euro to dollar conversion rate again positively impacted our comparable quarterly revenues and this time by about $500,000. As a reminder, about 23% of our revenues are based in Europe and about 8% of our revenues are based in Canada.

Capital expenditures were $4.3 million for the quarter, as opposed to $9 million for the third quarter of 2007. That decline was expected and we do see seasonality in our construction activities with typically the fourth quarter lower than the third quarter. Capital expenditures for the year were $30.4 million and that was consistent with our guidance of about $30 million for the year. And we expect 2008 capital expenditures to again be about $30 million and again, add about 100 buildings to the network so very similar to 2007 is what is expected for 2008.

Some balance sheet items. At year end, our cash and cash equivalents were $177 million, $172 million of that is invested in a series of money market funds and we are comfortable with those valuations. During 2007 and through yesterday under our total of 100 million stock buyback programs, we purchased a total of 2.9 million of our common shares for a total of $72.7 million. We have $27.3 million remaining under our second $50 million buyback program as of yesterday and we will continue to evaluate additional share purchases under that program.

Capital leases under our long-term IRU contracts were $92.6 million at year end and $7.7 million of that is a current liability. As a reminder, these lease obligations are paid over a long period of time over the lease term so the weighting average, remaining term of about 13 years.

Days of sales outstanding on accounts receivable was 35 days at 12-31-'07 and much better than our targeted rate of 40 days. I'd like to personally thank our billing and collections team members worldwide for just doing a fantastic job on customer collections. That is also reflected in our bad debt expense which was just about 1% for the year, which is fantastic.

Operating cash flow from operations was $13.5 million for the fourth quarter compared to $11.3 million for the third quarter, essentially the increase in EBITDA include through to cash flow for operations. On year-over-year cash flow from operations increased substantially increasing over 9 times to $48.6 million for the year compared to $5.3 million for last year. That $43 million increase in operating cash flow again was from our increase in EBITDA but also improved accounts receivable collections and also working capital management from the vendor side.

I'm now going to provide guidance for the first quarter of 2008 and then update and reaffirm our 2008 guidance provided on our last call. We prepare this guidance based upon the current and expected run rates of our business, planned increase in sales and marketing programs, and current network expansion projects and also anticipated network expansion projects.

For the first quarter of 2008, we expect our total revenue to increase by over 4% and to be over $50 million for the quarter. On a quarter-over-quarter basis, so from the fourth quarter of 2007 to the first quarter of 2008, we expect on-net revenues to increase by over 7%. We expect our off-net revenue to increase by over 1% and we expect a decline in our non-core revenues to continue and decline by approximately 20%. As a reminder, we do not to actively sell those services and they will eventually go to zero.

We expect our gross margin percentage for the quarter to continue to expand and to expand by an additional 100 to 200 basis points to be over 56.5% for the quarter. We expect EBITDA as adjusted to grow to over $14.5 million and the EBITDA margin to continue to expand as well by another 100 to 200 basis points to be over 28%.

We expect SG&A expense excluding non-cash equity based comp to be approximately 28% to 29% of our revenues for the quarter. We expect that non-cash equity based comp expense to be between $5.5 million and $6 million for the quarter. We expect depreciation and amortization to be between $16 million and $16.5 million and net interest expense to be between $1 million and $1.5 million dollars. These results are expected to result in a loss per share for the quarter of between $0.17 and $0.22 per share. And that loss per share assumes 46 million weighted average shares outstanding and as a reminder, additional share purchases lower our weighted average shares outstanding and that would raise our loss per share and impact that guidance.

For the year of 2008, we are refining and updating certain non-EBITDA components are being revised -- EBITDA components remain the same and I'll remind you of what they are. Our total revenue for 2008 is expected to be between $225 million and $235 million. To take the midpoint of this, it's an increase of about 24% from 2007 in total revenue.

We expect the annual revenue growth rates from 2007 and 2008 to be as follows. On-net revenue to grow between 30% and 33%; off-net revenue to grow -- to either be flat or to increase of about 5%, so no growth or an increase of 5%; non-core revenues to decline by between 35% and 40%. We expect our gross margin percentage to increase to about 60% for the year. We expect EBITDA to grow to between $75 million and $80 million. If you take the midpoint of this amount, that is about a 68% increase in EBITDA from '07 to '08.

We expect EBITDA margin expansion to continue and to be approximately 34% for the year. We expect SG&A to be between 26% and 27% of our revenues and depreciation and amortization to be between $62 million and $63 million. So those amounts I've just indicated are unchanged from what was provided on the last call.

The following amounts are our updated based upon the deferral of an expected accounting change and then the impact of share grants and share purchases. We now expect non-cash equity based comp expense to be between $18 million and $19 million from the previous guidance of $14.5 million to $15.5 million. That increase is due to the amortization of equity based comp expense associated with share grants to our employees and our Board that we completed in January 2008.

We expect net interest expense to be between $4.5 million and $5.5 million for the year and that is down from our previous guidance of between $11 million and $12 million. We mentioned this in our press release, the previous guidance from the last quarter for -- that we issued last quarter for 2008 of net interest expense and net loss per share assumed that we would have to adopt FASB Staff Position 14A which is entitled accounting for convertible debt instruments that may be settled in cash upon conversion. And expected to adopt that and for that to be approved as of January 1, 2008.

As what happens with some of these accounting changes, that has been deferred, so we have removed that impact from our interest expense guidance for 2008. Essentially that pronouncement was going to require us to separately value the conversion feature on our notes. That would lead to an increase in the discount on the notes and an increase to non-cash interest expense. So it appears that that will not happen or this will not go through until 2009.

The impact on these changes on our guidance and the weighted average common shares revises our loss per share credits for 2008 which is now expected to be between $0.10 and $0.20 per share and that is changed from our previous guidance of $0.15 to $0.30 per share. That loss per share assumes 46 million weighted average shares for the year and as a reminder again if we buy additional shares, weighted average shares goes down and loss per shares under the math would increase.

We expect our building additions in 2008 capital expenditures to be essentially the same as this year which was $30 million and again, we do experience quarterly variations so the first quarter will be more than the fourth quarter of 2007.

Finally as I mentioned on our last call, we anticipate achieving another corporate milestone in 2008 and we continue to expect to achieve positive net income for the first time in our history in the fourth quarter of 2008.

So with that, I will turn the call back over to Dave.

Thanks, Tad. We continue to expand our footprint and again this quarter we added 28 buildings to our network. As of December 31, 2007, we had a total of 1217 buildings on-net. As of that date, we had over 30 buildings in process of being connected to our network, many of those will come on-net during the first quarter.

Our sales reps continue to increase as well as their productivity remains solid. We began the fourth quarter of 2007 with 166 sales reps and we ended the quarter at 192 reps. If you remember on our third-quarter call, we actually increased the targeted number of reps for year end. That original target was 180 to end the year, we took that up to 190 and slightly exceeded that. We began the fourth quarter with 134 full-time equivalent sales reps. These are reps that have ramped to full productivity and we ended the quarter with 160 FTEs.

We continue to be very disciplined about monitoring salesforce productivity and unfortunately sometimes have to remove some unproductive reps. As of today, we have 172 reps selling our services with direct quotas in North America and Europe. Of these 172 quota bearing reps, we currently have 100 FTEs under our ramping protocol. Our salesforce reps continue to be productive. Productivity per FTE for the fourth quarter was four units per FTE, about the same level of productivity on a unit basis that they had experienced in the third quarter. However, their revenue productivity was greater and that was witnessed in our increase in on-net and off-net ARPUs.

We continue to be comfortable with our 2008 revenue plan. Our business remains entirely focused on the Internet and we believe that this focus has allowed us to remain isolated from some of the current economic issues plaguing some other service providers.

We continue to add sales reps to our salesforce and we expect to end 2008 with approximately 240 sales reps on our network. We continue to expand our footprint and increase our scale. We have over 10,000 miles of metro fiber, over 26,000 miles of intercity fiber, we remain connected to approximately 2300 networks globally, about 340 of these are settlement free peers, the remaining are Cogent customers that pay as for connectivity.

Our network continues to have substantial capacity to accommodate our future growth. As we had outlined last year, we doubled the amount of lit capacity in our network in 2007. We will continue to increase capacity selectively in our network in 2008. We are currently utilizing only 22% of the lit capacity in our network, so while traffic grew 14% sequentially quarter over quarter, our capacity expansions have allowed us to keep our network utilization constant at this low level.

So in summary, our on-net revenues, our growth businesses, continue to grow and increase as a percentage of our revenue. Our traffic continues to increase on our network demonstrating our gain in market share. Both our on-net revenue and on-net traffic growth accelerated during the fourth quarter. We again surpassed our provisioning guarantee of 17 days by delivering services for full year with an average of a ten-day provisioning cycle business day.

We continue to have probably the strongest balance sheet in our sector. We have less than $23 billion and true net debt. We continue to expand our footprint into new markets and will expect that expansion to continue throughout 2008 to serve these high demand locations.

We continue to plan to invest in our sales and marketing efforts by expanding our salesforce and ending the year with at least 240 quota bearing reps. Our business provides a basic utility to our customers. The Internet has become integral to the way in which all businesses are conducted and we believe that Cogent's position as a low-cost provider has allowed us to not see the impact on our business that many other businesses are seeing in the current economic turmoil.

Finally, under our 2008 guidance plan, we expect to generate approximately $1 a share of free cash flow for the benefit of our equity holders. We will continue to consider additional share repurchases under our existing $50 million share buyback program and we continue to discuss with the Board future programs that might either entail continued share buybacks and/or dividends.

What that, I'd like to open the floor for questions and again thank the entire Cogent team for a very solid 2007.

Thank you. (OPERATOR INSTRUCTIONS) Jonathan Atkin, RBC Capital Markets.

Thanks very much. I'm curious if you can comment on the ARPU trend and is that something that you think might continue in the current year? And then also with respect to the growth that you are seeing in recently opened fiber routes or recently lit on-net buildings, is that growth fairly linear or are you seeing kind of an immediate spike when you expand the footprint?

Thanks, John. With regard to the ARPU trend, let me separate the on-net and off-net businesses. In the on-net business, which is the majority of our revenue, over 81% of revenue, as the net centric salesforce continues to mature, those reps build larger funnels and selectively focus on larger accounts. While we hope that this trend continues, we do not have sufficient empirical evidence from one quarter to feel comfortable in guiding to a consistent trend of ARPU expansion.

The net effect of price per megabit remains effectively constant. Since our contract lengths only increase by about 1.3% in the quarter, that would have a reduction in that price per megabit and quite honestly we got a little bit of a pick up from the weakening dollar where we've seen our effective prices overseas and in Canada go up slightly.

So all of those trends say kind of a flat price per megabit larger net centric sales, we hope that trend continues. Our models actually anticipate some continued reduction but we will continue to monitor this trend and if it changes or if we do comfortable we will modify our guidance accordingly.

With regard to the off-net business, what we have seen is a larger availability of RBOC Ethernet based services primarily from AT&T and Verizon. While off-net represents only about 17% of our revenues, the ability to sell these Ethernet circuits which are much higher capacity, they are 10 megs up to full gigabit circuits, will allow us to pull that off-net ARPU up. And now we've seen a couple of quarters of sequential growth in that ARPU, we would expect that trend to probably continue at the kind of same rate that we have seen historically.

Now shifting gears to your second question, which was the new buildings and new routes on our network. We remain very disciplined about the buildings that we are adding to our network. We have a finite target universe of buildings that we wish to add, and we continue to work through that at the pace of about 100 a year. Our typical corporate building has about 6.8 customers per building. Our typical net centric building or carrier neutral data center has about 7.5 customers per building.

Typically, we see a kind of linear growth rate within these buildings as they mature. There is generally not any pre-selling activity, simply because the gestation period of these buildings is relatively long and customers are not willing to wait for those long-term construction efforts to be completed until they get their service, and we want to remain constant on the 10-day achievement that we have or at least within the 17-day goal that we have laid out.

Now with regard to new routes, a slightly different picture there because in many cases, we are pulled into new markets because existing customers have indicated they will buy more services from Cogent if we get closer to or actually serve them in their home market. And if you look at our network expansion in Italy, Scandinavia, Eastern Europe and even some new markets here in North America, all of that has been driven in large part by initial customers' requests and then also additional add-on business. So in these new markets, we typically do see an initial spike from an existing customer taking service. We saw that, for example, in Romania recently as we expanded into Bucharest. Then a more linear expansion that looks more like the entire Cogent network.

And finally with traffic growth, traffic growth tends to be fairly evenly distributed across our network. Specific customers can have lumpiness in their traffic growth patterns, but generally that kind of 14% sequential quarterly growth came broadly distributed across our network and our customer base.

Thanks. And then just any comment on the competitive environment, pricing and so forth, both domestically and internationally.

You know, again, kind of a couple of ways of looking at the business. Domestically and in Canada, we have a corporate business. There we typically compete with the incumbent telco provider, AT&T, Verizon, Bell Canada, Qwest, are kind of competitors in that market space. Because of the lack of facilities-based competition in many of our on-net buildings, I would say pricing by those providers is flat. But what we are selling is a substantially differentiated product that allows us to win business based on the diversity of the network, the quality of the network, and the value we deliver.

On the net-centric side of our business which continues to be about 58% of our revenue, in that market we compete with about one dozen global backbone operators. Now within any given facility, there are generally only five or six competitors. What we have seen is some of the larger companies elect not to drop their price and effectively withdraw from the market.

So we've seen a lot of names that would have been bidding for competitive situations a year ago just kind of no bid at this point in time. We've seen some of the more aggressive players continue to drop their price at a pretty substantial rate, but we still maintain about a 3.5 to 1 cost advantage over our competitors in that market space, and probably 2.5 to 3 to 1 cost advantage over the most aggressive of those competitors.

Thanks very much.

Scott Goldman with Bear Stearns.

Two questions. First, just looking at the guidance particularly the on-net I guess looking at your methodology for how you forecast I think that is as that six-month kind of run rate that you use, you came in at 7.6% on-net revenue growth for the fourth quarter. And yet for first quarter you are kind of guiding it looks to be to the low-end at 7% and you maintain full-year numbers as they were. Is there anything that would give you pause that you can't keep the 7.6% growth going or at least improve that heading into 2008?

And then second question, just wonder if you could comment on the increase in SG&A, the surprisingly large increase in SG&A in the fourth quarter as well as the site dropping network operation expense seems to be out of character based on the last several quarters.

Sure. I will like Tad take the SG&A and network cost numbers. With regard to growth, you are absolutely correct, Scott, in saying that we take a six-month kind of backward look as we forward project. Now also we did slightly modify the way in which we give guidance on our sequential on-net revenue growth rather than give a range we gave a floor. So the 7% remained a floor for what we think we're going to achieve.

If you took the 6.7 and the 7.6 that represented the previous two quarters, obviously the 7 seems very doable and we are on an uptrend. We also are encouraged by the acceleration in traffic growth which is directly correlated to our net centric business; the 2% going to 14% for the quarter and then the even further acceleration December to January of 6% is encouraging as well.

On the negative side, there were some salespeople who didn't produce. And we're pretty disciplined about the way in which those reps are asked to leave the company so we saw a slight reduction in the number of FTEs go in the first quarter. We are actively hiring and we are maturing reps and feel very comfortable about our full-year guidance.

Also to remind you, our full-year on-net revenue growth guidance was 30% to 33%. So if you took the 7%, 7.5% and compounded it, we'd be right there. Long-term we think we can do even better in that as the Internet continues to grow at kind of consistent rates, video driving a lot of that growth and our ability to add salespeople to call on our addressable universe. Today if you look at our addressable footprint, less than half of the opportunities are either being worked today or are Cogent customers.

So we still have a tremendous opportunity in front of us and it's really incumbent on us to hire, incent and motivate these salespeople to be able to salvage. But we feel very comfortable about the kind of floor that we've laid out in terms of sequential revenue growth and our on-net business and perhaps there may be some further acceleration later in the year.

Let me now switch over to Tad and let him hit both the margin questions.

On SG&A, stepping back from it, what we said what we expected for the fourth quarter was SG&A to be between 28% and 29% of revenue, and it was 28.6%. Essentially dead on plan at the midpoint. And I think that is the way we look at it and that is why we guide that way. So we said in the first quarter I think 28% to 29%.

Now on just the gross dollar change, there is a couple of things there. There is a year-end bonus which admittedly is not substantial for Cogent but that is a non-recurring, that was about $600,000 that was in there. We do have more professional fees because compared to the third quarter associated with year-end work and that is about $500,000. And then we also have just more employees. We went from 421 to 451 as at the end of Q3 to the end of Q4, and sales reps fortunately earned more commission with better sales.

So you add all that up that is the reason for the dollar increase but again, the total was exactly in line with what we expected.

And on the lower network expense?

Really what is happening there as you see the decline in noncore businesses and some of the layer components of that that are now winding off our negative margin businesses, so we see both a greater flowthrough for gross margin but also a reduction in cost of goods sold.

That is particularly true of the managed modem business as we are exiting that business. The scale continues to shrink and there are fixed costs that we are eliminating but these noncore products of which include managed modem are not very profitable businesses. They came to us through acquisition. There were contract commitments and those contract commitments are winding up and we are then exiting those parts of our revenue and business that have this kind of accretive nature to our network cost structure.

Thanks, guys.

(OPERATOR INSTRUCTIONS) Tim Horan, Oppenheimer.

banks, guys, I've got a bunch of questions but I'll try to narrow some of them down. You're doing a great job on the customer (inaudible) side. You are not really seeing churn increase at all. The last time we had a slowdown that had surprised a lot of people just that the business models weren't really profitable at the time for a lot of the Internet focused companies and we're hearing that out of some of your peers that they are seeing some business model problems with some of their customers.

Can you talk about maybe how stringent you are in your credit requirements and how much you analyze your customers on that regard? Thanks.

(multiple speakers) I think where this shows up at the end of the day is in bad debt expense. We've just done a fantastic job and we do not have a collections issue here at the Company. Bad debt expense was 1.1% of revenues for '07, down from 1.7% from '06. And if you look at each quarter so you line up Q4 '07 to Q4 '06 on a comparative quarter basis, it's each one had declined.

Now you see a little bit of lumpiness in there and our target is to be around 2, so we've done better than that. And I'm not seeing any differences in credit approval or in our process that need to be made. Now I would add one thing as we go into newer markets in Eastern Europe, we will continue to monitor that and see if any changes need to be made but at this point in time, really the changes would be dictated by new areas as opposed to the base of customers.

I think also, Tim, if you look at our customer base, our corporate on-net customers tend to be located in some of the most expensive real estate in North America and the credit checks that those landlords do ensure a very high quality of corporate customer. In the net centric business, there is an interesting feedback loop that is very helpful. For the large net centric customers, they tend to the very creditworthy companies, household names.

For the very small companies that are generally venture back, they don't buy much bandwidth. As their business models either get traction, start to generate a lot of site hits and therefore require a lot of bandwidth, they tend to attract more investment. Those business models that don't attract a lot of users basically fade and go away but our exposure is very minimal. And we've remained very stringent on these business models doing credit checks on everyone and a just very disciplined approach and in some cases does require customers to have no outstanding or post an initial month's deposits. But for the most part, our credit quality of our customer base is as good now as it has ever been.

That is real helpful. One more follow-up then. Maybe you can talk about what your marketshare is within these data centers? Do you think it's in the 20% range? I guess for the life of me I would be hard pressed to find another industry where someone is charging 30% of what their competitors are and not gaining 78% of the market share for a particular service. What is really preventing customers from in mass switching over to you in these data centers particularly if others are kind of dropping away? Thanks.

Sure. We think our -- by unit of bandwidth, our marketshare in the data center footprint we have is about 18%. If we look at it by customers, the number of customers that reside within those centers, it's only about 7.5% so obviously we've had the larger of the customers. And then the final way to look at it is by dollar spent on bandwidth in those centers and there we are only at about 5.5% to 6% simply because our prices are so much lower.

So what limits our growth? First and foremost, it is a lack of sales resources. As I had stated earlier, over half of the potential customers that could be buying our service have never been contacted by a Cogent salesperson. Secondly, in that net centric footprint, it is quite common for a business that requires the Internet as an integral part of its business to have multiple providers. And we are comfortable with having a portion of their bandwidth and we think diversity is absolutely appropriate.

And then finally, there have been a number of competitors who have cast dispersions on the quality of service that we deliver. Our customer reference list is probably as strong as any in the industry, our SLA guarantee equals or exceeds that of any of our competitors. On a revenue run rate of call it $17 million a month, we are spending less than $30,000 in SLA credits with a 24-to-1 multiplier so we are really delivering on what we say. But there is this perception in the market that if something is so much cheaper, is there something wrong with it and that is reinforced by our competitors and it just takes salespeople to overcome that.

But we are consistently gaining share and feel that -- I'm very encouraged by your comment of 70% penetration. I don't think we are going to get there. I hope we do but I don't think we will. But we will just continue to add salespeople and continue to gain marketshare which I think we are doing.

Thanks, guys.

Jonathan Schildkraut, Jefferies & Co.

Good morning, thanks for taking the questions. You gave some color on contract lengths. In the past you've also given some color on the percent of customers on month to month or on extended contracts. I was wondering if you might give us those statistics again?

Yes, sure, Jonathan. In the quarter, what we saw is the average customer contract length increase by approximately 1.3%. That is actually less than the rate of contract length extension that we saw in the previous quarter where it was about 5%. I'll let Tad give you the exact percentages because I see he pulled out his little chart and I don't have these members memorized.

Good morning. The change was not as significant as we experienced from the second to the third quarter where it was 5.6%. But it did still increase. So about 56% of the customers right now are one-year contracts. We did see two-year contracts go from about 5% to about 5.5%, and that is really what drove the uptick. There are some other terms in there but I think your also question was month to month, which did decline, so 39% to 38%. So you kind of run those figures and that led to the uptick in the average length.

All right, great. In terms of your guidance for the first quarter and the year, it looks like in the first quarter you're expecting incremental margins on the EBITDA side of roughly 50%. For the year though, your guidance implies higher incremental margins which means that we should expect some scaling in incremental margins as we move through the year. Are there any costs that are in the quarter in the first quarter which will become less significant relative to the revenue base that we should have confidence that the incremental margins will scale back to the higher levels we'd seen previously?

I think there is a combination of costs. One, there are some significant new market expansions. I would suspect the rate of new markets will actually probably slow a little bit as we're starting to reach some maturity there. That is dilutive on the kind of gross margin side. In terms of SG&A costs, I think there are a couple of things. We've got a lot of salesforce ramping. We had our sales convention in the first quarter which had some costs associated with it, and then as Tad indicated, generally fourth quarter and first quarter can have higher professional service fees associated with them.

But if you look at our incremental margin expansion, you should expect to continue to see between 100 and 200 basis points of both EBITDA and gross margin on a pretty consistent basis. And we try to manage our network footprint expansion to ensure that we can deliver those types of margin expansion.

Great. Last is, Dave, you mentioned that I think you mentioned that somewhere in the mid 50% of your revenue or high 50% of your revenue was coming out of the network centric data centers versus the enterprise. In the past you've also given us traffic through those two groups and even maybe number of customers. Again, could you update us on those statistics?

Absolutely. So roughly 58% of our total revenue comes from net centric customers, that remains flat as a percentage of total revenue from the previous quarter. That customer base accounts for roughly 96% of all the traffic on the Cogent network and accounts for about 32%, I believe, Tad, as a percentage of unit number of customers.

Great. A final question here, did you say in your prepared remarks that you are expecting $1 per share of free cash flow in '08?

Yes we did.

Okay, thanks again for taking the questions.

Hey, thanks, Jonathan.

Just on a clarification on the connections, just so that lines up exactly for you. There was a slight increase in net centric as a percent of total. It's 38% for the fourth quarter as opposed to 32%. It went from 37% to 38%.

Frank Louthan, Raymond James.

Could you get us a little idea, you mentioned with the CapEx that there is some a little bit of seasonality in the first quarter in the CapEx. Can you walk us through why you see those trends? Any other sort of seasonality we should think about in the business? And can you give us an idea as we're going forward where you're expecting to see more growth? Does it come more out of the data center business or end-user demand? How should we be thinking about where the sources of revenue are coming from?

In terms of capital spending, typically the fourth quarter tends to be substantially lighter and that is because in most of our cities our outside plant construction work stops because of city moratoriums. So typically it tends to be pretty equal in the first, second and third quarter in substantially lower in fourth quarter. We saw about last year, we expect that to continue.

Now the number of buildings that come on actually is fairly consistent and that is because we hurry up and get the outside plant work done and then just focus on the inside plant work when these moratoriums are in place. But we expect our capital spending to remain at about $30 million and that will allow us to cover both maintenance CapEx, new building additions and capital related to footprint expansion.

In terms of growth in our business and which types of customers continue to increase, on both friends the limiting factor has been the number of salespeople. We are adding both net centric salespeople as well as corporate salespeople. We would expect over time eventually the percentage of our business that is net centric to continue to increase. So for the full year, that did increase from roughly 50% to 58% as a percentage of our business. We would expect that trend would continue.

Now within a net centric footprint, we do have what you may consider end-users, these can be either universities or they could be some web centric businesses that incorporate our bandwidth into their applications. So we would count VoIP companies, security companies, backup companies, streaming companies in that net centric universe as also -- are they end-users or net centric?

Okay, great. That's very helpful. And can you give us an update -- I apologize -- I probably know this, but what is with the share repurchase plan -- what are your thoughts there going forward? Is that going to continue to be thoughts for use of cash going forward and how should we think about uses of cash as you start to produce free cash?

Sure. We have told investors that there is an appropriate level of liquidity for the Company to keep on its balance sheet. We think that number is about $150 million. That is kind of what we target. As the Board thought through the authorization last August of the second $50 million buyback, what they were really doing is telling us to eat into some of the cash we had and effectively buy back using the cash flow generated in 2008, kind of on a forward purchase basis.

We still have about $27 million available to us under that authorized program. We expect that we will be in the market buying back stock and use a portion if not all of that program. We also think that on a going forward basis, the Board will consider kind of start to consider later in the year 2009's potential cash flow and make a decision on whether or not it remains share buybacks and/or a dividend as the appropriate way for us to return value to shareholders.

And quite honestly with a very concentrated shareholder base, it allows us to have a pretty candid set of conversations with our shareholders and take their views into consideration as the Board deliberates which of those two methods of returning value we'll use going forward.

Just one last question. You mentioned a couple of times sort of gaining factors and some of your growth have been you getting the number of salespeople. What do you see is really the determining factor there? Is that just an ongoing struggle? Is that the current economy and what plans do you have to try to meet your demand for salespeople?

I would say that the economy has actually helped us in that the number of applicants that we have is probably at an unprecedented level. Secondly, we have added additional recruiting resources where today we have 2.5 dedicated recruiters, two full-time people and one person spends half their time just on sales recruiting. Last year we went through a process of dividing territories and adding additional management strength. We continue to improve the training and kind of monitoring systems that we have for the salesforce. But it's a job that requires cold calling and there are people that are just not cut out for that. And it pays for us to remain disciplined about managing those underperformers out quickly.

So the good news about the job is half of all of the proposals made turn into sales. The bad news is all of those proposals started with a cold call to someone who probably didn't want the call in the first place. And that is a tough job. We feel comfortable that we can add the people, we can keep them productive, keep them motivated. Morale is a very important part of selling. It's a little bit like Eisenhower said about battles, morale is the most important ingredient in victory. And it is true here in the sales organization as well.

So we try to make sure Cogent is a good place to work, people feel good about coming to work and have the right attitude. And a big component of that is setting very clear goals. You may not like the goals but at least if you know what they are up front there is no ambiguity. And we've taken heat in the past for being too hard on managing out underperforming reps. But we think it's the right way to maintain morale and productivity in the whole sales organization. So we feel pretty good about where our sales efforts are going.

Great, thank you very much.

Jurgan Usman, Wachovia Securities.

Thank you very much, a couple of questions. First of all, have we seen the bottom of the ARPU here? It looks like you are saying that your salespeople as their sales funnel are maturing, targeting -- target a little bit bigger and bigger customers, it seems to me that have we reached the bottom here? If so, then what kind of ARPU increase should we expect on a sequential basis?

And the second one is I guess one of your fiercest competitors said last week that basically their existing customers were taking additional services from alternative (inaudible) there was potential customers in there backlog as well. Can you maybe comment on that see if you get any benefit from that?

Let me take the ARPU one first. Two components. Off-net, I feel very comfortable in saying that we've reached a bottom and now that we have a couple of sequential quarters behind us of upticks and a continued availability of these off-net Ethernet base services, I think that is a pretty clear trend. I think in the on-net, it's too early to tell. We do see the salesforce continuing to mature. We see their funnels getting larger, with larger funnels has come the ability to sell larger accounts. But I think it's probably too early to say that there is an absolute bottom here. Our model, as I said earlier, kind of forecasts some additional declines. I hope we're wrong but one quarter doesn't make a trend.

With regard to our competitors on the net centric side of the business which is I think where you are referring, clearly there have been companies that have had struggles but in many ways the biggest struggle the wireline telecom industry has experienced is the struggle of taking high revenue non-Internet based services and moving them to low revenue per bit mile Internet services. We benefit from that trend because we have none of those legacy services to cannibalize.

Some companies may have internally generated provisioning or management issues that are exacerbating the trend. But for most of our competitors, the Internet is their worst enemy because it's cannibalizing their high revenue per bit mile traffic. And I think it is becoming increasingly clear that the Internet is the network of the future and that all applications will eventually be delivered over the Internet and that is why we feel so comfortable with future traffic growth and the ability off of such a large base to continue to grow.

All right, thanks. Just a couple of more questions. First of all, productivity, what percentage of your salesforce is above quota in terms of dollars sales? And given that I think you changed your sales practice a little bit this year, do you expect to see you change your average unit productivity down maybe -- guided it down to about 4 versus 5 in the past?

Clearly if ARPU goes up, productivity will go down since quotas are established around dollars. So there is a inverse correlation there. About 65% of the salesforce achieve quota on an FTE basis. As I mentioned, there were some underperformers that got managed out early this quarter and you see a bifurcation of those that are very productive and doing well and those that are struggling with kind of the activity base model that we have. But we feel quite comfortable that there are enough opportunities out there that the salesforce is going to continue to be productive and actually a few individuals greatly exceed quota which is probably the best motivation of all to the entire salesforce.

So in terms of target numbers, we balance between 4 and 5.8 units per rep per month. We think that range is kind of still the correct range going forward.

Just remind me again, what was the percentage of salesforce meeting their dollar quota last quarter?

It was slightly higher, I think it was in the low 70s.

Okay --

And again, there was this bifurcation where some people greatly exceeded. That is why we had good numbers and good results and a few individuals who just struggled and that is why we lost a few heads.

All right thanks, and last question, can you tell me more about the activities of your biggest customers? And then how many customers of yours especially on the net centric side, I guess mostly on the net centric side, are taking 10 gigs or more bandwidth from you?

A number of our large customers continue to increase their bandwidth purchases from us. We have a handful of customers that all kind of buy at various points in time to be our largest customer. Most of them have a video business model of some sort. They continue to grow. I think we are seeing an increased amount of professional video traffic and while we are seeing growth in casual video, it's not growing at the same rate that it has grown.

In terms of 10 gig ports deployed in the network, we are seeing a substantial increase in the number of customers taking 10 gig ports and multiple locations and it is entirely a net centric phenomenon.

Okay, thank you very much.

Erin Schmidt, Citi Investment.

Good morning. I was wondering, you've talked a lot about how you're having larger customers that is really helping your ARPU. Are you seeing a change in the length of your sales cycle by trying to attack these larger customers? Is it taking longer to then close the deal or could you just give us a comment on that?

Yes, sure, Erin. We have seen no material shift in our sales cycle length. The biggest gating item to our sales cycle is actually the incumbent contract length from the existing provider. So once a customer becomes ripe for a sale we have typically seen a fairly short decision cycle of generally about 6 weeks from active discussion to installed new orders. So a fairly short period of time. The industry norm remains these one-year contracts, so the biggest challenge tends to be around just catching people when they are coming out of contract.

Large customers in some cases actually can make decisions quicker than small customers simply because the bandwidth that they have used or continue to use is such an important component of their cost structure that the ability to you save money is something they can react to quickly whereas for a corporate customer where it's incidental to their business, it just really isn't -- it is more a matter of getting people's attention than saving them money.

Can you provide an update on what percent of your revenue, your new revenue is coming from existing customers versus your new customers?

That mix has generally been and continues to be about 70/30, about 70% of new incremental revenue in a given period comes from customers who never bought from Cogent before; about 30% of revenues come from existing customers buying additional services.

Great, thank you.

Nick Netchvolodoff, Lehman Brothers.

Good quarter. I had a couple of quick questions. Once again on the on-net ARPU, I wanted to get your thoughts on how much of the increase is coming from additional purchases from current customers versus new customers? I mean you just commented that new revenue is about 70%. I mean, do you think that it's the embedded base that will support the ARPU increases? And also as a follow-on to that, you mentioned that the FTEs are going to drop from 160 to I think you said 100 in the first quarter. Is that going to affect --

151 as of today. We think we will actually be up at the end of the quarter.

Okay, I misunderstood what you said then. And also what percent of your new buildings in 2008 are going to be in data centers versus corporate offices?

Let's start on the ARPU. So on the ARPU, for the corporate customers ARPU remains effectively unchanged. The only variation there tends to be on contract length and as Tad commented on, there wasn't a whole lot of variation in those contract lengths, 1% increase as opposed to the 5% that we saw previous quarter. So for the most part the increase in ARPU is coming from the net centric customers pretending to focus on larger ones as the funnel gets fuller. We're also seeing that as even the smaller customers use more bandwidth, everybody on the Internet who has a business model just consumes more bandwidth. That is pulling up both the existing base and the new base is also tending to buy larger connections.

So it's all of those factors and then finally, we do have kind of the mix by jurisdiction and with the dollar where it is you get a little bit of pick up in ARPU as the percentage of business outside the U.S. increases and it did go up in Europe from 22% to 23% of revenues. So we get a slight uptick there as well. So it's all of those factors, maturing funnels, maturing business models, all on the net centric side of the business.

With regard to the FTEs, we did end the year at 160. We have 151 today. We have reps maturing. We did manage out some people that weren't making it but we feel very comfortable in terms of our training and hiring funnel that we're going to hit all of the goals we've laid out in terms of adding new reps and maintaining the ratio of FTE to reps.

And then in terms of data centers versus net centric, I will let Tad take that one.

Essentially when I look at what is in process right now, so we said over 30 and actually that number is 35. One-third of those are multitenant office buildings and two-thirds are in the carry neutral data centers and that is probably about the mix going forward.

Okay, thanks.

James Breen, Thomas Weisel Partners.

Thanks for taking the questions, it's actually Shane. Just a couple of quick questions. I was wondering if you could talk -- a give a little more color about any customer churn trends you saw exiting the quarter or anything you can tell us about in the first part of '08? And then my second question is you mentioned on last call that you think you'll be able to get to 90% on the number of customers that have -- that are locked into long-term contracts. And I was just wondering since you've seen a little bit of a slowdown there, if you still think that is a pretty reasonable goal for this year? Thanks.

Sure, I'll let Tad take the churn. I will take the customer contract length. We do believe that people are increasingly comfortable with Cogent and are taking longer-term contracts. We did see the rate of those contract lives extending slow from 5% sequentially to 1.3%. We do think that we will eventually get to over 90% of the base that will be under something other than a month-to-month, so a one-year or two-year contract length. How long that will take we are not sure. That obviously has an impact on our revenue per megabit but that again is offset by the larger volume purchases.

So I can't tell you when it happens but I can tell you I'm still comfortable with it happening. Let me let Tad take the churn one.

I went back and looked just to see over the past two years now that we've closed '07 out, and really the on-net churn has been essentially 2% for the past two years and we don't see -- have not seen an uptick of that or a change in that really one way or the other. So essentially 2%. If you look at the off-net business, we did see that trend better. So I do anticipate that rate to be lower than it was historically so an improvement in the off-net churn based upon what we've seen over the past couple of years and on-net to remain steady at about the 2%.

Great, thanks.

Jennifer Adams, Cowen & Company.

Good morning. This is Jennifer on behalf of Tom Watts. One quick question on stock based comps. You're guiding to a big increase in '08 versus '07 and I was just wondering if this reflected any change and your philosophy of how to compensate people or any specific change in the way you will compensate and motivate your salesforce? Thanks.

Sure. So every employee at Cogent has some form of stock-based compensation. We feel that broad equity ownership is extremely important. Secondly, virtually all of our Board compensation is in stock and that was a program that was instituted about a year and a half ago and is fully reflected. And then finally, as Tad mentioned in terms of bonuses and maybe the meager size of the bonus relative to the company size, the bonus pool, much of that bonus recognition was also in stock.

So for example, I received no cash bonus whatsoever and took all of mine in future stock grants. And I think that is true of the majority of the senior staff at the Company and their kind of increased confidence in the Company and its prospects going forward. I don't know, Tad, if you want to add to that any?

Just that the grants were made in January. We didn't include it in the guidance because it hadn't been finalized and obviously we didn't know what the share price would be which drives the number for the amortization of that over the vesting period. In the case of the Board, it's immediately vested so you see a bigger number in the first quarter than you'll see in the second quarter of '08 because of that vesting. And then the remaining grants are amortized over the service period which is basically four years. So we will see that expense amortized over the four-year period.

Great. Thanks for that information.

There are no further questions at this time. I'd like to turn the conference back to Mr. Schaefer for closing remarks.

Thank you very much and thank everyone. I know we went kind of long today but again, we appreciate everyone's support. The management team is available for further Q&A and again, thanks everyone for supporting us. We look forward to another great quarter coming up. Take care, bye-bye.

Thank you. That does conclude today's conference call. We thank you all for your participation. Have a great day.