Cogent Communications Holdings Inc (CCOI) 2008 Q1 法說會逐字稿

Good day everyone and welcome to the Cogent Communication's Group first quarter 2008 earnings conference call. As a reminder, this conference is being recorded and will be available for replay at www.CogentCo.com.

I would like to turn the conference over to Dave Schaeffer, Chairman and Chief Executive Officer of Cogent Communications. Please go ahead, sir.

Thank you. Thank you and good morning everyone. Welcome to our first quarter, 2008 earnings conference call. I'm Dave Schaeffer, Cogent's Chief Executive Officer. With me on today's call is Tad Weed, our Chief Financial Officer. We are pleased with our results for the quarter. Our first quarter revenue, EBITDA and loss per share, either met or exceeded our first quarter guidance provided to you on our last call. During the quarter, as part of our second $50 million stock buy back program, we returned a total of $18 million to our shareholders by purchasing 981,000 shares at an average price of $18.40 per share. As of today, approximately $20 million remains available under this second $50 million authorization. Through yesterday under our total of $100 million stock authorization program, we have purchased a total of 3.3 million shares of our common stock, for an aggregate total cost of approximately $80 million.

During the quarter, we continued to expand our EBITDA and gross margins demonstrating the tremendous operating leverage of our on-net business. For Q1, 2008 our gross margin expanded by 270 basis points, to 57.9%, and our EBITDA margin expanded by 140 basis points to 28.1%. Our direct incremental on net gross margins continue to be approximately 100% with direct incremental on-net EBITDA margins of approximately 95%. During the quarter, we continue to increase our footprint, we added 30 buildings to our network, we added over 4000 intercity fiber route miles and over 900 miles of metro fiber to our network during the quarter. I want to personally thank the entire Cogent team for efforts in helping us achieve these results.

Throughout this discussion as in the past we will continue to focus our results and focus on the impact of our on net business which today is approximately 82% of our total revenues, we continue to highlight several operational statistics that we believe will demonstrate our increasing gain and market share expanding scale, operating leverage of our on-net business. I will review certain operational highlights and also outline our continued expansion plans and growth opportunities. Tad will provide some additional details to our financial performance. Tad will also walk through our guidance for the second quarter of 2008, and update and reaffirm our guidance for full year 2008. Following these prepared remarks we will open the floor for questions and answers. Now I would like Tad to read our Safe Harbor language.

Thank you, Dave and good morning everyone. This first quarter 2008 earnings report and this earnings conference call discuss Cogent's business outlook and contain forward-looking statements within the meaning of Section 27A and Section 21E of the Securities Act. Forward-looking statements are based upon our current intent, belief and expectations, these forward-looking statements and all other statements that 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 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 or supplement statements made on this call. Also, during this call, if we use any non-GAAP financial measures as defined the SEC in Reg-G, you will find these reconciles to the GAAP measurement in our earnings release on our website at CogentCo.com. Now I would like to turn the call back to Dave.

Thanks Tad. Hopefully you have had a chance to review our earnings press release. As with in previous quarters our press release includes a number of historical quarterly metrics. These metrics will be added to our website, hopefully you find these metrics informative and helpful in understanding our financial results and the trending in our operations.

As always, if you have any suggestions for us to add or to refine, or perhaps even delete some metrics, please let us know. Our first quarter 2008 revenue of $52.1 million, was consistent with our guidance for total revenue of greater than 52 million. EBITDA, as adjusted of 14.6 million was consistent with our guidance for the quarter of having EBITDA of greater than 14.5 million. Our loss per share of $0.21, was within our guidance range of $0.17 to $0.22 per share. As Tad will explain, a non-cash asset impairment charge reduced EPS in the first quarter of 2008 by more than $0.03. As a result, our recurring lost per share was in fact $0.17. We continue to be pleased with the growth of our on-net business which continues to grow at a rate greater than that of our competitors; however, we did not meet our targeted FT Representative productivity goals for the quarter and have taken a number of measures to proactively improve their performance. These measures include adding retention bonuses for our Representatives who continue to achieve quota in six month increments. Adding additional sales support staff, adding and enhancing our training program for our Sales Reps, and finally, adjusting our compensation program to ensure that Reps are only compensated for gross margin, therefore incenting our entire sales force to focus on on-net products. During the quarter, we again extended our average contract length by approximately 3%, as many more customers continue to enter into long-term contracts and customers continue to express their increased confidence in Cogent and Cogent's value proposition.

Now I would like to talk in a little more detail about some of our revenue and traffic trends for the quarter. Total revenue for Q1 2008 was $52.1 million. This represented a 4.3% increase over fourth quarter 2007, and a 19.5% increase over Q1, 2007. Traffic on our network continued to grow and traffic growth for the quarter was approximately 7%. On-net revenue and on-net revenue drive from our customer connections also continues to increase. On-net revenue increased by 5.7%, sequentially Q1 2008 from Q4 2007. This growth rate was less than the increase of 7.6% that we had experienced in third quarter, 2007, to fourth quarter, 2007. Our on-net customer connections increased at 5.9% sequentially, Q1 2008, over Q4 2007. On-net revenue continues to increase as a percentage of total revenue, growing from 81.1% of total service revenue in Q4, 2007, to 82.2% of total revenues in first quarter. Approximately, 90% of our new sales in Q1, 2007, were from our on-net services. Revenues from our off-net services also increased approximately 0.3 of 1% for the quarter and non-core revenues actually declined 12.2% for the quarter.

Now I would like to spend a moment talking about ARPU and pricing trends. Cogent remains committed to be the industry price leader. Our pricing for our most widely sold product remains at $1000 a month for 100 mega bit connection or $10 per mega bit. We continue to offer discounts for longer term contracts. We also continue our policy of under cutting our competitors, while we did see a slight increase in the number of competitive offers in which our customers availed themselves of these further discounts, it was still only about a dozen incremental orders out of our total sales funnel. We continue also to guarantee a provisioning cycle of 17 business days or less for our on-net services. In the first quarter, we delivered in excess of this guarantee, in fact, provisioning our on-net services in an average of ten days. Our on-net ARPU was essentially unchanged for the quarter. On-net ARPU in the fourth quarter of 2007 was $1245. In Q1 it was $1239, representing a decline of about a 0.5 of 1%. Our off-net ARPU continued to increase. Off-net increased ARPU from $884 in fourth quarter, to $890 in Q1 of 2008, an increase of about 6/10 of 1%. Total churn remained consistent at approximately 2% per month. On-net revenue churn, is the same that we have experienced for the past two years. Off-net churn remained consistent at approximately 2.5%, in the fourth quarter of 2007, and again in first quarter, 2008.

We intend to continue to expand our network. During the quarter, we added 30 additional buildings to our network, these were both corporate buildings and data centers. We have a total of 1247 buildings, attached to the network as of the end of the quarter. Again, to remind you in 2008, our goal was to add 100 buildings to our network. We have also secured fiber and extended our network into a number of new markets. In Europe, extending the network into the Balkans and to Zagreb and Croatia, Lithuania and Slovenia. In Italy our network expanded into Genua. Here in the united states we've extended the network adding Omaha, Nebraska and Indianapolis, Indiana.

During the quarter, we also acquired two additional data centers, again, consistent with our policy, we did not pay anything for these fully constructed centers but rather took over the operating leases of these centers, this increases our total data center footprint to 36 centers and a total of 340,000 square feet of data center space. These two new centers, one in the Bay Area in Oakland, California, the other in Cleveland, Ohio. We will continue to evaluate additional fiber routes and extensions in both Europe and North America, but remain consistent in our capital guidance. Tad would like to cover some additional details about our operations in first quarter 2008. Tad will also provide our guidance for second quarter 2008, as well as reaffirm and update our guidance for full-year 2008. Now I would like the turn it over to Tad.

Thanks, Dave and, again, good morning, everyone. I would also like to thank and congratulate our team on their hard work and performance for this quarter.

With respect, EBITDA and gross margin, as Dave mentioned EBITDA adjusted was 14.6 million for the quarter, and that represented an increase of 9.6% from the 13.3 million for the fourth quarter of 2007. And our EBITDA and EBITDA margins continue to increase, and that's largely due to gross margin expansion from the increase in on-net business. EBITDA margin expanded by 140 basis points from 26.7% from the fourth quarter, to 28.1% for the first quarter. That expansion was consistent with guidance provided on the last call of 100 to 200 basis points. Gross margin percentage, again, substantially increased and gross margin increased by 270 basis points for the quarter, demonstrating, again, the operating leverage of the on-net business. Our first quarter gross margin expanded to 57.9%, compared to 55.2 for the fourth quarter and that expansion also exceeded our guidance gross margin expansion of 100 to 200 basis points. Gross margin flow through was over 100% with our revenues increasing by 2.1 millions and our gross margin dollars increasing by 2.6 million due to reduction in certain costs. Loss per share, our loss per basic and diluted common share was $0.2, and that was within our range of $0.17 to $0.22 a share.

During the quarter, some of you may noticed on the press release we had an asset impairment charge for a unused IRU that had to be fully depreciated during the quarter, that was $1.6 million non-cash charge or about $0.03 a share and if you exclude that charge, the loss per share would have been $0.17. We located alternative fiber to serve the related buildings and under the accounting rules you're actually required to fully amortize the asset; however, the corresponding liability, since this is a capital lease IRU needs to remain until the extinguishment criteria are met, and that total liability was 2.9 million at March 31. Our weighted average shares decreased by about 620,000 from the fourth quarter as a result of shares we bought under stock buy back program, and we purchased an additional 981,000 shares in the first quarter for $18.1 million. Non-cash equity base comp expense for the first quarter was 5.4 million or about $0.12 per share. This amount was slightly less than the guidance we provided of 5.5 to 6 million for the quarter. Depreciation amortization expense was 16.3 million for the quarter and that was within the range of 16 to 16.5 million, excluding the impairment charge which is disclosed separately.

Foreign currency impact, the Euro to Dollar conversion rate positively impacted our comparable quarterly revenues by about $300,000. For the first quarter of 2008, about 23% of our revenues were based in Europe, and about 8% of our revenues were based in Canada, that relationship was consistent with the same relative percentages for the fourth quarter of 2007. Capital expenditures were 9.8 million for the quarter and 4.3 million for the four quarter of 2007, that expected increase is related to seasonality of construction activities, as a reminder, the fourth quarter typically has moratorium on construction activities, so we expect the first quarter to be greater than the fourth quarter. We continue to expect a total CapEx for the year to be about $30 million.

At March 31, 2008, cash and cash equivalence and short-term investments were 155.4 million, this is almost entirely in money market funds. Our capital lease IRU obligations totaled 104.8 million at the quarter-end and 7.7 million amount is a current liability. As a reminder, these obligations are paid over remaining weighted average term of about 13 years. Day sales outstanding on accounts receivable, again, exceeded our expectations and was 34 days at the end of March, our bogie for DSO was 40 days, so that was substantially better. Once again, I want to personally thank our worldwide billing and collections team for doing a great job on customer collections.

Cash flow from operations was 11.5 million for the quarter that was a decline from the 13.5 million from the four quarter that was entirely related to a reduction in working capital and from the lumpiness of some vender payments, primarily in Europe where you have quarterly payments. In guidance, I'm now going to provide our guidance for the second quarter 2008, which was included in the press release, and update and reaffirm the 2008 guidance. We build our guidance based upon the current and expected run rates of our business, typically from many figures using the last six months average, removing outliers, and this includes our plan increase in sales and marketing programs, and our current anticipated network expansion projects. So from the second quarter of 2008, we expect total revenues to be over 54.5 million. On the components of revenue as compared to the first quarter, we expect on-net revenues to increase by over 5% and we also expect off-net revenues to increase by over 5%.

We expect non-core revenues to continue to decline and decline by approximately 15%, as a reminder, we don't actively market these revenues and they will eventually trip to zero. We expect our gross margin percentage for the quarter to expand by another 100 basis points. We expect EBITDA as adjusted to grow to over 17 million for the quarter. That will be a EBITDA margin expansion of approximately 200 basis points. We expect non-cash based equity comp to be about 4.5 million. We expect depreciation and amortization to be about 16 million. We expect net interest expense to be about a $1.5 million. Those results are expected to result in the loss per share of between $0.08 to $0.12. That assumes 46 million weighted average shares outstanding, and, again, if we purchase additional shares, the number of shares are reduced on the denominator of the calculation so our loss per share would increase.

For the year, we're refining and updating 2008 guidance provided on the last call, we are reaffirming our total revenue in EBITDA guidance. As a reminder, the guidance includes the following - - total revenue for 2008 expects to be between 225 and 235 million, and we expect the following annual growth rates from 2007 to 2008, on-net revenue growth of approximately 30%. Off-net revenue growth to be between 5 and 10%, and non-core revenues to decline by between 35 and 40%. We expect the full-year 2008 gross margin to increase to approximately 60%. We expect EBITDA to grow to between 75 and 80 million, depreciation and amortization expense to be between 62 and 63 million. Non-cash equity base comp to be between 18 and 19 million. Net interest expense to be approximately $4.5 to $5.5 million. Primarily from the impact of the impairment charge we took in the first quarter and the impact on our weighted average common shares from our stock purchases, and just updating our overall guidance, we are revising the loss per share from previous was $0.10 to $0.20 per share for the year, and we are now expecting the range between $0.20 and $0.30 per share. That loss per share assumes approximately 46 million weighted average shares outstanding.

Finally, as we mention on the last call, we do anticipate achieving another corporate milestone in 2008, which is to achieve positive net income by the fourth quarter of this year. And now I will turn the call back over to Dave.

Thanks, Tad. As I mentioned earlier, we intend to continue to expand our footprint. During the quarter we added 30 buildings to our network as of March 31, we had 1247 buildings, on-net, and, in fact, we have over 25 buildings in the process of being connected to our network today. We began the first quarter of 2008 with 192 Sales Representatives and ended the quarter with 190 Sales Reps. We again remain very disciplined about maintaining Rep productivity. We began the first quarter with 160, full-time equivalent Sales Reps and ended with 156 Sales Reps. As mentioned earlier, we are taking a number of proactive steps to increase the retention of Reps and to ensure that those Reps remain productive and fit their quota goals. As of May 5, this Monday we had 198 Sales Reps, selling our services in both North America and Europe. Those 198 Reps equate to 173 full-time equivalence under our ramping protocol. Productivity per full-time equivalent Rep was 3.6 per [FT], less than the 4 units of productivity we experienced in the most recent two quarters. The effort we are undertaking we believe will accelerate that Rep productivity. As we continue to grow our foot print, we are also looking to add additional Reps to sell into that footprint. We have a full-year goal of adding Reps. and bringing that total to 240 by the end of the year. We feel very comfortable about meeting that goal.

We will continue to expand our metro footprint as well as our intercity network. We added over 1000 miles of metro fiber since the last call and have now, approximately 11,000 miles of metro fiber. We added over 4000 route miles of intercity fiber and now have over 30,000 miles of intercity fiber. Our network remains one of the most interconnected networks in the world. We are connected to over 2300 other networks with approximately 330 of these networks being settlement free peers, the remaining 1970 networks are Cogent customers, we believe our network has substantial scale and capacity to support our additional growth. As of the end of the quarter, we are utilizing approximately 21% of the lid capacity in our network.

In summary, our on-net revenue, our growth business continues to grow and increase as a percentage of our total revenue and we expect that to continue. Traffic also continues to grow on our network, we are very comfortable with our 2008 full-year and second quarter revenue, EBITDA, sales force and network expansion guidance. Our business remains entirely focused on the Internet. We sell no telephony based services, we sell no value added services, we believe our products suite and our business model remain isolated from current economic conditions. Our business provides a necessary utility to our customers and this is a utility that continues to grow. We continue to be the industry's low cost provider, for a simple product set and limited number of skews allow us to continue surpass our 17-day provisioning goals for on-net services. Again, to remind you, we delivered our services in an average of 10 days for on-net services, our balance sheet remains very strong especially when compared to others within our sector, we have less than $42 million of true net debt. During 2008, we expect to increase the amount of with IP capacity in our network by approximately 60%. This will be done within the capital budget that we, again, reaffirm of $30 million for full-year.

Finally, and maybe most important to our shareholders, under our 2008 plan we we feel highly confident of, we will generate a $1 of free cash flow, per share for the benefit of our equity holders, we will continue to consider additional share repurchase programs or other means of returning value to our equity holders. With that I would like to now open the floor for questions.

Thank you. (OPERATOR INSTRUCTIONS). And we will first here from Jonathan Schildkraut of Jefferies & Company.

Good morning, Dave, Tad, thank you for taking the questions. If you could talk a little bit about the traffic trends, coming in to the first quarter, I think you said on the last quarter that traffic increased to January over December by about 6%, what did you see in the rest of the quarter, that kind of led to only 7% traffic growth and what were the trends coming in to the second quarter? Secondly, if you could go a little bit deeper on the contract length extension, could you tell us what the average contract length is at this point and also, what percent of your customer base is on long-term contracts. Finally, while you reiterated your $1 free cash flow guidance in the past you gave us an outlook as to what percent that could grow by over the next several years. I'm wondering if there is any change there.

Thank you for the question. Let me start and give them in the order in which you outlined them. You are correct in that in the first month of this quarter as we indicated on the last call we saw 6% traffic growth sequentially month over month. We saw virtually flat traffic for the remaining two months in the quarter. The internet has experienced this long-term trend of 70 to 75% of traffic growth. Cogent outpaced that. Now that growth has generally come from different business models. I would say that the primary driver of traffic growth on Cogent's network are a number of video models, Today Video is our dominant application, our largest customer remains YouTube who is primarily a casual video site. We have seen a number of professional video sites being launched but a number of these sites have not gotten the kind of pick up in traffic volume that the casual sites have experienced. We do believe the the long-term trends of traffic growth remain in tact but our guidance is really based on the six month trailing rolling average that Tad mentioned earlier. As we look at our future revenue guidance, we feel comfortable with the approximately 30% growth in on-net revenues for the full-year, and 5% or greater in the upcoming quarter, the traffic growth is a important contributor to that and we do believe we will continue to achieve both gains and market share and the market will continue to grow.

Now with regard to contract length, we saw the average contract length continue to expand by approximately 3%, those contracts remain at about 11.7 months in total. And approximately 90% of our customer base is under either a one or two-year contract. And then the final question you had asked was around our continued ability to grow cash flow in the out years. While the company does not have firm guidance, we have said that within about five years we should be producing between $5 and $6 dollars of free cash flow per share. We still feel very comfortable about that outlook and I think investors should feel heartened by both the revenue growth trends that we are exhibiting as well as the phenomenal margin expansion that we demonstrated in the last quarter and as we indicated going forward we expect the margin expansion both in gross margin and EBITDA margin to continue.

Just a couple of follow ups here. Coming into then April which is now behind us, was it a traffic trend still kind of flat over March? And secondly, in terms of the contract length, approximately 90% of your customers under long-term contracts, again, that seems to be a fairly large jump. Last quarter we were about 82.5% and in the past I guess we thought that 90% was probably as high as you can get. What's the company's feel on that? Thanks.

I will take the contract length point. We are clearly heartened by the fact that people are willing to commit to Cogent and believe in us and will extend our contracts. We think we have reached a plateau on contract length at about 90%. But obviously that decision ultimately resides with the customers. With regard to your traffic growth question, we did see sequential growth in April but it was the order of 1%. And we do anticipate continued growth throughout the quarter but that sequential traffic growth in April over March was about 1%.

Thank you.

Frank Louthan of Raymond James & Associates.

Thank you. Where exactly do the Sales Reps need to be as far as average in productivity to hit through the revenue growth numbers. Can you give us an idea, quite a few changes to our selling process in the sales force et cetera, when do you think that's going to have impact. Last question, with the increase in Lid capacity, you said 60%, that's within your budget. Can you give us total cost and what will your utilization be once you've gotten that done? Thanks.

You are correct in that we have made a number of modifications to our sales force in terms of expansion, and incentive programs. We believe that we could achieve the goals that we have with the current level of Rep productivity. That is what is projected in to our numbers. We believe; however, that the long-term productivity could achieve five units per Rep, which we have done in the past. Our most two recent quarters have been around four units of productivity. Productivity on a unit basis is a good indicator but not a absolute guarantee of Rep productivity because average selling price is also important and the steps that we have taken to incent our Reps to continue to stay with us and build a career at Cogent by implementing additional bonuses we think will continue to help us improve not only unit productivity but average selling price. You saw that in our rate of on-net ARPU decline continuing to decelerate, at some point we are actually hoping that number goes positive so people can meet quota by selling more units and also by selling at a higher price. We feel comfortable about our revenue growth trajectory, the guidance we have given and if Reps can reaccelerate productivity we would expect to exceed those goals and continued improvement throughout the year.

With regard to the network capacity, we have a fixed capital budget of approximately $30 million. That budge is basically divided in two three major categories, maintenance of the network, new building expansion and finally, new route augmentation. Embedded in that maintenance number is our need to expand capacity in hot spots in the network, and embedded in that expansion number is the addition of new routes which increases capacity in advance of traffic. As I stated, we expect to see over the course of this year, a 60% increase in the amount of IP LIT capacity. The reason why I put that [file fire] in there, it's important, a large portion of the capital is actually at layer three, not at the optical layer. And we continue to expand both the optical layer and the routing layer. Last year we increased the capacity or network in excess of 100%, and we affectively saw our utilization rates go in 2007 from about 14% to 22%. We saw utilization rates decline by about 1% in Q1, that was the direct result of capacity expansions as well as the 7% traffic growth. I would anticipate ending the year with utilization rates of below 30% in our network. But that is highly dependant on ultimately traffic growth and we obviously would welcome any acceleration in traffic growth.

Okay. Then, just what do you anticipate, do you think you're going to be back up to 4 units per Rep in this quarter? Where do you think you will end up the year? Average north of that?

We believe we will revert back to that trend. Preliminary data for April tells us we are doing quite well but there is a good bit of time left in this quarter. Initial sales results, even in May also say that 4 the probably where we are going to be. I would actually hope that we are at or above 4 for the full-year.

Okay. And can you tell us, what is your average price per meg for new customers that you are selling now?

Average price is just around $9, that is based on our discount structure that is based on contract term and to refresh people's memory, it's $10 per megabit, month to month, $9 on a one year contract and $8 on a two year or longer contract.

Great, thank you.

Next, Tim Horan with Oppenheimer.

Thank you for all the clarity on the quarter. On the buying growth, that 7% year-over-year, what was that in the Q1 of last year. It seems to be trending down. Shouldn't the network centric customer, grow revenues to buying growth don't they add their capacity as they see their buy in's grow.

You are correct, Tim, first of all that 7% number is the sequential quarter-over-quarter. Not Q1 '07 over Q1 '08 where that number was I think about 65 or 70%. Our full-year number was 75% for 2007. So the 7% sequential growth came almost exclusively from our net centric customer base, 96% of all traffic on our network comes from the 58% of our customer base that is net centric. In that market segment, we gain revenue two ways by winning new customers, and also by seeing existing customers increase their bandwidth demand. In fact, the rate at which existing customers increased their bandwidth purchases in the quarter was slower in Q1 of this year than it was in Q4 where we grew 14% quarter sequentially.

So our job is to deliver the bits, the most affective way possible, it's our customers business models that will generate that traffic growth. While we believe the long-term trends remain in tact, we looked at the deceleration in traffic growth in the quarter and are trying to establish whether or not it is industry wide phenomenon or whether it's peculiar to our specific customers, we think it was more of a temporal abnormality, then any kind of long-term trend and it is difficult since many of our competitors anecdotally talk about traffic, but do not give clarity in terms of specifics. We are very specific about our traffic growth numbers and our total traffic volume.

I appreciate that. Then on the on-net revenues versus off-net. On-net sequentially, I know you're looking for more in the 5%. But off-net the same thing, it seems like on-net you would be thinking more like 7, 8, 9 percent historically, and off-net being more flat. Why is that changing do you think? Is this a consistent trend going forward?

It is a trend. We build all forecasts based on the past six months of historical data. The Reps are now selling both products and one of the things that we did when we basically opened up our sales force in its entirety so we got a pick up in off-net sales. We hope we will refocus people on on-net by paying commissions only on gross margin. The on-net product is 100% gross margin the off-net product is only a 50% gross margin. It is a very large addressable market and Reps found it easier to hit their numbers and fill their funnels quickly with the off-net product. We actually in our guidance increased our full year expectations for our off-net business as a result of these most recent trends. But we think long-term the value proposition of Cogent is the on-net business. We believe we will revert back to our historical sequential growth rate. Obviously, a key component of that was the first question you asked which is aggregate internet traffic growth.

The previous off-net forecast was flat to an increase of 5% for the year. and what we do, we look at the last six months of history for all the components in building the plan, throwing out any lumpiness or out outliers, the amended change to off-net for the year of '08 as increase of 5 to 10%, that's based upon the recent experience.

Great. Just to play devil's advocate. Could it be you may be reaching some saturation or this is the optimal number is around 200, and maybe going to 300, might be counter productive in terms of productivity and you might drive up your SG&A higher than you would like to see?

We constantly look at that Tim and do think about it. We actually saw our cost of revenue acquisition continue in our historical run rate. And secondly, when we look at our addressable market we have a very defined on-net addressable market, and today less than half of that addressable market is either a Cogent customer or in the sales funnel. Our penetration rates remain low. Our corporate on-net penetration is about 14.6%. And our net centric penetration by unit is at about 7.4%. So we feel that we have substantial head room to add more Sales Reps and continue to see low cost revenue acquisition and acceleration of Rep productivity.

Thank you.

Next, Erin Schmitz of Citigroup.

I just wanted to follow up on the unit productivity. I was wondering if you could identify or add color about what actually contributed to the short fall. Has it been just sales turnover with higher in 1Q or were there other factors playing in to it that were causing that productivity to be lower in the first quarter?

Sure. I think productivity was lower for a number of reasons. One, the average tenure of the sales force was slightly less than we had seen. So there was greater turnover in the first quarter. Historically that has been the case at Cogent where Q1 has the highest level of sales force turnover. As I stated earlier, we implemented a number of steps to reduce that in the form of retention bonus,, these are above and beyond quota bonuses. And also additional training and additional sales support people.

Secondly, traffic growth was lower than what we had historically seen, therefore we were not getting as many new orders from net centric customers increasing their bandwidth commitments which will play in to sales force productivity. But we feel comfortable that we can continue to add Reps and achieve the productivity levels for the full-year we indicated at 4 units per Rep.

If the traffic growth is lower that's causing part of this, would that imply that if traffic stayed at these levels that turnover could be higher in the sales force because they are not reaching quotas in the second or third quarters as well.

Yes, the corporate sales individuals, traffic growth has no correlation to quota achievements since our average corporate customer is only utilizing today about 8% of the the bandwidth they purchased. We would not expect to see any correlation there. On the net centric side, traffic growth is a contributor, we believe that the quotas are obtainable and even with the reduced traffic trends that we saw in the most recent quarter, we would expect to see sales force turnover lower in Qs two, three, and four, as we did last year where we saw a deceleration in traffic growth in those quarters as well.

Okay. Great, thank you so much.

Thanks, Erin.

Jurgan Usman of Wachovia Securities.

First of all, you said that the guy is based on historical in the past, trend that you see in the past six or nine months. If I take a look at your on net revenue guidance, 30% growth it does imply that you are actually going to increase the run rate through about 8 to 8.5% of sequential growth in the second half of the year or so. It seems to be that a lot of this depends on the success of the new retention plan. Can you give a comment on that?

Sure. First of all, our sequential on-net revenue growth was 5.7%. If you just kept that weight and compounded it, you are correct, we would be below our 30% target at about 28.5%. We are going to be adding additional Reps to the sales force. As we said, we expect to be at the target of 240 by year-end. Actually there before year-end. And we are already adding additional Net Reps with the main number that we gave as well. We also believe that Reps will be more productive than they were in this quarter which was the lowest that we have seen. So we will see both Rep productivity and number of Reps up and we finally believe that the long-term traffic growth remains in tact. That will help us as well. We feel comfortable with our full-year sequential revenue, EBITDA, margin targets and the year-over-year revenue target of approximately 30%.

When did you implement this new retention bonus plan and what's the result so far? Have you seen lower the number or is it still the same?

We implemented the plan in the the middle of the quarter. We just paid the first round of these retention bonuses. It's too early to say there will be a material impact. We think logically this should help. We feel pretty comfortable with the growth in the sales funnels of the individual Reps and as I indicated earlier, to Frank's question, we should see I think a pick up in unit productivity, we are seeing that based on April and early May numbers.

Okay. Next question is, I guess, what is the productivity (inaudible - highly accented) dollar sales. I think you are saying that Sales Reps are about 80 about 72 to 85% or so of the salespeople meeting their productivity target? Is that still the case?

No, it was lower, that was part of the result of the greater turnover and Rep productivity short fall. In the quarter that number dipped to approximately 40% of the sales force at or above quota. Now that does not mean 60% of the people are due to be terminated because of we allow Reps to get to 75% of quota on a three month trailing rolling average. But it does represent a higher turnover in Q1 than we have historically seen and we do believe based on April's trends and early May, that we will see a higher level of Rep productivity reverting back to the historical run rate.

Last question, what's your -- has there been (inaudible - highly accented) traffic sell over the internet?

The answer is based on our total traffic volume at year-end, of about 11 [pedabits] per day and third-party data, most precisely published by [Telegeography], our market share has increased from about 15% of total bit volume to about 17% of total bit volume carried on the internet. Today we are carrying about 17% of the world's internet traffic.

Thank you, guys.

Nick Netchvolodoff of Lehman Brothers.

How are you doing?

Good, Nick.

I have just a couple of questions. First of all the competitive counter offers that you're making, are they coming from net to net centric customers or corporate base? That one is clear, it's entirely net centric. We have not seen any instance, not a single instance of a corporate customer presenting us a comparable product at a comparable price point that we had to match or beat. On the net centric we saw a up tick to about dozen or two situations where customers were better off taking the 50% discount guarantee than our standard price presenting us with those invoices and I do believe it is a indication of a continued rate of price decline for our competitors while our price remains unchanged. I know it's on a limited basis, but is it the same carrier doing it and do you see it as a loss leader for them? Are they bundling it with other offerings? That's the motivation behind the more aggressive price posture?

Sure. It is predominantly one carrier, although there are several carriers that we have responded to but the majority came from one carrier. That carrier I believe referred to these products as their debased product set or low values, which quite honestly is someone who is focused on the internet it a take a bit of offense at. The internet provides the greatest amount of value to consumers, we have not seen that product combined with other products. I think particularly for our net centric customer base, they buy products, based on the value of each product. Net centric customers do not tie their corporate telephony needs, or other product needs to their net centric purchases.

Okay. I wanted to ask about the Sales Reps. You're more tenured Reps are the ones that are leaving. Are they going any place in particular? What's their next career move? I know everybody has a different story. What's motivating people top leave?

It's actually not the most tenured Reps who are leaving. They stay here. It seems to be people, Reps that are initially hired to turnover very quickly because of the activity based nature of our sales process. That retention bonus isn't really going to address. But it's really those Reps that have been here 6 to 12 months, are hitting quotas but perhaps feel a bit stressed by the continued activity level because as we do our analysis of our Rep productivity, we see almost a perfect correlation between high activity level and quota attainment. What we are focusing on are those Reps that have been here 6 to 18 months and giving them the incremental 6 month bonuses after they make it 6 month and achieved 75% of quota or better on a rolling 3 month trailing average they get a bonus in addition to commission and then additional bonuses at months 12 and 18. This is incentive to keep those Reps here for at least a couple of years.

Thank you, Dave.

Next we will hear from Tom Watts of Cowen and Company.

How are you?

Good, Tom, how have you been?

Good. Understanding on the traffic patterns, if we break it apart between on net revenue growth, if we break that out between net centric and corporate customers, the slow down, sounded like it was more on-net centric's side. Am I understanding that correctly or are you seeing a slow down on both sides?

The corporate customer base represents 4% of our traffic. Even though they represent 42% of revenue. We continue to see kind of historical growth rates there of better than 100%. But because it is such a small portion of the total base of traffic it's not material and more importantly for the corporate customers, there is virtually no correlation between traffic growth and revenue growth and that the average corporate customer is only using about 8 megs of their 100 meg connection. What it does do is make those customers more likely to stay with Cogent even if they look to move out of the a building, they will look at another building that Cogent has led. We see that pattern among the corporate customers, on the the net centric side, that's where we saw the rate of traffic growth decelerate from 14% last quarter to 7%.. There is a closer correlation between revenue growth from existing customers, and existing customer traffic growth. Our traffic growth number represents new customers and growth from existing customers. What we saw in the quarter was our existing net centric customer base not experiencing their historical rate of traffic growth and that results in both lower sales productivity and lower sequential on-net revenue growth at 5.7% quarter-over-quarter.

If we look to revenue growth from the corporate base has that rate changed at all from Q4 to Q1?

No, virtually not at all.

The mix based upon revenue and connections was identical from the Q4 to the Q1.

Thank you very much.

Andrew Bill of Arete Research.

Just a question about your sales force. As you ramped it to increasingly high levels, you increasingly run in to churn issues. From what I can make out that seems to be one of the major factors behind sales productivity. Looking at how you sold this, I hate to talk about people in this way, how could you industrialize the recruitment process more to give you a greater number of gross hires, weed out the poorer performers earlier and retain the best. I think that is a major driver of your revenue growth alongside traffic.

Sure, Andrew. We are focused on growing our sales force in particular because we are looking at a intressable market where less than half of the market has been contacted. Sales continues to be a bottleneck. We put additional resources into our recruiting effort. We have actually gone in the past year from one to three recruiters. We are spending a lot more time on the front end in terms of both interviewed process reference checks and once we hire someone, training and supporting those individuals. Those are all kind of positive things that we can do. It does sound a bit harsh, but we do manage out under performers pretty quickly. We have been criticized in some part for being too extreme and managing out those people too quickly, most of our competitors have ramp schedules of 6 to 12 months until Reps become fully productive. We actually stick with a 4-month ramp schedule. We actually done analysis looking at existing Reps and said if we, in fact, lengthen that ramp cycle, would we materially improve retention and the answer is yes, we would improve retention, but the reality is at a lower level, it's not like what a extra month or two a Rep who wasn't making it would make it.

I wish it was a single magic bullet that we could shoot and improve our Rep productivity and industrialize it as you said but the reality is it is a tele-sales organization, and what you need to do is be vigilant on monitoring Rep activity levels and continuing to incent them correctly. I think we are doing all of the right things. Ultimately that traffic growth does play in to it. If traffic growth accelerates, Rep productivity goes up for the net centric Reps in direct relationship to that.

Do you think you need to add to the rate of gross hires, given that your sales force churn is running in the high single-digits, do you just need to have more growth hires?

The answer is, yes. We will continue to hire at an accelerating pace. We also feel comfortable that the rate of churn decelerate rates for the past three years and will this year in Qs, two, three, and for. We feel comfortable about our year-end target. Just to remind you, last year we actually in the Q3 increased our year-end target and beat that target in terms of number of Reps. I'm not guaranteeing that we will do that this year but we feel comfortable about the target we laid out. We got enough recruiting resources in hand. We believe that the revenue guidance and growth numbers we laid out are achievable with our sales force.

Thank you.

David Dickson of FBR Capital Markets.

Hi Dave.

Hello, thank you for taking the call. Couple of quick questions, really just want to spend sometime mentioning the competitive trends we are seeing in net centric and the enterprise segments, specifically, in the net centric segment. Could you help us with difference in the level of competition that you're seeing, focusing in on the over subscription model perhaps and relative to the better network quality service that you are providing. Be interested in exploring that with you and then a question just in terms of productivity, could you help us with the level of base comp relative to the industry and whether that is one area where you could or have made changes under these new incentives?

Sure. Let me start with the competitive question. We remain the price leader in the market. We have a standard offer that says we will undercut any of our competitors if they show us-- a customer show us a invoice for a comparable product, now our product is non-over subscribed and non-bought. Most of the other major backbone operators offer a similar product. Particularly net centric customers who tend to utilize most of what they purchase. We do sell to a large number of companies that resell our services and dramatically oversubscribe their resale. Examples would be some of our major cable customers, we have one of the largest cable companies in the world, maybe the largest as a customer, they buy from us typically at $9 a megabit and sell to their end users, actually a product of $2 a megabit, but based on the fact they oversubscribed that connection generally about 300 to 1, now they're providing the local access component to it, in conjunction with the oversubscription. We also see that model from a number of smaller resellers in the net centric market that tend to focus on the very small customer segment. But for any customer in the net centric market, they generally need the bandwidth what they are purchasing and are not comfortable with either oversubscription resulting in degraded service or bite transfer caps. Most recently in the news you have seen a lot of discussion around some of the major access net works putting total bite volume caps on customers where they charge a premium if a customer uses more than their allotted bite volume, even though that may not utilize all of their megabit transfer rate based on their guaranteed line rate and the number of minutes in a month.

To your second question, around base comp, our typical comp packages are 50% base and 50% at quota. So our Reps are divided into three major tiers, our entry level or Ram One Reps, generally have comp packages of 80,000, 40 of base, 40 of variable, Mid-Tier Reps are at about 95,000, 4 7- 5 and 47- 5 and our Senior Reps, or Ram Threes or at about 140,000, with a 50% base, 50% variable. Now Reps can substantially exceed this if they, in fact, sell more than 100% of quota. TheTop Reps here routinely make hundreds of thousands of dollars a year above their target for those that over perform. Now the implementation of the retention bonus is a desire to increase the base component for Reps and keep them here for a longer period of time. That is really targeted on the Ram Ones, so the idea would be a Ram One, who has got six months of tenure would go from a 40 to $45,000 base and then with 12 months of tenure would go to a $50,000 base and then 18 months would go to $55,000. We think that additional base compensation without impacting the variable component will incent people to stay in a telemarketing environment longer.

That's very helpful, thanks very much for the detail, Dave.

Okay. Thanks, Dave. And there are no further questions at this time. Again, a relatively lengthy call but we thank everyone for their interest. We thank the team and management will be available for any follow on questions, again, thank you all very, very much. Take care.

That does conclude today's teleconference. Thank you all for your participation, you may now disconnect.