Cogent Communications Holdings Inc (CCOI) 2009 Q2 法說會逐字稿

Good morning and welcome to the Cogent Communications Group second quarter 2009 earnings call. As a reminder, this conference is he being recorded and will be available for replay at www.CogentCo.com.

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

Thank you and good morning. Welcome to our second quarter 2009 earnings conference call. I'm Dave Schaeffer, Cogent's Chief Executive Officer. With me on this morning's call is Tad Weed, our Chief Financial Officer. Before we discuss the quarter, I'd like to recognize that Cogent's 10th year anniversary will occur in two days on August 9, 2009. I'd like to take a moment and thank all of our worldwide employees for helping us achieve our many successes and milestones. Several of these employees have been with the company for nearly its entire 10-year history, and I would like to personally extend my thanks to all of our team members. We were very pleased with the results for our quarter in this challenging economic environment. During the quarter, traffic grew on our network by approximately 10%. We are encouraged and continue to be encouraged by the increase in traffic on our network and remain optimistic for our outlook for 2009.

During the quarter, we significantly expanded our footprint by adding another 34 buildings to our network, and we continued our expansion efforts in both Mexico as well as our European markets. As we have discussed on previous earnings calls, and in June 2008 we extended a pilot program which gave customers term discounts for additional term and volume to our net-centric customers, both existing and new customers. Existing customers, if they increased their total contract value with us. During the quarter this program was again successful in the quarter under the program over 830 net-centric customers, representing $73 million of remaining contract value, increased their total contract value by another $10 million. Additionally, as more and more of our customers extend their contract terms and show their confidence in Cogent, our average customer contract length continues to increase and grew quarter over quarter by another 4%. We continue to invest in the improvement and measured expansion of our sales organization. Our quarterly rep productivity was 6.3 units of installed business per full-time equivalent rep per month, a substantial increase over the 3.4 units of FTE productivity experienced in the first quarter. We've added over 1300 on-net customer connections to our network during the quarter.

Given the current economic environment, we continue to judicially monitor our customers' activity and credit worthiness. As a result of these efforts, cash collections from customers in June established a Cogent record. Our days of sales outstanding at the end of the quarter was an excellent 27 days, a substantial improvement from the 32 days outstanding at the end of first quarter. While we monitor these activities and have improved our aging and collection results, these monitoring activities could potentially inhibit our revenue growth, so he we continue to balance those two objectives. Throughout our discussion, we will highlight several operational statistics that we believe will demonstrate our increasing market share, expanding scale, operating leverage of our business, and we'll review in greater detail certain operational highlights and our continued expansion plans. Tad will provide some additional details on our financial performance. Following our prepared remarks, we will open the call for questions and answers.

Now I would like to ask that had Tad to read our Safe Harbor language.

Thank you , Dave and good morning everyone. The second quarter 2009 earnings report and this earnings conference call will discuss Cogent's business outlook and contains forward-looking statements within the meaning of Section 27A and 21 E of the Securities Act. The forward-looking statements are based upon our current intent, belief and expectations. These forward-looking statements and all other statements that are made on this call that are not historical facts are subject to a number of risks and uncertainties and actual results may differ materially. Please refer to our SEC filings for more information on the factors that could cause actual results to differ. You should also be aware that Cogent's expectations do not reflect the potential impact of mergers, acquisitions, other business combinations or financing transactions that may be completed after today. Cogent undertakes no obligation to release publicly any revision to any forward-looking statement made today or otherwise update or supplement statements made on this call. Also during this call if we use any non-GAAP financial measures you will find these reconciliations to the GAAP measurement in our earnings release on our website at CogentCo.com.

Like to turn the call back over to Dave.

Thanks, Tad. Now for a few highlights of our second quarter results. Hopefully you've had a chance to review our earnings press release. As we previous quarters, our press release includes a number of historical metrics. These metrics will be added to our website. Hopefully you find the consistent presentation of these metrics informative and helpful in understanding our financial results and the trending of the operations of our business.

In the second quarter of 2009, revenue was $58 million, representing an increase of 5.3% sequentially from first quarter 2009's revenue of $55.1 million. This revenue growth was in excess of most of our competitors who have reported their second quarter results. In fact, in this challenging environment, the vast majority of our competitors have demonstrated sequential revenue declines for several quarters. We evaluate our revenue based upon product class, on-net, off-net, non-core, which Tad will cover, also by customer type.

Our customer types include two major groups. Our net-centric customers who buy services from us in data centers, and our Corporate customers who generally are located in large multitenant office buildings. net-centric customers buy large amount of bandwidth from us. Corporate customers will generally buy bandwidth to support their ongoing business activities in smaller amounts. Our Corporate customers represented 58.6% of our total customer connections at the end of the quarter. Our Corporate customers represented 47.9% of our revenues for Q2 2009, and revenue from Corporate customers from at a robust 5.4% from the first quarter of 2009.

The comparative Corporate revenue growth from fourth quarter of 2008 to first quarter 2009 was 3.4% sequentially. Our on-net customers represent 41.4% of our total customer connections at the end of the quarter. Revenue from our net-centric customers represented 52.1% of our revenues at the end of Q2 2009, an increase of 5.2% from the first quarter of 2009. The comparative growth rate from fourth quarter 2008 to first quarter 2009 was actually a decline of 2.5% from our net-centric customers. Fluctuations in foreign currency do materially impact our revenues. About 30% of our revenues are derived from international operations. From Q1 2009 to Q2 2009, foreign currency fluctuations positively impacted our revenues by about $700,000. On the comparable quarter to 2008 comparing Q2 2008 to Q2 2009, the fluctuations and foreign currency exchange were much more material in their impact on our comparable revenues and in fact had a negative impact on comparable revenues of $2.5 million.

Now to spend a moment talking about overall trends in our business. Pricing for our most widely sold product is our Corporate 100-Meg connection which is generally sold for $900 a month, or $9 per megabit, on a one year term. We offer discounts related to customer contract terms for all Corporate and net-centric customers. We also offer volume commitment discounts to our net-centric customers. As I mentioned during the quarter, over 830 net-centric customers took advantage of these volume and term discounts. These net-centric customers or contracts helped contribute to a reduction in our average price per megabit. In Q1 2009 the average price per megabit was $7.55. In Q2, 2009, that number was reduced to $6.82. One of Cogent's main competitive advantages is our ability to rapidly install orders. We guarantee installation in our on-net services in less than 17 business days. In second quarter, our provisioning team again consistently delivered on-net services on an average of 10 business days against our provisioning guarantee of 17 days.

Now to talk about ARPU, or average revenue per user. On-net ARPU declined, however at a much lower rate of decline than we've experienced in recent quarters. On-net ARPU declined at 1.4%, compared to first quarter of 2009, primarily due to the impact of greater contract length and greater volume discounts, partially offset by the positive impact of foreign exchange. The comparative on-net ARPU decline Q4 2008 to Q1 2009 was actually about 5.7%. Our on-net ARPU was $1,025 in Q1 of 2009 and $1,010 in Q2, 2009. Our off-net ARPU continued to increase, in fact, by bout 2.8% as the average size of our off-net connections continues to increase. Off-net ARPU increased from $1,088 in the first quarter to $1,118 in the second quarter of 2009. Substantially all of our international revenues are on-net, so variations in foreign exchange have virtually no impact in our off-net revenues.

Now to speak about churn. Something that people are concerned about in a challenging economic climate. On-net churn was 3.1% in the second quarter of 2009, which was an improvement from the 3.3% we experienced in the first quarter of 2009. As a reminder we consistently report churn numbers on a gross basis. So that means if a customer remains with Cogent but changes the terms of their contract, that churn is actually included in these gross reported numbers. Off-net churn was 3.2% in the second quarter as compared to 3%, for the first quarter of 2009, a slight uptick in our off-net churn rate. Churn rate can also be impacted by the stringent credit monitoring and collection processes that we have put in place. Traffic continues to increase on our network and increase by approximately 10% from Q1 of 2009. Traffic increase was somewhat more moderate than the 21% increase that we experienced Q4 of '08 to Q1 of '09. A seasonal decline in our rate of traffic growth is not uncommon as during the second quarter, we see a significant reduction in traffic from a large vertical which we have as a significant customer base. That is the educational vertical. In fact, in Q1 of 2008 to Q2 of 2008, we actually experienced a 1% traffic decline.

In these cost conscious times, we believe that being in a low-cost provider, such as Cogent, gives us a distinct competitive advantage, and we expect to continue to grow traffic on our network and increase our market share. Before Tad provides additional details on the quarter, I would like to address our position on providing guidance. You may have noticed there was no reference to guidance in our press release. It's become clear to me, especially over the past several weeks, that when management provides guidance, we spend -- end up spending a significant amount of time and effort explaining our guidance and or reconciling that guidance to analyst estimates.

In short, this has become an extreme distraction to our ability to run the Company. As a result, we will no longer be issuing forward guidance. We will, however, provide updates on our longer-term targets and expectations. These targets include our expectations to he be able to grow our annual revenues at the rate of between 10% and 20% per year, and our continued gross margin and EBITDA margin expansion similar to the rates that we've historically experienced commensurate with our revenue growth.

In each of our quarterly earnings press releases, we provide a table that includes approximately 40 financial metrics. We have consistently provided these quarterly metrics since our first public offering in 2005, for a total of 17 consecutive quarters. We are committed to continuing to provide this level of transparency. I am actually more confident today in our business, our business plan, and our long-term future objectives, than I have ever been since the inception of the Company over 10 years ago. I believe our results for the quarter demonstrate that level of confidence and speak for themselves.

Now I would like to turn things over to Tad so he can provide some additional detail on our second quarter 2009 results.

Thank you, Dave. Again, good morning to everyone. I'd also like to thank and congratulate our entire team on their hard work and efforts this quarter. I will begin with providing additional details on our revenue by product class, our on-net revenue was 46.5 million for the quarter. That was an increase of 4.9% from the first quarter and reversed the decline that we experienced from the fourth quarter to the first quarter of '09 of 1.1%. About 90% of our new sales for the quarter were for on-net services. Slightly up from the percentage from the first quarter. Our on-net customer connections increased by over 1300 customer connections, or 9% for the quarter. We ended the quarter with about 16,000 on-net customer connections on the network.

Our revenues from off-net increased by 7% for the quarter, and the off-net customer connections increased by about 300 connections, or 9.4%. Non-core revenues are essentially about 2% of our revenues for this quarter and last quarter. On EBITDA and gross margin, the operating leverage of our business continued to result in healthy gross margin EBITDA and EBITDA margin expansion. Gross margin expanded by 150 basis points for the quarter from 56.2% to 57.7% for Q2. If you look at our 17 quarters of quarterly metrics, you will occasional lumpiness in quarterly gross margin changes and gross margin expansion. However, the long-term trend is clear, and it's for increasing gross margins, and we expect that long-term trend to continue. EBITDA as adjusted was 16.7 million for the quarter, a 20% increase from the first quarter. As with our gross margin, you will see similar lumpiness in quarterly EBITDA expansion. That lumpiness can occur due to seasonal factors such as the timing of the performance of certain professional services and the impact of resetting of payroll taxes in the first quarter, for example. However, we expect EBITDA margin expansion to continue.

The impact of foreign exchange positively impacted second quarter EBITDA by about 200,000. EBITDA margin expanded by 350 basis points from the first quarter and was 28.7% versus 25.2% for the first quarter. Basic and diluted loss per share was $0.10 for the quarter, a significant improvement over the $0.19 loss per share we had in Q1. Dave touched on foreign currency and as a reminder, 30% of our business is outside of the US. Behind that number, about 22% is in Europe and 7% is in Canada. Those percentages have been relative consistent for many quarters. Continued volatility in the Euro and Canadian dollar to the US conversion rate do impact quarterly revenues and other financial results and the impact on our revenues, as Dave said was a 700,000 increase for the quarter. However, when you look at comparable quarters, Q2 '09 to Q2 '08, it was a negative impact of 2.5 million. The rates are substantially different for these periods. So the average rates for the Euro for Q1 was $1.31, in increased to $1.36 for Q2 '09. If you look back at Q2 '08 it was it at $1.56. We're at $1.43 and change as we sit here today. The Canadian to US dollar average was $0.80 for the first quarter, increased to $0.86 for the second quarter. About the same percent slightly greater than the Euro increase. If you look back to the second quarter of '08, the Canadian dollar was just about parity with US dollar at $0.99.

Capital expenditures were 13.4 million for the second quarter and 11.7 million for the first quarter. Each quarter and on a quarterly basis, we have -- can have and historically have experienced seasonal variations in CapEx and in our construction activities, and that amounts in part dependent upon the number of buildings that we connect to our network each quarter. As Dave said, that was an increase from Q1. Typically we experience our lowest level of CapEx in fourth quarter with a pickup of projects and activity in the first half of the year. We did add 34 buildings to the network in the quarter which was 5 more than we added in the first quarter. We continue to expect to add in excess of 100 buildings to the network in 2009. As a result of this, we expect our 2009 CapEx rate to be modestly greater than our 2008 CapEx rate. This increase is due to an acceleration of our expansion plans and expansion opportunities that have arisen, including the impact of adding more buildings to the network.

On the balance sheet, as of June 30, our cash and cash equivalents were 60.1 million. We have $92 million remaining of our original 200 million of convertible notes outstanding, and those notes mature in June 2027. Own the balance sheet, they are reported net of the discount which includes the impact of an accounting change we adopted in Q1, so they're reported at 63.9 versus -- million, versus a face of 92 million. Capital lease obligations were 110.9 million at June 30, and about 12.5 million of that is a current liability. These obligations are for long-term dark fiber leases, and are being paid over remaining life of more than 10 years. Typically these leases are for 15 years with renewable periods.

As Dave mentioned, our days outstanding for worldwide accounts receivable was 27 days at June 30, which is significantly better than a target of 40 and a vast improvement from a great number, nevertheless of, 32 days outstanding at the end of the first quarter. And each quarter seems like I need to say this but I want to personally thank and recognize our worldwide billing and collections team for continuing to do a fantastic job, customer collections and credit monitoring. In this economic environment we will continue to work diligently on this and closely monitor credit standards and our accounts receivable status. Bad debt expense performance was very good and less than 2.4% of our revenues for the quarter.

When we have increases in our average contract term and perform these credit monitoring activities, that can impact our future revenue performance. As an example, as you increase your average contract term, you need to recognize your installation billings over a longer period, resulting in a reduction in recognized revenue under US GAAP. Additionally, closer credit monitoring activities may result in the rejection of certain orders or the termination of an account. Operating cash flow was relatively consistent during the quarter, increased 200,000 to 13 million from 12.8 for the first quarter. I would like to turn the call back over to Dave.

Hey, thanks, Tad. I would like to take a moment and talk about our sales force and sales force productivity. We began the second quarter of 2009 with 245 sales representatives, and actually ended the quarter slightly down at 230 reps. We hired 42 reps in the quarter, which is less than our typical hiring quarterly rate. We continue to remain very selective about the hires that we bring on. Over the prior year, we averaged about 65 reps per quarter. During the quarter, we were somewhat more selective in evaluating the potential for success at Cogent of these new hires, 57 reps left the Company during the quarter. This was a decrease from the 66 reps that left the Company in the first quarter of 2009. Our sales force turnover actually was reduced from 9% per month down to about 8% in the second quarter. We began the second quarter with 209 -- excuse me, 221 full-time equivalent sales reps and ended the quarter at 214 full-time equivalents. While we have fewer sales reps, our sales force rep productivity for the quarter was actually at an all-time high. Productivity on an FTE basis for the second quarter was 6.3 units as customers installed per month per rep. This represents a substantial increase from the 3.4 units we experienced in the first quarter. As a reminder, our sales productivity is based not on contract signings but actually on billable services.

Now with regard to our network and scale, we added 34 buildings to the network in the second quarter, and we ended the quarter with 1389 unique buildings connected to our network. In 2009, we expect to add greater than 100 buildings for the full year. We have continued to grow the scale of our footprint. We now have over 12,200 metro fiber miles, and over 37,000 miles of inner city route fiber. We continue to evaluate additional fiber routes in both Europe and North America. Cogent's network is one of the most inter connected networks in the world. Today we directly connect to 2770 other networks that make up the Internet. Approximately 175 of these are settlement free peering partners, the remaining approximately 2600 networks are paying Cogent customers. We believe our network has substantial available capacity to accommodate our growth plans. We are utilizing approximately 20% of the capacity in our network. Our traffic continues to grow and grow faster than that of our competitors, demonstrating our increase in market share.

Our revenue growth this quarter was significantly better than the revenue growth of others in our sector. We believe that our policies of being a low-cost provider, the pricing changes for volume and term contracts that we implemented about a year ago, have reemphasized our position and strengthened our competitive position. Our pricing program continues to attract new customers, increase our average contract term, increase the volumes and revenue commitments from existing customers. Our business remains entirely focused on the Internet, and the Internet is continued to be a necessary utility for our customers. Our strong balance sheet, when compared to others in our industry, gives aus great deal of flexibility. We are putting some of our cash flow to work by expanding our footprint and expanding the number of markets we serve. We remain absolutely encouraged by the results of our sales initiatives, the increase in sales productivity and the improvements in both EBITDA and gross margins. We remain committed to providing top-line revenue growth of between 10 and 20% annually. We are committed to continuing to expand our gross margins and EBITDA margins and moderating our capital expenditures, therefore remaining a producer of free cash for our equity holders.

Now I would like to open the floor for questions.

Thank you. (Operator Instructions). We'll take our first question from Jonathan Atkin of RBC Capital Markets.

Wondered if you could talk about the seasonality of the second quarter in terms of pace of customer additions, and then with respect to ARPU, if you look at revenue per connection, it looks like the rate of decline the past several quarters has been reducing, and is that an accurate observation, based on what you're seeing in the business from a competitive standpoint?

Sure, John, it's Dave. First of all, traffic growth tends to moderate in warmer months. The majority of Internet traffic is in the Northern Hemisphere. That trend has accentuated for Cogent because of the fact that we have such a huge penetration in the educational vertical. Now, many customers, however, sign contracts anticipating needs in the fall, and I think our productivity of the reps was not really seasonally driven, but rather a result of our ability to manage out the less effective reps, to focus on training and management structure, so many of the initiatives we put in place over the past year are paying dividends in terms of adding customers. Quite honestly, we also had a couple of large customers in the retailing industry that had previously used us tore some back-end he services in their on-line commerce, who are extending services into some of their retail locations. So we just saw really good productivity with gains of additional connections from existing customers as well as winning new customers in the market. With regard --

If you could talk maybe about April-May. When I said seasonality, I also kind of meant by month did you exit the quarter -- was it sort of even by month, or did he exit at a faster or slower run rate.

Our rate of additions were actually pretty evenly spread other over the quarter.

So there was no front end loading or back end loading.

I would say the distribution of new orders was almost equal throughout the quarter. There was no real skewing on our revenue. Now to your ARPU question. On the Corporate side, we have both on-net and off-net. Our Corporate on-net revenue has been virtually constant, as the average Corporate customer takes a one-year contract of 100-Meg connection as we mentioned in our prepared remarks, at about $900. Our off-net ARPU, which is entirely Corporate has been trending up. The reason for that increase is not that the price per megabit is going up.

In fact, it's basically flat, but rather the average connection size continues to increase for these off-net customers, but they still remain substantially below our on-net services. And then finally, on the net-centric customers, the price per megabit is coming down, the $7.55, down to the $6.82, but the average connection is going up. Now, our on-net business is almost -- has a much greater percentage he of revenues in Europe than the total business, as well as Canada. So there is some FX impact as well. So the moderation in on-net ARPU decline is a combination of FX impacts as well as increased customer connection size, then offset by the lower price per megabit, but I do think this moderation in ARPU decline we hope and expect to see it continue to moderate.

Thank you very much.

Thanks, John.

We'll go next to Jonathan Schildkraut of Jefferies.

First, I'd like to start on the traffic. You indicated the traffic growth was 10% quarter-over-quarter and that that was down due to seasonality. But when we look at the year-over-year numbers it's still kind of in the -- call it 75, 80%, which is actually an excellent number. I was wondering if you could tell us whether you think you're taking share or continuing to take care of traffic, or if you're seeing any change in terms of the overall industry growth rate on traffic, and then I have one more question after that. Thanks.

Sure, thanks, Jonathan. As I said, we do see some he seasonality in the rate of traffic growth, although our long-term growth on a year-over-year basis is very good, and does exceed the industry averages. There are a number of third parties that have done analysis, while traffic measurement is more of an art than an exact science is, many of these studies have pointed to kind of 30% aggregate traffic growth on the Internet. So therefore our 75 to 80% year-over-year growth demonstrates our taking share. I know at least one competitor publicly commented that their traffic grew 8%, but only over a portion of their network. They didn't comment on their global footprint, but rather a regional footprint. Many of our other competitors do not give traffic data on a consistent basis. We actually measure data in a very empirical way. We just literally count the number of bits that enter and exit the network over the 90-day period in the quarter, and compare that to what it was in the previous quarter. It's probably the most objective measurement standard we can come up with. So we absolutely believe we are gaining share, particularly as many of our competitors previously in the net-centric market, which generates the vast majority of our traffic volume, about 95% of our traffic, continue to deemphasized that portion of their business and try to sell other industry products. So I think, there is a real tug-of-war going in, in the broader communications industry, between product segments, and does it appear the Internet is being quite successful at cannibalizing all of these other product lines, whether it be wavelength, point to point services, NPLS services, VPN services, or traditional voice. We're continuing to see the acceleration of the trend that traffic migrates to the lowest cost network, and the Internet is the most enter connected and the lowest cost way to move those bit miles.

All right, thanks. When I look at the revenue number for the quarter, I guess it's up about 8% year-over-year, which is a good number, but as we look at your long-term jut look of 10 to 20% growth on an annual basis, that would imply some revenue growth acceleration towards the back end of the year. Is that view supported by the uptick in productivity and maybe seeing some of the ramp out of the customers that you were able to win this quarter, or are there some things going on in terms of maybe promotional pricing with regards to some of the earlier contract wins that could help elevate your per packet prices as we go through the year? And along those lines, actually if you could give us the price per packet in Q2 '08, I know you gave us for Q1 '09, but for Q2 '08 would be helpful as well.

Okay, sure. First of all, just to remind you, on the year-over-year growth of about 8%, there was $2.5 million of FX head wind or about -- probably about 4 to 5% head wind. So on a constant currency basis that would have been more like 13%. Also, we are in a, I hope, unprecedented and not perpetual economic environment. Clearly the general macro environment over the past 12 months is as bad as at least I've seen in my lifetime, and I think as many people have, and while we cannot guarantee that the economy is going to improve, if you looked at us on a constant currency basis, we're kind of in the middle of that long-term growth projection, even in this environment, on that constant currency basis. Now, we are encouraged by several factors. As I have mentioned on the previous call, in the first part of the year we had some promotional pricing that gave customers low prices in exchange for take-or-pay volume commitments. Those are ramping in over the course of the year and give us confidence in our ability to continue to see our revenues grow.

Secondly, we are encouraged by our rep productivity, and we're seeing productivity and growth across both components of our customer segment. With 5.4% growth in our Corporate market, and 5.2% growth in our net-centric market, we're seeing a very balanced approach. So it's not really driven by one segment or the other. Each of those segments could have pressures on them that could negatively impact us, and we've been able to overcome those. On the Corporate side, listen, it's a challenging environment for small and medium size businesses, but we gain share because they do need connectivity, the and we offer them better value. On the net-centric side, it is absolutely true that we have a pricing compression due to longer-term contracts and also greater volume commitments off of our pricing grid. So for that reason, we are seeing some price compression, but at the end of the day, the volume increases and the market share gains are able to help us overcome those he head winds, and we are absolutely continuing to gain share. Now, I have to admit, I had to send [someone] out to get me a number here to be able to get your Q2 '08 number, which was $7.80.

All right, Dave, thanks a lot. Really appreciate it.

Thanks, Jonathan.

We'll go next to Frank Louthan of Raymond James.

You mentioned the take-or-pay contracts. And I can appreciate the change in the guidance stance, but it seems to me that the key for Cogent to grow at a 10% or better level is to see the decline in the ARPU at the on-net business to moderate or you even start to -- (inaudible -- technical difficulties).

Hello?

If you could press star 1 again, please.

Yes, Dave, are you there?

Yes, I'm here. All I heard was the ARPU, then you faded. So if you could pick it up.

Sorry about that. Okay, I just want to look at -- looking at your business, seems to me that to be able to achieve your north of 10% growth that you're calling for, really depends on being able to grow that on-net ARPU or at least stop the contraction that we've consistently seen over the last several quarters. Are these take-or-pay contracts going to materially change that trend when the price-volume commitments start to kick in, or what are we going to see there on the ARPU that will moderate that slide to give us some confidence that you can achieve north of 10% growth?

Okay, sure. So there's actually a couple of questions there. First of all, take-or-pay contracts, these are existing customers who have a commitment to increase their volumes, either in size of connection or number of connections with Cogent, continue to be implemented over the course of the year. And we saw some impact in this quarter, we'll see some more in third and fourth quarter, and as I said previously, actually the greater impact will be in the it latter part of the year. To the ARPU question, and this is kind of picking up on John's question, first question, we are seeing a moderation in the rate of ARPU decline. Our Corporate ARPU, for on-net has been virtually unchanged. The only impact is actually contract lengthening that has a slight impact on reducing an ARPU, but it's at about $900 per month. Our net-centric ARPU is more complex. There is a foreign currency impact, there's a size of connection impact, as well as a contract term. The on-net ARPU is the blend of these two things. We believe it will eventually not only stop declining, but will eventually increase. We, however, cannot absolutely predict whether that's going to be this quarter, next quarter, or a year from now. We do monitor our rep productivity. That is a critical component to growing revenues.

So you've got revenue growth being driven by price per connection as well as the number of connections installed. That's a little bit different than the discussion around price per megabit, which is important to our net-centric market. Many people confuse the price per connection with the price per megabit. While the price per connection will eventually, I believe, not only stabilize, it will increase, I do believe that the price per megabit will continue to fall perpetually. There is no end in sight to that decline. However, we, as others, continue to benefit from the advances in technology and in routing software that allow us to be more efficient in delivering those bits. And, our network is optimized for the highest traffic and also the most efficient pricing in the market. We absolutely believe we an grow revenues even if we see a compressing net-centric price per megabit.

Finally, in order to help grow revenues, we are focused on our sales force. Half of the people at Cogent are in sales, and it's still an area in which we need more people, we are actively trying to hire. We want to be extremely selective. We're seeing dozens of resumes per opening, up from the 6 or 8 that we used to see a year ago, for each open slot, but we are becoming increasingly picky in this market to be able to pick only the best people, but we do expect to see the number of reps we have grow as well. All of these factors will result in our an ability to replicate our long-term growth history. Remember that 10 to 20% is kind of a very conservative view. We've grown faster than that in the past, and it's also acknowledging these challenging macro economic conditions.

Okay, what are some of the -- I hear what you're saying, and I understand -- appreciate the color. What is it that -- what are one or two things that we should be looking for that will give us confidence that, like you said, you have confidence that you are going to achieve that top-line growth rate. What should we be looking at to be able to track that and see when that's coming ourselves? I mean, is it the ARPU change? Is it the rep productivity? What are the factors that you are looking at that are giving you that confidence? There's a lot of moving parts here.

Sure, Frank. First of all, let's just talk about actual results. We went from 0.3% of a percent sequential revenue growth Q4 '08 to Q1 '09, to 5.3% sequential revenue growth. So the actual trends in the business are the first thing that should give you comfort. The remember, if you continued to grow at 5.3% sequentially quarter-over-quarter, you're above even the top end of our long-term guidance range, and you're growing at probably closer to 25% annually. Things to look for, improvement in churn, improvement in rep productivity, ARPU mitigation is part of it, but there are a number of factors that result in our ability to grow revenues as we get into the most recent quarter.

Thank you very much.

Thanks.

If you find that your question has been addressed, you may remove yourself by pressing the pound key. We'll go next to James Brean of Thomas Weisel Partners.

Thanks for taking the question. Just a couple questions. One, with respect to margins this quarter and expenses, you had a pretty large contribution margin in terms of the amount of revenue going to the EBITDA line. Can you talk about that in terms of trends you're seeing there and on the cost of service side as well as SG&A? And then, economically, obviously seems like things have picked up a bit for you, the economy has helped a little bit. Can you talk about your sales process into the Corporate sector and sorted of where people's heads are at now in that group?

Absolutely, Jim. I'm going to get Tad to take the margins and COGS question.

Good morning. For the EBITDA, or gross margin flow-through, we essentially saw would we've said in the past, a 95% flow-through for increase in on-net revenue and about a 50% flow-through to gross margin for increases in our off-net revenues. So if you took the change in revenue from Q1 to Q2 for both of those product classes, and used those percentages, you almost tie exactly to the increase in gross margin proving out the percentages I provided. So that kind of gets you to the gross margin improvement from the revenue improvement and the flow-through. On the SG&A side is I mentioned a couple things on the call. We do have some seasonality in SG&A. With the second quarter having some reductions from the first quarter, and in particular, we have less professional fees associated with frankly audit work and tax work. The second quarter is kind of a lull in that activity, it picks up again with the Sarbanes-Oxley work as we stand here in the third quarter. We also have a reduction in our tax rate, as you reset payroll taxes for the first quarter, and we also have [colas] that kick in, in the first quarter, whether it's compensation increases for inflation, or other costs that we have. Overall, on the cost side, there's a great deal of precision in our ability to, I think, accurately forecast what the costs will be, with the variable being, again, in the timing of some of the professional fees and how we perform on the bad debt side can also have some variability, although I'd say over the past year, we've been below 2.4% each quarter, and I continue to project a slightly higher number and am pleased with the performance in that regard.

Thanks for that.

In terms of the sales process, Jim, on the Corporate side, I think we're continuing to see companies evaluate their IT budget. They cannot disconnect from the world, and what they're doing is migrating other applications to the Internet. So, it's not only just IP. There are private IP networks in the public Internet, and I think we continue to demonstrate to many of our Corporate customers that we can provide an Internet product that is equal or superior in quality to that of a VPN or private network. So those customers are migrating more of their traffic and applications away from those private networks and from voice networks to the Internet. So their aggregate telecommunications spend is contracting, yet their spend with Cogent is going up. So, we continue to see pretty consistent sales cycles times and very high close rates. We close half of our pitches. The real challenge is always just to get the decision makers attention and be able to tell the Cogent story, but once we do it, our close rates are high. I think for those companies that derive the majority of their revenue from non-Internet services, they're in a very challenging enterprise sales environment.

Great, thank you.

Thanks, James.

We'll go next to Colby Synesael of Kaufman Brothers.

On the drivers side we obviously saw really nice improvements on a quarter-over-quarter basis, both in terms of net-adds, and maybe that was driven by the sales force productivity. Is there any reason to suggest that the improvements that we saw were one-time in nature? In other words, we're not going to see 6.3 units per sales rep going forward, or that's going to come back down, or is that kind of the new status quo going forward? Then my next question, I understand and appreciate that you're not giving guidance any more, but you had been suggesting that you were going to grow about 15% or 16% on the top line, at least previously. Is there any reason for us to -- that -- excuse me is there anything that you've seen in the first half of the year that would suggest that that number was potentially too aggressive, or maybe that's still on track.

Sure, Colby. Let me start with the rep productivity number, 6.3 is the best we've ever done. It was helped a little bit by some contracts of existing customers taking large number of locations. I think that is probably not the new norm. I wish it was, but it's not. If you look at our kind of long-term average, it's about 4.5 units per rep, per month that's going back over those 17 quarters of data that Tad mentioned. We are seeing that number trend up. Clearly our goal is to do as good as possible, and so are the reps incented to do as well as possible, because their quotas are generally set at five units of the average product they -- each rep at their appropriate level have in their portfolio. So I don't think you are going to see 6.3 as the new norm. Hopefully you are going to see at least a reversion back to our long-term trend line, if not above that.

And what was -- what drove the 6.3 this quarter that's not going to occur next quarter?

It was just a number of customers that had taken a large number of locations, where they previously had commitments for just a few locations.

Okay.

And then to the guidance number, again, our long-term trend is going to be between 10% and 20% annual growth. So the 15% that you referenced is right smack in the middle of that. I am not going to reaffirm or adjust full-year guidance, because, as I said, in my prepared remarks, it's just become an in an inordinate amount of effort to talk to investors, to reconcile my guidance to that of various analysts or investors, and I don't think that's really that productive in trying to understand Cogent. I don't think our previous guidance was too aggressive. I don't think it was too conservative. I think we have demonstrated a substantial acceleration in the rate of revenue growth, and in an environment when the competitive universe continues to see sequential revenue declines. All I can say is, that's kind of demonstrating the success of our model, and you should kind of extrapolate from our performance this quarter to get to what you believe the Company will do. But we are absolutely comfortable with the 10%, 20% annual rate of revenue growth, even in a challenging economic environment and even subject to the FX fluctuations, both positive and negative and the volatility we've seen in the past year.

If I could just ask in a different way, as we sit here today versus where we were when you announced your first quarter results, are your expectations for the second half of 2009 the same or different?

Again, I'm not going to reaffirm or deny. What I will say is, my confidence level in the business, and our ability to grow revenues, is as high today as it's ever been.

Okay, thanks.

We'll go next to Michael Rollins of Citi Investment Research.

Just a couple follow-up questions. First question is, if you look at the productivity in the quarter, you saw significant step-up in what you call the non-core units. Just wondering if you could describe -- I realize it is a small piece of revenue, but if you could describe what drove that component of the productivity. Then I'll just follow up with another question after that.

Sure. We did have to sign up some non-core customers, which is not our business, and actually we're looking to see those customers go away. We acquired two data centers in the quarter. In those data centers there were some non-core customers. We basically paid for the data centers, whatever lease obligations that the previous data center operator had, but as a condition to take over those centers, we had to get our sales people to sign-up those non-core customers. So the sales people did the work, they signed up the business. We actually wish they didn't have to; it represented about 685 units. And many of these units we hope over time will go away. Even without those sales occurring, the rep productivity would have been 5.2, but we were kind of forced to allocate some sales resources to this, in order to expand our data center footprint, and we've actually increased from 37 to 39 data centers now.

Was there any other revenue impact from those data centers in the quarter, and can you talk strategically about what you're doing in the data center market?

Sure, data center revenue, meaning rack and power, has actually increased slightly to about 4.6% of our aggregate revenue, up from about 4.1% a year ago. So it is becoming slightly more significant, but still not our main business. We see data centers as a amenity that will help us sell additional bandwidth services. These centers were in the Chicago market. Our current center in that market was virtually full. We were looking for some additional space, and we were able to find fully built-out space for just taking it over. We don't view data centers as particularly, in our long-term strategy, we're not a data center operator, but they do become a nice amenity to help us sell bandwidth. The revenue impact of these data centers on the quarter was minimal. It was a lot of these, a vast, vast majority of the customers were these non-core. There were a couple of racks in the centers that were occupied, but they were virtually empty, which is why the previous operator was looking to walk away from their lease obligation. But, strategically going forward, we continue to look at the market. We find regions in which there are data centers that others have built-out a huge capital expense that are not able to be loaded, and our policy has been typically to just take over these centers, rather than pay anything for them. And try to add them to the Cogent network, giving us the ability to sell bandwidth on the network, but, again, we are not a data center operator.

And just lastly, if you could just talk a little bit more about Corporate market. What kind of churn are you seeing in the Corporate side, and the productivity looked like it was up sequentially, is that reflection, do you think of, the economy, your productivity within the sales force itself, or some combination there of? Thanks.

Two different questions here, Michael. On the churn side, we saw a slight reduction in our on-net churn of which the majority of that, by unit, is Corporate. So we continue to see our Corporate on-net churn far below 1%, proving that our service is a vital utility to those companies running their businesses. Our off-net churn did tick up slightly by 2/10's of a point. That is all Corporate. Our off-net services can be to less credit worthy customers, i.e., they tend to be more in office parks or suburban areas as opposed to the class-A office buildings our on-net services are in, and for that reason I think Tad commented on it, we are exceedingly diligent on monitoring the credit quality, both going in, and also for existing customers and monitoring their payment history. So we do not anticipate any material changes in our Corporate churn from what we experienced in the most recent quarter. Now, in terms of productivity, you are absolutely correct, we are seeing significant productivity in our Corporate sales force. In fact, our revenues grew at 5.4% sequentially quarter-over-quarter, with effectively flat ARPU in that space. That's above the 17-quarter average rate of growth in Corporate growth, which has been running between 3% and 4%. I think the reason for that increase in productivity, some of it were these existing contracts that people were committed to take, but a lot of it I think comes from the fact that our Corporate customers understand the value we deliver, vis-a-vis other service providers that they can get, i.e., lower price and/or greater bandwidth and physical diversity. So I think you are going to continue to see good solid growth out of our Corporate segment.

Thanks very much.

Thanks, Michael.

We'll go next to Tim Horan at Oppenheimer.

Good quarter, Dave.

Thanks, Tim.

Just -- I know a lot of questions have been asked, but two main points. One, was there anything in the quarter that spiked up volumes? I know it sounds kind of crazy, but when Michael Jackson passed away there seemed to be a spike-up in Internet usage. I don't know if that impact you at all. Secondly, on the pricing front, level 3 was saying there's some very aggressive pricing in your segment of the market, and I know we had some aggressive pricing last summer. It seems to have been fairly stable, but maybe you can talk about the pricing environment, because when you look at the trends from a very high level, volumes are up 9% sequentially, and I know it's a low quarter, an pricing is down 9% sequentially, it would suggest -- and I know this is not an exact correlation, but would it suggest it would be difficult to grow overall revenues if those are the trends going forward. Thanks.

Sure. So the two questions you raise really are for the net-centric 52% of our business, not our Corporate business.

Sure.

We see specific events, whether it be the inauguration, it can be sporting events, like March Madness, or things like the Michael Jackson tragedy, creating momentary blips, but because we have such a global footprint and such a large number of users, the end of the day any one event, even things like the inauguration, do not materially impact a quarter's results. So the growth in volume is actually coming from a longer-term trend of traffic migrating to the Internet. Now with regard to the kind of net-centric market in pricing trend, that market, in aggregate dollar volume has been constant for about 10 years. We have seen prices compress, a number of competitors exit the market, and volumes increase. With those trends, all I can say is the aggregate spend on those net-centric services has not changed. While I would love to sit here and tell you it's going to grow, I can't make that prediction. In fact, our revenue guidance is not based on a growth in the aggregate size of the net-centric market. What we have seen is a vast reduction in the number of companies that we compete with, even though the price differential between Cogent and those companies has compressed, it is not compressed to where we're at parity. Only in a very few instances have we had to be more aggressive than our standard pricing matrix, which really tells that you say we're in a very benign competitive environment, but our balance sheet, our network operating costs, are sized appropriately for this market. And I think the revenue growth that you will see, just like you saw the 5.2% sequential growth in our net-centric business, is coming from the fact that we are gaining share in the market. On the Corporate side, it's also a market share gain, but with a very different competitive landscape.

Not to put words in your mouth, but do you think you maybe have 5% market share now and you can grow that to 15 to 20 over time, or where do you think you are in terms of revenue market share? I know that's quite different than volume.

Sure. We actually talk about our market share in the net-centric market three ways. We talk about our traffic market share, which we believe to be at about 17% of the market. We believe that we have by unit number of customers somewhere around 8% of the market. And by revenue, somewhere between 6% and 7%. So we believe we have significant room to grow our revenues in a market in which there are fewer facilities based competitors.

Thanks.

Thanks, Tim.

We'll go to Peter Park of Park West Asset Management.

Hi, thanks. I wanted some help in thinking about CapEx for the year, for a typical year. I had previously thought that $30 million was the bogey to use, but it sounds like that's not right. I don't know if this is a guidance issue or not, but can you talk about how one might think about CapEx going forward? And I have a couple of other follow-ups.

Sure, Peter. It's Dave. Last year CapEx was 33.5 million. We have said that it will be, in about that zip code, but we do believe it's going to be slightly higher this year than that number. Not a quantum leap, but it will be higher than that number. We're not giving an exact number. We are adding buildings at a significantly faster pace, 34 in the quarter as opposed to a pace of 25. So about a third faster on buildings, but we're also expanding the footprint at a faster pace. We went up -- we increased the number of inter city route miles, for example, in the quarter by 6% or 7% just in the quarter. We have seen some very unique opportunities to acquire dark fiber in some regions, and then use equipment that we have to increase and light that capacity. We also have seen the amount of used capacity in our network actually decline. So while traffic grew 10%, our utilization rate actually fell from 22 to 20%. All of this results in slightly more capital spending, but while we're not giving an exact number, we expect it to be slightly more than it was last year, but not materially different.

Got it. And what did you pay for the data centers?

Basically, zero. We assumed the -- we had to pay the deposits on the leases in those facilities. And assume these non-core customers that we really didn't want to take.

Great, thanks very much. Good luck.

Thanks, Peter.

We'll go to Robert Dezego of SunTrust Robinson Humphrey.

I wanted to go back to these take-or-pays for the back half of the year. I know you're not going to put a number around it, but I was wondering if could you tell us if you thought that these customers, is there an expectation they are going to actually use that volume, and is there any risk that as these take-or-pays expire, that these customers roll down to a lower bandwidth level?

We've actually seen the percentage of capacity purchased versus used increase. So people are using what they are buying. We do monitor the credit quality of the customers that would enter into these contracts. We don't offer these types of contracts to people unless we feel pretty comfortable with either their balance sheet or the balance sheet of those investors who have supported them. While there's a great deal of diversity in the business models, we've seen some of these take-or-pays materialize in this quarter. We expect more of them to materialize towards the back half of the year. I can't tell you categorically that none of them are going to not need the bandwidth that really is very specific to their business models, what we have monitored is the credit worthiness and feel that even if they don't -- if their models don't pan out, we have got substantial backing that will force them to take their commitments.

Okay. What's the average length of the contract length of these take-or-pays that are coming along here?

They vary in length. Our average contract length for our total base is slightly over a year. I would say these take-or-pays are slightly longer than that, but they're not all two and three-year deals. There's a blend. There's a huge number of them, and they're blended in.

Okay, and then last question, on stock buybacks, I notice you guys didn't buy back any stock in the quarter. Could you kind of refresh us on your expectation for the use of cash and how you feel about the rest of your stock buyback program?

Sure. We have about $30.1 million authorized in our program. It's still active. And we will most likely continue to buy some stock back. Quite honestly, the market rally kept us out, not because we didn't agree with the price, but it just kept moving up, and maybe I'm a cheap guy and it wait for pull-backs. Don't always tend to be a perfect market timer, but that was part of it, and secondly, as I mentioned earlier, we go through, with our board, on a consistent basis, uses of capital. The highest and best use of our capital is to invest in our sales force. We also look to invest in our network, and we have increased the rate of investment in the network, to Peter's question, we then look to return capital to shareholders, and we monitor both the ability to buy back the debt and the equity, as mechanisms to return that value to shareholders. And in this quarter, we did not, but it does not mean that we won't do it going forward.

All right, thank you very much.

Thanks, Rob.

We'll go to Donna Jaggers of D.A. Davidson.

Quick follow-up. You just mentioned that you do a lot of credit monitoring of your customers. Can you give us some idea of the percentage of your revenues or percentage of your customers that would be described as sort of V C based web 2.0 companies? Obviously these models haven't really proven in yet, so those companies are sort of on the bubble whether they'll get more funding or not.

Sure, first of all, 48% of our revenues come from our Corporate customers. None of those, or virtually none of those, are venture backed. These are established businesses, class A office buildings. On the 52% of our revenues that come from net-centric customers, about half of that revenue comes from large access networks. PTTs or cable operators. I think I can safely say none of those are venture backed, or maybe a couple them are private as CLECs, but they're big entities. In terms of what 2.0 companies, about half of our net-centric revenue comes from content based businesses, but the vast majority of that comes from well capitalized established players. So my expectation, and I have to admit, I don't have perfect data on this, is that kind of venture-backed, a as a percentage of revenue, is probably 5% to 10% of total revenues, or no more than 15% to 20% of net-centric revenues. Thanks, Donna.

We'll go to David Dickson of FBR Capital Markets.

Thanks, good morning, Dave.

Hey, Dave.

Wanted to just touch on just your outlook here. Thinking about the technology, the impact of 100 gigabit connections being installed and trial by competitors, just how you think that will affect the business jut look going forward as we do move up to 100-gig connections, and then secondly, just on your utilization, the 20%, how does that vary by pop? The average is obviously around the 20% range, but do you see it significantly different across the different pops as you measure it there? And just have a couple of follow-ups, thanks.

Let me hit these two capacity issues. First of all, there's actually not even an ITU standard yet for 100-gigabit ethernet, so there's at least three competing technologies that are being tested, and in talking to any of the equipment vendors, 100-gigabit ethernet will probably not be commercially in the market until at the earliest, 2012. There are some deployments of 40-gig connections today, which are really built off of the SONET 768 hierarchy with their framer and lasers. We're not seeing a lot of that deployed, and a lot of companies fully expect to just jump from 10 up to 100 gigabit. And our backbone, we're running anywhere between about 12 and 40 10-gig waves, so 400-gigs between some markets. We will constantly evaluate technology and see when 100-gig is available if it is more effective. The equipment we've deployed is capable of 160 wave lengths. And no segment of the market are we using more than 40 of those wave lengths. So as long as we either have equipment on the shelf or can replace those wave lengths with 10-gig, until we fully exhausted the optical transmission capacity, we would probably not look to deploy the more expensive technologies. Now, in terms of customer interfaces, the most dominant ethernet interface in the world today is still 100-megabit, not even gigabit or 10 gigabit.

So we see a progression, the enterprise moving away faster, or 100-Meg, and we're service providers migrate to 10-gig. We really don't see any 100-gig interfaces, and none of the routing manufacturers back planes today could even support that, whether it be Cisco, [Juniper,] [Foundry] any of the vendors. So I think there will eventually be some 100-gig interfaces, but it's going to be awhile. In terms of utilization we look at the network four ways. We look at the backbone transport, we look at the core routing, we look at metro transport, and we look at edge interfaces. Any time a particular segment becomes hot, we upgrade it. We give the worst of those four metrics, when when he give the average, so while it is an average, it's the average of the worst of the four measurement points, which tends to be the metro transport. When we initially light a building, any building, we install 2-gigs. We today have some buildings that have as much as 160-gigs going to a specific building. There's a migration path based on that building's customer demand and bit volume growth that we then upgrade those segments. We try to upgrade with equipment we have, sometimes we can't, sometimes we have to buy. But I can absolutely tell you that there are metro segments in our network that is the connectivity from the building back to our core backbone, that could be running a 40 or 50% for some building, but the aggregate of those is below 20%. And the backbone and the core routing and edge interfaces we actually probably have even more cushion.

Right. Dave, would it be fair to say that you would have to move up to the 100-gig along with the industry, even if it is 2012, just to be able to compete on a price per megabit basis some, is that the wrong way to be thinking about it? Seems to be one of the things that will actually move the price per meg down quite considerably as we move off the curve from a technology front.

Well, remember, the majority of the capital that is spent in building an Internet backbone is not at the transport layer, but rather at the routing layer. So the real question is going to be what is the price per meg of those routers on 100-gig versus 10. So while 100 may be used at the transport layer, transport only represents about 20% of the cost of the incremental capital, about 80% of the cost is actually at the IP or routing layer, and the real cost in the router is actually not in the interface, but actually the packet forwarding engine, i.e., the CPU, or the router. So we have not seen that kind of price decline in those packet forwarding prices. It's much more slow than the rate of price decline in transport. Final point is, when you -- when new technologies are introduced, the typical rule has been a 4x increase in capacity, and the vendor initially tries to charge 2.5 times as much. So therefore is cheaper on a per meg basis, but not that much cheaper. I think at the end of the day, it's going to be quite awhile, and before we see 100-gig driving down prices. I think it will be routing processing that drives down prices faster, and I think we at Cogent are committed to low-cost provider. There's an absolute requirement that we're going to need to put new capital into our equipment at some point, but the equipment we have today is current generation, fully supported by our software agreements with our vendors, and we do not envision any kind of wholesale increase in capital spending for the foreseeable future.

Thanks very much. And Dave, you mentioned the benign competitive environment. I guess just a follow-on from Tim's question. Wondered if you could comment on whether you're seeing the $2 price per megabit levels in the marketplace today on 10-gig connections. This is in your net-centric . Obviously seeing a number of competitors moving into that range now is that something you're seeing whether or not you are accepting those levels, are you seeing that in the marketplace?

First of all, we are committed to low-cost provider, and as we've said in the past, we will beat any valid offer in the market. We have given that type of pricing that I have commented on, on the previous call, in some of these special ramp promotions. So it is not surprising that you have heard of that price in the market, because it's probably originated from Cogent. We have seen a much less aggressive stance of other Tier 1 providers, in fact, the majority of Tier 1 providers have withdrawn from the net-centric market and we through smaller resellers and a couple of players. As I commented earlier in the call, there are a couple of instances in this quarter, in Q2 that we had come in and be more aggressive than our standard pricing to win the business, but we at Cogent continue to be th price leader in the market. I don't want to really comment on specific customers and specific prices or even specific competitors, but I think you can see the growth that we have exhibited in dollar terms. And really we told you what our average price per megabit is.

Okay, Dave. Just one really quick followup. CapEx was up significantly in the quarter relative to my estimates, what level of CapEx generally do you see is necessary to achieved your advised revenue guidance here over the longer-term?

I actually think the CapEx simular to the rates we did last year, which historically, 335, the rate long-term. As I stated, we have been shown some very unique opportunities in this environment both in terms of adding buildings and adding routes to the network. Our CapEx did go up, you will see it decline in the latter part of the year, particularly in the fourth quarter. We always see substantial downturn in our capital spending, but I do not believe our guidance is predicated on any long-term increase in capital spending.

Thanks, very much, Dave.

Thanks, Dave.

At this time, with no further questions in the queue, I will turn the conference back to Mr. Schaeffer for any additional remarks.

Thanks, a lot. I know we went long, but we had a lot of good questions today, again, I just want to thank the entire Cogent team for getting us to this point in ten years, it has been a tremendous success and, again, thank you all very much for the questions and support. Take care now, bye-bye.

That concludes today's conference. We thank you for your participation.