Cogent Communications Holdings Inc (CCOI) 2010 Q1 法說會逐字稿

Good day, and welcome to the Cogent Communications Group, Inc., first quarter 2010 earnings conference call and web cast.

Today's conference is being recorded and will be available for replay at www.cogentco.com.

At this time, I'd like to turn the conference over to Mr.

Dave Schaeffer, Chief Executive Officer.

Please go ahead, sir.

Thank you, and good morning.

Welcome to our first quarter, 2010 earnings conference call.

I'm Dave Schaeffer, Cogent's Chief Executive Officer.

On this call this morning with me is Tad Weed, our Chief Financial Officer.

We are pleased with our results for the quarter in an improving, but challenging economic environment.

During the quarter, traffic grew on our network 8% from the fourth quarter of 2009, and 64% for full year-over-year from first quarter 2009.

We continue to be encouraged by the increase in traffic on our network and as well by the increased productivity of our sales force.

Our sales rep productivity increased for the quarter, quarter-over-quarter, by 10%, from 3.6 units of installed customer connections per rep per month to 3.9.

We continue to be optimistic about the outlook for 2010, and encouraged by the record level of order backlog, orders signed but not yet installed in our network.

Since the end of the fourth quarter, we have significantly expanded our footprint by adding an additional 24 buildings to our network and over 4,000 miles of intercity route miles to our network since the last earnings call.

Throughout this discussion, we will highlight several operational statistics that we believe demonstrate our increasing market share, expanding scale, size of our network, and, most importantly, the leverage of our business model.

We assembled a unique set of assets, infrastructures, and operations that allow us to efficiently generate cash, while selling a product whose demand is rapidly growing.

We believe there's a continued significant barrier to entry to anyone to replicate the assets that we have assembled here at Cogent, and we believe, firmly, that we are the lowest cost, most efficient operator in our sector.

I will review in greater detail certain operational highlights and our continued expansion plans.

Tad will provide some additional details on our financial performance.

And following our prepared remarks, we'll open the floor for questions and answers.

Now I'd like to ask Tad to please read our safe harbor language.

Thank you, Dave, and good morning, everyone.

This first quarter 2010 earnings report in this earnings conference call discuss Cogent's business outlook and contain forward-looking statements within the meaning of Section 27A and 21E of the Securities Act.

The forward-looking statements are based upon our current intent, belief, and expectation.

These forward-looking statements and all other statements that may be made on this call that are not historical facts are subject to a number of risks and uncertainties, and actual results may differ materially.

Please refer to our SEC filings for more information on the factors that could cause actual results to differ.

You should also be aware that Cogent's expectations do not reflect the potential impact of mergers, acquisitions, other business combinations, or financing transactions that may be completed after today.

Cogent undertakes no obligation to release publicly any 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 reconciled to the GAAP measurement in our earnings release and on our website at cogentco.com.

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

Thanks, Tad.

Now for some highlights for our first quarter results.

Hopefully you've had a chance to review our earnings press release.

As within previous quarters, our press release includes a number of historical metrics.

These metrics have been added to our website.

Hopefully you find this consistent presentation of metrics informative and helpful in understanding the financial results, as well as the trends from our operations.

Our first quarter 2010 revenue was $62.8 million, an increase of 0.4 of 1% from fourth quarter 2009.

On a constant currency basis, our revenues for the first quarter of 2010 increased by approximately 2% from the fourth quarter of 2009.

We evaluate our revenues based on product class, on-net, off-net, and non-core, which Tad will cover.

We also evaluate our revenues by customer type.

Our customer types include two primary groups, NetCentric customers and corporate customers.

NetCentric customers purchase large amounts of bandwidth from us in carrier-neutral datacenters.

Corporate customers buy bandwidth to support their businesses in multi-tenant office buildings.

Our corporate customers represent 58% of our total customer connections at quarter's end.

Our corporate customers represent 47.5% of our revenues in Q1, 2010, and revenues from our corporate customers grew by 2.5% from the fourth quarter.

Our corporate customer connections grew by 3.5% quarter-over-quarter.

Our NetCentric customers represent 42% of our total customer connections at the quarter end.

Revenues from our NetCentric customers represent 52.5% of revenues in Q1 2010, a decrease of 1.4% from the first quarter -- from the fourth quarter, due largely to the impact of foreign exchange.

Our NetCentric customer connections, however, grew by 5% in the quarter.

Fluctuations in foreign exchange materially impact our revenue and particularly our NetCentric revenues.

30% of our total revenues are derived from our international operations.

From Q4 2009 to Q1 2010, fluctuations in foreign exchange negatively impacted revenues by over $900,000.

Now for some overall trends and highlights, pricing and provisioning trends in our business.

Pricing from our -- for our most widely sold corporate product remains $900 for an annual contract of 100 megabit symmetric internet connection, or $9 a megabit.

We continue to offer discounts for all of our customers, corporate and NetCentric, based on their contract term length.

We offer volume discounts, as well, to our NetCentric customers.

During the quarter, over 720 NetCentric customers took advantage of these volume and term discounts and entered into longer contracts with us.

Our average contract length continues to increase, and increased by another 3% in the most recent quarter.

These discounted NetCentric customer contracts, however, resulted in a 7% reduction in the average price per megabit in our installed NetCentric base.

The average price per megabit declined from $6.01 in Q4 2009 to $5.59 in Q1 2010.

The price per megabit for new NetCentric contracts in the most recent quarter was $4.26.

Our on-net ARPUs declined by 4.2% from the fourth quarter, primarily as a result of the impact of foreign exchange on on-net revenues and on-net ARPU.

Our on-net ARPU was $979 in fourth quarter 2009 and $938 in first quarter.

On a constant currency basis, our ARPU was $955.

The decline in ARPU on a constant currency basis was much more benign, at only about 2.5%.

Our off-net ARPUs, which are predominantly in North America, continued to increase, and increased by 4.1% from the fourth quarter to the first quarter of 2010, as the average off-net customer connection size continues to increase.

Changes in foreign exchange had virtually no impact in our off-net revenues.

Our off-net ARPU increased from $1,205 in fourth quarter '09 to $1,254 in first quarter 2010.

Now to touch on churn.

Our on-net and off-net churn both significantly improved in the most recent quarter.

Our on-net churn rate improved to 2.5% for the first quarter as compared to 2.7% in fourth quarter 2009.

As a reminder, we consistently report our churn on a gross basis.

As a result, customers who remain with us but enter into amended contracts such as moves, adds, or changes, are counted in this gross churn number.

Our off-net churn also improved to 2.7% from the first quarter, versus 2.9% in fourth quarter 2009.

And traffic continues to increase on our network as well.

Traffic grew by 8% sequentially from the fourth quarter to the first quarter, and on a full year-over-year basis, when comparing first quarter of 2010 to first quarter 2009, traffic on our network was up 64%.

In these cost-conscious times, we believe that customers will continue to choose Cogent as a low-cost provider, which has given us a distinct advantage in gaining market share in these challenging times.

We anticipate continued growth in network traffic, as well as g r in our customers, as customers continue to take advantage of Cogent's value proposition.

Before Tad provides some additional details on the quarter, I'd like to address our expectations and long-term revenue targets.

As a reminder, we have previously announced we expect top-line revenue growth of between 10% and 20% annually.

We remain comfortable with these targets and feel that we are on track to meet those goals.

Now I'd like Tad to cover some additional details about our results.

Thank you, Dave.

And again, good morning to everyone.

I'd also like to thank and congratulate our entire team on another solid performance and their efforts during the quarter.

I'll begin by providing some additional details on our revenue by product class.

Our on-net revenue and on-net customer connections.

On-net revenue was $49.6 million for the first quarter, essentially unchanged from $49.7 million for the fourth quarter of '09.

And consistent with prior quarters, about 85% of our sales during the quarter were for our on-net services.

On-net customer connections increased by about 900 customer connections, or 5.3% for the quarter.

Our on-net customer connection growth rate was 3.3% from Q3 '09 to Q4 '09, so our quarterly on-net customer connection growth rate increased.

We ended the quarter with about 18,100 on-net customer connections on our network.

Our revenues from our off-net business were $12.3 million for the first quarter of 2010, an increase of 4.5% from the fourth quarter.

Off-net customer connections increased by about 70 customer connections, or 2.3% for the quarter.

Off-net customer connections declined by 1.6% from Q3 to Q4 '09, but the quarterly off-net customer connection growth rate also improved during the first quarter of 2010.

And we ended the quarter with about 3,300 off-net customer connections on our network.

Non-core revenues are becoming very insignificant, and they're about $800,000 for the quarter, and they're now about 1% of our revenues, and about 830 customer connections are non-core.

On EBITDA and gross margin, the operating leverage of our business continued to result in reasonable and healthy growth in EBITDA margins.

Our gross profit margin declined by 60 basis points from the quarter, from 55.9% to 55.3%, primarily due to continued increase in investment in our expansion.

However, our EBITDA margin increased by 10 basis points from the fourth quarter.

This margin expansion incurred in a quarter which is normally seasonally challenging for us, as I mentioned on the fourth quarter earning call, and there are certain SG&A costs that we typically experience in our first quarter.

In particular, we experience material increases in audit fees.

We have our annual sales meeting, and the re-setting of payroll taxes occur in our first quarter.

Our EBITDA margin increased by 270 basis points from the first quarter of '09.

Our EBITDA margin was 27.9% for the quarter, 27.8% for the fourth quarter of '09, and 25.2% for the comparable first quarter of 2009.

EBITDA as adjusted was $17.5 million for the quarter, as Dave mentioned, an increase of 0.7%, from 70 -- 17, rather, .4 million for the fourth quarter, and an increase of 26.1% from $13.9 million for the first quarter of '09.

Quarterly lumpiness in our gross margin and EBITDA margins can and does occur.

If you looked at our last 20 quarters of quarterly metrics, you'll notice lumpiness in our quarterly gross margin and EBITDA margin expansion.

And this lumpiness can occur due to the seasonal factors I mentioned typically in our first quarter, and also due to the timing and nature of our expansion activity.

However, the long-term trend has demonstrated increasing gross and EBITDA margins, and we expect that long-term trend to continue.

On earnings per share, our basic and diluted loss per share was $0.01 for the first quarter.

It was $0.03 for the fourth quarter of '09, and $0.19 for the first quarter of '09.

There were some nonrecurring items that reduced our loss per share, totaling about $1.5 million in both this quarter, the first quarter of 2010, and in the fourth quarter of '09.

Reducing the loss per share for the fourth quarter of '09, was we spoke on the last call, was an income tax benefit of $1.5 million, and that reduced the loss per share for the fourth quarter by about $0.03 per share.

Reducing the loss per share for this quarter, the first quarter of 2010, was another income tax benefit of about $600,000, and an adjustment to our asset retirement obligations of about $900,000.

If you exclude these items, the loss per share for the fourth quarter of '09 would have been $0.06, and the loss per share for the first quarter of 2010 would have been $0.05.

So on a recurring loss per share basis, the loss per share declined by about a penny from the fourth quarter to the first quarter.

Dave touched on foreign currency.

Some additional details.

As he mentioned, about 30% of our business is located outside of the United States.

And for the first quarter of 2010, about 23% of our revenues were based in Europe and about 7% of our revenues were related to our Canadian operations.

These percentages have been relatively consistent for the last several quarters.

And we have just begun to recognize revenue related to our operations in Mexico, however, they are minimal at this point.

Continued volatility in the euro and Canadian dollar, in particular the euro, to the US dollar conversion, those rates materially impact our comparable quarterly revenues and financial results.

The impact on our revenues, as Dave mentioned, from the fourth quarter of '09 to first quarter of 2010, was decrease of over $900,000.

However, when you compare the first quarter of 2010 to the comparable quarter of '09, the impact on our revenues was an increase of $1.5 million.

The euro to US dollar rates have varied widely, and for the fourth quarter of '09, it was $1.48.

That increased by $0.10 to [$1.38[, the average, for the first quarter of 2010, and the comparable quarter average was $1.31 for the first quarter of 2009.

I'm sure, as many of you have noticed, the current euro to US dollar rate is less than $1.30.

As a result, at these exchange rates, our 2010 revenue results will be facing significant foreign currency headwinds, primarily related to the impact of the euro.

At our fourth quarter earnings call, we estimated that the negative foreign exchange conversion impact on sequential quarterly revenues would be about a million dollars, and it came in very close to that amount.

The net -- we estimate that the negative foreign exchange conversion impact on sequential quarterly revenues from the first quarter to the second quarter of 2010, will be about $800,000.

Capital expenditures.

Our capital expenditures totaled $11.3 million for the first quarter, and it was $7.7 million for the fourth quarter of '09.

The increase is related to the increase in our network expansion activities and the expiration of construction-related and weather-related moratoriums that typically occur in our fourth quarter.

On a quarterly basis, we can and historically experience seasonal variations in CapEx and construction activities.

And our quarterly capital expenditures are, in part, dependant upon the number of buildings we connect to the network each quarter and the timing and scope of our network expansion activities.

And again, typically we experience our lowest level of CapEx in our fourth quarter.

We added another 24 buildings to our network during the first quarter.

We continue to expect our expansion activities [to] carry on and expect to add about another 120 buildings to our network in 2010.

Balance sheet items.

As of March 31, 2010, our cash and cash equivalents totaled $55 million.

For the quarter, cash and cash equivalents declined by about $900,000, as we continue to invest our operating cash flow in our network and geographic expansion.

We have about $92 million of our original $200 million of face value convertible notes remaining, and those notes mature in June 2027.

The notes are reported on our balance sheet at $67.5 million, which is net of their unamortized discount.

Our capital lease IRU fiber lease obligations totaled $107.1 million at the end of the quarter, and about $5.6 million of this amount is a current liability.

A comparable IRU lease, fiber lease capital least obligations at year end was $109.7 million.

These obligations are for long-term dark fiber leases and are being paid over a remaining weighted average period of more than 13 years.

In October 2009, we entered into a $20 million revolving credit facility that we may use for general corporate purposes -- purchases, rather, acquisition, and share or note purchases.

We have not borrowed under this facility.

Our days sales outstanding for worldwide accounts receivable was excellent at 30 days at quarter end.

This metric is, again, significantly better than our targeted rate of 40 days, and it was also an improvement from the 31 days outstanding at year end.

Network

I want to again personally thank and recognize our worldwide billing and collections team for continuing to do a fantastic job in customer collections and credit monitoring.

In this economic environment, we will continually -- continue to closely monitor our credit standards and our accounts receivable.

Further demonstrating excellent customer collections results, our bad debt expense was only 1.7% of our revenues for the quarter.

Our average contract term continued to increase, and increased by another 3% for the quarter.

Increases in our average contract term and credit monitoring activities can and have impacted our revenue performance under US GAAP.

For example, when our average contract term increases, that increases the estimated customer life and results in a longer period over which we recognize our installation revenues.

Increasing that amortization period reduces our US GAAP revenues.

Also, closer credit monitoring activities can result in the rejection of certain orders or the termination of an account.

Operating cash flow.

Cash flow from operations was $15.3 million for the quarter.

It was $16.3 million for the fourth quarter, and $12.8 million for the first quarter of 2009.

Operating income.

Finally, we continued our progress towards achieving net income and positive EPS by increasing our operating income from $1.4 million for the fourth quarter to $2.7 million for the first quarter of 2010.

I will now turn the call back over to Dave.

Great.

Thanks, Tad.

Clearly a key to this has been the improvement in our sales force productivity.

We began the first quarter of 2010 with 267 sales reps, and we ended with 262 reps selling our service.

We hired 31 reps in the quarter, and 56 reps left the company during the quarter.

Our monthly rep turnover significant improved to only 4.5% per month from 7.6% in the fourth quarter.

I believe this is probably the best in the company's history.

We began the first quarter with 235 full-time equivalent sales reps.

These are reps that are ramped through their bridge period and are now carrying a full quota, and we ended the quarter with 250 full-time equivalent sales reps, as our average rep tenure increased.

This 250 full-time equivalents is the highest number in the company's history.

Productivity on a per-rep basis increased to 3.9 units of installed business per rep per month.

This performance was a 10% improvement from the 3.6 units per full-time rep equivalent in the fourth quarter of 2009.

As a reminder, the sales reps' productivity rates are not based on contract signing but rather upon completed, installed, and billing services.

Now to our network scale.

We continue to expand our footprint.

At the end of the first quarter of 2010, we had 1,475 building on our next work.

We added 24 buildings to our footprint.

We now have over 13,700 miles of metro fiber, and crossed a significant milestone in our intercity network where today we have over 50,000 route miles of intercity fiber.

Cogent network remains one of the most interconnected networks in the world.

The Internet is a network of networks, and we are directly connected or have direct adjacency to over 3,100 networks around the world.

We believe our network has substantial available capacity to accommodate our growth plan.

Our network utilization actually declined slightly in the quarter to 18%, as we have added many new routes with low utilization initially.

We continue to evaluate additional fiber routes both in Europe and North America.

We are specifically evaluating a number of specific opportunities presented to us by the recent volatility in the European markets.

We may opportunistically take advantage of certain of these opportunities to accelerate some of our European expansion plans.

In North America, we have also focused on expanding by adding some additional low-latency routes to our network, as many of our customers have expressed an interest in those types of services.

Traffic continues to grow on our network, and revenues continue to grow faster than that of most of our competitors, demonstrating our increasing market share.

We believe that Cogent remains the low-cost provider and that our value proposition to our customers is unmatched in the industry.

Our pricing strategy continues to attract many new customers, increases our average contract term, increases our volume and revenue commitments from our existing customers.

Our business remains entirely focused on the Internet.

We do not sell legacy services.

And that Internet service remains a necessary utility for our customers.

We have one of the strongest balance sheets in our sector.

We continue to be putting our operating free cash flow to work by expanding our footprint, both domestically and internationally, increasing the number of markets we serve and increasing the number of endpoints or traffic-generating buildings that we connect to our network.

We remain extremely encouraged about our sales initiatives and the volume of our backlog.

We do recognize that the strengthening of the US dollar may have some short-term negative impacts on our revenue growth most recently in this current quarter, even though we continued to grow in light of the rapidly appreciating dollar.

We are committed to remaining focused on growth in revenue, margin, and EBITDA, and remain committed and comfortable with growing our top line between 20 -- 10% and 20% annually.

From that growth in top line, we expect to see increasing growth in our free cash flow.

Now I'd like to open the floor up for questions.

Thank you, sir.

(Operator Instructions) We'll pause for just a moment to assemble the queue.

And we'll take our first question from Mike McCormack at JP Morgan.

Hey, Dave.

It's Scott.

How are you?

Hey, good, Scott.

How you doing today?

Good, thanks.

Couple questions.

I wanted to talk a little bit about in the pricing.

You look at the average price per megabit on the customer base declining about 25% year-over-year, that's held pretty steady.

New contracts actually saw a little bit of improvement on the year-over-year decline.

Wondering if we should think about some sort of floor to, you know, obviously, your contract lengths keep extending a little bit.

Is there a floor we should think about in terms of the pricing?

We're already starting to see some of that stabilization in the on-net ARPU, which I think is a good thing.

So if you could just talk a little bit about the pricing in general.

And then on the margin side, obviously still focused on expanding the network.

Saw a little bit of a margin, EBITDA margin improvement this quarter, which was good, given the decline in gross margins.

You talked about some European opportunities you're looking at.

How should we think about kind of the opportunity to expand EBITDA margins throughout 2010?

Yes, sure.

Hey, thanks, Scott.

First of all, let me touch on the pricing question.

And I'm actually answering that question by putting pricing into three buckets.

For our corporate customers who purchase on-net services, we have seen an extremely stable pricing environment.

In many situations, we have a unique asset in our in-building infrastructure and the fiber and agreements to serve those customers, and typically compete with the incumbent in that environment.

So over the past nine years or so, since Cogent's been selling services, we have seen our flagship product, our 100 megabit product, remain the most competitive in the market and we continue to see stable pricing where pricing for the average customer connection is about $900 due to the fact that most customers take a one-year contract and avail themselves of the 10% discount.

For our corporate off-net customers, we're actually seeing price per connection go up, as you pointed out.

We saw ARPU increase by 4.1% sequentially quarter-over-quarter, and that continues to be as a result of our customers being able to take advantage of Ethernet services and, therefore, larger connections.

We expect that trend to continue.

Now to the NetCentric customers.

For NetCentric customers, they do not think about their purchases on a poor connection basis, but rather a per megabit basis.

We continue to see the average price per megabit decline both in the installed base and the new sale, as customers take larger connections and they also take longer term contracts.

On top of this, there is, obviously technology advances throughout the industry that are allowing service providers to increase the efficiency of their outside plant and drive down the cost per megabit.

As I've stated in the past, the price per megabit will probably continue to fall perpetually.

However, we are very encouraged that we see very little competitive pressure in the marketplace, as the number of companies have seemed focused on high volume, dedicated Internet access services and carrier neutral data centers continues to decline.

And for those companies that remain in the market space, they have shown a fair amount of price discipline, perhaps because of their cost structure.

So we have seen very little competitive pressures in the market driving that price down.

The largest impact in our price per megabit in this most recent quarter was actually the impact of foreign exchange.

Remember, almost 50% of our on-net revenues come outside of the United States.

And it is that decline in the euro against the dollar that effectively replace the entire base down, even though the price we were charging in local currencies was much more consistent with the prices we had charged in the past.

So I think we're going to continue to see some price erosion, particularly as the euro continues to deteriorate.

But for the most part, we feel very comfortable with the trends in pricing, both corporate and NetCentric.

And now that does tie in to margin.

We have been able over the past 20 quarters as a public company, to demonstrated consistent margin expansion.

As we told investors about a year ago, that rate of margin expansion in EBITDA margins had moderated somewhat because of the pace of accelerating our network expansion.

Those expansions dilute our ability to expand our margins at our historical average rate.

But as you saw, even with a robust rate of network expansion, we have expanded our network by almost 25% in terms of long-haul routes in the past 12 months, and, yet, we were still able to demonstrate 270 basis points of EBITDA margin expansion.

It does have an impact on gross margins, in that we pick up some additional cost of goods.

But we've been benefiting from the significant operating leverage in our business and the ability to expand our margin.

So as we look throughout the year, as we have told investors, they should expect to see kind of year-over-year EBITDA margin improvement more in the 100 basis points or 1% range as opposed to the 3 to 400 basis points we have historically demonstrated in previous years, due to this rapid expansion.

But then we should start to see, as our expansion moderates, a reacceleration of our ability to expand margins.

Now to the expansion opportunities.

We have had our idea -- our eyes on a number of new markets and new routes.

We remain extremely disciplined buyers of either companies or outside plant assets that we then deploy our equipment on.

And in this period of, I think unprecedented European volatility, we have seen a number of opportunities presented to us.

While I can't comment on specific new markets and opportunity, we are remaining resolute and firm in our pricing -- in our discipline in terms of what we're willing to pay for our assets, and we're seeing the sellers come around to us as they become desperate for US dollars.

So I think we will have some opportunities this year, which could require us to spend a little more capital than we expected, but we will accelerate the rate at which we build out the network and get the benefit by having a larger addressable market.

That's great.

Thanks for the detail, David.

Hey, thanks, Scott.

(Operator Instructions) We'll take our next question from Tim Horan from Oppenheimer.

Thanks.

Good morning, Dave.

Hey, Tim.

How's it going, buddy.

Okay.

Good.

On this question, where do you think CapEx is going to come in for the year?

And maybe, what do you think your maintenance versus growth CapEx is?

And the only reason I'm kind of asking is that it's not real obvious in your model.

You're not really generating all that much unlevered free cash flow margin, and a lot of your peers are starting to see that accelerate.

And it's not really clear that a lot of your capital investments the last three, four years have really earned much in the way of a return.

But, obviously, you're very focused on earning return.

So maybe there's something going on that's just not showing up in the numbers right now.

And kind of what point do you decide to pull back on the CapEx to really start generating cash flow?

Are you just kind of waiting for a lot of your peers to continue to drop out and you just continue to gain share?

I know it's a long-winded question, but it's all kind of obviously related.

No, those are all good questions, Tim.

And we have a very targeted market that Cogent is looking to serve, whether it be multi-tenant office buildings or new markets and cities on those new routes.

We had moderated our rate of expansion in the kind of 2006-2007 time frame, as we focused almost all of our resources on ramping up and growing our sales force.

We continue to view that as the highest and best use of free cash.

And you do see that both in terms of our revenue growth relative to others in our sector.

Remember, the wire line telecommunication sector is a sector where virtually all of our peers are experiencing shrinking revenues and we're growing our revenue.

So we are absolutely seeing the benefit of the capital that we had deployed earlier on, as well as the moneys that we have spent in our sales organization.

And you should expect to see that continue.

As you look at our capital spending, it is really divided into three categories.

We spend capital on maintaining the current network.

That includes capacity increases on existing routes.

We spend capital on adding new buildings to the network, growing our total addressable market.

And then third, we expand our physical reach and get to new markets.

As we look at that relative breakdown, last year about 25% of our capital was spent on maintenance, approximately about 20% to 22% was spent on new buildings, and the balance, about 50% was on new routes getting into new markets.

It is not infinite.

We do understand the need to generate increasing margins, increasing top-line growth, and, most importantly, increasing cash flow, which means a moderation in capital spending.

We do expect our CapEx to remain probably elevated from our long-term run rates throughout 2010.

I can't give you an exact number.

We had said the low 40s, based on the environment that we were going into at the end of the year.

As I said, while we have not consummated any deals, we do see an unprecedented volume of deal flows for new routes that are ones that Cogent would eventually get to at higher prices at a later point in time.

We may pull some of that in.

But you should see, I think, consistent growth in revenue, so, again, 10% to 20% top-line growth.

Secondly, a growth in free cash flow from operations and a growth in EBITDA margins, as witnessed the 270 basis point year-over-year growth in EBITDA margins in the most recent quarter, and growth in free cash flow.

And, ultimately, a reduction in our capital spending back to more of the maintenance levels that we were experiencing in 2007, 2006 time frame.

But we are going to be using our free cash flow to create the most amount of shareholder value.

In the past we've bought back stock, we've bought back our debt opportunistically and we have turned up the rate of expansion in the network.

And three of those are legitimate uses of capital.

And you saw that in our utilization number actually declining as well because of many of these new routes being brought on.

I might just add, if you think about the fourth quarter, the euro at $1.48, and now south of $1.30, several transactions that, on a euro basis, were, perhaps, outside of the range we would consider, now are looking much more attractive.

Thanks a lot, guys.

And maybe we can follow up later on on the topic.

Okay.

Sounds good, Tim.

(Operator Instructions) We'll take our next question from Michael Funk at Bank of America/Merrill Lynch.

Great.

Thank you for taking the question, guys.

Two quick questions.

First on the rep productivity, if you measure by gross adds, you mentioned that the sales force turnover has declined during the quarter and the average life of a salesperson is increasing.

Maybe along those lines, can you talk about the productivity or gross add for a salesperson with greater life with the company versus a new one, so we can think about how that might ramp through the year?

And then second, on the comment about the record signed backlog, I think second quarter in a row that you've made that comments, so, presumably, it increased sequentially, can you help us think about how that backlog scales onto the income statement over the remainder of the year and the visibility there?

Yes.

Hey, Michael.

Thanks for the question.

We made a number of managerial changes and investments in our sales training and sales management systems about a year ago.

And we continue to see, I think, an increasing benefit from those investments.

Our unit growth on-net was 5.3%.

Our off-net unit growth sequentially was 3 -- 2.3%.

That is a result of both a reduction in our churn rate, so that means we're, again, measuring churn on a gross basis, we're getting a few less moves, adds, and changes, but we're also getting less people either going out of business or leaving Cogent.

And, secondly, we had a record number of full-time equivalents.

Our average rep tenure has continued to increase.

It increased by another couple of percent in the most recent quarter.

And probably, most significant, and you touched on that, is the ability to reduce turnover.

While one quarter does not make a long-term trend, we saw our rep turnover, in what is normally a fairly high turnover quarter, Q1, go from 7.6 rep percentage of base per month down to 4.5% in the first quarter.

I mean, that's a material change.

Those reps have a bigger funnel.

They have more things they're working on, and, therefore, we remain encouraged about that flowing through throughout the remainder of the year, that funnel of things that are -- reps are actively working but not have sold.

The second funnel is orders actually executed by not yet installed.

And you see that flowing through specifically in the off-net business.

And we've commented on this in the past.

While our on-net provisioning averages between 10 and 12 days, our off-net provisioning for Ethernet services are over 100 days.

So a lot of that off-net backlog is just starting to flow through now that we commented on at the end of last year.

And the on-net side, we continue to have a good backlog.

We continue to have a backlog of customers who have take-or-pay contracts, i.e., contracts where they have agreed to specific ramps over the course of the year.

That gives us a great deal of confidence in growth in revenue and why we are comfortable with the 10% to 20% top-line growth even in light of the foreign exchange headwinds that we are facing today.

We have a significant foreign exchange headwind last quarter, you saw growth of only 0.4 of a percent on total top line.

And you saw about 2% if it was foreign exchange adjusted.

We expect similar type foreign exchange headwinds this quarter.

Tad indicated about $800,000 is what we're expecting.

Yet, based on the backlog that we have in hand and knowing what our average provisioning windows are, we expect an acceleration in top-line revenue growth even with comparable FX headwinds.

Great.

Thank you very much, Dave.

Okay.

Thanks, Mike.

And, Mr.

Schaeffer, there are no further questions at this time.

I'd like to turn the call back over to you for any additional or closing remarks.

Well, I thank everyone for taking time today.

I know today is a very busy day, as a lot of companies in our space have reported.

I know there's a lot going on with the FCC concerning net neutrality.

And we are a bit unique.

As a service provider, we actually view net neutrality as a positive for us because our business is exclusively the Internet.

And we are in favor of what we anticipate the FCC to be implementing in terms of ensuring an open and fair Internet.

Many other network operators may not share those views.

And again, thank you, everyone, for taking time to join us.

And Tad and myself are available for any follow-up questions.

Again, thanks a lot.

Take care.

Bye-bye.

That does conclude today's conference.

We thank everyone for their participation.