Cogent Communications Holdings Inc (CCOI) 2011 Q4 法說會逐字稿

Good day and welcome to the Cogent Communications Group Inc. fourth quarter and full year 2011 earnings conference call and webcast. Today's conference is being recorded and will be available for replay at www.cogentco.com.

At this time, I would like to turn the conference over to your host, Chief Executive Officer, Dave Schaeffer. You may begin.

Thank you and good morning. Welcome to our fourth-quarter 2011 earnings conference call. I'm Dave Schaeffer, Cogent's Chief Executive Officer, and with me on this morning's call is Tad Weed, our Chief Financial Officer.

We're extremely pleased with the results for the quarter, as well as for the full year. Our revenue grew from the third quarter by 2.2% sequentially. On a constant currency basis, our growth would have been 3.5% for the same period. For the year, our revenue grew by 16%. On a constant currency basis, our revenues for the full year would have grown by 14.5%. The tremendous operating leverage in our business continued to result in expanding EBITDA margins. Our EBITDA margins for the quarter sequentially expanded by 70 basis points from the third quarter of 2011 and 270 basis points from the fourth quarter of 2010. Our EBITDA margins expanded by 400 basis points for the full year 2011 as compared to full year 2010.

During the quarter traffic on our network grew sequentially from the third quarter of 2011 by 20%, and traffic grew by 52% from the fourth quarter of 2010. For the full year 2011, as compared to full year 2010, traffic on our network grew by 44%. Since the end of third quarter 2011, we continued to expand our footprint by adding 37 additional buildings to our network, over 500 metro fiber miles and over 1600 inner-city fiber route miles to our network. For the year, our footprint expansion included 165 buildings, over 1400 metro fiber miles and 4800 inner-city fiber route miles were added to our network. This represents an approximately 10% increase in the scope and reach of our network for the full year.

We generated positive cash flow of $14.2 million for the fourth quarter, including all investing and financing activity. Excluding the proceeds from our debt offering, as well as the capital used to buy back shares, cash for the full year, we were cash flow positive by over $14.4 million. This is inclusive of all expansion spending, capital spending, additional interest expense incurred on our senior notes and prepaid capital lease activity. We were encouraged by our 2011 results as well as our continued order backlog, these are orders signed but not yet installed on our network. We were optimistic about our outlook for 2012 but do expect that a significant customer loss that occurred in Q1 2012 to negatively impact our revenue growth and margin expansion temporarily.

Throughout this discussion, we will highlight several operational statistics that indicate and demonstrate the increasing market share, expanding scale and scope of our network, and most importantly the operating leverage of our business model. We've assembled a unique set of assets and infrastructure, our operations are efficient and generate cash while selling a service that is in great demand at lower prices than our competitors, with greater margins. We continue to believe there is a significant barrier to entry for anyone trying to replicate the network that we have built and the assets that we have assembled here at Cogent. We operate as the lowest cost, most efficient operator in a sector and are focused on the most traffic rich locations that we bring On-Net.

I will review in greater detail certain operational highlights about our business, the expected impact of our extraordinary Q1 event and our continuing expansion plans. Tad will provide some additional details on our financial performance, and then following our prepared remarks, we'll open the floor for questions and answers. Now, I'd like to turn things over to Tad to read our Safe Harbor language.

Thank you, Dave, and good morning, everyone. This fourth-quarter 2011 and full-year 2011 earnings report in this earnings conference call to discuss Cogent's business outlook can contains 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 expectations. 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 result 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'll turn the call back over to Dave.

Thanks, Tad. Now for some highlights from our fourth-quarter results. Hopefully you've had a chance to review our earnings press release. As in previous quarters, our press release includes a number of historical quarterly 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 trendings in our operations.

Our fourth-quarter revenue was $79.1 million, an increase of 2.2% from our third-quarter 2011 revenues and a 13.9% increase from our Q4 2010 revenues. Our 2011 full-year revenues were $305.5 million, an increase of 16% from our full-year 2010 revenues.

We evaluate our revenues based on product class, On-Net, Off-Net and non-core, which Tad will cover in greater detail. We also evaluate all of our revenues by customer type. We have two primary types of customers, NetCentric customers and Corporate customers. All customers are categorized two ways, either Corporate or NetCentric and either On-Net, Off-Net or non-core. NetCentric customers buy large amounts of bandwidth from Cogent in carrier neutral data system. Corporate customers buy bandwidth from us in multi-tenant office building.

Revenues and customer connections from both Corporate and NetCentric customers grew in the fourth quarter sequentially as well as for the full year. Revenue from our Corporate customers grew 4% from the third quarter and grew 15% for the full year. Corporate customers now represent 53% of our total customer connections at the end of the quarter and 49% of our Q4 2011 and full year 2011 revenues. Our Corporate customers connections grew by 4% sequentially for the quarter and by 12% for the year.

Revenues from our NetCentric customers increased 1% from the third quarter and grew 17% for the full year. The impact of foreign exchange has greater impact on our NetCentric revenues and these growth percentages. Our NetCentric customer connections represent 47% of our customer connections at the end of the quarter and 51% of our revenues in both Q4 2011 as well as full year 2011. Our NetCentric customer connections grew by 4% sequentially for the quarter and 31% for the full year.

Now I'd like to take a moment and talk a little bit about pricing trends in our industry. Our most widely sold Corporate customer product is a 100 megabit per second symmetric Internet connection. Our most commonly sold NetCentric product is a 10 gigabit connection. We offer discounts related to contract term to all of our Corporate and NetCentric customers. We also offer volume discounts to our NetCentric customers.

During the quarter, over 1000 NetCentric customers took advantage of our term discounts and entered into longer contracts with Cogent, increasing their aggregate revenue commitment to Cogent by over $10 million. Customers also tend to lengthen their contracts and express additional confidence in Cogent. Our average contract term increased by another 1.2% sequentially in the quarter. More than one of every three customer contracts entered into in 2011 was either a two or three-year term. As a reference point, these multi-year contracts represented less than 1 in 10 customer contracts two years ago. The price per megabit of our installed base and our new contract and our new sales continued to decline.

Our average price per megabit of our installed base was $3.75 in the third quarter and that declined to $3.58 in the fourth quarter 2011. The price per megabit for new contracts entered into in the fourth quarter was $2.54. That is down from the $2.65 a megabit for orders sold in the third quarter of 2011. These declines are partially attributable to targeted promotional activities that we have initiated and continue in response to industry M&A activity.

Now to discuss our average revenue per user. Our On-Net ARPU for Corporate and NetCentric customers combined declined by 3% from the third quarter, a moderation in the rate of decline from the 4.4% decline that we experienced sequentially from Q2 to Q3. Our On-Net ARPU was $817 in the third quarter and $793 in the fourth quarter. Our Off-Net ARPU, which is predominantly Corporate customers, continued to increase and actually increased sequentially by 3.3% from the third quarter as the size of our average Off-Net connection continues to increase. Our Off-Net ARPU increased from $1571 in the third quarter to $1623 in the fourth quarter.

But before Tad provides some additional details on the quarter, I'd like to address our results and expectations against our announced revenue and EBITDA guidance targets. As a reminder, we previously have announced our expected top line revenue growth for 2011 to be between 10% and 20%. For the full year 2011, our revenues grew by 16%, and adjusted for foreign currency, that growth was 14.5%. We also expected our annual margins to expand in 2010 to 2011. Initially, that expansion was only 200 basis points and then during the year we revised that to 400 basis points. For 2011, our EBITDA margins grew exactly by 400 basis points.

I would like now to address our expectations for 2012 and the one-time extraordinary event that we experienced in January. We normally do not provide guidance on a quarterly basis, but rather have provided long-term annualized targets. Due to the loss of our largest On-Net NetCentric customer in January 2012, Megaupload, who represented 5.5% of our 2011 revenues and approximately 11% of our 2011 NetCentric revenues, as a significant operating leverage associated with our On-Net business, we do expect a decline in revenue, EBITDA, EBITDA margin and traffic sequentially from Q4 2011 to Q1 2012. We also expect our revenue growth for full-year 2012 versus full-year 2011 to be slightly below our revenue growth target of 10% to 20% due to this loss and foreign exchange. We do anticipate that our full-year revenue growth in 2013 over 2012 will return to our long-term range of 10% to 20%.

However, after absorbing the impact of this event, beginning in the second quarter, after our first quarter over fourth quarter sequential decline, we expect our top line revenue growth to resume. And we expect our EBITDA annualized margin rate expansion of approximately 200 basis points to resume as well. Unrelated to this event, on a calendar year basis, we expect a continued reduction in the absolute level of capital expenditures, that is CapEx plus prepaid capital leases for 2012 as compared to 2011, of at least 10%. Now I'd like Tad to discuss some additional details of our financial results.

Thank you, Dave, and again good morning to everyone, and I'd also like to thank and congratulate the entire Cogent team on their hard work and efforts not only for the fourth quarter but for the full year of 2011, which was really a great year for the Company. I'll begin by providing additional details on revenue by product class, which is On-Net, Off-Net and non-core.

Related to On-Net revenue, our On-Net revenue was $59.5 million for the quarter, and that was an increase of 1.4% from the third quarter. As we continue to add On-Net customers to our network, our On-Net revenue was $233 million for the year, which increased 13.7% from 2010. Similar to prior quarters, about 85% of our new sales for the quarter were for On-Net services. On-Net customer connections increased by 4% for the quarter, and On-Net customer connections increased by 22.3% for the year. And we ended the year with about 25,500 On-Net customer connections on our network in our 1744 On-Net buildings.

Our revenue from our Off-Net business was $18.9 million for the quarter, which was an increase of 5.4% from the third quarter as we continue to add Off-Net customer store network and also from the continued increase in our Off-Net ARPU. Our Off-Net revenue was 69.6% for the-- $69.6 million, excuse me, for the year which was an increase of 25.9% from 2010. Off-Net customer connections increased by 1.3% for the quarter and by a 11% for the year. And we ended the year serving about 3900 Off-Net customer connections in about 3800 Off-Net buildings. As I mentioned, we continue to experience an increase in Off-Net connection size and ARPU, due to the increase in the availability of Off-Net Ethernet services in lieu of traditional TDM services.

Non-core revenues were about $0.6 million for the fourth quarter and represent less than 1% of our revenues and about 560 customer connections at year end. Related to unit churn, our On-Net monthly gross churn rate was 2.4% for the fourth quarter compared to 2.2% for the third quarter. As a reminder, we have consistently reported our churn numbers on a gross basis. As a result, a customer who remains with us but enters into an amended Cogent contract is counted in churn, as churn, and included in our gross churn rates. If you exclude this impact move out change contracts from this, our On-Net churn rate was 1.3% for the quarter. Off-Net gross monthly churn rate was 2.8% for the fourth quarter, compared to 2.4% for the third quarter and if you exclude the impact again of move add change contracts, the Off-Net churn rate was 1.7%.

EBITDA and gross margin, the operating leverage of our business continued to result in healthy gross and EBITDA margins. Our EBITDA margin expanded by 70 basis points in the fourth quarter sequentially and expanded by 400 basis points for the year. Our EBITDA margin was 35.2% for the fourth quarter and 34.1% for the year. The EBITDA margin of 35.2% for the fourth quarter was the highest EBITDA margin percentage in our history. Our EBITDA as adjusted was $27.8 million for the quarter, which was a quarterly increase of 4.4%. And our EBITDA as adjusted was $104.1 million for the year which was an increase of 31.4% from last year.

Our gross profit margin increased by 110 basis points for the quarter from 56.7% for the third quarter to 57.8% for the fourth quarter. And for the year, our gross profit margin increased by 190 basis points to 56.9%. Our On-Net revenues continue to carry 100% direct incremental gross profit margin and our Off-Net revenues continue to carry a 50% incremental direct gross profit margin, the difference being the cost of the tail circuit, associated tail circuit when connecting an Off-Net customer. Occasional lumpiness in our EBITDA and gross margin can and does occur, and if you examine our quarterly metrics for the last 27 quarters included in each of our press releases you will notice lumpiness in our quarterly margin expansion.

This lumpiness can occur due to seasonal factors such as the resetting of payroll taxes in the US, our annual sales meeting cost and cost of living increases which all occur during our first quarter, and also the timing of our audit and tax services which are also greater in our first quarter, and the timing and scope of our expansion activities which varies from quarter to quarter. Additionally in the first quarter of 2012 we will incur increased bad debt expense related to the termination of Megaupload. However our long-term trend, as Dave mentioned, is for increased -- an increasing EBITDA margins.

Interest expense. Interest expense results from interest incurred on our $175 million of senior notes that we issued in January 2011, our $92 million of 1% convertible senior notes and also interest on our capital lease obligations. Our interest expense increased from $16.7 million for last year to $34.5 million for 2011, the increase is primarily attributed to approximately $14 million of interest expense related to the issuance of our senior notes.

Earnings per share. Our basic and diluted income per share was $0.12 for the fourth quarter, our basic and diluted income per share was $0.17 for 2011 and $0.01 for last year. There's some nonrecurring items in these amounts. Included in net income per share for last year was a tax benefit of $1.5 million, related to recording a deferred income tax asset in our Canadian operations. That amount represented about $0.03 per basic and diluted share for last year. Included in net income per share for this fourth quarter and this year of 2011, there was an income tax benefit and other tax adjustments netting to a tax benefit totaling $3.4 million. This tax benefit represents about $0.08 per basic and diluted share for both this fourth quarter and for 2011. If you exclude this 2011 net tax benefit, our basic and diluted share would have been $0.04 for the fourth quarter and would have been $0.09 for the year of 2011. Note that this tax benefit of $3.4 million recorded in the fourth quarter is not expected to recur in the first quarter of 2012 when we expect to revert to our normal recurring effective income tax amounts.

Foreign currency impact. About 27% of our business is located outside the United States. About 20% of our revenues are based in Europe and about 7% of our revenues are related to our Canadian and Mexican operations. Continued volatility in foreign currency exchange rates can materially impact our comparable quarterly and annual revenues and financial results. At our third-quarter earnings call, we estimated that the negative foreign exchange conferred an impact on sequential quarter revenues for our fourth quarter would be a decrease of about $0.7 million. It turned out rates were different than the actual foreign exchange impact on our revenues from -- sequentially from Q3 to Q4 was actually a decrease of $1 million.

Our revenue grew from the third quarter by 2.2% and on a constant currency basis adjusting for $1 million impact quarter over quarter, it grew by 3.5%. For the year, our revenue grew by 16% on a constant currency basis that was 14.5%. The average euro to USD rate so far for the first quarter is approximately $1.30 while currently at $1.32 you use the average rate in translating your revenues. That is a decrease from the average exchange rate of $1.35 for the fourth quarter of 2011. So should the average exchange rate or the first quarter remain at current levels, we estimate that the foreign exchange conversion impact on sequential quarterly revenues from Q4 2011 to Q1 2012 will be another decrease of about $0.5 million.

Customer concentration. Our revenue and customer base represents about 30,000 customer connections is not highly concentrated. For 2011, our top 25 customers represented approximately 12.5% of our revenues including Megaupload. After the loss of Megaupload, which represented as Dave said 5.5% of our 2011 revenues, our next largest customer represents less than 2% of our revenues, and our top 25 customers represent approximately 7.5% of our revenues.

Capital expenditures. On a quarterly basis we can and have historically experienced seasonal variations in CapEx and construction activities. Our quarterly CapEx is in part dependent upon the number of buildings we connect to the network each quarter and the timing and scope of our expansion activities. CapEx for the quarter, fourth quarter, was $10.4 million and it was $9.4 million in the third quarter. CapEx for the year was $45.9 million versus $52.8 million last year, which was a decrease of 13.1%, and as Dave mentioned we expect that to decline again in 2012.

Despite the holiday season and certain construction moratoriums, we added another 37 buildings to our network in the fourth quarter and we added 165 On-Net buildings to our network for the year. Capital lease payments, including prepaid capital leases, declined to $2.1 million for the fourth quarter from $6 million for the third quarter. Our capital lease payments were $15.5 million for 2011 compared to $19.1 million for 2010, which was a decline of 19%. We expect to continue our network expansion in 2012, but at a slightly more moderate pace than we experienced in both 2010 and 2011.

On some balance sheet items. At year end our cash and cash equivalents totaled $238.2 million. And for the quarter, our cash increased by $14.2 million as or $27.3 million of operating cash flow was only partly offset by $10.4 million of CapEx and $2.1 million of capital lease payments. For the year, cash increased by $181.9 million, that includes the $170.5 million of net proceeds from the issuance of our senior notes in January of this year of 2011, and payments of $3 million for stock purchases under our stock buyback plan. If you exclude both these amounts for the full year of 2011, cash increased by $14.4 million, as our $75.8 million of operating cash flow was partly offset by $45.9 million of CapEx and $15.5 million of capital lease payments.

Included in operating cash flow for this year was an $8.1 million payment for interest on our $175 million of senior notes. Our operating cash flow will continue to be impact by semi-annual interest payment on these senior notes, each being $7.3 million, and those payments occur in February and August through the maturity date of 2018. We only had one interest payment in 2011 which was the $8.1 million. We have about $92 million of our original $200 million of face value of our convertible notes remaining, and those notes mature in June 2027, and may be redeemed by us or put by the holders beginning in June of 2014. The notes are reported on our balance sheet net of discount at $76.6 million. That discount is amortized to the put date of June 2014.

Our capital lease IRU obligations are for long-term dark fiber leases and typically have initial terms of 15 to 20 years or longer and typically include multiple renewal options. These capital lease IRU obligations totaled $134.7 million at year end.

Bad debt expense was 1.4% of our revenues for the year, which was an improvement of 1.6% that we experienced in 2010. Our days sales outstanding on accounts receivable was 28 days at year end, and that was compared to 26 days at the end of the third quarter, an improvement of 1 day from 29 days that was outstanding at the end of last year. And again, I want to thank our worldwide billing and collections team for continuing to just do an outstanding job on customer collections and credit monitoring getting customers their bills on time and collecting for those bills. I'd like to now turn the call back over to Dave.

Thanks, Tad. I'd like to take a moment now and chat about sales force growth and sales force productivity. We began the fourth quarter of 2011 with 266 sales representatives and ended the quarter with 301 sales representatives selling our service. We began 2011 with 252 reps. We hired 64 sales reps in the fourth quarter and 29 sales reps left the Company during the quarter. Our monthly sales rep turnover was 3.4% in the fourth quarter, which was substantially better than our long-term monthly average of 6.6%. Our monthly rep turnover in full-year 2011 was 5%, also an improvement from the 5.4% turnover that we experienced in 2010.

We began fourth quarter with 240 full-time equivalent sales reps and ended the quarter with 269 full-time sales equivalent reps. As a reminder, these FTEs are reps that have fully ramped through their initial training period. We begin 2011 with 230 full-time equivalents. Productivity on an FTE basis for the fourth quarter was 4.3 units, or installed customer connections per FTE per month. This performance was better than our long-term historical average of 4.1 customer connections installed per rep per month. As a reminder, our rep productivity numbers are not based on contract signings but are rather derived based on actual customer installs and the commencement of revenue generation.

Now to our network scale. We added 37 buildings to our network in the fourth quarter and ended the year with 1744 buildings on our network. The size and scale of our network continues to grow. Our network now consists of over 16,800 metro fiber miles and over 56,200 route miles of inner-city fiber. Our network is the most interconnected network in the world, and today interconnects with over 3900 networks. Approximately 55 of these networks are settlement free peers, the remaining 3850 plus networks are actually customers of Cogent who pay us for service. Today we are currently utilizing about 14% of the lit capacity. We routinely augment parts of our network to maintain a low utilization rate. We have a well diversified customer base with low revenue concentration. Today, no customer accounts for more than 2% of our revenues. We believe our network has substantial capacity available to accommodate future growth.

We will continue to evaluate additional fiber routes. We have tried to take advantage of market volatility within Europe. We may continually try to take advantage of this -- these opportunities to expand our network. In the most recent quarter, we have expanded our network into three additional countries, Turkey, Japan, with lit capacity not dark fiber, and Lithuania, both Turkey and Lithuania were expanded by dark fiber that we then lit.

Now in summary, traffic continues to grow on our network and traffic growth and revenues have grown faster than that of our competitors demonstrating our increase in market share. We believe that Cogent remains the low-cost provider and our value proposition to our customers is truly unmatched in the industry. Our pricing strategy has continued to attract new customers, improved our sales force productivity, increased our contract terms, increased the volume and revenue commitments from our existing customers. Our business remains completely focused on the Internet, and the Internet is increasingly becoming a necessary utility for all of our customers.

After experiencing the decline in our first quarter 2012 revenues, due to the loss of Megaupload, we expect our annualized revenue growth and EBITDA margin to restore -- return to historical annualized rates. We continuously evaluate how to optimize our strong balance sheet including the proceeds from our senior secured note offering at the beginning of the year for the benefit of our stockholders.

In February 2011, our Board of Directors authorized a $50 million buyback program, and in February of 2012 the Board elected to extend this program to 2013. We want to be opportunistic in the timing of these purchases. At the end of Q4 2011, we had purchased 232,000 shares under this program for approximately $3 million at an average price of $12.78 a share, with the remaining $47 million available under this program.

We continue to be encouraged about the results of our sales initiative and the growth of our sales force, our targeted promotional programs and our order backlog. We are committed to providing annualized top line revenue growth of 10% to 20% and continued EBITDA margin expansion and most importantly continuing to increase the amount of cash flow that we generate for our equity holders. We remain confident in our network reach, our product set, our addressable market and our operating leverage. In short, we like our position and we like our business. And with that, I'd like to open the floor for questions.

Thank you. (Operator Instructions) Dave Coleman, RBC Capital Markets.

Thanks a lot. Dave, I was wondering if you could talk about the Asia expansion and just how much further geographic expansion in the region you anticipate? And I believe your -- you built into one data center in Tokyo, just wondering if you have an estimate as to how much of traffic in the region comes out of that facility? And then just on the Megaupload situation, file sharing in general, just wonder if you could talk about since their shutdown any success Cogent's had in signing new [logo] file sharing customers? Thanks.

Sure. Thanks, Dave. First of all, our expansion into Asia was done not by purchasing dark fiber as we traditionally do but rather leasing subsea capacity much as we do across the Atlantic. That expansion was driven by a request from a customer as well as other sales inquiries that have come to the sales force. We evaluated markets based on additional addressable market, regulatory environment, as well as total size of the market. The facility that we've built into which is Equinix Tokyo, is actually the largest traffic aggregation point in all of Asia. We are just in that one facility today, we do not have any current plans to expand beyond that facility in Asia.

We are in the long term considering over the next several years whether or not to add dark fiber in Japan, go to other data centers in that market and then look at other countries that have a relatively stable regulatory environment where we could expand our network. This would include places such as Singapore, the Philippines and probably Hong Kong as additional markets that may make sense. But for the short and even intermediate term, we have no further Asian expansion plans. In fact, we focused our expansion on continuing to enrich our European footprint, adding Lithuania and also adding Turkey to our network. Now whether or not Turkey is Asia or Europe is a question of debate. These are targeted markets that we've been focused on for a while and intend to focus most of our efforts in adding additional buildings in those markets as opposed to adding many more markets to our footprint.

Now with regard to Mega, we as the low-cost provider tend to offer bandwidth to companies that have business models that are very price sensitive to bandwidth. We have had other file sharing sites as customers, we still do have some. Many of these sites have actually curtailed or dramatically limited their activity after the governments actions against Mega. Today, while we serve a number of these sites, they are far less than 1% of our revenues in aggregate, with no site accounting for even a half of 1% of our revenues.

I think video traffic will continue to grow on the Internet. There are a number of different business models that are being pursued. Cogent is agnostic to which of these models we support and we expect to continue to see traffic growth because the underlying behavior, that is, consumers using the Internet to consume video content, continues. And while the actions the government have taken against Mega have at least temporarily shut down that particular business model and may permanently prohibit that type of model from existing, we believe that the long-term trend is for continued video growth. And we are encouraged by the fact that our customer base is very diverse. We've also seen a resurgence in traffic growth, so we obviously took a significant downturn with our largest customer being turned off and abruptly ceasing that traffic. But subsequent to that we've seen traffic begin to return to its normal growth trajectory off of a lower base from that one-time event.

Great, and then just can you quantify the amount of the Megaupload bad debt?

Yes. Mega represented about 5.5% of our revenues. Their DSOs were effectively comparable to that of our customer base, so probably in the order of a little less than a couple million dollars.

Great, thanks a lot.

Frank Louthan with Raymond James.

Great, excuse me, thank you. With the buyback continuing to be extended, is that -- first off, did you take advantage of that any of this quarter, can you give us an idea of what it was quarter -- what you've repurchased quarter to date? And can we assume that there are just less and less attractive M&A opportunities that are out there now? Thanks.

Thanks, Frank. So in the fourth quarter, we actually bought back very little stock at about a little under $13 a share, we bought back only about 3,000 shares. We have not bought any stock in the first quarter of this year as of yet. And as the Company was blacked out based on the fact that Management had the numbers that we've just shared with the market today. We continue to evaluate with the Board methods to return capital to shareholders. Currently the Board has authorized the buyback program. It has considered dividend structures, either special or recurring in nature, and continues to evaluate those. But at this time, the Board felt that a continuation of the buyback program was an effective way to return capital to shareholders.

With regard to M&A, we continue to look at a large number of opportunities. We are fortunate in that we have no extraordinary pressures that are forcing us to do M&A that are not accretive to our equity holders. We remain very disciplined about what we're willing to pay for companies and we would like acquisition opportunities that are closely aligned to our business model. So with those filters applied, we have not seen a single opportunity in the past several years that we have actively pursued once we have concluded preliminary due diligence. I think it is highly unlikely that the Company will pursue any significant M&A. I can't preclude it from ever happening, we're going to be opportunistic, but I think we've demonstrated to our shareholders over the years a very disciplined approach.

Now, we do continue to acquire assets. As we talked about, we expanded the metro footprint, we expanded the long-haul footprint and we have also added to our data center footprint taking over an additional data center in the fourth quarter, actually the largest data center on our network in Pasadena was added to the network, bringing our data center footprint to about 420,000 feet of raised floor space. This was nearly a 40,000 foot center that brings our total count of data centers to 43. But this was not an acquisition, but rather the assumption of a lease of a center that was effectively vacant but fully built out.

Colby Synesael with Cowen.

Great, thanks for taking my questions. So first on Megaupload, sorry to keep going back to this, but I know you broke out the revenue, but I was wondering if you could also breakout what the EBITDA came from the company in 2011 since obviously you're going to have a pretty big impact on the first quarter? Also I was just curious, just to be clear, you didn't receive any payment for the first quarter so I guess from a modeling perspective we should be assuming that the last revenue that you received was for the month of December.

And then on the stock buyback, I guess my questions there have to deal with how important is to the Board, and Dave you're obviously the Chairman of the Board, so I think you could obviously speak for the Board. How important is it for the Board to get to some type of consistent strategy where you're actually providing capital back to investors? Whether that is in the form of a more consistent buyback program or it is in a matter of a consistent dividend. And the other aspect of that is clearly the stock has been very volatile of recent. Has this made you think about putting in some type of automated plan where if something like this was to occur again, let's hope it doesn't, but if something like this was to occur, you could actually have the ability to buy back the stock regardless if you're in possession of material information that's not yet public? Thanks.

Thanks for the questions, Colby. So first of all with regard to Mega, you are correct that our last payment received from them was in the fourth quarter and there were no payments received in the first quarter because in January, on January 19 when the government shut down Mega's site they actually seized $42 million of cash in their bank accounts and therefore they had no ability to pay us even though they owed us additional monies.

In terms of EBITDA margin contribution, this was all On-Net revenue with virtually no direct cost of goods sold. So 100% gross margin contribution and $0.95 of incremental EBITDA, much like any of our other On-Net customers. So there is both high operating leverage in the business as we add revenue, which has been our historic pattern, and there is high decremental margins when we lose a customer. We do view this as a truly extraordinary event, a one-time event, we've communicated both when the event occurred to the extent that we felt comfortable and now in even more greater detail today to our investors.

And Dave, just to interrupt you just to be clear then, so I think it was roughly $16 million, if I just do the 5.5% and I think like $305 million in revenue for the full year. So you're saying we should take 95% of whatever that number is and that's what we should be deducting from EBITDA as a base to start from?

That is correct, Colby.

Okay.

And that is absolutely correct. Now to your second question about return of capital, we did at our most recent Board discussion actually discuss a 10b5-1 plan. We did note the volatility and our frustration on the day of the Mega event that we were not able to participate in the market. We would still be subject to market limitations under buyback programs and probably, based on the trading fine, that they couldn't have been very significant. But we did understand that we precluded ourselves by not putting the 10b5-1 and the Board elected to not put a plan in place now. I think what they are willing to do is look at the volatility over the next quarter or two. I think there is some frustration on the Board's part that we haven't done as much of a buyback. And with that, I think there's a heightened interest among at least some of the Board members were we are discussing a more dividend centric program; one that would be recurring in nature and would be predictable for investors. But no final decision has been yet made. And all I can say is that the Board takes this seriously, is committed to returning capital to shareholders.

And to follow up on Franks question, we do not believe that the capital that we have our balance sheet is needed for M&A for the business; we do not see any particularly attractive opportunities in the market. And as Tad and myself have pointed out, we actually expect a further reduction of about 10% in our capital spending this year as well as our prepaid capital lease activity. And if you just look at the cash flow generation that occurred in the fourth quarter, you can see that the trends of increased cash flow generation means that the Board does need to increasingly focus on return of capital strategies. But--

I mean and to that point then, I mean you're obviously I mean one of the big pieces, if you will, for people who are positive on the name is that there is this excess cash now being driven as there's the growth obviously on the P&L and then the reduction in CapEx. And you just mentioned obviously the hope or the expectation to potentially start putting out a dividend on a predictable manner. What's the urgency on that as it relates to the Board? I mean is this something that could be decided at your next Board meeting? Or is this something that could take another year to kind of get figured out?

I think it's probably over the course of the year. I think the Board looks at the macro volatility and I think for any investor they are very aware how volatile the markets have been and a lot of the causes of that volatility still exist. So I think the Board is patient. We fully and I fully understand the negative carry associated with the cash on our balance sheet. When compared to many other companies either in our sector or tech companies, I think the Board has a more aggressive return of capital strategy. Remember over the years we have returned over $200 million of capital to investors through three previous fully completed buyback programs each for $50 million. Another program, a fourth program that we spent $27 million on. This program we spent about $3 million and we also bought back $58 million of face, or excuse me, $108 million of face value, about $45 million of actual capital spend in our purchases of convert.

So the Board is very cognizant of returning capital and just wants to be cautious in this environment. And I don't want to leave people with the impression that there's an imminent decision to put a dividend policy, but it is actively discussed. I would actually encourage any shareholder to come to our annual meeting, which will be on April 19 and I can assure you the Board will be in attendance at that meeting, and if shareholders would express a strong preference of one strategy or another, I think the Board would take that and probably act on shareholders request.

Okay, thanks. And just my two cents, I do think it's worth trying to decide this sooner rather than later because I do think it's a question that people continue to ask. Thanks.

Thanks, Colby.

Tom Seitz with Jefferies.

Yes, thanks for taking the question. Dave, a lot of activity over the last couple of weeks on over the top announcements with Verizon, Coinstar and then Comcast yesterday. And additionally there's a lot of discussion regarding original content being created for the Internet by some marquee entertainment names. Can you just talk to us in general about what you view as the trend? I mean I know you think that professional video hitting the Internet is going to be great for Cogent, but can you talk about your expectations for how soon this develops? Are we in the third inning or are we barely in the first? And then -- yes, well why don't you just answer that first, please.

Thanks, Tom, thanks for the question, and congratulations on your new role, I think is been awhile since we've chatted on one of these calls. 2010 I think marked a transition for video on the Internet. Still, less than 2% of video consumption occurred over Internet delivery in 2010. Good third-party numbers are not yet out for 2011, but we expect those numbers were up significantly. We also think that Cogent is a disproportionate beneficiary of that because we are committed to providing bandwidth at the lowest possible price to our customers and video is a business model that is very price sensitive. I mean Mega was a great example of that, I don't want to keep going back to them, but someone who basically had virtually all of their traffic on Cogent. And independent third parties calculated that Mega, while being the 13th most [traffic in] site in the world, represented 4% of global traffic. And that's pretty impressive for a site that probably a lot of people hadn't focused on and was somewhat under the radar screen.

I think we're going to continue to see video migrate to the Internet. I think we'll continue to see new content professionally being produced for distribution solely over the Internet. Many of those content companies that have made announcements are actually Cogent customers and we expect to benefit from that. We also think that a lot of libraries of pre-existing content will be monetized but that content becoming increasingly available over the Internet. If we look at some of the companies that you mentioned, the Coinstar/Verizon, quite honestly probably won't have an impact on Cogent. They will use Verizon's network and therefore not be a customer of ours. That may actually not be the most cost effective way for Coinstar to reach the Internet, but my guess is that partnership will require that. In the case of Comcast, I think their product, the way I understand it, is not a completely over-the-top product but is designed primarily to be cash and delivered over their network with only a portion of it being available externally. Comcast is a customer of ours and we think we will benefit from that for the portions of that content that is truly available on the Internet as opposed to sitting behind a walled garden inside of the XFINITY network.

But I think you're going to continue to see different publishers and creators of content experiment with different business models but the inexorable trend of people watching video over the Internet is going to continue. And for the NetCentric portion of our business, half our business, we think over the next 5 to 10 years that this would be the key driver of our growth. And to your baseball analogy, I would say we're closer to probably the beginning of the game, maybe at the bottom of the first inning as opposed to anywhere near the middle of the game. But I think the game is underway and it is clearly going to continue to accelerate as consumers have demonstrated their desire to have content available anyplace anywhere, and the only way to do that is practically through the Internet.

Great, thanks a lot. And just in the interest of time I'll just follow up with you after the call.

Okay, great.

Michael Rollins with Citi Investment Research.

Hi, this is Gage Krieger on for Mike. Two quick questions, first on the sales force headcount, there's some strong growth in the quarter above the rates we've seen over the past several quarters. Can you talk about what led to some of that growth and what your expectations are going forward? And then also I know CapEx is expected to decline year over year, but can you talk about the number of buildings you plan to connect to this year and how long you think it might take to reach that mature building count you've mentioned in the past? Thank you.

Yes, sure, Gage, thanks for the questions. First of all, if I look at 2010, and I've shared this with investors, probably one of our biggest failures was we didn't [secure] the sales force fast enough and it was one of our main initiatives in 2011. And we were very successful in adding to the sales force, growing it by approximately 20% in the year. We've been able to do that while we've been able to increase our sales force efficacy, so our sales productivity in 2011 for full year was actually the highest in the Company's history. So not only did we grow the force the fastest, we kept them the most efficient. We've seen the benefits of all of the training programs and Management changes that we put in place take hold and we feel very comfortable that we need to continue to grow the sales force and make sure that we have enough sales resources to focus on our addressable market. So I think investors should feel comfortable that they're going to see good productivity out of the sales force going forward as well as at least this elevated sales force headcount and maybe even some additional growth.

Now to the CapEx number, as we've indicated multiple times to investors, we felt that 2010 was our peak year in capital. The wrong way to think about our business is capital as a percentage of revenue, but rather as an absolute number. We expect our CapEx as well as prepaid capital leases, which are really just two different categorizations of cash out the door for capital assets, to continue to decline. As we said, we expect that number to decline by about 10% in calendar year 2012 over 2011.

As we look at our building count, we have less than 100 multi-tenant office buildings that we intend to add to the network. As we've identified the largest and most significant buildings that are cost effective for us to connect to the network, we'll probably add closer to 120 total buildings as opposed to the 165 this year. In our building mix, roughly 50 to 60 are data centers and probably 70 or so will be multi-tenant, 60 to 70 multi-tenant office buildings. We will expect however to continue to add data centers, pretty much perpetually to our network as new data centers are being announced, or as single-purpose corporate data centers are being repurposed as carrier neutral data centers. We think that pretty much perpetually we will have to add 50 or so data centers to our network. We don't envision that ever ending and that is included in our CapEx forecast for not only '12, but as we think about capital for '13, '14 and the out years. But we absolutely feel that our business has demonstrated its capital efficiency and that should continue over the next couple of years.

Thanks for taking my questions.

Mac Tatman with Stephens.

Yes, great, guys, thanks for taking the questions. Following up on Dave's question as far as building growth goes, if we look at the slowdown in the building expansion, what should we expect as a run rate for -- as the customers per building per year? I know we put up about two per year, or two additional customers per building this year, and that's up pretty significantly from the year before. And I was wondering if you could give us a sense of what your expectations are from the sales force for 2012?

Thanks, Mac. A couple of things. One, we ended the fourth quarter with 10.2 customers per multi-tenant office building in our On-Net corporate footprint. That's out of an addressable market of approximately 51 opportunities. We believe we have significant room to continue to grow that number. We have about 22 customers per data center; we also believe we have significant room to grow that opportunity. In terms of sales force growth, we expect to continue to both grow the sales force and maintain or even increase these elevated levels of productivity. So on average, we've been able to add about 1.8 customers per existing multi-tenant building per year.

One of the analyses we recently completed was looking at as we slow down the buildings, what will be the impact on our long-term growth trajectory, and it will be de minimis. So actually 89% of our growth in 2011 came from buildings that were On-Net in actually January 1, 2010. So we had previously looked at buildings that were On-Net at the beginning of the year. We actually went back another year and said for buildings that were On-Net January 1 of the year before. So on average, buildings that had been On-Net for 18 months, what percentage of our growth was coming out of those new buildings versus the more seasoned buildings, and 89% of our growth came out of the more seasoned footprint.

The result was that we concluded that we have seen no degradation in our rate of customer additions, either in the data center or in the multi-tenant office building as the buildings mature. In fact, our most significant multi-tenant office building has over 260 customer connections in that building. That's a very atypical building but it's shown that we've been able to consistently grow our penetration as more and more businesses realize the value that we deliver.

Great. Well I think most of my other questions have been answered. Thanks again.

Thanks, Mac.

James Breen with William Blair.

Hi, Dave this is actually Louis DiPalma in for Jim Breen. How are you?

Good, Louis, how are you doing, buddy?

Not bad. When we look at On-Net revenue per connection, the decline seems to have somewhat stabilized in the fourth quarter and seems that even more stabilized if you back out the negative currency impact. Can you talk about the different trends for pricing in the Corporate segment and separately for the NetCentric segment?

Sure, thanks Louis for the question. So on the Corporate side, it's actually very simple. Our prices have been constant for 11 years since we've been selling service. The only form of discounting that occurs is based on contract length as virtually all of the Corporate customers take the same product. We do have some targeted promotional activities throughout the year that could run what is effectively sales, but for the most part, our Corporate On-Net ARPU has been very stable. And our most common product is a 100 megabit per second connection on a three-year contract for $700 a month.

Our NetCentric revenue trend, however, is more complex. It includes really three different factors. One is the size of the connection. Two, the length of the contract, and therefore the price per megabit that the customer is getting on that connection. And then finally, utilization rate as approximately 4.5% of our NetCentric customers have burst or overcharges where they use more than their fixed commit that goes into the revenue. So on average, what we have seen is price per megabit on the NetCentric side declined about 22% per year for the past three years. We think that rate of decline is pretty consistent. We've seen the average utilization continue to tick up, the average size the connection tick up, and customers continuing to use about 4% or 5% of their purchases in the form of these burst payments. All of those trends have been pretty consistent and I think that has resulted in the moderation in the rate of decline in our On-Net revenues per connection.

Now you are correct, that a big portion of our NetCentric revenue is outside of the US, so there can be some currency volatility. But in aggregate, we think we are nearing a plateau on the price per revenue per On-Net connection. While there may be some further declines, we think we're asymptotically approaching what appears to be a [four] even though the price per megabit we think will fall perpetually forever.

Great, Dave, and as a follow up to the Citigroup question and answer, in which you said that almost into perpetuity you think that Cogent will be adding 50 data centers, or maybe not into perpetuity, but can you remind us how much CapEx on average you spend to add 50 data centers to your network? And could you also remind us what maintenance CapEx generally is for Cogent?

Sure. So we spend about $120,000 to add a building whether it be a data center or a multi-tenant office building. So adding 50 data centers will be about $6 million a year. We believe that the long-term maintenance CapEx in our network as it gets bigger, as it gets older will go up to about $30 million a year. That includes adding capacity to the existing footprint. So with those two numbers, we believe that our long-term capital spend number, and this is both CapEx and any prepaid capital leases, will be in aggregate about $35 million a year. We think we will be at that run rate probably by the end of 2014 as we will have kind of fully built out our targeted network and we expect that rate to continue into the future beyond that.

And for that, I think you said $36 million for an aggregate prepaid capital leases and traditional CapEx, how does that compare to what CapEx plus prepaid IRUs was in 2011?

It was about $60 million in aggregate, so as Tad mentioned, we spent about $45 million in straight CapEx, $46 million and about $15 million in prepaid capital leases. So just over $60 million, about $61 million. So we anticipate that number coming down, and remember peak year was about $76 million in 2010. So again, as we've told investors, they should expect over the next several years to see this continued downward trend in that combined number.

Great, that was very helpful. Thanks, Dave.

Okay thanks, Louis.

Donna Jaegers with D.A. Davidson.

Hi, Dave, thanks for taking the question. I just curious on your NetCentric growth can you -- I know obviously wireless carriers are seeing a lot more Internet usage because of the smartphone. Have you had any luck or can you talk a little about the growth from wireless carriers, both in the US and Europe, that's impacting your network?

Yes, thanks for the question, Donna. So first of all, while we are seeing a much more rapid rate of growth in wireless data than we are in terrestrial data, it's growing from a much smaller base. And there is some technological and physical limits to how much data can eventually be delivered wirelessly as compared to fixed line. Our primary business is selling wired services but many times we sell to wireless carriers. They would generally be our NetCentric customers. We have wireless carriers who buy upstream connectivity, that means they're aggregating thousands if not millions of end-users, and then buying their upstream connectivity from Cogent. We have a number of customers in the US and in Canada. We obviously, in the US, do not have the three largest providers, as they have their own global backbones, that being AT&T, Verizon and Sprint. We do have services for I think almost the rest of the market.

In Europe, we also have a number of wireless operators. Some of the incumbent operators use their own networks, some of them have global footprint such as Deutsche Telekom and FT, and [Telia]. Many of the other ones do not and they are buying service from us and generally the second, third and fourth operator in the country also uses us for connectivity. So throughout the UK and Continental Europe, we see significant growth from that segment, but they are NetCentric customers and they really look just like any other access network customer. Remember slightly over half of our NetCentric revenue comes from selling to access networks. These can be either wireless or wire line. And at least to date, the wire line companies have purchased far more than the wireless. But we're seeing that change to some extent.

Great, thanks, Dave.

Thanks.

David Dixon with FBR Capital Markets & Co.

Thanks very much, Dave. A question I wanted to ask was around the order backlog, if you could distinguish between what you're seeing on the On-Net and the Off-Net side of the business? And looking at trends in [tail] circuit costs, could you give us some sense of how that's trending on a per circuit basis and as metro Ethernet capacity is increasing? That'd be great. And then maybe just on the CapEx, if you could just quickly highlight for me the split of incremental spend by region, that'd be terrific, thanks.

Thanks for your questions, Dave. So first of all in our Off-Net business, our unit growth mirrors our On-Net Corporate growth. So in unit terms, that business is growing less rapidly than it is in revenue terms because we're actually seeing ARPU expansion. That backlog in terms of units is generally about 85% On-Net and about 15% Off-Net. Because, however, the Off-Net is a greater revenue per connection, on a revenue basis, it's probably more like 75% On-Net and approximately 25% Off-Net. I'll let Tad go ahead and take the circuit and CapEx questions.

Sure. Dave, how are you doing? Good morning.

Good, thanks.

We look at the direct incremental margin with all of our Off-Net transactions on a monthly basis and then aggregate that; roll it up. And we have seen a relatively consistent 50% direct incremental gross profit margin associated with that for the past several years. So we're not seeing a trend one way or the other in that regard. The CapEx by region -- Europe is about 20% of the business, Canada and Mexico, with Canada being most of this about 7%, the remainder in the US. Do not see a big regional difference in the level of CapEx by region with respect to the percent that those entities represent of the business.

And so just in incremental CapEx terms for 2012?

We've said that we expect an aggregate 10% decline in CapEx in prepaid capital leases and that would be consistent across regions.

Okay, thanks very much.

It appears there are no further questions at this time. Mr. Schaeffer, I'd like to turn the conference back over to you for any additional or closing remarks.

Well thank you all very much, I know this was a little longer than usual, but this was an extraordinary quarter for us as well as we're extremely pleased with our full year. I want to thank everyone for taking the time. I'd like to think the entire Cogent team for a great 2011, and we look forward to delivering great results in 2012. Thank you all very much. Bye-bye.

And that concludes today's conference, thank you for your participation.