Cogent Communications Holdings Inc (CCOI) 2014 Q1 法說會逐字稿

Good day ladies and gentlemen and welcome to your Cogent Communications Group first quarter 2014 earnings conference call and webcast. As a reminder this conference call is being recorded and will be available at www.Cogentco.com. I'd now like turn the call over to Dave Schaeffer, Chairman and Chief Executive Officer. You may begin Sir.

Thank you and good morning. Welcome to our first quarter 2014 earnings call. I'm Dave Schaeffer, Cogent's Chief Executive Officer. With me on this morning's call is Tad Weed our Chief Financial Officer.

First of all I'd like to apologize for moving the call time but we've been requested to appear in front of the house judiciary committee concerning the proposed merger of Comcast and Time Warner Cable. In order to accommodate the House's request, we needed to reschedule this call an hour earlier than originally scheduled and then finally, we will be holding this call to a strict one-hour time window.

We are very pleased with our results for the quarter and are optimistic about the strength of our business and the outlook for the remainder of 2014. During the quarter we experienced accelerated sequential revenue growth, gross margin expansion, network traffic growth, sales growth, productivity that was far above our historical averages. We returned a total of $32.6 million to our shareholders through a combination of dividends and buybacks during the quarter.

This $32.6 million includes our regular recurring quarterly dividend of $0.16 per share and an additional $10.7 million paid under our return of capital program for a total dividend in the quarter of $0.39 per share or $18.4 million which we paid in March. The $32.6 million return to shareholders in the first quarter includes $14.2 million spent on the purchase of 405 million shares of our common stock during the quarter through our buyback program at an average price per share of $35.05 per share.

So far this quarter and through yesterday, we have purchased an additional 391,000 shares of common stock for a total of $13.4 million at an average price in the second quarter of $34.29 per share. We continue to remain confident in the cash flow generating capabilities of our business. As a result, we have indicated in our press release we have announced a further 6% increase in our regular quarterly dividends from $0.16 per share to $0.17 per share. Our seventh consecutive quarterly sequentially increase in our regular dividend.

Our second quarter regular dividend will be paid on June 18 to the holders of record as of May 30, 2014. Since we returned more than $10.5 million to shareholders under our return of capital program in the first quarter by purchasing $14.2 million worth of the common stock, we will not make a special dividend payment in the second quarter. Additionally, since we already spent $13.4 million on the stock buybacks in the second quarter in may spend additional monies, we will not make a special dividend payment in the third quarter of 2014 as well.

As a reminder, under our capital return program, we are committed to returning at minimum, $10.5 million to our shareholders through either stock buybacks or a dividend or a combination of both in addition to our regular dividend. We will continue to evaluate and are committed to a combination of stock buybacks, regular dividends and special dividends under our capital return strategy. Again, as a reminder, our capital program is planned to continue until our net debt to EBITDA as adjusted reaches 2.5 times.

Our net debt to EBITDA adjusted ratio increased to 1.86. As of March 31, 2014 from 1.57 at the end of 2013. Our annual shareholders meeting was held on April 17 and several shareholders attended that meeting in person and have direct conversations with our board of directors. We have also held multiple conversations with shareholders outside of our annual meeting concerning our return of capital program.

One common theme among our shareholders was a request for us to provide investors more clarity on the timing of reaching our net debt to EBITDA ratio of 2.5 to 1. As a result, we are announcing today that we intend to hit that targeted ratio no later than December 31, 2016. We note that we are pleased with our return of capital program and these conditions could potentially change if facts change.

As we announced in April, we took advantage of favorable market conditions and raised an additional $200 million in unsecured debt at an interest rate of 5.625%. This debt matures in 7 years and has interest payments payable semi-annually in April and October. In order to complete this transaction, it was necessary to fund those proceeds into escrow due to leverage covenant requirements under our existing senior secured notes.

After we call our $92 million of convertible notes on June 20, 2014, we anticipate the proceeds from these new unsecured debt to be transferred from the escrow account into our operating accounts. Additionally, in connection with this transaction, after we have completed our corporate restructuring and retired our convertible notes, we will have approximately $230 million available for use under our programs to return capital to shareholders.

Our first quarter of 2014 sequential revenue growth versus the fourth quarter of 2013 was 3.4%. Our gross margin expanded by 90 basis points in the quarter to 58.3%. During the quarter, traffic grew on our network sequentially from the fourth quarter by 16% and grew year-over-year versus the first quarter of 2013 by 69%. Our sales force productivity was five units of installed orders per rep per month. A rate that is significantly higher than our historical average of 4.60 units per rep per month.

Since the end of the fourth quarter, we continue to expand our footprint by adding an additional 34 buildings to our network and for the last 12 months we added 134 network buildings to our network footprint. We have over 2,024 [lit]-buildings connected to our network at the end of Q1 of 2014. Throughout this discussion we will highlight several operational statistics that we believe demonstrates our increasing market share, expanding scale, size of our network, and most important, the operating leverage of our business.

We are the lowest cost, most efficient operator in our sector. We are focused on the most revenue rich rotations that we then bring on [net] and we sell the highest quality Internet service in the market, at the lowest price possible. I will review in greater details some operational trends and highlights. Tad will provide some additional details on our financial performance and following are remarks, we will open it up for a brief question-and-answer period. Now I'd like Tad to read our safe harbor language.

Thank you Dave and good morning everyone. This first quarter 2014 earnings report and earnings conference call discusses Cogent's business outlook and contains forward-looking statements within the meaning of section 278 and 21-E of the securities act. These forward-looking statements are based on 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 risk 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 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, on this call if we use any non-GAAP financial measures you will find these reconciled to the gap measurement on our earnings release and on our website at www.Cogentco.com. I'll turn the call back to Dave.

Now for some highlights of first 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 quarterly historical metrics. These metrics will be added to our website. I hope you find the consistent presentation of these metrics informative and helpful in understanding our financial results as well as trending from operation.

Our sequential revenue growth for the quarter was 3.4%. A significant improvement from the 2.4% sequential revenue growth that we achieved from the third quarter of 2013 to the fourth quarter of 2013. Our first quarter revenue growth revenue was $92.9 million. We believe the recent initiatives undertaken in our sales organization are beginning to generate results. 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 based on customer type. We classify all of our customers into two major categories, netcentric and corporate customers. Our netcentric customers buy large amounts of bandwidth from us and carry our neutral data centers where corporate customers buy smaller amounts of bandwidth from us and large multi- tenant office buildings. Revenues from our corporate customers grew 3.1% from the fourth quarter of 2013.

These corporate customers represent 47.2% of our total customer connections at the end of the quarter and 51.5% of our Q1 2014 revenues. Our corporate customer connections grew 1.8% sequentially for the quarter. Revenue from our netcentric customers grew 3.7% from the fourth quarter of 2013. Our netcentric customers represent 52.8% of our total customer connections at the end of the quarter and 48.5% of our Q1 2014 revenues. Our netcentric customer connections grew sequentially by 6.9%.

Now for a few comments on overall trends and pricing. Our most widely sold corporate product continues to be the 100 megabit-per-second connection and our most commonly sold netcentric product a the 10 gigabit connection. We offer discounts related to contract terms to all of our corporate and netcentric customers. We also offer volume discounts to our netcentric customers.

During the quarter, several of our customers took advantage of these volume [in term desk counts] and entered into longer-term and larger contracts with Cogent representing over 1,970 customer connections and these customer connections resulted in a over $13 million additional revenue commitment to Cogent. The average price per megabit of our installed base decreased in the quarter.

The average price of our installed base on a per megabit basis declined by 7.8% from $2.34 at the end of fourth quarter 2013 to $2.15 in Q1 of 2014. A decline of 24.9% from the $2.87 we experienced in the first quarter of 2013. The average price for a new customer contract however actually increased sequentially in the quarter. The average price per megabit for new customer contracts was $1.36 versus $1.31 in the fourth quarter of 2013, a 3.7% increase sequentially and a 20.1% decline from the $1.70 we were charging new customers in the first quarter of 2013.

Before Tad provides some additional details on our results for the quarter, I'd like to address our results and expectations against our announced revenue and EBITDA targets. Our revenues increased sequentially by 3.4%. Or at an annualized rate of 14.4%. This rate of growth is in line with our revenue guidance range of 10% to 20%. We do believe that our recent sales initiatives will help us achieve accelerating revenue growth and return to the midpoint of our guidance range.

Our EBITDA margin was 34.6% in the first quarter, 35.1% in the fourth quarter of last year, and 33.5% in the first quarter of 2013. The 50 basis point decline in our EBITDA margin in the fourth quarter was primarily due to the expected impact of seasonal cost related to our SG&A for the end of the year. Our EBITDA's adjusted margin increased by 110 basis points from the first quarter of 2013.

Our EBITDA's adjusted increase by 1.8% sequentially from the fourth quarter of 2013 and on a year-over-year basis of our EBITDA increased by 13.5% from the first quarter of 2013. We anticipate that for the full year, our revenue growth will be within the guidance range of 10% to 20% and our EBITDA margin expansion for full year 2014 versus full year 2013 will again be greater than 200 basis points. Now Tad will cover additional details related to the quarter.

Thank you Dave and again, good morning everyone. I'd also like to thank and congratulate our entire team for the results of their hard work and efforts during the quarter. I will begin my discussion by providing additional details on our revenue -- detail on revenue results by product class, on-net and off-net. Our on-net revenue was $69.1 million for the first quarter which was an increase of 4.6% from the fourth quarter. And an increase of 12% from the first quarter of last year.

About 90% of our new sales for the first quarter were for our on-net services which was higher than our typical percentage of on-net sales of about 85%. On-net customer connections increased by 4.7% sequentially and increased by 17.4% from the first quarter of last year. We ended the quarter with over 36,300 on-net customer connections on our network and our 2,024 buildings on-net buildings.

Off-net revenue was $23.5 million for the quarter which was a sequential increase of 0.3% and an increase of 5.3% from first quarter last year. Of-net customer connections increased by 3.1% sequentially and by 14.2% from last year. We ended the quarter serving over 5,200 off-net customer connections and over 4,060 off-net buildings.

Our non-core revenue was $400,000 and represents less than 24% of revenue and about 400 customer connections and will continue to degrade. On ARPU, our on-net ARPU actually increased for the quarter sequentially and off-net ARPU declined from the fourth quarter of last year. Our on-net ARPU which includes corporate and netcentric customers combined was $648 for the fourth quarter of last year and increased slightly to $649 this year.

Our off-net ARPU which is predominately corporate customers was $1,567 for the fourth quarter and declined by 3.2% to $1,516. Churn rates for both on-net and off-net customers slightly increased during the quarter but not materially. Our on-net churn rate was 1% rather for the fourth quarter and increased to 1.1%. Off-net churn rate was 1.2% 4th quarter of last year and increased to 1.5%. Those are unit-based numbers.

Our EBITDA and suggested margin percentage for the quarter decreased sequentially as expected due to the seasonal factors largely due to SG&A but increased over the prior year quarter from last year. Our EBITDA's adjusted margin for the quarter decreased by 50 basis points from the fourth quarter and increased from the first quarter of 2013 by 110 basis points. The margin was 33.5% for the first quarter, 35.1% for the fourth quarter last year, and 34.6% for the first quarter of 2014.

EBITDA's adjusted was $32.1 million for the quarter which was an increase of 1.8%. In dollar basis from the fourth quarter and a 13.5% increase from the first quarter of last year. Our gross profit margin increased by 220 basis points from first quarter of last year and also increased sequentially by 90 basis points from the fourth quarter due to the operating leverage of our business.

The gross profit margin was 56.1% for the first quarter of last year, 57.4% for the fourth quarter last year, and for this quarter, the increased amount and the percentage was 58.3% was our gross margin for this quarter. Our on-net revenues continued to carry nearly 100% incremental direct gross profit margin. And our off-net revenues continued to carry a 50% incremental direct gross profit margin. Variability in our EBITDA and gross margin expansion can and does occur.

If you examine our quarterly metrics for the last 36 quarters included in each of our press releases since we became a public company, you will notice some unevenness in our quarterly margin expansion. This can occur due to seasonal and other factors which could vary from quarter to quarter, including the timing and scope of our network expansion activities and sales organization expansion.

Seasonal factors that impact our SG&A expenses include the resetting of payroll taxes in the United States, the cost of annual sales meeting which is held in January each year, annual cost-of-living increases [technically] occurring in January, and the timing of our audit and tax and other professional services typically heavier in the first quarter. These changes typically increase, did increase our SG&A expenses in the first quarter as planned.

Despite quarter to quarter variability, our long-term margin trend has demonstrated that our business model generates increasing EBITDA margins. Interest expense for the quarter was results from interest on our $240 million of senior notes, interest on our $92 million of convertible notes, and interest on capital lease obligations. Our interest expense was $11.1 million for the fourth quarter of last year and increased slightly to $11.3 million for this quarter. The components of interest for this quarter were as follows:

$4.9 million related to the senior notes; $1.9 million related to convertible notes, and of that amount $1.7 million was for the non-cash amortization of the note discount on convertible notes; and lastly, $4.5 million was related for capital lease obligations. Beginning in the third quarter of 2014 we will no longer incur interest on convertible notes since we will call those notes on the first available call date of June 20, 2014.

We will incur $11.3 million of additional annual interest on our new $200 million of unsecured debt that accrues interest at a rate of 5.625% and we began accruing that interest on April 9, 2014 as those notes are in escrow but that's the date we began accruing interest. Interest is payable on the new $200 million of unsecured notes in April and October and the first interest payment we will make will be on October 15, 2014 and the notes mature on April 15th, 2021, 7-year term.

Our basic and diluted income per share was $0.00, did round up to $0.01 for the quarter. Our basic income per share for the fourth quarter was $1.14 and diluted was $1.10, that was inflated by recording a US tax benefit of $49.3 million in the fourth quarter that added $1.06 to our basic income per share and $1.01 for diluted income per share last quarter and if you excluded that impact, the basic and diluted income per share for the fourth quarter would've been $0.07.

Foreign currency impact consistent with prior quarters about 27% of our business is located outside the US, 21% of the revenue is in Europe and 6% related to Canada and Mexico and Japan. Continued volatility foreign currency exchange rates can materially impact our quarterly and annual revenue and financial results. The foreign exchange impact on our revenue from the fourth quarter to first quarter, was a decrease of about $0.1 million.

Our revenue increase from the fourth quarter as Dave said by 3.4% and on a constant currency basis it was 3.5%. The foreign currency exchange impact on revenue from the first quarter of last year to this quarter was an increase of about $0.3 million and our revenue increased from the first quarter last year by 9.9% on a constant currency basis that was 9.6%. The average Euro to US dollar rate so far for the second quarter, so the quarter we're in now, is about $1.38.

Should that average exchange rate remain, we expect and estimate the sequential impact will be an increase to revenues of $0.2 million. That average rate for the second quarter of last year was at $1.31 so less than $1.38 if that rate remains constant, we expect the increase on a year-over-year basis to be about $0.7 million.

Our revenue and customer base of about 42,000 customer connections is not highly concentrated. For the first quarter no customer represented more than 2.5% of revenue and our top 25 customers represented less than 8.9% of the revenues for this quarter.

CapEx on a quarterly basis we can and have historically experienced seasonal variations in CapEx. Prepay capital lease payments and construction activities, our quarterly CapEx and capital lease payments are primarily dependent upon the number of buildings we connect to our network each quarter, and the timing and scope of our network expansion activities. Our CapEx increased sequentially but decreased on a year-over-year basis.

Our CapEx for the quarter was $15.6 million versus $10.1 million in the fourth quarter and that's a decrease of 4.2% from the $16.3 million we had in the first quarter of last year. Principal payments on capital leases are for long-term, dark-fiber IRU agreements increased to $3.4 million for this quarter and last year was $5 million so $1.6 million decrease from the comparable quarter last year.

Combined capital lease principal payments and CapEx total defined by 10.7% compared to the first quarter of last year. The comp combined amount was $19 million for this quarter, $12.3 million for the fourth quarter of last year and $21.3 million for the first quarter last year. We added another 34 buildings to our network this quarter and 134 buildings over the past year. We expect to continue our network expansion in 2014 at a slightly more moderate pace than we experienced in 2012 and 2013 with continued moderation in 2015.

Regarding some sheet amounts, at the end of the quarter cash and cash equivalence was $263.7 million and for the quarter, cash decreased by $41.1 million. After including all interest payments, our $18.4 million first quarter dividend payment and $14.2 million spent on the stock buyback during the quarter. Cash flow from operations was $10.6 million compared to $29.3 million for the fourth quarter and $15 million for the first quarter last year.

We paid $10.1 million in the quarter under our semi-annual interest payment on our senior notes and that had the impact of reducing that operating cash flow. A $10.6 million of operating cash flow this quarter was offset by our $15.6 million of CapEx. $3.4 million of higher [you] capital lease payments and $18.4 million first quarter dividend payment and $14.2 million spent on stock buybacks.

We exclude the cash return to our shareholders through our dividend stock buyback and interest payments, we were cash flow positive by $1.5 million for the first quarter of this year. Operating cash flow will continue to be impacted by our $10.1 million semi-annual interest payments on our $240 million of senior secured notes and those interest payments occur in February and August due to maturity in February 2018.

Our operating cash flow was also impacted by $0.5 million semi-annual interest payment on our convertible notes may occur in June and December and we'll be making that final payment on our convertible notes this June when we call those notes.

Going forward our operating cash flow will now also be impacted by $11.3 million of annual interest payments paid semi-annually on our new $200 million of unsecured notes and those payments will occur in October and April and we'll make the first payment of $5.6 million on October 15, 2014. We have $92 million remaining on the original $200 million of convertible notes. They're reported on the balance sheet at $90.6 million in the quarter. Which is net of the unamortized discount.

May be redeemed by us or by holders beginning in June and as we said, and announced, we will call the remaining convertible notes that are not put to us, on June 15 on the earliest call date which is June 20. Our capital lease IRU obligations are for long-term dark-fiber leases and typically have terms of 15 to 20 years or longer and often have multiple renewal periods after that. On that, the total capital lease obligations at the end of the quarter was $162.4 million.

Our total debt including capital lease obligations was $498 million at the end of the quarter and our net debt was $234.3 million. Our total debt to trailing last 12 month EBITDA as adjusted ratio, was 3.99 at the end of the quarter and our net debt to trailing last 12 months EBITDA as adjusted ratio was 1.86. These amounts do not include the impact of our new $200 million notes we issued into escrow on April 9. Our bad debt expense for this quarter and the fourth quarter was consistent at 1.2 percent of revenues.

Days sales for worldwide accounts receivable was 30 at the end of the quarter and I want to again personally thank and recognize our worldwide [bone-in] collections team members who continue to do a fantastic job on customer collections, customer service and credit monitoring, and also recognize entire worldwide finance team for successfully managing the growth of our business. Now I'll turn the call back to Dave.

Thanks Tad. Now for a few comments on sales, rep productivity and activity. We began the first quarter of 2014 with 308 quarter bearing reps and ended the quarter were 317 sales reps. We hired 60 sales reps in the quarter and 51 reps left our company during the quarter. Our rep churn was approximately 5.4% in the first quarter, much better than the long-term historical average of 6.5%.

We began the first quarter with 289 full-time equivalent reps, these are reps that have ramped up and have now a full quota and ended the quarter were 303 full-time equivalent reps. Productivity on a full-time equivalent basis for the first quarter was 5.9 units of installed orders per rep per month. This rate of organic rep productivity is significantly better than our long-term historical average, which has been 4.6 units per full-time equivalent rep per month.

As a reminder, our sales force productivity rates are not based on contract signings but rather are based only upon completed installed orders. Now for a few comments about our network scale and scope. The size of our network continues to grow. We added 34 buildings to our network in the first quarter and have over 2,020 buildings connected to our network. Our network consists of 27,200 miles of metro fiber and over 57,500 inner-city route miles of fiber.

The Cogent network remains one of the most interconnected networks in the world with 5,120 networks directly connected to Cogent. Forty of these networks are settlement-free peers and the remaining approximately 5,100 networks are actually Cogent paying customers purchasing transit from us. We are currently utilizing 29% of the lit capacity in our network. We routinely augment parts of our network to maintain a yield lower utilization rate.

We currently serve 23% of our corporate on-net customers and our footprint, about 1% of our netcentric market opportunity and approximately 14% of the netcentric customers available for service in our footprint. We have a well-diversified customer base with low revenue concentration. No customer represents more than 2.5% of our revenues in the first quarter. Our top 25 customers represented less than 8.9% of revenues. We believe our network has substantial capacity to accommodate our future growth plans.

So in summary, we believe that Cogent is that low-cost provider of Internet access and transit to our industry with an unmatched value proposition to our customers. Our pricing strategy continues to attract many new customers resulting in above-average sales force productivity, increased volumes and increased revenue commitments from customers. Our business remains completely focused on the Internet and provides a necessary utility to customers.

We expect our annualized growth rate and our EBITDA margin expansion to be consistent with our historical rates of 10% to 20% top-line growth and over 200 basis points of annual margin expansion and EBITDA. For 35 out of 36 quarters as a public company, we've produced organic sequential growth and we are encouraged by the free cash flow generation of our business.

We are encouraged by the traffic growth on our network and the results of our sales force initiatives as the productivity of the sales force as well of the pipeline that they are currently working. Certain of our last [file] access providers with whom we peer have been reluctant to upgrade their peer interconnectivity to us. This has been a controversial issue. Unlike these organizations, we believe strongly in an open Internet and support true net neutrality.

We like and are confident in the reach of our network, our product set, our addressable market and the operating leverage, in short we like the business we have. We feel that we have an underserved addressable market that is ample to accommodate our growth and are on-net footprint and allow us to grow our revenues at historical rates. We are committed to providing annual top-line revenue growth of 10% to 20%, expanding our margin and most importantly, generating increasing free cash flow for equity holders.

We will be opportunistic about the timing of purchase of common stock under our current $50 million buy back program. We have purchased approximately 1.1 million shares recently under that program with -- for $31.8 million. We currently have $18.2 million remaining under this program which runs through February, 2015. Our Board of Directors has approved yet another increase of our regular quarterly dividend to $0.17 per share.

This dividend will be paid to shareholders on June 18 of this year, this dividend increase it represents a continuous commitment to our shareholders and demonstrates the optimism we have in the cash flow generation capabilities of our network. We have strengthened our balance sheet through the issuance of a new $200 million unsecured debt offering earlier this year.

We are committed to returning an increasing amount of capital to our shareholders on a regular basis and migrating toward our targeted goal of net-debt to EBITDA ratio of 2.5 no later than the end of 2016. With that, I'd like to now open the floor for questions.

Thank you Sir.

(Operator Instructions)

Michael Bowen with Pacific Crest Securities.

Good morning. Thanks for taking the question guys. A couple questions if I may?

With regard to some commentary you put out earlier in the quarter with regard to offering to pay for some of the equipment upgrades with regard to the peer and interconnection disputes, would love to know whether anyone has taken you up on that? And if so, if you can't comment on any amounts that have been paid? And also give us if you haven't put anything out there, give us an idea of how much the ultimate commitment at least from your projections, how much could it be?

Question number two, Dave, I hope I didn't hear incorrectly but I think in the beginning of your commentary, I think you said productivity was 5 but then you clarified 5.9 so I want to make absolutely sure it's 5.9 it was slightly lighter than what we are looking at that still very, very good obviously.

Can you give us an idea with regard to, you've added I think 14 reps, full-time equivalent reps. Do you see that accelerating? And then related to the rep productivity, as you hopefully accelerate that to 350 to 360 range, by the end of this year, where do you foresee that rep productivity figure going or can you help us out with the range?

Thanks for the questions Michael. I will take them, first of all I do apologize for mis-speaking. The rep productivity was 5.9 not the 5 that I misspoke earlier in the call. And I did correct myself.

Two, with regard to sales force productivity, we are clearly trending above our historical average of 4.6 units per rep per month at 5.9. The rep sales force continues to mature and season. Our sales force turnover was lower than our historical turnover rate. At 5.4% as opposed to 6.5% of long-term average which is coming down.

I think all of those factors will contribute to elevated levels of sales force productivity and I believe a number of the initiatives that Ernie has undertaken in terms of changing the management culture and structure in the sales organization are absolutely showing positive results. And we expect that rep productivity to continue to remain at an elevated level and hope we can continue to see further acceleration through the year. Based on the current sales funnels we think that's highly likely.

With regard to hiring of the sales force, we feel very encouraged that we're going to hit our hiring targets. We continue to add sales offices and fully staffed those offices. And have been very encouraged by the rate at which these new reps have been becoming productive.

I think the training initiatives we put in place are absolutely delivering the results that they hoped to deliver. We expect going forward more hiring, more productivity, better training, lower turnover, all of that should allow us to see continued accelerated revenue growth while there can be some fits and starts to that, we feel very comfortable that we will be demonstrating the ability to return to the midpoint of the guidance range as we had indicated.

Now with regard to the [peering] question, unfortunately we have not had a single taker on our offer. While that offer remains outstanding and we do hope we will see substantial numbers of additional ports with problematic peers being added, we have not had any of the counter-parties accept our offer. The capital cost to us, if they accepted all of them would probably be on the order of $2 million. But as I said, so far we've spent none of that.

I am encouraged by the fact that one of the major problematic peers after entering into a bilateral agreement with one of our large customers has come back and now voluntarily and proactively asked us to increase port capacity. Now the ports remain full, there is ample traffic to continue to fill up those ports and I think their willingness to open up port capacity is an attempt to try to gain support for their proposed merger activity.

So, right now, we still remain constrained with a number of our ISP access provider networks but in aggregate, the majority of our traffic continues to flow to our customers and to non- constrained peers.

Dave, thanks for that. One last thing, in the first -- on the fourth quarter conference call you had mentioned that in January more reps had hit the 100% of their quota than ever in the history of the Company. February was better than January. Can you tell us about March?

Yes, March also was a very good month. It was not a record month but it was better than March of last year and comparable to the type of quota productivity that we saw in January and February. So it was excellent and for the quarter, the greatest percentage of reps hitting their quota in the Company's history for any quarter and we had a record number of reps going to our quarterly over-achievers club known as Leaders Club where they receive prizes and bonuses.

And based on the funnel activity so far this quarter, we expect to see that percentage of the sales force hitting quota actually even higher in second quarter than it was in first quarter.

Great. Thanks a lot.

Thanks Michael.

Thank you for your questions sir. The next question comes from the line of James Breen with William Blair.

Thanks for taking the question. Around the expense in this quarter, SG&A jumped up quite a bit from the fourth quarter and then you had the one-time gain that was in the EBITDA. Can you talk to us about the puts and takes there? How that was all tied into the debt? I'm not sure exactly all the details, thanks.

There really was no SG&A impact related to the debt deal in the quarter. And any professional fees related to that will wind up being capitalized as debt costs, being as we expect, sequentially, we always experience an increase from Q4 to Q1, the components being cost-of-living increase, and taxes in the US on payroll, that's a couple million dollars in the aggregate.

We've got more professional fees in the first quarter, audit, tax and legal. That's in the neighborhood of close to $1 million, when you look on a quarter to quarter basis. So, out of the aggregate $3.5 million, that's largely the components of that we also have the sales meeting which is in the neighborhood of 600,000. As we look at that going forward, some of those announced either go away or decrease when we look from Q1 to Q2.

Sorry I was just going to say, so there's the absolute SG&A number should come down in the second quarter from the first quarter?

That's correct.

For that one time number Jim, we had an equipment sales and trade-in program that resulted in a gain. We've done that in the past as we've modernize portions of our network. And that gain gets reflected in our EBITDA. And again, this is not unique to this quarter, it's happened several times in the past. But we do expect our EBITDA as adjusted to deliver again over 200 basis points on a year-over-year basis of growth.

Okay so the combination of better gross margin, even though the one time item won't be there in the second quarter, you also see better lower expenses than in better gross margins?

That's correct Jim.

Okay great thank you.

Thank you, sir. Our next question comes from the line of Colby Synesael from Cowen and Company, your line is now open.

Great. Thank you. Just a few. First off, nice to see you guys taking advantage of the recent dislocation in the stock price. Just a few questions around that. Has the Board's view of buybacks relative to dividends changed at all since last quarter? Is it really just the fact that your stock has come down as much as it has and you guys have chosen to be more aggressive on that?

And then also, when I think of the $10.5 million capital returned to investors every quarter, plus your targeted year-end 2016, you still really don't get to that 2.5 times leverage. So help me understand the disconnect or the bridge there.

And then, just my other question is, your quarter-over-quarter growth was a bit stronger than we expected. Is it still your expectation from the linear perspective that we will see an acceleration in quarter-over-quarter growth as we go through the course of the year? Thanks.

Sure. Thanks for the questions Colby. First of all, on buybacks versus dividends, we have always been opportunistic in using buybacks. Cogent has bought back since it's initial buyback of approximately 7.8 million shares in the market. If we look at the current trading price and look at the timing of those buybacks, the return on those buybacks has been approximately 18% IRR.

So I think the Board has continued to view buybacks as a critical part of its strategy to return capital to shareholders but also believes in an opportunistic use of buybacks in conjunction with dividends. So the combination of growing the dividend and taking advantage of the dislocation made a lot of sense. I think the general consensus is, when there's either volatility in the market or in our stock, we will use buybacks, when there is not we will use dividends.

You are correct that the $10.5 million minimum return of capital under the special program coupled with a moderate growth in our recurring dividend will probably not allow us to reach the target by the end of 2016 based on the Company's internal projections as well as I believe, external projections of the Company performance.

I think over the next couple of quarters, we will continue to take the input from shareholders and the Board will continue to evaluate it's discussions that it had at the April 17 shareholder meeting. And again I want to thank you personally for coming to that meeting and helping the Board understand these issues, and hear what investors are saying. But I think you will see some further announcements later this year that'll demonstrate our commitment to getting there no later than the end of 2016, possibly even sooner.

And then to your final question about sequential growth. We have told investors that by the end of this year it will be obvious our sequential growth rate when annualized will get us to the midpoint of our guidance range. Quite honestly, we got very close to that this quarter at 3.4% sequential growth, if you annualize it that's 14.4, if you actually took the FX adjusted it's 3.5, we actually would be at the midpoint. I don't necessarily know if it's going to be an improvement every quarter. Earnings put over a dozen major initiatives in place for the sales force.

They're all delivering results. We feel very encouraged that we're going to see long-term payback on those but I can't guarantee that within one or two quarters there won't be some lumpiness. Particularly, as today, about 7% of our revenues come from usage-based services [versus an] overage. And typically there is some slower growth in traffic in summer months than winter months. So I don't want to mislead people and say it's going to be up and to the right every quarter. But I do believe the trend will be up, it will be up year-over-year and it'll be clear that by the end of the year that 15%-type growth rate will be what the company will deliver on an annualized basis.

Thank you so much.

Thanks Colby.

Our next question comes from the line of Frank Louthan with Raymond James. Your line is now open.

(technical difficulty) A little bit more color on the off-net revenue? We would've thought the revenue would've been a little bit stronger here given the adjustments to sales force compensation for off-net sales. And then on the customer concentration, it was a noticeable sequential step up there, despite the strong total ads. What are the trends you're seeing with these larger customers? Are they taking more incremental bandwidth, are they lighting up new locations or taking new services? Any other color there would be helpful. Thank you.

Sure. So let me start with the off-net question. You are correct that we have modified our comp plan and tried to incent our sales force to go back to our existing customers to sell additional locations for corporate customers and off-net. And as we said, we have less than 1% market penetration in that portion of our business.

We are seeing very good bookings but our revenues reported on an install basis. Typically and off-net sale takes 90 business days to install or about 120 calendar days. So the changes that were made at the beginning of the year did not really show up in the first quarter. And in fact, the sales force reorganization and realignment of accounts that occurred at the end of the fourth quarter, which did dampen corporate sales in general, had some impact as well. So the 3/10 of 1% sequential growth in off-net was low but it was expected because of the long install times and the realignment of the sales force. We should expect to see those numbers grow sequentially and return back to their historical norms.

With regard to customer concentration, we continue to add capacity with existing customers at existing locations. Many of our netcentric customers also take additional locations to build CDMs and further diversify their infrastructure. And again, we are the lowest priced, highest-quality provider. So we're seeing growth in all of those areas, more capacity same location or locations.

With regard to the acceleration and concentration, that has really occurred because of the growth in that particular customer's business and the fact that we provide them connectivity to a vast number of networks most efficiently. We've also commented that at least eight major networks have refused to upgrade their peer interconnectivity to us and we've got no growth from that particular customer when going to those networks and we expect that trend to continue.

So it's a combination of better service, lower prices that are incenting our big netcentric customers to give us more their business.

Great. Thank you.

Our next question comes from the line of Tim Horan from Oppenheimer.

Just two clarifications, it does sound like on the SG&A side there was $1 million of more, seasonal expenses, that should decline in the second quarter?

Secondly, Dave do you think 15% revenue growth is sustainable into 2015, maybe even 2016? And third, Dave I know you touched on this, but do you think a lower [return] is also sustainable? And last -- maybe what's was driving that? And last, what's your primary argument to regulators at this point on net neutrality? Thanks.

Sure. Tad, do you want to take the SG&A one? (multiple speakers)

That's not a ballpark number across -- of course there will also be impacted sequentially on the pace of hiring that we do. And we are anticipating adding reps throughout this quarter as well as throughout the year, so that will be impacted there. But your million dollar is within, in the ballpark of the nonrecurring change that we experience Q4 to Q1 typically each year.

And then Tim to your three other questions, absolutely we believe that we can achieve the midpoint of our guidance in terms of growth over the long periods and the 10% to 20% range that we've laid out, we expect to continue into 2015 and 2016. There is ample market opportunity and again we remain extremely encouraged by the improvements in the sales force. Both in terms of productivity and [reduction] in churn.

I think we're going to continue to see those trends play out the remainder of this year and into the next couple of years. We are very focused on making sure we build a career path for our reps, that we compensate them correctly and [LOST AUDIO] we train them to be able to sell our products and we feel very good that the reduced rate [AUDIO RETURN] of sales force turnover at 5.4% percent versus the historical average of 6.5% is actually just a starting point. We actually think we can drive that number down even further.

And then finally, to that net neutrality question, and I'm going to have to be brief on this because unfortunately I have to go testify in front of Congress in an hour on this, and I'm in DC but not quite that close to the hill and I have to get through security. [LOST AUDIO] it's all about consumer choice, innovation and making sure all traffic is treated equally and whether you manipulate traffic inside your network or at the boundary of the network, you are still violating the net neutrality principles by manipulating net traffic.

All traffic should be equal, all connections should be adequate to deliver the services that companies have sold to their customers. With that, we may have time for one other brief question and we will have to jump.

Thank you, sir. Our next question comes from the line of Michael Rollins with Citi.

Dave, thanks for squeezing my question in. I wonder if you could briefly give us an update on the competitive landscape you're seeing on the netcentric and corporate side of your business? Thanks.

Sure. Let me start with the corporate. I think the competitive landscape remains unchanged, our two primary competitors are AT&T and Verizon. That's where the bulk of our footprint is. The off-net corporate business we do see cable, Time Warner cable, Comcast as viable competitors. [AUDIO RETURN] But that's a very small part of our business.

In the netcentric side, are most common competitor globally remains at Level 3. We have regional competitors such as [Tilia and NTT], Tata, PCCW, Telecom Italian. But we again, are committed to being the lowest price, highest-quality service. Our gains in market share, our growth in revenue, is witness that gain and market share we're growing traffic at about double the rate of the market. Our year-over-year traffic growth of 69% is substantially above the 29% the market is growing. And the reason for that growth is we deliver the best value.

No other provider will match or undercut Cogent, and in fact, we are committed to being the lowest price provider and even with that strategy you saw our average new sale in the quarter go up by 3.7% from $1.31 megabit to $1.36.

Thanks.

I'd like to thank everyone. I apologize for maybe a little shorter call that we normally do but again, I really appreciate everyone's attention getting up that extra hour early and most importantly, I want to thank the entire Cogent team for doing a great job and helping us with these great results. Take care we'll talk to you soon. Thanks. Bye-bye.

Ladies and gentlemen, this conference will be available for replay after 10:30 AM today through May 14, 2014 at 11:59 PM Eastern time. You may access the remote replay system anytime by dialing 800-585-8367 and entering access code 20281267. International participants dial 404-537-3406. Those numbers again are 800-585-8367 and 404-537-3406. Access code 20281267. That does conclude our conference for today. Thank you for your participation in today's conference.