Cogent Communications Holdings Inc (CCOI) 2014 Q4 法說會逐字稿

Good morning and welcome to the Cogent Communications Holdings fourth-quarter 2014 and yearend 2014 earnings conference call. As a reminder, this conference is being recorded and it will be available for replay at www.Cogentco.com. I would now like to turn the call over to Mr. Dave Schaeffer, Chairman and Chief Executive Officer of Cogent Communications.

Hey, thank you, and good morning, everyone. Welcome to our fourth-quarter earnings conference call. I am Dave Schaeffer, Cogent's Chief Executive Officer. With me on this morning's call is Tad Weed, our Chief Financial Officer.

We are pleased with our results for the quarter and for the year and remain optimistic in the strength of our business and outlook for 2015. During the quarter we experienced accelerated constant currency sequential revenue growth, accelerated sequential traffic growth on our network, lower sales force turnover and better productivity then our historical averages.

During the quarter we returned a total of $24.7 million to our shareholders through a combination of dividends and stock buybacks. This $24.7 million returned to our shareholders includes our regular recurring dividend payment, which totaled $14.2 million or $0.31 a share and an additional $10.6 million paid under our return of capital program that we executed in the quarter through share buybacks.

We purchased 328,000 shares of our common stock for an average price of $32.14 during the quarter. For the year we purchased $1.7 million of our common stock for a total cost of $58.6 million at an average price of $33.84.

As posted on our website, 78.9% of our 2014 dividend should be treated as a return of capital and 21.1% should be treated as taxable dividends for US federal income tax purposes.

At the end of the year we had a total of $37.2 million still available under our stock buyback program, which is authorized to continue through February 2016.

We continue to remain confident in the growth of our cash flow generating capabilities in our business. As a result, as we indicated in our press release, we announced yet another increase on our regular quarterly dividend from $0.31 a share to $0.32 a share, our 10th consecutive increase on our regular quarterly dividend on a quarterly basis.

Our first quarter 2015 regular dividend will be paid on March 26, 2015 to holders of record as of March 11, 2015. Since we purchased only $10.6 million of our common stock in the fourth quarter, under our return of capital program our commitment was a minimum return of $12 billion.

So we will also make a special dividend payment in the quarter of $1.4 million or $0.03 a share along with our regular dividend of $0.32 per share. As a result our combined dividend to be paid in the first quarter will be $0.35 a share.

Under our return of capital program, in addition to our regular quarterly dividend, we are committed to returning a minimum amount to shareholders of $12 million each quarter through either buybacks or special dividends in that quarter or a combination of both. We will continue to evaluate and remain committed to a combination of both stock buybacks and special dividends each quarter under our return of capital program.

Our return of capital program is planned to continue until our net debt to EBITDA as adjusted reaches a total of 2.5 to 1. Our net debt to EBITDA adjusted ratio as of the end of the year, December 31, 2014, was 2.40, up from 2.22 at the end of Q3 2014. We intend on hitting our target of 2.5 to 1 no later than December 2016.

Please note that our return of capital program is subject to potential change if conditions warrant.

In February we refinanced our $240 million senior secured notes that were costing us 8 3/4 -- 8 3/8% and replaced those by issuing $250 million of 5 3/8 senior secured notes. We previously incurred 21 -- $20.1 million of annual interest under the old senior secured notes and that has now been reduced to $13.4 million of annual interest expense. As a result of this refinancing we will save $6.7 million in annual cash interest expense.

In early February the FCC Chairman released an outline of his proposed Title II framework in order to protect net neutrality and the open Internet. We were fully supportive of Title II net neutrality protections and we believe it strikes a reasonable balance between assuring consumers can access all lawful content while limiting the regulatory burdens on the multiple parties that comprise the Internet.

The apparent inclusion of Peering or interconnection in the Chairman's order is essential on delivering on the promise of the open Internet. Without interconnection there will be no access to the entire Internet and only access to an ISB specific network. We look forward to continuing to work with the Commission to ensure that these policies promote the intended open Internet.

The policy makes it clear that last mile ISP's [cannot] violate those principles by requiring interconnecting parties to pay terminating access fees to avoid degraded service when a consumer is requesting [awful] content from its Internet service provider.

On a constant currency basis our fourth-quarter 2014 revenue grew from the third quarter of 2014 by 2.5% and grew year over year from the comparable quarter in 2013 by 10%. These were substantial accelerations in our rate of growth as our previous third-quarter sequential improvement was 1.8% on a sequential basis and 9.3% on a year-over-year basis.

During the quarter traffic on our network grew sequentially by 12% from the third quarter of 2014 and on a year-over-year basis grew by 37% from the full quarter -- fourth quarter 2013.

The productivity of our sales force continues to remain above historic levels. Our sales rep productivity was 5.5 units per full-time equivalent rep per month, a rate that is substantially better than the historical average of 4.7 units per full-time equivalent rep.

Our EBITDA and SG&A expenses for the quarter were impacted by the $1.2 million of additional legal fees and economic analysis fees that we spent supporting net neutrality. We spent a total of $5.2 million in fees for this purpose in the full year 2014.

Since the end of third quarter we continue to expand our footprint by adding another 35 buildings to our network and during the last 12 months we added 135 buildings to our network. We have a total of 2,125 lit connected buildings to our network at year end.

Throughout this discussion we will highlight several operational statistics that continue to show our improvement in gain in market share, expanding scale, the size of our network and the operating leverage of our business. We are the lowest cost most efficient operator in the sector.

We remain focused on the most traffic rich locations which we then bring on net, selling the highest quality Internet access service to our customers at the absolute lowest prices in the market.

I will review in greater detail certain operational and highlights and trends from our business. Tad will provide some additional financial performance. And following our prepared remarks we will open the floor for questions and answers. Now I would like Tad to read the Safe Harbor language.

Thank you, Dave, and good morning to everyone. This fourth-quarter 2014 and full-year 2014 earnings report and this earnings conference call discuss Cogent's business outlook and contain forward-looking statements within the meaning of section 27A and 21E of the Securities Act. These 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 results to differ.

You should also be aware that Cogent's expectations do not reflect the potential impact of mergers, acquisitions, other business combinations or financing transactions that may be completed after today. Cogent undertakes no obligation to release publicly any revision to any forward-looking statement made today or otherwise update or supplement statements made on this call.

Also during this call, if we use any non-GAAP financial measures as defined by the SEC and Reg G, you will find these reconciled to the GAAP measurements in our earnings release and on our website at cogentco.com. Now I will turn the call back over to Dave.

Hey, thanks, Tad. Now for some highlights from our fourth-quarter results. Hopefully you have had a chance to review our earnings press release. As within previous quarters, our press release includes a number of historical metrics, these metrics will be added to our website. Hopefully you find the consistent presentation of these quarterly metrics informative and helpful in understanding our financial results and trends from our operations.

Our fourth-quarter 2014 revenue was $96.7 million. Our sequential revenue growth for the quarter was 1.1%, but on a constant currency basis our sequential revenue growth for the same period was 2.5%, a substantial acceleration from the 1.8% sequential revenue growth that we achieved from Q2 of 2014 to Q3 2014.

Our quarterly year-over-year revenue growth was 7.7%, but on a constant currency basis this revenue growth was 10%, again, an acceleration from the revenue growth in the previous quarter as measured similarly which was 9.3% on a constant currency basis when comparing Q3 2013 to Q3 2014.

Our 2014 full-year revenue was $380 million. Our revenue growth rate for the year was 9.2%, but on a constant currency basis our full-year revenue growth was 9.6%. We believe that our sales organization initiatives and the expansion in investment that we have made in our sales force are beginning to generate demonstrable results that show our accelerating growth rate.

Now for some overall trends in pricing. Our most widely sold corporate product continues to be a 100 megabit per second dedicated Internet access service and our most commonly sold net centric product continues to be a 10 gigabit transit connection. We recently began selling 100 gigabit transit connections to our net centric customers.

We continue to offer discounts related to contract term for all of our corporate and net centric customers. We also offer volume commitment discounts to our net centric customers.

During the quarter certain of our customers took advantage of these programs and entered into longer-term contracts with Cogent. These contracts represented over 2,300 customer connections and increased the revenue commitment by these customers to Cogent by $12.6 million.

Consistent with historical trends, the average price per megabit of our installed base and our new base -- new sales in the quarter decreased. The average price per megabit of our installed base declined by 6.4% sequentially from $1.93 to $1.81, a decline of 22.7% from the $2.34 in our installed base in the fourth quarter of 2013.

The average price for a new sale on a contract entered into in the quarter was $1.22. It was actually identical to the price that new contracts originated in the third quarter of 2014 were, also $1.22. And this represents a 6.7% decline from the $1.31 of a new average contract entered into in the fourth quarter of 2013.

Before Tad provides some additional details on our fourth-quarter 2014 results and full-year I would like to address our results and expectations against our announced EBITDA and revenue targets.

On a constant currency basis in the fourth quarter our revenues increased by 10% from the comparable period in 2013 and for the full year that increase was 9.6%. These growth rates are at the low end or just below our guidance range of 10% to 20%. We expect that the continued investment and recent initiatives in our sales force will allow us to grow our revenues within our guidance range and actually reach the midpoints of that range.

Our EBITDA as adjusted margin was 35.0% for full-year 2014 and 34.7% for the fourth quarter. Despite the $5.2 million that we spent in legal fees for the year our full-year EBITDA margins increased by 50 basis points from 2013. These substantial legal fees had a very material impact on our EBITDA results. We anticipate [occurring] additional legal and economic costs in 2015, but these will be less than 2014.

Adjusting for these $5.2 million in nonrecurring legal and economic analysis fees we would have incurred full-year EBITDA as adjusted margins that would have been 36.4% and would have increased by 160 basis points over the full-year 2013.

We anticipate that our full-year revenue growth for 2015 versus 2014 on a constant currency basis will be within the range of 10% to 20%. We also anticipate our gains on equipment transactions in 2015 to be less than half of the gains that we experienced in 2014.

We expect that our EBITDA margins, excluding these asset gains for 2015 over 2014, will be substantial and greater than 100 basis points, partly dependent on the level of legal and economic analysis fees that we will have to incur in 2014.

We eagerly await the FCC's vote tomorrow and the ability to look at the detailed report in order to fully understand what additional fees we will be responsible for.

Tad will now cover some additional details related to our operational results for the quarter and the year.

Thank you, Dave, and again, good morning, everyone. I'd also like to thank and congratulate our entire Cogent team for the results and their continued hard work and efforts during this very busy quarter for the Company and a very busy year as well.

We analyze our revenues based upon product class which is on-net, off-net and non-core. We also analyze our revenues based upon customer type and classify all of our customers into two types, net centric and corporate customers. Our net centric customers buy large amounts of bandwidth from us and carrier neutral data centers. Our corporate customers buy bandwidth from us in large multitenant office buildings.

Revenue from our corporate customers grew by 3.7% from the third quarter to $53.1 million. Our corporate revenue was $201.8 million for the full year of 2014, which was an increase of 12.3% from last year. Our corporate customers represented 46.7% of our total customer connections at the end of the year and represented 54.9% of our fourth-quarter revenues. Our corporate customer connections grew sequentially by 2.1% and grew by 11% for the year.

Our revenue from our net centric customers actually decreased by $850,000 or 1.9% from the third quarter of 2014 to $43.6 million. The decrease was primarily due and almost entirely due to a sequential $1.4 million negative impact of foreign exchange on our fourth-quarter revenues.

Our European revenue is almost entirely net centric revenue and, as a result, subject to the impact of variations of foreign exchange. Our net centric revenue was $178.2 million for the full year, which was an increase of 5.9% from last year.

Our net centric customers represented 53.3% of our total customer connections at the end of the fourth quarter and 45.1% of our fourth-quarter revenues. Our net centric customer connections grew sequentially by 4.9% for the quarter and grew by almost 19% for the year.

Revenue by product class, on-net, off-net and non-core. Our on-net revenue was $71.3 million for the quarter which was a sequential quarterly increase of 0.4% and an increase of 8% from the fourth quarter last year. Our on-net revenue was $281.9 million for the full year which was an increase of 10.6% from 2013 and about 85% of our new sales for the fourth quarter were for on-net services.

Our on-net customer connections increased by 3.2% sequentially and increased by 14.8% from the fourth quarter of last year. We ended the year with 39,800 on-net customer connections on our network in our 2,125 on-net buildings.

Our off-net revenue was $25.1 million for the fourth quarter, which was a sequential increase of 3.3% and an increase of 7.3% from the fourth quarter of last year. Our off-net revenue was $96.8 million for the full year, which was an increase of 6.3% from last year.

Our off-net customer connections increased sequentially by 6.7% and by 19.4% for the year and we ended the year serving over 8,000 off-net customer connections and over 4,300 off-net buildings.

Lastly, our non-core revenue was about $300,000 for the fourth quarter and $1.3 million for the year and represents less than 0.3% of our revenue and about 360 customer connections.

Related to pricing and average revenue per unit or ARPU. Our on-net and off-net ARPUs declined from the third quarter. Our on-net ARPU, which includes both corporate and net centric customers, was $607 for the fourth quarter, which was a decrease of 2.7% from 624 for the third quarter of 2014. And that was a decline of 6.3% from $648 in the fourth quarter of last year.

Our off-net ARPU, which is comprised of predominantly corporate customers, was $1,424 for the fourth quarter, which was a decline of 1.8% from $1,451 from the third quarter and 9.1% from $1,567 for the fourth quarter of last year.

Churn rates. Our churn rate for our on-net customers was flat during the quarter and our off-net churn rate actually improved during the quarter. Our on-net churn rate was the same for this quarter, same as last quarter at 1%, and our off-net churn rate was 1.4% this quarter, which was an improvement from the 1.6% in the third quarter of this year.

Gross margin and EBITDA. Our gross profit margin increased by 30 basis points from the fourth quarter of 2013 and decreased by 20 basis points from the third quarter of 2014. Our gross profit margin was 57.4% for the fourth quarter of 2013, 57.9% for the third quarter of 2014, and 57.7% for the fourth quarter of 2014. Our gross profit margin increased by 110 basis points for the full year and was 57% for last year and increased to 58.1% for 2014.

Our EBITDA as adjusted margin for the quarter decreased by 60 basis points from the third quarter and decreased from the fourth quarter of 2013 by 40 basis points. Our EBITDA adjusted margin for the year increased by 50 basis points from last year.

EBITDA as adjusted in dollars was $33.6 million for the quarter, which was a decrease of 0.4% from the third quarter and an increase of 6.5% from the fourth quarter of last year. EBITDA as adjusted was $133 million for the year, which was an increase of 10.6% from last year.

As Dave mentioned, we spent $1.2 million on legal and economic analysis fees supporting net neutrality during the quarter and we spent $5.2 million for this purpose in 2014 for the full year. Consequently these professional fees have materially impacted our EBITDA results and our EBITDA margins.

Adjusting for these legal fees our EBITDA as adjusted margin would have been 36% this quarter and with increased by 90 basis points over the fourth quarter of last year. And if you adjust for the $5.2 million in net neutrality and legal fees we incurred in 2014 our EBITDA adjusted margin would have been 36.4% for the year and that would've been an increase of 190 basis points over last year.

Our on-net revenues continue to carry a nearly 100% incremental direct gross profit margin and our off-net revenues continue to carry an approximate 50% incremental direct gross profit margin.

Variability in our EBITDA and gross margin expansion rates can and does occur. If you examine our quarterly metrics for the last 39 quarters since we became a public Company you will notice an unevenness in our quarterly margin expansion. And this can occur due to recurring seasonal and other factors which can vary from quarter to quarter.

These other factors include the timing and scope of our network expansion activities, our sales organization expansion programs, equipment transactions and more recently the significant legal and economic analysis fees we have incurred associated with supporting net neutrality.

Seasonal factors that typically impact our SG&A expense include the resetting of payroll taxes in the US in the first quarter, the cost of our annual sales meeting, annual cost of living increases including increased medical insurance costs and the timing and level of our audit and tax and other professional services. These seasonal factors typically increase our SG&A expense in our first quarter and we anticipate that occurring again this year.

Despite quarter-to-quarter variability our long-term margin trend has demonstrated that our business model does generate increasing EBITDA margins.

Details on interest expense. Interest expense for the quarter resulted from interest on our $200 million of senior unsecured notes, interest on our $240 million of senior secured notes and interest on our capital lease obligations. Our interest expense was $12.7 million for the third quarter and $12.2 million for the fourth quarter.

The detail of our interest for the fourth quarter of $12.2 million was as follows: $2.9 million related to our $200 million of senior unsecured notes; $4.9 million was related to $240 million of senior secured notes that we have since refinanced; and $4.3 million was related to our capital lease obligations.

Interest expense for the year was almost $50 million, $49.9 million, and was $41.8 million last year. The detail of the $49.9 million of interest expense for this year is as follows: $8.6 million related to our $200 million of senior unsecured notes; $19.7 million related to our $240 million of senior secured notes that we, again, have refinanced in 2015; $3.5 million related to our convertible notes that we repaid in June of 2014; and $18.1 million was related to our capital lease obligations.

Again, in February 2015 we refinanced our $240 million of senior secured notes by redeeming them at 104.188% of par using the proceeds from the issuance of our $250 million of senior secured notes and cash on hand. This refinancing will save us $6.7 million in annual cash interest expense.

Earnings per share. Our basic and diluted income loss per share was a loss of a penny for the fourth quarter compared to zero for the third quarter. Our basic and diluted income per share for the year was $0.02 compared to income per share for full-year last year of $1.22 and diluted of $1.21. And for the fourth quarter of last year it was $1.14 and $1.10.

There were some unusual tax adjustments last year, so during the fourth quarter of last year we met the US GAAP requirements by demonstrating a consistent history of cumulative earnings and recognized certain deferred federal income tax assets that were over $49 million. This income tax benefit added $1.06 to our basic EPS last year and $1.01 to our diluted EPS last year.

If you exclude that impact from last year the diluted income per share would have been $0.07 for the fourth quarter of last year. And our basic income per share was $1.22 last year and diluted was $1.21 for the year. If you exclude the one-time tax benefit those numbers would have been $0.16 EPS for the full year of 2013.

Dave mentioned tax treatment of dividends. We paid four quarterly dividends in 2014 totaling $54.2 million or $1.17 per share. The expected tax treatment of these dividends is generally that 78.9% should be treated as return of capital and 21.1% should be treated as dividends for the United States federal income tax purposes.

Please note, however, that while the above information includes general statements about the tax classification of dividends paid on Cogent common stock, these statements do not, of course, constitute tax advice. The taxation of corporate distributions can and is complex and stockholders are encouraged to consult their tax advisors to determine what impact the above information may have on their specific situation.

Foreign currency has a material impact on our operations and has reduced the proportion of our business reported in US dollars outside of the United States to about 25%. About 20% of our revenues are based in Europe and about 5% of our revenues currently are based related to our Canadian, Mexican and Japanese operations.

Continued volatility in foreign-exchange rates materially impacts our quarterly and annual revenue and financial results. The foreign-exchange impact on our revenue from the third quarter to the fourth quarter resulted in a material decrease to our revenue of about $1.4 million and the foreign-exchange impact on our revenue from full-year 2013 to 2014 resulted in a material decrease to our revenue of about $1.4 million as well.

From the fourth quarter of 2013 to the fourth quarter of 2014 the foreign-exchange impact on our revenue again was material and was a negative $2.1 million. And our revenue increased from the third quarter by 1.1%, but again on a constant currency basis that was 2.5%. And the increase on a GAAP basis from 2013 to the fourth quarter of 2014 was 7.7%, but the constant currency rate was 10%.

Finally, our annual revenue increased from 2013 to 2014 by 9.2%, but on a constant currency basis that was 9.6%.

So looking forward, the average euro to US dollar rate for the fourth quarter was $1.25 and the average rate so far this quarter, the first quarter of 2015, is about $1.15 with current rates below $1.14.

Should the average foreign exchange rates remain at these levels -- at the average levels for the first quarter of 2015, we estimate that the FX conversion impact on a sequential quarterly revenue basis from Q4 2014 to Q1 2015 will be a decrease of at least $1.9 million.

The average euro to US dollar rate for the first quarter of last year was actually $1.37, so materially above where it is now. Should the average exchange rates remain at current levels for this first quarter of 2015 we estimate that the foreign-exchange conversion impact on year-over-year quarterly revenues from Q1 2014 to Q1 2015 will be a decrease to revenues of at least $3.9 million.

Customer concentration. We believe that our revenue and customer base of about 46,200 customer connections is not highly concentrated. For the fourth quarter of 2014 no customer represented more than 1.8% of our revenues and our top 25 customers represented less than 8% of our fourth-quarter revenues. For the year no customer represented more than 2.2% of our annual revenues and the top 25 customers were less than 7.9%.

Capital expenditures. On a quarterly basis we can and have historically experienced seasonal variations in CapEx, prepaid capital lease payments and construction activities. These 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 decreased 15.5% on a sequential basis but increased on a year-over-year basis. Our CapEx for the quarter was $13 million versus $15.4 million for the third quarter and $10.1 million for the fourth quarter of last year. Our CapEx for the year was $60 million versus $49 million in 2013.

During 2014 we increased our Cogent operated data centers materially from 43 data centers to 49 data centers. We invested in and incurred CapEx for these data centers mostly with landlord provided tenant improvement allowances; however, that still reported as capital expenditures.

Our capital responsible payments are for long-term dark fiber IRU agreements. These payments decreased 62% to $2.8 million for the fourth quarter from $7.3 million for the third quarter and $2.2 million for the fourth quarter of last year. Our capital lease principle payments were $18.2 million for the year versus $11.2 million for last year.

We added another 35 buildings to our network in the quarter and we added 135 on-net buildings in 2014. We continue to expand our network in 2015 but expect it at a slightly more moderate pace than we experienced in 2014 with continued moderation in 2016.

Some balance sheet items. At the end of the year our cash and cash equivalents was $287.8 million and for the quarter our cash decreased by $24 million as we returned $30.6 million of capital to our stakeholders.

During the quarter we paid $14.2 million for our fourth-quarter dividend payment, $10.6 million was spent on stock buybacks and we spent $5.8 million for our initial semiannual interest payment on our $200 million of 5.625% senior unsecured notes. If you exclude this cash or add it back that was returned to stakeholders through our dividend stock buyback and interest payment, we were cash flow positive by $6.6 million for the fourth quarter.

For the year our cash decreased by $17.1 million. We returned $139.1 million of capital to our stakeholders in 2014. For the full year we paid $54.2 million for dividends, $58.6 million was spent on stock buybacks and we spent $26.3 million for interest on our debt obligations. Excluding this cash returned to our stakeholders, or adding that back, and the transactions associated with principal on debt, we were cash flow positive by $18.2 million for the full year.

Cash flow from operations was $17.9 million for the quarter compared to $16.1 million for the third quarter and $29.3 million for the fourth quarter of 2013.

As I mentioned, we paid our initial $5.8 million semiannual interest payment on our $200 million of senior unsecured notes this quarter. And after our debt redemption and our new debt issuance our operating cash flow will [be continue to] impacted by now $24.7 million of annual interest that we will pay on our combined $450 million of notes.

We will now pay $13.4 million of annual interest on our new $250 million senior secured notes and $11.3 million of annual interest on our $200 million of senior unsecured notes.

Our semiannual interest payments on our $200 million of senior unsecured notes occur in April and October through April 2021 and our semiannual interest payments on our new $250 million senior secured notes occur in March and September, the first payment will be in September of this year, 2015, and the payments are made through maturity which is March of 2022.

Cash flow operations for the year was $73 million compared to $81.9 million last year, the difference largely due to $10.7 million more of interest paid in this year versus last year on our notes.

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 often include multiple renewal options after that period. Our long-term and short-term capital lease IRU obligations were $166.5 million at year end.

Our total debt, including our capital lease obligations, was $610.8 million at year end and our net debt was $323 million. Our total gross debt to trailing last 12 months EBITDA as adjusted ratio was 4.56 at year end and our net debt ratio, as Dave mentioned, was 2.40.

Our bad debt expense for the quarter was consistent at 1% of our revenues -- was 0.8% in the third quarter and 1.2% in the fourth quarter of last year. Bad debt was 1% of our revenues from that year which was the same percentage as last year.

Lastly, our days sales outstanding, or DSO, for worldwide accounts receivable was only 28 days at the end of the year compared to 26 at the end of the third quarter and the same 28 days at the end of last year.

I want to again thank and recognize our worldwide billing and collections team members who are continuing to do just a great job on customer collections and customer service and monitoring credit. And also to our entire worldwide finance team for successfully managing the many financing transactions we had this year including our corporate reorganization and also the growth of our business. Now I would like to turn the call back over to Dave.

Hey, thanks, Ted. Now for a few words on the sales force, sales force rep productivity and activity. We began the fourth quarter with 344 sales reps and ended the quarter with 346 sales reps. We hired 45 sales reps in the quarter and 43 sales reps left the Company during the quarter.

Our monthly rep turnover was 4% in the fourth quarter, again much better than our long-term average of 6.3% which has been coming down. We began the fourth quarter with 329 full-time equivalent reps and ended the quarter with the same number.

We believe we are seeing the benefits of the increased number of sales reps and the increased tenure and quality in our sales force. We anticipate additional sales resources will help us see further productivity and revenue growth improvement.

Productivity on a full-time rep basis for the fourth quarter was 5.5 units per full-time equivalent rep per month, these are installed orders. This rate of organic rep productivity was significantly better than our long-term historical sales rep productivity number of 4.7 units per full-time equivalent rep per month.

As a reminder, our reps are based on not on contract signing but only upon completed installs once the customer begins to actually receive service and we begin billing them.

Now for a few words on Cogent's scale. The size and scope of our network continues to grow. We added 35 buildings to our network in the fourth quarter of 2014 and we added 135 buildings for the full year 2014. We have 2,125 buildings connected to our network.

We have approximately 800 million square feet of multitenant office buildings connected to our network in North America. Our network consists of over 27,200 miles of metropolitan fiber and approximately 60,000 intra-city route miles of fiber.

The Cogent network is one of the most interconnected in the world connecting to over 5,200 networks directly, approximately 40 of these are settlement free peers, the remaining 5,150 plus networks are Cogent transit customers.

We are currently utilizing 34% of the [lit] capacity in our network. We routinely augment capacity on parts of our network to maintain these low utilization rates.

We currently serve less than 24% of our potential on-net corporate customers, less than 1% of our potential off-net customers, and less than 14% of the potential net centric customers in our addressable market. Our customer base is well diversified with low revenue concentration. No customer represents more than 1% -- 1.8% of our revenues in the fourth quarter and our top 25 customers represent less than 8% of our aggregate revenues in the fourth quarter.

We operate 49 Cogent owned and controlled data centers with over 550,000 square feet of space. We believe our network has ample capacity to accommodate our future growth.

In summary, we believe Cogent as the low cost provider of Internet access and transit service is unparalleled in our value proposition to the industry. Our pricing strategy has continued to attract many new customers resulting in above average sales force productivity, increased volumes, increased revenue commitments from both new and existing customers.

Our business remains completely focused on the Internet and IP connectivity and data center co-location services. And we provide a necessary utility to our customers. We expect our annualized constant currency revenue growth and EBITDA margin to be consistent with our historical rates of 10% to 20% revenue growth and substantial annual EBITDA margin expansion.

For 38 of the past 39 quarters as a public Company we have produced organic sequential revenue growth and continue to be encouraged by the increasing amount of free cash flow that our business generates. We have actually produced 39 consecutive quarters of organic sequential corporate growth of averaging 3.4% sequentially quarter over quarter. We did better than that this most recent quarter.

We continue to be encouraged by the results of our sales force investments and our increased number of reps as well as their productivity and the pipeline that those reps are building.

Certain of our last mile provider peers continue to be reluctant to upgrade peering connections with us. Unlike these organizations, we believe and completely support net neutrality and a totally open Internet. We mean the true literal definition of net neutrality.

We are fully supportive of Title II net neutrality and Title II broadband classification and we believe that the inclusion of interconnection and Peering in the Chairman's proposal strikes a reasonable balance between ensuring consumers can access all legal content while limiting the regulatory burden on the multiple entities that comprise the Internet.

We have incurred material legal and economic costs and have spent a total of $5.2 million in 2014 supporting these net neutrality filings. We have prepared responses to the FCC, the Department of Justice and the Director General for Competition in Europe.

We believe we will incur additional fees in 2015, but these fees will be lower than 2014. We eagerly await the FCC's vote tomorrow and our ability to review the final report and order as it is published in the federal register.

We like and are confident with our network reach, our product set, the addressable market and the operating leverage that we have. We like the business that we are in. We feel that we have an ample underserved market in our on-net footprint enabling us to grow revenues at historic rates.

We are committed to providing top-line revenue growth of 10% to 20%, expanding EBITDA margins and, most importantly, increasing free cash flow for our equity shareholders.

We are opportunistic about the timing and purchase of common stock. At year end we had purchased a total -- we have available to us $37.2 million remaining under our current authorization buyback program which runs through February of 2016.

Our Board of Directors has approved yet another increase to our regular quarterly dividend of $0.32 a share. Combined with our $0.03 special share dividend program under our capital return program, our first-quarter 2015 dividend will be $0.35 a share paid to our shareholders on March 26.

Our dividend increase and our return of capital program demonstrates our continued optimism around the increasing cash flow generating capabilities of our business. We are committed to returning increasing amounts of capital to shareholders on a regular basis and migrating towards our net debt to EBITDA goal of 2.5 to 1 no later than the end of 2016.

With that I would like to know open the floor for questions.

(Operator Instructions). Michael Bowen, Pacific Crest.

So I guess I wanted to just touch base with you a little bit about the midpoint of your revenue guidance range. I want to make sure I understood that the 10% to 20%, and also the EBITDA gains where you said you would be 100 basis points higher. I wanted to make sure the 10% to 20% you said was on constant currency.

And then with EBITDA margins, excluding the asset gains, when you say 100 basis points higher is that also -- on the denominator is that net of the asset gains as well?

And then one other question with regard to net neutrality tomorrow, I think it is almost a foregone conclusion we know where the vote is going to go. But how do you think this is going to impact perhaps that single-digit revenue stream that we all know about?

How quickly do you think that some of the arrangements that have been struck by other companies may be abandoned? And could we see some acceleration, do you think, in the near-term? Or do you think the court battle that's ensuing will delay that indefinitely? Thanks.

Hey, Michael, thanks for the list of questions. So first of all on the revenue growth, we have clearly demonstrated now substantial improvement in our sequential revenue growth on a constant currency basis and those trends should continue going forward. In fact, a 3.7% sequential corporate growth rate puts us actually above the midpoint of our guidance range for the corporate business.

Clearly the net centric business has been growing at a slower rate of about 6% last year. And part of that drag has been FX, part of it has been the net neutrality debates that we have been dealing with.

I'm going to jump to your last question; I'm going to let Tad take the EBITDA part of your question. But with regard to net neutrality: one, we are very pleased that the principles of non-blocking, non-throttling and no pay prioritization are outlined in the Chairman's statements. Two, we are equally encouraged that interconnection or Peering is going to be included.

We have not seen the final report and order. I think it is actually still being negotiated between the commissioners as we speak. And then it has to be published in the public register.

I am confident that the FCC will survive any of the legal challenges that many of the terminating ISPs will launch to try to circumvent net neutrality. We will probably not be party to those litigations, but we have not seen the interconnection language yet and do not know whether or not the case-by-case valuation that the Commissioner -- the Chairman laid out will require us to spend additional legal or economic fees with administrative law judges. And I think that is part of the reason why we cannot today give perfect visibility to our legal and economic expenses for next year.

Now with regard to timing, the order becomes effective after it is in the public register for 30 days. I do not believe that the ISPs who will litigate will be successful in getting a TRO or a stay, so therefore it will be the law of the land while they are litigating. We hope that they honor the law and the FCC does not have to come in and sanction them or fine them for violating it. But again we have no visibility.

We hope everyone complies with the law as passed and the connections would immediately be allowed to be increased and traffic would flow and therefore that headwind to our business will turn into a tailwind. Now let me let Tad take the EBITDA question.

Sure, all give you a little bit more color I guess on revenue guidance and constant currency. So the average euro rate last year was actually $1.33, so we are guiding using constant currency because that's a very material impact on year-over-year revenues. Just kind of using the average rate it's kind of -- and at least $15 million impact year over year on the revenue results.

Now with respect to EBITDA, as we mentioned in the prepared remarks, the asset gain program is winding down. We expect those gains to be less than half this year as what they were last year. So we are providing EBITDA guidance including professional fees, legal fees, but excluding the asset gains. We are saying greater than 100 basis points just because of the uncertainty associated with the timing and the level of those fees. But the number we are discussing excluded the asset gains.

And, Dave, one follow-up on the revenue guidance. Can you talk a little bit about, if you can -- you mentioned in the past reaching midpoint of that guidance by a certain time period. I think we -- I think you may have fell a little short of that here. I think you had said you were going to exit 2014 on that. How should we think about the revenue ramp -- the revenue growth ramp for 2015 in this still rather wide range? Thanks.

Yes, sure, Michael. So what we have said is that looking to Q4 of 2014 versus Q1 of 2015 -- and again at this is on a constant currency basis because I cannot predict the volatility in the currency markets. We would deliver total revenue growth in the 3% to 3.5% range, which on a sequential basis when annualized would put us squarely in our range.

Now for the corporate business we have actually already exceeded those goals and at 3.7% sequential growth that annualizes to over 16%. The net centric business has been impacted by FX but also by net neutrality and volatility. We think it will improve too from that 6% growth rate.

And what we are expecting is that the entire business on a constant currency basis will deliver growth rates that will be squarely in our range and with I think the resolution of net neutrality will be at the midpoint of that range. And if you take our sequential rate in Q1 versus Q4 and annualize it.

Got it, thanks, guys.

Barry McCarver, Stephens.

Dave, let me ask that less question about I guess net neutrality a little differently. Can you talk about the behavior of some of the bigger networks over the course of the last few months leading up to this vote tomorrow? How have they been acting in the marketplace in regards to opening up ports and throttling? And then at the same time what about some of your bigger content providers, what are they thinking going into this?

Okay, so, with regard to port behavior, it varies by provider. We have eight ISPs globally who have been in transient. Deutsche Telekom and Telefonica in Europe have made no movement, there have been no additional ports. There has been a very slight increase from France Telecom, but that is only due to an ongoing investigation in France and it has been too little and the ports remain completely congested.

Here in North America actually Comcast has begun upgrading ports and have done so at an even accelerating rate, even though the ports remain congested and the rate of expansion is inadequate. We believe this is trying to garner sympathy from the regulators in reviewing their merger.

Time Warner Telecom has made no increases, AT&T no increases, Verizon no increases whatsoever in port capacity. And then finally with regard to CenturyLink, we have seen modest increases, but again an adequate to handle the amount of traffic trying to go to them.

Now with regard to our content customers, we are always trying to strive to deliver the very best quality of service possible to all of our customers. Our content customers understand this constraint is not of our making but of the ISPs. They have unfortunately been pressured into buying direct connectivity in some cases. They do buy from our competitors but understand our competitors also have the same constraint.

So they are sympathetic. They have a work around, it is more expensive, it is more cumbersome and it is clearly a violation of what the President, with the Chairman and what Congress have intended in net neutrality. So I believe that the change in the regulatory oversight moving it clearly under the FCC with Title II is going to make this problem, hopefully, go away and I think virtually all of our content customers are supportive of our position.

Okay, that is very helpful. Just two quick follow-ups. First off, you mentioned in your prepared remarks adding to sales. I think you actually said sales assets. I'm curious as to what you meant by that and what the level of sales headcount might be this year if that is a change.

And then lastly, in terms of capacity utilization, we've seen that move up quite a bit for your network over the last couple of quarters. And I think two years ago we were kind of hanging out in the 20s, now we are deep into the 30s. Is there any need for additional CapEx in the coming years to upgrade some capacity there? Thanks a lot.

Okay, let me try to take both of those. So with regard to the sales organization, over the past six quarters we increased our sales force by 40%. Roughly 75% of the additional headcount added to Cogent over the past year came in the sales organization, either direct quota bearers or sales managers or sales support.

Those trends are going to continue but at a more moderate rate. They actually began to moderate last year. In fact sales force only grew year over year about 13%. We expect it to grow this year probably in the order of around 8% to 10% in terms of total headcount. And we intend to continue to invest in better training, better management and better motivational tools for the sales force.

So we believe our revenue growth is a direct result of both more people and making those people more productive. And the results on the corporate side have been very obvious and have shown up. On the net centric side they are more muted and the issues are the ones that I have talked about.

Now with regard to capacity utilization. Our network is divided into about 1,900 discrete segments. Each time a segment reaches 40% utilization we launch an upgrade program. The technology that we use continues to fall in cost.

We actually believe our capital will be down in 2015 as we are not going to be adding nearly the square footage to our data center footprint which was the majority of the spike up in capital last year. And we will continue to augment the network as necessary.

The 34% utilization that we reported is still far, far below industry average where some of our competitors have commented publicly they run in the 80% to 90% range. So we feel that there will be no need for a step-up in capital.

Thanks a lot, Dave.

Eric Pan, JPMorgan.

One on guidance and then one on net neutrality -- actually and another on sales force productivity. On the guidance, you're guiding to margin improvement of 100 basis points excluding asset-related gains, which is lower than your traditional 200 basis point guide. Is that just a function of additional legal fees you expect this year or are you anticipating higher costs somewhere else?

And then on net neutrality, what are your thoughts on Commissioner Clyburn's request yesterday to delay the vote and her opposition to the creation of the new legal category of broadband subscriber access services, which is meant to not monitor the back end. Do you view her opposition as a negative for you or do you expect the vote to be delayed? And I have a follow-up on the sales force productivity.

Yes, sure. So first of all with regard to margin, Eric, we said at least 100, so I think it is going to be better. And the reason for that is we just have no visibility to exactly what we are going to have to spend on these administrative law judge proceedings at the FCC if there is case-by-case adjudication. And having kind of lived through the pain of spending $5.2 million last year, we decided to be a little bit more cautious.

Remember, with a $400 million revenue number, a $4 million expense is 100 basis points. So I don't think we're going to spend that much, but I just don't know. So I want to be extra careful.

With regard to the net neutrality vote, I believe there has been a lot of work at the Commission. I believe that the Commission is very serious about voting on it tomorrow. I met probably about a week ago with Commissioner Clyburn. I think her additional revisions will be helpful. I think anything that clarifies the interconnection part of it will be helpful to us.

But the fact that there are these three overarching principles of non-throttling, non-blocking and no pay prioritization and they will be applied to interconnection as well as to the broadband terminating part of the network, I think those are all positives.

Again, we have not seen the final report and order. And it is a little bit like making sausage -- it is kind of ugly while it is happening, that is what law making is. And it is hard for me to comment on kind of intermediate proposals.

Got it, okay, that's helpful. And then lastly on the sales force productivity. Sales force churn of 4% is great to see, but productivity seems to have slowed down to 5.5 units in the quarter. What attributed to that and when can we start to see improvement on that metric? Is it something that is in the first half or more towards the second half of this year?

So first of all 5.5 is substantially above the long-term 4.7. Two, I think it will continue to improve. In the fourth quarter we do have the Christmas holidays at the end of December which makes installations a bit challenging. And that two weeks when the customer is not necessarily around to accept service can skew the numbers by a few tenths of a percent and make the difference.

So, I think you will see continued steady improvement. There will be some lumpiness, but I think as you look at the trend line, take trailing three or four quarters and you will see a constant improvement.

Got it. Thank you very much.

Scott Goldman, Jefferies.

I want to follow up on productivity and then have another question as well. On the productivity side, just wondering if there is anything unique about this fourth quarter. You talked about some seasonality, but if you look back to last year, I think maybe in the prior year we didn't necessarily see that sort of change. So I'm wondering if there is anything unique here.

And on the topic of productivity as well, wondering if you can maybe segment productivity in terms of what levels of productivity you see for sales staff that have been there for a certain period of time, say a year, sort of a same-store sales metric to give us a better idea to where that metric can go over time.

And then lastly, just on the leverage front. Given where your guide is, where your leverage is today it looks like you probably could get to that 2.5 times leverage well before yearend 2016. So just wondering given the current credit environment how you were thinking about that leverage target and shareholder returns going forward.

Sure. So with regard to productivity, like I said, there will be a consistent improvement and we are substantially above the trend line. Nothing goes up in a perfect straight line and the dip to 5.5, which is still above the 4.7, is still a great quarter for the sales force and I think they will do better going forward and will be able to see consistent improvement.

Now with regard to kind of the cohorts within the sales force, we typically see rep productivity increase based on tenure in almost a straight line manner from month zero through month 30. And our average sales force tenure has actually come down slightly as a result of the rapid hiring over the past six quarters. As that pace of hiring I think slows we will start to see an increase in rep tenure which will also help push the productivity numbers up.

The final point to your leverage question is, it is something that is discussed at every Board meeting. As we have told shareholders we would address leverage once we reach 2.5 times. There is no commitment we will increase it. But we clearly have now done a good job in bolstering our balance sheet and improving our liquidity position and, most importantly, saving $6.7 million a year in interest expense.

So the result will be we are going to be committed to returning capital to shareholders and we are going to do that, again, in a measured pace with a combination of dividends and buybacks. The leverage will be addressed once we get to 2.5.

Great, thanks a lot, Dave.

Colby Synesael, Cowen & Company.

Great, it is actually Greg sitting in for Colby. Good morning and thanks for taking my questions. Just two if I may. Dave, it seems like you were purchasing stock around $32-$33 levels and in this quarter and you sort of pivoted to the special dividend.

I would imagine it is because the stock strengthened. I think you've said in the past around $35 is where you feel comfortable purchasing. So is it safe to say in the second quarter and beyond we will see more of a special dividend as a capital return?

And then the second question is just on your pricing stabilization and your new sales, it seemed to stabilize at $1.22. And I'm just wondering, is it safe to say we have reached that moderation or stabilization point or is this sort of a pause in a continuing downward trend? Thanks.

I will take those in reverse order. In terms of the rate of price decline on the net centric side, it has averaged about 22% to 23% a year. That is going to continue, you saw it in the base.

I think for new sales when you see pauses or stability it is just kind of the nature of the actual sales that occurred in the quarter and the lumpiness of the orders and the port sizes. But overall that trend and price per megabit is going to continue to decline I think perpetually at a constant rate due to the improvements in technology and the increase in unit volume.

Again, if you look at Cogent, we have grown our net centric business on average about 12% year over year while the price per megabit has fallen at 23%. And that's as a result of us growing traffic about double the rate of the underlying Internet. I think those things are all continuing those trends and will be the case going forward.

Now with regard to buybacks, we are opportunistic. Clearly when the vote on net neutrality appeared to be going in our direction with Title II our stock performed better, that is a sentiment call. We were aggressive in buying when the stock went up, we weren't chasing it up, but we will continue to use both buybacks and dividends.

We feel that the current stock price still represents a deep discount to the true TCF value of the Company. So I don't think you can read into a $0.03 special dividend and the return of $1.4 million through that special dividend is a change in strategy.

Great, thanks.

Nick Del Deo, MoffettNathanson.

I have two for you. So first, your top-line growth rate has faced a couple headwinds, you haven't really talked about much historically. One, you have got price concessions as people take longer-term contracts -- or as more of your customers take longer-term contracts. And second, the declining ARPU from -- in the off-net business stemming from your lower circuit costs.

I was hoping you could talk about those trends a bit. The magnitude of the growth impact, where off-net ARPU should stabilize and I guess how you think about the trade-off between price and contract term with respect to customer lifetime value?

Sure. So three questions there. Let's start with off-net price trends. We experienced a significant uplift in off-net ARPU as we migrated customers from TDM services, primarily bonded T1's, to Ethernet services. Today over 85% of our off-net base is using Ethernet services and we expect that TDM base to virtually disappear over the next couple of years. So we are not going to get that type of uplift.

When we sell off-net we search competitive providers as well as incumbents for the best loop prices possible. Now the majority of our loops come from the incumbent, but with cable competition in our off-net footprint we've actually had the ability to buy loops from some of those cable companies and that has driven down the loop costs which have then allowed us to pass those on to the customers and lower ARPU.

Partially offsetting that is the same trend that we see on the on-net side, which is customers are using more bandwidth. So people that previously bought 10 or 20 megabit off-net circuits may buy 50 or 100 meg, so we are getting some uplift from circuit size increases.

The net result has been a fairly modest rate of price decline in that off-net ARPU on a blinded basis. It is probably going to continue for the next year or two. Beyond that it is really hard for us to predict what these three different forces will do in terms of driving pricing. But I think the rates of decline will be fairly moderate.

And most importantly for us, we've seen a reacceleration in our off-net business. As we realigned the sales force we actually saw that off-net business, which is almost entirely corporate, drop to kind of a 1.5% or even below, slightly below 1.5% sequential growth rate. Now it is back up to 3.3%. That's still not as good as 3.7% in the on-net corporate business. But I think the two should converge and converge to a higher number.

Now with regard to contract length, we have always used discounts for contracts as a tool to close sales. Actually the salespeople get paid less on longer-term contracts. As Tad commented, we saw a slight improvement in our off-net churn, our on-net churn remains some of the lowest in the industry and very stable.

I think we are going to continue that strategy of term discounts, but we have actually seen a moderation in corporate on-net pricing where we actually saw a slight uptick this quarter as corporate on-net pricing ARPU's went up slightly, net centric's went down. And again, that is just a mix of specific customer bases and what they are buying.

But I think that rate of contract term extension is also moderating. So you are right, they're headwinds, but I don't think they are significant, they are dwarfed compared to the headwinds of FX and the headwinds we've seen on the block ports on the net centric side.

Okay. And then real quick, I may have missed it. Did you disclose the number of customers for corporate billing this quarter?

We did not give that number but we are happy to since we report it in our MD&A, I think it is 12.

12, okay.

It is up slightly.

All right, thanks, Dave.

Walter Piecyk, BTIG.

Hey, Dave, I wanted to go back to some of your comments kind of describing the process with the FCC. You had mentioned that when this order comes out you are hoping that everyone is going to -- I don't know, I guess make changes and not face sanctions at the FCC.

So if you look at your existing interconnection situation between the ISPs that you think are not investing enough money, is your expectation that there is something in the document that will specifically require them to do something that would lead to sanctions or is it more likely that you would have to file a complaint?

And can you just talk about what exactly are you going to put in the complaint if that is the process as opposed to what you described as far as some type of sanction for something which I thought was already a complaint process?

Sure. So first of all, remember we have and have not withdrawn our standing offer to invest the capital for the counterparty. So we will buy our port, we will buy their port and we will buy the physical interconnection, that offer still stands.

We are not asking them to spend any capital, we are just asking them to abide by the non-blocking and non-throttling provisions that are outlined in the report and order, in the preamble and are intertwined in the order.

Now I have not read the exact order. Now two things will happen. First of all, there will be this kind of global attempt to try to basically put the order aside, stay or a TRO. We probably won't be party to that, that is really going to be a fight between the terminating ISPs and the government. Once that fight has been settled, then it is a question of what is the enforcement mechanism to require the no blocking and no throttling terms.

Now in the ideal report and order we would see explicit terms. What the Chairman outlined in his very abbreviated wired article was basically this case-by-case adjudication. So what would happen is we would file a -- hopefully people say, look, we understand what no blocking and no throttling means, we go ahead and upgrade the ports and therefore there is no complaints.

If they refuse to we would file a complaint with an administrative law judge and show that we are willing to pay both sides and have them explain why that is not throttling or blocking. And as with any violation of FCC rules, the FCC has a wide splay of different tools it can use, sanctions, fines or revocation of licenses are all things that are within their purview.

Right. But the point is that I think your earlier comment was a suggestion that you wouldn't do anything and all of a sudden that the FCC would just start to sanction them if they didn't change anything as far as the interconnection rate.

But the reality is that in order for anything to change, assuming that they don't actually invest in those ports, is that you actually have to file a complaint and go through an ALJ process which we have been told in the case of mergers is a very lengthy process. Do I have that correct?

For mergers it is. Actually the FCC for enforcement mechanisms have a five month guideline or clock. And it is not clear that we actually have to launch those complaints. If the rules basically say that there is a requirement to upgrade, then there would be actually the FCC that launches the complaint.

I guess we would show them the evidence, but they already have the evidence. That is part of why we are in the situation we're in. So it is really difficult for me today to forecast exactly what the mechanism is that enforces the rules because I haven't seen the rules yet.

Okay. So then if you look at these legal expenses, the $5.2 million, which is about 130 basis points of margin, and you're only talking about a 100 basis point improvement, presumably those legal expenses go down pretty substantially. So you are basically looking at no margin improvement in your existing business.

I guess the question is, is your kind of lack of kind of more specific guidance in the legal expenses because you don't know about what these complaints are going to cost you? Or is it -- or are you also planning on now contesting the Comcast/Time Warner merger and are factoring that into potential future legal expenses?

With regard to the merger, we are on record as contesting it. I believe we have spent virtually all we are going to spend on that and have had multiple meetings at FCC and DOJ on that issue. The $5.2 million that we spent was on kind of getting the evidence to the FCC to get them to the point where they are passing a law and asserting jurisdiction.

We are guiding to greater than 100 basis points no matter what. So we are saying worst-case, no matter how about the legal fees are, we are going to still deliver over 100 basis points. What we are saying is between 100 and 200 the difference is exactly what you said, $5.2 million. And I am not going to have to spend the money on getting the law passed, but I may have to spend money on specific complaint processes.

And again, I don't know because I haven't seen the report and order yet and the mechanism that is going to be required. It could be that the Commission just takes the evidence that it already has and enforces the order without an additional complaint because the evidence has been produced and they require new evidence to be produced. Just have not seen the order yet.

Just one last question. What exactly is the harm to Cogent of Comcast buying Time Warner? What are you contesting the merger on, under what grounds?

That is a very lengthy set of comments --.

Well, we are in hour and a half in so I'm sure we've got more time.

No, I think we'll take that one off-line, Walt. It's not that I am punting, but it is basically a foreclosure argument, a vertical integration argument and a market share domination argument. And (multiple speakers).

But has a vertical argument ever worked in a merger? Can the DOJ actually prove a merger -- a vertical argument works to block a deal?

There has been precedent for it, yes.

All right, I would love to hear this.

They are limited but there are precedents -- there is various [processes].

Okay, thank you.

I want to keep this one shorter than last time (laughter). Next one.

Frank Louthan, Raymond James.

Can you give us a couple of more specific things that you are doing that are giving you confidence that -- I guess where we need the traction is more on the net centric side. The things you are doing with differently with the sales force that is going to get that traction.

And then on some of the contract extensions, are you still able to get volume increases that sort of outpace the price declines on these new contracts that you are extending?

And then just quickly if I can, the data center expansion that you invested in last year, is that mostly helping corporate customers and when do we expect to see some revenue growth for that?

Let me take all three of them. First of all, the sales force investment is actually on both sides, corporate and net centric. That investment is primarily in training and in management. That is continuing and we are seeing benefits on the net centric side, but they are dampened by the two bigger issues which are the net neutrality issue and the FX issue.

On the corporate side it's shown up very clearly because those two issues don't impact it and, quite honestly, the sales cycles are a little shorter.

With regard to contract lengthening the answer is yes to volume commitments because the salesperson only gets paid if the monthly recurring revenue goes up. And it also requires that the total contract value, which is the amount committed to Cogent, increases as a result of contract lengthening.

To your data center question, the answer is we are adding to the footprint in new markets, the customer base is primarily corporate, although there are some net centric customers. And we have a substantial amount of excess inventory in our data centers.

And with these additional centers coming online we are starting to see an uptick in the number of racks, power and revenue coming out of those centers. But today we are in the low 30s in terms of occupancy in those centers -- 30%.

And where does that show up on the income statement? Just lumped in either between corporate and net centric? You're just going to show some ARPU growth from that? And when should we expect to see that ramp up?

So it shows up in on-net revenue. It can be either corporate or net centric. And it actually may result in ARPU decline but revenue growth because some of the rack and power sales are actually below the cost of the bandwidth sales.

We typically sell rack and power for less than bandwidth and we use that as a tool to help us sell the bandwidth. We are substantially below what the carrier neutrals charge for that. So it is actually a bit of a drag on ARPU.

Got it. Okay, thank you very much.

James Breen, William Blair.

Just a couple things. I just wanted to clarify in terms of the FX impact on a year-over-year basis. If we look at the full year revenue for 2014, Tad, maybe can give us what the full-year FX headwind will be so we can sort of think about how that 10% to 15% growth rate adjusts.

And then secondly, Dave, just sort of as a bigger picture, [Yakima] had an Analyst Day yesterday and talked about really the bottleneck being in the transit part of the network, which I think you have talked about as well and probably in the port capacity side. And they also talked about moving more content closer to the edge of the network.

Just wondering how you feel about how that would affect your business over time if we did see more content moving closer to the edge, sort of what like Netflix is doing with some of their server technology and so forth. Thanks.

Well, I will let Tad take the first one, I will take the second one.

Sure. So I'll mention a couple of these stats, I'll throw them out again. So the average euro rate for 2014 was $1.33. Currently the average for the quarter -- first quarter of 2015 is now $1.14. My FX negative impact I said would be at least $15 million. There is also a small impact from the Canadian dollar which also has declined, but it is largely related to the euro.

Now with regard to content and bottlenecks, the bottleneck is an artificial one and it is at the point where networks interconnect. And it can be either for a CDN if they don't have an adequate connectivity to an ISP's network, or for a transit network that then connect to an ISP's network. And that has been really the cause of why the FCC is dealing with these net neutrality issues and imposing the rules.

Now with regard to content distribution, that trend has been in place for 15 years, whether it be large content companies like Google or Apple or Netflix or third-party aggregators like Akamai or Limelight. Content has proliferated at the edge, but the Internet has become more global. So it is been kind of interesting.

We track the average packet travel distance and it has not materially changed in 15 years at about 2,700 miles. So it is kind of the two forces offsetting one another, content being distributed multiple caches. Remember CDN is just a distributed server farm. And the globalization of the Internet which has increased the packet travel distance, the two forces have roughly offset one another.

But remember, most CDNs connect through transit. They only connect through Peering to an ISP when they can't buy transit. Transit is cheaper than those direct connections. And in our network we further (inaudible) route, we always try to carry the packet to the last possible point before we can hand it off. So a CDN would always prefer to buy from us than buy directly from an ISP at a higher price.

So at the end of the day in terms of the traffic movements, even if the content ends up sitting more resident to the end-user at the time that they want to view it, it still has to get there somehow, it is just a matter of the time during the day when that content gets from point A to point B?

That is correct. And listen, if your cost of space and power and servers was zero you would distribute the content in every home. Transit allows that content to be cached at a finite number of locations and then transmit it to 44,000 networks at the very lowest cost. So it is not like CDNs were a substitute for transit, they are just another type of customer that buys transit services.

Great, thanks.

Barry Sine, Drexel Hamilton.

You gave the corporate customers per building metric at 12. As you slow down the rate of buildings you are going to be connecting to, presumably getting that metric up becomes a bit more important towards growing revenue. Could you talk about your ability to do that? And then also within that comment on what impact, if any, you are seeing now that Level 3 and tw telecom have merged? Thank you.

Yes, sure, Barry. So first of all we have historically added about 1.8 additional corporate customers per multitenant office building per year. That number has been diluted by the additional buildings that we add to the network. As we slow that down the reported number will go up and the rate at which it will go up will be faster because there is less buildings coming on net with zero customers.

With regard to TWTC and Level 3, we compete with Level 3 vigorously on the net centric side of the business. On the corporate side, quite honestly, both of those companies were not really competitive with us because of three reasons.

One, where their buildings are, their footprint tends to be more suburban campus type buildings as opposed to CBD sky scrapers.

Two, it is their product set, they tend to sell a vertically integrated bundle of telecom services with very high ARPUs versus our dedicated Internet service with a $650 ARPU.

And then third, the type of customer they focus on, they tend to focus on larger enterprise companies that are more global in nature. We tend to focus on businesses that tend to be a little bit smaller but are located in the CBD building.

So we really just have not seen any shift in our corporate business from the combined Company, it was different than the two companies independent, and that was they really weren't there. Whereas on that net centric side Level 3 is a very ubiquitous competitor.

But I am assuming little impact on net centric competitive environment because TWTC was not in that environment.

That is correct, they were actually a customer of Level 3's.

Okay, those are my questions, thank you.

James Moorman, D.A. Davidson.

Thanks. I'll keep it quick to keep this under two hours. Just in terms -- can you give a little more color on what you are doing Netflix in Europe? It sounds like -- with this being the first quarter how has that been and what kind of do you expect for that going forward? And I assume you are not having as many issues as you are in the US with blocking interconnection, any more color would be great. Thanks.

Sure, so we do provide connectivity to Netflix, their I think launches in English speaking countries, particularly in Northern Europe, have gone better than some of the other Southern European and non-English speaking countries. We did comment earlier and have had and publicly commented on the blocking issues that we have with FT, DT and Telefonica.

Other than that at our connectivity in Europe is actually excellent and we provide great connectivity to Netflix and other content companies. But they are growing, I don't really want to comment on their specific growth rates in any given market.

Okay, thanks, Dave.

Georgios Kyriakopoulos, SunTrust.

A couple of things. First of all going back to net neutrality, assume that the vote is in your favorite tomorrow, when do you think the lost revenue from content providers will return to Cogent given that some of your customers have already signed bilateral agreements with ISPs and they will wait for the contracts to expire before entering into new agreements with you?

And my second question is about traffic growth. If I look at the traffic growth for your network it has declined in the last few quarters. You said it was up 37% this quarter. But can you help us understand the level of traffic growth assuming similar price trends that you need in order to maintain your top-line growth target of 20 -- 10% to 20% in 2015? Thank you.

Yes, sure, Georgios. So first of all, with net neutrality it impacts our net centric customers. Many of those companies that have entered into bilateral Peering agreements where they are buying Peering from ISPs are paying more for those.

We will -- one, they are looking to invalidate those agreements or looking for the Commission to help them do that. Two, those contract terms are relatively short. Three, most importantly, traffic grows and they are not committed to the growth in traffic so we will get that growth.

It is real simple, the bids are going to go to the highest quality, lowest cost network. We will win that business in a competitive dynamic.

Now with regard to traffic growth, our growth actually accelerated on a sequential basis from 6% to 12%. The 37% is below our long-term trend line of 54% year-over-year growth but it is still well within the range and still substantially faster than the Internet.

So again, on the corporate side traffic growth really has no direct impact as corporate traffic only represents 3% of the traffic on our network. On the net centric side it is a combination of volume growth as well as that 23% per year price decline.

For us to be at the midpoint of our guidance we need both corporate business growing, which has been demonstrated and it is doing quite well, and net centric business to grow as well above 10%. And we have done that historically and we can do that with 23% price declines and traffic volumes in the current range that they are in.

So we feel very encouraged. I mean traffic growth on our network continues to hit record levels. And if we were not constrained with that roughly 4.6% of exiting revenues and about 10% of exiting traffic going to networks where it can't get there we would see faster growth.

Great, thank you.

Michael Funk, Bank of America.

Yes, thank you for hanging around and taking all the questions. Just one really quick one. Dave, I'm trying to I guess think about or get my head around expectations for corporate on-net revenue growth. I know you have commented on what's happened this quarter and this year.

But if you look forward and you think about the total addressable market buildings that you attach to salespeople that are available, what has to happen in your mind to gross add churn and pricing to I guess maintain and improve that level of revenue growth. Kind of given very simple math the larger your base gets, the more your gross ads have to increase just to offset a natural rate of turn. I would love to hear your thoughts there.

Yes, sure, Michael. So first of all, we have seen the long-term average at 3.4% sequentially. We did 3.7% this most recent quarter. And over the past year and a half you have seen a consistent improvement in that growth rate and that should continue because of the work that I think [Ernie] and his team have been doing in terms of managing and training the sales force better.

Secondly, we only have 24% of the potential customers in our existing on-net footprint and we do still add, albeit at a more moderate pace, additional buildings. But more importantly, as those remaining 76% of the opportunities in the building want applications that need to be more reliable with higher throughput, they become incented to buy from Cogent.

Our churn rates are very low and remain low. We are getting the net growth in our on-net business due to better gross ads and that is going to continue because the customers actually need more bandwidth. And we are not so presumptuous as to think we will get 100% penetration.

But we have a long way to go with increasing penetration from the 24% we are at today to a much higher level based on the differential and our value proposition of a ring protected, fully fiber, fully diverse network with a 100 meg symmetric than any of our competitors.

So I think we can easily see better sales force productivity and better sequential growth rate in that corporate business for the foreseeable future. I mean listen, at some point you reach saturation without deploying more capital, but we are very far from that point.

And one more quick follow up, Dave, and so the expectation for improving sales productivity, I understand the average age of the sales force increasing. But just kind of very simply, the marginal product of labor, you would expect that productivity to actually come down over time as you are throwing more salespeople at the same addressable market.

Are you offsetting that just through different sales processes? Is it really that [potential] customer, they're recognizing the value you are offering, that much more staid than they were a year ago? I'm just trying to think about this the right way to include that higher productivity number.

Yes, you're absolutely asking a good question. And remember, that productivity number is substantially above a 10-year trend line and it is getting better. And the reason is twofold -- one, we can improve productivity by better management, better training/better management, that is partially happening and that is under our control and there is more that we can do and are doing.

But the second thing we have got going for us is a natural demand uplift. The customer that previously was content with two T-1's bonded in a 3 meg solution now is running a FAS solution that needs 10 or 12 megabits or maybe 50 megabits and our solution becomes compelling.

So as more and more of businesses move more and more of their applications into remote computing environments, there is just more and more demand for connectivity. And it is really that demand uplift that is helping us. I wish I could give it all to the sales force, that is part of it, but a lot of it is just coming from market forces.

People just can't live with single threaded copper T-1 based services anymore. And for a DIA fiber-based service no one delivers a better value proposition in our on-net buildings than us. And we are gaining market share for those reasons.

Okay, thank you, Dave.

I am not showing any further questions at this time. I would like to turn the conference back over to our host.

Well, thanks, I promised to keep it short and it is still ran an hour and 45, better than two. But again, I want to answer all the questions. Thanks everyone for the support and we will be talking soon. Take care. Bye-bye.

Ladies and gentlemen, this does conclude today's presentation, you may now disconnect and have a wonderful day.