David Schaeffer - Founder, Chairman, Chief Executive Officer and President Thaddeus G. Weed - Chief Financial Officer, Principal Accounting Officer and Treasurer.

Brian Hawthorne Colby Synesael - Cowen and Company, LLC, Research Division Scott Goldman - Jefferies LLC, Research Division Walter Piecyk - BTIG, LLC, Research Division Eric Pan - JP Morgan Chase & Co, Research Division Nicholas Ralph Del Deo - MoffettNathanson LLC James D. Breen - William Blair & Company L.L.C., Research Division Frank G.

Louthan - Raymond James & Associates, Inc., Research Division Ana Goshko - BofA Merrill Lynch, Research Division Timothy K. Horan - Oppenheimer & Co. Inc., Research Division Michael Rollins - Citigroup Inc, Research Division Michael G.

Bowen - Pacific Crest Securities, Inc., Research Division Georgios Kyriakopoulos - SunTrust Robinson Humphrey, Inc., Research Division Barry M. Sine - Drexel Hamilton, LLC, Research Division Michael J. Funk - BofA Merrill Lynch, Research Division James G. Moorman - D.A. Davidson & Co., Research Division.

Good day, ladies and gentlemen, and welcome to the Cogent Communications Holdings', Inc. Third Quarter 2014 Earnings Conference Call and Webcast. [Operator Instructions] As a reminder, this conference call is being recorded and will be available for replay at www.cogentco.com.

I'd now like to introduce your host for today's conference, Dave Schaeffer, Chairman and CEO of Cogent Communications. Please go ahead, sir..

Good morning, and thank you, all. Welcome to our third quarter 2014 earnings conference call. I'm Dave Schaeffer, Cogent's Chief Executive Officer. With me on this morning's call is Tad Weed, our Chief Financial Officer.

We are relatively pleased with our results for the quarter, and we are optimistic in the strength of our business and the outlook for the remainder of 2014 and beyond. During the quarter, we experienced sequential revenue growth, EBITDA margin expansion, EBITDA expansion, sequential traffic growth.

Sales rep productivity again was far above our historical averages. During the quarter, we returned a total of $29.7 million to our shareholders through a combination of dividends and buybacks.

This $29.7 million return of capital to our shareholders includes a regular recurring dividend payment of $13.8 million or $0.30 per share and an additional $15.9 million paid under our return of capital program through the purchase of stock during the quarter.

We purchased a total of 7 -- 476,000 shares of our common stock at an average price of $33.51 during the quarter. During the first 9 months of this year, we have purchased 1.4 million shares of our common stock for approximately $48 million at an average price of $34.24.

So far this quarter and through yesterday, we have purchased an additional 218,000 shares of our common stock, spending $6.8 million at an average price of $31.27. We have a total of $40.9 million available under our authorized stock buyback program, and that authorization is allowed to continue through February of 2016.

We continue to remain confident in the cash flow-generating capabilities of our business. As a result, as we have indicated in our press release, we announced another regular increase in our dividend, from $0.30 per share per quarter to $0.31 per share per quarter, our ninth consecutive increase on our regular quarterly dividend.

Our fourth quarter regular dividend will be paid on December 12, 2014, to holders of record as of November 26, 2014. Since we returned more than $10.5 million of capital to shareholders under our capital return program through the purchase of $15.9 million of common stock, we will not make a special dividend payment in the fourth quarter of 2014.

Under our return of capital program, in addition to our quarterly dividend, we are committed to returning a minimum amount to our shareholders each quarter through buyback or dividends or a combination of both.

Our Board of Directors has approved another increase under our return of capital program, increasing that minimum from $10.5 million per quarter to a minimum return in excess of the regular dividend of $12 million per quarter.

We will continue to evaluate and remain committed to a combination of stock buybacks and special dividends under our return of capital program in conjunction with our regular recurring dividend. Our return of capital program is planned to continue until our net-debt-to-EBITDA, as adjusted, ratio reaches 2.5.

Our net-debt-to-EBITDA, as adjusted, ratio increased to 2.22 as of September 30, 2014, from 1.99 at the end of the second quarter of this year. We intend on hitting our target of 2.5 no later than December 31, 2016. Please note, our return of capital program is potentially subject to change as conditions may warrant.

Our third quarter 2014 revenue grew sequentially from the second quarter by 1.1% and by 9.9% year-over-year. On a constant-currency basis, however, our growth grew more substantially as our revenue growth sequentially from the second quarter was 1.8% and 9.3% on a year-over-year basis.

During the quarter, traffic on our network grew from the second quarter of this year by 6% and grew on a year-over-year basis by 39% from the third quarter of 2013. Our sales force productivity remained high at 5.9 installed orders per full-time equivalent rep per month.

This rate is significantly above our historical average of 4.7 units per rep per month and similar to the productivity we've achieved in the past several quarters. Our revenue growth, our network traffic growth were both impacted by seasonal trends of slower traffic growth in the third quarter, also impacting our usage volumes.

Our EBITDA and SG&A expenses in the quarter were materially impacted by the $1.9 million that we spent on legal fees and economic analysis defending and supporting net neutrality through filings we prepared for the FCC, U.S. Department of Justice and the Director General of Competition in Europe.

We now anticipate spending a total actually of $5 million in legal fees and economic analysis for the full year. This is more than our previous forecast of $4 million as the amount of analysis required has increased.

Since the end of the second quarter, we continue to expand our footprint by adding another 33 buildings to the network, and for the last 12 months, we added 135 buildings to our network. We had a total of 2,090 buildings connected to our network at the end of the third quarter 2014.

Throughout this discussion, we'll highlight several operational statistics, we believe, demonstrate our increasing market share, expanding scale and scope and size of our network and most importantly, the operating leverage of our business model. We are the lowest-cost, most efficient operator in this sector.

We remain focused on serving the most traffic-rich locations, which we bring on-net, selling the highest quality Internet services to our customers at the lowest prices in the market, delivering the greatest amount of value to those customers. I will review in greater detail certain operational highlights.

Tad will provide some details on our financial performance. And following our prepared remarks, we'll open the floor for questions and answers. Now I'd like to have Tad read the safe harbor language..

Thank you, Dave, and good morning, everyone. This third quarter 2014 earnings report and this earnings conference call discuss Cogent's business outlook and contain forward-looking statements within the meaning of Section 27-A and 21-E 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 revisions to any forward-looking statement made today or otherwise update or supplement statements made on this call.

Also during this call, if we use any non-GAAP financial measures, you will find these reconciled to the GAAP measurement in our earnings release and on our website at cogentco.com. Now I'll turn the call back over to Dave..

Okay. Thanks, Tad. Now for some highlights from the third quarter of this year. Hopefully, you had a chance to review our earnings press release. As within previous quarters, our press release includes a number of historical quarterly metrics. These metrics will be added to our website.

Hopefully, you'll find the consistent presentation of these quarterly metrics informative, helpful in understanding the financial results and the trendings from our operations. Our third quarter of 2014 revenue was $95.7 million.

Our sequential revenue growth for the quarter was 1.1%, and on a constant-currency basis, our sequential revenue growth for the quarter was 1.8%. Seasonal fluctuations in revenue and -- usage have an impact on our revenues as well as the negative impact from foreign exchange contributed to our lower-than-historical growth rates in the quarter.

We believe that our sales force reorganization initiatives will continue to deliver results and the investment that we have made in our sales force are beginning to generate results. Overall trends and highlights for the quarter, now pricing.

Our most widely sold Corporate product continues to be 100-megabit per second non-oversubscribed and non-blocked dedicated Internet service, and our most commonly sold NetCentric product is a 10-gigabit port. We continue to offer discounts related to contract term to all of our Corporate and NetCentric customers.

We also offer volume commitment discounts to our NetCentric customers. During the quarter, some of our customers took advantage of these discounts and entered into longer-term contracts with Cogent, representing over 2,800 customer connections and increasing their revenue commitment to Cogent over their contract life by $19.4 million.

The average price per megabit in our installed base on our new customer contracts decreased during the quarter, both on a sequential and year-over-year basis.

The average price per megabit of our installed base declined sequentially by 5.8% from $2.05 in the second quarter of 2014 to $1.93 in the third quarter and declined by 23.4% from $2.52 for the third quarter of 2013 on a full year-over-year basis.

The average price per megabit for our new customer contracts in the quarter was $1.22, a 7% decrease from the $1.31 for average new contract sold in the second quarter and a 13.3% decline from the $1.41 per megabit for the average new contract that was sold in the third quarter of 2013.

Before Tad provides some additional details on our results for the quarter, I would like to address our results and expectations against our announced revenue and EBITDA targets. Our revenue for the first 9 months of 2014 increased by 9.7% over the same period in 2013 and 9.5% on a constant-currency basis.

This rate of growth is just below our guidance range of 10% to 20%. We expect that our recent initiatives in the sales organization will help us return to the revenue growth within our guidance range and towards the midpoint of that guidance range.

Our EBITDA, as adjusted, margin was 35.1% for the first 9 months of 2014 and 35.3% for the third quarter of 2014.

Despite the $1.9 million in legal and economic fees spent defending and supporting net neutrality in the quarter, our EBITDA, as adjusted, margin increased 70 basis points from the third quarter of 2013 when we did not have these expenses and only decreased on a sequential basis by 10 basis points from 2014 second quarter.

These substantial legal fees have had a very material impact on our EBITDA, as adjusted, results. Adjusting for the $1.9 million in legal and economic fees that we incurred in the third quarter, our EBITDA, as adjusted, margin would have been 37.2% and would have increased 220 basis points over the third quarter in 2013.

Adjusting for the $4 million spent so far this year on nonrecurring legal and economic analysis fees, for the first 9 months of 2014, our EBITDA margin as adjusted would have been 36.5% and would have increased from -- by 220 basis points over a similar 9-month period in 2013.

We anticipate spending a total of $5 million on our efforts to support and defend net neutrality. We've been encouraged by the recent movements at the Federal Communications Commission. This is more than the -- our initial projection of $4 million in total. We do not anticipate similar legal or economic fees in 2015.

We anticipate that our full year revenue growth for 2014 over 2013 on a constant-currency basis will be within our range of 10% to 20% and our EBITDA margin expansion, adjusted for the $5 million in legal fees and economic analysis, will again be greater than 200 basis points. Tad will now cover some additional details on the quarter..

$2.9 million related to the $200 million of senior unsecured notes; $4.9 million related to the $240 million of senior secured notes; and lastly, $4.8 million was related to our capital lease obligations. We will incur $11.3 million of annual interest on our $200 million of senior unsecured notes that we issued last quarter.

These senior unsecured notes accrue interest at a rate of 5.65%, and we began accruing interest on these notes on April 9, 2014.

Our basic and diluted income/loss per share was 0 for this quarter as compared to income per share of $0.03 for the second quarter, the decline resulting largely from the impact of an increase in quarterly income tax expense. Foreign exchange, which has a material impact on our business.

About 26% of our business is located out of the United States, with 20% of our revenues based in Europe and about 6% of our revenues are related to our Canadian, Mexican and Japanese operations. Continued volatility in forward exchange rates can materially impact our quarterly and annual revenue and financial results.

The foreign exchange impact on our revenue from the second quarter to third quarter resulted in a material decrease to our U.S. GAAP revenue of about $700,000. Our revenue increased from the second quarter of 2014 by 1.1%, but on a constant-currency basis, the increase was 1.8%.

The foreign currency exchange impact on our revenue from the third quarter of last year to the current third quarter was a decrease to our revenue of about $200,000, and our revenue increased from the third quarter of last year by 9%, and on a constant-currency basis, that was 9.3%. So the average euro to U.S.

dollar rate for the third quarter was $1.33, and the average, thus far, for the current quarter is $1.27. However, the current rate is actually below $1.25, to those tracking this.

Should the average foreign exchange rate remain at current average levels for this quarter, we estimate that the FX conversion impact on sequential quarterly revenues from Q3 to Q4 will be a decrease of at least $1.1 million. The average euro to U.S. dollar rate for the fourth quarter of last year was $1.36.

Should the average exchange rates, again, remain at current levels, and again, that's using the average, we estimate that the FX impact on a year-over-year basis on quarterly revenues from Q4 '13 to Q4 '14 will be a decrease to revenues of at least $1.7 million. Customer concentration.

We believe that our revenue and customer base of about 45,000 customer connections is not highly concentrated. For the third quarter, no customer represented more than 2.1% of our revenues, and our top 25 customers represented less than 7.6% of our revenues. Capital expenditures details.

On a quarterly basis, we can and have historically experienced seasonal variations in CapEx, prepaid capital lease payments and our 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 expansion activities.

Our CapEx decreased on a sequential basis and increased on a year-over-year basis. Our CapEx for the quarter was $15.4 million versus $16 million last quarter and $10.2 million from the third quarter of last year. Our capital lease principal payments are for long-term dark fiber IRU agreements.

These payments increased to $7.3 million for the third quarter, related to expansion activities, from $4.8 million for the second quarter and $1.9 million for the third quarter of last year. We added another 33 buildings to our network in the quarter and have added 135 on-net buildings to our network over the past year.

We expect to continue our network expansion in 2014, but at a slightly more moderate pace than we experienced in 2012 and 2013, with continued moderation in 2015. Some balance sheet items. At the end of the quarter, our cash and cash equivalents totaled $311.8 million.

For the quarter, our cash decreased by $36.9 million as we returned $40 million of capital to our stakeholders. During the quarter, we paid $13.8 million for our third quarter dividend payment, $15.9 million on stock buybacks, and we spent $10.1 million on our semiannual interest payment on our $240 million of senior secured notes.

Excluding this cash return to our stakeholders through our dividends, stock buybacks and interest payment, we were cash flow positive by $1.7 million for the third quarter of this year. Cash flow from operations was $16.1 million for the quarter compared to $28.4 million for the second quarter and $14.9 million for the third quarter of last year.

We paid, again, $10.1 million for our semiannual interest payment on our senior notes this quarter. That impacts and reduces our operating cash flow in the quarters paid.

Our operating cash flow will continue to be impacted by $20.2 million of annual interest paid semiannual in our $240 million of senior secured notes, and those semiannual interest payments occur in February and August through February 2018 unless we choose to refinance these notes.

Our operating cash flow will be impacted additionally by $11.3 million of annual interest, again, paid semiannually, on our recently issued $200 million of senior unsecured notes. Those interest payments occur in October and April, and we just made our first $5.6 million semiannual interest payment on these notes on October 15.

Our capital lease IRU obligations are for long-term dark fiber leases, typically have initial terms of 15 to 20 years or longer and often include multiple renewal options after the initial term. Capital lease IRU obligations were $162.5 million at the end of the quarter.

Our total debt, including capital lease obligations, was $607 million at the end of the quarter, and our net debt was $295.2 million. Our total debt to trailing last 12-month EBITDA, as adjusted, ratio was 4.6 at the end of the quarter, and our net-debt-to-EBITDA trailing ratio was 2.22.

Bad debt expense from the quarter improved, and it was only 0.8% of our revenues compared to 1% of our revenues from the second quarter and 1% of our revenues in the third quarter of last year.

Our days sales outstanding for worldwide accounts receivable declined and improved and was only 26 days at the end of the quarter, a significant improvement from the already low 28 days at the end of the second quarter.

And again, I want to thank and recognize our worldwide billing and collections team members for continuing to do a fantastic job on customer collections, customer service and monitoring credit and also, to our entire worldwide finance team for successfully managing the growth of our business. And with that, I'll turn the call back over to Dave..

Okay. Thanks, Tad. Now for a moment about our sales force activity and productivity. We began the third quarter with 337 reps selling our services and ended the quarter with 344 sales reps. We hired 63 sales reps in the quarter and 56% of the -- or 56 sales reps left our company during the quarter.

Our monthly rep turnover rate was 5.5% for the third quarter, which is significantly better than our long-term historical average rate, which has been declining to 6.4%.

We began the second quarter of 2014 -- or excuse me, the third quarter of 2014 with 310 full-time equivalent sales reps and ended the quarter with 329 full-time equivalent sales reps.

We believe we are seeing the benefit from the increased tenure and quality of our sales force, and we anticipate that our additional sales resources will help us further see better improvements in productivity and accelerating revenue growth.

Productivity on a full-time equivalent rep basis in the second quarter was 5.9% and similar, again, in the third quarter. This rate of organic rep productivity is substantially better than our long-term historical average of 4.7 units per full-time equivalent rep per month.

As a reminder, our sales force rep productivities are not based on contract signing but rather are only calculated upon the delivery of service and the complete turn of a customer's order. Now to the scale and scope of our network. The size and scope of our network continues to grow.

We added 33 buildings to our network in the second quarter of -- or excuse me, third quarter of 2014, and we ended the quarter with 2,090 buildings connected to our network. Our network consists of approximately 27,500 miles of metro fiber and approximately 60,000 intercity route miles of fiber.

The Cogent network is one of the most interconnected networks in the world, directly connecting to over 5,100 networks, 40 of which are settlement-free peers. We are currently utilizing approximately 32% of the load capacity in our network, and we routinely augment this capacity to maintain these low utilization rates.

We today currently serve only 24% of our Corporate on-net addressable market, less than 1% of our potential off-net addressable market and only 14% of the customers in the carrier-neutral data centers that we connect to. We have a well-diversified revenue base with very low customer concentration.

No customer accounts for more than 2.1% of our revenues in the third quarter, and our top 25 customers cumulatively account for slightly less than 7.6% of our revenues.

Now we have increased the number of Cogent-owned and controlled data centers on our network to 49, and we have, today, over 550,000 square feet of raised floor space in our network available for customers to co-locate. We've also expanded our network into 2 additional countries, Albania and Montenegro.

We believe that our network has substantial available capacity to accommodate our growth plans. So in summary, we believe that Cogent is the low-cost provider of Internet access and transit service. Our value proposition in the industry remains unmatched.

Our pricing strategy has continued to attract many new customers, resulting in better sales force productivity, increased volumes, growing traffic faster for Cogent than the Internet in its totality, and existing customers are increasing their revenue commitments to us.

Our business remains completely focused on the Internet, IP connectivity and data center co-location services and provides a necessary utility to our customers.

We expect our annualized revenue growth and our EBITDA margin expansion to be consistent with our historical rates of 10% to 20% revenue growth on a constant-currency basis, greater than 200 basis points of EBITDA margin expansion, excluding our onetime unusual legal and economic expenses related to net neutrality.

For 37 of our 38 quarters as a public company, we have produced organic sequential revenue growth and are encouraged by the cash flow performance of our business. We have produced 38 consecutive quarters of sequential organic growth in our Corporate business, with average quarter-over-quarter growth rates of 3.3%.

We did slightly better than that this quarter at 3.4% in that business. We continue to be encouraged by the results of our sales force initiatives.

The training, hiring and increase in sales force tenure are all helping us build our pipeline and see an improvement in productivity, partially offset by the declines in price per connection that we've experienced.

Our certain last-mile access providers that we connect to have been unwilling or in transient in upgrading their peering connections with us. Unlike these organizations, we believe and completely support a totally Open Internet and true strong net neutrality.

We're incurring material legal and economic expenses associated with the fight for net neutrality.

$5 million is a lot of money to a company of Cogent's size, and we are spending that money on to fight, defending net neutrality and have prepared -- and are preparing numerous responses to the FCC, Department of Justice and the Director General for Competition in Europe.

We've recently expanded our network to cover 2 additional new countries, Albania and Montenegro. Our network expansion is nearing completion. We like and feel confident in our network reach, our product set, our addressable market and operating leverage. In short, we continue to like the business that we have and the customers we serve.

We feel that we have an underserved ample addressable market in our on-net footprint to allow us to continue to grow our revenues at our historical rates of 10% to 20%.

We are committed to providing annualized top line revenue growth in that range, expanding EBITDA margins at minimum 200 basis points a year and continuing to increase cash flow for our equity holders. We are opportunistic about the timing of purchase of our common stock.

We have a total of $40.9 million remaining under our current buyback program, which runs through February 2016.

Our Board of Directors has approved another increase on our regular quarterly dividend to $0.31 a share and has approved another increase on our return of capital program from a minimum of $10.5 million per quarter to a new higher minimum of $12 million per quarter. Our regular dividend will be paid to our shareholders on December 12, 2014.

Our dividend increase and increased return of capital program demonstrates our continued optimism and belief in our business and its increasing cash flow-generative capabilities.

We are committing to returning an additional amount of capital to our shareholders on a regular basis, trying to reach our targeted goal of net-debt-to-EBITDA of 2.5:1 no later than December 31, 2016. With that, I'd like to open the floor up for questions..

[Operator Instructions] Our first question comes from Barry McCarver of Stephens..

This is Brian Hawthorne on for Barry McCarver. My first question is about CapEx and kind of how are you thinking about that going forward.

Should we expect this kind of $15 million to $16 million range?.

Yes. Thanks, Brian. So we do expect capital to continue to decline. We did spend more capital in the quarter than we had expected, both for the expansion of the network into the 2 new markets, as well as the addition of expert data centers to our network.

Now oftentimes, when we acquire these data centers, they are built out, but we are able to get tenant allowances or tenant improvement budgets from the landlords.

While we will spend the capital in the quarter to modernize these facilities and bring them online, we receive the offsetting cash but have to amortize that cash as a discount to the lease over the life of the lease.

We do anticipate slowing the rate of data center expansion as well as we now need to focus on increasing the utilization of our existing data center footprint, which is only running at about 35%..

Okay, that's great.

And then the other one is, how are you thinking about revenue growth coming up here in the fourth quarter?.

Sure. So as Tad mentioned, we have a significant headwind ahead of us in terms of foreign exchange. At least, we know where it is today, and we're 5 weeks into the quarter. We anticipate about $1 million or slightly more in FX headwind.

With that, we do expect our revenue growth rate to accelerate in the quarter and on a constant-currency basis to materially accelerate, again, on a sequential basis and help us return not only to within our range, but our target is continuing improvement as well as consistent improvement in revenue growth that should allow us to return to the midpoint of our guidance range..

Our next question comes from Colby Synesael of Cowen and Company..

Just also touching on top line growth. So as we think about the expectations earlier this year, there's an expectation that growth would accelerate through the course of the year, ultimately, getting to, call it, 2.5% or 15% growth by the fourth quarter.

I think you'll still do that, but certainly, the second and third quarter growth has been slower than anticipated. And while there's been a big focus on improving Corporate, which I think you've done, I think, where the slowdown has been relative to expectations has been more on the NetCentric piece.

And while I appreciate the seasonality that occurs within the business, it seems like there might be something else there beyond that.

And I'm curious if with the congestion you're experiencing at specific ports with specific ISPs, so recognizing your network is up, is underutilized, but you are seeing congestion at the port itself, are you starting to see customers change the way in which they use Cogent, recognizing that there might be a slowdown in how they're actually getting to customers in that ISP's network? So for example, if Netflix may potentially be the cause for that, other customers are arguably being congested as well and how that might be impacting total top line growth.

And to that point, M-Lab came out with network information in terms of congestion last week. And I was wondering if you could touch on what your interpretations are of the information that they put out there..

Yes. Sure, Colby. Thanks a lot. A series of questions there. So first of all, we are seeing improvement in the Corporate sales force in terms of size of sales force, productivity resulting in accelerating growth in that Corporate business.

And we have now been able to get our sequential growth rate in Corporate back above our long-term historical average, which is 3.3% quarter-over-quarter.

We actually did 3.4% quarter-over-quarter this quarter, and we do anticipate continued improvement as that sales force continues to season and become more tenured and as a number of the initiatives and training that we put in place and management continue to bear fruit. So we actually think there's further improvement to come on the Corporate side.

Now touching on the NetCentric side. We are disappointed it did not perform as well as we'd like. I would say the major culprit was actually FX, at least on a sequential basis. The $700,000 of FX headwind that we had entirely hit the NetCentric part of our business.

Secondly, we are seeing some improvements in sales productivity on the NetCentric side, but approximately 5% of our aggregate revenues or 10% of NetCentric revenues are capped because of the intransigent of 8 ISPs to upgrade their connectivity to Cogent..

Specific to that though, I mean, is that becoming a bigger issue? I mean it seems like just a quarter ago, your expectations around that improving were better than what we're actually seeing. It's just seems like there's -- this is a very fluid, very dynamic aspect of your business.

I'm just trying to get a sense of what's changing quarter-to-quarter here as we go through the course of this year..

to either not have their applications run at the optimal level going to those customers or be forced into a monopolistic relationship with the ISP, paying a higher price per paid connectivity, i.e., paid peering. We have seen the FCC take a fairly aggressive stance and change its position on this.

I think we are at the cusp of the commission coming out with some new rules as a result of their proposed rule-making that was issued earlier in the year. Customers understand this, and it actually ties into the M-Labs discussion. So our Corporate customers represent 3% of our traffic but 53.5% of our revenues.

We have prioritized or made sure that those Corporate customers are unimpacted by this behavior of the monopolistic ISPs. That has resulted in all of our NetCentric customers experiencing this problem, not only Netflix but every other content provider, and they have the same problem everywhere. The result has been slower traffic growth.

Yes, we grew sequentially 6%, we grew 39% year-over-year, both faster than the underlying Internet. But the behavior of these ISPs is actually retarding the growth of the Internet, not just of Cogent.

And that is why, I think, the combination of the DOJ and the FCC is so important to look at this monopolistic behavior, this abuse of market power, and we are seeing, I think, some action on the part of regulators. We continue to see growth in all of the other ports on our network.

I do not believe this is a change in long-term behavior of our customers. It's also important to remember that our NetCentric customers, for the past 8 years, have actually grown in revenue slightly slower than our Corporate customers.

Our average growth rate in NetCentric revenues, while very volatile, has averaged 2.7% sequentially as opposed to 3.3%. Clearly, we were below that this quarter with revenues actually declining about $100,000.

But we do anticipate a continued improvement, and we also anticipate customers continuing to develop new applications and drive unit volume growth at accelerating rates. So I do not believe that this is a structural change..

So to get back to the midpoint of your guidance that you continue to reaffirm.

Is it that the NetCentric business accelerates and improves just beyond, I guess, these ISPs or what you're seeing the congestions of the other ISPs or the growth comps ? Or is it really more an expectation that the Corporate side of the business really sees continued acceleration, kind of get the aggregate companies to that midpoint of the range?.

I think it's a combination of both, Colby. So I think we will see improvement in our average sequential growth rate in the Corporate part of our business. It's already above the long-term average at 3.4%.

I think we'll continue to see that improve materially from where it is today due to more productivity and more sales rep selling those Corporate products. On the NetCentric side, it will be more volatile. We do need, I think, the regulatory solution to be able to get back to above the 2.7% sequential growth rate in that business.

But I do believe we will see improvements there as well. And I think I do want to comment on your M-Labs question. M-Labs was treated as a Corporate customer on our network. It was very visible in the data that they made public that there was no congestion to our customer network such as Cox, Charter, Cablevision, some of the smaller ISPs.

But the larger ISPs, like AT&T and Verizon, Comcast and Time Warner, abused their market power. You saw heavy congestion on those ports. When we effectively partitioned our Corporate customers and isolated them from that impact, you saw an improvement in the M-Lab's measurement, but it was only for our Corporate customers.

All of our NetCentric customers continue to suffer from this abuse of market power by the ISPs. We believe that the FCC is on the verge of strong regulations, and they've, I think, been pretty vocal in saying they are going to come up with a scheme to support the Open Internet..

Our next question comes from Scott Goldman of Jefferies..

Dave, I guess, a couple of questions. First, on the sales force productivity side and its implications for growth, I guess, a 2-parter there. And one is maybe you could just talk about sales productivity in dollar terms. I feel like we've seen this elevated sales force productivity in terms of orders per rep per month being at the 5.9, 6 level.

We haven't really seen any acceleration in the revenue growth coming out of that. So maybe just talk about what it is in dollar terms.

Or is this just the order side? And as you look into 4Q and the implied growth to get to that 10% growth level that you've talked about, how much of that is sort of seasonal increases in traffic versus needing increased productivity or increased size of the sales force to hit that number? And then I have one quick follow-up question on the regulatory side..

Yes, sure. Thanks for the question, Scott. So let me start with the rep productivity and revenue growth. So while rep productivity has improved by about 25% from historical averages, we have also seen a decline in ARPUs.

So our on-net ARPUs year-over-year declined 5.5% and on the off-net side, about 8%, 8.1%, in large part due to the lower cost of loops. So we have seen an improvement in revenue growth on a constant-currency basis.

Because we had under-invested in the sales force and we're not growing the sales force for 4 years, we saw our growth rate, on a constant-currency basis, decelerate to about 8.8% at the trough. It has improved to 9.3% as a result of this additional sales force hiring and additional productivity, even offsetting the declines in ARPU.

Also, usage does play a role here. Approximately 5% of our revenues or 10% of our NetCentric revenues are burst-related, meaning there are customers using more than their commit.

And because of the limitations on access to these 8 ISPs and the constraint on that approximately 10% of our NetCentric business, we have seen some pressure, further pressure on ARPU and a lack of revenue growth from the NetCentric side of our business. I think you will see improvements in both areas.

Now in terms of improvements in the fourth quarter and continuing on through next year, we have a long-term growth target of 10% to 20%, with the goal being at the midpoint of that range. We will see significant FX headwind and will not deliver a full 10% year-over-year growth rate this year because of that foreign exchange.

We will see acceleration in revenue growth in the quarter due to all of the sales force initiatives on the Corporate side, which has no seasonality, as well as 3 strong months of traffic growth, which will help both the burst usage and ARPUs on the NetCentric portion of the business.

But to hit our long-term goals, we need to continue to improve the sales force both in terms of productivity and size, and I think you're seeing that. And that over the past year, we have increased the number of quota-bearing reps by almost 28%, and over the same 1 year period, we've seen that productivity increase, offsetting these ARPU declines..

That's helpful. And then just following up on the last question. You made a comment about needing regulatory intervention to return the NetCentric back to that historic 2.7% average.

Just wondering, assuming the worst-case scenario where you don't get any -- where regulators don't step in to help out on that front, how did your business model change on a go-forward basis?.

one, continuing to sell more dedicated Internet access and probably accelerate the growth of our VPLS- and MPLS-based pseudowire products, i.e., point-to-point and point-to-multipoint services, which have generally been an add-on to our Corporate customers and not a big part of our business.

I think increasingly, we will focus on those Corporate customers that are probably a bit up-market that have multiple sites and use our network to allow us to drive revenue growth on that Corporate side hopefully above even 4% sequentially..

Our next question comes from Walter Piecyk of BTIG..

Dave, can you give some sense if there was any increase in churn with the Corporate customers on a sequential basis related to the fact that -- and I think this was quoted in the press. I think I actually sent you this link.

Some of these customers were experiencing some issues on the Corporate side from the stuff that was going on with the increased traffic from the NetCentric business..

Sure. So we basically survey our customers twice a year, and we actually survey every customer every time there is a trouble outage.

At the -- earlier this year, in February, because we were not seeing regulatory relief as quickly as possible, we ended up effectively prepping our Corporate customers up, meaning that 3% of the traffic always got through and there was adequate capacity. There was no uptick in Corporate churn as a result of this issue.

Now what has been a result of this issue is even if one customer or a series of customers is causing the problem, all of our NetCentric customers are suffering. And it's an unfortunate need for us to manage the traffic exiting our network as we have no capacity constraints on our network.

Witness the fact, at peak, we're only 32% utilized, yet we were forced to use these extraordinary traffic management tools to differentiate our customer Corporate customers. And quite honestly, a lot of those Corporate customers run applications like VoIP that are particularly latency-sensitive, but we saw no uptick in Corporate churn.

And in fact, that's been reflected in the fact that our on-net churn was flat for the couple quarters. Our off-net churn did spike up from 1.5% to 1.6%, but that's noise, it's -- the trend line has been consistent..

In fact, the Corporate churn was 1.1% in Q2 and 1% in Q3, so it actually slightly ticked down..

So the issue then is on the units. Getting the units back up to maybe 1,600 a quarter is just getting the salespeople to do a better job and deliver a little bit more. I mean, I figured if you hired salespeople, if we look to those on-net customer additions, we would have seen more of an uptick on a sequential basis.

I think on the customer net addition, you're down 15% year-on-year despite adding all these salespeople..

Yes, and I think you're right. It takes a while for these salespeople to become fully productive, and we are continuing to see improvement but not as quickly as we'd like..

Understood. So one last question is -- Hank Kilmer was quoted in Ars Technica, if I'm pronouncing that right, article, talking about exactly what you were saying as far as prioritizing, I guess, or whatever word you want to use, network managing the traffic of your Corporate customers.

And I guess, I'm curious, when you made this change in February, do you think that, that specifically contributed to the jump in speeds that M-Lab had recorded? Because obviously, there's been a lot of focus on that chart, and I guess the theory has been pushed that, while it was effectively you guys, by basically prioritizing the traffic that made things look better.

It wasn't because Comcast and Verizon all of a sudden made things better by signing these interconnection deals with Netflix.

So just curious, since Hank has basically admitted that there was this change in February, and you did as well on this call, do you think that's what contributed to that change in speeds that were on the network that everyone's been focused on?.

Absolutely. So it had nothing to do with the direct connect agreements that were signed. In fact, Netflix, I think, acknowledged that they hadn't even moved most of their traffic as of those dates. And we were forced to do this because our latency-sensitive applications that we're running on our customers networks were being impacted.

M-Labs is not a NetCentric customer; they are a Corporate customer, and their ports were treated as such. So the improvement that they saw concurrently to all 4 networks on the same day occurred because we effectively prioritized there traffic out of necessity, not out of desire..

Because the thing that's interesting that John Oliver makes this huge deal about how -- oh, look, right when Comcast and Verizon signed these agreements, look at how the traffic improved. And the reality was it may be had more to do with how you're prioritizing traffic at the time..

Well, 2 different things. Traffic improved for our Corporate customers. I will say that when these direct agreements were signed between Netflix and the ISPs, Netflix's experience did improve as a result of having more port capacity available; therefore, their bps could flow.

Previously, their bps were constrained going through Cogent and every other trans or provider. They continue to be constrained going through us and every other transit provider, but they have an alternate, more expensive direct route, euphemistically called a fast lane, which is probably not a -- it's not what the FCC wants to see..

Our next question comes from Eric Pan of JPMorgan..

A little more on CapEx. You previously talked about plans to moderate your CapEx spending as a result of your building expansions going forward. This comes at a time when a lot of your peers, large and small, are adding buildings on it almost as their budgets will allow.

Can you give us some color on the defensive strategy and the economics?.

Sure, Eric. So we added buildings at a consistent rate to what we have been doing over the past several years. We do continue to expect our building addition rate to moderate on the Corporate side as we are completing the construction to all the buildings on our target list.

On the data center side, we actually have seen some slight acceleration in the number of carrier-neutral data centers that are being constructed, and therefore, we connect into those facilities to remain able to serve the entire addressable market.

Now I think the bulk of our higher CapEx came actually from things that were different than those 2 causes.

They came from, one, the addition of long-haul mileage into 2 new markets that we had been planning and had mentioned to investors, but were waiting on regulatory approval to be able to do that, that is Albania Montenegro completing our network footprint in Eastern Europe and the Balkans; and then secondly, we have been opportunistic about acquiring Cogent-owned data centers.

And in the past year, we have increased the amount raised for square footage in our network by 25%. That has resulted in us spending CapEx to take what were completely vacant data centers that have been mothballed but constructed and bringing them back online and into current compliance.

Now in every instance, we've been able to get the landlord, the owner of the facility to pay for those costs, but we record the CapEx up-front and then depreciate it over the life of the various improvements. And the landlord's cash payment to us is amortized over the life of the lease as a rent discount.

So it has distorted our capital and made it look larger than it probably really was..

So on the Corporate side, would you consider expanding your addressable market into buildings with much fewer tenants if you're able to get a contract in place beforehand?.

Probably not. So our average building is approximately 550,000 feet. We, today, have 12 customers per building. That's the highest penetration we've ever had out of the 51 opportunities. I think without a material revenue commitment from a customer, we would not build into those additional smaller buildings that have fewer tenants.

We have been pretty disciplined about where we build, and today, there is no tenant that's ubiquitous and offer large enough to give us that kind of anchor commitments. So I think we expect the pace of about 15 Corporate buildings a quarter if tax rate continued to decline..

Got it. That's very helpful.

And then as your building expansion slows and your CapEx comes down, have you considered -- instead of returning the capital, redeploying that spending to perhaps acquiring dark fiber assets or getting into the fiber-to-the-tower business?.

We do a limited amount of fiber backhaul from our buildings. We do not view that as our core competency and have no intention of either constructing or acquiring companies to be in the dark fiber business. We view our skills in selling Internet connectivity and IP connectivity, and we leave that to others..

Got you.

And lastly, have you thought about expanding into the consumer broadband market?.

So we indirectly serve a number of consumers. First of all, we sell bandwidth to all of the large content generators that are targeted to consumers. Secondly, we sell to over 90 international PTTs and thousands of regional consumer-focused service providers. So we indirectly, through our NetCentric business, serve those market segments.

We have no desire to become a residential ISP, and you've seen, I think, the 2 competitive overbuilds of fiber, that being FiOS and Google Fiber both struggling and probably generating no return on capital..

Our next question comes from Nick Del Deo of MoffettNathanson..

Dave, 2 questions. First, looks like your revenue from Netflix was down modestly in Q3 versus Q2 despite their European expansion. And I think why the number of networks connected Cogent fell to 5,100 from 5,200 in the quarter, which I think is the first time you've ever had a decline. I was hoping you could comment on those items..

July and August. Their launch in Europe was in 2 phases. At the beginning of the year, we saw a significant turn-up in Northern Europe, the U.K. and Scandinavia. Their French and German launches were actually later in the year and actually not until -- a little later than they had originally planned, that being September 15.

So we only got the impact of those markets in the last 2 weeks of the quarter. It did result in a very slight decline, but very slight, in their revenue, but they have a take-or-pay, and we expect that revenue to continue to grow. Now with regard to networks connected, we have gone back to a number of our network operators that buy upstream from us.

Many of these companies operate multiple networks, i.e., more than 1 autonomous system number. We have had a program to go through and try to convince all of those networks that have more than 1 AS to concentrate traffic on one of those networks as opposed to having multiple ASs connect to us. There are 2 reasons for that.

The first one is actually for the entire Internet. Many of you may remember earlier in the year, Verizon had an issue when the routing table, due to the way they were configuring their BJP sessions, actually went beyond 512,000 entries. It's, today, hovering at around 480,000.

By forcing these networks to groom and consolidate, we can effectively extend the time at which some of those older routers can continue to operate. Now we, ourselves, have none of those devices on our networks, so we have no issue, but it doesn't do us any good if the routing table gets bigger than our peers' routers can support.

So we've been pretty active in trying to get people to groom down their networks and get to as few of the ASs as possible. And that's really all that's going on here..

Our next question comes from James Breen of William Blair..

Just around the margin you had addressed a little bit. When we look at sort of where potential numbers are for 2014 for EBITDA and you adjust for the equipment sales as well as legal fees and currency, it seems like EBITDA margins are only up modestly, maybe 30 or 40 basis points just based on the actual growth rate.

Can you just talk about what's the impact there and what gives you confidence that the EBITDA margins continue to grow 200 basis points a year as we move through 2015?.

one, by mid-year, these equipment sales will taper off, but they will continue into the beginning of the year; two, we will see a dramatic and material decrease in our expenditures for legal and economic analysis; and then, third, we will see a moderation in the rate of sales growth that -- and a continued seasoning of the sales force that will accelerate revenue growth with the high contribution margins.

So we feel very comfortable that our long-term average of 200 basis points a year can continue for the foreseeable future..

Our next question comes from Frank Louthan of Raymond James..

I want to just go back on the net neutrality thing, and maybe if you could just be a little bit more clear exactly what you're trying to accomplish. Because when we talk about net neutrality, a lot of things tend to come to mind. But I think to myself and most investors, your cushion is a fairly unemotional rational -- economically rational company.

In most net neutrality commentary, it tends to be the antithesis of that.

So what exactly are you trying to accomplish within that sort of movement? Are you pushing for Title II regulation? Is it just simply looking at the smaller aspect of it that affects you on the peering side? How broadly are you supportive of net neutrality? And what would you see as -- how would you define being successful with this expense that you're going to in pushing this issue?.

Okay, Frank. So thank you for the compliment that we're rational and nonemotional, and I hope that is true. Cogent was founded with the fundamental premise that the Internet was the network of the future, and I think that assumption has come to fruition.

However, there are legacy networks that are trying to protect their vertically integrated business models. So at one level, anything that retards the advancement of the Internet, its usefulness to consumers, is ultimately bad for Cogent. That's a little too indirect for us to invest $5 million.

Now net neutrality means a lot of different things to different people. It's interesting, the ISPs that are violating net neutrality all publicly state that they support net neutrality, yet their actions speak the exact opposite.

Net neutrality means every bit that a consumer pays for can be delivered to them equally, and they get what they pay for, and the bits that they get over the Internet are comparable in quality and quantity to what they get from a closed wall network, and the customer is free to pick the applications that they choose.

Now unfortunately, because the FCC's authority to use Section 706 of the Telecom Act was upheld by the courts, the ISPs realized that the only way they could degrade Internet traffic was doing so through the interconnection points, i.e., directly where Cogent feels the pain. And it's not only Cogent; it's every other backbone provider as well.

So we have experienced behavior that has effectively impacted 5% of our revenue, saying they can't grow, and 10% of our NetCentric revenues can't grow. We're spending $5 million to allow that 5% of our revenues to grow at our historical average.

With a 95% EBITDA margin contribution, if we're successful, we get a payback on that investment in about 13 or 14 months. I wish I could be as precise in predicting when the regulators ultimately do their job and impose a set of rules that align to the public policy the Congress and the FCC have supported.

I think you've seen a lot of movement out of the commission. There's currently a hybrid approach that, I think, gets our problem solved. While I am not a lawyer and definitely not a regulatory purist, I think the proposed solution appears to be durable enough to sustain a core challenge and would accomplish what we need.

And I think the commission is on a pretty fast track to get something done..

David, are you not concerned that you get the law of unintended consequences? And with you all supporting this, it helps support something like Title II regulation or other things that would cause disincentive to invest, which would ultimately result in the lower Internet traffic from a broader base? Or do you think that -- it's going to be -- are you that convinced that it's going to be a more surgical approach that will be helpful to you? Because [indiscernible] aside to this, and you've got one aspect of it on the deep and the network side that truly, nobody out there in the public understands.

But unfortunately, it seems like the FCC will take the wind up with whatever they do being a much broader brush, which could also have then even worse consequences for you and others down the road..

So we are supportive of Title II. We actually think that's the right answer. Two, I do not believe Title II will disincent investment. I think that the disincentive to invest comes from the need to protect one's legacy businesses and preserve the functionality of an obsolete outside plan. We are an all-fiber end-to-end company.

We think that the value and functionality of the Internet will continue, and as long as innovators are free to come up with new applications and deliver those to end users, the demand will be, for the foreseeable future, insatiable. So I am certain there will be some unintended consequences of any regulatory action.

If people behave correctly and abided by the law, this would not be an issue, but what we have seen is companies that have a long history of using market power to circumvent the law. They are continuing to pressure competitive companies, such as ourselves and ultimately the users of these companies, into a monopolistic relationship.

It's a mess, and we've got the best solution to what is an imperfect situation..

Our next question comes from Ana Goshko of Bank of America..

It's been a very lengthy and thorough call, so I'll keep it brief. Dave, you do have some bonds that are very high-coupon over 8%, and they become callable in February.

So I want to understand what your plan is and timing for addressing those, so we could get a better understanding of how much free cash flow savings the refinancing could result in for next year..

Thanks, Anna, for the question. So I think Tad mentioned it in our prepared remarks. We are currently evaluating that. We do not plan on, I think, trying to buy the bonds prior to the call date.

At the call date, we will evaluate the market, and it is almost a certainty that if the market remains as it is today, we will go ahead and refinance those bonds, i.e., pay the May call, exercise our call and lower our interest rates.

I think the cash savings could be pretty material, and the payback on that May call is probably about an 18-month payback. So I think those holders should expect us to refinance..

Okay.

And then would you refinance with secured debt?.

We're going to look at our cost of capital and the various instruments that are out there, whether they be floating or fixed, secured or unsecured. But I think we will be very focused on our absolute lowest cost of capital. And for that reason, it will probably be secured, and it will probably be of relatively short tenor..

Our next question comes from Tim Horan of Oppenheimer..

So Dave, in your opinion does -- is the FCC, FTC or DOJ, are they on your side with this argument? Do they understand the argument at this point? And I guess, clearly, you want the last small provider to add ports.

Is there a referee or someone that can really force them to do this?.

So 2 questions. Ultimately, you need to ask the regulators. I think what we have seen publicly, which is what I can comment on, the FCC has come out, along with the White House, and supported a definition of net neutrality that we think is accurate and gets us to where we need to be.

Two, the FCC has, I think, modified its position on the bifurcation of the problem and really understands now that interconnection is part and parcel of net neutrality, and to be able to deliver an end-to-end user experience, you need to regulate all or, at least, make sure all parts of the traffic path remain uncongested.

In terms of who's the referee, I think it's very clear, under the '96 act and the '34 act, that it's the FCC. Now we can get into a legal debate whether that's what's allowed under 706, Title I, Title VI or Title II. I think it will be a hybrid of all those.

And I do believe after the commission received 3.7 million written comments on its proposed rulemaking, the preponderance, over 99% of those comments in favor of net neutrality. I think the public has spoken.

I think the regulators understand what they need to do, and there is now a process going on to try to craft those regulations to make them as sustainable as possible to the legal challenges that there almost a certainty. Listen, Verizon was so concerned that it preemptively told the FCC it's going to sue it before it even knew what the rules were..

I know it's only 5% of your revenues, but it seems like it's impacting a good piece of the other business because it's 18% of your terminating traffic and it -- and now the customers must be worried about it.

Can you talk about maybe how much overall revenue impact it truly has been? Because it does seem to be much more than what your basis at this point.

Or said another way, how much faster could you be growing if it wasn't for this?.

Well, I actually think my characterization of the revenue is pretty accurate. Listen, it's always difficult to do a counterfactual on a what-if. We are growing -- on a constant-currency basis, we grew 9.3%. There's no other telecom services company or datacom services company that's growing anywhere near that rapidly. So I think we're doing pretty well.

I can't tell you how the lack of connectivity impacts a venture capitalist decision to invest in the next Facebook or Snapchat or Dropbox.

Are they concerned that they can't get access to the customer so they don't fund the entrepreneur to come up with a new application that drives consumers' desire to see more or use more Internet? Does it slow down someone's desire to put more video on the Internet? These are things that I just don't have great visibility to.

What I can tell you is the things that are under our control, our sales force, our Corporate business is accelerating its growth. The NetCentric business -- 90% of that NetCentric business is growing, and it is growing on a constant-currency basis as well as a nominal basis.

But there's clearly an overhang here, and I think it's probably far broader than Cogent in terms of its impact on society. And I think -- listen, the FCC is not acting to protect my 5% of the revenue. And quite honestly, if that was my only argument to them, they shouldn't listen to Cogent.

They should be looking at this and understanding is the Internet transformational for our society? And whether it be the proposed mergers or net neutrality, I don't think anyone wants to preside over the creation of the next AT&T or the death of the Internet..

Our next question comes from Michael Rollins of Citigroup..

Maybe just to change topics for a moment. Just curious, Dave, if you can talk a little bit more about your Corporate business.

Maybe give us a range of experience you have with penetration, your buildings and, as you look at the competition on the ground today, what you think a fair average penetration makes sense for the business to aspire to over the next 3 to 5 years..

Sure, Mike. So when we look at our Corporate buildings by age, we actually continue to see the addition of about 1.8 customers per building, whether the building has been on-net 12 years or 1 year. Now there's a fair amount of variability in there. Our best Corporate building has over 200 connections in it, but that's an outlier.

Our average Corporate building has 12 as we migrate to selling some of these additional services like VPN services, VPLS and disaster recovery to customers. It actually increases the size of the addressable market above the 51 tenants because the tenant can actually buy more than one connection, one to the Internet and one to a remote site.

And I think it's reasonable that we can expect to see, at least, a doubling of our penetration. Over time, now, I don't think that's over 2 to 3 years, I think that's probably going to take 7 or 8 years for us to ultimately reach that penetration.

And because of the types of Corporate buildings we focus on, both size and location, we have not seen the type of competition that cable has given to the more suburban, smaller single-tenant buildings..

Our next question comes from Michael Bowen of Pacific Crest..

I think you're setting a record here for length..

I'm trying to keep it short, Mike, but I'm only answering people's questions..

No, it's fine. One quick one and one little longer one.

I guess on -- since you've telegraphed that you're going to spend $5 million in legal fees this year, and you don't expect to spend any next year, is there anything that can delay this process, either by the ISPs or the FCC, which could potentially force you to spend more into -- or additional funds in 2015 that you're not contemplating right now? And then maybe a little bit longer one, I understand the sales force churn is still down from a historical average, but it did tick up to 5.5% from, I think, 5%, if I'm not mistaken, last quarter.

I'm trying to get a feel for what type of reps are leaving and how that might be affecting your on-net revenue growth or your on-net ARPU. Can you help perhaps connect the dots there? Because I think ultimately, we're trying to figure out how you're going to get back to that 10% to 20% range.

And then finally, any thoughts on tightening that range from 10% to 20% maybe down to a smaller range?.

Sure, Michael, a number of questions here. So first of all, on the legal fees, it's always harder. It always takes longer than you expect. We have been encyclopedic in our delivery of data and statistics to the various regulators. I do not believe there is more that we have to give.

Most of what is going on at this point is now just interaction with those regulators. So while the process may get delayed, the large expense and our response to the civil investigative demands are complete at this point. And I'll be honest, I don't see what else they can ask us.

So I think that number is probably a good number, and I do see it going down even if the issue is not resolved. Two, to your second question on sales force churn, the answer is it did tick up slightly from 5% to 5.5%.

Part of that is as the sales force hiring that we did a year ago continues to mature and these people continue to have larger quotas, they're measured against a higher bar and some people that made the initial cut aren't necessarily making a long-term cut.

I do not believe that the sales force changes have had any impact on the type of customer we're selling or the ARPU. The ARPU changes are really coming from dynamics in the market declines, on price per megabit, on the NetCentric side, average port size and contract length. No real impact from the type or turnover of the sales force.

And then finally, on your range question, we are not in the business of giving very specific guidance but rather think it's in our best interest to give general broad guidance, and we feel very comfortable that there's ample addressable market, ample ability for us to hire and train salespeople to achieve the midpoint of our range.

And by keeping that range broad over the long term, I think it gives investors the ability to value Cogent not on a short-term basis, but rather over the long term against the potential of the business to produce cash flow. So we're going to stick with that wide range..

Yes. And if I could, I just want to make it real clear here. Because I think on -- one of the first questions that was asked was -- I think Colby actually said something about -- and you thought you might exit the year still at the midpoint of that range, and I wasn't -- I may have missed it.

I wasn't sure whether you affirmed that, whether that included FX or not. I just want to make sure we put a fine point on that..

Right. So let's be crystal clear. First of all, we will have significant FX headwind. Two, we will be slightly below our full year range; three, we will see a sequential improvement in our growth rate.

And what I have said publicly, and we still support, is by the end of the year, we will be on a sustainable path to deliver sequential growth rates that will get us to the midpoint of the range. That does not mean we will be at the midpoint of the range this year.

It means we will build a foundation of number of salespeople, productivity of those people, to get us there next year..

Our next question comes from Georgios Kyriakopoulos of SunTrust..

Given that you increased your minimum capital return to $12 million per quarter and also moved dividend higher by $0.01, can you discuss your 2.5x leverage target and, more specifically, the flexibility you might have with the model to expand beyond the target?.

Sure, sure. George, first of all, pleasure to meet you over the phone. So we are committed to producing an increasing amount of cash and returning that cash to shareholders. We set a target that was at the low end of any of the companies in our comparable universe.

We will continue to evaluate our cost of capital and what is the appropriate amount of net debt that the business can support. We are, today, under-levered and will continue to be in that.

I think once we reached 2.5x, the board will evaluate that, but at this point, I'm not in a position to give you any additional targets other than the ones we've laid out..

Okay. So then you would expect to reach the target before you make any decisions.

Is that correct?.

I think that's correct, sir..

Okay. And then lastly, Dave. If I step back and think about your NetCentric addressable market, which is somewhere between $1.5 billion and $2 billion, it would imply that your market share is around 10% and growing, given the overall flat growth profile of this market.

Now what do you think is a realistic market sales target for Cogent? And how fast do you think that you could get there?.

Sure. So first of all, your correct in sizing the market. While we are about 12% in the market by dollars, we are over 20% of the market by bps. I believe we can realistically get to be 1/3 of the market by dollars by continuing to grow faster than the market and gaining share due to the value we deliver to our customers and our pricing model.

I think we've got 3 more -- we're going to -- this will be a record call here, but we're trying to get these done quickly..

Our next question comes from Barry Sine of Drexel Hamilton..

Another net neutrality question for you. I thought it was an interesting comment you made that on both Google Fiber and Verizon FiOS, they're not getting any return on capital because they spend obviously on what they're charging.

So if the future comes to pass as you hope on net neutrality, it would seem to me for networks like that for end household networks with fiber, there's 2 ways to raise that return of capital, either charge the incoming content or bps coming in, which, I guess, they're trying to do through prioritization, or raise the access rates that they're charging customers for monthly subscription rates.

So is that the route that you expect the industry to take? And if so, does that not run into yet another perhaps even more important public interest issue, which is greater penetration broadband, especially the lower-income households?.

Sure. So a couple of points. First of all, the commission, I think, is evaluating and probably close to redefining what broadband is and raising that bar from 4 megabits to 25.

Two, the existing outside plans, that being twisted pair and HFC coax, were never designed to carry Internet are inadequate and eventually do need to be replaced with fiber closer to the PRAM, the ideal being fiber all the way to the end-user. Third, it is a certainty that people will pay for what they use. Usage-based pricing is fair.

That doesn't mean prices need to rise. It means that the legacy providers will have to not continue to subsidize their legacy businesses from their broadband business but rather take the profits of those broadband businesses and reinvest in modernizing their outside plant.

The challenge for FiOS and Google Fiber is that they are overbuilders with low market share. So you can't confuse the fact that local axis is a national monopoly, and any competitor has a disadvantage in that it has low market share compared to the incumbent.

What really needs to occur is a set of incentives to incent the incumbent operator to invest, and I think you will see that with later phases of regulation. Listen, local axis is a monopoly, and the only way you can ensure the monopolies ever invest is through regulation because they never have an economic incentive to invest..

Our next question comes from Michael Funk of Bank of America Merrill Lynch..

Two quick questions, I think, that haven't been asked yet. First, how are you thinking about the dividend payout ratio longer-term as a percentage of free cash flow? And do you have like a high-end target for that? And then second, you did show some improvement in working capital this quarter with the accounts receivable improvement.

Where are you driving there? Is there room for more improvement in working capital in the next few quarters?.

Sure. So first of all, let me take the payout one. I'll let Tad take the working capital one. In terms of -- our goal is to return capital. If we have internal places at the business to generate returns significantly above our cost of capital, we're going to go ahead and invest in the business.

We've been pretty clear that we cannot find enough of those opportunities. We also do not see inorganic opportunities that make economic sense. For that reason, we're committed to returning capital. We do need -- have no desire to hoard capital on our balance sheet.

So we will return that capital, right now, more than 100% of free cash flow to investors by levering up. That makes economic sense in a low interest rate environment. If interest rates remain low, we will reach an optimal leverage target and then return the vast majority of our capital either through a dividend or buyback.

I think the combination of those 2 tools is more powerful than just a dividend. So I don't think the dividend will ever approach 100% of free cash flow, but it will be an important part of our return of capital strategy.

And I think you've seen in the last couple of quarters, we're buying back about 1% of the company, and we're giving a dividend equal to about 1% of the market cap of the company, kind of a balanced approach. That seems pretty reasonable at this point in time. I can't predict where the stock is going to go or what the cost of capital is going to be.

What I can say is we're committed to making sure investors get the capital. We don't hoard it. And then Tad will take the working capital one..

Yes, on working capital, I mean, first off, the payments that have the most material impact on our working capital each quarter, as I mentioned in the script, are the timing of the interest payments.

I know that wasn't your question, but I just want to point that out again, and as a reminder, on the $240 million of notes we paid that in February and August and then on the new $200 million notes, we pay that in April and October. So those statements have a material impact on the total working capital.

With respect to accounts receivable, we did a great job of lowering the days sales from 28 to 26. That's probably a historical low. I don't anticipate any material deviation from that. We can get in any one day in our lockbox north of $3 million.

So every customer being billed monthly, the timing of kind of that last receipt in the lockbox can have a relatively material impact on what our ultimate days sales and working capital is with respect to accounts receivable.

So our group continues to do a great job on monitoring that and making sure customers are living up to their obligations to pay us, but I don't anticipate a material change one way or the other in days sales..

For our final question, it is from James Moorman of D.A. Davidson..

I'll keep it real quick since I'm the last one. On Netflix Europe, with their launch of additional countries in September, I realized there's probably not much data from this quarter.

But just what have you seen so far and maybe what to expect for Q4?.

Sure. So I think they're growing. I want to be careful about really commenting on the business model of a specific customer. Netflix has been the largest -- it's just become the largest distributor of video content around the world, and I think their penetrations outside the U.S. are very minimal. So I expect rapid growth from them.

I do think there are some unique regulatory requirements, and some of the European countries are different than in the U.S., and we expect continued growth from Netflix. But I wouldn't feel comfortable giving an exact prediction of how quickly they'll grow..

Thank you. That's our final question. I'd like to turn the call back over to management for any further remarks..

I just want to thank everyone. Hopefully -- it was a very long call but a complete one -- and take care, and we'll talk next quarter. Thanks. Bye-bye..

Ladies and gentlemen, thank you for participating in today's conference. This concludes today's program. You may all disconnect. Everyone, have a great day..