Dave Schaeffer - Founder and CEO Tad Weed - CFO.

Nick Del Deo - MoffettNathanson James Breen - William Blair Michael Bowen - Pacific Crest James Moorman - DA Davidson Georgios Kyriakopoulos - SunTrust Colby Synesael - Cowen Eric Pan - JPMorgan.

Good morning and welcome to the Cogent Communications Holdings First Quarter 2015 Earnings Conference Call. As a reminder this conference call is being recorded and 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 Holdings..

Thank you and good morning. Welcome to our first quarter 2015 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.

Despite financial or significant foreign currency headwinds, we're relatively pleased with our results for the quarter and are optimistic about the strength of our business and the outlook for 2015.

During the quarter we experienced accelerated constant currency sequential growth, sales were up, turnover and productivity were far above historical averages. During the quarter we returned a total of $24.1 million to our shareholders through a combination of dividends and stock buybacks.

We purchased 232,000 shares of our common stock at an average price of $34.98 during the quarter. At the end of the quarter we had approximately $29.1 million still available under our stock buyback authorization which is expected and available for us to use through February of 2016.

We continue to remain confident in the growth and our free cash flow generating capabilities. As a result, and as we indicated in our press release, we've announced another increase to our regular quarterly dividend from $0.32 per share per quarter to $0.33 per share per quarter, our 11th consecutive increase in our regular quarterly dividend.

Our second quarter 2015 regular dividend will be paid on June 12 to holders of record on May 22, 2015. Since we purchased only $8.1 million of our common stock in the first quarter, under our return of capital program this is less than our minimum commitment of $12 million.

We will make a special dividend payment of $3.9 million, or $0.09 per share in the second quarter along with our regularly recurring dividend. As a result our combined dividend to be paid in the second quarter will be $0.42 per share.

Our return of capital program is planned to continue until our net debt-to-EBITDA as adjusted for asset gains reaches a ratio of 2.5 to 1. The ratio has increased to 2.45 to 1 as of March 31, 2015 from 2.40 at the end of Q4, 2014. We intend on hitting our target of 2.50 no later than December 31, 2016.

Please note that our return of capital program is subject to change if conditions warrant such a change. Now I would like to take a moment and speak about the open Internet rules.

On April 13, the open Internet order as proposed by the FCC was posted in the Federal Register and these rules become effective 60 days from their posting, so on June 12, 2015. We are fully supportive of Title II net neutrality protections.

We believe that the open Internet rules strike a reasonable balance between ensuring consumers can get access to all lawful content, while limiting the regulatory burden of the multiple entities that comprise the Internet ecosystem.

The inclusion of peering or interconnection in the open Internet order rules is essential to delivering on the promise of an open Internet. Without interconnection there is no access to the entire Internet, inly access to an ISPs own network. We hope that all ISPs abide by these rules and support these new rules.

As we posted on our website, on May 1st we are pleased to announce a long-term bilateral peering agreement with Verizon. This is one of the networks where we were previously having network congestion issues. Now for a quick highlight of our revenue performance.

On a constant currency basis, our first quarter 2015 revenue grew from the fourth quarter of 2014 by 2.9% which is an acceleration in our growth rate from the fourth quarter over the third-quarter of 2.5%. On a constant currency basis our first quarter 2015 revenues versus first quarter of 2014 grew by 9.3%.

During the quarter traffic on our network grew by 7% from the fourth quarter and grew by 26% on a full year-over-year basis, compared to the first quarter of 2014.

Our sales rep productivity was 5.3 units per full-time equivalent per month, a rate that is again significantly above our long-term historical average of 4.7 units of sold business per full-time equivalent rep per month.

In response to requests from investors we have expanded the metrics table in our press release to include specific disclosures around legal fees spent on net neutrality and their impact on SG&A as well as specific disclosure around the asset-related transactions that also impact our EBITDA as-adjusted calculations.

We have also tried to reduce the length of our prepared remarks in order to allocate more time for questions. Throughout this discussion we will highlight several operational statistics. I will review in greater detail certain operational highlights and trends. Tad will provide some additional details on our financial performance.

Following these prepared remarks we'll open it up for questions and answers. Now I'd like to Tad to read the Safe Harbor language..

Thank you, Dave, and good morning, everyone. This earnings conference call includes forward-looking statements. 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.

Cogent undertakes no obligation to update or revise forward-looking statements. If we use any non-GAAP financial measures during this call, you'll find these reconciled to the GAAP measurement in our earnings release and posted on our website at cogentco.com. Now I'll turn the call back over to Dave..

Hey, thanks, Tad. Hopefully you’ve had a chance to review our earnings press release. As within previous quarters, our press release includes a number of historical metrics. These metrics will be added to our website.

Several investors have requested that we include additional details regarding our determination of EBITDA as-adjusted, so we have added all of these details to the metric table that we did release.

Now with regard to our guidance, our EBITDA margin, adjusting for the $1.4 million in non-recurring legal expenses that we spent in support of net neutrality and excluding the asset sale gains in the first quarter of 2015 was 31.9%.

We continue to anticipate that our full year revenue growth for 2015 over 2014 on a constant currency basis will be within our guidance range of 10% to 20%. We also anticipate that our gains on asset sales and equipment transactions will be approximately $5 million in 2015 as compared to $11 million of equipment gains we experienced in 2014.

We expect our EBITDA margin, excluding asset gains for 2015 over 2014 to be over a 100 basis points better than it was the previous year, but it’s somewhat dependent on the amount of monies needed to be spent related to the legal fees in defending net neutrality.

We anticipate incurring additional net neutrality costs in 2015, but we do believe these costs will be less than 2014, but are today unsure of the exact amounts of these costs. Tad will now cover some additional details related to our quarter..

Thanks, Dave and again good morning to everyone. I would also like to thank and congratulate our entire Cogent team for their results and the hard work and efforts during another very busy quarter for the company. On revenue by type.

We analyze our revenues based upon product class which is on-net, off-net and non-core and also analyze our revenues based upon customer type. We classify all of our customers into two types, NetCentric customers and corporate customers.

Our NetCentric customers buy large amounts of bandwidth from us in carrier neutral data centers and our corporate customers buy bandwidth from us in large multi-tenant office buildings. Revenue from our corporate customers grew by 3.8% from the fourth quarter of 2014 to $55.1 million.

Our corporate customer connections grew 2.4% sequentially to 22,090 corporate customer connections on the network at the end of the quarter. Revenue from our NetCentric customers decreased by 3.5% from $43.6 million for the fourth quarter of 2014 to $42.1 million for this quarter.

The decrease was primarily and almost entirely due to the sequential $2.3 million negative impact of foreign exchange on our first-quarter revenues. Our European revenue is almost entirely NetCentric revenue and accordingly subject to the impact of variations in FX.

Despite the revenue decline our NetCentric customer connections grew sequentially by 2.8% for the quarter to 25,321 net centric customer connections.

Revenue by product class; our on-net revenue was $71.2 million for the quarter which was a sequential quarterly decrease of 0.1%, again, primarily related to the FX headwinds and increased by 3.1% from the first quarter of last year. Approximately 85% of our new sales for the quarter were for our on-net services.

Our on-net customer connections increased by 2.4% sequentially and increased by 12.2% from the first quarter of last year. We ended the quarter with over 40,000 on-net customer connections on our network in our 2,155 on-net buildings.

Our off-net revenue was $25.7 million for the quarter, which was a sequential quarterly increase of 2.3% and an increase of 9.5% from the first quarter of last year.

Our off-net customer connections increased sequentially by 4.8% and we ended the quarter serving over 6,300 off-net customer connections and over 4,500 off-net buildings primarily in North America. Our non-core revenue is relatively immaterial at this point. It was about $300,000 and less that 0.3% of our revenue and about 300 customer connections.

Some statistics on pricing; consistent with our historical trends, the average price per megabit of our installed base in our new customer contracts decreased for the quarter.

The average price per megabit for our installed base declined by 4.5% from $1.81 for the fourth quarter of last year to $1.73 for this quarter and declined by just under 20% from $2.15 for the first quarter of 2014.

The average price per megabit for our new customer contracts was $1.20, a slight decline from the $1.22 for new customer contracts that were sold in the fourth quarter of last year, and a 11.3% decline from the $1.36 price per megabit for our new customer contracts that were sold in the first quarter of last year.

These pricing numbers were of course impacted by FX rates as approximately 45% of our traffic is located in Europe. On price per unit, average price per unit our off-net and on-net ARPUs declined from the fourth quarter.

Our on-net ARPU, including both Corporate and NetCentric customers was $5.90 for the quarter, which was a decrease of 2.8% from the $6.07 for the fourth quarter of last year, again FX impacting ARPU as well.

Our off-net ARPU, which is comprised predominantly of corporate customers, was $1,379 for the quarter, which was a decline of 3.2% from $1,424 for the fourth quarter of 2014. On some churn rates, our churn rate for on-net to customers was stable during the quarter and our off-net churn rate improved.

Our on-net churn rate was 1% for this quarter which was the same rate as the fourth quarter of last year, and our off-net churn rate was 1.2% which was an improvement from 1.4% from the fourth quarter. Our gross profit margin increased by 20 basis points from the fourth quarter and decreased by 40 basis points from the first quarter of last year.

Our gross profit margin was 57.9% this quarter, 57.7% for the fourth quarter and 58.3% for the first quarter of last year. On EBITDA and EBITDA as-adjusted; as Dave mentioned we have expanded our presentation and our press release table of our EBITDA and EBITDA as-adjusted calculations.

We have included the adjustment amounts, which include our gains on asset related transactions and our fees for net neutrality that we use in determining EBITDA as-adjusted.

Our presentation of EBITDA, which excludes any asset related gains and includes all net neutrality fees that are in our SG&A expenses is reconciled to our cash flow from operations and was $29.6 million for the quarter and that margin was 30.5%.

Our EBITDA as-adjusted by including asset related gains, previously referred to as just EBITDA as-adjusted, was $31.2 million for the quarter and that margin was 32.1%. EBITDA as-adjusted by including asset related gains and also adding back legal fees associated with net neutrality was $32.6 million for the quarter and that margin was 33.5%.

And finally EBITDA as-adjusted by adding back net neutrality fees, but excluding any asset related gains, which are our legal fees and our SG&A expenses was $31 million for the quarter and that margin was 31.9%. Again all these details are outlined and reconciled to our cash flow from operations in our press release.

Asset-related gains and net neutrality fees can have a material impact on our EBITDA as-adjusted calculations and also can vary materially from quarter-to-quarter.

Additionally, we have some seasonal factors that typically impact our EBITDA and in particular SG&A expenses, and they include the resetting of payroll taxes in the U.S., the cost of our annual sales meeting, Annual CPI or 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 and did increase our SG&A expense in our first quarter consistent with what's happened in previous years.

Some details on interest expense, as we mentioned on our year-end call in February 2015, we refinanced our $240 million of senior secured notes by redeeming those notes at 104.2% of par, using the proceeds from our February issuance of $250 million of 5.375% senior notes and also some cash on hand.

This refinancing will save us $6.7 million in the annual cash interest expense.

Interest expense for the quarter resulted from interest incurred on our $200 million of unsecured notes, interest on our $240 million of senior secured notes prior to their redemption and interest incurred on our $250 million of senior secured notes from the issuance date in February and finally interest on our capital lease obligations.

So interest for the fourth quarter was $12.2 million and $11.3 million for this quarter. The details of that $11.3 million are as follows; $2.9 million was related to the $200 million of notes, $2.7 million was related to the $240 million of notes that we redeemed in the quarter, and $1.4 million was related to the new $250 million notes.

And lastly, $4.2 million was related to our capital lease obligations. EPS was a loss of $0.04 for the quarter, compared to a loss of $0.01 for the fourth quarter and breakeven for the first quarter of last year.

During the quarter we experienced a loss of $10.1 million on the notes extinguishment and redemption, also a gain of $10.1 million on the early termination of capital lease obligations in the Spain, have more details on in a minute.

Foreign exchange impact; we’ve mentioned a few times, the impact of foreign currency has reduced the portion of our business reported in U.S. dollars outside of the United States to approximately 23%, in the aggregate, as measured by revenues.

Approximately 18% of our first quarter revenues were based in Europe and about 5% of our revenues were related to our Canadian Mexican and Japanese operations. Continued volatility in foreign exchange rates can materially impact our quarterly revenue and financial results. The average euro to U.S.

dollar rate for the fourth quarter of last year was $1.25, and the average euro to U.S. dollar rate for this quarter have reduced to $1.13. The average euro to U.S. dollar rate for the first quarter of last year was substantially higher at $1.37.

The foreign exchange impact on our revenue from the fourth quarter to first quarter resulted in a $2.3 million material decrease to our U.S. GAAP revenues, from the first quarter of last year to the first quarter of this year. The impact was much more substantial and it was a negative $4.3 million. Looking forward, the average euro to U.S.

dollar rate for this current quarter, so the second quarter of 2015 is about a $1.08 [ph], that's the average. Should the average foreign exchange rate remain at current levels we estimate that the FX conversion impact on sequential quarterly revenues from the first to second quarter of this year will be a decrease of about $800,000.

The average euro to U.S. fee rate for the second quarter of last year was $1.37. Should again the rates remain at current levels we estimate that the FX conversion impact on our year-over-year quarterly revenues will be a decrease of approximately $5.3 million, so $1 million greater than what we experienced this quarter.

Customer concentration; we believe that our revenue and customer base is not highly concentrated for the first quarter of this year. No customer represented more than 2.1% of our revenues, and our top 25 customers represented less than 8.1% of our first-quarter revenue.

CapEx; CapEx decreased by approximately 1% on a sequential basis and 17.3% on a year-over-year basis. Our CapEx for the quarter was $12.9 million, was $13 million in the fourth quarter and $15.6 million last year.

Principal payments on capital leases are for long-term, dark fiber IRU agreements and that was $3.7 million this quarter, a slight increase from $2.8 million from the fourth quarter and about the same as the first quarter of last year.

We added 30 buildings to our network in the quarter, including eight carrier neutral data centers and 22 multi-tenant office buildings. We added 131 on-net buildings to our network over the last 12 months. That includes 88 multi-tenant office buildings and 43 carrier-neutral and Cogent operated data centers.

We expect to continue our building and network expansion in 2015 but at a slightly more moderate pace than we experienced last year and with continued moderation in 2016. Some balance sheet items; our cash at the end of the quarter was $260 million.

And for the quarter our cash decreased by $27.7 million as we returned $34.2 million of our capital to our stakeholders. During the quarter we paid $16 million for our first quarter dividend, 8.1 million was spent on stock buybacks. And we spent $10.1 million for our initial and final semiannual interest payment on our $240 million of notes.

We also spent a net amount of $2.6 million on the redemption of our $240 million of notes, net of the proceeds we received from our $250 million notes. Our cash flow from operations materially increased. It was $18.4 million for the quarter compared to $17.9 million for the fourth quarter and $10.6 million for the first quarter of last year.

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. Our long-term and short-term capital lease fiber obligations after the lease termination in Spain totaled $132 million at quarter end.

During the quarter, we experienced a $10.1 million gain on the early termination of $30 million of capital lease obligations in Spain. We obtained alternative fiber to serve the Spanish market, and there was no impact at all on our customers or revenue from the lease termination.

Debt ratios; our total debt including capital lease obligations was $583.6 million at quarter end and our net debt was $323.5 million. Our total gross debt-to-trailing last 12 months EBITDA as-adjusted for asset-related gains was $4.42 million at quarter end and our net debt-to-trailing EBITDA ratio was 2.45.

Bad debt expense; our bad debt expense for the quarter had improved and was less than 1% of our revenues, was 1% in the fourth quarter and 1.2% in the first quarter of last year. Lastly, our days sales outstanding had materially improved and was only 25 days at quarter end compared to 28 days at the end of the year.

And as in each quarter I want to thank and recognize our worldwide billing and collections team who are continuing to just do a fantastic job on customer service and customer collections. Now I'll turn the call back over to Dave..

Hey, thanks, Tad. Now for a moment on our sales force activity and productivity; we began first quarter of 2015 with 346 reps and ended the quarter with 343. We hired 43 reps in the quarter and 46 reps left the company during the quarter.

Our rep churn rate was 4.3% for the quarter which again has been much better than our long-term average of 6.3%, which continues to come down. We began the quarter with 329 full time equivalent reps selling our services and ended the quarter with 326.

Productivity on a full time equivalent basis for the quarter was 5.3 installed orders per full-time equivalent rep per month. This rate of organic rep productivity is again significantly ahead of our long-term historical averages for rep productivity, which has averaged 4.7 units per full-time equivalent since the company has gone public.

Now for a moment on our network scale and scope, the size of our network continues to grow. We passed a major milestone with over 800 million square feet of North American multi-tenant office space directly connected to the network. Our network consists of over 27,600 metro fiber miles and approximately 55,000 intercity route miles.

The Cogent network is one of the most interconnected networks in the world and we directly connect with over 5,335 networks. Approximately 35 of these networks are settlement free peers, the remaining networks are all Cogent customers. We are currently utilizing 31% of our route [ph] capacity.

We routinely augment capacity in parts of our network to maintain these low utilization rates. We operate 49 Cogent controlled data centers with 550,000 square feet of raised floor space. So in summary, we believe that the Cogent network remains the lowest cost network.

We are the low-cost provider of Internet access and transit services, and our value proposition remains unmatched in the industry. Our business remains completely focused on the Internet and IP-connectivity and data center co-location services which are necessary utilities for our customers.

We expect our annualized constant currency revenue growth and EBITDA margin expansion to be consistent with historical rates of 10% to 20% revenue growth and will achieve annual EBITDA margin expansion of over 100 basis points, inclusive of the extraordinary legal expenses that we are bearing.

For 39 of the past 40 quarters as a public company we produced organic sequential growth and are encouraged by the cash flow generating capabilities of our business. We continue to be encouraged by our sales initiatives and our rep productivity as well as order funnel and pipeline.

Certain last mile Internet access peers continue to be reluctant to upgrade their connectivity to our network. Unlike these organizations, we believe and completely support an open Internet with true and strong net neutrality as demonstrated under Title II.

We're very pleased in May to have entered into a long-term interconnection agreement with Verizon, I think recognizing their support for Title II.

We continue to believe that peering included in Title II with a light regulatory touch, strikes a reasonable balance ensuring consumers have access to all lawful content while limiting the regulatory burden on the multiple entities that comprise the Internet ecosystem.

We incurred material legal costs and spent approximately $1.4 million in the first quarter of 2015. We believe we will incur additional fees in 2015 but they will be at a lower rate than in 2014.

We are committed to providing annualized top line constant currency revenue growth of 10% to 20%, expanding margins and most importantly generating increasing amounts of free cash flow for our equity. We are opportunistic about the purchase of common stock.

We have at the end of the quarter $29.1 million remaining under our current authorization program.

Our Board of Directors has approved yet another increase in our dividend; $0.33 a share in the quarter combined with the $0.09 special dividend under our return of capital program means we will be returning $0.42 a share in cash to shareholders on June 12.

Our dividend increase and our return of capital program continues to demonstrate our belief in the business and the cash flow generating capabilities that we have built.

We are committed to returning an increasing amount of capital to shareholders and are migrating towards our target of EBITDA, net EBITDA ratio of 2.5 to 1 no later than the end of 2016. With that I’d like to open up the floor for questions..

Certainly. [Operator Instructions]. Our first question comes from the line of Nick Del Deo of MoffettNathanson. Your line is now open..

Okay. Hey, thanks for taking my question. Probably I’ll be hoggy [ph] and ask two. So first, Dave, you had guided to 3% to 3.5% growth at the end of February, meaning you had almost two months results under your belt when you made that - when you gave that guidance.

Was there a sales slowdown in March or anything else that sort of put you below the low end of that range? And are you still comfortable with that sort of 3% to 3.5% sequential going forward? And then the second question with respect to the productivity, obviously it's higher than the 4.7 long-term average that you’ve had.

I think in 2013 and 2014 you averaged like six installed units per rep, so last two quarters have been below that, you’ve achieved since making those sales force changes. So I was wondering if you could comment on that..

Sure. First of all thanks for the question Nick. With regard to the revenue growth coming in at 2.9% sequentially, we did see slightly lower burst traffic in the month of March than was anticipated. That put us just below the guidance range.

But I do feel comfortable that we'll be able to continue to deliver that increasing growth rate and be in that 3% to 3.5% range. If you look at our corporate growth rate, which does not include any burst it grew at an accelerated rate of 3.8% sequentially. No FX, no burst, no seasonality, really impacting that number.

The corporate off-net growth rate was 2.3%. The on-net corporate growth rate was actually 4.2%. So these numbers mean that 57% of our revenues are growing above trend line. With regard to the NetCentric revenue we did see slightly lower burst. Our traffic growth was more moderate.

Some of that is the impact of congested ports with our peers and we believe we will see that continuing to moderate as we start to see some of the peers abiding by the open Internet order.

Now with regard to the sales productivity numbers we actually achieved better ARPU in the quarter, both a more moderate rate of price per megabit decline and actually on a per unit basis a more moderate rate, we actually saw our corporate on-net ARPUs actually tick up slightly in the quarter. The productivity numbers are a bit volatile.

They're not perfectly linear. We did have a few reps leaving the company in the quarter, a little bit above our target but still below long-term trend lines. And I feel comfortable that the initiatives that Ernie's put in place are taking hold, are delivering results. You see that most clearly on the corporate side.

On the NetCentric side, we're getting the unit productivity. It's just we haven't seen all the benefits of traffic growth. If you look at our off-net or our NetCentric business it actually declined at about 3.5%, sequentially even if you add back for the FX impact, it only grew at about 1.1%, considerably below the 2.8% trend line.

And part of that is that those ports still remain congested and we're unable to accept that burst traffic.

As those ports become un-congested, I think we will see that burst revenue continue to reaccelerate, and hopefully get our NetCentric growth rate back up to a constant currency rate that has historically been 2.8% or even above that, and with that I think we will be able to achieve growth rates for the entire business well within our guidance range..

Okay. That's great. Thanks, Dave..

Thank you. Our next question comes from James Breen of William Blair. Your line is now open..

Yeah, thanks, Dave.

Can you talk about, on the net neutrality side, and the recent agreement you signed with Verizon, in your comments you just made you talked a lot about port capacity, how do you think this agreement with Verizon will help that? And then how do you feel about the potential of having similar arguments with the other ISPs or is Verizon unique in this situation? Thanks..

Sure. So first of all we're very pleased that we were able to enter this agreement. Cogent has been, since its inception, a proponent of billing keep, meaning each party bills its customers and keeps the revenue and there are no settlement fees. Cogent has not purchased peering and continues not to purchase peering and does not sell peering.

The exact terms of the agreement are covered by confidentiality, but there is a mechanism in the agreement to ensure that all of the congestion that exists today will be eliminated fairly quickly and then as it is eliminated there is a mechanism for continued annual upgrades and the ability to moderate or adjust the pace of those upgrades as needed.

So I feel that for Verizon which is our second largest peer, this problem has been ameliorated, even though none of the impact has shown up as of yet, over the next few months we think that problem will be gone.

We also have seen a marked improvement in Comcast s behavior, really just in advance of the Justice Department evaluating its proposed merger and ultimately withdrawn merger with Time Warner.

While all of the congestion today has not been alleviated, much of it has been alleviated and we would think that if the upgrades that are in the works are installed over the next month, there will be no congestion. So the number one and number two peering partners will be resolved.

We sincerely hope that the other three North American providers and the three European providers that continue to have congested ports honor the requirements of the open Internet order even though they may question its validity and this problem goes away. We're in active discussions with all of the parties.

I'm hopeful and I sincerely hope that we have to bring no enforcement actions with the FCC. But we're prepared to do so if necessary.

So while I was not pleased about spending now $7 million on these proceedings for legal and economic analysis I think it was money well spent and we're seeing the benefit of it and we should see improved quality of service for all customers on the Internet and for all backbone providers, not just Cogent over the next couple of quarters..

Great. Thanks..

Thank you. Our next question comes from Michael Bowen of Pacific Crest. Your line is now open..

Thanks a lot for taking the question. Dave just wanted to clarify something in case I missed it. I think last call you said you were expecting around $15 million of FX impact in 2015.

I wanted to see if you could give us an update on that? And then with regard to the legal costs, obviously still reasonably significant this quarter, can you give us an idea of what are the particular costs that you're getting hit with now in somewhat of a post net neutrality world? And how do we think about the pacing of that as we model that impact going forward? Thanks..

Sure. Thanks for the questions, Michael. So you are correct. It is still a material expense and we would like that expense to go to zero. Some of this expense was the final work necessary to help support the FCC, as they issued the open Internet order as well as final expenses in providing information to the DoJ for the Comcast, Time Warner merger.

As you may have noted, we have also filed protests against the AT&T DIRECTV merger. While we are not proposing an outright block on the merger we are proposing conditions that will include a commitment to make sure that the interconnections between AT&T's network and the rest of the Internet are open. We do think that our expenses are going down.

They have tailed down throughout the first quarter. They are continuing in first half of this quarter to be at a lower rate and you should see throughout the year lower numbers than last year.

The wildcard in that is, if we have to file any enforcement actions, and if we do, will the Enforcement Bureau actually prosecute those or will we be forced to present our case directly to an Administrative Law Judge, and we just don't have answers to that.

As you know there are four current protests to the validity of the open Internet order requesting stays. We're going to be filing a brief supporting the FCC and opposing the stay. We feel pretty comfortable that the law, as a consumer protection law, will remain in place and we sincerely hope everyone obeys by.

And I'm going to let Tad to take the FX number now..

Sure. Euro had further depreciated since our last estimate, or the dollar had strengthened when we talked about $15 million. The estimate now is slightly more than $17 million negative impact. That's because the average rate for the euro for 2014 was a $1.33.

And our number that kind of backs into that estimate is approximately $1.10, and I think today it's about $1.11. So those are kind of the figures that get us to about a $17.5 million impact expected year-over-year related to foreign exchange on revenue..

Okay. Great. Thank you..

Yeah, thanks, Michael..

Thank you. Our next question comes from James Moorman of DA Davidson. Your line is now open..

Yeah. Thanks for taking the question. Just first I guess, a follow-up on the - what you just said about AT&T. So given the fact that you filed the protest have you - how are discussions going with AT& T, kind of have they started? And then also back to the sales force.

Do you think it’s kind of more of an issue with the sales force or are you just seeing more competition out there that might be having an impact?.

Sure. So first of all with regard to the peers that are resistant to opening up additional ports, we're having regular discussions with all of those peers. I think it would probably be inappropriate for me to comment on the exact staging of the AT&T discussions. I can tell you that we reached out to them and have discussions on a very regular basis.

And I hope they end up coming to a similar conclusion that Verizon did, and understand that they have a responsibility to their customers to ensure they get connectivity to the whole Internet.

And just the open Internet Order more than anything else is a consumer protection order and it's disturbing when any ISP decides to deliver lower quality to its customers than it should. With regard to the sales force I think this is really a Cogent issue, not a competition issue. We've basically have two competitive landscapes.

On the corporate side of our business, we typically compete with the incumbent telco and we've actually seen substantial improvement in our corporate performance. Our sequential corporate revenue growth has gone from like 1.5% when Ernie joined us to over 3.8%. Our on-net sequential growth rate has gone up to 4.2%, our off-net growth rate at 2.3%.

These are all marked improvements and put us on an annualized basis well above the midpoint of our guidance range. And remember this business is purely in North America, very little FX impact, and represents 57% of our revenue. So we feel pretty comfortable that what we're doing is resulting in better performance on the corporate side of our business.

I think we have not seen any material change in the corporate behavior in our on-net footprint of our competitors. In the off-net footprint we do continue to see cable competing for the smaller buildings, those 4,200 buildings that we connect to, and often times we use cable as our loop provider.

That's part of the reason why our ARPUs on off-net have been coming down as we achieve a 50% profit margin on those off-net sales. With the regard to the NetCentric business we've actually seen an improvement in unit productivity on the NetCentric side, which is again a direct result of what's happening in our sales force.

With regard to competition, we have three major global backbones that we compete with, and then a number of Tier 2 resellers. We continue to gain market share and continue to outperform, I think, any of those other networks, whether it'd be on traffic or revenue growth.

Now we've been very clear that 18% of our exiting traffic, which represents about 10% of the revenues in our NetCentric business have been capped and are actually on revenue terms declining at about 22% per year, 20% this most recent quarter.

I think we will see those problems become less acute and eventually be completely ameliorated, and we feel comfortable that we're going to see some improvement in the NetCentric growth rates. I don't think it's a competitive dynamic. I think it's just a question of where the bits need to go.

The fact that we continue to gain, AS’ [ph] connected to us gain market share and grow revenues in a flat market, tell us that we're doing just fine. So we've got more work to do on the sales force, but we're pretty pleased with how far we've come in the past year and a half..

Great, thanks a lot..

Thanks..

Thank you. Our next question comes from Georgios Kyriakopoulos of SunTrust. Your line is now open..

Excellent. Thank you, guys. First of all on Netflix, you mentioned in the past about the possibility for companies like Netflix be to be able to get out of contracts signed with the incumbents at a time when ports were congested.

How likely do you think this might be and what level of revenue you expect to capture over the next few months? And then one more question on OpEx. Basically you mentioned you resetting payroll taxes in in the U.S.

at the annual sales meeting, some of the reasons for the higher spending this quarter, how should we think about OpEx for the remaining of 2015? And also given that you had a high watermark for legal fee spend in the March quarter, should we think that OpEx should trend lower from here throughout 2015? Thank you..

Sure Georgios, thanks for the question. I'll take the Netflix and I’m going to get Tad to take the OpEx question. With regard to companies that were pressured and into signing bilateral paid peering agreements, while these agreements are legal under the open Internet order they also are governed by a fair and reasonableness test.

And the measure of that test is pretty simple. Are these agreements commercially economically attractive? Today, the cost of transit which includes connectivity to the whole Internet is less than the cost of these direct paid peering agreements.

So the fact that these companies entered into agreements to buy a more reduced product set at a higher price only can be explained by the market power the terminating access networks used to pressure them into these agreements. Now it's not up to us to go protest these agreements and have them repudiated. It would be up to the parties who signed them.

I think you would have to ask Netflix and others how they plan to react. I think what I've heard publicly from these companies is they would like to extricate themselves from these agreements, if there was adequate transit capacity available for them to purchase.

I believe these improvements in interconnections with Verizon and others are going to help us in fact give them that alternative. Now it is true that our largest customer, as a percentage of revenues did increase in the quarter from about 1.8% of revenues to 2.1%. I think that will continue.

And they have not yet gotten out of the contracts that they are today bound by. So it's really difficult for me to give you an exact prediction of when or how much additional revenue will come. What I know is that Cogent is the lowest cost, highest quality provider. And if there are no artificial constraints in the market we will win the business.

I'll let Tad touch on the OpEx question..

Sure. As I mentioned in the prepared remarks we always experience a seasonal SG&A increase from the fourth to the first quarter. And I can give you some kind of details on that, in the aggregate, it that was about - just about $2 million.

From the compensation side which is salaries and commissions really from changes in CPI is about $0.5 million from the fourth quarter to the first quarter benefits, and - which relate to two things, really the resetting of payroll taxes, but also an increased rate for medical costs, it's about $800,000.

Audit fees are always higher in the first quarter following our 10-K and completing our annual audit and annual report, also the proxy. That's about $300,000. So in the aggregate that's sort of a seasonal impact.

When you look from the fourth quarter or the first quarter rather to the second quarter, expect about $1 million to $1.5 million decline in the aggregate in SG&A, and that will come from the lower tax rate for payroll taxes in the U.S. We don't have the sales meeting which is about $450,000. I didn't mention that, that occurs in the first quarter.

And then the audit fees are lower just because of seasonality and that's already about $0.5 million there. So I do expect a decline first quarter to second quarter in the aggregate.

The level for all of 2015 will be largely dependent upon what we do with head count with respect to primarily sales reps and then also what happens with the legal fees that we expect to decline. But frankly, that level of decline is kind of unknown at this point..

Okay, thank you..

Thank you. Our next question comes from Colby Synesael of Cowen. Your line is now open..

Thanks. I apologize I jumped on late, so hopefully this wasn't already covered. But I was hoping you could summarize or review what was talked about at your annual shareholder meeting.

I know the last few years you've been inviting key investors to come down and give their thoughts to the Board, maybe just kind of summarize what were the key aspects the investors that were there were talking about, and then also what the Board or at least your own response on those suggestions were? Thanks..

Yeah, hey thanks Colby. Thanks for your question. So as many of our shareholders know we've actually been over the years encouraging people to come to our shareholders meeting and this year was well attended. We had six or seven significant holders represented. As always there was a diverse view of opinions around mechanisms to return capital.

I think shareholder questions kind of fell into three major categories. One was just the ability to continue to reaccelerate growth and reaccelerate profitability. The second category was our ability to continue to moderate our level of capital spending. We did see a spike up in 2014 after four consecutive years of declining capital intensity.

We will see that number come down this year and I think investors wanted to hear from management and the Board that would be the case. And then the third topic was return of capital. And there were questions there in two areas.

One, what would be the exact mechanism? Would it be more buybacks or more dividends? I think what you heard from the Board at that meeting was a commitment to continuing to grow the regular recurring dividend at a moderate pace.

Two, to be able to use buybacks opportunistically, and then commit with this extraordinary commitment of return of capital program. So I think it was kind of stay the course, if market conditions change.

I think what the Board indicated is they would it be extremely flexible and would react quickly to those changes in market conditions, and give management the tools they needed, including additional authorizations if necessary to step in and up buy a significantly greater amount of stock back than we have been.

Then the other part of the question was what happens to the actual targeted net leverage ratio. We still have excess capital on our balance sheet. We ended the quarter with $260 million of capital. I think the Board had an open mind to either raising the net leverage target to allow us to disgorge more of that capital and return it to shareholders.

And whether or not it was a higher stated limit or we just went over that limit, wasn't determined. And even the ability to go over that was not yet determined.

But I think the board had an open mind and heard loud and clear from the shareholders that unless there was a productive business use to deploy that $200 million of excess capital, or there was some great M&A opportunity, it needs to be returned to shareholders. And I think the Board has supported that.

Hopefully over the next couple of quarters as we breach that 2.5 level, we'll have some further announcements on that..

Great, thank you..

Thank you. Our next question comes from Eric Pan of JPMorgan. Your line is now open..

Hey, guys. Thanks for taking the question. A couple of things.

On the Interconnection agreement, when do you expect the port upgrades to be completed with Verizon and then how should we think about the relief of Verizon Comcast congestion with regard to the 3% and 3.5% growth expectation? And then on the capital return, share buybacks has slowed over the last few quarters while special dividends has increased, what's the reasoning behind the shift?.

Sure. With regard to the Verizon upgrade, there are planning sessions that are occurring on a regular basis between Cogent engineers and Verizon engineers. We've identified the locations and amounts of the initial upgrades. They are in progress and I would suspect over the next couple of months, the first wave of those upgrades will be completed.

Both parties believe those upgrades are going to be sufficient to alleviate the congestion. I'll be honest, I don't know for sure because we can't tell how much traffic is pent-up waiting to go through those ports. And there is a mechanism in the agreement that allows us to review at the end of that initial upgrade cycle if it was adequate.

If it's not there is a requirement for further upgrades. And then there are, over the multi-year agreement, a mechanism for continuous upgrades. So I feel pretty comfortable that over the next two to three months, the Verizon congestion issues which have been extreme, will be gone.

With regard to Comcast, as I said, they began slowly upgrading earlier in the year and then throughout the year we saw the pace of those upgrades improve, whether they'll continue to improve or not unclear. There is no binding written agreement on of the parties. There's just a return to the pattern and practice that we've had in the past.

We've had some movement out of some of the other ISPs also with moderate upgrades. So my hope is that at least half of the interconnection problem gets resolved, just through what's underway now. I would hope that going forward, they would all be resolved..

And how should we think about the resolution in regards to that 3% and 3.5% quarter-over-quarter growth expectation..

Sure. So there will be no impact on the Corporate business, which is 57% of revenue and today is growing above that 3.5% range. Corporate on-net grew 4.2%, corporate off-net 2.3%, blended rate 3.8%, probably just about where it should be, maybe it will improve slightly from here.

On the NetCentric side, the growth rate is below par at a constant currency growth rate of 1.1%, a reported growth rate of negative 3.5%. That's clearly currency related.

But then we should expect to see those ports opening up and that roughly 18% of traffic or 10% of revenues that were declining at basically 20%, so a 2% headwind, dissipate and turn into a bit of a tailwind.

Again I cannot predict exactly when, but what we would hope is that our NetCentric growth rate would return to its long-term trend line of 2.8% or maybe even go above that. And then with regard to return of capital we have been opportunistic about buying stock in the open market.

We've been reluctant when the market seems to be very fully valued, not necessarily for Cogent, but the market in general. We've been selective. We did buyback over 4% of the company last year.

And we are committed to buy back the return of capital program that's meant to be a safeguard to keep management honest and make sure that the buyback that is announced is really used. And that's really a minimum level that we're going to return above and beyond what we're returning through the regular dividend..

Great. Thanks Dave..

Thanks..

Thank you. And at this time I'm showing no further questions in the queue I would like to turn the call back to management for any closing remarks..

We want to thank everyone for the call and for the questions. And we look forward to chatting with you soon. And most importantly, we are committed to continuing to accelerate our growth and return increasing capital as we have promised shareholders. Thanks a lot everyone..

Ladies and gentlemen, thank you for your participation on today's conference. This concludes the program. You may now disconnect. Everyone have a great day..