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Cogent Communications Group, Inc. (NASDAQ:CCOI)

Q1 2014 Results Earnings Conference Call

May 8, 2014 8:30 AM ET

Executives

Dave Schaeffer - Chairman and CEO

Tad Weed - Chief Financial Officer

Analysts

Michael Bowen - Pacific Crest

James Breen - William Blair

Colby Synesael - Cowen and Company

Frank Louthan - Raymond James

Tim Horan - Oppenheimer

Michael Rollins - Citigroup

Operator

Good day, ladies and gentlemen. And welcome to your Cogent Communications Group First Quarter 2014 Earnings Conference Call and Webcast. As a reminder, this conference call is being recorded and will be available at www.cogentco.com.

I’d now like to turn the call over to Mr. Dave Schaeffer, Chairman and Chief Executive Officer. Mr. Schaeffer, you may begin, sir.

Dave Schaeffer

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

Firs of all, I’d like to apologies for moving the call time but we've been requested to appear in front of the House Judiciary Committee concerning the proposed merger of Comcast and Time Warner Cable. In order to accommodate the House’s request we need to reschedule this call an hour earlier than originally schedule. And then finally, we will be holding this call to a strict one-hour time window.

We are very pleased with our results for the quarter and are optimistic about the strength of our business and the outlook for the remainder of 2014. During the quarter, we experienced accelerated sequential revenue growth, gross margin expansion, network traffic growth, sales productivity that was far above our historical averages.

We returned a total of $32.6 million to our shareholders through a combination of dividends and buybacks during the quarter. This $32.6 million includes our regular recurring quarterly dividend of $0.16 a share and an additional $10.7 million paid under our return of capital program for a total dividend in the quarter of $0.39 per share, or $18.4 million, which we paid in March.

The $32.6 million return to shareholders in the first quarter includes $14.2 million spent on the purchase of 405 million shares of our common stock during the quarter through our buyback program at an average price per share of $35.05 per share.

So far this quarter and through, yesterday, we have purchased an additional 391,000 shares of common stock for a total of $13.4 million at an average price in the second quarter of $34.29 per share.

We continue to remain confident in the cash flow generating capabilities of our business. As a result, we have indicated in our press release, we've announced a further 6% increase in our regular quarterly dividend from $0.16 a share to $0.17 a share. Our seventh consecutive quarterly sequentially increase in our regular dividend.

Our second quarter regular dividend will be paid on June 18th to the holders of record as of May 30, 2014. Since we returned more than $10.5 million to our shareholders under our return of capital program in the first quarter by purchasing $14.2 million worth of common stock, we will not make a special dividend payment in the second quarter.

Additionally, since we've already spent $13.4 million on stock buybacks in the second quarter and may spend additional monies, we will not make a special dividend payment in the third quarter of 2014 as well.

As a reminder, under our capital return program, we are committed to returning at minimum $10.5 million to our shareholders through either stock buybacks or a dividend or a combination of both in addition to our regular dividend. We will continue to evaluate and are committed to a combination of stock buybacks regular dividends and special dividends under our capital return strategy.

Again, as a reminder, our capital program is planned to continue until our net debt-to-EBITDA as adjusted reaches 2.5 times. Our net debt-to-EBITDA adjusted ratio increased to 1.86 as of March 31, 2014 from 1.57 at the end of 2013.

Our Annual Shareholders Meeting was held on April 17th and several shareholders attended that meeting in person and had direct conversations with our Board of Directors. We have also held multiple conversations with shareholders outside of our Annual Meeting concerning our return of capital program.

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

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

After we call our $92 million of convertible notes on June 20, 2014, we anticipate the proceeds from this new unsecured debt to be transfer from the escrow account into our operating accounts.

Additionally, in connection with this transaction after we’ve completed our corporate restructuring and retired our convertible notes, we will have approximately $230 million available for use under our programs to return capital to shareholders.

Our first quarter of 2014 sequential revenue growth versus the first -- the fourth quarter of 2013 was 3.4%. Our gross margin expanded by 90 basis points in the quarter to 58.3%. During the quarter, traffic grew on our network sequentially from the fourth quarter by 16% and grew year-over-year versus the first quarter of 2013 by 69%.

Our sales force productivity was five units of installed orders per rep per month, a rate that is significantly higher than our historical average of 4.6 units per rep per month. Since the end of the fourth quarter, we continued to expand our footprint by adding an additional 34 buildings to our network and for the last 12 months we added 134 network buildings to our network footprint.

We have over 2,024 lift buildings connected to our network at the end of Q1 2014. Throughout this discussion we will highlight several operational statistics that we believe demonstrates our increasing market share, expanding scale, size of our network and most importantly, the operating leverage of our business.

We are the lowest cost most efficient operator in our sector. We are focused on the most revenue rich locations that we then bring on that and we sell the highest quality Internet service in the market at the lowest price possible.

I will review in greater detail some operational trends and highlights. Tad will provide some additional details on our financial performance and following our remarks we will open it up for a brief question-and-answer period.

Now, I’d like Tad to read our Safe Harbor language.

Tad Weed

Thank you, Dave, and good morning, everyone. This first quarter 2014 earnings report and this earnings conference call discuss Cogent's business outlook and contain forward-looking statements within the meaning of Section 27A and 21E of the Securities Act.

These forward-looking statements are based upon our current intent, belief and expectations. These forward-looking statements and all other statements that maybe 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 potential impact of mergers, acquisitions, other business combinations or financing transactions that maybe completed after today. Cogent undertakes no obligation to release publicly any revision to any forward-looking statement made today or otherwise update our 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 on our earnings release and on our website at cogentco.com.

I'll turn the call back over to Dave.

Dave Schaeffer

Hey. Thanks, Tad. Now for some highlights of our first quarter results, hopefully, you've had a chance to review our earnings press release. As in previous quarters, our press release includes a number of quarterly historical metrics. These metrics will be added to our website. I hope you find the consistent presentation of these metrics informative and helpful in understanding our financial results, as well as trending from operations.

Our sequential revenue growth for the quarter was 3.4%, a significant improvement from the 2.4% sequential revenue growth that we achieved from the third quarter of 2013 to the fourth quarter of 2013. Our first quarter revenue growth -- revenue was $92.9 million. We believe that the recent initiatives undertaken in our sale and organization are beginning to generate results.

We evaluate our revenues based on product class, on-net and off-net and non-core, which Tad will cover in greater detail. We also evaluate all of our revenues based on customer type. We classify all of our customers into two major categories, NetCentric and corporate customers.

Our NetCentric customers buy large amounts of bandwidth from us and carrier-neutral data centers. Our corporate customers buy smaller amounts of bandwidth from us and large multi-tenant office buildings.

Revenues from our corporate customers grew 3.1% from the fourth quarter of 2013. These corporate customers represent 47.2% of our total customer connections at the end of the quarter and 51.5% of our Q1 2014 revenues.

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

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

During the quarter, several of our customers took advantage of these volume and term discounts and entered into longer term and larger contracts with Cogent representing over 1,970 customer connections and these customer connections resulted in a -- over $13 million additional revenue commitment to Cogent

The average price per megabit of our installed base decreased in the quarter. The average price of our installed base on a per megabit basis declined by 7.8% from $2.34 at the end of fourth quarter 2013 to $2.15 in Q1 of 2014, a decline of 24.9% from the $2.87 we experienced in the first quarter of 2013.

The average price for a new customer contract, however, actually increased sequentially in the quarter. The average price per megabit for new customer contracts was a $1.36 versus a $1.31 in the fourth quarter of 2013, a 3.7% increase sequentially and a 20.1% decline from the $1.70 we were charging new customers in the first quarter of 2013.

Before Tad provides some additional details on our results for the quarter, I'd like to address our results and expectations against our announced revenue and EBITDA targets. Our revenues increased sequentially by 3.4% or at an annualized rate of 14.4%. This rate of growth is in line with our revenue guidance range of 10% to 20%.

We do believe that our recent sales initiatives will help us achieve accelerating revenue growth and return to the midpoint of our guidance range. Our EBITDA margin was 34.6% in the first quarter, 35.1% in the fourth quarter of last year and 33.5% in the first quarter of 2013.

The 50 basis point decline in our EBITDA margin in the fourth quarter was primarily due to the expected impact of seasonal cost related to our SG&A for the end of the year. Our EBITDA, as adjusted margin increased by 110 basis points from the first quarter of 2013. Our EBITDA, as adjusted, increased by 1.8% sequentially from the fourth quarter of 2013. And on a year-over-year basis, our EBITDA increased by 13.5% from the first quarter of 2013.

We anticipate that for the full year our revenue growth will be within the guidance range of 10% to 20%, and that our EBITDA margin expansion for full year 2014 versus full year 2013 will again be greater than 200 basis points.

Now, Tad will cover some additional details related to the quarter.

Tad Weed

Thank you, Dave. And again, good morning, everyone. I’d also like to thank and congratulate our entire team for the results of their hard work and efforts during the quarter. I'll begin my discussion by providing additional details on our revenue, by detailing our revenue results by product class, on-net and off-net.

Our on-net revenue was $69.1 million for the first quarter, which was an increase of 4.6% from the fourth quarter and an increase of 12%, from the first quarter of last year. About 90% of our new sales for the first quarter were for our on-net services, which was higher than our typical percentage of on-net sales of about 85%.

On-net customer connections increased by 4.7% sequentially and increased by 17.4% from the first quarter of last year. We ended the quarter with over 36,300 on-net customer connections on our network and our 2,024 on-net buildings.

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

Our non-core revenue was about $400,000 and represents less than 0.4% of our revenue and about 400 customer connections and will continue to degrade. On ARPU -- our on-net ARPU actually increased for the quarter sequentially and off-net ARPU declined from the fourth quarter of last year.

Our on-net ARPU, which includes corporate and net-centric customers combined was $648 for the fourth quarter of last year and increased slightly to $649 for this quarter. Our off-net ARPU, which is predominantly corporate customers, was $1,567 for the fourth quarter and declined by 3.2% to $1,516.

Churn rates for both on-net and off-net customer slightly increased during the quarter but not materially. Our on-net churn rate was 1% rather for the fourth quarter and increased to 1.1%. Off-net churn rate was 1.2% for the fourth quarter of last year and increased to 1.5%. Those are unit based numbers.

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

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

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

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

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

These changes typically increase and did increase our SG&A expense in the first quarter as planned. Despite quarter-to-quarter variability, our long-term margin trend has demonstrated but our business model generates increasing EBITDA margins.

Interest expense for the quarter, results from interest on our $240 million of senior notes, interest on our $92 million of convertible notes and interest on our capital lease obligations. Our interest expense was $11.1 million for the fourth quarter of last year and increased slightly to $11.3 million for this quarter.

The components of interest for this quarter were as follows. $4.9 million related to the senior notes, $1.9 million related to the convertible notes and of that amount, $1.7 million was for the non-cash amortization of the note discount on the convertible notes and lastly, $4.5 million was related to the capital lease obligations.

Beginning in the third quarter of 2014, we will no longer incur interest on our convertible notes, since we will call those notes on the first available call date of June 20, 2014. We will occur $11.3 million of additional annual interest on our new $200 million of unsecured debt that accrues interest at a rate of 5.625%. And we begin accruing that interest on April 9, 2014, as those notes are an escrow but that's the date we begin accruing interest.

Interest is payable on the new $200 million of unsecured notes in April on October and the first interest payment we will make will be on October 15, 2014, and the notes mature on April 15, 2021, seven year term. Our basic and diluted income per share was $0.00, didn’t roundup to a penny for the quarter.

Our basic income per share for the fourth quarter was $1.14 and diluted was a $1.10, that was inflated by recording a U.S. tax benefit of $49.3 million in the fourth quarter, that added a $1.06 six to our basic income per share and a $1.01 to our diluted income per share last quarter. And if you excluded that impact, the basic and diluted income per share for the fourth quarter would have been $0.07.

Foreign currency impact consistent with prior quarters, about 27% of our business is located outside of the U.S., 21% of the revenues in Europe and 6% related to Canada, Mexico and Japan. Continued volatility in foreign currency exchange rates can materially impact our quarterly and annual revenue and financial results. The foreign exchange impact on our revenue from the fourth quarter to first quarter was a decrease of about $0.1 million. Our revenue increased from the fourth quarter, as Dave said by 3.4% and on a constant currency basis, it was 3.5%.

The foreign currency exchange impact on revenue from the first quarter of last year to this quarter was an increase of about $0.3 million and our revenue increased from the first quarter of last year by 9.9%. On a constant currency basis that was 9.6%. Our average euro to U.S. dollar rate so far for the second quarter, so the quarter we are in now is about $1.38. Should that average exchange rate remain, we expect and estimate that the sequential impact will be an increase to revenues of $0.2 million. The average rate for the second quarter of last year was $1.31, so less than $1.38. If that rate remains constant, we expect the increase on a year-over-year basis to be about $0.7 million.

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

CapEx, on a quarterly basis we can and have historically experienced seasonal variations in CapEx, prepay capital lease payments and construction activities. Our quarterly CapEx and capital lease payments are primarily dependent upon the number of buildings we connect to our network each quarter and the timing and scope of our network expansion activities. Our CapEx increased sequentially but decreased on a year-over-year basis. Our CapEx for the quarter was $15.6 million versus $10.1 million in the fourth quarter and that's a decrease of 4.2% from the $16.3 million we had in the first quarter of last year.

Principal payments on capital leases are for long-term, dark-fiber IRU agreements increased to $3.4 million for this quarter and last year was $5 million, so $1.6 million decrease from the comparable quarter last year. Our combined capital lease principal payments and CapEx total declined by 10.7%, compared to the first quarter of last year. The comp combined amount was $19 million for this quarter, $12.3 million for the fourth quarter of last year, and $21.3 million for the first quarter of last year. We added another 34 buildings to our network this quarter and 134 buildings over the past year. We expect to continue our network expansion in 2014 but at slightly more moderate pace than we experienced in 2012 and 2013 with continued moderation in 2015.

Regarding some balance sheet amounts, at the end of the quarter cash and cash equivalents were $263.7 million and for the quarter cash decreased by $41.1 million after including all interest payments, our $18.4 million first quarter dividend payment and $14.2 million spent on stock buyback during the quarter. Cash flow from operations was $10.6 million, compared to $29.3 million for the fourth quarter and $15 million for the first quarter of last year. We paid $10.1 million in the quarter under our semiannual interest payment on our senior notes and that have the impact of reducing our operating cash flow.

Our $10.6 million of operating cash flow this quarter was offset by our $15.6 million of CapEx, $3.4 million of IRU capital lease payments and our $18.4 million first quarter dividend payment and $14.2 million spent on stock buybacks. We exclude the cash return to our shareholders through our dividend, stock buyback and interest payments. We were cash flow positive by $1.5 million from the first quarter of this year.

Operating cash flow will continue to be impacted by our $10.1 million semiannual interest payments on our $240 million of senior secured notes, and those interest payments occur in February and August due to maturity in February of 2018. Our operating cash flow was also impacted by $0.5 million semiannual interest payments on our convertible notes. They occur in June and December and we will be making that final payment on our convertible notes this June when we call those notes.

Going forward, our operating cash flow will now also be impacted by $11.3 million of annual interest payments paid semiannually on our new $200 million of unsecured notes. Those payments will occur on October and April and we will make the first payment of $5.6 million on October 15, 2014. We have $92 million remaining on the original $200 million of convertible notes. They’re reported on the balance sheet at $90.6 million in the quarter, which is net of the unamortized discount. They maybe redeemed by us or by the holders beginning in June. And as we've said and announced, we will call the remaining convertible notes that are not put to us on June 15 on the earliest call date which is June 20.

Our capital lease IRU obligations are for long-term, dark-fiber leases and typically have terms of 15 to 20 years or longer and often have multiple renewal periods after that. And that, the total capital lease obligations at the end of the quarter was $162.4 million. Our total debt, including capital lease obligations, was $498 million at the end of the quarter and our net debt was $234.3 million. Our total debt to trailing last 12 months EBITDA as adjusted ratio was 3.99 at the end of the quarter and our net debt to trailing last 12 months EBITDA as adjusted ratio was 1.86. These amounts do not include the impact of our new $200 million notes that we issued into escrow on April 9.

Our bad debt expense for this quarter and the fourth quarter was consistent at 1.2% of revenues. Day sales for worldwide accounts receivable was 30 at the end of the quarter, and I want to again personally thank and recognize our worldwide billing and collections team members who continue to do a fantastic job on customer collections, customer service and credit monitoring, and also to recognize our entire worldwide finance team for successfully managing the growth of our business.

Now I’d like to turn the call back over to Dave.

Dave Schaeffer

Thanks, Tad. Now for a few comments on sales rep productivity and activity, we began the first quarter of 2014 with 308 quota-bearing reps and ended the quarter with 317 sales reps. We hired 60 sales reps in the quarter and 51 reps left our company during the quarter. Our rep churn was approximately 5.4% in the first quarter, much better than the long-term historical average of 6.5%. We began the first quarter with 289 full-time equivalent reps, these are reps that have ramped up and have now a full quota and ended the quarter with 303 full-time equivalent reps.

Productivity on a full-time equivalent basis for the first quarter was 5.9 units of installed orders per rep per month. This rate of organic rep productivity is significantly better than our long-term historical average which has been 4.6 units per full-time equivalent rep per month. As a reminder, our sales force productivity rates are not based on contract signings but rather are based only upon completed installed orders.

Now for a few comments about our network scale and scope, the size of our network continues to grow. We added 34 buildings to our network in the first quarter and have over 2,020 buildings connected to our network. Our network consists of 27,200 miles of metro fiber and over 57,500 intercity route miles of fiber. The Cogent network remains one of the most interconnected networks in the world, with 5,120 networks directly connected to Cogent. 40 of these networks are settlement free peers. The remaining approximately 5,100 networks are actually Cogent paying customers purchasing transit from us. We are currently utilizing 29% of the lit capacity in our network. We routinely augment parts of our network to maintain a low utilization rate.

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

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

Our business remains completely focused on the Internet and provides a necessary utility to our customers. We expect our annualized growth rate and our EBITDA margin expansion to be consistent with our historical rates of 10% to 20% topline growth and over 200 basis points of annual margin expansion in EBITDA.

For 35 out of 36 quarters as a public company, we’ve produced organic sequential growth and we are encouraged by the free cash flow generation of our business. We’re encouraged by the traffic growth on our network and the results of our sales force initiatives, and the productivity of the sales force as well as the pipeline that they are currently working. Certain of our last mile access providers with whom we peer have been reluctant to upgrade their peering connections to us.

This has been a very controversial issue. Unlike these organizations, we believe strongly in an open-internet and support through net neutrality. We like and are confident in the reach of our network, our product set, our addressable market and the operating leverage. In short, we like the business we have. We feel that we have an underserved addressable market that is ample to accommodate our growth and are on that footprint and allow us to grow our revenues at historical rates.

We are committed to providing annual topline revenue growth of 10% to 20%, expanding our margin and most importantly, generating increasing free cash flow for our equity holders. We will be opportunistic about the timing of purchase of common stock under our current $50 million buyback program. We have purchased approximately 1.1 million shares recently under that program for $31.8 million. We currently have $18.2 million remaining under this program, which runs through February 2015.

Our Board of Directors has approved yet another increase on a regular quarterly dividend to $0.17 a share. This dividend will be paid to our shareholders on June 18th of this year. This dividend increase represents a continuous commitment to our shareholders and demonstrates the optimism that we have and the cash flow generation capabilities of our network.

We’ve strengthened our balance sheet through the issuance of a new $200 million unsecured debt offering earlier this year. We are committed to returning an increasing amount of capital to our shareholders on a regular basis and migrating towards our targeted goal of net debt to EBITDA ratio of 2.5, no later than the end of 2016.

With that, I'd like to now open the floor for questions.

Question-and-Answer Session

Operator

Thank you, sir. (Operator Instructions) Our first question comes from line of Michael Bowen of Pacific Crest.

Michael Bowen - Pacific Crest

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

Question number two. Dave, I hope I didn't hear incorrectly but I think in the beginning of your commentary, I think you said productivity was 5, but then you clarified 5.9. So, I just wanted to make absolutely sure, it's 5.9. That was slightly lighter than what we are looking at but still very, very good obviously. Can you give us ideas with regard to -- you’ve added I think 14 reps, full-time equivalent reps, do you see that accelerating? And then related to the rep productivity, as you hopefully accelerate that to that 350 to 360 range by the end of this year, where do you foresee that rep productivity figure going or can you help us out with the range? Thanks.

Dave Schaeffer

Sure. Thanks for the questions, Michael. I’m going to take them. First of all, I do apologize for misspeaking, the rep productivity was 5.9, not the 5 that I misspoke earlier in the call and I didn't correct myself. With regard to sales force productivity, we are clearly trending above our historical average of 4.6 units per rep per month at 5.9. The sales force continues to mature and season. Our sales force turnover was lower than our historical turnover rate at 5.4%, as opposed to 6.5%, a long-term average, which is coming down.

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

With regard to hiring of the sales force, we feel very encouraged that we’re going to head our hiring targets. We continue to add sales offices and fully staff those offices and have been very encouraged by the rate at which these new reps have been becoming productive. I think the training initiatives that we put in place are absolutely delivering the results that they hope to deliver. And we expect going forward more hiring, more productivity, better training, lower turnover, all of that should allow us to see continued accelerating revenue growth. While there can be some fits and starts to that, we feel very comfortable that we’ll be demonstrating the ability to return to the midpoint of our guidance range as we had indicated.

Now with regard to the peering question, unfortunately we’ve not had a single taker on our offer. While that offer remains outstanding and we do hope that we will see substantial numbers of additional ports with problematic peers being added, we have not had any of the counterparties, except our offer. The capital cost to us, if they accepted all of them, would probably be in the order of about $2 million. But as I said, so far, we've spent none of that. I am encouraged by the fact that one of the major problematic peers after entering into a bilateral agreement with one of our large customers has come back and now voluntarily and proactively asked us to increase port capacity.

Now the ports remain full. There is ample traffic to continue to fill up those ports and I think their willingness to open up port capacity is an attempt to try to gain support for their proposed merger activity. So right now, we still remain constrained with a number of our ISP access provider networks. But in aggregate, the majority of our traffic continues to flow to our customers and to non-constrained peers.

Michael Bowen - Pacific Crest

And Dave, thanks for that. One last thing, in the first -- pardon me in the fourth quarter conference call, you had mentioned that in January more reps had hit 100% of their quota than ever in the history of the company, February was better than January, can you tell us a little bit about March?

Dave Schaeffer

Yes. March also was a very good month, it was not a record month, but it was better than March of last year and comparable to the type of quota productivity that we saw in January and February, so it was excellent. And for the quarter, the greatest percentage of reps hitting their quota in the company's history for any quarter and we had a record number of reps going to our quarterly Overachievers Club, known as Leader's Club where they receive prices and bonuses and based on the funnel activity so far this quarter, we expect to see that percentage of the sales force hitting quota actually even higher in second quarter than it was in first quarter.

Michael Bowen - Pacific Crest

Great, thanks a lot.

Dave Schaeffer

Hey, thanks, Michael.

Operator

Thank you for your question sir. Our next question comes from the line of James Breen with William Blair. Your line's now open.

James Breen - William Blair

Thanks for taking the question. Just around the expense in this quarter SG&A jumped up quite a bit from the fourth quarter and then you had the one-time gain that was in the EBITDA, can you just talk to us about, sort of puts and takes there, there is -- how that was all tied into maybe the debt deal, I'm not sure exactly of the details, thanks.

Tad Weed

There really was no SG&A impact related to the debt deal in the quarter and any professional fees related to that we'll want to being capitalized as debt costs. I mean as we expect sequentially, we always experience an increase from Q4 to Q1 the components being cost of living increase and taxes in the U.S. on payroll, you know that's a couple of million dollars in the aggregate.

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

Tad Weed

Again on the --

James Breen - William Blair

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

Dave Schaeffer

That's correct.

Tad Weed

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

James Breen - William Blair

Okay, so the combination of better gross margins, even though that that one-time item won't be there in the second quarter, you also see better lower expenses then and better gross margins.

Dave Schaeffer

That's correct, Jim.

James Breen - William Blair

Okay, great, thank you.

Dave Schaeffer

Thanks.

Operator

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

Colby Synesael - Cowen and Company

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

And also when I think of the $10.5 million capital returned to investors every quarter, plus your target of yearend 2016, you still really don't get to that 2.5 times leverage, so help me understand the disconnect or the bridge there. And then just my other question is your quarter-over-quarter growth was a bit stronger than we expected, is it still your expectation from a one-year perspective that we'll see an acceleration in quarter-over-quarter growth as we go through the course of the year, thanks.

Dave Schaeffer

Yeah, sure. Thanks for the questions, Colby. So first of all, on buybacks versus dividends, we have always been opportunistic in using buybacks. Cogent has bought back, since its initial buyback, approximately 7.8 million shares in the market. If we look at the current trading price and look at the timing of those buybacks, the return on those buybacks has been approximately an 18% IRR. So I think the Board has continued a few buybacks as a critical part of its strategy to returning capital to shareholders, but also believes in an opportunistic use of buybacks in conjunction with dividend.

So the combination of growing the dividend and then taking advantage of the dislocation made a lot of sense. I think the general consensus is when there's either volatility in the market or in our stock we will use buybacks, when there is not we will use dividends.

You are correct that the $10.5 million minimum return of capital under the special program, coupled with a moderate growth in our recurring dividend, will probably not allow us to reach the target by the end of 2016 based on the Company's internal projections, as well as I believe external projections for the Company's performance. I think over the next couple of quarters we will continue to take the input from shareholders and the Board will continue to evaluate its discussions that it had at the April 17th, shareholder meeting and again I want to thank you personally for coming to that meeting and helping the Board understand these issues and hear what investors are saying. But I think you'll see some further announcements later this year, that will demonstrate our commitment to getting there, no later than the end of 2016, possibly even sooner.

And then to your final question about sequential growth. We have told investors that by the end of this year it will be obvious that our sequential growth rate, when annualized, will get us to the midpoint of our guidance range. Quite honestly we've got very close to that, this quarter at 3.4% sequential growth, if you annualize that that's 14.4% if you actually took the FX adjusted at 3.5 we actually would be at the midpoint.

I don't necessarily know if it's going to be an improvement every quarter, earnings put over a dozen major initiatives in place for the sales force, they're all delivering results. We feel very encouraged that we're going to see long-term payback on those, but I can't guarantee that within one or two quarters there won't be some lumpiness, particularly as today about 7% of our revenues come from usage based services (indiscernible) overage, and typically there is some slower growth in traffic in summer months than winter months, so I don't want to mislead people and say it's going to be up into the right every quarter but I do believe that the trend will be up, it will be up year-over-year and it will be clear that by the end of the year that if 15% type growth rate will be what the company will deliver on an annualized basis.

Colby Synesael - Cowen and Company

Okay, thank you so much.

Dave Schaeffer

Thanks, Colby.

Operator

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

Frank Louthan - Raymond James

Little bit more color on the off-net revenue, we would have thought -- the revenue would have been a little bit stronger here given the adjustments to sales force compensation for off-net sales. And then on the customer concentration, it was a noticeable sequential step up there, despite the strong total adds. What are the trends you're seeing with these larger customers are they taking more incremental bandwidth so they're lighting up new locations, they're taking your services, as any other color there would be helpful, thank you.

Dave Schaeffer

Sure, so let me start with the off-net question. You are correct that we have modified our comp plan and tried to incent our sales force to go back to our existing customers and sale additional locations for corporate customers in off-net. And as we said we have less than 1% market penetration and that portion of our business. We are seeing very good bookings, but our revenues reported on an installed basis, typically an off-net sale takes 90 business days to install or about a 120 calendar days. So the changes that were made at the beginning of the year, did not really show up in the first quarter.

And in fact the sales force reorganization and realignment of accounts that occurred at the end of the fourth quarter which did dampen corporate sales in general, had some impact as well. So the three tenths of 1% sequential growth at off-net was low but it was expected because of these long installed times and the realignment of the sales force. We should expect to see those numbers grow sequentially and return back to their kind of historical norms. With regard to customer concentration, we continue to add our capacity with existing customers at existing locations, many of our net-centric customers also take additional locations to build CDNs and further diversify their infrastructure. And again, we are the lowest priced highest quality provider. So we're seeing growth in all of those areas more capacity same location more locations.

And with regard to the acceleration and concentration that has really occurred because of the growth and that particular customer's business, and the fact that we provide them connectivity, to a vast number of networks most efficiently. We've also commented that at least eight major networks have refused to upgrade their parent connectivity to us and we've got no growth from that particular customer when going to those networks and we expect that trend to continue. So it's a combination of better service-lower prices that are incenting our big net-centric customers to give us more of their business.

Frank Louthan - Raymond James

Great, thank you.

Operator

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

Tim Horan - Oppenheimer

Thanks, guys just two clarifications, so it sounded like on the SG&A side there was $1 million of more seasonal expenses that should decline in the second quarter. Secondly, Dave, do you think the 15% revenue growth is sustainable until '15, maybe even '16?

Third, Dave I now you've touched on this, but do you think that these lower rev-churn is also sustainable and then last and maybe what's driving that?

And then last what's your primary argument to regulators at this point on net neutrality? Thanks.

Dave Schaeffer

Sure. So, Tad, do you want to take the SG&A one and I'll provide the…

Tad Weed

Sure, that's about a ball-park number, of course, there will also be impacted sequentially on the pace of hiring that we do when we are anticipating, adding reps throughout this quarter as well as throughout the year, so that won't be impacted there, but your -- your million dollar is within -- was in the ballpark of the non-recurring change that we're experienced Q4 to Q1, typically each year.

Dave Schaeffer

And then Tim to your three other questions, absolutely we believe that we can achieve the midpoint of our guidance in terms of growth over the long period and the 10% to 20% range that we've laid out we expect to continue into '15 and '16. There is ample market opportunity and again we remain extremely encouraged by the improvements and the sales force, both in terms of productivity and reduction in churn.

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

Finally, to the net neutrality question, and I have to be brief on this because unfortunately I got to go testify in front of Congress in an our hour on this and I'm in DC but not quite that close to the hill and I got to get through the security. It's all about consumer choice, innovation and making sure that all traffic is treated equally. And whether you manipulate traffic inside your network or at the boundary of the network, you're still violating the net neutrality principles by manipulating that traffic. All traffic should be equal, all connections should be adequate to deliver the services that companies have sold to their customers.

With that we may have time for one other brief question and we're going to have to jump.

Operator

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

Michael Rollins - Citigroup

Hey, Dave, thanks for squeezing the question in. I was just wondering if you could briefly then give us some update on the competitive landscape that you're seeing in both the net-centric and on the corporate side of your business, thanks.

Dave Schaeffer

Sure, so let me start with the corporate, I think the competitive landscape remains unchanged our two primary competitors are AT&T and Verizon, that's where the bulk of our footprint is. In the off-net corporate business, we do see Cable -- Time Warner Cable, Comcast as viable competitors, but that's a very small part of our business.

In the net-centric side, our most common competitor, globally, remains Level 3. We have regional competitors, such as Telia and NTT, TATA and PCCW, Telecom Italia, but we again are committed to being the lowest priced-highest quality service, our gains in market share our growth in revenue is witness that gain in market share, we're growing traffic at about double the rate of the market, or year-over-year traffic routes of 69%, just substantially above the 29% that the market is growing and the reason for that growth is we deliver the best value. No, other provider will match or undercut Cogent and in fact we are committed to being the lowest priced provider. And even with that strategy you saw average new sale in the quarter, go up by 3.7%, from $1.31 a megabit to $1.36.

Michael Rollins - Citigroup

Thanks.

Dave Schaeffer

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

Operator

Ladies and gentlemen, this conference will be available for replay after 10:30 a.m. today, through May 14, 2014 at 11:59 p.m. Eastern Time. You may access the remote replay system at anytime by dialing 800-585-8367 and entering the access code 202-812-67. International participants dial 404-537-3406. Those numbers again are 800-585-8367 and 404-537-3406. Access code 202-812-67. That does conclude our conference for today, Thank you for your participation in today's conference. You may now disconnect at this time.

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