Cogent Communications Group Q3 2007 Earnings Call Transcript

| About: Cogent Communications (CCOI)

Cogent Communications Group Inc. (NASDAQ:CCOI)

Q3 2007 Earnings Call

November 7, 2007 8:30 am ET


Dave Schaeffer - Chairman and CEO

Tad Weed - CFO


Tom Watts - Cowen and Company

Jonathan Schildkraut - Jeffries & Co

Jonathan Atkin - RBC Capital Markets

James Breen - Thomas Weisel

Tim Horan - CIBC World Markets

Tom Seitz - Lehman Brothers

Jurgan Usman - Wachovia Securities

Scott Goldman - Bear Stearns

Andrew Bill - RSA Research

Andrew Tuttle - Crowe Point Partners


Good morning and welcome to the Cogent CommunicationsGroup's Third Quarter 2007 Earnings Call. As a reminder today's conference isbeing recorded, and we'll be available for replay at

I would now like to turn the call over to Mr. DaveSchaeffer, Chair and Chief Executive Officer of Cogent Communications. Pleasego ahead, sir.

Dave Schaeffer

Thank you, Melissa. Thank you and good morning. Welcome toour third quarter 2007 earnings call. I am Dave Schaeffer, Cogent's ChiefExecutive Officer. With me on today's call is Tad Weed, our Chief FinancialOfficer.

We are very pleased with the results from this quarter. Ourthird quarter revenue, EBITDA, and loss per share were either with in the rangeor better than the ranges that we had presented to you in our Q2 2007 earningscall, when we were giving our forward estimates. We expect our 2007 revenue,EBITDA, and loss per share they either be better or within the ranges forfiscal year 2007 as we originally presented them to you back on our Q3 2006earnings call.

Since our last earnings call we have returned $4.5 millionto shareholders as part of our second $50 million share buyback program, whichwas announced in August of this year. Under this program we repurchased the194,000 shares with an average price per share of $22.85. I should point outthat this is the $50 million buyback program that was put in place by our Boardin addition to the initial $50 million buyback that was completed as part ofand in conjunction with our 2007 $200 million convertible debt transaction.

During the quarter, we continued to increase our footprint.We added another 30 buildings to our network and expanded the network intothree additional countries. During the quarter, we also significantly increasedour sales resources and we added 23 net representatives to our sales team. As aresult, we have 179 quota-bearing reps selling Cogent services in North Americaand in Eastern and Western Europe as of today.

We also achieved another significant corporate milestone inthe third quarter by adding our 10,000th on-net customer connection to ournetwork.

Finally, we again exceeded our provisioning guarantees andour service level guarantees by delivering our services to customers with anaverage on-net provisioning cycle of only 12 business days.

Again, I'd personally like to thank entire Cogent team, andparticularly the sales force, for their efforts in helping us achieve theseresults. Involved in our provisioning and network expansion efforts many of ourteam members also deserve a great pat on the back.

Throughout this discussion, as in the past, we will continueto focus on results and impacts of our on-net business, which is in factCogent's growth business. We will also highlight several other operationalstatistics, we believe, which will demonstrate our increasing market share,expanding sales and the operating leverage of our business.

I will review certain operational highlights and alsooutline expansion plans and growth opportunities. Tad will provide additionaldetails on our financial performance. Tad will also walk us through ourexpectations for fourth quarter 2007, updated and reaffirmed expectations forfull year 2007 and provide our initial guidance for fiscal year 2008.

Not to steal Tad's thunder, but as Tad will present, weexpect to achieve another significant corporate milestone in 2008. Weanticipate having net income by the end of 2008, but this will not be taxabledue to our significant NOLs.

Following our remarks, we will open it up for questions andanswers. Now, I would like to turn it over to Tad to read our Safe Harborlanguage.

Tad Weed

Thank you, Dave, and good morning everyone. This thirdquarter 2007 earnings report and this earnings conference call discuss Cogent'sbusiness outlook and contain forward-looking statements within the meaning ofSection 27-A and Section 21-E of the Securities Act. Forward-looking statementsare based upon our current intent, belief and expectations. Theseforward-looking statements and all other statements that maybe made on thiscall that are not historical fact are subject to a number of risks anduncertainties and actual results may differ materially. Please refer to our SECfilings for more information on the factors that could cause actual results todiffer.

You should also be aware that Cogent's expectations do notreflect the potential impact of mergers, acquisitions, other businesscombinations or financing transactions that may be completed after today.Cogent undertakes no obligation to release publicly any revision to anyforward-looking statement made today, or otherwise update or supplementstatements made on this call. Also during this call, if we use any non-GAAPfinancial measures, as defined by SEC and Regulation G, you'll find thesereconciled to the GAAP measurement in our earnings release and on our websiteat

I would like to turn the call back over to Dave.

Dave Schaeffer

Hey thanks, Tad. Hopefully, you've had a chance to reviewour earnings press release. As within previous quarters, this press releaseincludes a number of historical quarterly metrics. These metrics are also addedto our website. Hopefully you'll find these metrics helpful and informative inunderstanding our financial results and trends within our operations. Asalways, if you have any suggestions on how we can either refine or add to thesemetrics, please let us know.

Our third quarter 2007 revenue of $47 million was at themidpoint of our guidance of between $46.5 million and $47.5 million. EBITDA asadjusted of $11.7 million was also within the range of our guidance, which hasbeen between $11.5 million and $12.5 million.

Our loss per share at $0.12 was better than our range ofguidance of $0.18 to $0.23 per share. We continue to be pleased with the growthtrends in our On-Net business.

We are continuing to increase our investments in our sales,marketing, and network activities to increase the number on-net customerconnections, and ultimately the on-net revenues from those connections.

Our on-net revenues grew at 6.7% sequentiallyquarter-over-quarter from Q2 2007 to Q3 2007. This growth rate was greater thanthe increase of 6.5% we experienced from Q1 2007 to Q2 2007, but were slightlybelow our on-net target growth rate of 7% to 9%.

Net additions of customer connections increased 7.4% sequentially quarter-over-quarter fromQ2 2007 to Q3 2007. Our on-net revenue per subscriber or ARPU decelerated itsrate of reductions to 3.5% from Q2, 2007 to Q3 2007 from the historicallydecline rate of 5.1% in Q1 2007 to Q2 2007.

During the quarter, we saw larger accounts leading to adeceleration in the rate of ARPU decline. During the quarter, we again extendedour average contract length. I think this represents a significant vote ofconfidence encouraged by its customers.

Our average contracts length increased in the quarter byapproximately 5%, and as these customers take longer term contract, we areinsuring a more stable and long-term revenue growth trend.

Overall revenues for the quarter grew to $47 million. Thisrepresents a 4.1% sequential quarter-over-quarter increase from the $45.1million of revenue in Q2, and a 23.8% year-over-year increase from Q3 2006 whenrevenues were $38 million.

Traffic on our network grew approximately 2% sequentiallyquarter-over-quarter, and approximately 66% year-over-year Q3 2006 to Q3 2007.Our on-net revenue and customerconnections continue to increase. On-net revenues increased by $2.4 millionsequentially quarter-over-quarter or 6.7%. On-net revenues increased by $10.2million year-over-year or 37.1% on an annual basis Q3, 2006 to Q3, 2007.

On-net revenue continues to increased as a percentage of ourrevenues, growing from 78.2% of service revenues in Q2 to over 80% of our Q3revenues. Over 90% of our new sales in Q3 were on-net services. This is agreater percentage of sales than we have historically been experiencing as apercentage of our on-net revenue growth, again demonstrating the accelerationand growth in that business.

Our on-net customer connections increased by 7.4% for thequarter from a little over 9700 customers to over 10,500 on-net customerconnections by the end of Q3, 2007.

Revenues from our Off-Net business declined at approximately2.3% for the quarter, and non-core revenues, these are revenues for serviceswhich we no longer sell declined sequentially at approximately 16.5%.

Pricing trends in the industry remain intact. Cogent'spricing policy remains unchanged, and we are committed to being the industryprice leader. Our pricing of our most widely sold product that is a $1,000 amonth, 100 megabit connection on a month-to-month contract or $10 per megabitremains unchanged since the company's inception. We do continue to offerdiscounts for longer-term contracts, as we've mentioned on previous calls, andwe have had an increase in the number of customers availing themselves of thesecontract discounts and saw our average contract term extend as I had mentionedearlier by approximately 5% within the quarter.

We also guarantee customers that any on-net service will beprovisioned in 17 business days or less. In 2007, we delivered on thisguarantee with an average on-net provisioning cycle of less than 12 days.On-net ARPU was approximately $1,238 in Q3, 2007 as apposed to $1,283 in Q2, adecline of approximately 3.5%. This decline was lower than the rate of declinethat we experienced on a sequential basis in Q1, when that decline was about5.1%.

Off-net ARPU actually increased from $807 in Q2 toapproximately $841 in Q3, and this was a result of selling larger off-netconnections and increase in both Q3 connections, as well as off-net Ethernetservices, where we purchase the local loop from generally an incumbenttelephone operator.

EBITDA was approximately $11.7 million for Q3 2007. Thisrepresents an approximately 6.3% increase from the $11.1 million that weexperienced in Q2 of '07. Our EBITDA and EBITDA margins continue to expand andincrease due to the gross margin expansion of our business. Our EBITDA marginsexpanded 50 basis points from 24.5% in Q2 to 25% in Q3.

Our gross margins decreased marginally from 52.5% in Q2 to51.6% in Q3. Gross margin decline was primarily due to the increased fixedcosts of operating our networks and the additional costs that were assumed byacquiring six data centers at the end of last quarter. As we had mentioned,these data centers were predominantly empty and we picked up the cost of thesecenters as we begin to populate them with our customers.

Our direct incremental on-net gross margin continues to benearly 100% and our direct incremental on-net EBITDA margin remains at about95%.

We continue to expand our network. We expect to meet orexceed our goal of adding 100 buildings to our network in 2007. In the thirdquarter, we added 30 buildings to the network and have added 82 buildings tothe network year-to-date in the nine months ending September 30,'07. We expectto add additional buildings and meet or exceed that goal.

During the third quarter, we also fully integrated the six newdata centers that we acquired at the end of the pervious quarter and confirmthose data centers to Cogent's standard configurations and operatingprocedures.

Since the last call, we've also extended our network bysecuring additional fiber in new markets and countries. We continue heading inEurope further east, extending our network significantly into Bucharest,Romania, into Helsinki in the North, Manchester in Britain and more on Glasgowin Scotland, and here domestically adding new cities to the network such asStanford, Connecticut and Providence, Rhode Island.

We continue to evaluate additional expansion opportunitiesbeing very judicious about deploying that capital and focusing only on thehighest traffic growth locations. Tad, would like to now cover some additionaldetails on our Q3 operating results. Tad will also provide additionalexpectations for Q4 of 2007, reaffirming and tightening our full yearexpectations, and also providing our additional guidance for calendar andfiscal year 2008.

I'd now like to turn it over to Tad.

Tad Weed

Thanks Dave, and again good morning to everyone. And I wouldlike to also firstly thank and congratulate our team on there very hard workand performance this quarter.

On loss per share, our loss per basic and diluted commonshare, as Dave mentioned, was $0.12 for the third quarter. We did have fromnon-recurring, below the line, non-operating gains, primarily related to a $2.1million lease settlement that was acquired in our Verio acquisition back in 2004.And these gains reduced out net loss by $2.6 million in total during thequarter, and as a result reduced the loss per share by about $0.05.

So without these gains our basic and diluted common shareloss for the quarter would have been $0.17. That recurring loss of $0.17 was apenny better than our range of guidance issued to you of $0.18 to $0.23 pershare. Non-cash equity based comp expense, including the impact of 123-R,increased our Q3, 2007 loss by about $3.1 million or about $0.07 per share.

Regarding foreign currency the Euro to dollar conversionrate positively impacted our Q2 to Q3 comparable revenues by about 200,000. Theaverage Euro rate for Q2 was a $1.35 and a $1.37 for Q3. And I'm sure as manyof you know that Euro rate has significantly increased during this quarter.

As a reminder, about 22% of our revenues are based in Europeand about 8% of our revenue are in Canada. On capital expenditures, aswe may have mentioned on prior calls, we're accelerating our rate of addingbuildings to our network which is impacting CapEx. CapEx was $9 million for thethird quarter slightly less than a $9.5 million for the second quarter. Weadded the same number of buildings during Q2 and Q3, that being 30 per quarter.

We’ve added a total of 82 buildings for the network in thenine months ended September 30, so well on our way to our goal of 100. On ourbalance sheet, as of December 30, our cash and cash equivalents totaled $180.2million that is all invested in money market funds.

Our second $50 million approved stock buyback, the Broadapproved in August 2007. As Dave mentioned we purchased 194,000 shares for $4.4million, so an average price of 22.85 per share.

Capital lease, IRU obligations were $90.9 million atDecember 30; and $7.3 million of that amount is a current liability, and theselease obligations are being paid over our remaining weighted average life ofapproximately 12 years.

Day sales outstanding on account receivable was 40 days tillSeptember 30, which is our bogey rate. This compared to 32 days at June 30,which was well ahead of our bogey rate. We were impacted by the calendar, wherethe last two days of the month fell on a weekend, so some September cash fellin to October and we are well back into below 40 today.

Operating cash flow increased by $1 million from the priorquarter, primarily from the increase in EBITDA, positive cash flow fromoperations with $11.3 million for the third quarter compared to $10.3 millionfor the second quarter.

I'm now going to provide guidance for three periods for thefourth quarter, update 2007 based upon that fourth quarter guidance, andprovide initial guidance for 2008, and these based upon the current andexpected run rates of our business, planned increase in sales and marketingprograms, in anticipated network expansion projects.

The guidance covers each line item on our P&L down tothe net loss level, so hopefully you'll find this very helpful in modeling.Updates to our 2007 guidance are mostly narrowing our previous ranges and ourprojected 2007 revenue EBITDA and loss per share are all expected to be withinbetter than our standing 2007 guidance.

Here we go on the fourth quarter. We expect the fourthquarter total revenue to be between $49 million and $50 million. The componentsof that revenue, we expect on-net revenue to increase quarter-over-quarter by7% to 8%. We expect off-net revenue to be flat or to increase approximately 5%,so off-net would be flat to an increase approximately 5%, and non-core revenuesto decline quarter-over-quarter by approximately 15% to 20%.

We expect our gross margin percentage to increase and toexpand by approximately 200 basis points to about 54% for the quarter. Weexpect EBITDA as adjusted to grow to between $13 million and $14 million. Thatwill put our EBITDA margin standing by another 200 basis points to about 27%.

We expect SG&A excluding the non-cash equity-based compexpense, that’s classified as SG&A in the 10-Q format to be 28% to 29% ofour fourth quarter revenues. We expect that non-cash equity based comp expensesin total to be between $3.5 million and$4 million for the quarter.

We expect depreciation and amortization to be between $17.5million and $18.5 million, and we expect net interest expense, so interestexpense net of interest income to be between $1 million and $1.5 million of anexpense.

These results are expected to result in a loss per share ofbetween $0.17 and $0.22 from the quarter. Net loss per share assumes $47million weighted average outstanding.

As a reminder, if we purchased additional shares that willlower the share outstanding and helps the impact of raising our loss per share.

The 2007 guidance that I am refining and updating is asfollows. Our total revenue now is expectant to be between $184.5 million and $185.5million for the year and that will result in the following growth rates for thecomponents of revenue. On-net revenue to grow between 38% and 40% and I thinkour guidance there was 35% to 40%, off-net revenues to decline by between 5%and 10%, non-core revenues to decline by between 25% and 30%.

We expect our full year 2007 gross margin to beapproximately 52.5%. We expect EBITDA for 2007 to be between $46 million and$47 million and we expect SG&A to be between 28% and 29% of our revenues,again, excluding comp expense, classified that way in the 10-Q, and non-cashequity-based comp expense to be between $10.5 million and $11.5 million for theyear. Depreciation and amortization to be between $66.5 million to $67.5million and net interest expense to being expensed of approximately $4 millionto $5 million.

These results are expected to result in a loss per share forthe year between $0.65 and $0.75 Net loss per share assumes a weighted averageshare outstanding of 47.7 million, again, if we buy the additional sharesbetween now and the end of the year that will reduce the shares and couldincrease for loss per share. And total CapEx is still expected to be under $30million for 2007.

Now, our initial guidance for 2008. Total revenues expectedto be between $225 million and $235 million. If you take the midpoint of '07and '08 this is an increase of about 25% from '07 to '08 in total revenue. Andthe following growth rates for the components of revenue, on-net revenue togrow between 30% and 33%, off-net revenue be flat to an increase of 5%, andnon-core revenues to decline by between 35% and 40%.

We expect our 2008 gross margin to increase to approximately60% for the full year. We expect EBITDA, as adjusted, to grow to between $75million and $80 million, at the midpoints of the ranges, this is anapproximately 67% increase in EBITDA from '07 to '08.

We anticipate our 2008 EBITDA margin to expand toapproximately 34% for the year. We expect SG&A to be between 26% and 27% oftotal revenues for the year, again, excluding equity-based comp. And we expectthat equity-based comp to be between $14.5 million and $15.5 million.

We expect deprecation and amortization to be between $62million and $63, and we expect net interest expense to be approximately $11million to $12 million. And those of you that have seen our press release, our2008 interest expense guidance includes about $9 million of additional non-cashinterest expense that we expect to have to record under our proposed accountingstandard that Cogent and companies with similar convertible notes are expectedto have to adopt on January 1, 2008.

And the pronouncement entitled APB 14-a, called Accountingfor Convertible Debt Instruments that maybe settled in cash upon conversion andthe pronouncement essentially requires that convertible feature of our notes bebifurcated from the notes and separately valued. It looks like that valuesabout $80 million. So, that will result in an increase in the debt discount anda corresponding increase to the additional paid-in capital, so a balance sheetentry, if you will. Due to that increase in the debt discount, which needs tobe amortized, there'll be additional non-cash interest expense from amortizingthat through June of 2014, which is the earliest put date. There is obviouslyno change here in cash flow, so the pronouncement is currently proposed.

We will also require that we, and although is impacted bythis, restate that 2007 results as well and show additional interest expensefrom the amortization of the discount. That amount for us is about $5 million,and the notes, as a remainder, were issued in June, 2007. So, that's theadditional interest expense from June, '07 through the end of the year.

We are including this, because and consulting with our auditors.The approval of this pronouncement appears imminent. So, we thought it wasappropriate to include this in our 2008 guidance. I apologize for that longexplanation, but that's a very material item that should be approved.

We expect our 2008 loss per share to be between $0.15 and$0.30 per share. As Dave mentioned, we anticipate achieving another corporatemilestone in 2008. We expect to have positive net income by the fourth quarterof 2008. We do have significant NOLs that will offset this book net income.

Our EPS estimate assumes 47 million weighted average sharesoutstanding for the year and any buybacks would reduce those shares. And weexpect our 2008 CapEx to be similar to our 2007 range and adding another 100buildings and there would be approximately $30 million.

I'll now turn the call back over to Dave.

Dave Schaeffer

Hey, thanks Tad. As we mentioned earlier, we expect tocontinue to expand our footprint. We did add 30 buildings to our network in themost recent quarter, as well as the intercity route extensions that wediscussed.

We've added 82 buildings during the first nine months of2007 and are on pace to exceed our goal of adding a 100 buildings in 2007, andwe anticipate adding another 100 buildings to our network in 2008. As of September30, 2007, we had 1,189 buildings directly connected to the network,representing over 520 million square feet of rentable office space, out of anaddressable inventory in North America ofabout 6.2 billion square feet. We also have approximately 25 buildings that areunder construction and in the process of being connected to our network as wespeak.

In terms of our sales force, as of today, we have 179quota-bearing reps selling our services in North America and Europe.These 179 reps equate to 152 full-time equivalents based under our rampingprotocol. And just to remind people on this call, basically when a rep ishired, in the first month they have no quota, one-thirds, two-thirds and thenfull quota responsibility of a sequentially monthly basis.

We began Q3, 2007 with a 143 representatives and ended thequarter with a 166. For a record, net quarter adds of 23 sales reps. We beganQ3, 2007 with a 122 full-time equivalents and ended the quarter with a 134full-time equivalent reps, representing an increase of 12 full-time equivalentsover the quarter.

Our sales reps continue to maintain their productivity.While productivity per FTs for the quarter was below our target of [four], wealso has been focusing our reps on some larger and more lucrative opportunitiesand also building upon all to ensure their continued success. We continue to bevery disciplined about monitoring the productivity of our reps and removingthose reps who do not meet our productivity requirements.

We continue to be quite comfortable with our 2007 and 2008revenue plan. Our business remains entirely focused on the Internet andtherefore a beneficiary of the huge trends in our economy that are migratingtraffic to the Internet from other forms of communication and also proliferatingthe amount of information that is available. Due to the successful recruiting,we expect now to increase the number of sales reps quarter, quota-bearing repsthat we have, by the end of the year to a 190, from our previously announcedgoal of 180.

We see significant opportunities to add these reps and stillhave ample addressable market. We also expect to continue to add sales reps in2008 to address both our existing footprint and our expanding footprint. Asannounced on the previous call, we expect to increase number of reps by 50 in2008. As a result, this will take our sales rep count from the previouslyannounced 230 reps at end of '08 to now 240 reps. We continue to be veryjudicious about hiring only the best candidates who apply for jobs at Cogent,and then can train and sent these peopleto keep them productive. But to manage out those individuals that don’t' needour strict requirements for productivity.

We continue to expand our footprint, we now have over 10,000miles of metro fiber, 249 operational rings, and over 100 markets.

We have over 26,000 miles for terrestrial and inner-cityfiber. We are today the most inter-connected network in the world, todaydirectly connected to over 2270 other networks.

Over 350 of these networks are settlement-free peering partners,and over 1920 networks that connect to our Cogent customers who pay us forconnectivity. We believe our network has substantial capacity to accommodateour future growth plans.

We are currently utilizing a little bit less than 22% of thelit capacity in our network. So, in summary, our on-net revenues or growthbusiness continues to grow as an increasing percentage of our total revenue,and traffic continues to increase on our network.

We are surpassing our provisioning goals of 17 days foron-net services, allowing customers to experience 12 days from order placementto actually receiving Cogent services in any of our on-net footprint.

We are well on track to exceed ourfootprint expansion plans and our rate of adding buildings to the network. We continue to have a strongbalance sheet, with less than $20 million in true net debt. We continue to befocused on statistically expanding our network into the higher trafficlocations, both domestically in existing markets and new market, as well asinternationally.

We will continue to invest in oursale force, and continue to remain focused in our marketing effort. And thenfinally, and maybe most importantly of all to our shareholders, under our 2008plan, we expect to generate and access of $1 per share of free cash flow forthe benefit of our equity shareholders. And we will continue to look to returnthat value to our shareholder.

Now I'd like to open the floor to question.



Thank you. (Operator Instructions). Now we'll go first toTom Watts with Cowen and Company.

TomWatts - Cowen and Company

Hi, Dave, how are you?


Hey, good, Tom.

TomWatts - Cowen and Company

Congratulations on the quarter. A couple of things, one can you just give alittle bit more color, you'd hoped for the 7% to 9% on that revenue growth inthe quarter, and why didn't we quite get there, even though things are goingwell.

And then second; so you're having a phenomenal expansion onyour sales force, are you seeing different products being sold or how was itchanging - changing what's coming in the door, and particularly you mentioned yourproductivity was lower this quarter. And then, is that going to rebound and howwill that change product mix?

Dave Schaeffer

Sure. First of all let's start with the sequential on-netrevenue growth. You are correct, while we were hoping for a little bettersequential growth we did see acceleration from the previous quarter.

I think probably, the biggest contributor to our revenuegrowth not hitting our target of 7% to 9% was the fact that sequential trafficgrowth was only a couple of percent for the quarter. So, we were getting liftof uplift from existing customers buying bigger connections, but we were continuingwith a great deal of success signing brand new customers and new logos.

And, I think, this is a result of some of the seasonalityassociated with internet traffic growth, particularly as it becomes more of akind of content delivering and entertainment media, there tends to be a littlebit more seasonality with slower growth in summer month.

Also, as a backdrop, several of our competitors haverecently released results in which they've experienced sequentialquarter-over-quarter declined in their internet businesses, where we areexperiencing 6.7% sequential growth.

And as Tad indicated in our guidance for next quarter, as wesee traffic increase just in the month of October at a sequential rate of about5% month-over-month, we are quite comfortable with the 7% to 8% on-net revenuegrowth number that we are forecasting for fourth quarter, and the full yeargrowth number in on-net revenue of 30% to 33% for 2008, also is a direct resultof these long-term trends that we are seeing.

To your second point about sale force product mix, wecontinue to hire a sales force at an unprecedented rate, at least for Cogent,and make sure that we continue to manage out those individuals that are less productive.Our product suite remains very focused, but we felt no other products otherthat Internet Connectivity and the co-location space associated with thatInternet Connectivity.

So we are a direct beneficiary of the growth in InternetTraffic, in the migration of traffic from other types of networks to theInternet. What we do not sell, however, are value-added services in competitionwith our customers. So the sales force product mix what that they have in theirbag remains constant.

What we have instructed sales people to do is spend timebuilding those funnels, getting out there, and talking to enough customers sothey can selectively pick under the larger accounts to be working on, and close.That did have some impact on productivity.

We have seen productivity down last quarter in Q2. It was actuallythe highest in the company since [5.8], but that was coming off a quarter wherein Q1 it was 4.5%. So we've used the four units per rep as somewhat indicative ofthis kind of fluctuation on a quarterly basis. It also is a direct result ofthese reps continuing the focus on building their funnels.

Tom Watts - Cowen andCompany

And perhaps I should have been more accurate. I think lastquarter you'd said that a lot of the newer reps were selling smaller contractbecause those were easier. It sounded like you tried to refocus on thisquarter, have you seen progress on that front, and then should we expect thatgoing forward?

Dave Schaeffer

Yeah, we did. We sit down with the sales force on a weeklybasis and monitor their productivity. We look at their funnels and also try to givethem counsel to make sure that they meet their total requirements and remainemployed at Cogent.

And, in doing that, we really emphasize that people neededto work on building bigger funnels and having the luxury of being able to workon bigger accounts.

And we actually saw that in the deceleration of the rate ofARPU decline, coupled with the fact that contract lengths for the quarteracross the entire base increased by 5% resulting in lower ARPU because of thediscounts.

So, we absolutely are seeing a pickup in larger sales, andwe expect to see that even accelerate more in the upcoming quarter particularlyas some existing customers will come back and increase their traffic purchasesas their traffic requirements increase.

Tom Watts - Cowen andCompany

Okay. Thanks very much.

Dave Schaeffer



We'll go next to Jonathan Schildkraut with Jeffries &Co.

Jonathan Schildkraut- Jeffries & Co

Thank you for taking the questions. Just two questions,first if you could tell us what some of the cost associated with the launch inthe new data centers, the six new data centers was, just to get a sense of whatthe incremental margin might have looked like without that? And secondly, whatpercent of your customer base is now under long-term contract?

Dave Schaeffer

Sure. So, let me start with the data centers. Adding six newdata centers to our footprint that were virtually vacant and we didacquisitions at the end of second quarter in late June. So, we've picked up allthe expense associated with those centers. The direct cost of carrying thosecenters was approximately $200,000 a month or about $600,000 for the quarter.We also picked up probably another $300,000 in increased operating cost of theexisting centers due to increases in power cost and rental cost within thosecenters.

We also experienced a slight up tick in capital spending asa result of bringing those centers up to Cogent’s standards. Now, while thesewere completely build-out centers, they had been virtually vacant at the pointof acquisition and did not have, say, the same security and environmentalmonitoring systems that our other 28 centers have. We did complete theintegration and the standardization of those facilities.

But probably most importantly, we are beginning to sellcustomers into those facilities and beginning to increase the occupancy. Theworker cost or entire footprint, we are still running above 40% occupancywithin our data centers. And also rack and power as a percentage of revenuesdid increase for the quarter from about 3.4% of revenues to a total of about3.8%. So, we are starting to see some of the up tick from the growth that weare getting in the data centers.

Let me let Tad then take the margin question on the contractline.

Tad Weed

So, if you look at 2007 installed orders through the end ofthe second quarter, the weighted average was about 10.7 months and thatincreased to about 11.3 months on the third quarter. Another way of looking atthat is contracts that are one year or greater, so, we do have some three-yearcontracts and longer, were about 75% through the second quarter. And then thatincreased to 80% of contracts in the third quarter. So, again, the trend ismore of longer-term contracts.

Jonathan Schildkraut- Jeffries & Co.

Thank you.


We'll go next to Jonathan Atkin with RBC Capital Markets.

Jonathan Atkin - RBCCapital Markets

Yeah. I was wondering if you could refresh us on the mixbetween corporate and NetCentric revenues or the portion of corporate versusNetCentric among your incremental revenues? And then, the new buildings thatyou adding, are they predominantly data centers or office buildings?

Dave Schaeffer

Hello, John. First of all in Q2, our mix was roughly 56%NetCentric revenue and 44% corporate. That mix actually changed in the thirdquarter, where we were about almost 57.6% NetCentric and just about 42.3%corporate in our revenues. Now in terms of new buildings, here in North America, the majority of the buildings we are addingare corporate. In Europe, virtually all of thebuildings that we are adding are NetCentric or data centers. That mix remainsfor incremental buildings at about 75% -- of the incremental buildings arecorporate, about 25% of the incremental buildings are data centers with the Europe kind of leading a way there.

Jonathan Atkin - RBCCapital Markets

And then, Tad mentioned 22% Europe, 8% Canada and maybe, if we fastforward one year, is the mix of domestic versus international likely to besimilar as we exit next year?

Tad Weed

Yes. We don't anticipate a difference in the mix and thegrowth rates are relatively similar across the regions. So, don't expect that22% and 8% to vary significantly.

Jonathan Atkin - RBCCapital Markets

And then, when you connect to a data center, how many otherbandwidth providers are also connecting?

Dave Schaeffer

Fairly greatly, but data centers by their nature, havemultiple providers. I would say that on the typical data center that we connectto, there are seven or eight other unique networks connected to that facility.Whereas, when we connect to a corporate building, there is generally only oneor two other networks typically connected to that corporate build.

Jonathan Atkin - RBCCapital Markets

Thanks very much.


We'll go next to James Breen with Thomas Weisel.

James Breen - ThomasWeisel

Thanks. Given what your guidance is for revenue for nextyear, can you talk about the trends in the off-net side and the non-corerevenue businesses, to give us a better picture of the growth in on-netbusiness? Thanks.

Dave Schaeffer

Yeah. Hey, sure, Jim. It's Dave. As we pointed out, weexpect our on-net revenue growth to be between 30% and 33% of revenues orsequentially that business to grow. We also indicated that for the first time,incremental sales are approx 90% being on-net, whereas our kind of historicalrun rate was only about 80% of new sales being on-net, where 20% were off-net,and that were more like 90/10. We do expect to see a continued deceleration inthe rate of decline in the off-net business that will be helped by theavailability of higher capacity in the local groups from the incumbentoperators and the increased availability of Ethernet services.

I think with these strengths, we expect to see relativelyflat. So I think Tad said, flat to down 5% are off-net revenue growth. We doexpect to see the non-core continue to dissipate quickly. Remember, included innon-core is our managed modem service business, really the provisioning ofwholesale dial-up services to companies like EarthLink and United Online, whichare continuing to see continued defections from dial-up to broadband.

And then finally, or the most important part of our businessthat's being on-net, we will see growth from both new logos buying from Cogentas well as existing customers particularly NetCentric customers taking morecapacity. I think all of these factors together give us a great deal of comfortand seeing our total top line revenue growth from about $185 million this yearto about $230 million at the mid points of our guidance for next year.

James Breen - ThomasWeisel

Great and just one follow up on traffic. You said that thesame store sale sort of over the customer growth slowed a little bit thisquarter. Was that broken evenly between the NetCentric versus your corporatecustomers?

Dave Schaeffer

Actually, the corporate customers continue to grow at apretty fast pace, but they account for only about 4% of our traffic. 96% of thetraffic on Cogent's network comes from that 57% of our revenue that is comingfrom the NetCentric customers. Those customers typically buy on a per-megabitand their additional spend comes from consuming more megabits. Whereascorporate customers, even though they may grow, don't generate more revenue forCogent, simply because we sell on increments that are typically larger thanthey can consume. So, traffic road disproportionally impacts the NetCentricpart of our business in terms of revenue growth.

James Breen - ThomasWeisel

Great, thank you.


We will go next to Tim Horan with CIBC World Markets.

Tim Horan - CIBCWorld Markets

Good morning, guys. Thanks a lot. Good quarter.

Tad Weed

Hey, thanks Tim.

Tim Horan - CIBCWorld Markets

Dave, the stock looks like it’s weak this morning and whenyou look at your guidance, it looks like you are looking to more like 8%sequential growth going forward. And that from a surface seems aggressiveparticularly where the stock is. Why wouldn't you guide them more like 6% to 7%like you are seeing now and when the upside comes, that's fine? And the netgain, can you maybe talk about what you are expecting the ARPUs the next year?You might have touched on it, but how does that kind of revenue break down onthe on-net front? And then I just have one follow up. Thanks.

Dave Schaeffer

Yeah. Sure. Let me start with the growth. So, we did see anacceleration in our sequential quarter-over-quarter growth to 6.7%. If youcompounded that out, that would put us in the high 20s, probably 28% - 29%.

We do see acceleration in that sequential growth to the kindof 7% to 8% this quarter, and if you look at kind of the long-term trends, wehave averaged 9% to 10% sequential on-net revenue growth over the past coupleof years.

We continue to believe that the selling environment and ourcompetitive advantage, is as strong now, as it's ever been. So we feel verycomfortable that we will eventually return to that 9% to 10% long-term trend.

We did dive to 30% to 33% in a sense conservancy, in thesense of giving us some ramp to do that. You will see some fluctuationsquarter-over-quarter particularly as traffic growth fluctuatesquarter-over-quarter.

And we continue to increase as a percentage of the worlds' internettraffic. So it will become much more of a proxy for the entire internet, andtherefore, our ability to kind of outperform the internet tends to compress.

We do believe, however, that there are a number ofsignificant social and business trends that are going to continue to drivetraffic growth at the same historic rate that it has experienced for the past15 years - 18 years.

And from that, we feel very comfortable with the revenueguidance, and again, we feel that the 7% to 8% that we guided to in Q4 isextremely achievable base, particularly on early results that we've seen fromOctober traffic growth.

Tim Horan - CIBCWorld Markets

Thanks for that. On a longer term on note, one of your main benefitsversus your peers is you've not had to kind of, re-price your base. What we'rehearing from data center prices that you can buy service in the $20 megabitrange kind of declining 25% a year.

I know in the corporate environment the office buildingenvironment that's more like $40 a megabit. But if you extrapolate those trendsout at some point in the next three years, you're probably going to have to startre-pricing your base, and that could, at that point, try to impact the revenues.I know it's a ways out, but can you talk about your plans how and what you'regoing do when that comes to fruition? Thanks

Dave Schaeffer

Sure, Tim. I'll take that and I'll let Tad touch on yourARPU questions which we owe to get an answer on. If you look at our effectiveprice from megabit with today 80% of our contracts being one year or longer inlength, our effective price per megabit today is about $9 per megabit based onthe pricing discounts that we gave for contract term.

Remember $10 a meg is month-to-month, $9 a megabit is forone year contract, and $8 a megabit is for two year or longer contract. Alsoare the pricing rent you referred in the 20’s in some data centers, is buy afew more aggressive careers that are probably loosing money and are also onlyoffering those prices to extremely large customers.

We have a very different model in which we offer flatpricing not based on volume commitments but rather on contract term. Becauseour belief, is that there is a huge advantage to Cogent in having a lot of newbusiness models choose Cogent, where a few of those models will become a verysuccessful and others may not. So we think in the long-term our pricingstrategy is the right one.

In terms of eventually re-pricing our base, again, we have apolicy that says any customer can present us an invoice from a competitor, andthey can either take the standard approach in price, or under cut it by 50%.

Now I will admit we do see a slight increase in that take rateon that program last quarter, and as I mentioned in Q1, I think we had a grandtotal of one instance, where we had to do that. I think we actually had twoinstances in this most recent quarter. So it's still relatively insignificant.

But if you really put your crystal ball in front of you andlook far and [wide] in to the future, the internet is very deflationary, priceswill fall. We are uniquely positioned to be the price leader. Remember, we areutilizing less than 22% of our lit capacity.

And while we do not anticipate any material impact fromre-pricing our adjusting base for the foreseeable future, eventually the marketaverage price will get to Cogents' price, but there will be a whole lot lessplayers in the market and that’s probably a good, safe way to test ARPUresponse

Tad Weed

The overall trend on our ARPU basically, what we experiencedthis quarter versus last quarter was de-continuing through the fourth quarterand in to '08. So that being an increase in the off-net ARPU and a decline inthe on-net ARPU, however the decline expected to occur at a slower rate.

We don't and having in the past given the exact rate,because we can essentially hit the revenue target with a different mix of units,but I do think the overall impacts in the trends will continue with off-netARPU increasing and on-net decreasing, but at a slower rate.

Tim Horan - CIBCWorld Markets

Thanks a lot guys.


We'll go next to Tom Seitz with Lehman Brothers.

Tom Seitz - LehmanBrothers

Thanks for taking the question. Couple of, I guess,follow-ups. If you've got 80% of your customers on long-term contracts today,can you tell us what's baked into the guidance from next year for yourexpectation for the percentage of customers on long-term contracts next year?

And then second question, you've talked about how the Europeanopportunities is mainly a data center NetCentric customer opportunity, which Ithink implies a higher ARPU customer. And I was wondering if you could tell usof the sales force additions that you are adding, what number or what's thegrowth like in the European sale force versus the US sales force? Thanks.

Dave Schaeffer

Okay, hey, great Tom. Thanks for the question. First of all,we do anticipate continued lengthening of contracts. We were actually a bitsurprised in Q2 at the rate of acceleration and customers taking us up on ourdiscount offer and longer term contracts. We continue to see that trendcontinuing.

Our modeling methodology as we prepare guidance is that Tad,and his team, basically pick all of the trend lines from key drivers in ourbusiness from the previous six months. We look at any out wires that are not particularlywithin the range, and then we take kind of the average of that range, and projectit going forward.

With that, we would expect that the percentage of customerstaking advantage of the discount therefore, on longer term contracts than month-to-monthwill probably, by the end of next year get close to 90% of our base as opposedto the 80% today. So, we'll expect to see that continue.

Now, to your European question, while we would love to havea corporate business in Europe, the buildingfootprint just doesn’t fit our demographic requirements. There are fewbuildings in Europe of the scale of buildingshere in the U.S, and secondly, those very large buildings tend to be moresingle tenant than multi- tenanted.

So, we do have a few buildings in Europe.We are actually in the process of adding a few building in the Canary Wharfregion in Londonto our network. So there are some corporate opportunities, but it is true thatmost of the opportunity in Europe is selling to either content companies or inmany cases PTGs within Europe, and we continueto do quite well in the market space.

That does generally, mean higher ARPUs, meaning that theygenerally are paying more than a corporate customer per connection. However,some of these countries have relatively small installed broadband basis. Thereis an opportunity for significant growth in their broadband penetration rates,whereas in Western Europe and the U.S. that’s much more of a maturedmarket.

So I think, we'll some smaller ARPUs there, and we'll have someacceleration in growth that comes from someone who buys a smaller connection inthe market that has only 10% or 15% broadband penetration, maybe growing to the60% to 70% that we are seeing in the western world. And then the final impacton non-US ARPU is, quite honestly, the FX impact. And as Tad said, we obviouslyare expecting to see some pick up this quarter at an accelerated rate thenwe've seen in the past. But, at the end of the day, we are not currencytraders, we are running an Internet company and we are trying to best of ourability not to create cross border arbitrage opportunities with our products.

Tom Seitz - LehmanBrothers

Great. Thank you very much.

Dave Schaeffer

Thanks Tom.


We'll go next to Jurgan Usman with Wachovia Securities.

Jurgan Usman -Wachovia Securities

Hi, thank you very much, at the end of the line here, coupleof questions. First of all, on the revenue churn. Can you maybe give that out?

Dave Schaeffer

Sure. Essentially, on-net has held steady at 2% for quitesome period of time. So, it was 2% for the quarter, basically, identical towhat it was for the first half and for the prior two quarters of 2007. We didsee that off-net ARPU or churn, rather, did declined. And giving the exactnumbers here it was 6% for the second quarter and 3.5% for the third quarter.So, the churn for off-net did decline and for on-net essentially dead-on at 2%.

Jurgan Usman -Wachovia Securities

All right, and then next one, can you give me an update onyour largest customer and how they did, I guess, in the quarter regardingbandwidth commitment?

Dave Schaeffer

Sure. Our largest customer represents about 2.7% of revenue.That particular customer did increase their commitments in the quarter, Jurgan,primarily by expanding their footprint into Europe.So, they have taken multiple connections throughout Europe, as well as North America. We did see, quite honestly, their NorthAmerican traffic growth slow, while still positive, not growing at the samerate, kind of indicating maybe a bit of a maturity in their business model.But, we have a very diverse customer base with a number of different businessmodels and overall we are seeing a good pick up across all of our customers,represented by the fact that our monthly traffic growth in October was about 5%sequentially just month-after-month.

Jurgan Usman -Wachovia Securities

All right, and then next one is on your productivity seemsto be fluctuating a lot, more volatile, I guess, in the past couple of quartersor so, which, I guess, is kind of counterintuitive given that you have largernumber of sales people. Has there been an increase in terms of sales forcechurn or is this just because of they are still building their funnels, orwhat's going on there?

Dave Schaeffer

Sure. Big part of it is funnel building here again. Sale force churn has beenrelatively constant. What has happened, though, is the average tenure of thesales force continues to decrease. As we indicated, we had record hiring in themost recent quarter. In Q3 we added more reps than we had ever added in a givenquarter. So, that kind of brings down the average tenure of those sales repswith less tenured people they tend to have less material funnels and thereforeare more subject to these volatilities. And again, we feel very comfortablethat the long-term trend remains intact and you are just going to getvolatility quarter-over-quarter based on lumpiness of specific customercontracts and timing. But, the long-term trend for these reps to remainproductive at about five units per rep, per month.

Jurgan Usman -Wachovia Securities

And then last one, I promise. Are you…

Dave Schaeffer

That's okay.

Jurgan Usman -Wachovia Securities

Yeah. On that revenue growth guidance for 2008, can I implyabout 7% sequential growth, obviously lower than your current guidance of 7% to9%, 7% to 8% in the fourth quarter? Now you did say in the past that, I guess,longer-term you expect on-net to grow 9% to 10% sequentially. I mean, if thissomething that you probably see somewhere longer in the future, maybe 2009 orso. Or, I was just wondering there seems to be a little bit of disconnect withwhat you said and what the guidance imply. Thanks.

Dave Schaeffer

Sure, Jurgan. As I said, I think the long-term drivers ofour growth remain intact. We do believe that with adequate number of salespeople and that's why we would increase the number of sales people that we planto add, we can continue to achieve that type of growth.

As we look at, coming up with projections for the nextquarter and the next year, I am going to again revert to the methodology weused. And what we do is take actual results form the previous six months andstraight-line down, because we experience lower growth sequentially in Q2 andQ3.

In our long-term historical run rate we're projecting thatout in to Q4 and into next year. But, we do believe that the underlying driversof growth are as strong as ever and we do believe that we will be able toreturn to that 7% to 9% or ultimately 9% to 10% growth rate in the long-term,and maybe even in 2008.

We just try to be as conservative as responsible. Andhopefully, investors get comfort in the fact that we gave our guidance inNovember of 2006, and are literally at the midpoints of those guidance numbersa year later in an industry that is growing rapidly. So, I think ourmethodology of forecasting has hopefully earned us a little bit ofcreditability.

Jurgan Usman -Wachovia Securities

Alright, finally last on CapEx, 2008 seems to be, I guess,flat versus 2007 about $30 million give or take?

Dave Schaeffer

That’s correct, Jurgan. This year CapEx went up justmarginally because of the data centers that we didn't anticipate when we putthat guidance out and having to bring them up to standards. We do expect tocontinue to expand the network and report on a series of new markets andobviously new buildings. We intend to exceed the goals that we have. Weabsolutely anticipate CapEx to be flat and in that kind of $30 million range orslightly under, next year as well as this year.

Jurgan Usman -Wachovia Securities

All right, thank you very much.

Dave Schaeffer



We'll go next to Scott Goldman with Bear Stearns.

Scott Goldman - BearStearns

Hi, good morning guys.

Dave Schaeffer

Hi, Scott.

Scott Goldman - BearStearns

Just wanted to go back on the gross margins; I guess, backin the second quarter you added the data centers late in the quarter. Youtalked about being able to grow gross margin the 100 basis points in the third,obviously that did not materialize and there had been a decline.

So, just wondering what may have changed from those originalexpectations that resulted in that decline? Is that also what broughtincremental margins appear to be below your historic run rate in this quarteras well? It's the same factor that impacted gross margins at work there.

Secondly, you talked about seasonality of traffic, justwondering if you can make any comment as far as what you may have seen kind oflate in the quarter, September or what you saw already in October as far astraffic growth.

Dave Schaeffer

Sure. First of all, with regard to the new data centers,they did have a direct cost on network operations, as I reflected earlier, ofabout $600,000. As we took over centers that were baked in, were virtuallybaked in. Just a few costs connects them down with virtually no revenue andthen had to both bring them up to standards and to begin to populate them.

We did indicate that our gross margins for Q4 should expand200 basis points. As I have shared with investors over the years, there istypically some volatility in any given quarter due to lumpiness of payments,various service contracts and so for. But, that 100 basis point marginexpansion on a sequential basis, both gross and EBITDA trend remains intact.

If you look at our margins for next year, we are actuallyforecasting better than a 100 basis points sequentially of gross margin andEBITDA margin expansion for the year. So, we are looking at full year 2008gross margins of about 60%, up from the roughly 54.5% this year and EBITDAmargins continuing to expand from the roughly 27.5% that we are going to dothis year, up to the roughly 34% that we're forecasting for next year.

We do see continuing operating leverage as the on-netportion of our business continues to increase, as we increase the utilizationof our existing footprint more effectively. So, while we did see some grossmargins degradation in the quarter as a result of picking up these empty datacenters, we see that as a one-time anomaly, not as any kind of long-term trendsand feel very comfortable that the guidance we've given.

In terms of seasonality of traffic, as I'd mentioned earlierwe saw significant pick up in the month of October where the traffic on amonth-over-month basis picked up at about 5%. That we compound to better thanthe 75% annual rate. We also saw a significant pick up in September overAugust. Basically, July and August were relatively flat months, as we have seenprevious summers.

Although, we think that the proliferation of media migratingto the internet will be the continuing driver of growth, maybe a little bitmore pessimistic than others in industry. We don't see an acceleration but wedo see kind of a consistent rate of traffic growth.

Tad Weed

[Since the package is out], I will add one thing to thegross margin comment. In our cost of good sold we did have some cost associatedwith our expansion. And our expansion, frankly, is kind of ahead of ourschedule. So, we did incur some cost of good sold expenses kind of ahead ofplan, which contributed to the margin decline in Q2 to Q3.

Scott Goldman - BearStearns

Okay, great. One follow-up and one other additionalquestion, I guess, as going with standard, Jurgan's number of questions thatshould be okay. Anyway Tad, you can quantify those costs that you are justreferring to and then, just quickly on customer adds, on-net, ramping salesforce.

We've talked a bit about the productivity on the callalready, churn relatively flat. Is there anything about the sales cycle oftrying to sell to the higher bandwidth that would maybe have brought thaton-net customer add number below, maybe were I was expecting relative to pastquarters?

Tad Weed

On the quantification, I'd put it in the total cost of goodssold, dollar amount in the $700,000 to $800,000 range. As Dave, mentioned theway we build our forecast just looking at the recurrent run rates and anythingthere that is recurring as opposed to non-recurring is baked into the plan forthe fourth quarter and for 2008. On the sales cycle, I would say there isnothing in particular there to point out, at least from my end, but Dave mighthave something.

Dave Schaeffer

Yeah, I think on the sales cycle, there really is nodifference in selling to someone if they are large customer or small customer.They basically are going to buy when they need the service and when they areout of contracts with their existing provider. Where the variation comes fromis, really having a bigger funnel.

So, if a ramp has more things that are becoming actionablein a given month, they are able to pick and choose and go after the biggerdeals. And we are really trying to train and in essence, the sales forcecontinues to build that funnel. The limiting factor in Cogent’s growth for theforeseeable future is actually, still sales people and not contacting enough ofthe opportunities on our footprint. But, again, within the footprint, we wantto go after the better opportunities first, and that's probably the biggerfactor.

Scott Goldman - BearStearns

Great. Thanks for taking the time, guys.

Dave Schaeffer



We go next to Andrew Bill with [RDD Research]

Andrew Bill - RSA Research

Hi, it is Andrew Bill from [RSA] Research. Can I just goback to the sales force churn question, first of all, and just ask you how manygross sales force additions did you make to get to your 23 net? Secondly, interms of the 100 buildings that you are planning to add in '08 is there anymeasure you could give on the revenue potential per of building of those,rather to your existing buildings. I mean, just presumably, they are gettingslightly smaller in terms of average size.

And then thirdly, I don't know is there anyway you can thinkabout breaking down the revenue growth in a slightly different way to talkabout, how much of it comes from increasing share within building. How thatcomes from adding new buildings and how is just from the underlying demand,which I think you probably said was 2% sequentially. But, any thoughts you haveon those areas, appreciated. Thanks

Tad Weed

I’ll take the first question. I can kind of give you therole forward, if you will, of sales reps. That we started the third quarterwith 143 representative, added 53 and turn 30, so…

Dave Schaeffer

So, in terms of the building demographics, actually, thecorporate buildings that we are adding today are actually slightly larger thanour existing average. So, that number continues to increase towards nearly at580,000 square feet up from roughly to 570,000.

We are very judicious about adding those buildings. It's inthose buildings we have increased our penetration work. Today, across theentire footprint we have about simply the customers or corporate building outof an addressable market of about 50, which are those buildings.

For those corporate customers is almost a certainty thatthey are not going to buy a second connection in the same building or increasetheir connection. Now that portion of our revenue stream is about 23% ofrevenue. So roughly 43% being corporate, 23% of that 43% is the net corporatecustomers.

Now for the NetCentric customers, a little bit differentdemographic; within the data centers we have just under 15 unique customers percenter across the entire footprint. That represents about a 7.5% unit penetration,but still about an 18% penetration by bandwidth consumed within those facilities.

In any given month, roughly 70% of our sales come from brandnew logos, someone who never bought connection from Cogent before. Roughly 30%sales come from existing customers. So then if you look at the split betweenNetCentric and corporate, that kind of 70:30 ratio applies almost equally to twobasis.

So with 40% of NetCentric incremental revenues coming fromexisting customers, there is a high correlation between traffic growth andrevenue growth for that 30% of the 57%. So hopefully that was enough detail toanswer your question.

Andrew Bill - RSAResearch

That's great. Thank you.


We'll go next to Andrew Tuttle with [Crowe Point Partners].

Andrew Tuttle - CrowePoint Partners

Can you hear me?

Dave Schaeffer

Yeah, sure.

Andrew Tuttle - CrowePoint Partners

Okay, thanks. Forgive me if you've answered these questionsbefore, but could you give the traffic growth stats sequentially and year-over-year?

Dave Schaeffer

Yes. Year-over-year traffic grew by a little over 66% fromQ3, 2006 to Q3, 2007.

Andrew Tuttle - CrowePoint Partners

Okay. I've also noticed that in about the last 18 months orso, the average revenue per on-net connection is probably down 18% or 19%. Isthat decline going to abate do you think going forward or where does that go?

Dave Schaeffer

Yeah. I didn't touch on that. We see that ARPU continues todecline at least for the next year, eventually, at some point, it will actuallystart back up. But the decline is driven by kind of two key factors. The firstis on the NetCentric portion of our business which is 57% of revenues. Thatportion of our business is selling to smaller and smaller customers withinthose data centers. So their average buy is less not that they are paying lessper megabit, but they are just buying less megabit.

On the corporate side, we see ARPUs virtually flat. And then,the second factor is this increasing contract length. So in the quarter we sawthe entire base of average contract duration extend about 5%. So we saw it goingup probably 10.7 months to 11.3 months that has the impact of reducing ourprice per megabit because we do offer discounts.

So our effective price per megabit today is just around $9 amegabit. That is down from probably, maybe $9.40 or $9.50 a year ago on aweighted average basis of customers' contract length. So ultimately, what willhappen is, we'll get to a saturation point of people that take longer term contracts,I think 90% probably close to that, where we think we'll be by the end of nextyear.

And then secondly, we will see that even the smallerNetCentric customers' buys are as big as our ARPU, and at that point it willsee ARPU for on-net business begin to actually increase.

Andrew Tuttle - CrowePoint Partners

Okay. And if you get to 90% of your customers on long termcontract by the end of next year like you're targeting, I imagine that churnsgoing to have to tick up a little bit at least after that point, if you kind ofmap it out on your contracted customer basis.

Dave Schaeffer

Well, not really, because remember, churn is measured when acustomers goes away. As we had mentioned on the previous call, approximately94% of our contract have auto-renewed provisions on them. So even for thosecustomers that take a one year contract, at the end of that one year, theyautomatically renew for one year unless they proactively cancel.

Now, we do not count that renewal in our new sales numbers.But, I think as the percentage of business that goes under longer-term contractincreases, that should actually have a beneficial impact on churn, and we'veseen no increase in churn, if anything, we are seeing a slight decrease in therate of which revenue is churned.

Andrew Tuttle - CrowePoint Partners

All right, great. Thanks, guys.


It appears we have no further questions at this time. Iwould like to turn the call back over to our speakers for any additional orclosing remarks.

Dave Schaeffer

Well, again, thank you all very much for your support forlistening to today’s call. The management team will be available, if you haveany follow-up questions. I personally, again, would like to thank the entireCogent team for the efforts of growing our revenues, of installing thoserevenues, and in timely manner and generating the incremental cash flow that'sallowing us to buy back shares in the market. So with that, I would like tothank everyone, and we'll talk next quarter. Take care, bye- bye.


And thus conclude today’s call. We do appreciate yourparticipation. You may disconnect at this time.

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