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Cogent Communications (NASDAQ:CCOI)

Q4 2007 Earnings Call

February 27, 2008 8:30 am ET

Executives

David Schaeffer – Chairman, CEO

Thaddeus Weed – CFO

Analysts

Jonathan Atkin – RBC Capital Markets

Scott Goldman – Bear Stearns

Tim Horan – Oppenheimer Funds

Jonathan Schildkraut – Jefferies & Co.

Frank Louthan – Raymond James

Jurgan Usman – Wachovia Securities

Erin Schmitz – Citi Investments

Nick Netchvolodoff – Lehman Brothers

James Breen – Thomas Weisel Partners

Jennifer Adams – Cowen & Co.

Operator

Good morning and welcome to the Cogent Communications group fourth quarter and fiscal year 2007 earning conference call. As a reminder, this conference is being recorded and it will be available for replay at www.cogentco.com. I would now like to turn the conference call over to your host Mr. Dave Schaeffer, Chair and Chief Executive Officer of Cogent Communications. Please go ahead sir.

Dave Schaeffer

Thank you and good morning. Welcome to our fourth quarter 2007 and year end 2007 earning conference call. I’m Dave Schaeffer, Cogent’s Chief Executive Officer. With me on this morning’s call is Tad Weed, our Chief Financial officer. We’re very pleased with the results for the quarter and the results for the full fiscal year 2007. Our fourth quarter and full year revenue EBITDA and loss per share were either within the guidance or better than the guidance ranges that we had given. As part of our second $50 million stock buyback program, we have returned a total of $22.7 million to our shareholders since September of 2007.

Under this program, we have purchased a total of 1.1 million shares in the open market at an average price of $20.01. I should point out that this is in addition to the $50 million share buyback program that was completed as part of our June 2007 $200 million convertible transaction. During the quarter we continue to expand our EBITDA and gross margins demonstrating the tremendous operating leverage of our own net business. For the fourth quarter, 2007 our gross margin expanded by 360 basis points to 55.2%. Our EBITDA margin has expanded by 170 basis points to 26.7%.

During the quarter, we continued to increase our footprint as well. We added another 28 buildings to our net worth earning the fourth quarter bringing our 2007 total to 110 additional buildings, 10 more than our targeted additions of 100 buildings. Finally, we again continue to exceed our on net provisioning service level guarantee of 17 days by delivering our on net services with an average provisioning cycle of 10 business days. Again I personally like to thank the entire Cogent team for their efforts in achieving these excellent results.

Throughout our discussions, as in the past we will continue to focus on the results and impact of our on net business, which today is over 80% of our business and it is the growth driver of our business going forward. We have also continued to highlight several operational statistics that we believe will demonstrate our continuing increasing market share expanding scale and tremendous operating leverage of our on net business. I will again review certain operational highlights, and also I outline some of our continuing expansion plans and growth opportunities. Tad will provide additional details on our financial performance. Tad will also walk you through the guidance for first quarter 2008 and an update and reaffirmation of our guidance for the full year, fiscal year 2008. Following our remarks, we will open the call for questions and answers. Now I would like to ask Tad to read our save harbor line.

Thaddeus Weed

Thank you Dave and good morning to everyone, well this fourth quarter 2007 and fiscal 2007 earnings report and this earnings conference call is Cogent’s business outlook contains forward looking statements and in the meaning in section 27A and 21E of the securities act, the forward looking statements are based upon our current intent, belief and expectations. These forward looking statements and all the statements that may be made on this call that are not historical facts are subject to a number of risks and uncertainties and actual results may differ materially. Please refer to our SEC filings for more information on the factors that could cause actual results to differ.

You should also be aware that Cogent’s expectation do not reflect the potential impact of mergers acquisitions other business combinations or financing transactions that may be completed after today. Cogent takes no obligation to release publicly any revisions any forward looking statement made today or otherwise update our supplement statements made on this call. Also during the call, if we use any non GAAP financial measures as defined by the SEC and Reg G, you will find these reconciled in the GAAP measurements in our earnings release and on our website at cogentco.com. I would like to turn the call back over to Dave.

Dave Schaeffer

Thanks Tad, Now for some highlights from our fourth quarter and year end results. Hopefully you’ve had a chance to review our earnings press release. As we did in previous quarter, our press release includes a number of historical quarterly metrics. This metrics will be added to our website. Hopefully you will find these metrics informative and helpful in understanding our financial results and the trending of our business operations. As always, if you have any additional suggestions on the metrics we may either add or refine to these press releases, please let us know. Our fourth quarter 2007 revenue was $50 million, at the top end our guidance range with was between $49 and $50 million.

Our EBITDA as adjusted of $13.3 million was within our guidance range of $13 to $14 million. Our loss per share of 15 cents was better than our guidance range of between $0.17 and $0.22 with less shares outstanding. We continue to be pleased with the growth in our on net business. Our continuing advancement and our sales and marketing organizations along with our network expansion activity is leading to an increase in our on net customer connections and our on net revenue.

Our on net revenues grew by 7.6% sequentially third quarter 2007 to fourth quarter 2007. This was 90 basis points better than the growth we had demonstrated sequentially of 6.7% in the second to third quarter 2007 and above the midpoint of the targeted revenue growth of sequentially between 7-8%. Our on net customers connections increased 6.6% from the third quarter to the fourth quarter which was less than the 7.4% that we had experienced in second quarter to third quarter.

On average our sales force was able to focus on selling to larger accounts during the quarter as their sales funnels continued to mature. This change in customers has led to an increase from third quarter to fourth quarter in our on net ARPU or average revenue per user as compared to the decline of 3.5% which we experienced second quarter to third quarter. During the quarter, we again extended the average contract term by another 1.3%. This was less than the roughly 5% contract duration extension that we have experienced in 2 to 3 of 2007. Today, most of our customers are under 1 year contract and our average contract length remains at about a little over 11.7 months.

We again continue to sell more extended firm contracts with contract discounts and more and more customers are continuing to express their confidence within Cogent by signing up for these longer term commitments. Now some overall trends and highlights of revenue growth and traffic front, for total revenue for Q4 2007, was $50 million. This represented a 6.4% increase over the third quarter and a 23.3% increase year over year as compared to fourth quarter 2006. Our total revenues for 2007 were $185.7 million versus the $149.1 million for fiscal year 2006, an increase year over year of total revenue of 24.5%. Traffic on our network grew at an accelerated rate in fourth quarter and grew by approximately 14% sequentially third quarter to fourth quarter. This traffic growth was a significant increase from the 2% traffic growth that we had experienced in Q2 to Q3, 2007.

For fiscal year 2006 to fiscal year 2007 network traffic grew by 75%. We continue to see strong traffic growth into 2008. Our monthly sequential traffic growth from December of 2007 to January 2008 was approximately 6%, month over month. On net revenue, non net customer connections also continued to increase. On net revenues increased sequentially 7.6% quarter over quarter and an increase of 39.3% full year, fiscal year 2007 from full year fiscal year 2006. On net revenue continues to increase as a percentage of our total revenue growing from 80.2% of total service revenue in third quarter to 81.1% of our total revenue in fourth quarter 2007.

Over 90% of our new sales in fourth quarter 2007 were for our on net products. Revenues from our off net business also increased 2.7% for the quarter and noncore revenues declined by 5.1% for the quarter. Cogent’s pricing policy remains unchanged and we continue to be committed to being the price leader. Our pricing for our most widely sold product remains $1000 a month for a month to month hundred megabit connection or $10 a megabit. We do offer discounts for longer term contracts. We also continue to guarantee an on net provisioning cycle of 17 days or less.

In 2007, our on net services were provisioned well within this guarantee, with an average provisioning cycle of 10 business days. Our on net ARPU inquiries for the first time in over 3 years our net ARPU increased for the fourth quarter over third quarter from $1245 in 4th quarter up from $1238 in third quarter. This was a result of our sales force continuing to mature and being able to focus on larger customers. Our off net ARPU’s also increased for the quarter going from $841 in Q3 2007 to $884 in Q4. This is a result of a greater availability of off net Ethernet based circuits and the ability of our sales force to sell these higher capacity and therefore higher revenue off net circuits. [Term], our total on net [term] remains constant at approximately 2%. This was the same rate of [terms] that we have been experiencing for the past two years. Off net churn decreased from approximately 3.5% in third quarter to approximately 2.4% in fourth quarter as our customer base continues to mature.

Our EBIDTA as adjusted is $13.3 million for the quarter, an increase of approximately 13.6% from the $11.7 million of EBIDTA we experienced in third quarter 2007. Our EBIDTA and EBIDTA margin continued to increase largely to the gross margin expansion due from the continued growth and our on net business. Our EDBDTA margins expanded by 107 bases points from 25% in third quarter to 26.7% for fourth quarter 2007, EBIDTA is adjusted for full year fiscal year 2007 with $46.2 million better than doubling the EBIDTA that we had demonstrated for full fiscal year 2006 of $22.6 million. Our EBIDTA margins expanded by 070 bases point during the year, expanding from 15.2% for fiscal year 2006 full year, to 24.9% for full fiscal year 2007.

Our gross margin substantially increased by 360 bases points for the quarter continuing to demonstrate the operating leverage of our on net business. Our fourth quarter gross margin was 55.2% compared to the 51.6% for third quarter. Our gross margin increase of 650 bases points for the full fiscal year 2006 to full fiscal year 2007 where our margins in 2006 for full year were 46.3% and 52.8% for fiscal year 2007. As Tad will quantify, we anticipate further gross margin and EBIDTA margin expansion to continue sequentially throughout 2008. Our direct incremental on net gross margin remain approximately 100% with direct incremental EBIDTA margins in our on net business of approximately 95%.

We added 28 building to our network in Q4 2007 bringing our total 2007 on net building increase to 110. This was 10 more than the stated goal of 100 buildings. For 2008, we expect to see continued expansion in all or on net footprint adding buildings at approximately the same pace adding another 100 buildings to our network in 2008. We have secured additional fiber and construction is underway in expanding our network even further into new markets. We are expanding into the Ukraine within the former Soviet Union to Kiev to Sophia in Bulgaria, and here in North America, and extensions into Des Moines, Iowa, Minneapolis, Minnesota, and Detroit Michigan all new markets to the Cogent network. We continue to evaluate additional fiber routes both in Europe and North America.

Now I would like Tad to cover some additional details related to our fourth quarter and full fiscal year 2007 results. As well, Tad will provide some additional guidance for first quarter 2008 and update and reaffirm our guidance for fiscal year 2008. Let me turn it over to Tad.

Thaddeus Weed

Thanks Dave, and again, good morning to everyone. And I would like to also thank and congratulate our entire team on their very hard work and performance, not only for the quarter but for the entire year of 2007. 2007 was the third year that Cogent was required to comply with the Sarbanes-Oxley section of 404 control work and that effort is obviously in addition to fulfilling our usual day jobs and statutory and corporate audit requirements. And I’m once again proud to announce that the work has been completed and our auditors will be issuing unqualified or clean stocks opinion for 2007.

Stock certification then in that compliance that comes along with that is a tremendous amount of work especially for a growing operation such as Cogent. We’re very pleased with the results and in particular I would like to thanks and recognize our entire finance team and our IT and IS teams for their efforts in helping us complete this important project.

Loss per share, a loss for basic and diluted common shares Dave said was $0.15 and that was $0.02 better than our range of guidance for the quarter that was between $0.17 and $0.22. A loss per basic and diluted common share for the year was $0.65 that was compared to a loss of last year of $1.16. This was at the better end of our guidance range of $0.65 to $0.75 a share. Weighted average share is decreased by about 200,000 shares from the third to the fourth quarter as a result of shares purchased under our stock buyback program. We purchased an additional 250,000 shares in the fourth quarter and subsequent to year end from January 1 through yesterday, we purchased an additional 689,000 shares under our stock purchase program.

At year end we had 47.9 million common shares outstanding, I should point out that shares that are granted to employees are counted as shares outstanding, however for the calculation of earnings per share, they are not counted until the shares actually vest. Non cash equity based comp expense increased our fourth quarter net loss by about $3.2 million or about $0.07 a share, and non cash equity based comp expense decreased our net loss for 2007 by about $10.4 million or $0.22 a share. Foreign currency impact, the Euro to dollar conversion rate again positively impacted our comparable quarterly revenue this time by about 500,000. As a reminder, about 23% or our revenues are based in Europe and about 8% of our revenues are based in Canada.

Capital expenditures were $4.3 million for the quarter as opposed to $9 million for the third quarter of 2007 that decline was expected and we do seasonality in our construction activities with typically the fourth quarter lower than the third quarter. Capital expenditures for the year were $30.4 million and that was consistent with our guidance of about $30 million for the year. And we expect 2008 capital expenditures to again be about $30 million and again add about 100 buildings to the network so there is somewhere in 2007 is what’s expected for 2008.

Some balance sheet items, at year end, our cash and cash equivalent were $177 million, $172 million of that is invested in the series of money market funds and we’re comfortable with those valuations. During 2007 and through yesterday, under our total of $100 million stock buyback programs, we purchased a total of 2.9 million of our common shares for a total of $72.7 million. We have $27.3 million remaining under our $50 million buyback program as of yesterday and we will continue to evaluate additional share purchases under that program.

Capital leases under our long term IRU contracts were $92.6 million at year end and $7.7 million of that is a current liability. As a reminder, these lease obligations are paid over long period of time of a lease term for the weighted average remaining term of about 13 years. Day sales outstanding on our accounts receivable was 35 days at 12/31/07 and much better than our targeted rate of 40 days. I’d like to personally thank our billing and collection team members worldwide for just doing a fantastic job on customer collections. That’s also reflecting that our bad expense which was just about 1% for the year which is fantastic.

Operating cash flow from operations was $13.5 million for the fourth quarter compared to $11.3 for the third quarter essentially the increase in EBIDTA flew through to cash flow for operations. On year over year, cash flow from operations increased substantially increasing over 9 times to $48.6 million for the year compared to $5.3 million for last year. That $43 million increase in operating cash flow again was from our increase in EBIDTA but also improved the accounts receivable collection and also working capital management from the vendor side.

I’m now going to provide guidance for the first quarter of 2008 and then update and reaffirm our 2008 guidance provided on our last call. We prepare this guidance based upon the current and expected run rates of our business planned increase in sales and marketing programs and current network expansion projects and also anticipated network expansion projects.

From a first quarter of 2008, we expect our total revenue to increase by over 4% and to be over $50 million for the quarter. On a quarter over quarter basis, so from the fourth quarter 2007 to the first quarter of 2008 we expect on net revenue to increase by over 7%. We expect our off net revenue to increase by over 1% and we expect a decline in our non for revenue to continue to climb by approximately 20%. As a reminder we do not actively sell those services and they’ll eventually go to zero. We expect our gross margin percentage for the quarter to continue to expand and to expand by an additional 100 to 200 bases points to be over 56.5% for the quarter. We expect EBIDTA adjusted to grow to over $14.5 million, and the EBIDTA margin to continue to expand as well by another 100 to 200 bases points to be over 28%. We expect SG&A expanse excluding non cash equity base comp to be approximately 28-29% of our revenues for the quarter.

We expect that non cash equity based comp expense to be between $5.5 and $6 million for the quarter. We expect depreciation and amortization to be between $16 and $16.5 million and net interest expense to be between 1 and $1.5 million. These results are expected to result in a loss per share for the quarter between $0.17 and $0.22 per share. Now that loss per share assumes 46 million weighted average share outstanding and as a reminder, if additional share purchases lower, our weighted average shares outstanding and that will raise our loss per share and impact that guidance.

For the year of 2008, we’re finding and updating certain non EBIDTA components being revised EBIDTA components remain the same and I’ll remind you of what they are. Our total revenue for 2008 is expected to be between $225 and $235 million. Take the midpoint of this to increase of about 24% from 2007 in total revenue. We expect the annual revenue growth rates from 2007 and 2008 to be as follows. On that revenue to grow between 30% and 33% off net revenue to grow, either be flat or to increase of about 5% so no growth or an increase of 5%. Noncore revenues to decline by between 35-40%. We expect our gross margin percentage to increase to about 60% for the year. We expect EBIDTA to grow to between $75 and $80 million. If you take the midpoint of this amount, that’s about a 60% increase in EBIDTA from 2007 to 2008.

We expect EBIDTA margin expansion to continue and be approximately 34% for the year. We expect SG&A to be between 26% and 27% of our revenues and depreciation and amortization to be between $62 and $63 million so those amounts I just indicated are unchanged from what was provided on the last call. The following amounts are updated based upon the deferral of an expected accounting change and then the impact of share grants to share purchases. We now expect non cash equity based comp expense to be between $18 and $19 million from the previous guidance of $14.5 to $15.5. That increase is due to the amortization of equity based comp expense associated with share grants to our employees and our board that we completed in January 2008.

We expect net interest expense to be between $4.5 and $5.5 million for the year and that’s down from our previous guidance of between $11 and $12 million. We mentioned this in our press release, the previous guidance from the last quarter from, that we issued last quarter for 2008, a net interest expense and net loss per share assumed that we would have to stop as we establish 14A which is entitled counting for convertible set instruments that may be settled in cash upon conversion and expect to adopt that and for that to be approved as of January 1, 2008 as what happens with some of these accounting changes that has been deferred so we have removed that impact from our interest expense guidance for 2008.

Essentially that pronouncement was going to require us to separately value the conversion feature on our notes. That would lead an increase in the discount on the note and an increased non cash interest expense so it appears that that will not happen or this will not go through until 2009. So the impact on these changes on our guidance and the weighted average common shares revises our loss per share guidance for 2008 which is now expect to be between $0.10 and $0.20 per share and that’s changed from our previous guidance of $0.15 to $0.30 per share.

That loss per share assumes 46 million weighted average shares for the year and as a reminder again, if we buy additional shares, weighted average shares goes down and loss per share is under the math would increase. We expect our building additions in 2008 capital expenditures to be essentially the same as this year which was $30 million and again we do experience quarterly variations of the first quarter will be more that the fourth quarter of 2007. Finally as I mentioned on our last call we anticipate achieving another corporate milestone in 2008 and we continue to expect to achieve a positive net income for the time in our history in the fourth quarter of 2008. So with that I will turn the call back over to Dave.

Dave Schaeffer

Hey, thanks Tad, we continue to expand our footprint and again this quarter we added 28 buildings to our network. As of December 31st, 2007 we had a total of 1217 buildings on net as of that date we had over 30 buildings in process of being connect to our network, many of those will come on net during the first quarter. Our sales reps continue to increase as well as their productivity remains solid. We began the fourth quarter or 2007 with 166 sales reps and we ended the quarter at 192 reps. If you remember on our third quarter call, we actually increased the targeted number of reps for year end.

That original target was 180 at the end of the year. We took that up to 190 and slightly exceeded that. We began the fourth quarter with 134 full time equivalent sales reps, these are reps that have ramped to full productivity and we ended the quarter with 160 FTE’s. We continue to be very disciplined about monitoring sales force productivity and unfortunately, sometimes have to remove some unproductive reps. As of today we have 172 reps selling our services with direct quotas in North America and Europe. Of the 172 quota bearing reps, we currently have 100 FTE’s under our ramping protocol. Our sales force reps continue to be productive. Productivity per FTE for the fourth quarter was four units per FTE, about the same level of productivity on a unit basis that they had experienced in the third quarter, however their revenue productivity was greater and that was witnessed in our increase in on net and off net ARPU’s. Continue to be comfortable with our 2008 revenue plan. Our business remains entirely focused on the internet, and we believe that this focus has allowed us to remain isolated from some the current economic issues plagues some other service providers.

We continue to add sales reps to our sales force and we expect to add in 2008 with approximately 240 sales on our network. We continue to expand our footprint and increase our scale. We have over 10,000 miles of metro fiber over 26,000 miles of intercity fiber we remain connect to approximately 2300 networks globally, about 340 of these are settlement free peers, the remaining are Cogent customers that pay us for connectivity. Our network continues to have substantial capacity to accommodate our future growth. As we had outlined last year, we doubled the amount of lift capacity in our network in 2007. We will continue to increase capacity selectively in our network in 2008. We are currently utilizing only 22% of the [lift] capacity of our network. So while traffic grew 14% sequentially quarter over quarter, our capacity expansions have allowed us to keep our network utilization constant at this low level.

So in summary, our on net revenues our growth business continue to grow and increase as a percentage of our revenue. Our traffic continues to increase on our network demonstrating our gain in market share. Both our on net revenue and on net traffic route accelerated during the fourth quarter, we again surpassed our provisioning guarantee of 17 day by delivering services for full year with an average of a 10 day provisioning cycle, business day. We continue to have probably the strongest balance sheet in our sector. We have less than $23 million in true net debt. We continue to expand our footprint into new markets and we’ll expect that expansion to continue throughout 2008 to serve these high demand location.

We continue to plan to invest in our sales and marketing efforts by expanding our sales force and ending the year with at least 240 quota bearing reps. Our business provide a basic utility to our customers. The internet has become integral to the way in which all businesses are conducted and we believe that Cogent’s position as a low cost provider has allowed us to not see the impact on our business that many other businesses are seeing the in the current economic turmoil.

Finally, under our 2008 guidance plan, we expect to generate approximately $1.00 a share of free cash flow for the benefit of our equity holders. We will continue to consider additional share repurchases under our existing $50 million share buyback program and we continue to discuss with the board future programs that might either entail continued share buyback and or dividends. With that I’d like to open the floor for questions and again thanks to the entire Cogent team for a very solid 2007.

Question-and-Answer Session

Operator

Thank you. If you would like to ask a question, please signal by pressing that star key followed by the digital one on your touch tone telephone. If you are using a speaker phone, please make sure your mute function is turned off to allow your signal to reach us. Once again that is star 1. And we’ll go first Jonathan Atkin with RBC Capital Markets.

Johnathan Atkin – RBC Capital Markets

Yes, thanks very much. I’m curious if you comment on the ARPU trend and is that something that you think might continue in the current year? And then also with respect to the growth that you’re seeing in recently opened fiber routes or recently lit on net buildings is that fairly linear or are you seeing kind of an immediate spike when you expand the footprint?

Dave Schaeffer

Thanks John, you know with regard to the ARPU trend, let me separate the on net and off net businesses. In the on net business which is the majority of our revenue over 81% of revenue, as the net centric sales continues to mature, those reps build larger funnels and selectively focus on larger accounts. While we hope that this trend continues, we do not have sufficient empirical evidence from one quarter to feel comfortable in guiding to a consistent trend of ARPU expansion. The net effect of price per megabit remains effectively constant since our contract lengths only increased by about 1.3% in the quarter that would have a reduction in that price per megabit and quite honestly we got a little bit of a pick up from the weakening dollar where we’ve seen our effective prices over siege and Canada go up slightly. So all of those trends they kind a flat price per megabit larger net centric.

We hope that trend continues our models actually anticipate some continued reduction but we will continue to monitor this trend and if it changes or if we feel comfortable we will modify our guidance accordingly. With regard to the off net business, what we have seen is a larger availability of [arbach] Ethernet they service, primarily from AT&T and Verizon. While off net represents only about 17% of our revenues, the ability to sell these Ethernet sockets which are much higher capacity they are 10 megs up to full gigabit circuits will allow us to pull that off that ARPU up. And now we’ve seen a couple of quarter of sequential growth in that ARPU we would expect that trend to probably continue at the kind of same rate that we have seen historically.

Now shifting gears to your second question which was the new buildings and new routes on our network. You know we remain very disciplined about the buildings that we are adding to our network. We have a finite target universe of buildings that we wish to add and we continue to work through that at the pace of about 100 a year. You know our typical corporate building has about 6.8 customers per building. Our typical net centric building or carrier control data center has about 7.5 customers per building. Typically we see a kind of linear growth rate within these buildings as they mature. There’s generally not any pre-selling activities simply because the gestation period of these buildings is relatively and customers are not willing to wait for those long term construction efforts to get completed until they get their service and we want to remain continual the 10 day achievement that we have or at least within the 17 day goal that we’ve laid out.

Now with regard to new routes, a slightly different picture there because a [minute case is re up holding] to new markets because existing customers have indicated they will buy more services from Cogent if we get closer to or actually serve them in their home market. And if you look at our network expansion in Italy, Scandinavia, Eastern Europe, and even some new markets here in North America, all that has been driven in large part by initial customers request and then also additional add on business. So in these new markets, we typically do see and initial spike from an existing customer taking service. We saw that for example in Romania recently as we expanded into Bucharest. And then a more linear expansion that looks more of like the entire Cogent network.

And finally with traffic roads, traffic road tends to be fairly evenly distributed across our network. Specific customers can have lumping in their traffic roads patterns but generally that kind of 14% sequential quarterly growth came broadly distributed across our network and our customer base.

Jonathan Atkin – RBC Capital Markets

Thanks and just any comments on the competitive environment, pricing and so forth both domestically and internationally.

Dave Schaeffer

You know again, kind of a couple of ways of looking at the business. Domestically and in Canada we have a corporate business. There we typically compete with the incumbent telco provider, AT&T, Verizon, Bell Canada, Quest, our kind of competitors in that market space. Because of the lack of facilities based competition in many of our on net building, I would say placing by those provider is flat but what we are selling is a substantially differentiated product that allows us to win business based on the diversity of the network, the quality of the network and the value we deliver.

On the net centric side of our business, which continues to be about 58% of our revenue, in that market, we compete with about a dozen global backbone operators. Now within any given facility, there are generally only 5 or 6 competitors. What we have seen is some of the larger companies elect not to drop their price and effectively withdraw from the market. So we’ve seen a lot of names that would have been bidding for competitive situations a year ago, just kind of no bid at this point in time. We’ve seen some of the more aggressive players continue to drop their price at a pretty substantial rate but we still maintain about a 3.5 to 1 cost advantage over our competitors in that market space and probably 2.5 to 3 to 1 cost advantage over the most aggressive of those competitors.

Jonathan Atkin – RBC Capital Markets

Thanks very much.

Operator

Our next question will come from Scott Goldman with Bear Stearns.

Scott Goldman – Bear Stearns

Hi, good morning guys.

Dave Schaeffer

Hey Scott, how’s it going?

Scott Goldman – Bear Stearns

Good thanks, so two questions, first, just looking at the guidance, particularly the on net, guess looking at your methodology for how you forecast thinking that’s usually the six month kind of run rate that you use. You came in at 7.6% on net revenue growth for the fourth quarter, and yet for first quarter you’re kind of guiding looks to be at the low end at 7% and you maintain full your numbers as they were. Is there anything that would give you pause that you can’t keep the 7.6% growth going or at least improve that heading into 2008? And then second question, just wondering if you could comment on the increase in SG&A, surprisingly large increase in SG&A in the fourth quarter as well as the slight drop in network operation expense seems to be out of character, based on the last several quarters.

Dave Schaeffer

Sure, I’ll let Tad take the SG&A and network cost numbers. With regard to growth, you’re absolutely correct Scott in saying we take a six month kind of backward look as we forward project. Now also, we did slightly modify the way in which we give guidance on our sequential on net revenue growth. Rather than give up a range we gave a floor. So the 7% remains a floor for what we think we’re going to achieve. If you took the 6.7 and the 7.6 that represented the previous two quarter, obviously the seven seems very doable and we are on an uptrend. We also are encouraged by the acceleration in traffic roads which is directly correlated to our net centric business. The 2% going a 14% for the quarter and then the even further acceleration to December to January of 6% is encouraging as well.

You know on the negative side, there were some sales people who didn’t produce and were pretty disciplined about the way in which those reps are asked to leave the company so we saw a slight reduction in the number of FTE’s in the first quarter. We are actively hiring and we are maturing reps and feel very comfortable about our full year of guidance. Also to remind you our full year on net revenue growth guidance was 30 to 33% so if you took the 7.5% and compounded it we’d be right there. You know long term we think we can do even better in that as the internet continues to grow at kind of consistent rates, video driving a lot of that growth and our ability to add sales people to call on our [entrustible] universe. Today if you look at our addressable footprint, less than half of the opportunities are either being worked today or our coaching customers. So we still have a tremendous opportunity in front of us and it’s really incumbent on us to hire and incent and motivate these sales people to be able to tell but we feel very comfortable about the kind of floor that we’ve laid out in terms of sequential revenue growth in non net business and perhaps there may be some further acceleration later in the year.

Let me now switch over to Tad and let him hit both the margin questions.

Thaddeus Weed

Yes, on SG&A, I mean stepping back from what we said what we expected for the fourth quarter was SG&A to be between 28 and 29% of revenue when it was 28.6% so essentially dead on plan at the midpoint and I think that’s the way we look at it and that’s why we guide that way so we said in the first quarter we got 28 to 29%. Now on just the growth dollar change, there’s a couple things there. There’s the yearend bonus which admittedly is not substantial for Cogent but that’s a non-recurring, about $600,000 that was in there. We do have more professional fees because compared to the third quarter associated with yearend work and that’s about a $0.5 million. And then we also have just more employees. We went from 441, to 451 as of the end of Q4 and the sales reps fortunately earn more commission with better sales so you add all that up that’s the reason for the dollar increase but again the total was exactly in line with what we expected.

Scott Goldman – Bear Stearns

And on the lower network expense?

Thaddeus Weed

Really, what’s happening there is as you see the decline in non core business and some of the later components of that that are now winding off our negative margin so we see both a greater flow through for gross margin but also a reduction in cost of goods sold.

Dave Schaeffer

That’s particularly true of the managed modem business as we are exiting that business, the scales continues to shrink and our fixed costs that we are eliminating but these nine core of which include managed modem are not very profitable businesses they came to us a flat position, work contract commitments, and those contract commitments are winding up and we are then exiting those parts or our revenue and business that have this kind of creative nature to our network call structure.

Scott Goldman – Bear Stearns

Okay, thanks guys.

Operator

Once again if you do have a question, please press star 1 on your telephone keypad. If you find our question has already been answered, you may remove yourself from the queue by pressing the pound key. We’ll next year from Oppenheimer’s Tim Horan.

Tim Horan – Oppenheimer Funds

Thanks guys I got a bunch of questions but I’ll try to narrow some of them down.

Dave Schaeffer

Okay Tim

Tim Horan – Oppenheimer Funds

Thanks Dave, you’re doing a great job on the customer credit side and you’re not really seeing churning increase at all, you know the last time we had a slowdown that surprised a lot of people just that a business models weren’t really profitable at the time for a lot of the internet focused companies and we’re that out of some of your peers that they’re seeing some business model problems with some of their customers. Can you talk about maybe how stringent you are in your credit requirements and you know how much you analyze your customers on that regard? Thanks.

Thaddeus Weed

Well sure I mean I think where this shows up is at the end of the day is in bad debt expense and you know we’ve just done a fantastic job and we do not have a collection issue here at the company with bad debt expense is 1.1% of revenues for ’07 down from 1.7% from ’06. And if you look at each quarter, so you line up to Q4 of ’07 to Q4 ’06 on a comparative quarter basis, if one had declined. Now you see a little bit of lumpiness in there kind of our target is to be around 2, so we’ve done better than that. And I’m not seeing any differences in credit approval or in our process that needs to be made. Now I would add one thing, as we go into newer markets in Eastern Europe, we’ll continue to monitor that and see if any changes need to be made, but at this point in time, really the changes would be dictated by new areas as opposed to the base customer.

Dave Schaeffer

I think also Tim, if you look at our customer base, our corporate on net customer tend to be located in some of the most expensive real estate in north America and the credit checks that those landlords do ensure a very high quality of corporate customer. In the net centric business, there is an interesting feedback loop that is very helpful for the large net centric customers, they tend to be very credit worthy companies, household names. For very small companies that are generally venture back. They don’t buy much fanfare. As their business models either get traction, start to generate a lot of site hits and therefore require a lot of bandwidth, they tend to attract more invests. Those business models that don’t attract a lot of user basically fade and go away but are exposure is very minimal. And we remain very stringent on these business models doing credit checks on everyone and a just very disciplined approach some cases it does require customers to have no outstanding or posted initial months deposit. But for the most part, our credit quality of all our customer bases is good now as it’s ever been.

Tim Horan – Oppenheimer Funds

That’s real helpful, one more follow up, maybe you can talk about what your market share is within these data centers. Do you think it’s in the 20% range? I guess for the life of me I’d be hard pressed to find another industry where someone’s charging 30% of what their competitors are and not gaining 78% of the market share in, for a particular service. What’s really preventing customers from en mass switching over to you in these data centers, particularly if others are kind of dropping away?

Dave Schaeffer

Sure, you know we think our band by unit of bandwidth are our market share in the data center footprint where we have is about 18%. If we look at it by customers, the number of customers that reside within those centers it’s only about 7.5% so obviously we’ve had the large share of the customers. And then the final way to look at it is by dollars spent on bandwidth in those centers and they we’re only at about 5.5% to 6% simply because our prices are so much lower. So what limits are growth? First and foremost, it is a lack of sales resources. As I had stated earlier, the majority, over half of the potential customers that could be buying our services have never been contacted by a Cogent sales person. Secondly in that net centric footprint it is quite common for a business that requires the internet as an integral part of its business to have multiple providers. And we’re comfortable with having a portion of their bandwidth and we think diversity is absolutely appropriate. And then finally, there have been a number of competitors who have cast dispersions on the quality of service that we deliver.

You know, our customer reference is probably as strong as any in the industry. Our SLA guarantee equal or exceeds that of any of our competitors. On a revenue run way of call it $17 million a month, we’re spending less than $30,000 in SLA credits with a 24 to 1 multiplier so we’re really deliver on what we say but there is this perception in the market that if something is so much cheaper is there something wrong with it and that’s reinforced by our competitors and it just takes sales people to overcome that.

We are consistently gaining share and feel that, I’m very encouraged by your comment of 78% penetration. I don’t think we’re going to get there, I hope we do but I don’t think we will. But we’ll just continue to add sales people and continue to gain more market share which I think we’re doing.

Tim Horan – Oppenheimer Funds

Thanks guys.

Operator

Moving on we’ll go to Jonathan Schildkraut with Jefferies & Co.

Jonathan Schildkraut – Jefferies & Co.

Good morning, thank you for taking the question.

Dave Schaeffer

Hey Jonathan, how have you been?

Jonathan Schildkraut – Jefferies & Co.

I’m doing well Dave, thank you. You know you gave some color on contract lengths, in the past you’ve also given some color on the percent of customers on month to month or on extending contracts. I was wondering if you might give us those statistics again?

Dave Schaeffer

Sure, Jonathan. In the quarter what we saw is the average customer contract length increased by approximately 1.3%. That’s actually less than the rate of contract length extension that we saw in the previous quarter where it was about 5%. I’ll let Tad give you the exact percentages because I see he pulled out his little chart and I don’t have all these numbers memorized.

Thaddeus Weed

Yeah, good morning, the change was not as significant as we experienced from the second to the third quarter where it was 5.6% but it did still increase so about 56% of the customers right now are one year contracts we did see two year contracts go from about 5 to about 5.5% and that’s really what drove the up take. There’s some other terms in there but I think also your question is month to month it did decline so 39% to 38%. So you kind of run those figure and that led to the uptick in the average.

Jonathan Chilcott – Jefferies and Company

All right, great, in terms of your guidance for the first quarter of the year, it looks like in the first quarter you’re expecting incremental margins on the EBIDTA side of roughly 50%. For the year though your guidance implies higher incremental margins which means that you know we should expect some scaling in incremental margins as we move through the year. Are there any costs that are in the quarter, in the first quarter which will become less significant relative to the revenue base that we should have confidence that the incremental margins will scale back to kind of the higher levels we’ve seen previously?

Dave Schaeffer

I think there’s a combination of costs. One there are some significant new market expansions. I would suspect the rate of new market will actually probably slow a little bit as we’re starting to reach some maturity there. That is dilutive on the kind of gross margin side. In terms of SG&A costs. I think there are a couple of things. You know we’ve got a lot of sales force ramping. We had our sales convention in the first quarter which has some costs associated with it. And as Tad indicated apparently fourth quarter and first quarter tend to have higher professional services fees associated with them. But if you look at our incremental margin expansion, you should expect to continue to see between 100 and 200 bases point of EBIDTA and gross margin on a pretty consistent basis. And we try to manage our network footprint expansion to ensure that we can deliver those types of margin expansion.

Jonathan Chilcott – Jefferies and Company

Great last is Dave you mentioned that I think you mentioned that somewhere in the mid 50% of the your revenue or high 50% of your revenue is coming out of the network centric data centers versus the enterprise. In the past you’ve also given us traffic through those two groups and even maybe a number of customers and again can you update us on those statistics?

Dave Schaeffer

Absolutely. So roughly 58% of our total revenue comes from net centric customers that remains flat as a percentage of total revenue from the previous quarter. That customer base accounts for roughly 96% of all the traffic on the Cogent network, and accounts for about 32% I believe, Tad is the percentage of unit number of customers.

Jonathan Chilcott – Jefferies and Company

Great. Final question here did you say in your prepared remarks that you’re expecting a $1.00 per share of pre cash flow in ’08.

Dave Schaeffer

Yes we did.

Jonathan Chilcott – Jefferies and Company

Thank you for taking the questions.

Dave Schaeffer

Thanks Jonathan.

Thaddeus Weed

And just for clarification on the connections, so it lines up exactly for you for, there was a slight increase in net centric as a percent of total. It’s 38% per quarter as opposed to 32%. It went up from 37% to 38%.

Operator

Thank you, or next question will come from Frank Louthan from Raymond James.

Frank Louthan – Raymond James

Good morning, could you give us a little idea, you mentioned about the cap ex that there’s a little bit of seasonality in the first quarter and the cap ex is key, walk us through why you see those trends any other seasonality we should think about in the business and can you give us an idea as we’re going forward, where you’re expecting to see more growth as it becomes more of a data center business or an end user demand. How should we be thinking about where the sources of revenue are coming from?

Dave Schaeffer

Okay thanks Frank in terms of capital spending, typically the fourth quarter tends to be substantially lighter and that is because in most of our cities, our outside plant construction work stops because a city moratorium so typically it tends to be pretty equal in first second and third quarter and substantially lower in fourth quarter. We saw that last year expect that to continue. Now the number of buildings that come on actually is fairly consistent and that’s because we hurry up and get the outside plant work done and just focus on the inside plant work when these moratoriums are in place. But we expect our capital spending to remain at about the $30 million and that will allow us to cover both maintenance cap ex, new building additions and capital related to footprint expansion.

In terms of growth in our business, and which types of customer continue to inquiry, you know on both fronts, the limiting factor has been the number of sales people. We are adding both net centric sales people as well as corporate sales people we would expect over time eventually the percentage of our business that is net centric to continue to increase. So for the full year, that did increase from roughly 50% to 58% as a percentage of our business. We would expect that trend would continue. Now within that net centric footprint, we do have what you may consider end users. These can be either universities or they can be some web centric businesses that incorporate our bandwidth into their application so we count [Voit] Company, security companies, backup companies, streaming companies in that net centric universe as also are they end users or net centric.

Frank Louthan – Raymond James

Thanks that’s very helpful and can you give us an update I apologize if you already know this, but what’s with the share repurchase plan, what are your thoughts there going forward, is that going to continue to be thoughts for use of cash going forward and how should we think about uses of cash as you start to produce free cash.

Dave Schaeffer

Sure, we have told investors that there’s an appropriate level of liquidity for the company to keep on its balance sheet. We think that number’s about $150 million that’s kind of what we target. As the board thought through the authorization last August of the second $50 million buyback, what they were really doing is telling us to eat to some of the cash we had and effectively buyback using the cash flow generated in 2008, kind of on a forward purchase basis. We still have about $27 million available to us under that authorized program, we expect that we will be in the market buying back stock and use a portion if not all of that program, we also think that on a going forward basis, the board will consider kind of start to consider later in the year 2009 potential cash flow and make a decision on whether or not it remains share buyback and/or a dividend as the appropriate way for us to return value to shareholders.

And quite honestly, with the very concentrated share holder base, it allows us to have a pretty candid set of conversations with our shareholders and take their views into consideration as the board deliberates which of those two methods of returning value we’ll use going forward.

Frank Louthan – Raymond James

Okay, one last question, you mentioned a couple of times kind of getting factors on some of your growth have been getting the number of sales people what do see as really the determining factor there, is that just an ongoing struggle, is that the current economy and sort of plans do you have to try and meet your demand for sales people?

Dave Schaeffer

I would say that the economy is actually helped us in that the number of applicants that we have is probably at an unprecedented level. Secondly we have added additional recruiting resources where today we have 2.5 kind of dedicated recruiter. 2 full time people and one person who spends half their time just on sales recruiting. Last year we went through a process of dividing territories and adding additional management strength. We continue to improve the training and the monitoring system that we have for the sales force but it’s a job, that requires cold calling and there are people that are just not cut out for that and it pays for us to remain discipline about managing those underperformers out quickly so the good news about the job is half of all the proposals made turn into sales. The bad news is all of those proposals started with a cold call to someone who probably didn’t want the call in the first place.

And that’s a tough job. And we feel comfortable that we can add the people, we can keep them productive keep them motivated you know morale is a very important part of selling. It’s a little bit like Eisenhower said about battle, morale is most important ingredient in victory, and it’s true here in the sales organization as well so we try to make sure Cogent’s a good place to work, people feel good about coming to work and have the right attitude and a big component of that setting very clear goals. You may not like the goals but at least if you know what they are up front there’s no ambiguity. And we’ve taken heat in the past for being hard on managing out underperforming reps. But we think it’s the right way to maintain morale and productivity in the whole sales organization. So we feel pretty good about where our sales efforts are going.

Frank Louthan – Raymond James

Thank you very much

Dave Schaeffer

Hey thanks Frank.

Operation

We’ll hear next from Jurgan Usman with Wachovia Securities.

Jurgan Usman – Wachovia Securities

Thank you very much. A couple of questions. First of all, have we seen the bottom of the ARPU here it looks like you were saying that your sales people have as your sales funnel are maturing, target in a bigger and bigger customer, it seems to me that have we reached the bottom here? If so then what kind of ARPU includes by consequential basis and then the second one is that I guess one your fierce competitors said last week that you basically they’re existing customers were taking additional services from opportunities, actually I think they lost potential customers in their backlog as well and maybe comment on that see if you get any benefit from that.

Dave Schaeffer

Sure, let me take the ARPU one first, Jurgan. Two components, off deck I feel very comfortable in saying that we reached a bottom and now that we have a couple of sequential quarters behind us of uptick and a continued availability of these off net Ethernet based services I think that’s a pretty clear trend. I think in the [odd net] I think it’s too early to tell. We do see the sales force continuing to mature we see their funnels getting larger with larger funnels has come the ability to sell larger accounts. But I think it’s probably too early to say that there’s an absolute bottom here. Our motto as I said earlier kind of forecasts some additional declines. I hope we’re wrong but one quarter doesn’t make a trend.

With regard to our competitors, on the net centric side of the business which I think is where you’re referring, clearly there have been companies that have had struggles but in many ways, the biggest struggle wire line telecom industry has experience is the struggle of taking high revenue non internet based services and moving them to low revenue per bit mile internet services. We benefit from that trend because we have none those legacy services to cannibalize. So companies may have internally generated provisioning or management issues that are exacerbating the trend but for most of our competitors, the internet is their worst enemy because it’s cannibalizing their high revenue per bit mile profit. And I think that’s becoming increasingly clear that the internet is the network of the future and that all applications will eventually be delivered over the internet and that’s why we feel so comfortable with kind of future traffic roads and the ability off of such a large base to continue to grow.

Jurgan Usman – Wachovia Securities

All right, thanks just a couple more questions. First of productivity, what percentage of your sales force is above quota in terms of dollar sales and given that you changed your practice a little bit this should we expect to see you change average unit productivity down maybe guiding it down to about 4 versus 5 in the past.

Dave Schaeffer

Well, clearly if ARPU goes up, productivity won’t go down since quotas are established around dollars. So there is an inverse correlation there. About 65% of the sales force achieved quota on an FTE basis. As I mentioned there were some under performers that got managed out early this quarter and you see a bifurcation of those that are very productive doing well and those that are struggling with kind of the activity based model that we have. But we feel quite comfortable that there are enough opportunities out there that the sales force is going to continue to be productive and actually a few individuals greatly achieve quota which is probably the best motivation of all to the entire sales force. So in terms of target numbers, you know we bounce between 4 and 5.8 units per rep per month we think that range is still the kind of correct range going forward.

Jurgan Usman – Wachovia Securities

Basically remind me again what’s the percentage of sales force meeting their dollar quota last quarter?

Dave Schaeffer

It was slightly higher, I think it was in the low 70’s. and again there was bifurcation where some people greatly exceed that’s why we had good numbers and good results and a few individual who just struggled and that’s why we lost a few heads.

Jurgan Usman – Wachovia Securities

Last question, can you tell me more about the activities of your biggest customers? And then how many customers of yours now are simple on the net centric side, I mean mostly on the net centric side are taking 10 gigs or more bandwidth from you?

Dave Schaeffer

Sure, a number of our large customers continue to increase their bandwidth purchases from us we have a handful of customers that all kind of vibe at various points in that they are our largest customer. Most of them have a video business model of some sort. They continue to grow. I think we are seeing an increased amount of professional video traffic and while we are seeing growth in casual video, it’s not growing at the same rate that it has grown. In terms of ten gig ports or more in the network, we are seeing a substantial increase in the number of customers taking 10 ports and multiple locations and it is entirely a net centric phenomenon.

Jurgan Usman – Wachovia Securities

Okay, thank you very much.

Dave Schaeffer

Thanks Jurgan.

Operator

We’ll hear next from Erin Schmitz with Citi Investments

Erin Schmitz – Citi Investments

Thanks good morning. How are you?

Dave Schaeffer

Good

Erin Schmitz – Citi Investments

I was wondering you talked a lot about how you’re having larger customers that’s really helping your ARPU, are you seeing a change in the length of your sales cycles by trying to attack these larger customers is it taking long to then close the deal can you give us a comment on that?

Dave Schaeffer

Yeah sure Erin, we have seen no material shift in our sales cycle length. The biggest gating item to our sales cycle is actually the incumbent contract length from the existing provider. So once the customer kind of becomes ripe for sale, we have typically seen a fairly short decision cycle of generally about 6 weeks from active discussion installed new order. So a fairly short period of time, the industry norm remains these one year contracts so the biggest challenge tends to be around just catching people just when they’re coming out of contract. You know large customers in some cases actually can make decisions quicker than small customers simply because the bandwidth that they have used or continue to use is such an important component of their cost structure that the ability to save money is something they can react to quickly whereas for a corporate customer, where it’s incidental to their business, it just really is more a matter of getting people’s attention then saving them money.

Erin Schmitz – Citi Investments

And can you provide an update on what percent of your new revenue is coming from existing customer versus your new customers.

Dave Schaeffer

Sure that mix is generally been and continues to be about 70/30 about 70% of new incremental revenue in a given period comes from customers who never bought from Cogent before about 30% of revenues come from existing customers buying additional services.

Erin Schmitz – Citi Investments

Okay, thank you.

Dave Schaeffer

Thanks Erin.

Operator

We’ll hear next from Nick Netchvolodoff with Lehman Brothers.

Nick Netchvolodoff – Lehman Brothers

Hey Dave, how are you?

Dave Schaeffer

Good Nick

Nick Netchvolodoff – Lehman Brothers

Good quarter. I had a couple of quick questions. Once again on the on net ARPU I wanted to get your thoughts on how much of the increase is coming from additional purchases from current customers versus new customers you just commented that new revenue is about 70%. I mean do you think that if the embedded base that will support the ARPU increases and also as a follow on to that, you mentioned that the FTE’s are going to drop from 160 to I think you said 100 in the first quarter is that correct?

Dave Schaeffer

151 as of today, we think we’ll actually be up at the end of the quarter.

Nick Netchvolodoff – Lehman Brothers

Okay. I misunderstood what you said then. Also and what percent of your new buildings in 2008 are going to be data centers versus corporate offices?

Dave Schaeffer

Sure let’s start on the ARPU. So on the ARPU, for the corporate customers ARPU remains effectively unchanged. The only variation there tends to be on contract length and as Tad commented on there wasn’t a whole lot of variation in those contract lengths. You have 1% increase as opposed to the 5% that we saw previous quarter. So for the most part the increase in ARPU is coming from the net centric customers who are tending to focus on larger ones as the funnel gets fuller we’re also seeing that as even the smaller customers use more bandwidth.

Everybody on the internet who has a business model just consumes more bandwidth that is pulling both the existing base and the new base is also tending to buy larger connections. So it’s all those factors and then finally you do have kind of the mix by jurisdiction and what dollar where it is you get a little bit of a pick up at ARPU as the percentage of business inside the US increases and it did go up in Europe from 22% to 34% on revenues. So you got a slight up kick there as well. So it’s all those factors, maturing funnels, maturing business models all on the net centric side of business.

With regards to the FTE’s we did end the year at 160 we have 151 today, we have reps maturing. We did manage out some people that weren’t making it. But we feel very comfortable in terms of our training and hiring funnel that we’re going to hit all of the goals we’ve laid out in terms of adding new reps and maintaining the ratio of FTE to reps. And then in terms of data centers versus net centric, I’ll let Tad take that one.

Thaddeus Weed

How are you doing Nick, especially when I look at what is in process right now so we said over 30 and the actually number is 35 a third of those are multi tenant office buildings and 2/3 are in the neutral data center and that’s probably about the mix going forward.

Nick Netchvolodoff – Lehman Brothers

Okay thanks.

Operator

We’ll hear next from Thomas Weisel Partners, James Breen.

James Breen – Thomas Weisel Partners

Hi guys, thank you for taking the question actually, it’s actually Shane.

Dave Schaeffer

Hey Shane.

James Breen – Thomas Weisel Partners

How are you doing? Just a couple of quick questions. I was wondering if you could talk, give a little more color about any customer Churn trends you saw exiting the quarter, anything you can tell us about kind of in the first part of ’08. and then my second question is you had mentioned on last call that you think you’ll be able to get to 90% on the number of customers that have a, that are locked into long term contracts and I was just wondering since you seen a little bit of the slow down there if you think that’s still a pretty reasonable goal for this year. Thanks.

Dave Schaeffer

Yeah, I’ll let Tad take the churn and I’ll take the customer contract length. We do believe that people are increasingly comfortable with Cogent and are taking longer term contracts. We did see the rate of those contracts lives extending slow from 5 % sequentially to 1.3%. We do think that we will eventually get to over 90% of the base that will be under something under than a month to month so a one year or two year contract length. How long that will take we’re not sure. That obviously has a impact on our revenue per megabit but that again is offset by the larger volume purchases. So I can’t tell you when it happens but I can tell you everybody I’m still comfortable with it happening. Let me let Tad take the churn one.

Thaddeus Weed

Yeah, good morning we’re back and then look and see over the past two years now that we’ve closed those seven out and really the OMNET churn has been essentially 2% for the past two years and we don’t seen have not seen an up kick of that or a change in that really one way or the other, so essentially 2%. If you look at the off net business we did see that trend better so I do anticipate that rate to be lower than it was historically so an improvement in the off net churn based upon what we’ve seen over the past couple of years and on that remains steady at about 2%.

James Breen – Thomas Weisel Partners

Okay great. Thanks.

Dave Schaeffer

Thanks Shane.

Operation

Next is Jennifer Adams with Cowen & Co.

Jennifer Adams – Cowen & Co.

Good morning this is Jennifer on behalf of Tom Watts. One quick question on stock base comps you’re buying into a big increase in ’08 versus ’07, and I was just wondering is this reflected any change in your philosophy of how to compensate people or any specific change in the way you’ll compensate and motivate your sales force, thanks.

Dave Schaeffer

Sure so every employee at Cogent has some form of stock base compensation. We feel that forward equity ownership is extremely important. Secondly, virtually all of our board compensation is in stock and that was a program that was instituted about a year and a half ago and it’s fully reflected and finally as Tad mentioned in terms of bonuses and maybe the meager size of the bonus relative to the company size, the bonus pool much of that bonus recognition was also in stocks, for example I received no cash bonus whatsoever in took all of mine in future stock grants. And I think that’s true of the majority of the senior staff at the company and they’re kind of increased confidence in the company and its prospects going forward. I don’t know Tad if you want to add to that any?

Thaddeus Weed

Just the idea that the grants were made in January, we didn’t include it in the guidance because it hadn’t been finalized and obviously we didn’t know what the share price would be which drives the number for the amortization of that over the vesting period. In the case of the board, it’s immediately vested so you see a bigger number in the first quarter than you’ll see in the second quarter of ’08 because of that vesting and the remaining grants are amortized over the service period which is basically four years so we’ll see that expand amortized over the four year period.

Jennifer Adams – Cowen & Co.

Thanks for that information.

Operator

There are no further questions at this time, I would like to turn the conference back to Mr. Schaeffer for closing remarks.

David Schaeffer

Thank you very much and I thank everyone I know we went kind of long today but again we appreciate everyone’s support, management teams are available for further Q & A and again thanks everyone for supporting us we look forward to another great quarter coming up. Take care, bye-bye.

Operator

That does conclude today’s conference call. We thank you all for your participation, have a great day.

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