Good day, and welcome to the Cogent Communications Group Incorporated Quarter One 2012 Earnings Conference Call and Webcast. Today's conference is being recorded. A replay will be available on the company's website at www.cogentco.com. At this time, I would like to turn the conference over to your host, Chief Executive Officer, Dave Schaeffer. You may begin.

Thanks. Thank you, and good morning. Welcome to our First Quarter 2012 Earnings Conference Call. I'm Dave Schaeffer, Cogent's Chief Executive Officer. With me on this morning's call is Tad Weed, our Chief Financial Officer. Our results for the quarter came in an as we anticipated. We are optimistic about our outlook for the remainder of 2012. But as we discussed on our year-end 2011 earnings call, the loss of our largest single customer, Megaupload, that occurred in January 2012, negatively impacted our revenue growth, traffic growth and margin expansion. The loss of Mega, which represented approximately 5.5% of our 2011 revenues and Q4 2011 revenues materially impacted our revenues in the first quarter. Our revenues declined from the fourth quarter by 2.8%. On a constant currency basis, however, this decline was more moderate at 2.4%. Our revenue increased from the first quarter of 2011 by 4.7%, and on a constant currency basis, that increase would've been 5.6%. As mentioned in our press release, at our April 19 Board meeting, immediately following our Shareholder Meeting, our Board of Directors approved a recurring dividend of $0.10 per share for common stock. The record date for this first dividend payment will be approximately September 15. The Board action to set the exact record date will be taken at a subsequent 2012 Board Meeting. During the quarter, traffic declined on our network by approximately 16% from the fourth quarter but increased 9% from the first quarter of 2011. We continue to invest in the growth of our network. Since the end of the fourth quarter, we expanded our footprint by adding an additional 25 buildings and an additional 2,900 metro fiber miles to our network. We remain extremely encouraged about the level of our order backlogs, orders signed but not yet installed. Throughout this discussion, we will highlight several operational statistics that we believe demonstrate our increasing market share, expanding scale and size of our network. And most importantly, the leverage within our business model. We continue to believe that there is a significant barrier to entry for anyone to trying to replicate the assets that we have assembled here at Cogent. We are the low-cost and most efficient operator in our sector, focused on the most revenue-rich locations which we then bring on net, selling the highest quality internet service to our customers at the absolute lowest prices in the industry. I will review in greater detail, certain operational highlights and continued expansion plans. Tad will provide some additional details on our financial performance. And then following our prepared remarks, we'll open the floor for questions and answers. Now I'd like to turn it over to Tad to read our Safe Harbor language.

Thank you, Dave, and good morning, everyone. This first quarter 2012 earnings report and this earnings conference call discuss Cogent's business outlook and contain forward-looking statements within the meaning of Section 27A and 21E of the Securities Act. The forward-looking statements are based upon our current intent, beliefs and expectations. These forward-looking statements and all other statements that may be made on this call that are not historical facts are subject to a number of risks and uncertainties and actual results may differ materially. Please refer to our SEC filings for more information on the factors that could cause actual results to differ. You should also be aware that Cogent's expectations do not reflect the potential impact of mergers, acquisitions, other business combinations or financing transactions that may be completed after today. Cogent undertakes no obligation to release publicly any revision to any forward-looking statement made today or otherwise update or supplement statements made on this call. Also during this call, if we use any non-GAAP financial measures, you will find these reconciled to the GAAP measurement in our earnings release and on our website at cogentco.com. Now I'll turn the call back over to Dave.

Hey, thanks, Tad. Now for a few highlights from our first quarter results. Hopefully, you've had a chance to review our earnings press release. As within previous quarters, our press release includes a number of historical quarterly metrics. These metrics will be added to our website, and hopefully, you find the consistent presentation of these metrics informative and helpful in understanding our financial results and the trending in our operations. Our first quarter 2012 revenues came in at $76.9 million, a decrease of 2.8% from our fourth quarter revenues and an increase of 4.7% from our first quarter of 2011 revenues. On a constant currency basis, this revenue decrease sequentially was only 2.4% and the revenue increase on a year-over-year basis, Q1 of 2011 to Q1 2012, was 5.6%. We evaluate our revenues based on product class, that is on-net, off-net and non-core, which Tad will cover in greater detail. We also evaluate all of our revenues by customer type. We have 2 primary types of customers, net-centric customers and corporate customers. All customers are categorized in 2 ways, either as corporate or net-centric, and as either on-net, off-net or non-core. Net-centric customers buy large amounts of bandwidth from us in carrier and neutral data centers. Corporate customers buy bandwidth from us in multi-tenant office buildings. Revenues from our corporate customers grew approximately 1% from the fourth quarter of 2011. Revenues from Megaupload, which was a 100% on-net, net-centric customer, did not impact our corporate revenue growth and traffic from our corporate customers. These corporate customers now represent 53% of our total number of connections at the end of the quarter and represent approximately 51% of our revenues in Q1 2012. Our corporate customer connections grew sequentially by approximately 2%. Revenues from our net-centric customers, including the loss of Mega,…

Thank you, Dave, and again, good morning to everyone. I'd also like to thank and congratulate our entire team on their hard work and efforts during the quarter. I'll begin by providing additional details on our revenue by product class. Our on-net revenue was $56.8 million for the first quarter, which is a decrease of 4.7% from the fourth quarter. While we continue to add on-net customers to our network, the impact of the loss of Megaupload negatively impacted our on-net revenue results. Similar to prior quarters, approximately 85% of our new sales in the quarter were for our on-net services. Our on-net customer connections increased by 2.9% for the quarter, and we ended the quarter with about 26,300 on-net customer connections on our network in our 1,769 on-net buildings. Our revenue from our off-net business was $19.5 million for the quarter, which was an increase of 3% as we continue to add off-net customer to our network and also from the impact of the continued increase in our off-net ARPU. Our off-net customer connections increased by 1.2% for the quarter, and we ended the quarter serving about 3,960 off-net customer connections and about 3,900 off-net buildings. We continue to experience an increase in off-net connection size and ARPU due to the increase in the availability of off-net ethernet services in lieu traditional TDM services. Our non-core revenues were about $0.6 million for the first quarter, and represent less than 1% of our revenues, and about 550 customer connections. Related to churn, our on-net monthly gross churn rate, including the impact of the loss of Megaupload, was 2.7% for the first quarter, that compares to 2.4% for the fourth quarter. This gross churn rate also includes customers who remain with Cogent but enter into amended or move/add/change Cogent contracts. If…

Thanks, Tad. We're going to spend a couple of minutes on our sales force and productivity. We began the first quarter with 301 quota-bearing reps and ended the quarter with 273 quota-bearing reps selling our services. We hired 32 reps in the quarter and 60 sales reps left the company during the quarter. Our monthly rep turnover was 7% in the first quarter. We began and ended the quarter with the same number of full-time equivalent reps. These are reps that have ramped and are productive, of 269 reps. Productivity on a full-time equivalent basis for the quarter was 4 units of installed business per month,per rep. This performance is consistent with our long-term historical average, which is actually 4.07 units per rep, per month. As a reminder, our rep productivity numbers are based not on contract signing but rather are based on completed customer installation. Our network scale continues to expand. We added 25 buildings to our network in the first quarter of 2012, bringing our total footprint to 1,769 buildings on-net at the end of the quarter. Our network size also grew as our metro network now consists of 19,800 metro fiber miles and over 56,200 intercity route miles of fiber. The Cogent network is one of the most interconnected networks in the world, today, connected to over 3,940 networks, approximately 45 of these networks are settlement-free peers. The remaining approximately 3,900 networks are actually customers of Cogent who pay us for connectivity. We are currently utilizing about 15% of the lit capacity in our network. We routinely augment parts of our network to maintain low utilization on the network. We have a well-diversified customer base with low revenue concentration. No customer today represents more than 1% of our revenues. We believe our network has substantial available capacity…

[Operator Instructions] We'll go first to Dave Coleman with RBC Capital Markets.

Just a couple of questions. First on the EBITDA guidance, just looking for clarification. I may have misinterpreted the comments. But you said, for 2012, that the EBITDA margins would resume a more normal upper pack of about 200 basis points year-to-year? How does the Megaupload shutdown factor into that? I'm assuming that margin progression in '12 over '11 would be lower than that. I just want to make sure that I'm understanding that properly? And then you mentioned a decline in the headcount by I think, 28 sales reps. How does that impact your ability? Well, I guess is that voluntary or involuntary reductions? And how does that impact your ability to hit the 10% to 20% top line growth in out years? And then finally, can you talk about any successes you've had in getting new business from video aggregation sites since the Megaupload shutdown?

Sure, Dave. First of all, on EBITDA margin, 3 points. First one is we took a significant hit in the first quarter, 590 basis points of sequential decline in EBITDA margin, due to the extraordinary bad debt expense and the loss of high incremental margin business. We will not have that bad debt expense recurring and we continue to sign incrementally profitable high-margin business. So investors should expect a significant rebound in the sequential Q1 to Q2 EBITDA margin of about 300 basis points on a sequential basis. After that, we will resume a more normal rate of annualized growth of about 200 basis points or 40 or 50 basis points a quarter of margin expansion. This does result in a relatively flat margin for 2012 over 2011, but what we do expect is to see 2013 over '12, again, up another 200 basis points and then that growth to continue in out years. Now with regard to the sales force, as tough as we are in terms of quantifying and holding people accountable to specific metrics, we generally don't terminate some people that are underperforming around the holidays. So the first quarter tends to be the worst quarter for turnover. The vast majority of that headcount reduction, those 60 people that left the company, were actually asked to leave. They were involuntary terminations due to these individuals generally not meeting their quota objectives. We continue to hire people and we expect to see an acceleration in our rate of hiring. It's a little slower in the first quarter because we're distracted with our sales meeting but we expect to continue to grow our headcount back to the 300 and maybe even above that number over the next quarter or 2. With our ability to hit our long-term revenue growth,…

We'll go next to Barry McCarver with Stephens Inc.

So I guess, first off, can you just give us the exact dollar amount of the bad debt expense in the quarter that was related to Megaupload? I'm assuming that's the piece that's totally one-time in nature?

That's right. Our total bad debt increase in the quarter was between $1.5 million to $2 million. We're a little reluctant to give the exact to the penny number on Mega because it's still under litigation and we have a claim against the monies that the government has seized. But that was the extraordinary bad debt expense. And then you need to think about it as our normal bad debt expense run rate is around 1.5% that has -- 1.5% to 2% as opposed to the 2.8% that we had in the quarter. So it's really that differential that is primarily ascribable to Mega.

Okay. So you took the maximum amount and you're hoping to get some of that back then?

It's fully reserved.

Yes, it's fully reserved. We've taken the hit. But yes, we are putting a claim in to the monies. When the government shut down Mega, they actually seized Mega's bank accounts and there was approximately $42.5 million in those accounts. We are one of their primary creditors and are placing a claim for that money but we've reserved it. Right now, we're not anticipating getting it back. But we're going to pursue all due process as rigorously as possible to get that money.

Okay. And then as it relates to the sales force, as we see this decline in the number of new buildings you bring on, you've talked just quite a bit in the past about refocusing the sales force to go back and add additional customers to your current stash of on-net buildings. Can you talk about that opportunity and kind of where you are in the process of refocusing the sales force?

Sure. We increased our penetration in our corporate buildings, our on-net corporate buildings to 10.3 customers per building up from 10.1 the previous -- or 10.2 the previous quarter. There are 51 opportunities on average in those buildings. We anticipate continuing to increase our penetration in the corporate footprint, at about 1.8 additional customers per existing building per year and approximately doubling our penetration. We need to be in front of customers when their current contracts run out and our sales force continues to grow to make sure that we have enough resources on the corporate side to get in front of all those potential customers. In the off-net corporate business which is about 40% of corporate revenues, they're typically tied to on-net relationships. There, our building penetration is somewhat irrelevant. As Tad mentioned, we have about 3,960 connections in 3,900 unique buildings. There's no real incentive for us to add more in a building because we buy a tail circuit to serve each customer independently. Finally, in the data centers, we continue to be very aggressive. Today, we have about 10.8% penetration in those data centers. We actually have 21.5 customers per carrier-neutral data center that we're in. And the sales force continues to be focused on adding additional customers and most importantly, additional revenues to those facilities.

So Just thinking out a little longer-term, I guess beyond this year, that 1.8 per on-net building per year, is that the metric we should expect to move up a little bit going forward?

Well, I think 2 things happen. The reported number, if you go back and look at the past 28 quarters of data, we actually have experienced about 1.1 additional customers per building per year, because what's happening is the existing base is growing at 1.8 and the base is getting bigger with buildings that have 0 customers. So that reported number has been about 1.1 additional. As the rate of new buildings declines -- and remember it hasn't declined significantly yet, we added 160 buildings over the past 12 months, 25 in the most recent quarter. You should expect to see growth rates comparable to the past. In a very long-term, if you look 3 or 4 years out, approximately 92% of our growth, each of the past 3 years, has come out of the footprint that was on-net 2 years prior. And only about 8% of our growth has come out of new buildings added in the short-term. Now why we add to buildings just to grow addressable market? So I don't think you should expect to see any significant deceleration in our growth rate for at least 5, 6 years, even if we slowed the pace of adding new buildings to the network, as we will continue that 1.8 additional customers per building and the 1.1 will converge to the 1.8 as we are not adding as many buildings with no customers.

Okay. Fair enough. And then just lastly, we ask every quarter, but can you talk just a little bit about the competition and maybe split that up both domestically, internationally and any kind of change in any pricing from some of the bigger competitors trying to block your market share gains?

All right. So let's take both our corporate business or our net-centric business and answer those separately. And to remind you, our corporate business is solely in North America. They were almost exclusively competing with the incumbent or a reseller of the incumbent's facility. We've seen a very stable pricing environment where our competitors are trying to sell a complete bundle of services as opposed to kind of naked internet service. And we remain by far and away, the most compelling value proposition in our on-net footprint and have seen no change in pricing dynamics in the past several years from our competitors, which are predominantly the incumbent telco operators. Now in our net-centric business, which is actually almost equally split between North America and Europe, we continue to see downward pricing pressure led actually by us. The competitive landscape continues to shrink with the combination of Level 3 and Global Crossing, they are our primary competitor ubiquitously. Regionally, we see folks like NTT, Telia, Telecom Italia, PCCW, as kind of regional competitors. But I think it's pretty illustrative that our price per megabit in our install base actually increased for the first time, in at least 6 years. And I think as we resumed, accelerated traffic growth after we get past the impact of Mega, we should expect to see kind of the normal dynamic in place. But even if you took a snapshot of the last year, so if you took Q1 2012 over Q1 2011, the average price per megabit to our net-centric customers declined 7% from $4.10 to $3.81. During that same period, traffic was up 9% net-centric revenues and this includes the impact of Mega, the loss of over 11% customer, and it was up 1.3%, and if you constant currency, that was up 2.2%. So even in a competitive market, and we are committed to being the absolute price leader in the market, we're able to grow our revenue right in the middle of our guidance range.

We'll go next to Frank Louthan with Raymond James.

Can you give us an idea of some of the seasonal items that usually sort of impact the margins in Q1. Was any of that pushed to Q2? And then can you give us an update on how much longer do you expect sort of the M&A-related promotional activity to continue? You've been fairly successful with that, it's going on for a couple more quarters longer than we thought. What's sort of the longevity of that promotion?

Sure. This is Tad. I'll take the seasonal question. I think we said this pretty much on every call, in particular, kind of the fourth quarter and first quarter calls, because of the seasonal changes we see in SG&A tend to happen from the fourth quarter to the first quarter. So the buckets of those change include increases of salaries and benefits for employees, we have our compensation changes occur in January, 1% to 2% has been the historical increase there. Secondly, we've got the resetting of payroll taxes, in particular, in the United States, as people reset on their FICA and Medicare balances. We have our sales meeting which has historically been in January. And then lastly, audit activities associated with the year-end audit and the filing of the 10-K and the proxy occur in the first quarter. If you aggregate those amounts, it's about $1 million from the fourth quarter to the first quarter of this year, and the other part of the increase in SG&A quarter-over-quarter attributed to the Megaupload bad debt expense. I think kind of the way to think about it would be what are we expecting next quarter, which is I'm assuming what you're trying to triangulate on is-- it should be similar to the run rate that we had in the fourth quarter. So kind of look at the SG&A for this quarter as an anomaly and then resetting approximately back to the run rate we had in the fourth quarter of 2011.

And Frank, I'll take the promotional question. This is Dave. We have not seen any real disruption to the customers of our competitors due to M&A, other than the fact that sales forces have been consolidated. There's been no network consolidation, there's been no billing consolidation. And therefore, no real impact. We think that there is a fairly long window of opportunity for us to continue to garner market share and grow. And I think you will see that in our next quarter's numbers. Clearly, Mega hid things to some extent, but if you just kind of, back of the envelope, look at it, we've lost, in our net-centric business, 11% of our revenues and our revenues were only down about 6%. So we actually grew that revenue about 5% in the quarter, absent that due to these promotional activities. And we expect that type of activity to continue going forward, as I mentioned earlier, the backlog is as large as it's ever been. A lot of that is a result of these promotional activities. And we think it is our objective to capture as much as share as possible and we really need to stay aggressive, probably throughout the remainder of this year. Now the promotional campaigns change. They're not always the exact same promotions. Part of sales is to make customers get something special that they need at that point in time. So sometimes, it's limited to the size ports, the amount of commitment, the amount of term and we varied our programs a couple of times, learning from the market and we think that we will continue to be absolutely aggressive on targeting just those specific customers throughout the remainder of this year, that are going to be impacted by these M&A combinations.

Okay. That's helpful. And can you give us an idea of -- so your ARPU came down on new contracts about 7%. Can you give us an idea of what sort of volume and commitment increases you got for that downtick? And then, can you give us an idea on what internet traffic growth would've been in the quarter excluding Mega, more of an on an apple-to-apples basis.

Yes, sure. So let me take the ARPU. A big part of that ARPU decline came from the fact that Mega went away and they had a large number of ports that were high-capacity, full-commit ports. So the rate of ARPU decline reflects the loss of those much more expensive per port. Lower price per megabit but more expensive per port connections. You should see a much more moderate rate of ARPU decline going forward. Now with regard to traffic, traffic would have grown sequentially on our network. Mega accounted for a little bit over 20% of our traffic. So we would've probably grown traffic in the 5% to 10% range, absent Mega, in the quarter and on a year-over-year basis, it would've been up probably 40%, 45% on a year-over-year basis, without Mega, as compared to the decline of -- the decline on a sequential basis and a relatively modest year-over-year growth.

[Operator Instructions] We'll go next to Tom Seitz with Jefferies.

Can you give us any -- are you seeing any impact at all with what's going on over in the European economy? And do you anticipate that, that will have, ultimately, any impact? And then just a quick administrative question. Why September 15 and not a little earlier? Is that time, trying to give income investors time to get in? Or just the rationale there?

Yes, sure. Tom, it's Dave. First of all, I was actually in Europe last week. I met with actually our largest European customer and several customers. I was there for 10 days. And it's pretty interesting. When you walk around on the streets, other than a few protests in Spain, I didn't really notice anything out of the ordinary. And it's very customer specific. We do not have corporate customers in Europe. Our customers are all net-centric. And they are either content companies or access networks. Actually, our largest European customers are of -- I think 4 largest were all access networks. And they've actually been experiencing growth in traffic volumes. Maybe it's due to the fact that unemployment rates were up and people are at home more, using the internet more. They're all experiencing significant traffic growth and are comfortable and increasing their commitments to us. So while just by reading the papers, it looks terrible. If you walk on the streets, you don't really see it. And more importantly, at least in our product universe, there doesn't appear to be any impact. Now to your second question around why September 15. I think there's actually 2 parts to it. One, you touched on, which is we do really want those shareholders who want to have the ability to get a dividend to have time to do work and study the company and come on-board. Those that maybe don't particularly like companies that issue dividends to have the ability to transition away from the company. And we understand there's going to be some transition in the shareholder base. And that was something that the Board debated quite extensively. I will compliment, we had some shareholder input at our Annual Meeting, that was very helpful in the Board making its decision. We've been asking shareholders to speak up and comment. Some did and voiced their opinion. And quite frankly, there's one more thing, we've never issued a dividend before and we needed to get all the mechanics in place to get that money out there. And having never done it before, we want to make sure we have enough time to just put these mechanics in place and not screw it up. I know companies do it all the time, but in our space, it's not very common. It's something that we really hadn't laid the foundation for. We got the shareholder input, the Board considered it, we had been talking about this for some time and just decided, now is the time to announce dividend and the Board then just gave us enough time to get all those mechanics in place.

It appears there are no further questions at this time. Mr. Schaefer, I'd like to turn the conference back to you for any additional or closing remarks.

Well, thank you all very much. I am glad we're able to get this done in a little less than an hour. I know the last call was extremely long. Thanks, everyone, for their support. I want to thank the entire Cogent team for giving us great results in the quarter and we remain extremely encouraged about our prospects going forward. And we look forward to regular mechanism of returning cash on a consistent basis to our shareholders. So with that, thank you all very much.

That concludes today's conference. We thank you for your participation.