Good day, and welcome to the Cogent Communications Group Incorporated Third Quarter 2012 Earnings Conference Call and Webcast. Today's conference is being recorded. It will be available for replay 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.

Thank you, and good morning to everyone. Welcome to our Third 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. We are pleased with our results for the quarter, and are optimistic about the strength of our business and the outlook for the remainder of 2012 and for the full year 2013. During the quarter, we experienced sequential revenue growth, EBITDA margin expansion, lower churn and a significant increase in traffic on our network. Additionally, we returned approximately $4.5 million to our shareholders on our first quarterly dividend of $0.10 a share that was paid in September. We continue to be confident in the cash flow generative capabilities of our business. As a result, and as we indicated in our press release, we announced a 10% increase in our quarterly dividend to $0.11 per share to be paid on December 12, 2012, to holders of record as of November 21, 2012. On a constant currency basis, our revenue grew from the second quarter sequentially 2.8%. On a constant currency basis and adjusting for the loss of our largest customer in January 2012, Megaupload, our revenue growth on a year-over-year basis would have been 11.9% from the third quarter of 2011. Our EBITDA margin expanded by 30 basis points sequentially from the second quarter to 32.9%. Since absorbing the loss of Megaupload in the first quarter, our EBITDA margin has expanded in the past 2 quarters by 360 basis points. During the quarter, traffic growth on our network accelerated to 17% sequentially from the second quarter. And on a year-over-year basis, traffic grew 28% from the third quarter of 2011. Since the end of second quarter, we continued to expand our footprint by adding an additional 33 buildings to our network. During the quarter, our sales rep productivity was 4.9 installed orders per rep per month. This is significantly above our historical average of 4.1 installed customer connections per rep per month. Throughout this discussion, we will highlight several operational statistics we believe demonstrates our increasing market share, expanding scale and size of our network, and most importantly, the operating leverage of our business model. We continue to believe we have built a business with a significant barrier to entry anyone trying to replicate what we have assembled here at Cogent. We are the lowest cost most efficient operator in our sector. We remain focused on the most revenue-rich locations, which we then bring on at selling the highest quality Internet service to our customers at the absolute lowest price and best value in the market. I will review in greater detail certain operational highlights and our continued expansion plans. Tad will provide some additional details on our financial performance. Following our remarks, we'll open the call 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 third 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. These forward-looking statements are based upon our current intent, belief and expectations. These forward-looking statements and all other statements that may be made on this call that are not historical facts are subject to a number of risks and uncertainties, and actual results may differ materially. Please refer to our SEC filings for more information on the factors that could cause actual results to differ. 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'd like to turn the call back over to Dave.

Hey, thanks, Tad. Now for some highlights from our third 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. Hopefully, you find the consistent presentation of these metrics informative and helpful in understanding our financial results and our trends from operations. Our third quarter 2002 -- '12 revenue was $79.7 million, an increase of 2.4% from our second quarter revenues, and an increase of 3% from our Q3 2011 revenues. On a constant currency basis, our revenues increased sequentially 2.8% from the second quarter, and increased 5.8% from the third quarter of 2011. On a constant currency basis and adjusting for the shutdown of Megaupload in January 2012, our revenue increased by 11.9% from the third quarter of 2011. 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 our revenues by the type of customer. Our customer types include 2 primary groups: NetCentric customers and corporate customers. All Cogent customers are categorized 2 ways, either as corporate or NetCentric, and is either on-net, off-net or non-core. NetCentric customers buy large amounts of bandwidth from us, generally in carrier-neutral data centers. Corporate customers buy smaller amounts of bandwidth from us in large multi-tenant office buildings. Revenues from our corporate customers grew approximately 4% from the second quarter of 2012. These corporate customers represent 51% of our total customer connections at the end of the third quarter, and represent 52% of our Q3 2012 revenues. Our corporate customer connections grew sequentially from the quarter, 1%. Revenues from our NetCentric customers grew approximately 1% from the second quarter of 2012. The negative…

Thank you, Dave, and again, good morning to everyone. I'd also like to thank and congratulate the entire Cogent team on their hard work and efforts for the quarter. I'll begin by providing additional details on our revenue by product class, on-net and off-net revenue. Our on-net revenue was $58.1 million for the quarter, which was an increase of 1.4% from the second quarter sequentially. Similar to prior quarters, about 85% of our new sales in the quarter were for on-net services. Our on-net customer connections increased by 5% for the quarter, and we ended the quarter with about 28,800 on-net customer connections on our network and our 1,832 on-net building. Our revenue from our off-net business was $20.9 million for the quarter, which is an increase of 5.3% sequentially from the second quarter as we continue to add off-net customers to our network. Our off-net customer connections increased by 3.9% for the quarter, and we ended the quarter serving about 4,300 off-net customer connections in approximately 4,000 off-net buildings. Our non-core revenues were approximately $0.6 million for the second and third quarter and represent less than 1% of our revenues and about 500 customer connections. Regarding churn, which improved, our on-net churn rate significantly improved during the quarter and our off-net churn rate was stable. Our on-net monthly gross churn rate improved to 2.1% for the third quarter, as compared to 2.6% for the second quarter. Our gross churn rate includes customer who remain with Cogent but enter into amended or a move-add-change Cogent contracts. Excluding the increase in these move-add-change contracts, our on-net churn rate improved to 1% from the third quarter, as compared to 1.2% for the second quarter. Our off-net gross monthly churn rate was 2.3% for both the third and second quarter. Excluding the increase…

Again, thanks, Tad. We're going to take a moment and talk about our sales rep activity and productivity. We began the quarter with 269 sales reps, and ended the quarter with 273 reps selling our services. We hired 46 new sales reps in the quarter and 42 sales reps left the company during the quarter. Our monthly rep churn rate was 5% for the third quarter of 2012, better than our long-term average historical rep turnover rate of approximately 7% per month. We began the quarter with 256 full-time equivalents. These are fully-ramped reps, and ended the quarter with 263 full-time equivalent sales representatives. Productivity on a full-time equivalent basis for the third quarter 2012 was 4.9 units per rep per month. This performance was significantly better than our long-term historical average, where we've seen sales force rep productivity of approximately 4.1 units per rep per month. As a reminder, our sales rep productivities are not based upon contract signing, but rather are based only upon completed installed customer connections. Cogent's scale and network expansion. We continue to grow our network. We added 33 buildings in the third quarter of 2012, and have over 1,830 buildings on our network, representing over 700 million square feet of multi-tenant office space, as well as many carrier-neutral data centers. Our network now consists of over 26,300 miles of metro fiber and 56,700 inter-city route miles of fiber. The Cogent network is the most interconnected in the world, and we directly interconnect with over 4,180 other networks. Approximately 40 of these networks are settlement-free exchanges of traffic. The remainder of the networks are actually paying Cogent customers. We currently are utilizing approximately 17% of our good [ph] capacity. We routinely augment parts of our network to maintain a low utilization rate. We have a…

[Operator Instructions] And we will take our first question from Colby Synesael with Cowen and Company.

I have 2 questions. The first one, just wondering we can get an update on the Level 3 Global Crossing promotions? I think you've previously said you had already won, I think, 700 of the 1,500 target customers you were going after. And I wonder if you could tie that back into the price increase on a per-megabit basis that we saw in the third quarter and how that's impacting that. And then my second question just has to do with the dividend. Obviously, this is just your second quarter, now, with the dividend, and you're already rasing it $0.01 or about 10%. What's the message you're trying to provide to investors with this raise? And what does that imply about your intentions for raising the dividend, call it, over the next 12 months?

Hey, thanks a lot for the questions, Colby. First of all, with regard to our targeted promotional activities, specifically related to the combination of Global Crossing and Level 3, we have now been successful in winning almost over 800 of the 1,500 targeted accounts. Virtually all of those customers do have their own autonomous system numbers, multi-home and are reflected in our network connectivity increases. We continue to be extremely aggressive and offer prices as low as $0.50 a megabit to those targeted customers. We've also seen many of those customers that previously had taken advantage of those purchases come back for additional purchases, some of those at higher prices. So it is the combination of customers taking additional capacity at our standard pricing, as well as existing people that we have won under the promotions, taking additional capacity at higher prices that has resulted in the 14% sequential increase in the price that we've been able to achieve on new sales going to $2.08 from the $1.82. We do expect, however, the long-term trend of price declines in the installed base will continue as volumes increase, as contract terms increase and as we continue to remain focused on being the most aggressive provider in the market on the NetCentric side of our business. And for our corporate customers, what we typically see is a very stable pricing environment. However, the effective price per megabit for those customers continues to come down as those customers increase their utilization. And we've actually seen our corporate utilization on average in our installed base go up to over 11% from where it's been harboring between 9% and 10% historically. To your second question around dividend strategy, we have been clear with investors that we have excess capital on our balance sheet. We feel…

And we'll take our next question from Michael Funk with Bank of America Merrill Lynch.

Just a couple of questions this morning. We heard from a few other carriers, AT&T, Verizon, TW Telecom, about some softness during the quarter. And in part that was attributed really just to uncertainty, perhaps around the election, the fiscal cliff. And I'm hoping that you can comment broadly on that first. And then, going back to your last comment about the dividend, and maybe providing a more formulaic way for us to think about it going forward. Is the implication there that as you get more comfortable with the free cash flow and the rate of growth in the future, we could see material step up in the dividend rate to x percent of free cash flow payout? Or how should we think about that?

Yes, hey, thanks for the questions, Michael. So first of all, what most other carriers classify as our enterprise revenue, we call our corporate revenue stream. And in fact, our corporate revenues increased sequentially 4% quarter-over-quarter. That's actually very good results. We've historically averaged about 3.5% sequential growth in that corporate revenue stream, so we actually saw some slight acceleration. We continue to see a strong productivity out of sales force, a rapid growth in our customer connections, both on-net and off-net and feel very comfortable about the state of the market. Now we are somewhat different than other carriers in that we only sell Internet connectivity and IP-based services. Those other carriers continue to fight the revenue attrition that is endemic in our industry where customers continue to migrate applications and services over to the Internet. So we expect our rate of corporate growth to continue to exceed that of other companies. Now that doesn't mean we're totally immune to economic conditions. Our NetCentric business is heavily impacted by currency fluctuations. And also, even our corporate business, if we went into a major recession kind of back to '09 type rates of negative GDP growth, was impacted. But in a sluggish but growing environment, we feel very comfortable with our corporate growth rate continuing to remain strong. With regard to the cash flow, I think it's too early for us to go ahead and give a payout formula. I think it's really incumbent upon us to demonstrate a consistent pattern of returning capital to shareholders. And I think probably, maybe a year from now or so, the board will review that policy. And maybe at that point, after 4 or 6 quarters of consistent dividend returns, we will then be able to come up with something that's more formulaic. I think what we're trying to message is what I -- to Colby, which is our commitment to be equity-friendly and return capital to equity in a very systematic and methodical way.

And we'll go next to Barry McCarver with Stephens, Inc.

Dave and Tad, and solid quarter. I guess, first off, Dave, can you give us an update on any of your network or data center assets that may have been affected by the hurricane?

Sure. So first of all, all of our thoughts go out to the people in the Northeast that were impacted. And in particular, I'd like to thank our field team led by Rich Rademaker and Maurice Augustin in New York who have just done a phenomenal job dealing with the devastation in Jersey and New York City. So our impact was felt 4 ways. First of all, and probably most importantly, at the peak we had 44 buildings that were taken offline. These were buildings that lost power and had battery backup in the building with our equipment. But typically in corporate buildings, we only install about 4 hours of battery backup. So at the height of the storm, we had lost 44 buildings. We're still just below 10 buildings in lower Manhattan offline. All of those buildings are still without power and the majority of those buildings have actually some kind of a prohibition on us entering them by the city, either a condemnation, structural integrity questions or power questions. We do eventually expect, over the next week or so, to get all of those buildings back online that are habitable. But we're down to below 10 buildings out of 1,288 buildings company-wide that are offline. The second impact was our major hub site in Tribeca, 32 Avenue of the Americas. That particular building does not allow a permanent generator so we had to bring a portable generator in. And because of road conditions, that hub was offline for about 4 hours. Even though there was 8 hours of back up, there was -- just the inability to get the backup generator that was designated to that site -- to the site quickly enough. Actually, the first generator was diverted to a hospital application, which we understood the contractors'…

Okay, that's very helpful and good to hear. I guess, my second question, if you look at your CapEx guidance for the year and what you've done in expenditures year-to-date, it would suggest that 4Q CapEx is going to be a little bit lower than the previous 3 quarters. Is that really relating to just the number of buildings you'll be moving into? Or are we starting to see that downshift as we move into 4Q and next year?

Yes. Barry, if you go back and look at the past 4 or 5 years, our capital expenditures typically tend to be the lowest in the fourth quarter. And that's because most major cities have construction moratoriums that some begin as early as Columbus Day, some as late as Thanksgiving and generally run through early January. And we generally just don't start as many projects. Now there are some projects that are underway that we do complete. But we do expect our fourth quarter CapEx to be lower than the average of the 3 previous quarters. That's been our historic trend. We expect our full year CapEx, as we said, to be at least 10% below last year inclusive of capital leases. And we expect those trends to continue in 2013. That is continued more moderation in capital spending.

Okay. And last question, just in terms of the pricing and competition, could you kind of break out what you're seeing in Europe versus the U.S. and your market share of takeaways there?

Sure. So in Europe, to remind investors, our business is exclusively NetCentric. Our corporate business is North American. Our NetCentric business is global, U.S., Canada, Europe, Japan. Our competitive dynamic in Europe is different. We generally don't see the major U.S. carriers, that is AT&T, Verizon and Sprint. We do see them more here in North America. We do ubiquitously see Level 3 and had previously seen Global Crossing in that market. And we see a number of regional players. We see Tilia in Northern Europe, in Eastern Europe, we'll see Telefonica and Telecom Italia. Generally in Southern Europe, we'll see France Telecom and some of our African opportunities and some Eastern European competition. So it's a slightly different competitive dynamic. We continue to be as aggressive in Europe as we are here in North America. We continue to gain market share across our global footprint. And that's in fact that why our traffic grew sequentially Q2 to Q3, 17%. If you go back and look, we've released those numbers every year now for the past 7 years. And I think what you'll see is the Q2 to Q3 sequential growth rate is actually the greatest in the company's history. And we expect to continue to see our NetCentric business grow. We've actually fully recovered from the loss of Mega in terms of traffic, and are at a all-time high in terms of traffic carry. Because of FX and because of price per megabit continuing to come down, we still have some ground to make up on revenue, but we expect to be fully recovered on the NetCentric portion of our revenue also by the end of next quarter.

And we'll go next to James Breen with William Blair.

Dave, can you just talk about the traffic trends across the geographies? You just talked about pricing a little bit. But where are you seeing growth in Europe versus the U.S? Is it existing customers? Is it new connections into new data centers, et cetera?

Sure. Hey, thanks, Jim. So a couple of things. First of all, 97% of our traffic comes from our NetCentric customer base. So really growth in the corporate base was continuing. And I commented, we've gone to average corporate utilization now of 11% is immaterial compared to the NetCentric portion of our business. The growth is actually geographically consistent, North America, Europe and the rest of the world. We continue to see strong growth in North America, but we also see strong growth out of Africa, which is a good market for us. Less so in Asia. We do have a number of Asian carriers but they generally meet us in the U.S. And then finally, in Europe, even though there's been a great deal of economic turmoil, our NetCentric customers continue to buy. I think that growth comes from existing customers taking more bandwidth and continuing to win new customers, both from the targeted promotional activity, as well as from general marketing and sales efforts. We're seeing growth being driven by video. As we talked about on the previous call, we're seeing ramp ups from companies like Netflix who are putting more and more of their traffic on their own CDN and using Cogent for bandwidth. We're also seeing our access network operators experience significant increases in bandwidth demand because their customers are spending more hours a day online and downloading more video per day. And we continue to be the low-cost provider. So as unit volumes increase for any customer, existing or potential new customer, they are more apt to give that traffic to Cogent. And that's why our rates of traffic growth are substantially ahead of where the industry is. And if you looked at application, it's by far and away dominated by video. While cloud computing in business applications continue to grow, they are de minimis in scale compared to the bit loads that are placed on the network. Today, we're carrying between 55 to 56 petabytes a day of traffic. That's up substantially, 17%, just in 1 quarter.

And do see -- you had good traffic growth this quarter. Do you see it getting stronger in the fourth quarter? Is there seasonality in the fourth quarter just as it gets colder in the northern half of the U.S.? Or is there anything around that?

Yes, sure, Jim. So normally, the fourth quarter is a strong growth quarter for us in traffic. We're seeing that trend or even an accelerating fourth quarter trend. As I look at our weekly and daily traffic stats, while on a daily basis there could be some fluctuations a day a week, I think every single week this quarter, so far, so we're 6 weeks in, we've seen records. Each week has broken the past -- the previous week. So we're absolutely seeing strong growth in traffic in the fourth quarter. And that's part of the reason why we're comfortable that the NetCentric portion of our revenues will resume some decent year-over-year growth as we get past Mega and the business continues to grow even though price per megabit declines.

And we'll go next to Frank Louthan with Raymond James.

This is Alex Sklar here for Frank. So I guess after the Level 3 Global Crossing promotion activity kind of flushes through and, I guess, how long -- how do you plan on keeping volume up? Is there any M&A opportunity that you see out there? Or do you think just the growth in video is going to be sustainable for the next several years?

Hey, sure, Alex. So a couple of points. First of all, our corporate growth is just winning more customers and more buildings based on the value of our product versus what they previously had. And to the question earlier that Michael asked about others that we compete with seeing soft enterprise growth and we see strong growth, it's really, we're delivering a better service for about the same price. And it's actually a service that people need. On the NetCentric portion of our business, we continue to gain market share, carrying 16% or 17% of the world's bids. We want more of those. We're going to earn those customer by customer, delivering the lowest price and the highest quality to those customers. So we expect to see growth being driven by 3 things: one, winning new customers on the NetCentric side; two, existing customers giving us more of their wallet; and then third, the aggregate growth in the entire market continuing to drive unit growth. And as unit volumes grow, customers become increasingly sensitive to price per megabit and tend to use Cogent. So we feel for all of those reasons, organically, we can achieve the revenue growth targets and margin expansion opportunities that we've outlined. In terms of looking at M&A, we look literally at dozens of deals a month. We continue to evaluate them. We're not opposed to them, but we have not seen any opportunities that are priced where we can feel comfortable that deploying our capital, we're going to get a return on capital that's greater than our cost of capital and not put our equity shareholders at risk. So at this time, our growth trajectory and our confidence in growth is not in any way dependent on M&A.

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

So I was interested in the sales force productivity stats and the retention stats. And is there any reason to think that reverts to kind of historical averages or maybe see some sort of a sustainable improvement? And then on the CapEx side for 2013, I'm wondering what's driving the moderation in route expansion. I think you addressed that a little bit earlier but if you could maybe provide a little bit more color.

Yes, hey, thanks for 2 questions, Jon. So 2 points. First of all, on the sales force. We're obviously encouraged by all the efforts that the sales organization has put it in terms of improving training, management. And typically, we actually see lower turnover in the fourth quarter in our sales force. So these are all good and improving trends. The productivity per rep is actually driven more by pricing than anything else. And we continue to remain very focused on delivering to each of our respective customer bases the absolute best value in the market. Now on the corporate side, that's a better connection for about the same price. On the NetCentric side, it's a lower price per megabit with comparable quality. We think that our increasing scale and increasing market share and increasing rates of traffic growth all give potential customers increased confidence in Cogent's sustainability. And therefore, we feel very comfortable with our trending in the sales force. We're not ready to say, "The new normal is now 4 9," [ph] but we do think we're going to see a gradual trending up in our sales force productivity. And it's a large part by the value of our products and our pricing. With regard to footprint expansion, we continue to evaluate new routes based on addressable market and availability of fiber. The reality is we are already in the densest markets and the most lucrative routes. We are the most interconnected network. And we will continue to look at new routes, but we have not seen very many routes that are as interesting to us this year as we did, say, the past year. So for that reason, we expect this continued moderation in capital spending to continue where we're going to be judicious. On the corporate side, there's a finite number of buildings that are big enough to get us to the sort of adequate return on capital to build into the buildings. On the NetCentric side, we will continue to go to virtually every data center that is constructed. And what we've actually seen over the past probably year is an acceleration in data center construction activity. And the percentage of new facilities connected to our network is probably the greatest mix of data center versus corporate it's been in the past 4 or 5 years where we're just seeing lots of new data centers get funded and built. And for our NetCentric market, we continue to need to be in all of those carrier-neutral facilities. So we expect that trend to continue. But the net result is, this more moderate level of capital is where we expect to be.

And then finally, I wondered to what extent are you seeing customers deploy dark fiber, and maybe replace OpEx with CapEx? And I know it doesn't solve their IP-transit issues. They would still maybe use you or somebody else. But is that at all something you're seeing in terms of maybe some of the larger customers? And any kind of migration that might affect your churn?

Sure. So for the largest NetCentric customers, they do deploy dark fiber to connect their proprietary data centers back to major aggregation points where they buy transit and buy upstream connectivity. I think that trend continues as many of those customers have outgrown the carrier-neutral facilities and also benefit from the lower cost of owning the facility as opposed to renting space. I think those trends will continue. That is very different than customers necessarily trying to build their own Internet backbone. Yes, the absolute largest customers have built networks to connect multiple data centers, have interconnected those networks and have global footprints. But even for the very largest of the NetCentric customers, they are still subscale in a business where scale is important. And the fact that we have almost 17,000 NetCentric customers allows us to draw the traffic from a wide berth. And then finally, a network is of no value if it's not interconnected. The Internet works because of its interconnection to other networks, and we are the most interconnected. And by being both the most interconnected and the lowest price, it's just cheaper to use us than to try to do it any other way. So we feel very comfortable that dark fiber just augments our market opportunity, doesn't compete.

And we'll go next to Thomas Seitz with Jefferies.

I got 2, actually. Dave, you mentioned that price per megabit was going to continue to fall. But with the new contract price actually increasing, is that a one-quarter anomaly? Or is there any sort of view that maybe the price per megabit deterioration may moderate just a bit? And then the second question is, I know gross margins are lumpy, but was there anything specific in this quarter that caused a little bit of the pressure?

Sure. I'll let Tad take the gross margin question, but I'll take the pricing question. So on pricing, the long-term trend is for prices to continue to decline. Now our long-term average rate of decline in the installed base has been hovering at around 22% year-over-year. It actually moderated some in the last couple of quarters, and it's only been around 13%. When we look at the year-over-year rate of decline in new sales, it is lumpier, but it did improve to about that 21%. So the moderation that we saw in the most recent quarter was kind of more of a reversion to the mean. We continue to be very, very aggressive on these targeted promotional programs, but the addressable universe for that program continues to dwindle. So as I said earlier, we've got over 800 of the 1,500 targeted customers, and the reality is, some of them for whatever reason will buy from Cogent or maybe out of geographies that we cost-effectively serve. So I think there's a little less promotional activity that helped this quarter. I think investors should kind of look at the past 3 or 4 years trends, look at the underlying improvements in technology and kind of model in a price per megabit decline in the average base in the mid-20s. With that rate of decline, we feel very comfortable with our topline revenue growth targets, both corporate and NetCentric achieving that 10% to 20% range and the ability to deliver margin expansion. So there's some lumpiness in terms of the specific targeted programs. I wouldn't get too excited about the 14% increase in the new sales in the quarter sequentially. I think the long-term trend is down, but this was in part a reversion to the mean, as we're, I think, nearing the end of what we can practically get out of the targeted programs we offered. But yet, I do think there's a lot of growth opportunity within those customers that we got connected and now we'll be able to sell additional capacity to.

With respect to gross margin, I guess, first, what is included in our cost of goods sold includes our circuit costs, in particular, associated with increases in off-net revenue when we had about $1 million increase in off-net revenue for the quarter. Typically, the gross margin there is about 50%, so you could infer about a $500,000 increase in certain costs associated with that. We have maintenance costs associated with our new fiber routes, and the timing of when those begin depends upon the timing of not only when the route is expected but when those maintenance costs begin as under the contract. And then cost of facilities which includes both new data centers and then cost to the landlords of the new buildings we connect. As you dig underneath that, some of those have CPI increases that the timing as when they can occur just vary based upon the contract. So dependent upon the timing of when those things -- those costs begin, including price changes, acceptance of routes, et cetera, is going to drive what is our level of cost of goods sold period over period. And depending upon that, you can get variations in gross margin. Also, if you look further back, obviously, the loss of Megaupload which carried essentially 100% gross margin, certainly impacted our gross margin rate, if you look back through January of 2012 when they canceled.

And we'll go next to Donna Jaegers from D.A. Davidson.

This is Nick Yu for Donna. Just a quick question on the -- on your new sales, could you go -- give us a little bit color on kind of the verticals that you're seeing there? Which verticals are you seeing more of your new sales coming from? And then the other question would be for European. We've kind of seen that there's a lot more job postings for European sales positions. And just kind of -- a little bit more of your strategy there on Europe?

Hey, sure, Nick. So first of all, I'm going to answer the verticals by dividing our 2 customer bases. On the corporate side, our largest vertical continues to be legal, followed by financial services and then general professional services. We've seen no real change in those verticals over the past several years. And quite honestly, that's kind of predetermined for us based on the types of tenants that are in the buildings that we choose to connect to. So we don't expect to see any significant change. What we do see on the corporate side is, increasingly, the Internet is becoming the network that matters. We had many customers, for example in Hurricane Sandy, who lost phone service but continued to communicate to the world via Internet as our servers stayed up and their POTS provider failed to deliver for them. I think increasingly for corporate customers, the Internet is an absolute necessity, whereas other types of networks are not. On the NetCentric side, our business is divided between access providers and content and application providers. On the access side, I'll be honest, I can't really tell you what the access users are doing with the bandwidth. But when I look at cable companies, I look at PTTs, universities that distribute our bandwidth, governments that distribute it, it's predominantly residential users and being driven almost exclusively by video over the top. And on the contents and applications side, we saw the people like Skype and eBay and Yahoo! and Microsoft, and they all generate different applications and different amounts of traffic and continue to grow. But the most significant driver of growth continues to be video on the content side. And whether it be CBS or Viacom or NBC, we continue to see good growth out of the content side to mirror the growth that's coming out of the access network side. So it's video as an application. The vertical is really a variety of business models that profit, whether they'd be access network operators whose users buy more bandwidth from them, or the content guys who have either more subscribers or more people paying to view those videos.

And on the European growth opportunities, Dave?

Yes. On Europe, our business is exclusively NetCentric. We continue to add sales reps in Europe. I will tell you that while we turn over 7% of our sales force a month, turnover in the sales force in Europe is much lower. It's just harder to turnover employees if you make a hiring mistake. So we try to put a lot more effort in on the front end. We are actively recruiting, actually, in every one of our European centers, whether it be London or Paris or Frankfurt, Madrid, Milan, Stockholm. We're looking for new reps in all those markets. And there has been a lot of turmoil in the market. I think a lot of less productive reps, particularly from legacy providers have been transitioned out of those businesses and have become available. Not all of them are well-suited to our hunting model. A lot of very tenured reps expect to come in with a Rolodex, take people to lunch and work that Rolodex. That doesn't work here at Cogent. We constantly need all of our salespeople out prospecting for new business. And we're looking to grow our sales force. We'll grow it in Europe, but we need hunters not farmers.

And we'll go next to Kevin Toomey with Citi.

Could you give us a sense of how much of your corporate sales were for 100 megabits versus more entry-level sub-100 megabit services? And then also, could you provide the capital lease inception for the quarter?

Tad will take the capital lease question. In terms of our corporate sales, on-net, virtually 100% of the sales, well over 95% of our corporate on-net sales, are the 100-meg product. We do have a 2-meg product, we do have a gigabit product, but they're de minimis and continue to be very rare in our corporate base. Off-net, the most common product is actually a 10-meg Ethernet circuit. We do continue to sell T1s and T3s. We do sell 100-megabit and gigabit off-net services. They tend to be much rarer, and the dominant product is 10-meg then followed by 100-meg off-net. But the TDM sales now account for less than 5% of our corporate off-net sales. And Tad, maybe you want to take the capital lease inception?

Sure. Actually, if you look at the press release, on the bottom of the cash flow statement, we give you the number for the 9 months, which was 9 -- essentially, $10 million for the 9 months. Getting it for the quarter, you'd deduct what we've disclosed for the 6 months, which was $5.7 million. So the net for the 3 months this quarter, capital lease obligations incurred was $4.2 million.

And there are no further questions in the queue.

Well, I know we always say this, but we went a little longer than an hour. But that we want to thank everyone for their interesting questions. I want to congratulate the entire Cogent team on another consistent and great quarter. And we look forward to chatting with you next quarter. Take care, everyone. Thanks. Bye-bye.

This does conclude today's conference. Thank you for your participation.