Good morning. And welcome to the Cogent Communications Holdings Fourth Quarter 2014 and Year End 2014 Earnings Conference Call. As a reminder, this conference is being recorded and will be available for replay at www.cogentco.com. I would now like to turn the call over to Mr. Dave Schaeffer, Chairman and Chief Executive Officer of Cogent Communications.

Hey. Thank you and good morning, everyone. Welcome to our fourth quarter 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 for the year, and remained optimistic in the strength of our business and outlook for 2015. During the quarter we experienced accelerated constant currency sequential revenue growth, accelerated sequential traffic growth on our network, lower sales force turnover and better productivity than our historical averages. During the quarter we returned a total of $24.7 million to our shareholders through a combination of dividends and stock buybacks. This $24.7 million return to our shareholders includes our regular recurring dividend payment, which totaled $14.2 million or $0.31 a share and an additional $10.6 million paid under our return of capital program that we executed in the quarter through share buybacks. We purchased 328,000 shares of our common stock for an average price of $32.14 during the quarter. For the year, we purchased $1.7 million of our common stock for a total cost of $58.6 million at an average price of $33.84. As posted on our website 78.9% of our 2014 dividend should be treated as a return of capital and 21.1% should be treated as taxable dividends for our U.S. federal income tax purposes. At the end of the year, we had a total of $37.2 million still available under our stock buyback program, which is authorized to continue through February 2016. We continued to remain confident in the growth of our cash flow generating capabilities in our business. As a result, as we indicated in our press release, we announced yet another increase on our regular quarterly dividend from $0.31 a share to $0.32 a share,…

Thank you Dave and good morning to everyone. This fourth quarter 2014 and full year 2014 earnings report and this earnings conference call discuss Cogent’s business outlook and contain forward-looking statements within the meaning of section 27A and 21E of the Securities Act. These forward-looking statements are based upon our current intent, belief and expectations. These forward-looking statements and all other statements that might 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 our supplement statements made on this call. Also, during this call, if we use any non-GAAP financial measures as defined by the SEC and Reg G, 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.

Thanks Tad. Now for some highlights from our fourth 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 metrics. These metrics will be added to our website. Hopefully, you find the consistent presentation of these quarterly metrics informative and helpful in understanding our financial results and trends from our operations. Our fourth quarter 2014 revenue was $96.7 million. Our sequential revenue growth for the quarter was 1.1%. But on a constant currency basis, our sequential revenue growth for the same period was 2.5%, a substantial acceleration from the 1.8% sequential revenue growth that we achieved from Q2 of 2014 to Q3, 2014. Our quarterly year-over-year revenue growth was 7.7%. But on a constant currency basis, this revenue growth was 10%, again an acceleration from the revenue growth in the previous quarter as measured similarly which was 9.3% on a constant currency basis when comparing Q3 2013 to Q3 2014. Our 2014 full year revenue was $380 million. Our revenue growth rate for the year was 9.2% but on a constant currency basis, our full year revenue growth was 9.6%. We believe that our sales organization initiatives and the expansion in investment that we have made in our sales force are beginning to generate demonstrable results that show our accelerating growth rate. Now for some overall trends in pricing, our most widely sold corporate product continues to be 100 megabit per second dedicated Internet access service and our most commonly sold NetCentric product continues to be a 10 gigabit transit connection. We recently began selling 100 gigabit transit connections to our NetCentric customers. We continue to offer discounts related to contract term for all of our corporate and NetCentric customers. We also offer volume commitment…

Thank you Dave and again good morning everyone. I’d also like to thank and congratulate our entire Cogent team for the results in their continued hard work and efforts during this very busy quarter for the company and very busy year as well. We analyze our revenues based upon product class which is on-net, off-net and non-core. We also analyzed our revenues based upon customer type. We classify all of our customers into two types, NetCentric and corporate customers. Our NetCentric customers buy large amounts of bandwidth from us and carrier neutral data centers. Our corporate customers buy bandwidth from us in large multitenant office buildings. Revenue from our corporate customers grew by 3.7% from the third quarter to $53.1 million. Our corporate revenue was $201.8 million for the full year of 2014 which was an increase of 12.3% from last year. Our corporate customers represented 46.7% of our total customer connections at the end of the year and represented 54.9% of our fourth quarter revenues. Our corporate customer connections grew sequentially by 2.1% and grew by 11% for the year. Our revenue from our NetCentric customers actually decreased by $850,000, or 1.9% from the third quarter 2014 to $43.6 million. The decrease was primarily due and almost entirely due to a sequential $1.4 million negative impact of foreign exchange on our fourth quarter revenues. Our European revenues, almost entirely NetCentric revenue and as a result, subject to the impact of variations in foreign exchange. Our NetCentric revenue was $170.2 million for the full year, which is an increase of 5.9% from last year. Our NetCentric customers represented 53.3% of our total customer connections at the end of the fourth quarter and 45.1% of our fourth quarter revenues. Our NetCentric customer connections grew sequentially by 4.9% for the quarter and…

Hey. Thanks, Ted. Now for few words on the sales force rep productivity and activity. We began the fourth quarter with 344 sales reps and ended the quarter with 346 sales reps, we hired 45 sales reps in the quarter and 43 sales reps left the company during the quarter. Our monthly rep turnover was 4% in the fourth quarter. Again, much better than our long-term average of 6.3%, which has been coming down. We began the fourth quarter with 329 full-time equivalent reps and ended the quarter with the same number. We believe we’re seeing the benefits of the increased number of sales reps and the increased tenure and quality in our sales force. We anticipate additional sales resources will help us see further productivity and revenue growth improvement. Productivity on a full-time rep basis for the fourth quarter was 5.5 units per full-time equivalent rep per month, these are installed orders. This rate of organic rep productivity was significantly better than our long-term historical sales rep productivity number of 4.7 units per full-time equivalent rep per month. As a reminder, our reps are based on -- not on contract signing but only upon completed installs once the customer begins to actually receive service and we begin billing them. Now for a few words on Cogent scale. The size and scope of our network continues to grow. We added 35 buildings to our network in the fourth quarter of 2014 and we added 135 buildings for the full year of 2014. We have 2,125 buildings connected to our network. We have approximately 800 million square feet of multi-tenant office buildings connected to our network in North America. Our network consists of over 27,200 miles of Metropolitan fiber and approximately 60,000 intra-city route miles of fiber. The Cogent network is…

[Operator Instructions] Our first question comes from Michael Bowen, Pacific Crest.

Okay Good morning. Thanks Dave. Thanks Tad for taking the questions. So I guess I wanted to just touch base with you a little bit about the midpoint of your revenue guidance range. I want to make sure I understood that the 10% to 20%, and also the EBITDA gains where you said you would be 100 basis points higher. I wanted to make sure the 10% to 20% you said was on constant currency. And then with EBITDA margins, excluding the asset gains, when you say 100 basis points higher, is that also -- on the denominator that net of the asset gains as well? And then one other question with regard to net neutrality tomorrow, I think it is almost a foregone conclusion we know where the vote is going to go. But how do you think this is going to impact perhaps that single-digit revenue stream that we all know about. How quickly do you think that some of the arrangements that have been struck by other companies may be abandoned? And could we see some acceleration, do you think, in the near term or do you think the court battle ensuing will delay that indefinitely? Thanks.

Hey Michael, thanks for the list of question. So first of all on the revenue growth, we have clearly demonstrated now substantial improvement in our sequential revenue growth on a constant currency basis and those trends should continue going forward. In fact, the 3.7% sequential corporate growth rate puts us actually above the midpoint of our guidance range for the corporate business. Clearly the NetCentric business has been growing at a slower rate of about 6% last year. And part of that drag has been FX, part of it has been the net neutrality debates that we've been dealing with. I’m going to jump to your last question and let Tad take the EBITDA part of your question, but with regard to net neutrality. One we are very pleased that principles of non blocking, non-throttling and no pay prioritization are outlined in the Chairman statements. Two we are equally encouraged that interconnection or Peering is going to be included. We have not seen the final report and order. I think it's actually still being negotiated between the commissioners as we speak, and then it has to be published in the public register. I am confident that the FCC will survive any of the legal challenges that many of the terminating ISPs will launch to try to circumvent net neutrality. We will probably not be party to those litigations. But we have not seen the interconnection language yet and do not know whether or not the case-by-case valuation that the Commissioner -- the Chairman laid out will require us to spend additional legal or economic fees with administrative law judges. And I think that's part of the reason why we cannot today give perfect visibility to our legal and economic expenses for next year. Now with regard to timing, the order becomes effective after it’s in the public register for 30 days. I do not believe that the ISPs who will litigate will be successful in getting a TRO or a stay. So therefore it will be the law, the land while they are litigating, we hope that they honor the law and the FCC doesn’t have to come in and sanction them or fine them for violating it. But again we have no visibility. We hope everyone complies with the law as passed and the connections would immediately be allowed to be increased and traffic would flow and therefore that headwind to our business will turn into a tailwind. Now, let me let Tad take the EBITDA question.

Sure. I’ll give you little bit more color I guess on the revenue guidance and constant currency. So the average euro rate last year was actually $1.33. So we're guiding using constant currency because that's a very material impact on year-over-year revenues just kind of using the average rate. It’s kind of -- and at least $15 million impact year-over-year on the revenue results. Now with respect to EBITDA, as we mentioned in the prepared remarks, the asset gain programs is winding down. We expect those gains to be less than half this year as what they were last year. So we're providing EBITDA guidance including professional fees, legal fees, but excluding the asset gains. We are seeing greater than 100 basis points just because of the uncertainty associated with the timing and the level of those fees, but the number we are discussing excluded the asset gains.

And Dave one follow-up on the revenue guidance. Can you talk a little bit about, if you can -- you mentioned in the past reaching midpoint of that guidance by certain time periods. I mean, I think we -- I think you may have fell a little short of that here. I think you had said you’re going to exit '14 on that. How should we think about the revenue ramp -- the revenue growth ramp for 2015 in this still rather wide range? Thanks.

Yes. Sure, Michael. So what we have said is that looking at Q4 of '14 versus Q1 of '15 that again this is on a constant currency basis because I cannot predict the volatility in the currency markets. We would deliver total revenue growth in the 3% to 3.5% range, which on a sequential basis when annualized will put us squarely in our range. Now for the corporate business, we've actually already exceeded those goals and at 3.7% sequential growth, that annualizes to over 16%. The NetCentric business has been impacted by FX, but also by net neutrality and volatility. We think it will improve too from that 6% growth rate. And what we are expecting is that the entire business on a constant currency basis will deliver a growth rate that will be squarely in our range. And with I think the resolution of net neutrality will be at the midpoint to that range in. And if you take our sequential rate in Q1 versus Q4 and annualize it.

Got it. Thanks, guys.

Our next question comes from Barry McCarver with Stephens.

Hey, good morning, guys. And thanks for taking my question. Dave, let me ask that last question about I guess net neutrality a little differently. Can you talk about the behavior of some of the bigger networks over the course of the last few months leading up to this vote tomorrow? How they have been acting in the marketplace in regards to opening up ports and throttling? And then at the same time what about some of your bigger content providers, what are they thinking going into this?

Okay. So with regard to port behavior, it varies by provider. We have eight ISPs globally who have been in transient Deutsche Telekom and Telefonica in Europe have made no movement. There have been no additional ports. There's been a very slight increase from France Telecom, but that's only due to an ongoing investigation in France and it's been too little and the ports remain completely congested. Here in North America actually Comcast has begun upgrading ports and have done so at an even accelerating rate, even though the ports remain congested and the rate of expansion is an adequate. We believe this is trying to garner sympathy from the regulators in reviewing their merger. Time Warner Telecom has made no increases, AT&T no increases, Verizon no increases whatsoever import capacity. And then finally with regard to CenturyLink, we've seen modest increases, but again inadequate to handle the amount of traffic trying to go to them. Now with regard to our content customers, we’re always trying to strive to deliver the very best quality of service possible to all of our customers. Our content customers understand this constraint is not of our making, but of the ISPs. They have unfortunately been pressured into buying direct connectivity in some cases. They do buy from our competitors, but understand our competitors also have the same constraint. So they are sympathetic, they have a work around, it’s more expensive, it’s more cumbersome, and it is clearly a violation of what the President, what the Chairman and what Congress have intended in net neutrality. So I believe that the change in the regulatory oversight moving it clearly under the FCC with Title II is going to make this problem hopefully go away and I think virtually all of our contact customers are supportive of our position.

Okay. That’s very helpful. Just two quick follow-ups. First off, you mentioned in your prepared remarks adding to sales, I think you actually said sales assets. I am curious as to what you meant by that and what the level of sales headcount might be this year if that’s a change. And then lastly, in terms of capacity utilization, we’ve seen that move up quite a bit for your network over the last couple of quarters. And I think two years ago, we were kind of hanging out in the 20s, now we are deep into the 30s. Is there any need for additional CapEx in the coming years to upgrade some capacity there? Thanks a lot.

Okay. Let me try to take both of those. So with regard to the sales organization, over the past six quarters we increased our sales force by 40%. Roughly 75% of the additional headcount added to Cogent over the past year came in the sales organization, either direct quota bearers or sales managers or sales support. Those trends are going to continue but at a more moderate rate. They actually began to moderate last year. In fact, sales force only grew year-over-year about 13%. We expected to grow this year probably in the order of around 8% to 10% in terms of total headcount. And we intend to continue to invest in better training, better management, and better motivational tools for the sales force. So we believe our revenue growth is the direct result of both more people and making those people more productive. And the results on the corporate side have been very obvious and have shown up. On the NetCentric side, they are more muted and the issues are the ones that I have talked about. That was regard to capacity utilization. Our network is divided into about 1900 discrete segments. Each time the segment reached its 14% utilization, we launched an upgrade program. The technology that we use continues to fall in cost. We actually believe our capital will be down in 2015, as we’re not going to be adding nearly the square footage to our data center footprint, which was the majority of the spike up in capital last year. And we will continue to augment the network as necessary. The 34% utilization that we reported is still far, far below industry average where some of our competitors have commented publicly that they run in the 80% to 90% range. So, we feel that there will be no need for a step-up in capital.

Thanks a lot, Dave.

The next question comes from Eric Pan with J.P. Morgan.

Hi. Thanks for taking the question. One on guidance and then one on net neutrality -- actually and another on sales force productivity. On the guidance, you are guiding to margin improvement of 100 basis points excluding asset related gains, which is lower than your traditional 200 basis point guide. Is that just a function of additional legal fees you expect this year or are you anticipating higher costs somewhere else? And then on net neutrality, what are your thoughts on Commissioner Clyburn's request yesterday to delay the vote and her opposition to the creation of the new legal category of broadband subscriber access services, which is meant to not monitor the back end. Do you view her opposition as a negative for you or do you expect the vote to be delayed? And I have a follow-up on the sales force productivity.

Yeah. Sure. So first of all, with regard to margin, Eric, we said at least 100, so I think it’s going to be better. And the reason for that is we just have no visibility to exactly what we’re going to have to spend on these administrative law judge proceedings at the FCC, if there is case-by-case adjudication. And having kind of live through the pain of spending $5.2 million last year, we decided to be a little bit more cautious. Remember, with a $400 million revenue number, $4 million expense is 100 basis points. So, I don't think we’re going to spend that much but I just don't know. So, I want to be extra careful. With regard to the net neutrality of vote, I believe there's been a lot of work at the commission. I believe that the commission is very serious about voting on it tomorrow. I met probably about a week ago with Commissioner Clyburn. I think her additional revisions will be helpful. I think anything that clarifies the interconnection part of it will be helpful to us. But the fact that there are these three overarching principles of non-throttling, non-blocking and no pay prioritization. And they will be applied to interconnection as well as to the broadband terminating part of the network. I think those were all positive. Again, we have not seen the final report order and it’s a little bit like making sausage. It’s kind of ugly while it is happening, that is what law making is. And it's hard for me to comment on kind of intermediate proposals.

Got it. Okay. That's helpful. And then lastly on the sales force productivity. Sales force churn of 4% is great to see, but productivity seems to have slowed down to 5.5 units in the quarter. What attributed to that and when can we start to see improvement on that metric? Is it something that is in the first half or more towards the second half of this year?

So, first of all, 5.5 is substantially above the long-term 4.7. Two, I think it will continue to improve. In the fourth quarter, we do have the Christmas holidays at the end of December, which makes installations a bit challenging in that two weeks, when the customers not necessarily around to accept service can skew the numbers by few tens of a percent and make the difference. So, I think you'll see continued steady improvement. Yeah, there will be some lumpiness. But I think as you look at the trend line, take trailing three or four quarters and you'll see a constant improvement.

Got it. Thank you very much.

Great. Thanks, Eric.

Our next question comes from Scott Goldman with Jefferies.

Hey. Good morning, Dave. I want to follow-up on productivity and then have another question as well. On the productivity side, just wondering if there is anything unique about this fourth quarter. You talked about some seasonality, but if you look back to last year, I think maybe in the prior year we didn't necessarily see that sort of change. So, wondering if there is anything unique here. And on the topic of productivity as well, wondering if you could maybe segment productivity in terms of what levels of productivity you see for sales staff that have been there for a certain period of time, say a year, sort of a same-store sales metric to give us a better idea to where that metric can go over time. And then lastly, just on the leverage front. Given where your guide is, where your leverage is today it looks like you probably could get to that 2.5 times leverage well before year-end 2016. So just wondering given the current credit environment, how you are thinking about that leverage target and shareholder returns going forward.

Sure. So with regard to productivity, like I said there will be a consistent improvement and we are substantially above the trend line. Nothing goes up in a perfect straight line and the dip to five and a half, which is still above the 4.7 is still a great quarter for the sales force and I think they will do better going forward and will be able to see consistent improvement. Now with regard to kind of the cohorts within the sales force, we typically see rep productivity increase based on tenure in almost a straight line manner from month zero through month 30. And our average sales force tenure has actually come down slightly, as a result of the rapid hiring over the past six quarters. As that pace of hiring, I think slows, we will start to see an increase in rep tenure which will also help, push our productivity numbers up. The final point to your leverage question is, it is something that is discussed at every Board meeting, as we have told shareholders, we will address leverage once we reached 2.5 times, there is no commitment we will increase it. But we clearly have now done a good job in bolstering our balance sheet and improving our liquidity position and most importantly, saving $6.7 million a year in interest expense. So the result will be, we are going to be committed to returning capital to shareholders and we are going do that again in a measured pace with the combination of dividends and buybacks. The leverage will be addressed once we get to 2.5.

Great. Thanks a lot, Dave.

Hey. Thanks, Scott.

Our next question comes from Colby Synesael with Cowen and Company.

Great. It’s actually Greg sitting in for Colby. Good morning and thanks for taking my questions. Just two if I may. Dave, it seems like you were purchasing stock around $30 to $32 levels and in this quarter, you sort of pivoted to the special dividend? I would imagine it is because of the stock strengthened. I think you've said in the past around $35 is where you feel comfortable purchasing. So is it safe to say, in the second quarter beyond we will see more of a special dividend as a capital return? And then the second question is just on your pricing stabilization in your new sales, it seems to stabilized at $22. And I am just wondering, is it safe to say, we have reach that moderation or stabilization point or just sort of pause in continuing downward trend? Thanks.

Hey. I will take those in reverse order. In terms of the rate of price decline on the NetCentric side, it’s averaged about 20% to 23% a year, that’s going to continue, you saw it in the base. I think for new sales when you see pause as a stability, it's just kind of the nature of the actual sales that occurred in the quarter and the lumpiness of the orders and port sizes. But overall that trend and price per megabit is going to continued to decline, I think perpetually at a constant rate due to the improvements in technology and the increase in unit volume. Again if you look at Cogent, we've grown our NetCentric business on average about 12% year-over-year, while the price per megabit has fallen at 23% and that’s as a result of us growing traffic about double the rate of the underlying Internet. I think those things are all continuing those trends and will be the case going forward. Now with regard to buybacks, we are opportunistic. Clearly, when the both our net new neutrality appeared to be going on our direction with Title II, our stock performed better. That's a sentiment call. We were aggressive in buying, when the stock went up we weren’t chasing it up, but we will continue to use both buybacks and dividends. We feel that the current stock price still represents a deep discount to the true DCF value of the company. So I don't think you could read into a $0.03 special dividend and return of $1.4 million through that special dividend is a change in strategy.

Great. Thanks.

Thanks.

Our next question comes from Nick Del Deo with MoffettNathanson.

Hi, Dave. Thanks for taking my questions. I have two for you. So first, your topline growth rate has faced a couple headwinds, you haven't really talked about much historically? One, you’ve got price concessions as people take longer-term contracts, as more of your customers take longer-term contracts? And second, the declining ARPU from in the off-net business stemming from your lower circuit costs? I was hoping you could talk about those trends a bit? The magnitude of the growth impact, where off-net ARPU should stabilize and I guess, how you think about the trade-off between price and contract term with respect to customer lifetime value?

Sure. So three questions there, let's start with off-net price trend. We experienced a significant uplift in off-net ARPU as we migrated customers from TDM services, primarily bonded T1s to Ethernet services. Today over 85% of our off-net base is using Ethernet services and we expect that TDM base to virtually disappear over the next couple of years. So we’re not going to get that type of uplift When we show off-net, we search competitive providers as well as incumbents for the best loop prices possible. Now the majority of our loops come from the incumbent but with cable competition in our off-net footprint, we've actually had the ability to buy loops from some of those cable companies that has driven down the loop cost, which have then allowed us to pass those on to the customers and lower ARPU. Partially offsetting that is the same trend that we see on the on-net site which is customers are using more bandwidth. So people that previously bought 10 or 20 megabit off-net circuits may buy 50 or 100 meg. So we're getting some uplift from circuit size increases. The net result has been a fairly modest rate of price decline in that off-net ARPU on a blinded basis. It is probably going to continue for the next year or two. Beyond that you know it's really hard for us to predict what these three different forces will do in terms of driving pricing. But I think you know the rates of decline will be fairly moderate. And most importantly for us, we’ve seen a reacceleration in our off-net business. As we realign the sales force, we actually saw that off-net business which is almost entirely corporate, drop to kind of 1.5% or even below, slightly below 1.5% sequential growth rate, now it’s back up to 3.3%. It’s still not as good as 3.7% in the on-net corporate business. But I think the two should converge and converge to a higher number. Now with regard to contract length, we have always used discounts for contracts as a tool to close sales. Actually the sales people get paid less on longer-term contracts. As Tad commented, we saw slight improvement on our off-net churn. Our on-net churn remains some of the lowest in the industry and very stable. I think we’re going to continue that strategy of term discounts. But we've actually seen a moderation in corporate on-net pricing where we actually saw slight uptick this quarter as corporate on-net pricing ARPUs went up slightly. NetCentric went down and again that’s just a mix of the specific customer basis and what they're buying. But I think that rate of contract term extension is also moderating. So you’re right, they are headwind but I don't think they are significant. They're dwarfed compared to the headwinds of FX and the headwinds we've seen on the block ports on the NetCentric side.

Okay. And then real quick, I may have missed it. Did you disclose the number of customers for corporate billing this quarter?

We did not give that number but we’re happy to since we reported in our MD&A. I think it’s 12.

12. Okay.

It’s up slightly.

All right. Thanks, Dave

Okay. Great.

Our next question comes from Walter Piecyk with BTIG.

Thanks. Hey, Dave, I wanted to go back to some of your comments kind of describing the process with the FCC. You had mentioned that when this order comes out, you are hoping that everyone is going to -- I don't know, I guess make changes and not face sanctions at the FCC. So if you look at your existing interconnection situation between the ISPs that you think are not investing enough money, is your expectation that there is something in the document that will specifically require them to do something that would lead to sanctions or is it more likely that you would have to file a complaint? And can you just talk about what exactly are you going to put in the complaint if that’s the process as opposed to what you described as far as some type of sanction for something which I thought was already a complaint process?

Sure. So first of all remember we have and have not withdrawn our standing offer to invest the capital for the counterparty. So we will buy our port, we will buy their port and we will buy the physical interconnection. That offer still stands. We’re not asking them to spend any capital. We’re just asking them to abide by the non-blocking and non-throttling provisions that are outlined in the report in order in the preamble and are intertwined in the order. Now, I have not read the exact order. Now, two things will happen. First of all, there will be this kind of global attempt to try to basically put the order aside, stay or TRO. We probably won't be party to that, that's really going to be a fight between the terminating ISPs and the government. Once that fight has been settled, then it's a question of what is enforcement mechanism to require no blocking and no throttling terms. Now in the ideal report order, we would see explicit terms. What the Chairman outlined in his very abbreviated wired article was basically this case-by-case adjudication. So what would happen is we would file -- hopefully, people say look, we understand what no blocking and no throttling means. We go ahead and upgrade the ports and therefore there's no complaints. If they refuse to, we would file a complaint with an administrative law charge and show that we are willing to pay both sides and have them explain why that's not throttling or blocking. And as with any violation of FCC rules, the FCC has a wide splay of different tools it can use, sanctions, fines or revocation of licenses, are all things that are within their purview.

Right. But the point is that I think your earlier comment was a suggestion that you wouldn't do anything and all of a sudden that the FCC would just start to sanction them if they didn't change anything as far as the interconnection rate. But the reality is that in order for anything to change, assuming that they don't actually invest in those ports, is that you actually have to file a complaint and go through an ALJ process, which we have been told in the case of mergers is a very lengthy process. Do I have that correct?

For mergers, it is -- actually the FCC for enforcement mechanisms have a five month guideline or clock up. And it's not clear that we actually have to launch those complaints. If the rules basically say that there is a requirement to upgrade, then it would be actually the FCC that launches the complaint. I guess we would show them the evidence. They already have the evidence, that's part of why we're in this situation we are in. So it's really difficult for me today to forecast exactly what the mechanism is that enforces the rules because they haven’t seen the rules yet.

Okay. So then if you look at these legal expenses, the $5.2 million, which is about 130 basis points of margin, and you're only talking about a 100 basis point improvement, presumably those legal expenses go down pretty substantially. So you are basically looking at no margin improvement in your existing business. I guess the question is are your -- is your kind of lack of kind of more specific guidance in the legal expenses because you don't know about what these complaints are going to cost you? Or is it -- or are you also planning on now contesting the Comcast-Time Warner merger and are factoring that into potential future legal expenses?

With regard to the merger, we are on record as contesting it. I believe we have spent. Virtually, all we are going spent on that and have had multiple of meetings at FCC and DOJ on that issue. The 5.2 that we spent was on kind of getting the evidence to the FCC to get them to the point where they are passing a law and asserting jurisdiction. We are guiding to greater than a 100 basis points, no matter what. So, we are saying worst-case, no matter how bad the legal fees are, we are going to still deliver over a hundred basis points. What we are saying is between 100 and 200, the difference is exactly what you said, $5.2 million. And I’m not going to have to spend the money on getting the law passed, but I may have to spend money on specific complaint processes. And again, I don't know because I haven't seen the report order yet and the mechanism that's going to be required. It just takes the evidence that it already has and enforces the order without an additional complaint because the evidence has been produced and they require new evidence to be produced. Just have not seen the order yet.

Just one last question. What exactly is the harm to Cogent of Comcast buying Time Warner? What are you contesting the merger on, under what grounds?

That’s a very lengthy set of comment.

We are in hour and a half in so I am sure we've got more time.

Yes. I think we will take that one offline. While it’s nothing I am punting, but it’s basically a foreclosure argument, a vertical integration argument, a market share domination argument and…

But has a vertical argument ever worked in a merger? Can the DOJ actually prove a merger -- a vertical argument works to block a deal?

There has been precedent for it, yes.

All right. I would love to hear those.

They are limited, but they are precedents.

Okay. Thank you.

I want to keep this one shorter than last time. Next one.

Our next question comes from Frank Louthan with Raymond James.

Thank you. Can you give us a couple of more specific things that you are doing that are giving you confidence that -- I guess where we need the traction is more on the NetCentric side. The things you are doing differently with the sales force that’s going to get that traction. And then on some of the contract extensions, are you still able to get volume increases that sort of outpace the price declines on these new contracts that you are extending? And then just quickly if I can, the data center expansion that you invested in last year, is that mostly helping corporate customers and when do we expect to see some revenue growth for that?

Let me take all three of them. First of all, the sales force investment is actually on both sides, Corporate and NetCentric, that investment is primarily in training and in management, that is continuing. And we are seeing benefits on the NetCentric side, but they are dampened by the two bigger issues, which are the net neutrality issue and the FX issue. On the corporate side, it’s shown up very clearly because those two issues don’t impact it and quite honestly the sales cycles are a little shorter. With regard to contract lengthening, the answer is yes to volume commitments, because the sales person only gets paid if the monthly recurring revenue goes up. And it also requires that the total contract value, which is the amount committed to Cogent increases as a result of contract lengthening. To your data center question, the answer is we are adding to the footprint in new markets, the customer base is primarily corporate, although there are some NetCentric customers. And we have a substantial amount of excess inventory and our data centers and with these additional centers coming online, we are starting to see an uptick in the number of racks, power and revenue coming out of those centers. But today we are in the low 30s in terms of occupancy in those centers, 30%.

And where does that show up on the income statement, just lumped in either between Corporate and NetCentric? You’re just going to show some ARPU growth from that. And when should we expect to see that ramp up?

So it shows up in on net revenue. It can be either Corporate or NetCentric, and it actually may result in ARPU decline but revenue growth, because some of the rack and power sales are actually below the cost of the bandwidth sales. We typically sell rack and power for less than bandwidth and we use that as a tool to help us sell the bandwidth. We are substantially below what the carrier neutral charge for that. So it’s actually a bit of a drag on ARPU.

Got it. Okay. Thank you very much.

Thanks.

Our next question comes from James Breen with William Blair.

Thanks for taking the question. Just a couple things. I just want to clarify in terms of the FX impact on a year-over-year basis. If we look at the full year revenue for 2014, Tad, maybe can give us what the full year FX headwind will be so we can sort of think about how that 10% to 15% growth rate adjusts. And then secondly, Dave, just sort of as a bigger picture, [indiscernible] had an Analyst Day yesterday and talked about really the bottleneck being in the transit part of the network, which I think you have talked about as well and probably in the port capacity side. And they also talked about moving more content closer to the edge of the network. Just wondering how you feel about how that would affect your business over time if we did see more content moving closer to the edge, sort of what like Netflix is doing with some of their server technology and so forth. Thanks.

Well, I will let Tad take the first one. I will take the second one.

Sure sir. So I mentioned couple of these stats, I’ll around again. So the average euro rate for 2014 was a $1.33. Currently the average for the quarter -- the first quarter 2015 is about $1.14. My FX negative impact I said would be at least $15 million and there is also a small impact from Canadian dollar which also has decline but it is largely related to the euro.

Now with regard to content of the bottleneck. The bottleneck is an artificial one, and it is at a point where networks interconnect and it can be either for a CDN, if they don’t have adequate connectivity to an ISPs network or for a transit network that then connects ask to an ISPs network. And that has been really the cause of why the FCC is dealing with these net neutrality issues and imposing the rules. Now with regard to content distribution that trend has been in place for 15 years whether it’d be large content companies like Google or Apple or Netflix or third-party aggregators like Akamai or Limelight. Content has proliferated to the edge but the Internet has become more global. So it’s big kind of interesting. We track the average package travel distance and it has not materially change in 15 years at about 2700 miles. So it is kind of two forces offsetting one another content being distributed multiple cashes. Remember CDN is just a distributed server form. And the globalization of the Internet which is increase the packet travel distance, the two forces have roughly offset one and other. But remember most CDN connect through transit. They only connect through paid Peering to an ISP when they can't buy transit. Transit is cheaper that those direct connections. And in our network we further stick to a route. We always try to carry the packets to the last possible point before we can handle all. So a CDN would always prefer by from us than buy directly from a ISP at a higher price.

So at the end of the day in terms of the traffic movements, even if the content ends up sitting more resident to the end-user at the time that they want to view it, it still has to get there somehow, it is just a matter of the time during the day when that content gets from point A to point B?

That’s correct. And listen, if your cost of space and power and servers was zero you distribute the content every home. Transit allows that content to be cached at a finite number of locations and then transmitted to 44,000 networks at the very lowest cost. So it's not like CDNs were a substitute for transit. They're just another type of customer that buys transit services.

Great. Thanks.

Thanks.

Our next question comes from Barry Sine with Drexel Hamilton.

Good morning. You gave the corporate customers per building metric at 12. As you slow down the rate of buildings you are going to be connecting to, presumably getting that metric up becomes a bit more important towards growing revenue. Could you talk about your ability to do that? And then also within that comment on what impact, if any, you are seeing now that Level 3 and TW Telecom have merged? Thank you.

Yeah. Sure, Barry. So first of all, we’ve historically added about 1.8 additional corporate customers per multi-tenant office building per year. That number has been diluted by the additional buildings that we add to the network. As we slow that down, the reported number will go up and the rate at which it will go up will be faster because there’s less buildings coming on-net with zero customers. With regard to TWTC and Level 3, we compete with Level 3 vigorously on the NetCentric side of the business. On the corporate side, quite honestly, both of those companies were not really competitive with us because of three reasons. One where their buildings are, their footprint tends to be more suburban campus type buildings as opposed to CBD skyscrapers. Two, it’s their products that they tend to sell a vertically integrated bundle of telecom services with very high office versus our dedicated Internet service with a $650 ARPU. And then third, the type of customer they focus on. They tend to focus on larger enterprise companies that are more global in nature. We tend to focus on businesses that are intended to be a little bit smaller, but are located in the CBD building. So, we really just have not seen any shift in our corporate business from the combined company was different than the two companies independent that was, they really weren’t there, whereas on the NetCentric side, Level 3 is a very ubiquitous competitor.

But I am assuming little impact on NetCentric competitive environment because TWTC was not in that environment?

That is correct. They were actually our customer of Level 3s.

Okay. Those are my questions. Thank you.

Hey. Thanks.

Our next question comes from James Moorman with D.A. Davidson.

Hi. Thanks. I'll keep it quick to keep this under two hours. Just in terms -- can you give a little more color on what you are doing Netflix in Europe? It sounds like -- with this being the first quarter how has that been and what kind of do you expect for that going forward? And I assume you are not having as many issues as you are in the U.S. with blocking interconnection, if you can give any more color would be great? Thanks.

Sure. So, we do provide connectivity to Netflix there. I think launches in English-speaking countries, particularly in Northern Europe have gone better than some of the other Southern European and non-English speaking countries. We did comment earlier and have had and publicly commented on the blocking issues that we have with FT, DT and Telefónica. Other than that, our connectivity in Europe is actually excellent and we provide great connectivity to Netflix and other content companies. But they are growing. I don't really want to comment on their specific growth rates in any given market.

Okay. Thanks, Dave.

Thanks.

Our next question comes from Georgios Kyriakopoulos with SunTrust.

Hey. Thank you, guys. A couple of things. First of all, going back to net neutrality, assume that the vote is in your favorite tomorrow, when do you think that the lost revenue from content providers will return to Cogent, given that some of your customers have already signed bilateral agreements with ISPs and they will wait for the contracts to expire before entering into new agreements with you? And my second question is about traffic growth. If I look at the traffic growth for your network, it has declined in the last few quarters. You said it was up 37% this quarter. But can you help us understand the level of traffic growth assuming similar price trends that you need in order to maintain your topline growth target of 10% to 20% in 2015? Thank you.

Yes. Sure, Georgios. So first of all, with net neutrality, it impacts our NetCentric customers. Many of those companies that have entered into bilateral peering agreements where they are buying peering from ISPs are paying more for those, we will -- one, they are looking to invalidate those agreements or looking for the commission to help them do that. Two, those contract terms are relatively short. Three, most importantly, traffic grows and they are not committed to the growth in traffic, so we will get that growth. It’s real simple the bids are going to go to the highest quality, lowest cost network. We will win that business in a competitive dynamic. Now with regard to traffic growth, our growth actually accelerated on a sequential basis from 6% to 12%. The 37% is below our long-term trendline of 54% year-over-year growth, but is still a well within the range and still substantially faster than the Internet. So again on the Corporate side traffic growth really has no direct impact as Corporate traffic only represents 20% of the traffic on our network. On the NetCentric side, it is a combination of volume growth as well as that 23% per year price decline. For us to be at the midpoint of our guidance, we need both Corporate business growing, which has been demonstrated and is doing quite well and NetCentric business to grow as well above 10%. And we've done that historically and we can do that with 23% price declines and traffic volumes in the current range that they’re in. So we feel very encouraged. I mean, traffic growth on our network continues to hit record levels. And if we’re not constrained with that roughly 4.6% of exiting revenues and about 10% of exiting traffic going to networks where it can't get there, we would see faster growth.

Great. Thank you.

Our next question comes from Michael Funk with Bank of America.

Yeah. Thank you for hanging around taking all the questions. Just one really quick one. Dave, I am trying to I guess think about or get my head around expectations for corporate on-net revenue growth. I know you have commented on what's happened this quarter and this year. But if you look forward and you think about the total addressable market buildings that you attach to sales people that are available, what has to happen in your mind to gross add churn and pricing to I guess maintain and improve that level of revenue growth. Kind of given very simple math the larger your base gets, the more your gross ads have to increase just to offset a natural rate of turn. I would love to hear your thoughts there.

Yes. Sure, Michael. So first of all, we have seen the long-term average at 3.4% sequentially. We did 3.7 this most recent quarter. And over the past year and a half, you’ve seen a consistent improvement in that growth rate and that should continue because of the work that I think, Ernie and his team have been doing in terms of managing and training the sales force better. Secondly, we only have 24% of the potential customers and our existing on-net footprint and we do still add albeit at a more moderate pace additional buildings. But more importantly, as those remaining 76% of the opportunities in the building want applications that need to be more reliable with higher throughput, they become incented to buy from Cogent. Our churn rates are very low and remain low. We’re getting the net growth in our on-net business due to better gross adds and that's going to continue because the customers actually need more bandwidth and we’re not so presumptuous as to think we’ll get 100% penetration. But we have a long way to go with increasing penetration from the 24% we’re at today to a much higher level based on the differential in our value proposition of a ring protected fully fiber, fully diverse network with 100 meg symmetric than any of our competitors. So I think we can easily see better sales force productivity and better sequential growth rate in that corporate business for the foreseeable future. I mean, listen some point you reach saturation without deploying more capital but we’re very far from that point.

And one more quick follow-up, Dave, and so the expectation for improving sales productivity, I understand the average age of the sales force increasing? But just kind of very simply into the marginal product of labor, you’d expect that productivity actually come down overtime, right, of you’re growing more salespeople at the same addressable market. Are you offsetting that just to different sales processes? Is it right that pivotal customers are recognizing the value you’re offering that much more stayed than where a year ago? I am just kind of think about this the right way to include that higher productivity number?

No. You’re absolutely asked a good question. And remember, that productivity numbers substantially above a 10-year trend line and it's getting better. And the reason is two-fold. One, we can improve productivity by better management, better training, better management. That’s partially happening and that’s under our control and there’s more that we can do and are doing. But the second thing, we've got going for us is a natural demand uplift. The customer that previously was content with two T1 bonded in a 3 meg solution, now is running a SaaS solution that mean 10 or 12 megabits or maybe 50 megabits and our solution becomes compelling. So as more and more of businesses move more and more of their applications into remote computing environments, they are just more and more demand for connectivity. And it's really that demand uplift that is helping us. I wish I could give it also the sales force. That’s part of it but a lot of it just coming from market forces. People just can't live with single threaded copper T1-based services anymore and for a [DIA] [ph] fiber-based service, no one delivers a better value proposition in our on-net buildings and us and we’re gaining market share for those reasons.

Okay. Thank you, Dave.

Thanks.

And I’m not showing any further questions at this time. I’d like to turn the conference back over to our host.

Well, thanks. I promise to keep it short and its still ran hour and 45 better than two. But again, I want to answer all the questions. Thanks, everyone for the support and we’ll be talking soon. Take care. Bye-bye.