Dave Schaeffer, CEO

Dave Schaeffer, CEO
SEC Safe Harbor Disclosure
Statements made in the course of this presentation that state the Company’s or
management’s intentions, hopes, beliefs, expectations or predictions of the future are
forward-looking statements. It is important to note that the Company’s actual results could
differ materially from those projected in such forward-looking statements. Additional
information concerning factors that could cause actual results to differ materially from
those in the forward-looking statements is contained from time to time in the Company’s
SEC filings, including but not limited to the Company’s report on Form 10-Q dated
November 9, 2006. Copies of these filings may be obtained by contacting the Company or
the SEC. This presentation also includes non-GAAP financial measures. A reconciliation
of those measures to the most comparable measures calculated in accordance with GAAP
is available at the Investor Relations section of the Company’s website, cogentco.com.
EBITDA represents net income before income taxes, net interest expense, depreciation
and amortization, and equity based compensation expenses. EBITDA, as adjusted,
represents EBITDA less gains on debt and capital lease restructurings and restructuring
2
charges.
Company Overview
Cogent is a Leading Global Provider of Dedicated Internet Access
• Cogent’s network carries ~ 15% of all Internet traffic and serves over
90 markets in North America and Europe
• Currently serves over 12,300 customer connections
• Our core product (representing over 50% of sales) is on-net
dedicated Internet access (e.g., 100 Mbps for $1,000 per month)
• Very high operating leverage with substantial network capacity
• We sell a commodity product and win business based on PRICE
3
Industry Focus
Time Warner
Telecom
Facilities
AT&T
Verizon
Level 3
Equinix
Qwest
XO
Global Crossing
SAVVIS
Resale
Cogent
Colt
USLEC/PAETECH
Akamai
Internap
Cbeyond
IP Transit as % of Revenue
4
4
IP and Telecom
Telecom Market Traffic, 2005
Telecom Market Revenue, 2005
Voice
IP
99.9%
0.1%
Voice
16%
84%
Backbone
2%
98%
Telecom Market Revenue Growth**
Telecom Market Traffic Growth*
100%
Access
Broadband
IP
100%
90%
80%
80%
76%
70%
57%
60%
60%
40%
50%
40%
20%
30%
20%
10%
0%
9%
Voice
IP
*Global data. Telegeography / Primetica. Global Internet Geography 2006
0%
IP
Voice -3%
-20%
5
**Global
data. Insight Research Corp and TIA 2006 Telecommunications Market
Review & Forecast
Corporate Customers
8,100+ Customer Connections
• Leading provider to professional
services firms
– Law firms
– Financial services
– Consulting services
– Corporations
Corporate
Customer
Since Financial
Accenture
Blue Cross
Boeing Corp
BP Energy Co
Business Wire
Canon
C-SPAN
CB Richard Ellis
Docs. w/o Borders
Edelman Pub. Rel.
Estee Lauder
Exxon Mobil
GA Pacific Corp
Hearst Magazines
IBM Canada
MarthaStewart
McKinsey & Co
Mitsubishi Int
Nordstrom
Northrop Grumman
Radio Free Europe
SAP
Toshiba America
Xerox
‘05
’04
’03
’01
’04
’03
’02
’02
‘05
’02
‘05
’02
’03
’01
’04
‘06
’03
’04
’03
’03
‘03
‘04
’04
’04
Customer
Since
ABN Amro
Adams Harness & Hill
American Express
Bain & Company
Bank of America
BNP
Bear Stearns
Boston Stock Exch
Chicago Brd of Trade
Chicago Merc Exch
Chicago Stock Exch
Deloitte & Touche LLP
Depository Trust
Equifax
Goldman Sachs
GMAC Comm. Mort.
Hicks Muse
Jefferies & Company
KKR
Merrill Lynch
Prudential Securities
Putnam Lovell NBF
Thoma Cressey Equity
UBS
‘01
’03
’03
’04
’01
‘05
’02
’03
‘06
‘05
’02
’02
’02
’03
’03
’02
’02
’02
‘04
’03
’02
’03
’04
’04
Law Firms
Customer
Since
Alston & Bird
Arnold & Porter
Arent Fox Kintner
Baker & McKenzie
Baker Botts
Bingham McCutchen
Cravath
Davis Polk
Debevoise/Plimpton
Dewey Ballantine
Foley & Lardner
Fried Frank
Heller Ehrman
Holland & Knight
King & Spalding
Kirkland & Ellis
Morrison & Forester
Pillsbury Winthrop
Ropes & Gray
Simpson Thacher
Steptoe & Johnson
Swidler Berlin
Weil Gotshal
White & Case
‘04
’04
’02
’02
’02
‘05
‘04
‘04
‘06
’03
‘05
’03
’03
’03
‘03
’02
’04
’01
‘05
‘02
’03
’01
’04
’02
6
NetCentric Customers
4,200+ Customer Connections
• Leading provider to bandwidthintensive organizations
– ISPs
– Universities
– Online gamers
– ASPs
Customer
Universities
Since
American Univ.
‘03
Boston College
’03
Carnegie Mellon
’01
Cornell University ’02
DePaul University ’04
Drexel
‘06
George Wash.
’03
Georgetown Univ. ’02
Georgia Tech
’03
Harvard Univ.
’02
MIT
’03
Pace Univ.
’02
Ryerson Univ.
’04
Suffolk Univ.
’03
Stanford Univ.
’02
Tufts University
’01
UC-Berkeley
’04
Univ. of Chicago
‘02
Univ. of Delaware ’04
Univ. of Illinois
’05
University of Iowa ’04
Univ. of Penn
’02
Univ. of S. Florida ’04
Univ. of Toronto
’03
Villanova
‘05
Customer
Service Providers Since
AboveNet
‘04
Bell Canada
’04
BT Americas
’04
Colt Telecom
‘05
Datagram
’04
FiberNet Telecom
’05
Foliofn
‘03
Impsat
‘03
Internet Radio
‘04
Deltacom
’02
Hughes Ntwk Sys
‘04
JazzTel
‘05
Jolt
’04
Keynote Systems
’03
Linx Telecom
‘06
Looking Glass Ntwks
’03
Numéricable
’02
Novis
‘05
ONO
’02
Primus
’03
Radio Free Virgin
’03
Telkom South Africa
’04
Telefonica
’05
Tsystems
’06
Wanadoo/France Tel
‘06
Application
Customer
Businesses
Since
Apple Computer
‘04
BrightCove
‘06
E! Entertainment
‘06
Ebay / Shopping.com ‘06
Gannett
‘06
Google
‘03
Media Defender
‘03
Newsfeeds.com
‘05
NFL
‘02
Ofoto
‘05
Pando
‘06
PhotoBucket
‘05
Rapidtec.de
‘06
Schlund & Partners
‘06
ShutterFly
‘05
Skype
‘06
SlingMedia
‘06
Socially Blog
‘06
TagWorld
‘06
Unipoint
‘02
Viacom
‘06
Voex
‘06
YouSendIt.com
‘04
YouTube
‘06
7
Why Customers Choose Cogent
Corporate Market (Local Distribution)
Cogent competes primarily with incumbents (ILECs)
and resellers offering T1 or T3 connectivity
– AT&T
– Sprint
– Verizon / MCI
– Qwest
Pricing Dynamics
Price per connection is relatively
equivalent
– Cogent’s quality of connection is
substantially superior
– Cogent offers 65 : 1 throughput
advantage
– Cogent offers true network
independence from telco facilities
NetCentric Market (Internet Core Backbone)
Cogent competes primarily with other backbone suppliers
– Level 3
– FT (in France)
– Global Crossing
– DTAG (in Germany)
– Verizon / MCI
– BT (in U.K.)
– Telefonica (in Spain)
Speed and quality of connection is
equivalent
– Cogent’s price is 20% of market
average
8
Simple, Focused Product Line
ON-NET SERVICES
Bandwidth (Mbps)
Fiber 500 (Ethernet)
0.5
2 meg (Ethernet)
2.0
Fast Ethernet
100
Gigabit Ethernet
10 Gigabit Ethernet
Colocation with Internet Access
% of 4Q06 Revenue
1,000
10,000
2 to 1,000
74%
OFF-NET SERVICES
T1 or E1
1.5 or 2.0
T3 or E3
45 or 34
Ethernet
10, 100, or 1,000
% of 4Q06 Revenue
21%
OTHER SERVICES
Managed Modem & Non-Core (e.g., Web Hosting, Email, Voice - Canada)
% of 4Q06 Revenue
TOTAL
N/A
5%
9
100%
9
Proven Integration Execution
Cogent purchased $14 billion of original investment for ~ $60 million
Date
($ in millions)
Original
Investment
PP&E
Network
Peering
Customers
9
9
NetRail
Sept. ’01
$180
$35
9
Allied Riser
Feb. ’02
$590
$335
9
PSINet**
Apr. ’02
$5,180
$2,175
9
Fiber Network Solutions, Inc.
Feb. ’03
$30
$5
Firstmark
Jan. ’04
$1,100
$560
9
Carrier 1**
Mar. ‘04
$1,035
$535
9
UFO Group
Aug. ’04
$25
$5
9
Global Access
Sept. ’04
$10
$5
9
Aleron Broadband
Oct. ’04
$200
$5
9
Verio**
Dec. ‘04
$5,700
$390
9
TOTAL
$14,050
9
9
Building
Access
9
9
9
9
9
$4,050
Now: One Network, One Set of Systems, One Global Team
10
*Does not include Applied Theory, FiberCity Networks, and OnSite Access acquisitions.
**Purchased the majority of assets of these companies.
Cogent’s Competitive Advantage
Cogent is the lowest cost provider
• Low cost, efficient network approximately 15% utilized
– $14 billion of invested capital ($4 billion of PP&E) purchased for
$60 million
– More reliable and less costly than IP networks overlaid on
traditional telephone networks
• IP only product set
– Simple product set with low cost of operations and provisioning
• High sales productivity
– Lower selling cost due to aggressive pricing model
– Gaining market share as an efficient operator
11
Focused Sales Force
Sales is key to success going forward
• ~ 50% success rate once a meeting is
held with a customer
Te
l
ai
• Net 5 additional sales employees per
month
Toronto
8
SALES FUNNEL
UK/
BENELUX
4
400 Contacts
Germany
6
US
107
France
4
Spain
3
132 quota based sales employees
All headcount data as of December 31st, 2006
g
tin
ke
ar
M
ct
re
m
le
Di
s
le
Sa
ct e
re rc
Di Fo
• 35% of Cogent’s 372 employees are in
quota-bearing sales
Cogent Communications Proprietary and Confidential
24 Appts/Calls
12 Proposals
5.1 Orders
$690,000
Gross Incremental Monthly
Recurring Revenue
12
Broad, Deep, Scaleable Network
•
Interconnected with 2,033 different networks, including 384 Peer ASs
•
1,107 On-Net buildings
- 80% multi-tenant office buildings (858)
North America IP Capacity: 80-160 Gbps
- 20% carrier neutral data centers (249)
- Agreements with 250+ building owners (REITs)
•
208 metro networks; 9,828 metro fiber miles
•
23,045 intercity fiber route miles
•
28 data centers with 252,351 square feet
Europe IP Capacity: 40-100 Gbps
Transatlantic IP Capacity: 12 x 10 Gbps Paths
13
Cogent Communications Proprietary and Confidential
Network Architecture optimized for
IP traffic and services
Enables low cost, high quality, scalability
Corporate (On-Net)
On-Net Data Center
MultiTenant
Building
2La 5 G
ter B
al
Hub
Backbone
NetCentric (On-Net)
Corporate (Off-Net)
ED
AS
E
L
Off-Net
Customer
E
LIN
1
T
WDM Metro Ring
Carrier
Neutral
Colocation
Facility
14
Addressable Market
Corporate Market (Local Distribution)
NetCentric Market (Internet Core Backbone)
MARKET SIZE3
MARKET SIZE
– U.S. corporate data services
spending $37 billion1
– World’s Internet Traffic
1,000 Gbps (average)
– Cogent On-Net addressable market
~40,000 SMB … 8% penetration
– 50%+ of world’s Internet
traffic passes thru buildings
directly connected to
Cogent
– Cogent Off-Net addressable market
~250,000 SMB … 1% penetration
COGENT PENETRATION
COGENT PENETRATION
Cogent
Total2
% of
Total
CBD Buildings
858
16,841
5%
CBD Sq. Footage (millions)
479
1,670
>25%
Total U.S. Sq. Footage
(millions)
479
6,214
7%
CBD = Central Business District..
1Instat, Pressure Mounting: Wireline Transport Services 2005 .
2Costar Office Report YE 2005 and CB Richard Ellis
3Telegeography/ Primetica and company analysis.
Carrier Neutral Data Centers
Data Center Customers
Total Traffic Gbps (average)
Cogent
Total
% of
Total
249
390
>50%
4,200
78,000
4%
125
1,000
12%
15
On-Net Building Expansion
On-Net Buildings
1,150
1,200
1,107
989
1,000
813
72
800
600
511
63
400
200
182
741
807
2003A
2004A
1,040
221
249
255
819
858
905
2005A
2006A
2007E
448
0
2002A
Carrier Neutral Colocation Facilities
Multi-tenant Offices
16
Business Breakout
Geography
Europe
On Net / Off Net
Market Segment
NetCentric
North America
On Net
Corporate
Off Net
Non Core
5%
21%
21%
45%
4Q 2006
Revenue
55%
$40.5 M
74%
79%
5%
32%
6%
4Q 2006
Traffic
326 Gbps
(Average)
68%
95%
18%
94%
7%
66%
4Q 2006
Customer
Connections
28%
12,315
82%
34%
65%
17
Cogent Communications Proprietary and Confidential
Significant Operating Margins
Very high operating leverage is driving EBITDA and FCF growth
• Majority of overall cost structure is fixed
• Significant On-Net operating leverage
$1.00
Revenue
Sales
Bad Debt
Commission Expense
$0.02
$0.13
Q4 ’06 Off-Net ARPU = $815
$0.95
$1.00
$0.02
$0.02
0.80
0.40
0.20
0.00
$1.00
$0.96
0.60
$0.50
Local
Loops
$0.02
$0.50
0.80
Operating Leverage
(EBITDA)
0.60
Sales
Bad Debt
Revenue Commission Expense
$1.00
$0.43
0.40
0.20
0.00
Cogent Communications Proprietary and Confidential
$0.46
Operating Leverage
(EBITDA)
Q4 ’06 On-Net ARPU = $1,360
18
Financial Highlights
4Q 2006 Results
• On-Net revenue expected to grow to
75-80% of Total revenue by YE 2007
($ in millions)
• Off-Net revenue (~90% of which was
acquired revenue) is expected to
decline, but at a decelerating rate
• Focus on On-Net revenue is driving
gross margin and EBITDA margin
expansion
Q/Q
% Change
3Q 2006
4Q 2006
On-Net Revenue
$27.5
$30.0
9.1%
Off-Net Revenue
$8.3
$8.4
1.5%
Non-Core Revenue
$2.2
$2.1
(3.5)%
Total Revenue
$38.0
$40.5
6.7%
$18.6
$20.2
8.5%
49.0%
49.8%
1.6%
$6.9
$8.0
16.2%
18.1%
19.7%
8.8%
Gross Profit
Gross Margin
EBITDA
EBITDA Margin
19
Cogent Communications Proprietary and Confidential
Revenue and EBITDA
Revenue Mix
EBITDA Growth
($ in millions)
($ in millions)
$45.0
$9.0
$40.0
$35.0
$34.4
$36.2
2.4
2.6
$30.0
$38.0
2.2
$40.5
2.1
$8.0
8.4
$7.0
$8.0
$6.9
8.3
8.6
$6.0
9.1
$25.0
$5.0
$20.0
$4.5
$4.0
$3.3
$15.0
$10.0
22.7
25.1
27.5
30.0
$3.0
$2.0
$5.0
$1.0
$0.0
Q1 06A
Q2 06A
On-Net Revenue
Q3 06A
Off-Net
Q4 06 A
$0.0
Q1 06A
Non Core
Cogent Communications Proprietary and Confidential
Q2 06A
Q3 06A
EBITDA
Q4 06A
20
Capital Expenditures
Cogent’s network build-out is substantially complete
CapEx Spending
$ in millions
– We intend to spend approximately
% of revenue
$118
$5 million per quarter on capex
$75
30
45%
40%
– ~ 50% of capex is spent on network
25
35%
20
and footprint expansions
30%
25%
15
20%
15%
10
10%
– Substantial network capacity in
5
5%
0%
0
2001 2002 2003
1Q
2004
1Q
2005
CapEx
place at high traffic locations
1Q
2006
% of Revenue
21
Cogent Communications Proprietary and Confidential
Capitalization
Less than $55 million of net debt (including capital leases)
Cogent is positioned for growth
As of
9/30/2006
As of
12/31/2006
Cash & Cash Equivalents
$49
$43
Debt & Capital Leases
Convertible Notes
Capital Lease Obligations
Total Debt and Capital Leases
$8
$89
$97
$9
$88
$97
Net Debt
$48
$54
$224
$321
$216
$313
($ in millions)
Shareholder Equity
Total Capitalization
22
Investment Highlights
•
Leading global Internet service provider
•
Fundamentals provide for continued, consistent growth and
profitability
•
Independent, low-cost international network
•
Network footprint targeted at high traffic locations
•
Very strong balance sheet
•
True Free Cash Flow Positive in Q1 2007
•
Experienced management team
•
Substantial network capacity; very high operating leverage
23
Cogent Communications
Group, Inc.
24