Business context and reporting period
Cogent Communications Holdings, Inc. filed this unaudited Form 10-Q for the quarter and six months ended June 30, 2022. It provides Internet access, private network and data center colocation services in 51 countries, operating as one segment. All dollar figures below are in millions unless stated otherwise.
Financial performance and position
| Metric | Q2 2022 | Q2 2021 | Six months 2022 | Six months 2021 |
|---|---|---|---|---|
| Service revenue | $148.5 | $147.9 | $297.6 | $294.7 |
| Operating income | $29.6 | $28.2 | $58.3 | $54.5 |
| Net income (loss) | $11.2 | ($2.5) | $12.3 | $16.4 |
| Operating margin | 19.9% | 19.1% | 19.6% | 18.5% |
| Diluted EPS | $0.24 | ($0.05) | $0.26 | $0.35 |
- For the six months, operating cash flow was $83.8 versus $86.9; capital expenditures were $35.4 versus $32.7. Dividends paid were $83.2 versus $73.1. Cash, cash equivalents and restricted cash increased $21.2 to $349.8.
- At June 30, cash and cash equivalents were $312.1 and restricted cash was $37.8. Current assets were $437.5 and current liabilities $96.9. Stockholders’ deficit was $440.2.
- Total debt at par was approximately $1.2 billion, including $950 million of notes and $254.2 million of finance lease obligations. Notes outstanding: $500 million secured notes due 2026 at 3.50%, and $450 million unsecured notes due 2027 at 7.00%.
Material changes versus the prior comparable period
- Six-month revenue rose 1.0%; reported growth was reduced by foreign exchange ($5.4 million adverse) and lower gross-billed taxes and surcharges. Q2 revenue rose 0.4%, with foreign exchange a $3.4 million headwind.
- On-net revenue grew 1.6% in the first half as connections increased 4.0%; off-net revenue fell 1.0% despite 6.2% connection growth. Corporate revenue declined 6.1%, while net-centric revenue increased 12.6%.
- Average price per megabit declined 18.7% year over year; management expects similar declines to continue. On-net and off-net ARPU also fell.
- Six-month SG&A declined 3.4%, primarily reflecting lower salaries and benefits and lower bad-debt expense. Total headcount fell to 988 from 1,087; sales headcount fell to 619 from 710. Depreciation and amortization rose 3.9%.
- In June, the company issued $450 million of 7.00% 2027 notes and redeemed its €350 million 2024 notes. The redemption produced an $11.9 million extinguishment loss. Six-month interest expense declined 8.1%, but the new notes carry a higher coupon than the redeemed notes.
- Net income comparisons include significant financing and currency items: first-half 2022 included a $31.6 million foreign-exchange gain on the euro notes and a $28.8 million noncash swap valuation loss. Q2 also included a $23.5 million foreign-exchange gain and a $7.5 million swap loss.
Outlook, commentary and risks
- No specific revenue, earnings or cash-flow guidance is provided. Management said cash on hand and operating cash generation should meet working-capital, capital expenditure, debt-service and dividend needs for the next 12 months if the company executes its business plan.
- Management described slower corporate sales, customer turnover and fewer upgrades amid pandemic-related uncertainty and weakness in office occupancy and leasing. It also cited equipment and optical-fiber delivery delays. Net-centric growth is supported by customer and traffic growth but pressured by continuing price declines.
- The company’s swap effectively converts the fixed-rate obligation on the 2026 notes to a SOFR-based variable rate through February 2026. Its June 30 fair-value liability was $37.8 million; $37.8 million of collateral was restricted. Additional collateral may be required if the liability exceeds $48.5 million.
- Committed dark-fiber lease agreements could require $172.5 million of payments over up to 22 years as routes are accepted, generally expected within 24 months. The filing reports a reasonably possible loss of up to $3.7 million above accruals for leased-circuit positions, plus a disputed $0.6 million claim from a former capacity provider.
- Other cited risks include competition and pricing pressure, foreign-exchange movements, customer concentration and retention, network disruption and reliance on third-party fiber and Cisco equipment, refinancing access, and the effects of COVID-19 and the war in Ukraine. The company said Ukraine-related revenue and assets were limited and did not expect a material overall impact.
- The board approved a $0.905-per-share quarterly dividend on August 4, estimated at $42.3 million, payable August 31. Management estimated approximately $354 million would be needed for expected dividends over the next two years based on historical dividend growth. Future dividends remain discretionary and subject to cash needs and debt covenants.
Important facts for investors to verify
- Whether customer and traffic growth can offset falling prices per megabit and weakness in corporate revenue.
- The cash-flow and refinancing implications of the 7.00% 2027 notes, finance leases, planned dividends and network investment.
- Potential cash collateral requirements and earnings volatility from the SOFR-linked swap.
- Timing and eventual payments under the $172.5 million dark-fiber commitments, and developments in the disclosed legal matters.
- Management’s next updates on sales-force retention, office-market conditions, equipment availability and the ability to sustain the dividend.