Cogent Communications Holdings, Inc. — Q2 2021 Form 10-Q
Reporting period: Three and six months ended June 30, 2021; unaudited. Amounts below are in U.S. dollars. The company provides internet access, private network and data-center colocation services in 48 countries.
Financial performance
| Metric | Q2 2021 | Q2 2020 | Six months 2021 | Six months 2020 |
|---|---|---|---|---|
| Service revenue | $147.9m | $141.0m | $294.7m | $281.9m |
| Operating income | $28.2m | $27.6m | $54.5m | $53.4m |
| Operating margin | 19.1% | 19.6% | 18.5% | 19.0% |
| Net income (loss) | $(2.5)m | $8.6m | $16.4m | $17.8m |
| Diluted earnings (loss) per share | $(0.05) | $0.18 | $0.35 | $0.38 |
| Operating cash flow | Not provided separately | Not provided separately | $86.9m | $69.8m |
| Capital expenditures | Not provided separately | Not provided separately | $32.7m | $26.8m |
Revenue grew 4.9% in Q2 and 4.5% year to date. On-net revenue rose 7.0% in Q2; off-net revenue declined 0.9%. Net-centric customer revenue increased 30.5% in Q2, while corporate customer revenue decreased 6.7%. On-net connections grew 4.2% year over year and off-net connections 4.6%. Average price per megabit fell 24.8% in Q2, reflecting continued pricing pressure.
For the six months, operating cash flow less property and equipment purchases was approximately $54.2m, compared with $43.0m in 2020. Cash and cash equivalents were $374.0m at June 30, versus $371.3m at year-end 2020. Total assets were $1.01bn; total liabilities were $1.35bn and stockholders’ deficit was $336.1m.
Debt, liquidity and capital allocation
- Total indebtedness at par was reported as $1.1bn, including $224.6m of finance lease obligations. Outstanding notes included $500m of 3.50% senior secured notes due 2026 and €350m of 4.375% senior unsecured notes due 2024, valued at $415.8m in the balance sheet.
- In May, the company issued the 2026 notes for net proceeds of $496.9m and used proceeds to satisfy and discharge its remaining 2022 notes. Debt redemptions generated a $14.7m loss for the six months, including $10.8m in Q2. Q2 also included a $5.3m unrealized foreign-exchange loss on the Euro notes; the six-month period recorded a $13.6m unrealized gain.
- Six-month financing cash outflows included $73.1m of dividends, $459.3m to redeem the 2022 notes, and $11.9m of finance-lease principal payments. The company paid no share repurchases during the period; $30.4m remained under its buyback authorization through December 31, 2021.
- Management said cash on hand and operating cash generation should cover working capital, capital spending, debt service and dividends for the next 12 months if the business plan is achieved. It also estimated approximately $330m would be needed for expected quarterly dividends over the next two years, based on historical dividend growth.
Changes, outlook and risks
- Operating income increased modestly, but Q2 shifted to a net loss, primarily reflecting debt-extinguishment costs and Euro-note foreign-exchange losses. Six-month net income also declined year over year despite higher revenue and operating income.
- Management attributed revenue growth to network expansion, more connected buildings and customer growth. Foreign exchange positively affected revenue by $3.0m in Q2 and $5.6m for the six-month period.
- Corporate sales remained affected by customer caution, fewer office configurations and upgrades, and weaker leasing activity in served buildings amid COVID-19. Management warned that customer turnover, fewer upgrades and fewer new tenant opportunities could weigh on revenue, cash flow and profitability.
- Net-centric growth was partly offset by sustained price-per-megabit declines; management expects declines at similar rates. Network operations and SG&A expenses rose, while depreciation and amortization increased 11.1% in Q2 and 11.8% year to date.
- The company does not hedge its Euro-denominated debt and warns that exchange-rate movements could increase its U.S.-dollar obligations. It also cited refinancing availability, competitive pricing, customer concentration, network disruption, third-party fiber dependence, cybersecurity, regulation and pandemic developments as risks.
- Management reported no material change in risk factors from its 2020 Form 10-K, effective disclosure controls, and no material change in internal control over financial reporting. It said COVID-19 had not materially changed its cost of capital or ability to service debt to date, but the Delta variant’s effects were uncertain.
Contingencies and other notable items
The company disclosed a possible loss of up to $3.5m above amounts accrued for certain leased-circuit positions. A Spanish arbitration involves a former fiber provider’s approximately $9m termination claim, accrued in 2015; the company contests the obligation and has counterclaimed. Management did not expect other ordinary-course claims to materially affect results, while noting outcomes remain uncertain. On August 4, 2021, the board declared a $0.805 quarterly dividend per share, estimated at $37.2m and payable September 3, 2021; future dividends remain discretionary and subject to debt covenant and other restrictions.
Important facts for investors to verify
- Whether on-net growth can offset weakness in corporate customers and continued net-centric price-per-megabit declines.
- Cash generation and dividend sustainability relative to capital spending, lease payments, debt service and the stated two-year dividend funding estimate.
- Euro exchange-rate exposure and the company’s capacity to refinance or repay the 2024 notes on acceptable terms.
- Debt covenant capacity and the restrictions applicable to dividends and share repurchases.
- Developments in the Spanish arbitration, leased-circuit exposure, and pandemic-related customer demand and operating conditions.