COGENT COMMUNICATIONS HOLDINGS, INC. quarterly report, Q1 FY2020

Business context and reporting period

Cogent Communications Holdings, Inc. (NASDAQ: CCOI) filed this unaudited Form 10-Q for the quarter ended March 31, 2020. It provides high-speed Internet access, private network services and data-center colocation, primarily to businesses and bandwidth-intensive customers across multiple regions.

Financial performance and liquidity

Amounts below are in millions of U.S. dollars except per-share data and where noted.

Operating margin is calculated as operating income divided by service revenue. Network operations expense rose 3.3% to $55.9 million; SG&A increased 10.6% to $39.7 million, including higher equity-based compensation. Depreciation and amortization declined 3.7% to $19.5 million. Interest expense rose 13.1% to $15.2 million, mainly reflecting the 2024 euro notes and higher finance lease obligations.

On-net revenue increased 6.5% to $103.5 million; off-net revenue rose 1.3% to $37.3 million. Corporate-customer revenue grew 7.5% to $97.0 million, while net-centric revenue was flat at $44.0 million. Customer connections increased 5.8% on-net and 5.2% off-net. Average price per megabit declined 21.8%; on-net ARPU fell 0.6% and off-net ARPU fell 4.2%.

Cash and cash equivalents were $375.1 million at March 31, down from $399.4 million at year-end 2019; cash declined $24.3 million during the quarter. Total indebtedness at par was $962.9 million, including $167.9 million of finance lease obligations; net of cash, this is approximately $587.8 million. Reported total liabilities were $1,135.9 million, exceeding total assets of $913.6 million; stockholders’ deficit was $222.2 million. Current assets were $456.6 million and current liabilities $90.1 million.

Material changes and unusual items

• Revenue growth was led by corporate customers and on-net services; pricing pressure on net-centric services offset connection growth.
• Q1 2020 included a $2.9 million unrealized foreign-exchange gain on the euro-denominated 2024 notes. Foreign exchange reduced reported revenue by about $0.7 million year over year.
• Foreign-currency translation reduced comprehensive income by $3.5 million, versus a $1.8 million reduction in Q1 2019.
• Dividends paid were $30.6 million, up from $26.6 million. The company declared $0.66 per share for the quarter and, on May 6, approved a $0.68-per-share dividend expected to total $31.1 million.
• No share repurchases occurred in the quarter; $34.9 million remained under the buyback authorization through December 31, 2020.
• Adoption of the expected-credit-loss standard had no material financial-statement impact. The allowance for credit losses increased to $2.0 million from $1.8 million at year-end; Q1 net bad-debt expense was $1.1 million.

Outlook, risks and contingencies

Management said cash on hand and operating cash generation should cover working capital, capital expenditures, debt service, dividends and other needs for the next 12 months, provided the company executes its business plan. It anticipated adding a similar number of on-net buildings over the next several years and expected average price per megabit to continue declining at a similar rate. No specific revenue or earnings guidance was provided.

The filing identifies COVID-19 as a material risk, citing possible lower demand, customer losses or delayed payments, constrained sales activity, restricted access to sites for network work, workforce and cybersecurity issues, and supply-chain disruption. The company temporarily suspended disconnections for nonpayment related to the pandemic. Management also highlights competition and pricing, foreign exchange, reliance on Cisco equipment and third-party fiber, customer concentration, network disruptions, lease renewals, regulation, and debt-service capacity.

Debt indentures restrict additional borrowing and shareholder distributions. The company’s consolidated leverage ratio was above 4.25 at quarter-end; $80.5 million was permitted for investment payments, including dividends and stock purchases. Management noted that future dividends and repurchases remain subject to board discretion and debt restrictions. The company disclosed a possible loss of up to $3.2 million above the amount accrued for certain leased-circuit matters. A Spanish fiber-lease arbitration seeks approximately $9 million, accrued in 2015; the company contests the claim and has counterclaimed.

Most important facts for investors to verify

• Whether COVID-19 affected customer retention, collections, new sales, network access or equipment availability after quarter-end.
• Whether revenue growth can offset continuing per-megabit price declines, particularly in the net-centric customer base.
• Debt maturities, cash available at the parent company, lease-related commitments, and compliance with dividend and borrowing restrictions.
• Whether operating cash flow continues to cover capital spending, debt service and dividends while the company expands its network.
• Developments in the Spain arbitration and other leased-circuit claims, and any resulting change in accrued or potential losses.