Cogent Communications Holdings, Inc. — Q3 2019 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2019. Unaudited results; comparisons are with the corresponding 2018 periods. Cogent provides Internet access, private networking and data-center colocation services.
Financial results and key metrics
| Metric | Q3 2019 | Q3 2018 | Change |
|---|---|---|---|
| Service revenue | $136.9 million | $130.1 million | +5.2% |
| Operating income | $25.8 million | $22.3 million | +15.9% |
| Operating margin | 18.8% | 17.1% | +1.7 percentage points |
| Net income | $13.7 million | $8.2 million | +66.5% |
| Diluted EPS | $0.30 | $0.18 | — |
| Dividends declared per share | $0.62 | $0.54 | — |
For the nine months, revenue was $405.9 million (+4.6%), operating income $72.2 million (+12.4%), net income $30.1 million (+39.4%), and diluted EPS $0.65 versus $0.47. Operating margin was 17.8%, compared with 16.6%.
Q3 revenue growth was led by corporate customers: corporate revenue rose 10.4% to $94.4 million, while net-centric revenue fell 4.7% to $42.5 million. On-net and off-net revenue grew 6.0% and 3.4%, respectively. Customer connections increased 9.6% on-net and 7.5% off-net, but ARPU declined 3.8% and 4.1%, respectively. Average price per megabit fell 22.2% in Q3 and 24.9% year to date.
- Cash flow: Nine-month operating cash flow was $102.7 million; property and equipment purchases were $37.1 million, implying approximately $65.7 million of operating cash flow less capital expenditures. Dividends paid were $82.9 million.
- Liquidity: Cash and cash equivalents were $396.3 million at September 30, up from $276.1 million at year-end 2018. Current assets were $474.4 million and current liabilities $86.2 million.
- Debt: Total indebtedness at par was $962.5 million, including $168.1 million of finance lease obligations; cash was $396.3 million. Debt includes $445.0 million of 2022 secured notes, $189.2 million of 2021 unsecured notes and €135.0 million of 2024 unsecured notes.
- Capital and balance sheet: Total liabilities were $1.123 billion against assets of $932.3 million; stockholders’ deficit was $190.5 million.
Material changes and notable items
- In June 2019, Cogent issued €135.0 million of 4.375% senior unsecured notes due 2024, receiving approximately $152.1 million net proceeds. Proceeds were designated for general corporate purposes and/or potential share repurchases or dividends.
- Q3 interest expense increased 19.0%, partly due to the 2024 notes, prior secured-note issuance and higher finance lease obligations. Interest income and other, net included a $6.1 million unrealized foreign-exchange gain on the euro notes; the nine-month gain was $6.3 million. This non-cash gain contributed to higher reported net income.
- Adoption of lease accounting on January 1, 2019 added $97.3 million of right-of-use assets and operating lease liabilities. At September 30, operating lease liabilities were $95.6 million and finance lease obligations were $168.1 million.
- SG&A rose 7.7% in Q3 and 9.7% year to date, reflecting higher staffing and sales-expansion costs. Sales headcount rose to 667 from 583 a year earlier; total headcount rose to 1,036 from 938.
Outlook, risks and contingencies
Management said cash on hand and operating cash flow should be adequate for working capital, capital expenditures, debt service and dividends over the next 12 months if the business plan is executed. The company anticipated adding a similar number of on-net buildings for the next several years. It expects continued declines in average price per megabit, with corporate revenue representing a greater share and net-centric revenue growing more slowly. No specific earnings or revenue guidance was provided.
Key risks include pricing pressure and competition, whether Internet traffic growth offsets lower per-unit prices, foreign-exchange movements, customer retention, reliance on third-party fiber and equipment, network disruption, lease renewals, regulation and ability to service or refinance debt. The company’s consolidated leverage ratio was above 4.25 at quarter-end; indenture restrictions limit certain dividends and repurchases. The filing reported $139.2 million permitted for investment payments, including dividends and stock purchases, subject to the indentures.
Contingencies include up to $3.0 million of potential losses above accruals related to leased-circuit obligations, and a Spanish arbitration in which a former fiber provider seeks approximately $9 million; that amount had been accrued in 2015 and Cogent is contesting the claim. Management said other ordinary-course legal matters were not expected to materially affect financial condition or results, while noting outcomes are uncertain.
After quarter-end, the board approved a $0.64-per-share quarterly dividend, estimated at $29.1 million, payable December 9, 2019. The buyback program had $34.9 million remaining through December 31, 2020; no shares were repurchased in the quarter. Management cautioned that dividends and repurchases remain discretionary and subject to cash needs and debt restrictions.
Important facts for investors to verify
- Whether customer and revenue growth can continue to offset falling ARPU and per-megabit pricing, particularly in net-centric services.
- How much reported earnings growth reflects operating performance versus the unrealized foreign-exchange gain on euro-denominated debt.
- Debt, lease and refinancing obligations, including the impact of the euro notes and covenant limits on future dividends and buybacks.
- Cash generation relative to capital spending and shareholder distributions, and whether management’s 12-month liquidity assessment remains valid.
- Developments in the leased-circuit exposure and Spanish arbitration, as well as the effects of ongoing network expansion and foreign-exchange changes.