Cogent Communications Holdings, Inc. — 2019 Form 10-K
Reporting period: Fiscal year ended December 31, 2019; the filing also reports unaudited fourth-quarter results. Cogent provides business internet access, private network services, and data-center colocation across North America and international markets.
Financial performance
| Metric | 2019 | 2018 | Change |
|---|---|---|---|
| Service revenue | $546.2 million | $520.2 million | +5.0% |
| Operating income | $100.3 million | $86.6 million | +15.8% |
| Net income | $37.5 million | $28.7 million | +30.9% |
| Diluted earnings per share | $0.81 | $0.63 | +$0.18 |
| Cash from operations | $148.8 million | $133.9 million | +11.1% |
| Capital expenditures | $47.0 million | $49.9 million | -6.0% |
Operating margin was approximately 18.4% and net margin approximately 6.9%. Revenue growth was led by corporate customers: corporate revenue rose 10.6% to $373.7 million, while net-centric revenue fell 5.4% to $172.5 million. On-net revenue increased 5.9% and off-net revenue 2.7%. On-net connections grew 8.4% and off-net connections 6.3%, but average revenue per unit declined 3.8% and 5.0%, respectively. Average price per megabit fell 23.9% to $0.62.
Fourth quarter: Revenue was $140.3 million, operating income $28.0 million, and net income $7.5 million, compared with $132.0 million, $22.3 million, and $7.1 million, respectively, in fourth-quarter 2018.
Cash, debt, and liquidity
Cash and cash equivalents were $399.4 million at year-end, up from $276.1 million. Current assets were $475.7 million and current liabilities $89.7 million. Total assets were $932.1 million; stockholders’ deficit was $203.7 million. Operating cash flow less reported capital expenditures was approximately $101.9 million, before dividends, debt payments, and other financing needs. Dividends paid were $112.6 million in 2019.
Total indebtedness at par, excluding operating lease liabilities, was $967.9 million, including $169.8 million of finance lease obligations and $12.5 million under an installment payment agreement. Debt includes $189.2 million of 5.625% notes due April 2021, $445.0 million of 5.375% secured notes due March 2022, and €135.0 million of 4.375% notes due June 2024. Operating lease liabilities were $96.8 million following adoption of the new lease standard.
Changes, outlook, and risks
- Revenue growth improved operating income and net income, while SG&A rose 9.8%, largely reflecting higher staffing and sales costs. Interest expense increased 12.5%, partly due to new debt issued in 2018 and 2019.
- Management said cash on hand and operating cash flow should cover working capital, capital expenditures, debt service, dividends, and other needs for the next 12 months if the company executes its business plan. It expects per-megabit pricing to continue declining at similar rates; it did not provide specific revenue or earnings guidance.
- Management’s strategy is to add customers and buildings to its network, emphasizing higher-margin on-net services. It reported 2,801 on-net buildings and 54 company-operated data centers. The company said it had not completed an acquisition in over a decade.
- Debt indentures restrict dividends and other distributions. The company’s consolidated leverage ratio exceeded 4.25 at year-end; $110.3 million was permitted for investment payments, including dividends and stock repurchases. The board approved a $0.66-per-share first-quarter 2020 dividend, estimated at $30.1 million.
- Key risks include sustained price competition and falling prices, customer retention and growth, peering capacity disputes, reliance on third-party fiber owners and last-mile providers, and dependence on Cisco for network equipment. A major U.S. intercity fiber lease was due for renewal in 2020; Cogent had exercised its renewal right, but the fiber owner could choose to abandon the fiber.
- Other exposures include foreign-exchange movements, cyberattacks and network outages, regulatory or privacy-law changes, debt refinancing and maturity risk, and the ability to maintain dividends. A Spanish fiber-lease arbitration seeks approximately $9.0 million, already accrued; the company contests the claim. It also disclosed possible additional leased-circuit losses of up to $3.1 million above accrued amounts.
Investor verification priorities
- Track whether customer and revenue growth can offset declining ARPU and per-megabit pricing, particularly in the net-centric business.
- Review cash generation against dividends, capital spending, finance-lease commitments, and upcoming 2021 and 2022 debt maturities; assess refinancing capacity.
- Monitor renewal and continuity of key fiber routes, peering capacity, and dependence on third-party providers and Cisco equipment.
- Verify dividend capacity in light of negative stockholders’ equity, debt covenants, and the board’s stated discretion over future distributions.
- Review the Spanish arbitration and leased-circuit contingencies, as well as foreign-exchange exposure. The filing estimates that a 1% exchange-rate change would affect annual consolidated revenue by approximately $1.1 million.
Ernst & Young issued unqualified opinions on the financial statements and internal control over financial reporting. The auditor identified initial measurement of indefeasible-right-of-use fiber lease assets and liabilities as a critical audit matter involving management judgments about lease terms and discount rates.