Cogent Communications Holdings, Inc. — Q2 2016 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2016. Unaudited results. Cogent provides high-speed Internet access and IP communications services to business, carrier and bandwidth-intensive customers, primarily in North America and Europe.
Financial performance
Amounts below are in millions of dollars except per-share data, percentages and operating statistics.
| Metric | Q2 2016 | Q2 2015 | Six months 2016 | Six months 2015 |
|---|---|---|---|---|
| Service revenue | $110.0 | $98.8 | $218.2 | $196.0 |
| Operating income | $17.5 | $10.8 | $33.2 | $21.3 |
| Net income (loss) | $4.2 | $0.8 | $7.6 | $(0.7) |
| Net income (loss) per share | $0.09 | $0.02 | $0.17 | $(0.02) |
| Operating cash flow | Not stated quarterly | Not stated quarterly | $51.3 | $38.4 |
| Capital expenditures | Not stated quarterly | Not stated quarterly | $29.3 | $23.8 |
- Q2 revenue increased 11.3% year over year; on-net revenue rose 10.5% and off-net revenue 13.7%. Six-month revenue also increased 11.3%.
- Q2 operating margin was approximately 15.9%, compared with 10.9% a year earlier; six-month operating margin was approximately 15.2%, compared with 10.9%. Results include equipment-exchange gains of $4.4 million in Q2 and $6.4 million in the first half of 2016.
- Q2 interest expense was $10.2 million, up 5.7% year over year. Six-month interest expense was $20.3 million, down 3.3%. The six-month 2016 income tax provision was $5.8 million, versus $1.6 million in 2015.
- Cash and cash equivalents were $155.0 million at June 30, 2016, down from $203.6 million at December 31, 2015. Current assets were $208.0 million and current liabilities $65.9 million.
- Total indebtedness was reported as $575.2 million, including $136.0 million of capital lease obligations. The company also held $250.0 million of senior secured notes and $189.2 million of senior unsecured notes. Stockholders’ deficit was $29.4 million.
Changes from the prior comparable period
- Customer connections grew faster than revenue: on-net connections increased 17.2% and off-net connections 21.1% year over year. On-net and off-net average revenue per unit fell 5.3% and 5.8%, respectively, in Q2; average price per megabit for the installed base declined 16.6%.
- Network operations expense rose 12.9% in Q2 and 14.0% for the first half, reflecting network and data-center expansion, higher off-net activity and pass-through customer taxes. SG&A increased 3.1% in Q2 and 1.3% for the first half.
- Six-month 2015 results included a $10.1 million capital-lease termination gain and a $10.1 million debt extinguishment and redemption loss; neither was recorded in the first half of 2016. The 2016 period instead included higher equipment-exchange gains and a $0.6 million loss related to debt purchases and repayment of the installment agreement.
- Operating cash flow increased to $51.3 million from $38.4 million, while investing cash use increased to $29.3 million from $23.7 million. Financing cash use was $71.5 million, including dividends, $10.9 million spent to repurchase senior unsecured notes and $17.1 million to repay the installment agreement.
Outlook, risks and unusual items
- 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 if the company executes its business plan. No specific revenue or earnings guidance was provided.
- Management expects to continue expanding network capacity and adding buildings, while noting that growth depends on customer demand, pricing, access rights, fiber availability and equipment supply. It cautioned that falling prices per megabit could constrain revenue growth and profitability; foreign operations, particularly Europe, continue to incur losses pending greater scale.
- Key stated risks include competition and pricing pressure, customer retention and traffic growth, peering terms, reliance on Cisco equipment and third-party fiber, network disruptions, foreign exchange, regulatory changes and litigation.
- The company reported one remaining California employee overtime case, denies the claims, and said a potential loss of up to $2.5 million beyond the amount accrued was reasonably possible for certain leased-circuit and dark-fiber positions. Management did not expect ordinary-course proceedings to materially affect results, while noting outcomes are uncertain.
- The board approved a $0.38-per-share Q3 2016 dividend after quarter-end, estimated at $16.9 million. The $12 million quarterly minimum under the additional capital-return program remained suspended. The notes’ covenants and Delaware law limit distributions.
- The board’s share-repurchase authorization had $47.8 million remaining through December 31, 2016; there were no repurchases in the first half of 2016. The company said its leverage ratio was below the 4.25 covenant threshold and that an additional $154.5 million was available for permitted investments, including dividends and stock purchases.
Investor verification points
- Assess whether connection growth can offset declining ARPU and per-megabit pricing, and track the margin and cash-flow effects of network expansion.
- Reconcile reported operating income and net income with equipment-exchange gains and other debt-related items; compare first-half results with the unusual 2015 lease and debt charges.
- Verify debt, capital-lease obligations, covenant headroom and the company’s capacity to sustain dividends and any future repurchases.
- Monitor the California litigation, potential leased-circuit and dark-fiber exposure, and the timing and financial impact of the new lease and revenue-recognition accounting standards.