Cogent Communications Holdings, Inc. — Q1 2022 Form 10-Q
Reporting period: Three months ended March 31, 2022; unaudited. Comparisons are with Q1 2021 unless noted. Cogent provides Internet access, private network services and data center colocation in 50 countries.
Financial results and liquidity
| Metric | Q1 2022 | Q1 2021 / prior date |
|---|---|---|
| Service revenue | $149.2 million | $146.8 million; up 1.6% |
| Operating income | $28.8 million; 19.3% margin | $26.3 million; 17.9% margin |
| Interest expense | $35.4 million | $15.8 million |
| Net income | $1.1 million; $0.02 per diluted share | $18.9 million; $0.41 per diluted share |
| Operating cash flow | $49.4 million | $47.1 million |
| Capital expenditures | $18.1 million | $15.4 million |
| Cash, cash equivalents and restricted cash | $311.8 million | $328.6 million at December 31, 2021 |
| Total indebtedness at par | $1.1 billion, including $245.2 million of finance lease obligations | — |
Operating cash flow less property and equipment purchases was approximately $31.3 million. Cash and cash equivalents were $281.5 million; $30.3 million was restricted, primarily as collateral for the interest rate swap. Current assets exceeded current liabilities by approximately $303.6 million. Total liabilities were $1.38 billion, and stockholders’ deficit was $408.6 million.
Changes versus the prior comparable period
- Revenue growth reflected 2.4% growth in on-net revenue, partly offset by a 0.9% decrease in off-net revenue. On-net connections rose 4.1%; off-net connections rose 5.8%.
- Net-centric customer revenue increased 15.1% to $63.1 million, while corporate customer revenue decreased 6.4% to $86.1 million. Average price per megabit fell 18.6%; on-net and off-net ARPU declined 1.8% and 6.4%, respectively.
- SG&A declined 2.0%, while network operations expense rose 0.6% and depreciation and amortization rose 3.3%.
- Net income fell substantially as interest expense more than doubled, principally reflecting a $21.3 million non-cash loss on the swap. The quarter also had a smaller unrealized foreign-exchange gain on the euro-denominated 2024 Notes ($8.0 million versus $18.9 million). Q1 2021 included a $3.9 million loss on repurchase of the 2022 Notes.
- Operating cash flow increased despite lower net income; the company reported no interest payments on its notes during Q1 2022, compared with $12.4 million in Q1 2021. Financing cash outflow was much lower because Q1 2021 included $119.7 million paid to repurchase and extinguish 2022 Notes.
Outlook, risks and unusual items
- Management said cash on hand and operating cash flow should meet working capital, capital expenditure, debt service and dividend needs for the next 12 months if the business plan is executed. It gave no specific revenue or earnings guidance.
- Management expects continued declines in average price per megabit and anticipates adding a similar number of network buildings for the next several years. It cited supply-chain delays in network equipment and optical fiber as a possible constraint on network expansion.
- The company reported $500 million of 3.50% senior secured notes due 2026 and €350 million of 4.375% senior unsecured notes due 2024. The euro notes are unhedged, creating foreign-exchange exposure. A swap makes the 2026 Notes’ effective interest rate variable with SOFR; its March 31 fair-value liability was $30.3 million. Additional collateral may be required if that liability exceeds $35 million.
- Q1 dividends paid were $41.3 million. The board approved a subsequent quarterly dividend of $0.88 per share, estimated at $41.0 million, payable May 27, 2022. The company said future dividends remain subject to board discretion, cash needs and debt-indenture restrictions; $145.5 million was available and permitted for restricted payments at quarter-end.
- Russia-related customers whose services were terminated represented less than 0.3% of Q1 revenue. Ukraine experienced periodic service outages; Ukraine represented less than 0.4% of revenue and less than 0.7% of assets. Management did not expect these matters, taken together, to have a material financial impact.
- Potential exposure includes up to $3.6 million of possible losses beyond amounts accrued for leased-circuit matters and a contested $0.6 million claim by a former transoceanic-capacity provider. Management stated ordinary-course legal matters are not expected to materially affect results.
- Corporate revenue and sales remain exposed to office-market weakness, customer turnover and fewer upgrades or new tenant opportunities. Employee departures, particularly in sales, and the return-to-office and vaccination policies may also affect hiring, retention and revenue. Other disclosed risks include competition and pricing pressure, network disruption, reliance on third-party fiber and equipment, and refinancing risk.
Important facts for investors to verify
- Whether corporate customer demand, retention and sales staffing improve, and whether net-centric growth can offset continued price-per-megabit declines.
- How SOFR movements affect swap settlements, interest expense and collateral requirements; the reported quarterly swap loss was non-cash.
- The company’s capacity to address the 2024 euro-note maturity and foreign-exchange exposure, alongside dividends, capital spending and lease obligations.
- Whether equipment and fiber supply delays, Ukraine-related disruptions or the identified legal matters develop into material operating or financial impacts.
- Dividend and buyback capacity under cash-flow needs and debt covenants; $30.4 million remained under the buyback authorization, with no Q1 2022 repurchases.