Cogent Communications Holdings, Inc. — Q3 2021 Form 10-Q
Reporting period: Three and nine months ended September 30, 2021; filed November 4, 2021. Unaudited. Amounts below are in U.S. dollars unless noted.
Business context
Cogent provides Internet access, private network services and data-center colocation in 50 countries. Its facilities-based on-net services accounted for 75.1% of Q3 revenue; off-net services accounted for 24.8%. The company reports one operating segment.
Financial performance
| Metric | Q3 2021 | Q3 2020 | Nine months 2021 | Nine months 2020 |
|---|---|---|---|---|
| Service revenue | $147.9 million | $142.3 million | $442.6 million | $424.2 million |
| Operating income | $28.6 million | $26.0 million | $83.1 million | $79.5 million |
| Operating margin | 19.3% | 18.3% | 18.8% | 18.8% |
| Net income (loss) | $13.3 million | $(5.0) million | $29.7 million | $12.8 million |
| Diluted EPS | $0.28 | $(0.11) | $0.63 | $0.28 |
| Operating cash flow | Not separately stated for the quarter | $134.3 million | $102.7 million | |
| Capital expenditures | Not separately stated for the quarter | $54.6 million | $40.1 million |
Cash from operations less capital expenditures was approximately $79.7 million for the first nine months, versus $62.7 million a year earlier. Cash, cash equivalents and restricted cash totaled $355.0 million at September 30, 2021, down from $371.3 million at year-end 2020. Total assets were $1.009 billion; stockholders’ deficit was $356.8 million.
Revenue grew 4.0% in Q3 and 4.3% year to date. Q3 on-net revenue increased 5.7%, while off-net revenue declined 1.2%. For nine months, on-net revenue rose 6.3% and off-net revenue fell 1.2%. Net-centric customer revenue grew 26.3% in Q3 and 27.1% year to date; corporate customer revenue declined 6.9% and 6.3%, respectively. The average price per megabit fell 23.3% in Q3 and 25.5% year to date.
Debt, liquidity and capital allocation
At quarter-end, Cogent reported $1.1 billion of total indebtedness at par, including $239.5 million of finance lease obligations, and $355.0 million of cash, cash equivalents and restricted cash. Debt included $500 million of 3.50% senior secured notes due 2026 and €350 million of 4.375% senior unsecured notes due 2024, valued at $405.6 million. The former 2022 notes were refinanced and discharged in May 2021 using proceeds from the 2026 notes issuance.
In August, the company entered into a swap that effectively converts the 2026 notes’ fixed-rate obligation to a SOFR-based variable rate. It recorded a $3.1 million fair-value liability and loss. The euro-denominated notes create foreign-exchange exposure; the company stated it does not hedge those obligations. Nine-month cash dividends paid were $110.7 million, up from $95.0 million. No shares were repurchased during the 2021 period. The board approved a $0.83-per-share dividend after quarter-end, estimated at $38.4 million. Management said cash on hand and operating cash flow should cover requirements for the next 12 months if the business plan is executed.
Material changes and unusual items
- Q3 net income improved from a loss in 2020, partly reflecting a $10.2 million unrealized foreign-exchange gain on the 2024 notes, compared with a $17.3 million loss in Q3 2020.
- Nine-month results included a $23.8 million unrealized foreign-exchange gain on the 2024 notes, versus a $17.8 million loss in 2020, and a $14.7 million loss on redemption and extinguishment of the 2022 notes.
- Nine-month operating cash flow increased, while capital expenditures also rose as network expansion continued. The company connected 3,008 buildings at September 30, 2021, compared with 2,884 a year earlier.
- Management expects to add a similar number of buildings annually for the next several years. It expects average price per megabit to continue declining at rates similar to those reported; no formal revenue or earnings guidance is provided.
Management commentary, risks and contingencies
Management attributed corporate revenue softness to pandemic-related caution on upgrades and new connections, office vacancies, delayed returns to workplaces and increased customer non-renewals. It warned that these trends could continue to weigh on revenue growth, cash flow and profitability. Net-centric growth benefited from customer and traffic gains, but persistent price competition remains a headwind.
Employee departures, particularly in sales, increased amid productivity management and U.S. vaccination and in-office requirements; management warned this could impair hiring, retention and sales. Delays in networking-equipment deliveries could constrain network expansion. Other disclosed risks include competition, interconnection and fiber-lease renewals, cyber incidents, foreign-exchange movements, regulation, customer concentration and refinancing access.
The company disclosed a possible loss of up to $3.5 million above amounts accrued for certain leased-circuit positions. In a Spanish fiber-lease arbitration, a decision issued October 25, 2021 awarded the former provider approximately $0.7 million and rejected Cogent’s counterclaims. The company had accrued approximately $9 million and said it does not record the impact of legal proceedings until appeals are exhausted or counsel advises further appeal is unlikely to change the outcome. Management said ordinary-course claims are not expected to materially affect results.
Most important facts for investors to verify
- Whether corporate customer turnover and sales-force attrition stabilize, and whether on-net growth offsets continued corporate weakness.
- Whether price-per-megabit declines, network expansion costs and equipment-delivery delays affect margins and cash generation.
- The effect of the SOFR swap on interest expense, and the company’s exposure to euro exchange rates on the 2024 notes.
- Whether dividend commitments remain supportable alongside debt service, capital spending and lease obligations, including compliance with debt-indenture restrictions.
- The final outcome and accounting treatment of the Spanish arbitration, including any appeals, and other leased-circuit contingencies.