Cogent Communications Holdings, Inc. — Q1 2016 Form 10-Q
Reporting period: Three months ended March 31, 2016; comparative period is Q1 2015. Cogent provides facilities-based, high-speed Internet access and IP communications services to business, carrier, and bandwidth-intensive customers in North America, Europe, and Asia. Financial statements are unaudited.
Financial performance and position
| Metric | Q1 2016 | Q1 2015 / comparison |
|---|---|---|
| Service revenue | $108.3 million | $97.2 million; up 11.4% |
| Operating income | $15.7 million | $10.5 million; operating margin 14.5% vs. 10.8% |
| Net income (loss) | $3.4 million; $0.08 per diluted share | $(1.6) million; $(0.04) per share |
| Cash from operations | $27.6 million | $18.4 million |
| Capital expenditures | $15.0 million | $12.9 million |
| Cash and cash equivalents | $196.1 million | $203.6 million at December 31, 2015 |
| Total indebtedness | $606.0 million, including $137.0 million of capital lease obligations | — |
At March 31, 2016, current assets were $247.4 million and current liabilities were $78.9 million. Stockholders’ deficit was $18.4 million. Cash declined $7.5 million during the quarter after $16.2 million of dividends, $15.0 million of capital expenditures, and debt and lease principal payments. Cash flow from operations less property and equipment purchases was approximately $12.5 million.
Changes, drivers, and unusual items
- On-net revenue rose 10.5% to $78.7 million; off-net revenue rose 14.1% to $29.4 million. Connections increased 16.0% on-net and 20.2% off-net.
- Average revenue per unit declined 4.1% on-net and 4.9% off-net; installed-base average price per megabit fell 14.9%. Management cited pricing discounts, customer mix, and foreign exchange. Currency movements reduced Q1 2016 revenue by about $0.9 million.
- Network operations expense increased 15.1% to $47.3 million, reflecting network expansion, higher off-net costs, and approximately $2.0 million of additional customer-billed taxes recorded in both revenue and expense. SG&A decreased 0.5% to $29.5 million.
- Interest expense fell 11.0% to $10.1 million, primarily following the 2015 refinancing of higher-rate notes and termination of certain Spanish capital leases. Q1 2015 results included a $10.1 million lease-termination gain and a $10.1 million debt-extinguishment loss; neither recurred in Q1 2016. Equipment-exchange gains were $1.9 million in Q1 2016 versus $1.5 million in Q1 2015.
Outlook, risks, and contingencies
Management believes cash on hand and operating cash flow will meet working-capital, capital expenditure, debt-service, dividend, and other needs for the next 12 months if the company executes its business plan. No specific financial guidance was provided. Management expects to continue network expansion and add on-net buildings, while noting that growth depends on matching expansion costs with expected customer revenue.
Risks identified include price competition and declining per-megabit pricing, foreign-exchange movements, customer and traffic growth, peering arrangements, reliance on Cisco equipment and third-party fiber, network disruptions, regulation, and execution in newer markets. Management says European operations continue to incur losses until sufficient scale is reached. The company reported that its consolidated leverage ratio was above 4.25; debt covenants therefore restricted additional permitted investments and distributions beyond specified amounts. The Capital Program’s $12 million quarterly minimum had been suspended in November 2015. A $0.37-per-share Q2 2016 dividend was approved after quarter-end, estimated at $16.4 million.
The company disclosed reasonably possible losses of up to $2.5 million above accrued amounts for certain leased-circuit and dark-fiber obligations. One California sales-employee wage-and-hour case remained; a class and collective action was provisionally certified, and the company sought appellate review. Management disputes the claims. Management did not expect ordinary-course legal matters to materially affect results, while acknowledging outcomes are uncertain.
Important facts for investors to verify
- Whether customer and connection growth can offset falling ARPU and per-megabit pricing, particularly in net-centric services.
- Cash generation, capital spending, dividend commitments, and compliance with debt-covenant distribution limits.
- The composition and servicing of reported $606.0 million indebtedness, including capital leases, and the effect of leverage on financial flexibility.
- Developments in the California employee litigation and the leased-circuit/dark-fiber contingency.
- The assumptions behind management’s 12-month liquidity assessment and planned network expansion.