Cogent Communications Holdings, Inc. — Q1 2015 Form 10-Q
Reporting period: Three months ended March 31, 2015; comparisons are with Q1 2014 unless otherwise noted. Cogent provides IP connectivity and Internet access services, primarily to business and bandwidth-intensive customers in North America, Europe, and Japan.
Financial performance and liquidity
| Metric | Q1 2015 | Q1 2014 / prior date |
|---|---|---|
| Service revenue | $97.2 million | $92.9 million; up 4.6% |
| Operating income | $10.5 million | $12.9 million |
| Net income (loss) | $(1.6) million | $0.1 million |
| Reported operating margin | 10.8% | 13.9% |
| Reported net margin | (1.6)% | 0.1% |
| Operating cash flow | $18.4 million | $10.6 million |
| Purchases of property and equipment | $12.9 million | $15.6 million |
| Cash and cash equivalents | $260.1 million | $287.8 million at Dec. 31, 2014 |
| Total indebtedness | $583.6 million, including $132.0 million of capital lease obligations | — |
Cash flow from operations less property and equipment purchases was approximately $5.5 million, compared with approximately $(5.0) million in Q1 2014. Financing cash outflow was $30.3 million, including $16.0 million of dividends, $8.1 million of share repurchases, and the redemption of the prior notes. Cash declined by $27.7 million during the quarter, including a $2.9 million adverse foreign-exchange effect. Current assets were $312.0 million and current liabilities were $68.3 million at quarter-end.
Material changes versus Q1 2014
- Revenue growth reflected higher on-net and off-net revenue, while reported results included an estimated $4.3 million foreign-exchange headwind. North American revenue rose to $79.6 million from $73.0 million; European revenue declined to $17.6 million from $19.9 million.
- On-net revenue increased 3.1% and off-net revenue 9.5%; non-core revenue fell 21.0%. Customer connections grew 12.2% on-net and 21.4% off-net, but on-net and off-net ARPU each declined 9.1%. Average installed-base price per megabit fell 19.5%.
- Network operations expense increased 5.8%, and SG&A increased 12.9%, partly reflecting network expansion, hiring and sales efforts, higher equity compensation, and regulatory-related legal and economic analysis fees.
- Reported results included a $10.1 million gain from terminating certain Spanish IRU capital leases and a $10.1 million loss on extinguishment and redemption of debt. The gain followed the company’s move to alternative fiber; the termination liability recorded was $8.1 million.
- Cogent issued $250 million of 5.375% senior secured notes due 2022 and redeemed $240 million of 8.375% senior secured notes due 2018 at a premium. It also has $200 million of 5.625% senior unsecured notes due 2021.
Outlook, risks and other notable items
- Management said cash on hand and operating cash generation should cover working capital, capital expenditure, debt service, dividends, and other requirements for the next 12 months if the company executes its business plan. Acquisitions or other unplanned needs could require additional financing; availability and terms are not assured.
- Management expects continued decline in non-core service revenue. It cited falling per-megabit prices as a potential constraint on revenue and profitability, with growth depending in part on Internet traffic, customer growth, and network utilization. European operations have incurred losses and management expects losses until scale improves.
- Disclosed risks include competition and pricing pressure, foreign-exchange movements, customer retention and concentration, peering arrangements, reliance on Cisco equipment and third-party fiber, network disruptions, regulation, and litigation.
- The company disclosed up to $2.2 million of reasonably possible loss above accruals relating to leased circuit and dark-fiber obligations. A shareholder lawsuit concerning bylaw amendments was subject to a proposed settlement requiring court approval; plaintiff’s attorney-fee request was undetermined. Four individual cases remained in a former-sales-employee overtime matter, with two settlements pending finalization or approval.
- The board approved a $0.42 per-share Q2 2015 dividend, estimated at $19.0 million. Future dividends and capital returns remain discretionary and subject to cash needs and debt-indenture restrictions.
- The company reported that a German subsidiary had provided services to a customer it understood to be affiliated with Iranian state broadcaster IRIB, receiving $10,008 gross revenue during the quarter and no net profit. The services were terminated and voluntarily disclosed to OFAC.
- Management concluded disclosure controls were effective at quarter-end and reported no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether customer and revenue growth can offset continued declines in ARPU and per-megabit pricing, including the effects of foreign exchange.
- Cash generation, capital spending, dividends and repurchases relative to the company’s $583.6 million of indebtedness and future debt service.
- The continuing costs and final accounting effects of the Spanish lease termination, and whether the estimated $8.1 million liability proves sufficient.
- Developments in the disclosed legal matters, including court approval and fees for the shareholder settlement, and the remaining overtime cases.
- Compliance with debt-indenture restrictions and the sustainability of planned capital returns alongside network expansion and other cash requirements.