Cogent Communications Group, Inc. — Q1 2013 Form 10-Q
Reporting period: Three months ended March 31, 2013; filed May 8, 2013. Unaudited consolidated results. The filing identifies Cogent Communications Group, Inc. as the registrant.
Business context
Cogent provides high-speed Internet access and IP communications services in North America and Europe, with expansion into Japan. It emphasizes on-net services delivered over its own network, alongside off-net services using other carriers’ facilities. The company operated as one segment and had 1,890 on-net buildings at quarter-end, up from 1,769 a year earlier.
Financial performance
Amounts below are in millions of dollars except per-share data and percentages.
| Metric | Q1 2013 | Q1 2012 | Change |
|---|---|---|---|
| Service revenue | $84.6 | $76.9 | +10.0% |
| Operating income | $9.9 | $6.0 | +66.0% |
| Operating margin | 11.7% | 7.8% | +3.9 percentage points |
| Net income (loss) | $0.4 | $(2.1) | Turned profitable |
| Net margin | 0.4% | (2.7)% | Improved |
| Operating cash flow | $15.0 | $12.7 | +$2.3 |
| Capital expenditures | $16.3 | $12.3 | +$4.0 |
- On-net revenue grew 8.7% to $61.7 million; off-net revenue rose 14.4% to $22.3 million. Non-core revenue fell 11.1% to $0.6 million. Corporate and net-centric revenue each increased 10.0%.
- On-net connections increased 17.8% to approximately 30,900, faster than on-net revenue, as average revenue per connection declined, partly due to volume and term discounts. Off-net connections grew 15.9% to approximately 4,600.
- Network operations expense rose 8.7% to $37.3 million, mainly reflecting network expansion and higher off-net activity. SG&A was nearly flat at $21.5 million; excluding equity compensation, it declined 5.4%, helped by lower bad-debt expense. Depreciation and amortization increased 4.2% to $15.9 million.
- Interest expense increased 9.7% to $9.9 million, reflecting higher capital lease obligations and convertible-note discount amortization. Income tax expense was $0.3 million, compared with a $0.6 million benefit a year earlier. Diluted EPS was $0.01 versus a loss of $0.05.
- Operating cash flow less property and equipment purchases was negative $1.4 million, versus positive $0.4 million in Q1 2012. Cash declined $12.3 million to $235.0 million, including $5.5 million of dividends paid and a $0.7 million adverse currency effect.
Balance sheet, debt and liquidity
At March 31, 2013, cash was $235.0 million and current assets were $274.2 million, against current liabilities of $47.7 million. Total debt, net of discount, was $408.9 million, including $149.9 million of capital lease obligations, $175.0 million of 8.375% secured notes due 2018, and $84.0 million carrying value of convertible notes with $92.0 million principal. Cash less reported debt was approximately $173.9 million. Capital lease obligations increased from year-end, including $18.8 million of obligations incurred during the quarter.
Outlook, risks and notable items
- Management said cash on hand and operating cash generation should cover working capital, capital spending, debt service and dividends if the business plan is executed. Additional funding could be needed for acquisitions or other significant unplanned needs; financing availability and terms are not assured.
- The company plans continued network expansion and building additions. It notes that growth depends on matching expansion costs with expected customer revenue; foreign operations, particularly Europe, continue to incur losses pending greater scale.
- Management cited risks including price competition and falling revenue per megabit, customer retention and traffic growth, peering terms, reliance on Cisco equipment and third-party fiber, network disruptions, foreign exchange, regulation, and execution in new markets.
- The board approved a $0.12-per-share dividend paid in March and a subsequent $0.13-per-share dividend, estimated at $6.1 million, for payment in June. Future dividends remain discretionary. No shares were repurchased during the quarter; $45.8 million remained under the $50 million buyback authorization.
- Two sales-employee misclassification cases are pending, one federal collective action and one California proposed class action. The company disputes the claims. It also disclosed up to $1.3 million of potential loss in excess of accruals related to leased circuit costs. Management did not expect other ordinary-course claims to materially affect results. Uncertain tax liabilities were approximately $1.7 million.
- Management reported disclosure controls were effective and no material change in internal control over financial reporting during the quarter.
Key facts for investors to verify
- Whether customer and connection growth can offset declining average revenue per on-net connection and per-megabit pricing.
- Capital expenditure and lease commitments relative to operating cash flow, cash reserves, and ongoing dividends.
- Debt terms and maturities, including the convertible notes’ earliest put date in 2014 and the level of capital lease obligations.
- Developments in the employee classification cases and the leased-circuit contingency.
- Progress toward scale and profitability in Europe and other newer markets, including Japan.