Cogent Communications Holdings, Inc. — Q3 2022 Form 10-Q
Business context and reporting period. This unaudited filing covers the quarter and nine months ended September 30, 2022. Cogent provides Internet access, private network and data-center colocation services in 51 countries, operating as one segment. Financial amounts below are in U.S. dollars; millions unless noted.
Financial results and liquidity
| Metric | Q3 2022 | Q3 2021 | Nine months 2022 | Nine months 2021 |
|---|---|---|---|---|
| Service revenue | $150.0 | $147.9 | $447.6 | $442.6 |
| Operating income | $28.1 | $28.6 | $86.4 | $83.1 |
| Net income (loss) | $(8.0) | $13.3 | $4.3 | $29.7 |
| Operating cash flow | Not provided for quarter | Not provided for quarter | $137.4 | $134.3 |
| Capital expenditures | Not provided for quarter | Not provided for quarter | $59.4 | $54.6 |
- Quarterly revenue grew 1.4%; nine-month revenue grew 1.1%. Operating margin was approximately 18.7% in Q3 2022 versus 19.3% a year earlier, and 19.3% for the first nine months versus 18.8%.
- Operating cash flow less capital expenditures was approximately $78.0 million for the first nine months, compared with $79.7 million in 2021; this is a simple cash-flow measure, not company-reported free cash flow.
- At September 30, cash and cash equivalents were $268.9 million and restricted cash was $54.7 million, totaling $323.7 million. Total indebtedness at par was approximately $1.2 billion, including $287.9 million of finance lease obligations. Stockholders’ deficit was $491.8 million.
- Debt included $450 million of 7.00% unsecured notes due 2027 and $500 million of 3.50% secured notes due 2026. The company reported compliance with indenture leverage and coverage tests and $207.4 million available for permitted restricted payments.
Material changes versus prior periods
- Revenue growth was led by net-centric customers; quarterly net-centric revenue rose 9.6%, while corporate customer revenue fell 4.0%. For the nine months, net-centric revenue rose 11.6% and corporate revenue fell 5.4%.
- On-net connections increased 3.1% and off-net connections increased 6.9% year over year, but average revenue per unit declined. Installed-base average price per megabit fell 20.8% in Q3 and 19.4% for the nine-month period.
- Q3 net loss included a $16.9 million unrealized interest-rate-swap valuation loss, higher interest expense and $2.0 million of Sprint acquisition costs. Nine-month net income was lower year over year, chiefly reflecting a $45.7 million swap valuation loss and an $11.9 million loss on redemption of the 2024 Euro notes; foreign-exchange gains on those notes partly offset the effects.
- Cogent issued $450 million of 2027 notes in June 2022 and redeemed its €350 million 2024 notes. The 2027 notes carry a higher coupon than the redeemed notes; Q3 interest expense increased 25.7% year over year.
Outlook, risks and unusual items
- Sprint transaction: Cogent agreed to acquire Sprint’s U.S. long-haul fiber network, including non-U.S. extensions, for a stated $1 purchase price, subject to customary adjustments and closing conditions. T-Mobile is to pay Cogent $700 million for IP transit services: $350 million in monthly installments during the first post-closing year and $350 million over the following 42 months. Closing was expected in the second half of 2023, subject to regulatory approvals and other conditions. Cogent incurred $2.0 million of related professional fees in Q3.
- Management outlook: No specific financial revenue or earnings guidance is provided. Management expects continued declines in average price per megabit at rates similar to recent periods, anticipates adding a similar number of on-net buildings in coming years, and expects non-core revenue to decline or remain flat. It believes cash on hand and operating cash generation should cover requirements for the next 12 months if the business plan is executed.
- Capital returns and funding: The board declared a $0.915-per-share quarterly dividend on November 2, 2022, estimated at $42.8 million and payable December 2. The company expects substantial dividend cash outlays and says future dividends and buybacks remain discretionary and subject to cash needs and debt restrictions. $30.4 million remained under the buyback authorization; no shares were repurchased in the period.
- Interest-rate exposure: The swap makes the effective rate on the 2026 notes variable based on SOFR. Its September 30 fair-value liability was $54.7 million, against a $57.2 million counterparty deposit, of which $54.7 million was restricted. A November 2022 settlement required a $3.4 million cash payment; further collateral could be required if the liability exceeds the deposit.
- Commitments and contingencies: Cogent had committed to $120.6 million of future dark-fiber IRU lease payments, generally beginning when routes are accepted, expected within 24 months. A leased-circuit matter could result in a loss of up to $3.8 million beyond the amount accrued. A separate Virginia case resulted in approximately $0.4 million of damages, paid in October 2022.
- Key risks: Sprint regulatory approval, closing and integration; competition and continued pricing pressure; corporate customer turnover and office-market weakness; foreign-exchange movements; equipment and fiber supply delays; employee retention; and variable-rate exposure. Management also cites potential refinancing needs and uncertainty about future access to acceptable financing. The filing reports effective disclosure controls and no material quarterly change in internal control over financial reporting.
Important facts for investors to verify
- Progress toward Sprint transaction approvals and closing, and the terms and timing of the $700 million IP-transit payments.
- Whether net-centric growth and connection growth can offset falling prices per megabit and weaker corporate revenue.
- Cash availability after dividends, capital spending, lease payments and any additional swap collateral requirements.
- Debt-service and refinancing capacity, particularly given the 7.00% 2027 notes and the SOFR-linked swap exposure.
- Potential outcomes of the leased-circuit contingency and the timing and scale of committed fiber-lease obligations.