Cogent Communications Holdings, Inc. — Q3 2020 Form 10-Q
Reporting period: Three and nine months ended September 30, 2020. Unaudited results; amounts below are in U.S. dollars. Cogent provides Internet access, private network and data-center colocation services in 47 countries.
Key financial results
| Metric | Q3 2020 | Q3 2019 | Nine months 2020 | Nine months 2019 |
|---|---|---|---|---|
| Service revenue | $142.3m | $136.9m | $424.2m | $405.9m |
| Operating income | $26.0m | $25.8m | $79.5m | $72.2m |
| Operating margin | 18.3% | 18.8% | 18.7% | 17.8% |
| Net income (loss) | $(5.0)m | $13.7m | $12.8m | $30.1m |
| Diluted earnings (loss) per share | $(0.11) | $0.30 | $0.28 | $0.65 |
| Cash from operating activities | — | $102.7m | $102.7m | |
| Capital expenditures | — | $40.1m | $37.1m |
Q3 revenue increased 3.9% year over year; nine-month revenue rose 4.5%. On-net revenue grew 5.7% in Q3 and 6.2% for the nine-month period, while off-net revenue declined 0.9% in Q3 and was essentially flat year to date. Revenue from net-centric customers increased in Q3, but average price per megabit for the installed base fell 26.5%; on-net connections grew 3.3% year over year.
Q3 net loss primarily reflects a $17.3m unrealized foreign-exchange loss on euro-denominated notes. For the first nine months, the comparable FX loss was $17.8m, alongside a $2.5m realized FX gain on the 2024 Notes and a $0.6m loss on redemption of the 2021 Notes. Interest expense rose 3.7% in Q3 and 10.0% year to date, primarily due to increased finance leases and 2024 Notes issuance, partly offset by redemption of the 2021 Notes.
Balance sheet, liquidity and debt
- At September 30, cash and cash equivalents were $393.3m, current assets $475.4m, and current liabilities $95.2m. Total assets were $1.001bn; stockholders’ deficit was $260.7m.
- Total indebtedness at par was approximately $1.1bn, including $212.9m of finance lease obligations and approximately $10.4m outstanding under an installment payment agreement. Notes included $445.0m of 5.375% secured notes due 2022 and €350.0m of 4.375% unsecured notes due 2024 (reported carrying value $410.4m at period end).
- In June, Cogent issued €215.0m of 2024 Notes, receiving $240.3m net proceeds, and redeemed $189.2m of 2021 Notes at par. The company does not hedge its euro-denominated debt; currency movements therefore affect reported earnings and debt values.
- Nine-month dividends paid were $95.0m, versus $82.9m in 2019. The board subsequently approved a $0.73-per-share quarterly dividend, estimated at $33.5m, payable December 4, 2020. Buyback authorization remaining at quarter-end was $34.6m.
Material changes and operating trends
- SG&A rose 10.4% in Q3 and 8.0% year to date, including higher equity compensation and staffing to support expansion and sales. Depreciation and amortization increased 8.1% in Q3.
- On-net buildings increased to 2,884 from 2,771; customer connections increased 3.3% on-net and 3.0% off-net. Management anticipated adding a similar number of buildings in coming years.
- Corporate revenue growth faced pressure in Q3 as customers delayed upgrades and satellite-office connections amid COVID-19 uncertainty and weakening office occupancy and leasing activity. Management also cited continuing net-centric pricing pressure and expected average price per megabit to continue declining at similar rates.
- Cash from operations was nearly unchanged year over year, while investing cash use increased to $40.1m. Financing cash use included dividends, lease payments and the 2021 Notes redemption, partly offset by proceeds from the 2024 Notes issuance.
Outlook, risks and contingencies
- No specific revenue or earnings guidance was provided. Management said cash on hand and operating cash flow should cover working capital, capital expenditure, debt service and dividends for the next 12 months if the business plan is achieved; it continued to monitor capital spending and liquidity amid COVID-19 uncertainty.
- The filing reports the consolidated leverage ratio was above 4.25 at September 30, 2020, a threshold relevant to restrictions on dividends and share repurchases under the debt indentures. The company reported $132.6m permitted for investment payments, including dividends and share purchases, subject to indenture terms.
- COVID-19 risks include weaker corporate demand, customer turnover, fewer upgrades and new tenant opportunities, building-access disruption, higher bad debts, workforce disruption and cybersecurity exposure. The company reported no material change in customer payment profiles or significant increase in turnover to date, but cautioned that future effects were uncertain.
- Other stated risks include competition and price declines, foreign-exchange volatility, reliance on third-party fiber and key equipment vendors, network disruptions, regulation, and ability to refinance or service debt.
- Contingencies include a reasonably possible loss of up to $3.3m above amounts accrued for certain leased-circuit positions, and a Spanish arbitration over approximately $9.0m claimed by a former fiber provider; that amount was accrued in 2015 and Cogent is contesting liability.
- A July 2020 vendor agreement requires $35.0m of annual network-equipment purchases for three years through July 2023. Cogent also had $20.7m of committed future dark-fiber IRU lease payments, generally expected to commence as routes are accepted.
- Management reported disclosure controls were effective and no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Reconcile the $393.3m cash balance in the balance sheet with the MD&A’s approximately $394.8m liquidity figure.
- Assess the sensitivity of earnings and reported debt to euro-dollar movements, given the unhedged euro notes and Q3 FX loss.
- Monitor corporate-customer demand, office occupancy and leasing trends, and the effect of continued per-megabit price declines on revenue and margins.
- Review indenture restrictions and available capacity for dividends and repurchases, alongside the company’s debt, lease commitments and planned capital spending.
- Track the Spanish arbitration and leased-circuit contingency, as well as COVID-related credit, operational and cybersecurity risks.