Cogent Communications Group, Inc. — Form 10-Q Summary
Reporting period: Three and six months ended June 30, 2011; balance sheet compared with December 31, 2010. The filing identifies the registrant as Cogent Communications Group, Inc., consistent with the filing text, rather than the “Holdings” name in the request metadata. Financial statements are unaudited.
Financial performance and position
| Metric | Q2 2011 | Q2 2010 | Six months 2011 | Six months 2010 |
|---|---|---|---|---|
| Service revenue | $75.6 million | $64.4 million | $149.0 million | $127.2 million |
| Operating income | $8.7 million | $3.0 million | $16.0 million | $5.7 million |
| Net income (loss) | $2.1 million | $(0.9) million | $1.8 million | $(1.5) million |
| Operating cash flow | Not presented by quarter | Not presented by quarter | $32.6 million | $30.5 million |
| Capital expenditures | Not presented by quarter | Not presented by quarter | $26.0 million | $24.5 million |
- Q2 revenue rose 17.4%; six-month revenue rose 17.2%. Reported revenue growth included foreign-exchange benefits of approximately $2.2 million for Q2 and $2.3 million for the six-month period.
- Operating expenses were $66.9 million in Q2 and $133.0 million for the first half. Operating income improved year over year in both periods.
- At June 30, cash and cash equivalents were $227.2 million, current assets $264.7 million, and current liabilities $43.1 million. Cash was $56.3 million at year-end 2010.
- Total indebtedness, net of discount, was $384.5 million, including $135.6 million of capital lease obligations. This implies net debt of approximately $157.3 million, calculated as reported debt less cash. Balance-sheet debt included $175.0 million of senior secured notes and $73.9 million carrying value for convertible notes.
- For the first half, financing cash flow was $163.2 million, principally from $170.5 million net proceeds from the January 2011 senior-note issuance. Cash increased $171.0 million overall.
Material changes and operating trends
- Q2 on-net revenue increased 15.4% and off-net revenue increased 25.5%; for the first half, increases were 14.9% and 27.5%, respectively. Non-core revenue declined 5.1% in the first half.
- On-net customer connections increased 21.7% year over year to approximately 23,400, while on-net revenue grew more slowly, reflecting lower average revenue per connection, customer mix, and volume- and term-based discounts. Off-net connections grew 10.3% to approximately 3,760.
- On-net buildings increased to 1,669 from 1,503 a year earlier. Network operations costs rose with network expansion and off-net activity; depreciation increased with deployed fixed assets.
- Interest expense more than doubled year over year in both periods, primarily due to the new senior notes and higher capital lease obligations. Q2 included $3.8 million of senior-note interest expense; first-half expense included $6.6 million.
Outlook, risks, contingencies, and unusual items
- Management stated that cash on hand and operating cash generation should meet working-capital, capital-expenditure, debt-service, and other requirements if the company executes its business plan. No quantitative revenue or earnings guidance was provided.
- Management intends to continue expanding the network and adding on-net buildings, while matching expansion costs to expected customer revenue. It identifies declining Internet access prices as a potential drag on revenue growth and profitability.
- Key disclosed risks include competition and pricing pressure, customer and traffic growth, favorable peering arrangements, dependence on Cisco equipment and third-party fiber providers, network disruptions, foreign-exchange movements, regulatory changes, and economic conditions.
- The company issued $175 million of 8.375% senior secured notes due 2018. The indenture limits certain additional debt, dividends and other restricted payments, liens, and asset dispositions. The notes are secured by substantially all company and guarantor assets, subject to stated terms.
- A $2.7 million gain was recorded after the company was released from an IRU capital lease obligation; the related asset had been fully impaired in 2008. The prior-year first half included a $0.6 million asset impairment, with none recorded in 2011.
- Management did not expect ordinary-course legal matters or resolution of tax examinations to have a material impact. A $0.9 million uncertain-tax-position liability was reported at both year-end and June 30, 2011.
- The headquarters lease is with a partnership owned by the CEO and his wife. In August 2011, after the reporting date, the lease was extended to August 2013 and additional office space was added.
- Management reported effective disclosure controls and no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether revenue and connection growth can continue to offset declining average revenue per on-net connection and industry pricing pressure.
- Debt-service capacity and the use of senior-note proceeds; the filing lists possible general corporate use, share or convertible-note repurchases, or a special dividend, without specifying a final allocation.
- Capital expenditure and network-expansion requirements relative to operating cash generation and the company’s stated liquidity expectations.
- The impact of foreign-exchange changes, off-net carrier costs, customer concentration, and reliance on third-party network providers.
- The terms and governance of the related-party headquarters lease extension and the senior-note covenants, collateral, and redemption provisions.