Cogent Communications Holdings, Inc. — Q1 2021 10-Q
Reporting period: Three months ended March 31, 2021; unaudited. Cogent provides high-speed Internet access, private network services and data-center colocation in 48 countries. Figures below are in U.S. dollars; financial statement amounts are in millions unless stated otherwise.
Financial performance and position
| Metric | Q1 2021 | Q1 2020 / prior date |
|---|---|---|
| Service revenue | $146.8 | $140.9; +4.2% |
| Operating income | $26.3 | $25.9 |
| Operating margin | 17.9% | 18.3% |
| Net income | $18.9 | $9.2 |
| Diluted EPS | $0.41 | $0.20 |
| Cash from operations | $47.1 | $28.5 |
| Capital expenditures | $15.4 | $12.9 |
| Cash and cash equivalents | $238.0 | $371.3 at Dec. 31, 2020 |
Operating cash flow less property and equipment purchases was $31.7 million, compared with $15.6 million in Q1 2020. Cash declined by $133.3 million during the quarter, mainly reflecting $119.7 million spent to repurchase and extinguish 2022 Notes and $36.1 million of dividends, partly offset by operating cash flow.
At March 31, total indebtedness at par was $963.4 million, including $218.5 million of finance lease obligations. Cash was $238.0 million. The company reported total liabilities of $1.161 billion and a stockholders’ deficit of $307.6 million. Current liabilities included $328.8 million of 2022 Notes reclassified as current; the notes mature in March 2022. The filing does not provide a conventional current ratio that reflects the company’s refinancing plans.
Material changes and operating trends
- On-net revenue rose 6.3% to $109.9 million; off-net revenue declined 1.6% to $36.7 million. On-net services were 74.9% of revenue, up from 73.4%.
- Net-centric customer revenue increased 24.6% to $54.8 million, while corporate customer revenue declined 5.1% to $92.0 million. Management cited stronger net-centric customer growth and COVID-related caution, office vacancies and fewer sales opportunities affecting corporate demand.
- On-net connections increased 4.3% and off-net connections increased 4.2%. On-net ARPU rose 2.2%; off-net ARPU fell 4.9%. Average price per megabit declined 28.1%, and management expects similar ongoing price declines in the net-centric market.
- Network operations expense increased 2.1%, SG&A rose 4.5%, and depreciation and amortization increased 12.6%. The latter reflected deployed assets and a fiber-lease renewal accounted for as a finance lease.
- Net income included an $18.9 million unrealized foreign-exchange gain on euro-denominated 2024 Notes and a $3.9 million loss on extinguishment of 2022 Notes. The foreign-exchange gain is noncash and results are exposed to exchange-rate movements.
Outlook, liquidity, risks and contingencies
- Management said cash on hand and operating cash flow should meet working-capital, capital expenditure, debt service and dividend requirements for the next 12 months, conditional on executing its business plan and refinancing strategy.
- After repurchasing $115.9 million principal amount of 2022 Notes in March, the company had $329.1 million outstanding. It announced a conditional $45.0 million redemption for May 6, 2021; following that redemption, $284.1 million would remain. Management anticipated refinancing the remainder in May and raising additional debt at a rate below the notes’ 5.375% coupon. Refinancing was not assured.
- The company had $30.4 million remaining under its share buyback authorization and reported no Q1 repurchases. The board approved a $0.78-per-share dividend for May 28, estimated at $35.9 million. Management noted dividends and other returns of capital are discretionary and restricted by debt indentures; the consolidated leverage ratio was above 4.25, with $57.9 million available for permitted investment payments, including dividends and stock purchases.
- COVID-19 had slowed corporate sales, though management reported no material change in customer payment patterns or significant increase in turnover to date. It warned that customer turnover, fewer upgrades and reduced tenant activity could hurt revenue, cash flow and profitability.
- Other cited risks include competition and pricing pressure, customer and traffic growth, peering arrangements, fiber lease renewals and third-party fiber reliability, cyber incidents, equipment dependence, foreign exchange, debt service and access to refinancing.
- Contingencies include a possible loss of up to $3.4 million beyond the amount accrued for leased-circuit matters. A Spanish arbitration concerns approximately $9 million claimed by a former fiber provider; the company had accrued the claim and is contesting liability. Management did not expect ordinary-course legal matters to materially affect results.
Important facts for investors to verify
- Whether the announced 2022 Notes redemption and planned refinancing were completed on the expected terms and timetable.
- How corporate customer demand, office occupancy and COVID-related sales effects evolve, alongside continued net-centric price-per-megabit declines.
- Whether operating cash generation can support debt obligations, network investment and the dividend while cash balances are lower.
- The effects of euro/U.S. dollar movements on the unhedged 2024 Notes and reported earnings.
- Updates to the leased-circuit exposure and Spanish arbitration, and any changes to dividend or debt-indentured distribution capacity.