Cogent Communications Holdings, Inc. — Q1 2019 Form 10-Q
Business context and period: Facilities-based provider of Internet access, private network, and data center colocation services. This unaudited report covers the three months ended March 31, 2019, compared with Q1 2018; balance-sheet figures are as of March 31, 2019, compared with December 31, 2018. Amounts below are in U.S. dollars.
Financial performance and liquidity
| Metric | Q1 2019 | Q1 2018 / comparison |
|---|---|---|
| Service revenue | $134.1 million | $128.7 million; up 4.2% |
| Operating income | $24.4 million | $20.6 million; operating margin 18.2%, versus 16.0% |
| Net income; diluted EPS | $9.2 million; $0.20 | $6.8 million; $0.15 |
| Operating cash flow | $28.6 million | $30.2 million |
| Capital expenditures | $13.3 million | $14.9 million |
| Cash and cash equivalents | $259.1 million | $276.1 million at Dec. 31, 2018 |
| Total current assets / liabilities | $333.9 million / $81.6 million | — |
Net margin was approximately 6.9%, compared with 5.3% in Q1 2018. Financing cash outflow was $31.8 million, including $26.6 million of dividends. Cash decreased $17.0 million during the quarter.
Changes, debt, and capital allocation
- On-net revenue rose 5.2% to $97.2 million; off-net revenue rose 1.9% to $36.8 million. Corporate-customer revenue increased 11.2% to $90.2 million, while net-centric revenue declined 7.6% to $44.0 million.
- Connections increased year over year: on-net 12.2% and off-net 8.8%. However, on-net and off-net ARPU fell 6.2% and 6.9%, respectively; average price per megabit fell 24.4%.
- Network operations expense declined 1.3%, while SG&A increased 7.0%; interest expense increased 8.4%, primarily following the 2018 issuance of additional secured notes and growth in finance lease obligations.
- At quarter-end, notes outstanding at par totaled $634.2 million: $445.0 million of 2022 secured notes at 5.375% and $189.2 million of 2021 unsecured notes at 5.625%. Reported total indebtedness, including $164.8 million of dark-fiber finance lease obligations, was $811.3 million.
- Adoption of the new lease standard in January 2019 added a $73.3 million right-of-use asset and $95.0 million of operating lease liabilities at March 31; the initial adoption adjustment was $97.3 million. Operating lease liabilities are excluded from the indenture leverage calculation.
- The company paid $0.58 per share in Q1 dividends. On May 1, the board approved a $0.60 per-share dividend, estimated at $27.2 million, payable May 31. The buyback authorization had $34.9 million remaining through December 31, 2019; no shares were repurchased in Q1.
Outlook, risks, and unusual items
Management said cash on hand and operating cash generation should meet working-capital, capital-expenditure, debt-service, and dividend needs for the next 12 months if the business plan is executed. It anticipated adding a similar number of on-net buildings over the next several years. No specific financial guidance was provided. Management expects ongoing price-per-megabit declines and says these may constrain revenue growth and profitability; it also expects corporate revenue to make up a greater share of total revenue.
Reported revenue growth included an estimated $2.1 million negative foreign-exchange impact. Equipment exchanges generated a $0.5 million gain in Q1 2019, versus $0.1 million in Q1 2018. The company noted risks including competition and pricing pressure, customer and traffic growth, foreign exchange, fiber and equipment-provider dependence, network disruptions, regulation, and litigation. A Spanish fiber-lease arbitration seeks approximately $9 million, accrued in 2015; the company contests the claim. Certain leased-circuit positions could result in up to $2.9 million of loss beyond amounts accrued. Management did not expect other ordinary-course claims to materially affect results. The filing says contractual obligations had no material change from the 2018 Form 10-K.
Important facts for investors to verify
- Whether connection growth can offset continued ARPU and per-megabit price declines, especially in the net-centric customer base.
- Cash generation, capital spending, and dividend sustainability relative to debt service and lease commitments.
- Debt maturities in 2021 and 2022, indenture distribution restrictions, and the effect of finance leases on leverage and liquidity.
- Outcomes and any changes in accruals for the Spanish arbitration and leased-circuit matters.
- Foreign-exchange effects and progress in expanding the network and achieving scale in overseas operations.