Cogent(CCOI) - 2019 Q4 - Annual Report

PART I Business Overview Cogent provides low-cost, high-speed Internet access, private network services, and data center colocation, focusing on on-net growth and strategic acquisitions - Cogent is a facilities-based provider of low-cost, high-speed Internet access, private network services, and data center colocation, optimized for packet-switched data[10] - The company's services are delivered primarily to small and medium-sized businesses, communications service providers, and other bandwidth-intensive organizations globally[10] - Key competitive advantages include a low cost of operation due to streamlined products and integrated network design, direct control over service quality for on-net customers, and a high-traffic network footprint in major multi-tenant office buildings and carrier-neutral data centers[11][13] - Strategic priorities include focusing on low-cost, high-speed Internet access, pursuing on-net customer growth by increasing sales efforts and expanding network connections, and selectively acquiring businesses or network assets that enhance customer base and cash flow[14][15] - The network encompasses 1,767 multi-tenant office buildings, 980 carrier-neutral data centers, 873 intra-city networks (35,526 fiber miles), an inter-city network (57,600 fiber route miles), and 54 data centers (over 609,000 sq ft)[18][23] - Sales and marketing rely on a direct sales force (686 employees as of Feb 1, 2020, with 548 quota-bearing) and an indirect sales program through master agents, with limited web-based advertising[29] - The company faces significant competition from incumbent telephone and cable companies and facilities-based network operators, many with greater financial resources and established brand names[30] - Regulation for Internet access and private networks to businesses is generally light, but evolving laws, data privacy requirements (GDPR, CCPA), and potential new taxes could impact operations[33] Risk Factors The company faces significant risks in maintaining peering relationships, customer retention, managing growth, vendor dependence, high indebtedness, and foreign currency fluctuations - Inability to maintain or increase settlement-free peering relationships with other Internet access providers could lead to higher costs, reduced performance, and loss of customers[38] - Failure to retain existing customers and add new ones, especially as large customers may build their own networks or switch providers, could impair growth and profitability[39][41] - Rapid growth strains management, operational, and financial infrastructure, requiring effective expansion of sales force, maintenance of service quality, and enhancement of internal controls and information systems[43] - Operating in countries outside the U.S., Canada, and Western Europe presents difficulties such as lack of dark fiber, regulatory issues, and slower revenue growth rates[44] - Dependence on a single network infrastructure vendor (Cisco Systems, Inc.) for routers and transmission equipment creates risks related to timely provision, performance, and potential litigation[53] - Substantial debt ($967.9 million at Dec 31, 2019) could make it difficult to meet financial obligations, limit funds for growth, and restrict corporate actions due to debt covenants[95][96][100] - Fluctuations in foreign currency exchange rates, particularly between the US dollar and the Euro/Canadian dollar, can adversely affect financial position and results of operations, as 22% of 2019 revenue was from foreign activities[57][168] - The company has negative stockholders' equity and its ability to pay future dividends is subject to asset valuations and limitations under debt indentures and Delaware law[79] Unresolved Staff Comments The company reports no unresolved staff comments from the SEC - No unresolved staff comments[104] Properties The company leases offices, data centers, and colocation facilities for its operations, including its Washington D.C. headquarters, with the lease extended to May 2025 - The company leases space for offices, data centers, colocation facilities, and points-of-presence[104] - Headquarters facility: 43,117 square feet in Washington, D.C.; lease extended to May 2025[105] - Total leased space: Approximately 760,000 square feet for data centers, offices, and operations centers[105] Legal Proceedings The company is involved in routine legal proceedings not expected to materially impact its business or financial condition - Involved in legal proceedings in the ordinary course of business[106] - These proceedings are not expected to have a material adverse effect on the business, financial condition, or results of operations[106] - Significant proceedings are discussed in Note 6 to the consolidated financial statements[106] Mine Safety Disclosures This item is not applicable to the company's operations - Not applicable[107] PART II Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities The company's common stock (CCOI) is traded on NASDAQ, with a $50.0 million buyback program authorized through December 2020 - Common stock (CCOI) is traded on the NASDAQ Global Select Market[110] - As of February 1, 2020, there were 135 holders of record holding 45,629,938 shares of common stock[110] Common Stock Performance (12/31/2014 - 12/31/2019) | Index | 12/14 | 12/15 | 12/16 | 12/17 | 12/18 | 12/19 | |:---|:---|:---|:---|:---|:---|:---| | Cogent Communications Holdings | $100.00 | $102.53 | $127.23 | $145.44 | $151.55 | $230.20 | | S&P 500 | $100.00 | $101.38 | $113.51 | $138.29 | $132.23 | $173.86 | | NASDAQ Telecommunications | $100.00 | $97.52 | $102.36 | $127.62 | $127.16 | $142.60 | - The Board of Directors authorized a plan to repurchase up to $50.0 million of common stock through December 31, 2020. As of December 31, 2019, $34.9 million remained available, and no shares were purchased in 2019[113][117] Selected Financial Data This section provides a five-year summary of the company's audited consolidated financial statements, offering a concise overview of financial performance and position Consolidated Statement of Operations Data (2015-2019, in thousands) | Metric | 2019 | 2018 | 2017 | 2016 | 2015 | |:---|:---|:---|:---|:---|:---|\ | Service revenue | $546,159 | $520,193 | $485,175 | $446,900 | $404,234 | | Total operating expenses | $446,961 | $434,617 | $413,119 | $390,010 | $358,140 | | Operating income | $100,257 | $86,558 | $75,918 | $64,042 | $53,036 | | Net income | $37,520 | $28,667 | $5,876 | $14,929 | $4,896 | | Net income per common share—basic | $0.82 | $0.63 | $0.13 | $0.33 | $0.11 | | Dividends declared per common share | $2.44 | $2.12 | $1.80 | $1.51 | $1.46 | Consolidated Balance Sheet Data (2015-2019, in thousands) | Metric | 2019 | 2018 | 2017 | 2016 | 2015 | |:---|:---|:---|:---|:---|:---|\ | Total assets | $932,124 | $739,850 | $710,588 | $737,892 | $665,860 | | Long-term debt (including finance leases and current portion) | $964,341 | $806,032 | $728,544 | $707,080 | $601,839 | Management's Discussion and Analysis of Financial Condition and Results of Operations This section analyzes the company's financial performance, liquidity, and capital resources, detailing revenue growth, expense changes, debt management, and critical accounting policies - The company is a leading facilities-based provider of low-cost, high-speed Internet access, private network services, and data center colocation, emphasizing on-net services for higher profit margins[121][123] - Key growth opportunities are driven by its high-capacity network, allowing for significant customer additions with minimal incremental costs, and strategic acquisitions[123] - Industry trends include continued long-term growth in Internet traffic and a decline in Internet access prices on a per-megabit basis, impacting revenue growth and profitability[123] Key Financial and Operating Data (2019 vs. 2018) | Metric | 2019 (in thousands) | 2018 (in thousands) | Percent Change | |:---|:---|:---|:---|\ | Service revenue | $546,159 | $520,193 | 5.0% | | On-net revenues | $396,753 | $374,555 | 5.9% | | Off-net revenues | $148,931 | $145,004 | 2.7% | | Network operations expenses | $219,801 | $219,526 | 0.1% | | Selling, general, and administrative expenses | $146,913 | $133,858 | 9.8% | | Depreciation and amortization expenses | $80,247 | $81,233 | (1.2)% | | Interest expense | $57,453 | $51,056 | 12.5% | | Income tax expense | $15,154 | $12,715 | 19.2% | | ARPU—on-net | $461 | $480 | (3.8)% | | ARPU—off-net | $1,097 | $1,155 | (5.0)% | | Average price per megabit | $0.62 | $0.82 | (23.9)% | | On-net customer connections (end of period) | 74,554 | 68,770 | 8.4% | | Off-net customer connections (end of period) | 11,660 | 10,974 | 6.3% | | Buildings On-net | 2,801 | 2,676 | 4.7% | Key Financial and Operating Data (2018 vs. 2017) | Metric | 2018 (in thousands) | 2017 (in thousands) | Percent Change | |:---|:---|:---|:---|\ | Service revenue | $520,193 | $485,175 | 7.2% | | On-net revenues | $374,555 | $346,445 | 8.1% | | Off-net revenues | $145,004 | $137,892 | 5.2% | | Network operations expenses | $219,526 | $209,278 | 4.9% | | Selling, general, and administrative expenses | $133,858 | $127,915 | 4.6% | | Depreciation and amortization expenses | $81,233 | $75,926 | 7.0% | | Interest expense | $51,056 | $48,467 | 5.3% | | Income tax expense | $12,715 | $25,242 | (49.6)% | | ARPU—on-net | $480 | $506 | (5.1)% | | ARPU—off-net | $1,155 | $1,239 | (6.8)% | | Average price per megabit | $0.82 | $1.11 | (25.9)% | | On-net customer connections (end of period) | 68,770 | 61,334 | 12.1% | | Off-net customer connections (end of period) | 10,974 | 9,949 | 10.3% | | Buildings On-net | 2,676 | 2,506 | 6.8% | Consolidated Cash Flows (in thousands) | Metric | 2019 | 2018 | 2017 | |:---|:---|:---|:---|\ | Net cash provided by operating activities | $148,809 | $133,921 | $111,702 | | Net cash used in investing activities | ($46,958) | ($49,937) | ($45,801) | | Net cash provided by (used in) financing activities | $22,020 | ($52,545) | ($97,267) | | Net increase (decrease) in cash and cash equivalents | $123,329 | $29,082 | ($27,308) | - Total indebtedness at December 31, 2019, was $967.9 million (at par, excluding operating lease liabilities), including $169.8 million in finance lease obligations. Cash and cash equivalents were $399.4 million[139] - Debt obligations include €135.0 million of 4.375% senior unsecured notes due 2024, $189.2 million of 5.625% senior unsecured notes due 2021, and $445.0 million of 5.375% senior secured notes due 2022[95][142][143][144] - Indentures governing debt impose restrictions on incurring additional debt, paying dividends, and making investments, with a consolidated leverage ratio threshold of 4.25 for certain payments. As of December 31, 2019, $110.3 million was permitted for investment payments, including dividends and stock purchases[145][241] Contractual Cash Obligations and Other Commercial Commitments (as of Dec 31, 2019, in thousands) | Type | Total | Less than 1 year | 1-3 years | 3-5 years | After 5 years | |:---|:---|:---|:---|:---|:---|\ | Debt | $903,696 | $50,601 | $691,748 | $161,347 | — | | Finance lease obligations | $340,188 | $25,459 | $48,693 | $45,311 | $220,725 | | Operating leases, colocation and data center obligations | $205,087 | $36,119 | $42,344 | $26,138 | $100,486 | | Unconditional purchase obligations | $27,885 | $12,154 | $1,346 | $1,307 | $13,078 | | Total | $1,476,856 | $124,333 | $784,131 | $234,103 | $334,289 | Quantitative and Qualitative Disclosures About Market Risk The company is exposed to market risks primarily from interest rate and foreign currency fluctuations, with significant foreign currency risk from Euro and Canadian dollar - Cash flow exposure to interest rate changes is limited as note obligations have fixed interest rates[167] - Operations outside the United States and Euro-denominated notes expose the company to foreign currency exchange risk, particularly with the Euro and Canadian dollar[168] - Foreign activities accounted for 22% of consolidated revenue in 2019; a 1% change in foreign exchange rates would impact consolidated annual revenue by approximately $1.1 million[168] Financial Statements and Supplementary Data This section presents the company's audited consolidated financial statements for 2017-2019, including the independent auditor's unqualified report and a critical audit matter regarding IRU lease assets - The report includes audited consolidated financial statements: Balance Sheets, Statements of Comprehensive Income, Statements of Changes in Stockholders' Equity (Deficit), and Statements of Cash Flows for the three years ended December 31, 2019[170][172] - Ernst & Young LLP issued an unqualified opinion on the consolidated financial statements for the period ended December 31, 2019[172] - A critical audit matter identified was 'Determining the Initial Carrying Amount for Indefeasible Right of Use Lease Assets and Liabilities,' due to the subjectivity in management's assumptions for lease term and incremental borrowing rate[175][177] Consolidated Balance Sheets (as of December 31, in thousands) | Metric | 2019 | 2018 | |:---|:---|:---|\ | Total assets | $932,124 | $739,850 | | Total liabilities | $1,135,803 | $888,852 | | Total stockholders' deficit | ($203,679) | ($149,002) | Consolidated Statements of Comprehensive Income (for each of the three years ended December 31, in thousands) | Metric | 2019 | 2018 | 2017 | |:---|:---|:---|:---|\ | Service revenue | $546,159 | $520,193 | $485,175 | | Operating income | $100,257 | $86,558 | $75,918 | | Net income | $37,520 | $28,667 | $5,876 | | Basic net income per common share | $0.82 | $0.63 | $0.13 | | Diluted net income per common share | $0.81 | $0.63 | $0.13 | | Dividends declared per common share | $2.44 | $2.12 | $1.80 | Consolidated Statements of Cash Flows (for each of the three years ended December 31, in thousands) | Metric | 2019 | 2018 | 2017 | |:---|:---|:---|:---|\ | Net cash provided by operating activities | $148,809 | $133,921 | $111,702 | | Net cash used in investing activities | ($46,958) | ($49,937) | ($45,801) | | Net cash provided by (used in) financing activities | $22,020 | ($52,545) | ($97,267) | | Cash and cash equivalents, end of year | $399,422 | $276,093 | $247,011 | Changes in and Disagreements With Accountants on Accounting and Financial Disclosure The company reports no changes in or disagreements with its independent accountants on accounting and financial disclosure matters - No changes in or disagreements with accountants on accounting and financial disclosure[274] Controls and Procedures Management assessed disclosure controls and internal control over financial reporting as effective, with an unqualified report from Ernst & Young LLP - Disclosure controls and procedures were effective at the reasonable assurance level as of December 31, 2019[274] - Internal control over financial reporting was effective as of December 31, 2019, based on COSO criteria[277] - No material changes in internal control over financial reporting occurred during the most recent fiscal quarter[274] - Ernst & Young LLP issued an unqualified report on the company's internal control over financial reporting[280] Other Information The company reports no other information required to be disclosed under this item - No other information to report[284] PART III Directors, Executive Officers and Corporate Governance Information regarding directors, executive officers, and corporate governance is incorporated by reference from the 2020 Proxy Statement - Information incorporated by reference from the 2020 Proxy Statement[287] Executive Compensation Information concerning executive compensation is incorporated by reference from the 2020 Proxy Statement - Information incorporated by reference from the 2020 Proxy Statement[288] Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters Information on security ownership of beneficial owners, management, and equity compensation plans is incorporated by reference from the 2020 Proxy Statement - Information incorporated by reference from the 2020 Proxy Statement[289] Certain Relationships and Related Transactions and Director Independence Information on certain relationships, related transactions, and director independence is incorporated by reference from the 2020 Proxy Statement - Information incorporated by reference from the 2020 Proxy Statement[290] Principal Accountant Fees and Services Information concerning principal accountant fees and services is incorporated by reference from the 2020 Proxy Statement - Information incorporated by reference from the 2020 Proxy Statement[291] PART IV Exhibits, Financial Statement Schedules This section lists financial statements, schedules, and comprehensive exhibits filed as part of the Form 10-K report, including organizational documents and debt indentures - Financial statements are listed in Item 8[294] - Financial Statement Schedule II—Valuation and Qualifying Accounts is filed as part of the report[295] - Exhibits include organizational documents, debt indentures (e.g., 2024, 2022, 2021 Notes), employment agreements, restricted stock awards, consents, and certifications[296][298][300][301] Form 10-K Summary The company indicates that no Form 10-K summary is provided - No Form 10-K Summary is provided[305] Signatures This section contains the required signatures of the registrant's authorized officers and directors, certifying the Form 10-K report - The report is signed by the Chairman and Chief Executive Officer, David Schaeffer, and the Chief Financial Officer, Thaddeus G. Weed, along with other directors[309]