Cogent(CCOI) - 2020 Q2 - Quarterly Report

PART I FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS This section presents the unaudited condensed consolidated financial statements, including balance sheets, statements of comprehensive income, and cash flows, along with detailed notes explaining the company's business, accounting policies, debt, commitments, and segment information for the periods ended June 30, 2020 and December 31, 2019 Condensed Consolidated Balance Sheets The condensed consolidated balance sheets provide a snapshot of the company's financial position as of June 30, 2020, and December 31, 2019, detailing assets, liabilities, and stockholders' equity (deficit) | Metric | June 30, 2020 (Unaudited) (in thousands) | December 31, 2019 (in thousands) | | :--- | :--- | :--- | | Total Assets | $1,005,401 | $932,124 | | Total Liabilities | $1,240,951 | $1,135,803 | | Total Stockholders' Deficit | $(235,550) | $(203,679) | - Total assets increased by $73.277 million (7.86%) from December 31, 2019, to June 30, 2020, primarily driven by increases in cash and cash equivalents, property and equipment, and right-of-use leased assets[8] - Total liabilities increased by $105.148 million (9.26%) over the same period, largely due to increases in senior unsecured 2024 Euro notes and finance lease obligations[8] Condensed Consolidated Statements of Comprehensive Income (Three Months) This statement details the company's financial performance for the three months ended June 30, 2020, compared to the same period in 2019, showing revenue, expenses, net income, and comprehensive income | Metric | Three Months Ended June 30, 2020 (in thousands) | Three Months Ended June 30, 2019 (in thousands) | Change (%) | | :--- | :--- | :--- | :--- | | Service revenue | $140,990 | $134,789 | 4.6% | | Operating income | $27,574 | $22,022 | 25.2% | | Net income | $8,564 | $7,136 | 20.0% | | Basic net income per common share | $0.19 | $0.16 | 18.8% | | Diluted net income per common share | $0.18 | $0.16 | 12.5% | | Dividends declared per common share | $0.68 | $0.60 | 13.3% | - Operating income increased significantly by 25.2% year-over-year, driven by revenue growth and relatively stable operating expenses[12] - Interest expense increased by 14.0% to $15.499 million, partly offset by a realized foreign exchange gain of $2.547 million on the issuance of 2024 Euro Notes[12] Condensed Consolidated Statements of Comprehensive Income (Six Months) This statement provides a cumulative view of the company's financial performance for the six months ended June 30, 2020, compared to the same period in 2019, highlighting revenue, expenses, net income, and comprehensive income trends | Metric | Six Months Ended June 30, 2020 (in thousands) | Six Months Ended June 30, 2019 (in thousands) | Change (%) | | :--- | :--- | :--- | :--- | | Service revenue | $281,904 | $268,930 | 4.8% | | Operating income | $53,427 | $46,427 | 15.1% | | Net income | $17,791 | $16,353 | 8.8% | | Basic net income per common share | $0.39 | $0.36 | 8.3% | | Diluted net income per common share | $0.38 | $0.36 | 5.6% | | Dividends declared per common share | $1.34 | $1.18 | 13.6% | - Service revenue increased by 4.8% for the six months ended June 30, 2020, compared to the prior year, contributing to an 8.8% increase in net income[15] - Interest expense rose by 13.6% to $30.720 million, influenced by increased finance lease obligations and the issuance of 2024 Notes[15] Condensed Consolidated Statements of Cash Flows This statement outlines the cash inflows and outflows from operating, investing, and financing activities for the six months ended June 30, 2020, and 2019, showing the overall change in cash and cash equivalents | Cash Flow Activity | Six Months Ended June 30, 2020 (in thousands) | Six Months Ended June 30, 2019 (in thousands) | Change (YoY) | | :--- | :--- | :--- | :--- | | Net cash provided by operating activities | $69,769 | $69,269 | +$500 | | Net cash used in investing activities | $(26,796) | $(25,008) | -$(1,788) | | Net cash (used in) provided by financing activities | $(25,257) | $88,961 | -$(114,218) | | Net increase in cash and cash equivalents | $17,604 | $133,186 | -$(115,582) | | Cash and cash equivalents, end of period | $417,026 | $409,279 | +$7,747 | - Net cash provided by operating activities remained stable, increasing slightly by $0.5 million year-over-year[18] - Net cash used in financing activities shifted from a significant inflow in 2019 to an outflow in 2020, primarily due to the redemption of 2021 Notes ($189.225 million) and higher dividend payments ($62.295 million), partially offset by proceeds from 2024 Euro Notes issuance ($240.285 million)[18] Notes to Interim Condensed Consolidated Financial Statements This section provides detailed explanations and disclosures for the interim condensed consolidated financial statements, covering business description, accounting policies, debt, commitments, and segment information - The Company is a facilities-based provider of low-cost, high-speed Internet access, private network services, and data center colocation space, serving businesses and communications service providers in 46 countries[21] - On-net services are delivered through the company's own facilities, providing greater control over service quality and pricing, and are offered at speeds from 100 Mbps to 100 Gbps[22] - The company adopted ASU 2016-02 (Leases) and ASU 2016-13 (Credit Losses) effective January 1, 2019, and January 1, 2020, respectively, with no material impact from the latter[45][53] 1. Description of the business and recent developments This note describes the company's business as a facilities-based provider of high-speed Internet access, private network services, and data center colocation, operating in 46 countries. It also details the basis of financial statement presentation, use of estimates, financial instruments, revenue recognition policies, and recent accounting pronouncements adopted Reorganization and merger On May 15, 2014, Cogent Communications Group, Inc. adopted a new holding company structure, becoming a wholly-owned subsidiary of Cogent Communications Holdings, Inc., which is now the 'successor issuer' - Cogent Communications Holdings, Inc. became the successor issuer to Cogent Communications Group, Inc. on May 15, 2014, following a reorganization into a new holding company structure[20] Description of business The company is a facilities-based provider of low-cost, high-speed Internet access, private network services, and data center colocation, primarily serving small and medium-sized businesses and bandwidth-intensive organizations across 46 countries - The company provides on-net Internet access and private network services through its own facilities, reducing dependence on third-party carriers for the 'last mile'[22] - Customers include corporate clients in multi-tenant office buildings and net-centric clients (e.g., OTT media, web hosting, other ISPs) in carrier-neutral colocation facilities and the company's own data centers[23] - Off-net services are provided to corporate customers using other carriers' circuits for the 'last mile', and certain non-core services from acquisitions are supported but not actively sold[24] Basis of presentation The unaudited condensed consolidated financial statements are prepared in accordance with SEC rules, reflecting normal recurring adjustments, and should be read in conjunction with the annual Form 10-K - Interim financial statements are unaudited and include all wholly-owned subsidiaries, with inter-company accounts eliminated[26][27] Use of estimates The preparation of financial statements requires management to make estimates and assumptions that affect reported amounts, and actual results may differ - Management's estimates and assumptions are crucial for reported asset, liability, revenue, and expense amounts, with actual results potentially varying[28] Financial instruments The carrying amounts of short-term financial instruments approximate fair value. Long-term debt instruments, such as senior secured and unsecured notes, are measured at fair value based on trading prices | Financial Instrument | Carrying Amount (June 30, 2020, in millions) | Fair Value (June 30, 2020, in millions) | | :--- | :--- | :--- | | Senior secured notes | $445.0 | $456.1 | | Senior unsecured 2024 Euro notes | $393.0 | $393.5 | Gross receipts taxes, universal service fund and other surcharges The company records certain excise taxes and surcharges, such as Universal Service Fund fees, on a gross basis, including them in both revenues and network operations expenses | Period | Excise Taxes and Surcharges (in millions) | | :--- | :--- | | Three months ended June 30, 2020 | $3.3 | | Three months ended June 30, 2019 | $3.2 | | Six months ended June 30, 2020 | $7.0 | | Six months ended June 30, 2019 | $6.6 | Basic and diluted net income per common share Basic EPS excludes common stock equivalents and is computed by dividing net income by weighted-average common shares outstanding. Diluted EPS adjusts for the dilutive effect of common stock equivalents, including restricted stock and stock options, using the treasury stock method | Metric | Three Months Ended June 30, 2020 | Three Months Ended June 30, 2019 | Six Months Ended June 30, 2020 | Six Months Ended June 30, 2019 | | :--- | :--- | :--- | :--- | :--- | | Weighted average common shares - basic | 45,754,880 | 45,354,327 | 45,760,302 | 45,349,397 | | Dilutive effect of stock options | 205,823 | 35,895 | 128,477 | 30,972 | | Dilutive effect of restricted stock | 725,962 | 522,069 | 703,666 | 458,549 | | Weighted average common shares - diluted | 46,686,665 | 45,912,291 | 46,592,445 | 45,838,918 | - Dilutive effects from stock options and restricted stock increased significantly in 2020 compared to 2019 for both three and six-month periods, indicating more potential dilution[33] Stockholder's Deficit This section details the changes in stockholder's deficit, including common stock, additional paid-in capital, accumulated other comprehensive income, and accumulated deficit, for the three and six months ended June 30, 2020 and 2019 | Metric (in thousands) | Balance at Dec 31, 2019 | Balance at June 30, 2020 | | :--- | :--- | :--- | | Common Stock Amount | $47 | $47 | | Additional Paid-in Capital | $493,178 | $506,391 | | Accumulated Other Comprehensive Income (Loss) | $(12,326) | $(12,906) | | Accumulated Deficit | $(684,578) | $(729,082) | | Total Stockholder's Equity (Deficit) | $(203,679) | $(235,550) | - Total stockholder's deficit increased from $(203.679) million at December 31, 2019, to $(235.550) million at June 30, 2020, primarily due to dividends paid ($62.295 million) and an increase in accumulated deficit, partially offset by equity-based compensation and net income[36] Revenue recognition The company recognizes revenue under ASC 606, deferring installation fees over the contract term or estimated customer life, and capitalizing certain contract acquisition costs - Service revenue recognized from deferred revenue (contract liabilities) was $1.8 million for Q2 2020 (vs. $1.7 million in Q2 2019) and $3.0 million for H1 2020 (vs. $3.4 million in H1 2019)[41] - Amortization expense for contract costs was $4.2 million for Q2 2020 (vs. $4.3 million in Q2 2019) and $8.4 million for H1 2020 (vs. $8.7 million in H1 2019)[41] Recent Accounting Pronouncements— Adopted The company adopted ASU 2016-02 (Leases) effective January 1, 2019, recording right-of-use assets and lease liabilities, and ASU 2016-13 (Credit Losses) effective January 1, 2020, with no material impact - ASU 2016-02 (Leases) resulted in a cumulative-effect adjustment on January 1, 2019, recording $97.3 million in right-of-use assets and operating lease liabilities[45] | Lease Cost (in thousands) | Three Months Ended June 30, 2020 | Three Months Ended June 30, 2019 | Six Months Ended June 30, 2020 | Six Months Ended June 30, 2019 | | :--- | :--- | :--- | :--- | :--- | | Finance lease cost (Amortization of ROU assets) | $4,973 | $4,917 | $9,735 | $9,888 | | Finance lease cost (Interest expense) | $4,517 | $4,415 | $8,990 | $8,816 | | Operating lease cost | $4,405 | $3,486 | $8,592 | $6,780 | | Total lease costs | $13,895 | $12,818 | $27,317 | $25,484 | - Net bad debt expense for the three months ended June 30, 2020, was $1.3 million (net of $0.2 million recoveries), and for the six months, it was $2.3 million (net of $0.4 million recoveries)[54] Finance leases—fiber lease agreements The company has finance lease agreements for dark fiber under indefeasible-right-of-use (IRU) agreements, typically with 15-20 year terms, recorded as finance lease obligations and IRU assets | Future Minimum Finance Lease Payments (in thousands) | Amount | | :--- | :--- | | For the twelve months ending June 30, 2021 | $32,568 | | 2022 | $31,800 | | 2023 | $30,772 | | 2024 | $30,051 | | 2025 | $29,710 | | Thereafter | $214,604 | | Total minimum finance lease obligations | $369,505 | | Less—amounts representing interest | $(165,727) | | Present value of minimum finance lease obligations | $203,778 | | Current maturities | $(14,734) | | Finance lease obligations, net of current maturities | $189,044 | - As of June 30, 2020, the company committed to an additional $17.6 million in dark fiber IRU lease agreements[48] Operating leases The company leases office space, data center facilities, and short-term dark fiber under operating leases, recognizing right-of-use assets and liabilities based on the present value of lease payments | Future Minimum Operating Lease Payments (in thousands) | Amount | | :--- | :--- | | For the twelve months ending June 30, 2021 | $16,725 | | 2022 | $16,108 | | 2023 | $14,918 | | 2024 | $13,833 | | 2025 | $12,097 | | Thereafter | $101,672 | | Total minimum operating lease obligations | $175,353 | | Less—amounts representing interest | $(64,910) | | Present value of minimum operating lease obligations | $110,443 | | Current maturities | $(11,292) | | Operating lease liabilities, net of current maturities | $99,151 | - The weighted-average remaining lease term for operating leases is 20.4 years, with a weighted-average discount rate of 5.4% as of June 30, 2020[46] 2. Property and equipment This note details depreciation and amortization expenses related to property and equipment, capitalized salaries for network construction, and information on equipment exchange agreements, installment payment agreements, and future purchase commitments | Expense (in millions) | Three Months Ended June 30, 2020 | Three Months Ended June 30, 2019 | Six Months Ended June 30, 2020 | Six Months Ended June 30, 2019 | | :--- | :--- | :--- | :--- | :--- | | Depreciation and amortization | $19.9 | $20.0 | $39.4 | $40.2 | | Capitalized salaries and benefits | $3.0 | $2.7 | $5.9 | $5.3 | Exchange agreement The company exchanged used network equipment and cash for new equipment, resulting in gains of $0.2 million for the three months and $0.2 million for the six months ended June 30, 2020 | Period | Gain on Equipment Transactions (in millions) | | :--- | :--- | | Three months ended June 30, 2020 | $0.2 | | Three months ended June 30, 2019 | $0.1 | | Six months ended June 30, 2020 | $0.2 | | Six months ended June 30, 2019 | $0.7 | Installment payment agreement The company has an installment payment agreement (IPA) with a vendor for network equipment, with $12.8 million in note obligations outstanding as of June 30, 2020, secured by the related equipment - Outstanding note obligations under the IPA were $12.8 million at June 30, 2020, and $12.5 million at December 31, 2019[58] Purchase agreement In July 2020, the company entered an agreement to purchase $35.0 million of network equipment annually from a vendor for three years, with $20.0 million already ordered and $6.8 million shipped 3. Long-term debt This note details the company's long-term debt, including senior secured 2022 Notes and senior unsecured 2024 Euro Notes, their issuances, redemption of 2021 Notes, and limitations imposed by debt indentures | Debt Instrument | Principal Amount | Interest Rate | Maturity Date | | :--- | :--- | :--- | :--- | | Senior Secured 2022 Notes | $445.0 million | 5.375% | March 1, 2022 | | Senior Unsecured 2024 Euro Notes | €350.0 million ($393.0 million USD) | 4.375% | June 30, 2024 | 2024 Notes issuances In June 2020, the company issued €215.0 million of 2024 Euro Notes, generating $240.3 million in net proceeds, following a €135.0 million issuance in June 2019. These notes bear 4.375% interest and mature on June 30, 2024 - A realized foreign exchange gain of $2.5 million resulted from the June 2020 issuance of €215.0 million 2024 Notes due to favorable Euro to USD exchange rate changes between issuance and receipt of proceeds[62] - Unrealized foreign exchange loss on 2024 Euro Notes was $(3.4) million for the three months ended June 30, 2020, compared to a gain of $0.2 million in the prior year[62] - The 2024 Notes are senior unsecured obligations, guaranteed by the company's material domestic subsidiaries, and are effectively subordinated to secured indebtedness[67] Debt extinguishment and redemption 2021 Notes In June 2020, the company redeemed its entire $189.2 million principal amount of 5.625% senior unsecured 2021 Notes using proceeds from the 2024 Notes issuance, incurring a $0.6 million loss on debt extinguishment - The redemption of 2021 Notes at par value plus accrued interest resulted in a $0.6 million loss on debt extinguishment and redemption[71] Limitations under the indentures The indentures for the 2022 and 2024 Notes impose restrictions on incurring indebtedness, paying dividends, making investments, and creating liens. Dividend payments are restricted if the consolidated leverage ratio exceeds 4.25 - As of June 30, 2020, the company's consolidated leverage ratio was above 4.25, limiting certain payments like dividends and stock purchases, though $165.5 million was permitted for investment payments[72] 4. Commitments and contingencies This note outlines the company's current and potential legal proceedings, including an arbitration in Spain for early termination of optical fiber leases, and other routine claims - The company is involved in an arbitration in Spain, where a former fiber provider seeks approximately $9.0 million for early lease termination, an amount accrued in 2015[74] - It is reasonably possible that the company could incur a loss of up to $3.2 million in excess of accrued amounts for certain leased circuit obligations[73] Current and potential litigation The company accrues contingent liabilities when probable and estimable, reviewing accruals quarterly. Management believes other routine legal actions will not materially impact financial condition - The company accrues contingent liabilities at the low end of the estimated range when no single amount is more likely[73] 5. Income taxes This note presents the components of income before income taxes, broken down by domestic and foreign sources, for the three and six months ended June 30, 2020 and 2019 | Component (in thousands) | Three Months Ended June 30, 2020 | Three Months Ended June 30, 2019 | Six Months Ended June 30, 2020 | Six Months Ended June 30, 2019 | | :--- | :--- | :--- | :--- | :--- | | Domestic | $14,113 | $16,332 | $31,902 | $35,084 | | Foreign | $(2,814) | $(6,152) | $(7,770) | $(12,136) | | Total Income before Income Taxes | $11,299 | $10,180 | $24,132 | $22,948 | - Foreign income before income taxes showed a larger loss in the six months ended June 30, 2020, compared to the prior year, while domestic income also decreased[77] 6. Common stock buyback program stock option and award plan The company's Board of Directors approved a common stock buyback program with $34.9 million remaining as of June 30, 2020. The company also granted 455,030 shares of common stock to employees and directors in the first two quarters of 2020 - No common stock purchases were made under the buyback program during the three and six months ended June 30, 2020 and 2019[78] - In Q1 2020, 319,750 shares ($23.7 million) were granted, including performance shares. In Q2 2020, 135,280 shares ($10.6 million) were granted[79] 7. Dividends on common stock The Board approved a quarterly dividend of $0.705 per common share, payable September 4, 2020. Future dividends are discretionary and subject to financial position, cash flow, and debt indenture limitations - A quarterly dividend of $0.705 per common share ($32.2 million estimated) was approved on August 5, 2020[80] - Debt indentures and Delaware General Corporate Law restrict the company's ability to return cash to stockholders, including dividends and stock buybacks[81] 8. Related party transactions The company leases its headquarters from Sodium LLC, owned by its CEO. The lease was extended to May 2025, with annual rent of $1.0 million plus taxes and utilities | Period | Rent and Related Costs Paid to Sodium LLC (in millions) | | :--- | :--- | | Three months ended June 30, 2020 | $0.5 | | Three months ended June 30, 2019 | $0.5 | | Six months ended June 30, 2020 | $0.8 | | Six months ended June 30, 2019 | $0.9 | 9. Segment information The company operates as a single segment, with service revenue broken down by geographic region (North America, Europe, Latin America, Asia Pacific) and product class (on-net, off-net, non-core) | Service Revenue (in thousands) | Three Months Ended June 30, 2020 | Three Months Ended June 30, 2019 | Six Months Ended June 30, 2020 | Six Months Ended June 30, 2019 | | :--- | :--- | :--- | :--- | :--- | | North America | $115,131 | $111,459 | $230,745 | $222,158 | | Europe | $23,573 | $21,917 | $46,847 | $44,149 | | Latin America | $436 | $74 | $766 | $109 | | Asia Pacific | $1,850 | $1,339 | $3,546 | $2,514 | | Total | $140,990 | $134,789 | $281,904 | $268,930 | | Long Lived Assets, net (in thousands) | June 30, 2020 | December 31, 2019 | | :--- | :--- | :--- | | North America | $301,187 | $269,364 | | Europe and other | $105,576 | $99,582 | | Total | $406,763 | $368,946 | - North America remains the largest revenue contributor and holds the majority of long-lived assets, showing growth across all regions[84] ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS This section provides management's perspective on the company's financial condition, results of operations, and liquidity, including a general overview of the business, competitive advantages, strategic initiatives, and a detailed analysis of financial performance for the three and six months ended June 30, 2020, compared to the prior year - The discussion includes forward-looking statements and highlights risks such as the COVID-19 pandemic, foreign exchange rate impacts, competition, and debt obligations[86] General Overview The company is a facilities-based provider of low-cost, high-speed Internet access, private network services, and data center colocation, serving businesses and bandwidth-intensive organizations across 46 countries - On-net services are delivered through the company's own facilities, providing high-speed Internet access and private network services from 100 Mbps to 100 Gbps[88] - Corporate customers are typically in multi-tenant office buildings, while net-centric customers (e.g., OTT media, web hosting, other ISPs) in carrier-neutral colocation facilities leverage the network for content delivery or access[89] - Off-net services are provided to corporate customers using third-party circuits for the 'last mile', and non-core services from acquisitions are supported but not actively sold[90] Competitive Advantages The company leverages its network design, operating strategy, and product offerings to maintain a low cost of operation, offering high-quality, reliable, and fast services. Its extensive network and customer base enable it to be a Tier One network with settlement-free peering - Competitive advantages include low cost of operation due to single network design and acquired optical fiber, greater control over service delivery for on-net services, and high-quality, reliable service optimized for packet-switched traffic[92][93][94] - The company's network connects to 2,854 buildings, including 1,771 multi-tenant office buildings and 1,029 carrier-neutral colocation/data center buildings, strategically positioning it for high Internet traffic[95] - Serving over 7,100 access networks and 48,300 corporate customers, the company's balanced, high-traffic network enables settlement-free peering as a Tier One network, reducing costs and enhancing delivery[96] Low Cost of Operation The company's network design, operating strategy, and product offerings are optimized for low operational costs, benefiting from a single network protocol, acquired optical fiber, and streamlined product sets - Utilizing a single network protocol and acquiring optical fiber from excess inventory reduces capital intensity and operating costs[92] Greater Control and Superior Delivery On-net services provide the company with full control over the network, including the 'last mile' and in-building wiring, enabling faster and more efficient service provisioning - The on-net service structure provides more control over service quality and pricing, allowing quicker and more efficient provisioning than third-party carrier networks[93] High Quality, Reliable Service The network's design is optimized for packet-switched traffic, ensuring high technical performance, increased speed, and reduced data packet loss compared to traditional circuit-switched networks - The network's optimization for packet-switched traffic results in high technical performance, increased speed, and reduced data packet loss[94] Large Addressable Market The company's network strategically connects to 2,854 buildings, including multi-tenant office buildings and carrier-neutral data centers, maximizing revenue opportunities and profitability - The network connects to 2,854 buildings, including 1,771 multi-tenant office buildings and 1,029 carrier-neutral colocation/data center buildings, with 54 data centers operated by the company[95] Balanced, High Traffic Network The network serves over 7,100 access networks and 48,300 corporate customers, with the majority of traffic originating and terminating on its network, enhancing reliability, speed, and margins - The extensive customer base and traffic volume enable the company to be a Tier One network, interconnected on a settlement-free basis, which broadens geographic delivery and reduces network costs[96] Proven and Experienced Management Team The senior management team possesses over 20 years of telecommunications industry experience, having designed and built the network, integrated acquisitions, and managed business expansion - The senior management team has an average of over 20 years of experience, with many members working together since 2000, leading network design, integration of 13 acquisitions, and business growth[98] Our Strategy The company aims to be a leading provider of high-quality, high-speed Internet access and private network services by growing its corporate and net-centric customer bases, expanding its on-net footprint, enhancing sales efforts, and pursuing selective acquisition opportunities - Strategy focuses on growing corporate customers in multi-tenant office buildings and carrier-neutral data centers by offering dedicated internet access and private network services with faster speeds and rapid installation[99] - The company plans to increase its share of the net-centric market by leveraging its high-capacity network to meet demand from bandwidth-intensive applications such as OTT media, online gaming, and IoT[100] - On-net customer growth is emphasized due to higher profit margins, greater control over service levels, and faster provisioning, achieved by adding customers in existing buildings and expanding network connections[101] Grow our Corporate Customer Base The company aims to expand its corporate customer base by providing dedicated internet access and private network services to businesses in multi-tenant office buildings and data centers, capitalizing on the increasing integration of data centers into IT infrastructure - Corporate customers benefit from significantly faster speeds and rapid installation times compared to competitors, driving growth in this segment[99] Increase our Share of the Net-centric Market The company intends to increase its share of the net-centric market by loading its high-capacity network to meet growing demand for high-speed internet access from bandwidth-intensive applications, expanding geographic reach, and offering competitive pricing - The company plans to broaden its geographic reach and continue offering competitive pricing to grow its share in the net-centric market[100] Pursue On-Net Customer Growth The company prioritizes on-net customer growth to leverage its high-capacity network with minimal incremental costs, focusing on increasing penetration in existing buildings and connecting more multi-tenant office buildings and carrier-neutral data centers - On-net services generate greater profit margins and offer more control over service levels, quality, and pricing, with faster provisioning times[101] Grow and Improve our Sales Efforts The company plans to continue increasing its sales efforts by expanding its sales force, optimizing sales productivity, and broadening its on-net addressable market to gain market share - The quota-bearing salesforce increased by 37% over the past five years to 572, with efforts to maintain productivity[102] Selectively Pursue Acquisition Opportunities The company will selectively pursue acquisitions that expand its customer base, footprint, and generate positive cash flow, including off-net and on-net customers, complementary businesses, or network assets - The company has not completed an acquisition in over a decade, indicating a highly selective approach to M&A[103] Results of Operations This section provides a detailed comparison of the company's financial performance for the three and six months ended June 30, 2020, versus the same periods in 2019, analyzing service revenue, operating expenses, interest expense, and income tax provision Three Months Ended June 30, 2020 Compared to the Three Months Ended June 30, 2019 For the three months ended June 30, 2020, service revenue increased by 4.6%, driven by growth in corporate customers and on-net connections, despite a decline in average price per megabit for net-centric services. Operating expenses remained relatively stable, leading to a significant increase in operating income | Metric | Q2 2020 (in thousands) | Q2 2019 (in thousands) | Change (%) | | :--- | :--- | :--- | :--- | | Service revenue | $140,990 | $134,789 | 4.6% | | On-net revenue | $103,800 | $97,472 | 6.5% | | Off-net revenue | $37,044 | $37,191 | (0.4)% | | Network operations expenses | $53,886 | $54,407 | (1.0)% | | Selling, general, and administrative expenses | $39,839 | $38,566 | 3.3% | | Depreciation and amortization expenses | $19,896 | $19,979 | (0.4)% | | Interest expense | $15,499 | $13,595 | 14.0% | | Realized gain on foreign exchange – 2024 Notes | $2,547 | — | NM | | Unrealized (loss) gain on 2024 Notes | $(3,420) | $177 | NM | | Income tax provision | $2,735 | $3,044 | (10.2)% | | Other Operating Data | Q2 2020 | Q2 2019 | Change (%) | | :--- | :--- | :--- | :--- | | ARPU—on net | $458 | $453 | 1.1% | | ARPU—off-net | $1,048 | $1,104 | (5.1)% | | Average Price per Megabit — installed base | $0.47 | $0.63 | (25.1)% | | Customer Connections—end of period (On-net) | 75,927 | 72,415 | 4.8% | | Customer Connections—end of period (Off-net) | 11,846 | 11,321 | 4.6% | | Buildings On-net | 2,854 | 2,737 | 4.3% | Service Revenue Service revenue increased by 4.6% to $140.990 million, primarily due to growth in corporate customers and on-net connections, despite a $0.7 million negative impact from exchange rates. Corporate revenue increased by 5.1% to $97.0 million, while net-centric revenue grew 3.6% to $44.0 million, impacted by a 25.1% decline in average price per megabit for net-centric services - The impact of exchange rates resulted in a $0.7 million decrease in revenues for Q2 2020[107] - Corporate customers represented 68.8% of total service revenue in Q2 2020, up from 68.5% in Q2 2019, reflecting a shift in revenue mix[110] - On-net revenues increased 6.5% with a 4.8% increase in on-net customer connections, while off-net revenues decreased 0.4% despite a 4.6% increase in off-net customer connections, due to a 5.1% decrease in off-net ARPU[112][113] Network Operations Expenses Network operations expenses decreased by 1.0% to $53.886 million, despite an increase in customer connections and on-net buildings. This decrease was primarily due to price reductions in circuit costs and the capitalization of an IRU fiber lease agreement - The decrease in network operations expense was primarily due to price reductions in circuit costs, fewer operating leases for fiber, and the capitalization of a $34.0 million IRU fiber lease renewal as a finance lease[114][115] Selling, General, and Administrative ("SG&A") Expenses SG&A expenses increased by 3.3% to $39.839 million, driven by higher salaries and related costs to support expansion and increased sales efforts, including a larger sales force - Sales force headcount increased from 656 to 716, and quota-bearing sales force increased from 519 to 572, contributing to higher SG&A expenses[117] Depreciation and Amortization Expenses Depreciation and amortization expense decreased slightly by 0.4% to $19.896 million, mainly due to certain fixed assets becoming fully depreciated - The decrease is primarily attributed to certain deployed fixed assets reaching full depreciation[118] Interest Expense and Loss on Debt Extinguishment & Redemption Interest expense increased by 14.0% to $15.499 million, primarily due to increased finance lease obligations and the issuance of 2024 Notes. A $0.6 million loss on debt extinguishment was incurred from redeeming the 2021 Notes - The redemption of $189.2 million of 2021 Notes in June 2020 resulted in a $0.6 million loss on debt extinguishment[119] Realized gain and unrealized (loss) gain on foreign exchange – 2024 Notes The company recognized a $2.5 million realized foreign exchange gain from the June 2020 issuance of 2024 Euro Notes. However, an unrealized foreign exchange loss of $(3.4) million was recorded for the three months ended June 30, 2020 - The realized gain was due to the Euro to USD rate changing from $1.112 at issuance to $1.133 at receipt of proceeds[120] - The company does not hedge its foreign currency obligations[120] Income Tax Provision The income tax provision decreased by 10.2% to $2.735 million, primarily due to changes in taxable income - The change in income tax provision is primarily related to changes in taxable income[121] Buildings On-net The number of on-net buildings connected to the network increased by 117 (4.3%) to 2,854 as of June 30, 2020, reflecting the company's disciplined network expansion program - The company anticipates adding a similar number of buildings to its network in the coming years[122] Six Months Ended June 30, 2020 Compared to the Six Months Ended June 30, 2019 For the six months ended June 30, 2020, service revenue increased by 4.8%, driven by corporate customer growth and on-net connections. Operating expenses saw moderate increases, while interest expense rose due to new debt and finance leases. Net income increased by 8.8% | Metric | H1 2020 (in thousands) | H1 2019 (in thousands) | Change (%) | | :--- | :--- | :--- | :--- | | Service revenue | $281,904 | $268,930 | 4.8% | | On-net revenue | $207,256 | $194,656 | 6.5% | | Off-net revenue | $74,364 | $74,036 | 0.4% | | Network operations expenses | $109,806 | $108,557 | 1.2% | | Selling, general, and administrative expenses | $79,513 | $74,427 | 6.8% | | Depreciation and amortization expenses | $39,402 | $40,240 | (2.1)% | | Interest expense | $30,720 | $27,051 | 13.6% | | Realized gain on foreign exchange – 2024 Notes | $2,547 | — | NM | | Unrealized (loss) gain on 2024 Notes | $(512) | $177 | NM | | Income tax provision | $6,341 | $6,595 | (3.9)% | | Other Operating Data | H1 2020 | H1 2019 | Change (%) | | :--- | :--- | :--- | :--- | | ARPU—on net | $459 | $460 | (0.1)% | | ARPU—off-net | $1,055 | $1,107 | (4.7)% | | Average Price per Megabit — installed base | $0.50 | $0.65 | (23.4)% | | Customer Connections—end of period (On-net) | 75,927 | 72,415 | 4.8% | | Customer Connections—end of period (Off-net) | 11,846 | 11,321 | 4.6% | | Buildings On-net | 2,854 | 2,737 | 4.3% | Service Revenue Service revenue increased by 4.8% to $281.904 million for the six months ended June 30, 2020. Corporate customer revenue grew by 6.3% to $194.0 million, while net-centric revenue increased by 1.7% to $87.9 million, impacted by a 23.4% decline in average price per megabit and a $1.4 million negative impact from exchange rates - The impact of exchange rates resulted in a $1.4 million decrease in revenues for H1 2020[126] - Corporate customers represented 68.8% of total service revenue in H1 2020, up from 67.9% in H1 2019, indicating a continued shift towards corporate services[128] - On-net ARPU decreased by 0.1%, partly due to volume and term-based pricing discounts and new customers having lower ARPU than canceling customers[129] Network Operations Expenses Network operations expenses increased by 1.2% to $109.806 million, driven by more customer connections and on-net buildings, partially offset by circuit cost reductions and the capitalization of an IRU fiber lease agreement - The increase in expenses was partially offset by price reductions in certain circuit costs and the capitalization of a $34.0 million IRU fiber lease renewal as a finance lease[131] Selling, General, and Administrative ("SG&A") Expenses SG&A expenses increased by 6.8% to $79.513 million, primarily due to higher salaries and related costs supporting expansion and increased sales efforts, with total headcount rising to 1,083 - Equity-based compensation expense included in SG&A was $10.6 million for H1 2020, up from $8.3 million in H1 2019[132] Depreciation and Amortization Expenses Depreciation and amortization expense decreased by 2.1% to $39.402 million, mainly due to certain fixed assets becoming fully depreciated - The decrease is primarily due to certain deployed fixed assets becoming fully depreciated[134] Interest Expense and Loss on Debt Extinguishment & Redemption Interest expense increased by 13.6% to $30.720 million, driven by higher finance lease obligations and the issuance of 2024 Notes. A $0.6 million loss on debt extinguishment was recorded from the redemption of 2021 Notes - The redemption of 2021 Notes in June 2020 at par value resulted in a $0.6 million loss on debt extinguishment[135] Realized gain and unrealized gain (loss) on foreign exchange – 2024 Notes The company recorded a $2.5 million realized foreign exchange gain from the June 2020 issuance of 2024 Euro Notes. An unrealized foreign exchange loss of $(0.5) million was recorded for the six months ended June 30, 2020 - The realized gain was due to the Euro to USD rate changing from $1.112 at issuance to $1.133 at receipt of proceeds[136] - The company does not enter into hedges for its foreign currency obligations[136] Income Tax Provision The income tax provision decreased by 3.9% to $6.341 million, primarily due to changes in taxable income - The change in income tax provision is primarily related to changes in taxable income[137] Buildings On-net The number of on-net buildings connected to the network increased by 117 (4.3%) to 2,854 as of June 30, 2020, as part of the company's network expansion program - The company anticipates adding a similar number of buildings to its network for the next several years[138] Liquidity and Capital Resources The company maintains strong liquidity with growing operating cash flow and access to capital markets, enabling distributions to shareholders. Management actively monitors cash balances, receivables, payables, and debt obligations, while also assessing the impact of the COVID-19 pandemic on its financial position - The company has returned over $820 million to shareholders through share repurchases and dividends since its IPO[139] - Management continuously reviews cash balances, accounts receivable, accounts payable, accrued liabilities, capital expenditure commitments, and debt payments to assess liquidity[140] - The company may retire or purchase outstanding debt through various transactions, which could be material[141] Impact of COVID-19 on Our Liquidity and Operating Performance The COVID-19 pandemic had a limited impact on the company's business in Q2 2020, with effective remote work policies and mitigated building access disruptions. While sales productivity decreased, network traffic grew. The company maintained high liquidity and repaid a PPP loan - The company adopted a mandatory work-from-home policy and implemented safety procedures for on-site personnel, mitigating operational disruptions[145] - Despite some delays in new service installations and decreased sales representative productivity, network traffic continued to grow at an accelerated rate[146][148] - The company maintained $417.0 million in cash and cash equivalents as of June 30, 2020, and repaid a Paycheck Protection Program (PPP) loan received in April 2020[149] Cash Flows Operating cash flows remained stable, while investing activities increased due to property and equipment purchases. Financing activities shifted to a net cash outflow, primarily due to debt redemption and dividend payments, partially offset by new debt issuance | Cash Flow Activity (in thousands) | Six Months Ended June 30, 2020 | Six Months Ended June 30, 2019 | | :--- | :--- | :--- | | Net cash provided by operating activities | $69,769 | $69,269 | | Net cash used in investing activities | $(26,796) | $(25,008) | | Net cash (used in) provided by financing activities | $(25,257) | $88,961 | | Net increase in cash and cash equivalents | $17,604 | $133,186 | - Interest payments on note obligations were $27.5 million in H1 2020, up from $17.3 million in H1 2019[153] - Financing activities included $62.3 million in dividends paid, $189.2 million for 2021 Notes redemption, and $240.3 million net proceeds from 2024 Euro Notes issuance in H1 2020[155] Cash Position and Indebtedness As of June 30, 2020, the company held $417.0 million in cash and cash equivalents and had total indebtedness of $1.1 billion, including $203.8 million in finance lease obligations - The company's liquidity position of $417.0 million in cash and cash equivalents reduces refinancing risk and enhances its ability to pursue acquisitions or operating opportunities[156] - Total indebtedness at par value was $1.1 billion as of June 30, 2020[157] Summarized Financial Information of Holdings Holdings, as a guarantor under the 2022 and 2024 Notes, reported $166.510 million in total assets and total equity as of June 30, 2020, with a net loss of $(11.766) million for the six months ended June 30, 2020 | Metric (in thousands) | June 30, 2020 (Unaudited) | | :--- | :--- | | Cash and cash equivalents | $166,497 | | Total assets | $166,510 | | Total equity | $166,510 | | Equity-based compensation expense (H1 2020) | $12,224 | | Net loss (H1 2020) | $(11,766) | Common Stock Buyback Program The Board of Directors authorized a common stock buyback program, with $34.9 million remaining available as of June 30, 2020. No shares were repurchased during the three and six months ended June 30, 2020 or 2019 - The buyback program is authorized through December 31, 2020[161] Dividends on Common Stock and Return of Capital Program The Board approved a quarterly dividend of $0.705 per common share, payable September 4, 2020. Future dividends and capital returns are discretionary and subject to financial performance, cash flow, and debt indenture limitations - The estimated dividend payment is $32.2 million[162] - Debt indentures limit the company's ability to return cash to stockholders[163] Contractual Obligations and Commitments Material changes to contractual obligations include the June 2020 issuance of €215.0 million 2024 Notes, the redemption of $189.2 million 2021 Notes, and a new agreement to purchase $35.0 million of network equipment annually for three years - Net proceeds from the June 2020 2024 Notes offering were $240.3 million, used to repay 2021 Notes and for general corporate purposes[165] - The redemption of 2021 Notes resulted in a $0.6 million loss on debt extinguishment[166] - A new agreement requires purchasing $35.0 million of network equipment annually from a vendor for three years, starting July 2020[167] Future Capital Requirements The company believes that its cash on hand and cash generated from operating activities will be adequate to meet its working capital, capital expenditure, debt service, dividend payments, and other cash requirements for the next twelve months. However, future acquisitions or unplanned costs may necessitate additional debt or equity financing, which could lead to dilution or impact business plans - Insufficient funds could lead to delays in network expansion, reduced sales and marketing efforts, or other adverse effects on the business[169] - The company may refinance existing debt or seek additional capital for liquidity, acquisitions, or general corporate purposes, potentially through new debt or open market purchases of outstanding debt[171] Off-Balance Sheet Arrangements The company does not have relationships with unconsolidated entities or financial partnerships for off-balance sheet arrangements and is not materially exposed to related financing, liquidity, market, or credit risks - The company does not engage in trading activities involving non-exchange traded contracts[172] Critical Accounting Policies and Significant Estimates Management confirms no material changes to critical accounting policies and significant estimates from those disclosed in the annual report on Form 10-K for the year ended December 31, 2019 - No material changes to critical accounting policies and significant estimates as of June 30, 2020[173] ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Management states that there have been no material changes to the company's exposures to market risk as of June 30, 2020, compared to those disclosed in the annual report on Form 10-K for the year ended December 31, 2019 - No material changes to market risk exposures as of June 30, 2020[174] ITEM 4. CONTROLS AND PROCEDURES The company's management, including the CEO and CFO, concluded that disclosure controls and procedures were effective at a reasonable assurance level as of June 30, 2020. No material changes to internal control over financial reporting occurred during the quarter - Disclosure controls and procedures were effective at the reasonable assurance level as of June 30, 2020[176] - No material changes in internal control over financial reporting occurred during the most recent fiscal quarter[177] PART II OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS The company is involved in routine legal proceedings that are not expected to have a material impact on its operations or financial results. Further details are provided in Note 4 of the financial statements - Legal proceedings in the ordinary course of business are not expected to have a material impact[180] ITEM 1A. RISK FACTORS This section supplements previously disclosed risk factors, emphasizing the significant and unpredictable uncertainties posed by the COVID-19 pandemic on the company's business, financial condition, and results of operations, including potential impacts on demand, customer payments, supply chain, and operational plans - The COVID-19 pandemic creates significant uncertainty, impacting demand for services, customer payment ability, third-party reliance, and operational plans across 46 countries[181][183] - Uncertainties include the pandemic's duration and scope, governmental responses (e.g., travel bans, lockdowns, re-opening policies), and impacts on global economic conditions[184][185][186] The impact of the spread of COVID-19 continues to create significant uncertainty for our business, financial condition and results of operations. The COVID-19 pandemic's impact on the company's business, financial results, and operations remains highly uncertain and unpredictable, depending on factors like the pandemic's duration, governmental actions, and global economic conditions - The pandemic's impact varies by market and could affect demand, customer payments, supplier capabilities, network expansion, and the implementation of strategic plans[182][186] Protective measures we have implemented to protect for our workforce from the COVID-19 virus may not be effective and may expose us to additional risks. Measures like remote work and safety procedures have led to increased costs and amplified risks, including strain on IT resources, increased cybersecurity threats, and potential operational impacts if a significant portion of the workforce is unable to work - Increased costs incurred due to COVID-19 include one-time expenses for laptops and recurring costs for sanitizing equipment[189] - Remote work amplifies risks such as increased demand on IT resources, higher cybersecurity attack vulnerability, and potential operational disruption from workforce illness or restrictions[191] ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS The Board of Directors authorized a common stock repurchase plan through December 31, 2020. No common stock was purchased during the second quarter of 2020 - No common stock purchases were made during the second quarter of 2020 under the authorized buyback plan[192] ITEM 6. EXHIBITS. This section lists the exhibits filed with the Form 10-Q, including various indentures related to senior notes, certifications from the CEO and CFO, and XBRL formatted financial statements - Exhibits include indentures for 4.375% Senior Notes due 2024, certifications (31.1, 31.2, 32.1, 32.2), and financial statements in iXBRL format[194] SIGNATURES The report is duly signed on behalf of Cogent Communications Holdings, Inc. by its Chief Executive Officer, David Schaeffer, and Chief Financial Officer, Sean Wallace, on August 6, 2020 - The report was signed by David Schaeffer (CEO) and Sean Wallace (CFO) on August 6, 2020[197][198]