Cogent(CCOI) - 2021 Q2 - Quarterly Report

PART I FINANCIAL INFORMATION This section provides the unaudited condensed consolidated financial statements, management's discussion and analysis, market risk disclosures, and controls and procedures ITEM 1. FINANCIAL STATEMENTS This section presents unaudited condensed consolidated financial statements and detailed notes on business, accounting, debt, and other financial aspects Condensed Consolidated Balance Sheets This statement provides a snapshot of the company's assets, liabilities, and equity at specific points in time | Metric (in thousands) | June 30, 2021 (Unaudited) | December 31, 2020 | | :-------------------- | :------------------------ | :------------------ | | Cash and cash equivalents | $373,963 | $371,301 | | Total current assets | $454,555 | $456,337 | | Total assets | $1,010,747 | $1,000,477 | | Total current liabilities | $93,726 | $94,443 | | Total liabilities | $1,346,888 | $1,293,643 | | Total stockholders' deficit | $(336,141) | $(293,166) | - Total assets increased by $10.27 million from December 31, 2020, to June 30, 2021, reaching $1,010,747 thousand[8] - Total liabilities increased by $53.245 million, leading to an increased stockholders' deficit of $(336,141) thousand as of June 30, 2021[8] Condensed Consolidated Statements of Comprehensive (Loss) Income (Three Months) This statement details the company's financial performance, including revenues, expenses, and net loss or income, over a three-month period | Metric (in thousands, except per share) | Three Months Ended June 30, 2021 (Unaudited) | Three Months Ended June 30, 2020 (Unaudited) | Change (%) | | :-------------------------------------- | :------------------------------------------- | :------------------------------------------- | :--------- | | Service revenue | $147,879 | $140,990 | 4.9% | | Total operating expenses | $119,668 | $113,621 | 5.3% | | Operating income | $28,211 | $27,574 | 2.3% | | Net (loss) income | $(2,493) | $8,564 | -129.1% | | Basic net (loss) income per common share | $(0.05) | $0.19 | -126.3% | | Diluted net (loss) income per common share | $(0.05) | $0.18 | -127.8% | | Dividends declared per common share | $0.78 | $0.68 | 14.7% | - The company reported a net loss of $2.493 million for the three months ended June 30, 2021, a significant decline from a net income of $8.564 million in the prior-year period, primarily due to a $10.830 million loss on debt extinguishment and redemption of 2022 Notes[12] - Service revenue increased by 4.9% year-over-year, reaching $147.879 million[12] Condensed Consolidated Statements of Comprehensive Income (Six Months) This statement details the company's financial performance, including revenues, expenses, and net income, over a six-month period | Metric (in thousands, except per share) | Six Months Ended June 30, 2021 (Unaudited) | Six Months Ended June 30, 2020 (Unaudited) | Change (%) | | :-------------------------------------- | :----------------------------------------- | :----------------------------------------- | :--------- | | Service revenue | $294,656 | $281,904 | 4.5% | | Total operating expenses | $240,171 | $228,721 | 5.0% | | Operating income | $54,503 | $53,427 | 2.0% | | Net income | $16,358 | $17,791 | -8.1% | | Basic net income per common share | $0.35 | $0.39 | -10.3% | | Diluted net income per common share | $0.35 | $0.38 | -7.9% | | Dividends declared per common share | $1.535 | $1.340 | 14.6% | - Net income for the six months ended June 30, 2021, decreased by 8.1% to $16.358 million, primarily impacted by a $14.698 million loss on debt extinguishment and redemption of 2022 Notes[15] - Service revenue for the six-month period increased by 4.5% to $294.656 million[15] Condensed Consolidated Statements of Cash Flows This statement summarizes the cash inflows and outflows from operating, investing, and financing activities over a period | Cash Flow Activity (in thousands) | Six Months Ended June 30, 2021 (Unaudited) | Six Months Ended June 30, 2020 (Unaudited) | Change (%) | | :-------------------------------- | :----------------------------------------- | :----------------------------------------- | :--------- | | Net cash provided by operating activities | $86,855 | $69,769 | 24.5% | | Net cash used in investing activities | $(32,661) | $(26,796) | 21.9% | | Net cash used in financing activities | $(50,874) | $(25,257) | 101.4% | | Net increase in cash and cash equivalents | $2,662 | $17,604 | -84.9% | - Net cash provided by operating activities increased by 24.5% to $86.855 million for the six months ended June 30, 2021[19] - Net cash used in financing activities more than doubled to $50.874 million, primarily due to significant debt redemption activities ($459.317 million for 2022 Notes) offset by new debt issuance ($496.933 million for 2026 Notes)[19][163] 1. Description of the business and recent developments This section outlines the company's core business as a high-speed internet provider and recent accounting standard adoptions - Cogent Communications Holdings, Inc. is a facilities-based provider of low-cost, high-speed Internet access, private network services, and data center colocation, serving businesses and communication service providers in 48 countries[22] - The company offers 'on-net' services through its own facilities and 'off-net' services using other carriers' 'last mile' circuits, with non-core services also supported from acquisitions[23][25] - The company adopted ASU 2016-13 (ASC 326) for credit losses on January 1, 2020, which did not materially impact its consolidated financial statements[51] 2. Property and equipment This section details the company's property and equipment, including depreciation expenses and financing arrangements | Expense (in thousands) | Three Months Ended June 30, 2021 | Three Months Ended June 30, 2020 | Six Months Ended June 30, 2021 | Six Months Ended June 30, 2020 | | :--------------------- | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | Depreciation and amortization | $22,100 | $19,900 | $44,100 | $39,400 | | Capitalized salaries and benefits | $4,200 | $3,000 | $7,400 | $5,900 | - Depreciation and amortization expense increased by 11.1% for the three months and 11.8% for the six months ended June 30, 2021, compared to the prior year, reflecting increased deployed fixed assets[53] - The company has an installment payment agreement (IPA) for network equipment, with $3.4 million outstanding as of June 30, 2021, down from $7.7 million at December 31, 2020[54] 3. Long-term debt This section outlines the company's long-term debt instruments, including new issuances, redemptions, and foreign exchange impacts | Debt Instrument | Principal Amount | Interest Rate | Maturity Date | | :-------------- | :--------------- | :------------ | :------------ | | Senior Secured Notes | $500.0 million | 3.50% | May 1, 2026 | | Senior Unsecured Euro Notes | €350.0 million ($415.8 million USD) | 4.375% | June 30, 2024 | - In May 2021, the company issued $500.0 million of 3.50% Senior Secured Notes due 2026, with net proceeds of $496.9 million[57][58] - The proceeds from the 2026 Notes were used to redeem and extinguish all outstanding 2022 Notes, resulting in a total loss on debt extinguishment and redemption of $14.7 million for the six months ended June 30, 2021[58][63][64] - The 2024 Euro Notes are subject to foreign exchange fluctuations, resulting in an unrealized gain of $13.6 million for the six months ended June 30, 2021, compared to a loss of $0.5 million in the prior year[66] 4. Commitments and contingencies This section details potential financial obligations and legal disputes, including estimated losses from leased circuits and arbitration - The company estimates a reasonably possible loss of up to $3.5 million in excess of accrued amounts related to obligations for leased circuits[70] - An arbitration proceeding in Spain involves a former optical fiber provider seeking approximately $9 million for early termination of leases, which the company is contesting[71] 5. Income taxes This section provides an overview of the company's income tax provisions and the factors influencing them | (Loss) Income Before Income Taxes (in thousands) | Three Months Ended June 30, 2021 | Three Months Ended June 30, 2020 | Six Months Ended June 30, 2021 | Six Months Ended June 30, 2020 | | :----------------------------------------------- | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | Domestic | $828 | $14,113 | $29,330 | $31,902 | | Foreign | $(2,899) | $(2,814) | $(5,199) | $(7,770) | | Total | $(2,071) | $11,299 | $24,131 | $24,132 | - The income tax provision decreased significantly for the three months ended June 30, 2021, to $0.4 million from $2.7 million, primarily due to a decrease in income before income taxes[126] - For the six months ended June 30, 2021, the income tax provision increased to $7.8 million from $6.3 million, mainly due to an increase in certain non-deductible expenses[148] 6. Common stock buyback program This section details the company's common stock buyback program, including remaining authorization and recent activity - As of June 30, 2021, approximately $30.4 million remained authorized for purchases under the Buyback Program, which extends through December 31, 2021[75] - No common stock was purchased during the three or six months ended June 30, 2021, or the corresponding periods in 2020[75] 7. Dividends on common stock This section outlines recent dividend declarations and the factors influencing future dividend payments - The Board of Directors approved a quarterly dividend of $0.805 per common share on August 4, 2021, estimated at $37.2 million, payable on September 3, 2021[76] - Future dividend payments are at the Board's discretion and subject to financial position, cash flow, capital requirements, and limitations under debt indentures and Delaware law[77] 8. Related party transactions This section discloses transactions with related parties, specifically the lease of the company's headquarters - The company leases its headquarters from Sodium LLC, an entity owned by its CEO, with an annual rent of $1.0 million plus taxes and utilities[78] | Rent and Related Costs (in millions) | Three Months Ended June 30, 2021 | Three Months Ended June 30, 2020 | Six Months Ended June 30, 2021 | Six Months Ended June 30, 2020 | | :----------------------------------- | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | Paid to Sodium LLC | $0.5 | $0.5 | $0.8 | $0.8 | 9. Segment information This section provides details on the company's single operating segment and revenue breakdown by geographic region and product class - The company operates as a single operating segment[80] | Revenue by Geographic Region (in thousands) | Three Months Ended June 30, 2021 | Three Months Ended June 30, 2020 | Six Months Ended June 30, 2021 | Six Months Ended June 30, 2020 | | :---------------------------------------- | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | North America | $117,140 | $115,131 | $233,537 | $230,745 | | Europe | $26,880 | $23,573 | $53,910 | $46,847 | | Latin America | $1,054 | $436 | $1,882 | $766 | | Asia Pacific | $2,712 | $1,850 | $5,156 | $3,546 | | Africa | $93 | N/A | $171 | N/A | | Total | $147,879 | $140,990 | $294,656 | $281,904 | | Revenue by Product Class (in thousands) | Three Months Ended June 30, 2021 | Three Months Ended June 30, 2020 | Six Months Ended June 30, 2021 | Six Months Ended June 30, 2020 | | :-------------------------------------- | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | On-net | $111,041 | $103,800 | $220,989 | $207,256 | | Off-net | $36,699 | $37,044 | $73,422 | $74,364 | | Non-core | $139 | $146 | $245 | $284 | ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of Operations This section discusses the company's financial condition, operational results, competitive landscape, strategic initiatives, and liquidity, including COVID-19 impacts General Overview This section provides an overview of the company's business model as a high-speed internet provider and its revenue composition - The company is a facilities-based provider of low-cost, high-speed Internet access, private network services, and data center colocation, serving small and medium-sized businesses and communication service providers globally[83] | Revenue Type | Q2 2021 Revenue Share | Q2 2020 Revenue Share | H1 2021 Revenue Share | H1 2020 Revenue Share | | :----------- | :-------------------- | :-------------------- | :-------------------- | :-------------------- | | On-net | 75.1% | 73.6% | 75.0% | 73.5% | | Off-net | 24.8% | 26.3% | 24.9% | 26.4% | | Non-core | ~0.1% | ~0.1% | ~0.1% | ~0.1% | - On-net services, delivered through the company's own facilities, constitute the majority of revenue, while off-net services, relying on third-party 'last mile' connections, represent a significant portion[85][87] Competitive Advantages This section highlights the company's operational efficiencies, network design, market reach, and experienced management team - The company maintains a low cost of operation through a single Ethernet network protocol, broad access to dark fiber leases, a narrow and focused product set, and scalable network equipment and hub configurations[89][90][91][93] - Key advantages include greater control over service delivery, high-quality and reliable service due to optimized network design, a large addressable market with 2,975 on-net buildings in 210 metropolitan markets, and a balanced, high-traffic network enabling settlement-free interconnection[94][95][96][97] - The senior management team possesses extensive experience in the telecommunications industry, with many members working together at the company since 2000[98] Our Strategy This section outlines the company's strategic goals, including customer base expansion, market share growth, and new product introductions - The company aims to grow its corporate customer base by leveraging superior speeds and rapid installation times, especially for dedicated internet access and private network services[100] - It plans to increase its share of the net-centric market by offering attractive features like geographic breadth (48 countries, 1,309 CNDCs), high capacity (100 Mbps to 100 Gbps), a balanced customer base, a large salesforce, and competitive pricing[101] - A new product, Global Peer Connect (GPC), was introduced in late 2020 to allow net-centric customers to dynamically peer traffic anywhere on its global platform, offering ubiquity, attractive economics (usage-based, no fixed port charges), and greater customer control[102] - Other strategic elements include pursuing on-net customer growth in existing and new buildings, expanding and improving sales efforts (30% increase in salesforce over five years), and growing the off-net corporate business through agreements with national carriers[104][105][106] Results of Operations (Three Months Ended June 30, 2021 Compared to the Three Months Ended June 30, 2020) This section analyzes the company's financial performance for the three months ended June 30, 2021, compared to the prior-year period | Metric (in thousands) | Q2 2021 | Q2 2020 | % Change | | :-------------------- | :---------- | :---------- | :------- | | Service revenue | $147,879 | $140,990 | 4.9% | | On-net revenue | $111,041 | $103,800 | 7.0% | | Off-net revenue | $36,699 | $37,044 | (0.9)% | | Network operations expenses | $56,180 | $53,886 | 4.3% | | SG&A expenses | $41,392 | $39,839 | 3.9% | | Depreciation and amortization | $22,096 | $19,896 | 11.1% | | Interest expense | $14,236 | $15,499 | (8.1)% | | Loss on debt extinguishment – 2022 Notes | $10,830 | — | NM | | Income tax provision | $422 | $2,735 | (84.6)% | | Operating Data | Q2 2021 | Q2 2020 | % Change | | :------------- | :------ | :------ | :------- | | ARPU—on-net | $470 | $458 | 2.6% | | ARPU—off-net | $994 | $1,048 | (5.1)% | | Average Price per Megabit | $0.36 | $0.47 | (24.8)% | | On-net Customer Connections | 79,146 | 75,927 | 4.2% | | Off-net Customer Connections | 12,386 | 11,846 | 4.6% | - Service revenue increased by 4.9%, positively impacted by $3.0 million from exchange rates and $1.5 million from gross receipts taxes and Universal Service Fund fees[112][113] - Corporate customer revenue decreased by 6.7% due to COVID-19 related caution and a deteriorating real estate market, while net-centric customer revenue increased by 30.5% despite a 24.8% decline in average price per megabit[114][115][117] - Interest expense decreased by 8.1% due to lower interest rates on the newly issued 2026 Notes compared to the extinguished 2022 Notes, but a significant loss on debt extinguishment of $10.830 million was incurred[123] Results of Operations (Six Months Ended June 30, 2021 Compared to the Six Months Ended June 30, 2020) This section analyzes the company's financial performance for the six months ended June 30, 2021, compared to the prior-year period | Metric (in thousands) | H1 2021 | H1 2020 | % Change | | :-------------------- | :---------- | :---------- | :------- | | Service revenue | $294,656 | $281,904 | 4.5% | | On-net revenue | $220,989 | $207,256 | 6.6% | | Off-net revenue | $73,422 | $74,364 | (1.3)% | | Network operations expenses | $113,272 | $109,806 | 3.2% | | SG&A expenses | $82,834 | $79,513 | 4.2% | | Depreciation and amortization | $44,065 | $39,402 | 11.8% | | Interest expense | $30,071 | $30,720 | (2.1)% | | Loss on debt extinguishment – 2022 Notes | $14,698 | — | NM | | Income tax provision | $7,773 | $6,341 | 22.6% | | Operating Data | H1 2021 | H1 2020 | % Change | | :------------- | :------ | :------ | :------- | | ARPU—on-net | $479 | $459 | 4.4% | | ARPU—off-net | $1,018 | $1,055 | (3.5)% | | Average Price per Megabit | $0.37 | $0.50 | (26.5)% | | On-net Customer Connections | 79,146 | 75,927 | 4.2% | | Off-net Customer Connections | 12,386 | 11,846 | 4.6% | - Service revenue increased by 4.5%, with foreign exchange rates contributing $5.6 million and taxes/surcharges adding $2.3 million[134][135] - Corporate customer revenue decreased by 5.9% to $182.5 million, while net-centric customer revenue increased by 27.6% to $112.2 million, despite a 26.5% decline in average price per megabit[136][138] - Network operations expenses increased by 3.2%, driven by network expansion and equity-based compensation, partially offset by leased circuit price reductions[142] Liquidity and Capital Resources This section discusses the company's ability to meet short-term and long-term financial obligations and its capital management strategies - Management assesses liquidity by reviewing cash balances, receivables, payables, capital expenditure commitments, and debt payments[150] - Significant contractual cash outlays include expected quarterly dividend payments of approximately $330 million over the next two years and annual interest payments of $17.5 million on 2026 Notes and €15.3 million on 2024 Notes[151][152] - The company may need to refinance debt at or before maturity and may seek additional capital for liquidity, acquisitions, or general corporate purposes, with potential for dilution if equity is issued[153][155][156] Cash Flows This section analyzes the company's cash flow activities from operations, investing, and financing for the six-month period | Cash Flow Activity (in thousands) | Six Months Ended June 30, 2021 | Six Months Ended June 30, 2020 | | :-------------------------------- | :------------------------------- | :------------------------------- | | Net cash provided by operating activities | $86,855 | $69,769 | | Net cash used in investing activities | $(32,661) | $(26,796) | | Net cash used in financing activities | $(50,874) | $(25,257) | | Net increase in cash and cash equivalents | $2,662 | $17,604 | - Operating cash flow increased due to changes in operating profit and interest payments, with $32.9 million in interest payments on note obligations in H1 2021[160] - Investing activities primarily involved property and equipment purchases, increasing to $32.7 million in H1 2021 due to network expansion[161] - Financing activities included $73.1 million in dividend payments and $459.3 million for 2022 Notes redemption, offset by $496.9 million from 2026 Notes issuance[162][163] Cash Position and Indebtedness This section summarizes the company's cash and cash equivalents and total indebtedness as of June 30, 2021 | Metric (in millions) | June 30, 2021 | | :------------------- | :------------ | | Total indebtedness (at par) | $1.1 | | Cash and cash equivalents | $374.0 | - Total indebtedness includes $224.6 million of finance lease obligations for dark fiber under long-term IRU agreements[164] Summarized Financial Information of Holdings This section provides a summary of the financial position and performance of the Holdings entity | Metric (in thousands) | June 30, 2021 (Unaudited) | | :-------------------- | :------------------------ | | Cash and cash equivalents | $148,217 | | Total assets | $148,219 | | Total equity | $148,219 | | Net loss (Six Months Ended June 30, 2021) | $(16,252) | - Holdings, as a guarantor under the 2024 and 2026 Notes, reported a net loss of $16.252 million for the six months ended June 30, 2021[166][167] Common Stock Buyback Program This section details the common stock buyback program, including remaining authorization and recent activity - The Board of Directors authorized a common stock buyback program through December 31, 2021, with $30.4 million remaining as of June 30, 2021[168] - No shares were repurchased during the three or six months ended June 30, 2021, or the corresponding periods in 2020[168] Dividends on Common Stock and Return of Capital Program This section outlines recent dividend declarations and the factors influencing future capital return decisions - A quarterly dividend of $0.805 per common share was approved on August 4, 2021, for an estimated $37.2 million payment[169] - Future dividends and capital returns are subject to Board discretion, financial performance, cash flow, capital needs, and debt indenture limitations[170] Future Capital Requirements This section discusses the company's anticipated capital needs and potential financing strategies for future operations and growth - Management believes current cash and operating cash flows will be sufficient for working capital, capital expenditures, debt service, and dividends for the next twelve months[171] - Future acquisitions or significant unplanned costs may necessitate additional debt or equity financing, which could lead to substantial dilution for existing stockholders[173] - The company may refinance existing indebtedness or seek additional capital to improve liquidity or fund strategic initiatives, evaluating transactions based on market conditions[174] Off-Balance Sheet Arrangements This section confirms the absence of material off-balance sheet arrangements and related financial risks - The company does not have relationships with unconsolidated entities or financial partnerships for off-balance sheet arrangements[175] - It is not materially exposed to financing, liquidity, market, or credit risks from such arrangements[175] Impact of COVID-19 on Our Liquidity and Operating Performance This section assesses the impact of the COVID-19 pandemic on the company's liquidity, operational adjustments, and sales performance - As of June 30, 2021, the company maintained a high level of liquidity with $374.0 million in cash and cash equivalents, with no material impact on its credit rating or cost of capital from COVID-19[176] - Operational adjustments included mandatory work-from-home policies, curtailed business travel, and new safety procedures, which allowed effective continued operation[177] - The pandemic led to a slowdown in new sales to corporate customers due to cautious approaches to new configurations, reduced demand for satellite offices, and a deteriorating real estate market[181] - The company cannot predict the full impact of new COVID-19 variants on the global economy or its operations[182] Critical Accounting Policies and Significant Estimates This section confirms that there have been no material changes to the company's critical accounting policies and estimates - Management believes there have been no material changes to critical accounting policies and significant estimates as of June 30, 2021, compared to the annual report on Form 10-K for December 31, 2020[184] ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK This section confirms no material changes to the company's market risk exposures since the last annual report - Management believes there have been no material changes to the company's exposures to market risk as of June 30, 2021, from those disclosed in its annual report on Form 10-K for December 31, 2020[185] ITEM 4. CONTROLS AND PROCEDURES This section confirms the effectiveness of disclosure controls and reports no material changes in internal control over financial reporting - The company's disclosure controls and procedures were evaluated and deemed effective at a reasonable assurance level as of the end of the reporting period[187] - There has been no material change in the company's internal control over financial reporting during the most recent fiscal quarter[188] PART II OTHER INFORMATION This section covers legal proceedings, risk factors, equity sales, and a list of exhibits filed with the report ITEM 1. LEGAL PROCEEDINGS This section confirms the company's involvement in ordinary course legal proceedings not expected to materially impact operations - The company is involved in legal proceedings in the ordinary course of business, which are not expected to have a material impact on its operations or results[191] - Further information on these proceedings is included in Note 4 of the interim condensed consolidated financial statements[191] ITEM 1A. RISK FACTORS This section indicates no material changes to the company's risk factors since its last annual report - Management believes there have been no material changes to the company's risk factors as of June 30, 2021, from those disclosed in its annual report on Form 10-K for December 31, 2020[192] ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS This section details the common stock buyback program and confirms no purchases were made during the second quarter of 2021 - The Board of Directors authorized a plan for common stock repurchases in negotiated and open market transactions through December 31, 2021[193] - No common stock purchases were made during the second quarter of 2021[193] ITEM 6. EXHIBITS. This section lists the exhibits filed with the Form 10-Q, including indentures, forms of notes, incentive plans, and certifications - Exhibits include the Indenture related to the 3.500% Senior Secured Notes due 2026, the Form of 3.500% Senior Secured Notes due 2026, and the Amended and Restated Cogent Communications Holdings, Inc. 2017 Incentive Award Plan[195] - Certifications from the Chief Executive Officer and Chief Financial Officer are also filed as exhibits[195] SIGNATURES This section contains the duly authorized signatures of the registrant's Chief Executive Officer and Chief Financial Officer SIGNATURES This section contains the duly authorized signatures of the registrant's Chief Executive Officer and Chief Financial Officer - The report is signed by David Schaeffer, Chief Executive Officer, and Sean Wallace, Chief Financial Officer, on August 5, 2021[199][200]