Cogent(CCOI) - 2021 Q4 - Annual Report

Part I Item 1. Business The company provides high-speed internet, private network, and data center colocation services globally using a low-cost, fiber-based network model Overview - Cogent is a facilities-based provider of low-cost, high-speed Internet access, private network services, and data center colocation space across North America, Europe, Asia, South America, Australia, and Africa[8] - The company offers on-net services (100 Mbps to 400 Gbps) to customers in buildings physically connected to its network, avoiding reliance on local telephone or cable companies for the last mile[8] - Customers are categorized as corporate (small to medium-sized businesses in multi-tenant office buildings) and net-centric (bandwidth-intensive users like OTT media providers, ISPs, and mobile operators)[8] Competitive Advantages - Cogent's low-cost operating strategy is driven by using a single network protocol (Ethernet), leasing long-term dark fiber, offering a narrow product set, and employing scalable network configurations, resulting in a 23.3% compounded annual decline in the cost of goods sold per bit over the last five fiscal years[9] - The company has direct control over its on-net service delivery, including the "last mile" and in-building wiring, enabling faster provisioning (typically under two weeks) compared to competitors[11] - The network connects to 3,035 buildings in 216 metropolitan markets, including 1,817 multi-tenant office buildings and 1,359 carrier-neutral data centers, positioning it to attract high-volume internet traffic[11] - As a Tier 1 ISP, Cogent interconnects with 7,569 networks and has settlement-free peering arrangements with 24 other major ISPs, which broadens geographic delivery and reduces network costs[12][22] Our Strategy - Grow the corporate customer base by providing high-speed dedicated internet access and private network services, capitalizing on the increasing integration of off-site data centers and cloud services[14] - Increase market share in the net-centric segment by leveraging geographic breadth, high capacity (up to 400 Gbps), a large salesforce, and competitive pricing to meet growing demand from applications like OTT media and online gaming[14] - Expand the off-net corporate internet access business by utilizing agreements with national carriers that provide last-mile access to over 4.0 million commercial buildings in North America[17] - Prioritize on-net customer growth due to higher profit margins and greater control over service levels, quality, and installation times[14][15] Our Network Network Statistics as of Dec 31, 2021 | Component | Statistic | | :--- | :--- | | Total On-Net Buildings | 3,035 | | Metropolitan Markets Served | 216 | | Multi-Tenant Office Buildings | 1,817 | | Carrier Neutral Data Centers | 1,359 | | Cogent Data Centers | 54 | | Intra-city Fiber Miles | 39,559 | | Inter-city Fiber Route Miles | 60,676 | - The network is built by leasing long-term dark optical fiber and connecting Internet routers to it, a strategy that positions the company for revenue growth with limited incremental capital expenditures[18] - Cogent is a Tier 1 ISP, directly connecting with 7,569 networks, and exchanges traffic with 24 other Tier 1 ISPs on a settlement-free basis, reducing operating costs as it does not purchase transit services or paid peering[22] Our Customers - The company serves two main customer sets: corporate customers (small and medium-sized businesses) and net-centric customers (content providers, application service providers, and access networks)[25] - Corporate customers primarily purchase direct internet access (100 Mbps to 10 Gbps) and private network services, either on-net or off-net[25] - Net-centric customers purchase high-capacity IP connectivity (10 Gbps to 400 Gbps) in 1,413 data centers across 216 markets and can purchase contractual capacity, metered service, or burst capacity[25] Human Capital Management Employee Statistics as of Dec 31, 2021 | Metric | Value | | :--- | :--- | | Total Employees | 1,001 | | Employees in US & Canada | 81.0% | | Employees in Europe | 18.0% | | Quota-bearing Sales Reps | 49% | | Sales Management/Support | 14% | | Operational/Admin | 37% | - In 2021, the company experienced a 7.0% average monthly churn rate among sales representatives, attributed to performance goals and the mandate to return to the office and be vaccinated against COVID-19[30] - The company mandated that all US and Canadian employees be vaccinated against COVID-19 by October 2021 and return to the office full-time, though this was later modified due to the Omicron variant[32] Sales and Marketing - The company employs a direct sales force of 633 full-time employees as of December 31, 2021, down from 712 at year-end 2020, including 490 quota-bearing sales representatives[33] - Marketing efforts focus on direct contact and lead generation through building events and public relations, rather than traditional television, radio, or print advertising[33] Competition - Cogent faces competition from larger incumbent telephone and cable companies with greater financial resources, established brand names, and large customer bases[34] - Competition is based on price, speed, reliability, and service availability, and competitors are upgrading their networks with optical fiber to match Cogent's speed and quality[36] Regulation - As a provider of Internet access and private networks to businesses, the company is not subject to significant regulation, which provides flexibility and ease of entry into new markets[37] - The company must comply with regulations concerning licensing, data privacy, law enforcement interception, and website blocking in the various jurisdictions where it operates[37] Item 1A. Risk Factors The company faces significant risks from the COVID-19 pandemic's impact on corporate demand, employee retention, competition, and its substantial indebtedness Market Risks - The COVID-19 pandemic has adversely impacted the business, particularly corporate revenue, due to remote work policies, office closures, and rising vacancy rates in multi-tenant office buildings[39][41] - The company's mandate for employees to be vaccinated and return to the office full-time has led to increased employee departures, particularly in the sales department, and may make it difficult to retain and hire new employees[42][45] - The company is experiencing delays in the delivery of networking equipment and services from vendors, which may impact its ability to expand and augment its network[46] Business Risks - A long-term shift to remote work may negatively impact revenue growth, cash flows, and profitability by increasing corporate customer turnover and reducing demand for new services and upgrades[53] - The company's rapid growth places significant strains on its management, operational, and financial infrastructure, requiring effective expansion of its sales force and systems to manage growth[55][57] Competitive Risks - Maintaining settlement-free peering relationships is critical to avoiding higher costs and ensuring high network performance, and a failure to maintain or expand these relationships could materially harm the business[60] - The company faces significant competition from incumbent carriers and ISPs that have greater financial resources, larger customer bases, and more diverse service offerings[61] Operational Risks - The company's network is a potential target for cyber-attacks (like DDOS), which could lead to service interruptions, compromise of customer data, and material adverse effects on the business[64] - Reliance on complex information systems for sales, billing, and financial reporting poses a risk, as system failures could adversely affect sales, collections, and the ability to prepare timely financial statements[65] Network Augmentation and Maintenance Risks - The network relies on leased optical fiber and building access from numerous vendors, and a failure to renew these leases on attractive terms could impact the network and customer base[68] - Substantially all network infrastructure equipment is purchased from a single vendor, Cisco Systems, Inc, and delays or failures from this vendor could disrupt service and network expansion[71] International Operations Risks - Operations in 50 countries expose the company to risks including currency fluctuations (particularly the Euro), regulatory requirements, political and economic conditions, and diverse tax regimes[75] Regulatory and Tax Risks - The unsettled legal landscape for ISPs could lead to new liabilities for content disseminated through the network, requiring costly measures to reduce exposure[76] - Changes in laws, such as those related to net neutrality, data privacy (GDPR, CCPA), and ISP liability (Section 230), could adversely affect the business and its customers[77][80] - Governments may impose new taxes on Internet services, similar to those on telephone services, which could increase costs and discourage customer growth[82] Risk Factors Related to Our Indebtedness - As of December 31, 2021, the company had $1.1 billion in total indebtedness, including senior notes and finance lease obligations, which could make it difficult to satisfy financial obligations[85][86] - An interest rate swap agreement on the 2026 Notes exposes the company to risks associated with variable interest rates based on the Secured Overnight Financing Rate (SOFR)[88] - Debt agreements impose significant restrictions on the business, limiting the ability to incur additional debt, pay dividends, make certain investments, and enter into transactions with affiliates[90] Item 1B. Unresolved Staff Comments The company reports no unresolved staff comments - None[94] Item 2. Properties The company leases approximately 748,000 square feet for its operations, including its headquarters from an entity controlled by its CEO - The company leases its headquarters facility of 43,117 square feet in Washington, D.C. from an entity controlled by its CEO, with a lease expiring in May 2025 that is cancellable on 60 days' notice[95] - In total, the company leases approximately 748,000 square feet of space for its data centers, offices, and operations centers[95] Item 3. Legal Proceedings The company is involved in ordinary course legal proceedings not expected to have a material adverse effect on its business - The company is involved in legal proceedings in the ordinary course of business, which are not expected to have a material adverse effect, with details in Note 6 to the consolidated financial statements[96] Item 4. Mine Safety Disclosures This item is not applicable to the company - Not applicable[97] Part II Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities The company's stock trades on NASDAQ as "CCOI" and a stock repurchase plan is authorized through December 2022 - The company's common stock trades on the NASDAQ Global Select Market under the symbol "CCOI"[100] - A stock repurchase program authorized up to $50.0 million is in place through December 31, 2022, with $30.4 million remaining available as of December 31, 2021[104] Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations FY2021 revenue grew 3.8% driven by net-centric customers, offsetting a corporate decline, while net income was significantly impacted by foreign exchange gains Results of Operations Financial Performance Comparison (2021 vs. 2020) | Metric | 2021 (in thousands) | 2020 (in thousands) | % Change | | :--- | :--- | :--- | :--- | | Service Revenue | $589,797 | $568,103 | 3.8% | | On-net Revenues | $442,838 | $419,454 | 5.6% | | Off-net Revenues | $146,383 | $148,128 | (1.2)% | | Network Operations Expenses | $226,337 | $219,157 | 3.3% | | SG&A Expenses | $162,380 | $158,476 | 2.5% | | Depreciation & Amortization | $89,240 | $83,477 | 6.9% | | Income Tax Expense | $23,235 | $4,096 | 467.3% | - Corporate customer revenue decreased by 6.5% to $358.4 million in 2021, attributed to the COVID-19 pandemic's impact, while net-centric customer revenue increased by 25.3% to $231.4 million[110] - The average price per megabit for the installed customer base declined by 24.2% from 2020 to 2021, a trend expected to continue[111] - The number of on-net customer connections grew by 4.4% and off-net connections grew by 5.8% from year-end 2020 to 2021[113] Liquidity and Capital Resources Consolidated Cash Flows (in thousands) | Cash Flow Activity | 2021 | 2020 | 2019 | | :--- | :--- | :--- | :--- | | Net cash provided by operating activities | $170,257 | $140,320 | $148,809 | | Net cash used in investing activities | ($69,916) | ($55,952) | ($46,958) | | Net cash (used in) provided by financing activities | ($140,825) | ($116,002) | $22,020 | - As of December 31, 2021, the company had cash, cash equivalents, and restricted cash of $328.6 million[120] - The company paid $150.3 million in dividends in 2021, up from $129.4 million in 2020, reflecting regular quarterly increases in the dividend per share[128] - The company believes cash on hand and cash from operations will be adequate to meet working capital, capital expenditure, debt service, and dividend payment requirements for the next twelve months[139] Indebtedness - Total indebtedness at December 31, 2021, was $1.1 billion at par value, including $500.0 million of 3.50% senior secured notes due 2026, €350.0 million of 4.375% senior unsecured notes due 2024, and $245.9 million of finance lease obligations[85][129] - In May 2021, the company issued $500.0 million of 2026 Notes and used the proceeds to redeem its remaining 2022 Notes[130][213] - Debt indentures limit the company's ability to make restricted payments, such as dividends and stock purchases, with $185.5 million unrestricted and available for such payments as of December 31, 2021[133] Critical Accounting Policies and Significant Estimates - A critical accounting policy involves finance lease obligations, where management must make significant judgments regarding renewal options, useful lives of assets, and the incremental borrowing rate[144] Item 7A. Quantitative and Qualitative Disclosures About Market Risk The company is exposed to interest rate risk from a swap agreement and foreign currency risk from its Euro-denominated notes and international operations - The company is exposed to variable interest rate risk on its $500.0 million 2026 Notes due to an interest rate swap agreement tied to SOFR, where a 1.0% change in rates would impact annual interest expense by approximately $20.4 million[146] - Foreign currency exchange risk exists due to the €350.0 million 2024 Notes and international operations, which generated 25.5% of consolidated revenue in 2021, where a 1.0% change in exchange rates would impact annual revenue by approximately $1.2 million[148] Item 8. Financial Statements and Supplementary Data This section contains the company's audited consolidated financial statements and the independent auditor's report for the fiscal year ended December 31, 2021 Report of Independent Registered Public Accounting Firm - Ernst & Young LLP issued an unqualified opinion on the consolidated financial statements for the year ended December 31, 2021, stating they are presented fairly in conformity with U.S. GAAP[152] - The audit identified a Critical Audit Matter related to the classification of Indefeasible Right of Use (IRU) lease agreements, which involved subjective judgment in determining the economic life of the underlying optical fiber assets[155] Consolidated Financial Statements Consolidated Balance Sheet Data (in thousands) | Account | Dec 31, 2021 | Dec 31, 2020 | | :--- | :--- | :--- | | Total Assets | $984,557 | $1,000,477 | | Total Liabilities | $1,357,655 | $1,293,643 | | Total Stockholders' Equity (Deficit) | ($373,098) | ($293,166) | Consolidated Income Statement Data (in thousands) | Account | 2021 | 2020 | 2019 | | :--- | :--- | :--- | :--- | | Service Revenue | $589,797 | $568,103 | $546,159 | | Operating Income | $119,233 | $106,922 | $100,257 | | Net Income | $48,185 | $6,216 | $37,520 | Earnings Per Share (Diluted) | Year | Diluted EPS | | :--- | :--- | | 2021 | $1.03 | | 2020 | $0.13 | | 2019 | $0.81 | Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure The company reports no changes in or disagreements with its accountants - None[255] Item 9A. Controls and Procedures Management concluded that disclosure controls and procedures were effective as of December 31, 2021, with no material changes to internal controls - Management, including the CEO and CFO, concluded that the company's disclosure controls and procedures were effective as of the end of the period covered by the report[256] - There were no changes in internal control over financial reporting during the most recent fiscal quarter that materially affected, or are reasonably likely to materially affect, internal controls[256] - The independent registered public accounting firm, Ernst & Young LLP, issued an unqualified report on the company's internal control over financial reporting as of December 31, 2021[259][262] Item 9B. Other Information The company reports no other information - None[266] Item 9C. Disclosure Regarding Foreign Jurisdictions that Prevent Inspections This item is not applicable to the company - Not applicable[267] Part III Item 10. Directors, Executive Officers and Corporate Governance Required information is incorporated by reference from the company's 2022 definitive proxy statement - Information is incorporated by reference from the registrant's 2022 definitive proxy statement[269] Item 11. Executive Compensation Required information is incorporated by reference from the company's 2022 definitive proxy statement - Information is incorporated by reference from the registrant's 2022 definitive proxy statement[270] Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters Required information is incorporated by reference from the company's 2022 definitive proxy statement - Information is incorporated by reference from the registrant's 2022 definitive proxy statement[271] Item 13. Certain Relationships and Related Transactions and Director Independence Required information is incorporated by reference from the company's 2022 definitive proxy statement - Information is incorporated by reference from the registrant's 2022 definitive proxy statement[272] Item 14. Principal Accountant Fees and Services Required information is incorporated by reference from the company's 2022 definitive proxy statement - Information is incorporated by reference from the registrant's 2022 definitive proxy statement[273] Part IV Item 15. Exhibit and Financial Statement Schedules This section lists the financial statements, schedules, and exhibits filed as part of the Form 10-K report - This section lists the financial statements, financial statement schedules, and exhibits filed with the report[276][277] Item 16. Form 10-K Summary The company provides no summary for this item - None[288]