Cogent(CCOI) - 2023 Q1 - Quarterly Report

PART I FINANCIAL INFORMATION Item 1. Financial Statements Unaudited condensed consolidated financial statements for the quarterly period ended March 31, 2023 Condensed Consolidated Balance Sheet Highlights (in thousands) | Account | March 31, 2023 | December 31, 2022 | | :--- | :--- | :--- | | Total Current Assets | $328,797 | $365,913 | | Total Assets | $998,412 | $1,010,182 | | Total Current Liabilities | $127,422 | $120,284 | | Total Liabilities | $1,546,959 | $1,528,814 | | Total Stockholders' Deficit | ($548,547) | ($518,632) | Condensed Consolidated Statements of Comprehensive Income (Loss) Highlights (in thousands) | Account | Three Months Ended March 31, 2023 | Three Months Ended March 31, 2022 | | :--- | :--- | :--- | | Service Revenue | $153,588 | $149,175 | | Operating Income | $24,312 | $28,784 | | Net Income | $6,148 | $1,137 | | Comprehensive Income (Loss) | $7,936 | ($1,028) | | Basic and Diluted EPS | $0.13 | $0.02 | Condensed Consolidated Statements of Cash Flows Highlights (in thousands) | Cash Flow Activity | Three Months Ended March 31, 2023 | Three Months Ended March 31, 2022 | | :--- | :--- | :--- | | Net cash provided by operating activities | $35,821 | $49,411 | | Net cash used in investing activities | ($23,204) | ($18,121) | | Net cash used in financing activities | ($54,616) | ($47,528) | | Net decrease in cash, cash equivalents and restricted cash | ($41,489) | ($16,853) | Notes to Interim Condensed Consolidated Financial Statements (Unaudited) Detailed notes accompany the financial statements, covering the Sprint acquisition, accounting policies, and segment information - The company is a facilities-based provider of high-speed Internet access, private network services, and data center colocation in 51 countries[227] - On May 1, 2023, the company closed its acquisition of the U.S. long-haul fiber network (Wireline Business) from Sprint[25][53] - Revenue is recognized over time as services are rendered, with installation fees recognized over the contract term or estimated customer life[194][234] Long-Term Debt Outstanding (at par, as of March 31, 2023) | Debt Instrument | Principal Amount | Interest Rate | Maturity Date | | :--- | :--- | :--- | :--- | | 2027 Senior Unsecured Notes | $450.0 million | 7.00% | June 15, 2027 | | 2026 Senior Secured Notes | $500.0 million | 3.50% | May 1, 2026 | - An interest rate swap agreement effectively converts the fixed interest rate on its 2026 Notes to a variable rate, with a fair value net liability of $50.3 million as of March 31, 2023[83][217] Service Revenue by Geographic Region (in thousands, Q1 2023) | Region | On-net Revenue | Off-net Revenue | Total Revenue | | :--- | :--- | :--- | :--- | | North America | $88,697 | $32,876 | $121,709 | | Europe | $21,847 | $4,020 | $25,883 | | Oceania | $3,755 | $327 | $4,091 | | South America | $1,645 | $33 | $1,679 | | Africa | $199 | $27 | $226 | | Total | $116,143 | $37,283 | $153,588 | Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Management analyzes financial condition and operational results, focusing on the Sprint acquisition and Q1 2023 performance Acquisition of Sprint Communications The acquisition of Sprint's Wireline Business closed on May 1, 2023, including a $700 million IP transit services contract - The acquisition of Sprint's Wireline Business closed on May 1, 2023, with a working capital adjustment resulting in a $61.1 million payment from Cogent to the seller[36][53][91] - As part of the deal, T-Mobile will pay Cogent an aggregate of $700 million for IP transit services over 54 months[44][54][88] - A Transition Services Agreement (TSA) is in place for up to two years to manage the operational separation of IT, finance, and HR functions[37][62][151] - With the acquisition, Cogent will begin offering optical wavelength and transport services, expanding its product portfolio[61][101] Results of Operations Q1 2023 service revenue grew 3.0% YoY, driven by on-net customer growth, though offset by higher operating expenses Q1 2023 vs. Q1 2022 Financial Comparison (in thousands) | Metric | Q1 2023 | Q1 2022 | % Change | | :--- | :--- | :--- | :--- | | Service Revenue | $153,588 | $149,175 | 3.0% | | On-net Revenue | $116,143 | $112,634 | 3.1% | | Off-net Revenue | $37,283 | $36,387 | 2.5% | | SG&A Expenses | $45,078 | $40,627 | 11.0% | | Depreciation & Amortization | $25,160 | $22,688 | 10.9% | | Interest Expense | $19,005 | $14,168 | 34.1% | Key Operating Data (Q1 2023 vs. Q1 2022) | Metric | Q1 2023 | Q1 2022 | % Change | | :--- | :--- | :--- | :--- | | On-net Customer Connections | 83,268 | 81,627 | 2.0% | | Off-net Customer Connections | 13,785 | 12,922 | 6.7% | | ARPU—on-net | $467 | $463 | 0.9% | | ARPU—off-net | $910 | $948 | (4.0)% | | Avg. Price per Megabit | $0.25 | $0.31 | (20.4)% | - Revenue from net-centric customers increased by 7.8% to $68.0 million, while revenue from corporate customers decreased by 0.6% to $85.6 million[105] - SG&A expenses increased by 11.0% primarily due to a 12.2% increase in total headcount, including a rise in sales force headcount from 620 to 714[109] - Interest expense increased 34.1% mainly due to higher interest rates on the new 7.00% 2027 Notes[111] Liquidity and Capital Resources The company maintains sufficient liquidity through cash and operations, supported by future cash inflows from the Sprint deal Cash Flow Summary (in thousands) | Cash Flow Activity | Three Months Ended March 31, 2023 | | :--- | :--- | | Net cash provided by operating activities | $35,821 | | Net cash used in investing activities | ($23,204) | | Net cash used in financing activities | ($54,616) | - As of March 31, 2023, the company had total cash, cash equivalents, and restricted cash of $234.4 million and total indebtedness of $1.3 billion[125][133] - The company paid dividends of $45.3 million in Q1 2023 and approved a subsequent quarterly dividend of $0.935 per share[124][128] - The stock buyback program has $30.4 million available for repurchases through December 31, 2023, with no shares repurchased in Q1 2023[127][271] Item 3. Quantitative and Qualitative Disclosures About Market Risk Market risk exposures remain materially unchanged from the 2022 Annual Report, except for newly disclosed risk factors - The company believes there have been no material changes to its market risk exposures since year-end 2022, apart from new risk factors mentioned in this report[138] Item 4. Controls and Procedures Management concluded that disclosure controls and procedures were effective with no material changes in internal controls - Management, including the CEO and CFO, concluded that the company's disclosure controls and procedures were effective as of March 31, 2023[139] - There were no changes in internal control over financial reporting during the quarter that materially affected, or are reasonably likely to materially affect, internal controls[174] PART II OTHER INFORMATION Item 1. Legal Proceedings Ordinary course legal proceedings are not expected to materially impact the company's financial results or operations - The company is involved in ordinary course legal proceedings that are not expected to have a material impact on its operations or results[140] Item 1A. Risk Factors Key risks include integration of the Sprint acquisition, economic instability, and challenges in employee retention - Key risks include difficulties integrating the Sprint Wireline Business, future economic instability, and the impact of the COVID-19 pandemic on corporate revenue growth[253][265] - The company maintains cash in accounts that exceed insured limits, posing a risk in the event of a financial institution's failure[141][168] - The company may face challenges retaining or hiring employees due to its requirement for all employees to return to the office full-time and be vaccinated[134] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds The company's stock repurchase program remains authorized, with no shares repurchased during the first quarter of 2023 - The company's Board has authorized a common stock repurchase program through December 31, 2023[142] - There were no purchases of common stock during the first quarter of 2023[142] Item 6. Exhibits This section lists all exhibits filed with the report, including certifications and XBRL data files - Exhibits filed include CEO and CFO certifications (31.1, 31.2, 32.1, 32.2) and Interactive Data Files (XBRL)[170][180] Signatures - The report is duly signed on May 5, 2023, by David Schaeffer, Chief Executive Officer, and Thaddeus G. Weed, Chief Financial Officer[172][182][183]