Cogent Communications Reports First Quarter 2017 Results and Increases Regular Quarterly Dividend on Common Stock

Q1 2016

Q2 2016

Q3 2016

Q4 2016

Q1 2017

Metric ($ in 000's, except share and per share data) – unaudited

On-Net revenue

$78,705

$79,539

$81,846

$83,511

$83,586

  % Change from previous Qtr.

2.9%

1.1%

2.9%

2.0%

0.1%

Off-Net revenue

$29,356

$30,149

$30,972

$31,861

$33,386

 % Change from previous Qtr.

3.3%

2.7%

2.7%

2.9%

4.8%

Non-Core revenue (1)

$230

$267

$239

$224

$231

  % Change from previous Qtr.

-5.3%

16.1%

-10.5%

-6.3%

3.1%

Service revenue – total

$108,291

$109,955

$113,057

$115,596

$117,203

  % Change from previous Qtr.

3.0%

1.5%

2.8%

2.2%

1.4%

Constant currency total revenue quarterly growth rate –
  sequential quarters (4)

3.0%

0.9%

3.1%

2.9%

1.6%

Constant currency total revenue quarterly growth rate –
  year over year quarters (4)

12.2%

11.1%

9.7%

10.2%

8.7%

Network operations expenses (2)

$47,156

$47,727

$48,666

$49,943

$50,551

 % Change from previous Qtr.

3.2%

1.2%

2.0%

2.6%

1.2%

GAAP gross profit (3)

$43,261

$43,479

$45,426

$45,434

$48,003

 % Change from previous Qtr.

4.7%

0.5%

4.5%

0.0%

5.7%

GAAP gross margin (3)

39.9%

39.5%

40.2%

39.3%

41.0%

Non-GAAP gross profit (4) (6)

$61,135

$62,228

$64,391

$65,653

$66,652

 % Change from previous Qtr.

2.8%

1.8%

3.5%

2.0%

1.5%

Non-GAAP gross margin (4) (6)

56.5%

56.6%

57.0%

56.8%

56.9%

Selling, general and administrative expenses (5)

$27,472

$27,278

$27,220

$28,576

$28,925

  % Change from previous Qtr.

11.1%

-0.7%

-0.2%

5.0%

1.2%

Depreciation and amortization expense

$17,753

$18,604

$18,804

$20,073

$18,538

 % Change from previous Qtr.

-1.4%

4.8%

1.1%

6.7%

-7.6%

Equity-based compensation expense

$2,181

$2,687

$2,991

$2,876

$2,647

 % Change from previous Qtr.

-15.2%

23.2%

11.3%

-3.8%

-8.0%

Operating income

$15,675

$17,511

$16,063

$14,795

$18,666

 % Change from previous Qtr.

-3.1%

11.7%

-8.3%

-7.9%

26.2%

Interest expense

$10,065

$10,243

$9,891

$10,602

$11,891

 % Change from previous Qtr.

-2.1%

1.8%

-3.4%

7.2%

12.2%

Net income

$3,354

$4,224

$3,459

$3,892

$4,136

Basic net income per common share

$0.08

$0.09

$0.08

$0.09

$0.09

Diluted net income per common share

$0.08

$0.09

$0.08

$0.09

$0.09

Weighted average common shares – basic

44,402,640

44,491,899

44,574,583

44,577,826

44,649,645

 % Change from previous Qtr.

0.2%

0.2%

0.2%

0.0%

0.2%

Weighted average common shares – diluted

44,571,937

44,705,037

44,776,918

44,803,782

44,917,014

 % Change from previous Qtr.

0.0%

0.3%

0.2%

0.1%

0.3%

EBITDA (6)

$33,663

$34,950

$37,171

$37,077

$37,727

 % Change from previous Qtr.

-3.1%

3.8%

6.4%

-0.3%

1.8%

EBITDA margin

31.1%

31.8%

32.9%

32.1%

32.2%

Gains on asset related transactions

$1,946

$4,439

$687

$667

$2,124

EBITDA, as adjusted (6)

$35,609

$39,389

$37,858

$37,744

$39,851

  % Change from previous Qtr.

-3.1%

10.6%

-3.9%

-0.3%

5.6%

EBITDA, as adjusted, margin

32.9%

35.8%

33.5%

32.7%

34.0%

 Fees – net neutrality

$493

$1,036

$1,315

$432

$2

Net cash provided by operating activities

$27,557

$23,698

$22,833

$33,879

$23,514

  % Change from previous Qtr.

25.3%

-14.0%

-3.7%

48.4%

-30.6%

Capital expenditures

$15,034

$14,260

$8,745

$7,195

$12,249

  % Change from previous Qtr.

203.0%

-5.1%

-38.7%

-17.7%

70.2%

Principal payments on capital leases

$3,369

$3,935

$2,354

$2,808

$3,854

  % Change from previous Qtr.

2.9%

16.8%

-40.2%

19.3%

37.3%

Dividends paid

$16,171

$16,671

$17,169

$18,199

$18,999

Purchases of common stock

$ -

$ -

$ 1,666

$ 2,826

$ -

Gross Leverage Ratio

4.39

3.94

3.89

4.73

4.64

Net Leverage Ratio

2.97

2.88

2.90

2.90

2.94

Customer Connections – end of period

On-Net

47,252

49,243

51,079

52,874

54,805

  % Change from previous Qtr.

3.9%

4.2%

3.7%

3.5%

3.7%

Off-Net

7,654

7,971

8,259

8,598

9,055

 % Change from previous Qtr.

5.2%

4.1%

3.6%

4.1%

5.3%

Non-Core (1)

450

349

386

350

383

  % Change from previous Qtr.

12.5%

-22.4%

10.6%

-9.3%

9.4%

Total customer connections

55,356

57,563

59,724

61,822

64,243

  % Change from previous Qtr.

4.1%

4.0%

3.8%

3.5%

3.9%

On-Net Buildings – end of period

Multi-Tenant office buildings

1,545

1,560

1,577

1,592

1,601

Carrier neutral data center buildings

675

686

706

729

752

Cogent data centers

51

51

51

52

53

Total on-net buildings

2,271

2,297

2,334

2,373

2,406

Square feet – multi-tenant office buildings – on-net

834,341,216

840,042,330

847,266,071

858,958,167

864,432,176

Network  – end of period

Intercity route miles

56,183

56,183

56,684

57,213

57,213

Metro fiber miles

28,316

28,874

29,326

29,536

30,190

Connected networks – AS's

5,617

5,700

5,834

5,927

5,949

Headcount – end of period

Sales force – quota bearing

398

397

394

422

432

Sales force - total

517

519

516

542

554

Total employees

855

854

858

887

900

Sales rep productivity – units per full time equivalent
  sales rep ("FTE") per month

6.3

5.9

5.7

6.1

6.1

FTE – sales reps

373

373

377

384

416

(1)

Consists of legacy services of companies whose assets or businesses were acquired by Cogent, primarily including voice services (only provided in Toronto, Canada).

(2)

Network operations expense excludes equity-based compensation expense of $121, $145, $161, $146 and $111 in the three month periods ended March 31, 2016 through March 31, 2017, respectively.  Network operations expense includes excise taxes, including Universal Service Fund fees of $2,003, $2,156, $2,362, $2,549 and $2,604 in the three month periods ended March 31, 2016 through March 31, 2017, respectively. 

(3)

GAAP gross profit is defined as total service revenue less network operations expense, depreciation and amortization and equity based compensation included in network operations expense.  GAAP gross margin is defined as GAAP gross profit divided by total service revenue.

(4)

Non-GAAP gross profit represents service revenue less network operations expense, excluding equity-based compensation and amounts shown separately (depreciation expense). Non-GAAP gross margin is defined as non-GAAP gross profit divided by total service revenue.  Management believes that Non-GAAP gross profit and Non-GAAP gross profit margin are relevant metrics to provide investors, as they are metrics that management uses to measure the margin available to the company after network service costs, in essence a measure of the efficiency of the Company's network.

(5)

Excludes equity-based compensation expense of $2,060, $2,542, $2,830, $2,730 and $2,536 in the three month periods ended March 31, 2016 through March 31, 2017, respectively. 

(6)

See schedule of non-GAAP metrics below for definitions and reconciliations to GAAP measures below.

Q1
2016

Q2
2016

Q3
2016

Q4

2016

Year
2016

Q1

2017

($ in 000's) – unaudited

Net cash flows provided by operating activities

$27,557

$23,698

$22,833

$33,879

$107,967

$23,514

Changes in operating assets and liabilities

(3,681)

1,755

4,737

(6,781)

(3,968)

3,192

Cash interest expense and income tax expense

9,787

9,497

9,601

9,979

38,861

11,021

EBITDA

$33,663

$34,950

$37,171

$37,077

$142,860

$37,727

PLUS: Gains on asset related transactions

1,946

4,439

687

667

7,739

2,124

EBITDA, as adjusted

$35,609

$39,389

$37,858

$37,744

$150,599

$39,851

EBITDA margin

31.1%

31.8%

32.9%

32.1%

32.0%

32.2%

EBITDA, as adjusted, margin

32.9%

35.8%

33.5%

32.7%

33.7%

34.0%

($ in 000's) – unaudited

Q1

2016

Q2

2016

Q3

2016

Q4

2016

Year

2016

Q1

2017

Service revenue, as reported – current period

$108,291

$109,955

$113,057

$115,596

$446,900

$117,203

Impact of foreign currencies on service revenue

(10)

(709)

273

749

892

195

Service revenue - as adjusted  for currency impact (1)

$108,281

$109,246

$113,330

$116,345

$447,792

$117,398

Service revenue, as reported – prior sequential period

$105,177

$108,291

$109,955

$113,057

$404,234

$115,596

Constant currency increase

$3,104

$955

$3,375

$3,288

$43,558

$1,802

Constant currency percent increase

3.0%

0.9%

3.1%

2.9%

10.8%

1.6%

(1)

Service revenue, as adjusted for currency impact, is determined by translating the service revenue for the current period at the average foreign currency exchange rates for the prior sequential period. The Company believes that disclosing quarterly sequential revenue growth without the impact of foreign currencies on service revenue is a useful measure of sequential revenue growth. Service revenue, as adjusted for currency impact, is an integral part of the internal reporting and planning system used by management as a supplement to GAAP financial information.

($ in 000's) – unaudited

Q1

2016

Q2

2016

Q3

2016

Q4

2016

Year

2016

Q1

2017

Service revenue, as reported – current period

$108,291

$109,955

$113,057

$115,596

$446,900

$117,203

Impact of foreign currencies on service revenue

855

(168)

(68)

276

892

503

Service revenue - as adjusted for currency impact  (2)

$109,146

$109,787

$112,989

$115,872

$447,792

$117,706

Service revenue, as reported – prior year period

$97,242

$98,799

$103,017

$105,177

$404,234

$108,291

Constant currency increase

$11,904

$10,988

$9,972

$10,695

$43,558

$9,415

Percent increase

12.2%

11.1%

9.7%

10.2%

10.8%

8.7%

(2)

Service revenue, as adjusted for currency impact, is determined by translating the service revenue for the current period at the average foreign currency exchange rates for the comparable prior year period. The Company believes that disclosing year over year revenue growth without the impact of foreign currencies on service revenue is a useful measure of revenue growth. Service revenue, as adjusted for currency impact, is an integral part of the internal reporting and planning system used by management as a supplement to GAAP financial information.

Q1 2016

Q2 2016

Q3 2016

Q4 2016

Year 2016

Q1 2017

($ in 000's) – unaudited

Service revenue total

$108,291

$109,955

$113,057

$115,596

$446,900

$117,203

Minus - Network operations expense including equity-based
  compensation and including depreciation and amortization expense

65,030

66,476

67,631

70,162

269,299

69,200

GAAP Gross Profit (1)

$43,261

$43,479

$45,426

$45,434

$177,601

$48,003

Plus  - Equity-based compensation – network operations expense

121

145

161

146

573

111

Plus – Depreciation and amortization expense

17,753

18,604

18,804

20,073

75,234

18,538

Non-GAAP Gross Profit (2)

$61,135

$62,228

$64,391

$65,653

$253,408

$66,652

GAAP Gross Margin (1)

39.9%

39.5%

40.2%

39.3%

39.7%

41.0%

Non-GAAP Gross Margin (2)

56.5%

56.6%

57.0%

56.8%

56.7%

56.9%

(1)

GAAP gross profit is defined as total service revenue less network operations expense, depreciation and amortization and equity based compensation included in network operations expense.  GAAP gross margin is defined as GAAP gross profit divided by total service revenue.

(2)

Non-GAAP gross profit represents service revenue less network operations expense, excluding equity-based compensation and amounts shown separately (depreciation and amortization expense). Non-GAAP gross margin is defined as non-GAAP gross profit divided by total service revenue.  Management believes that non-GAAP gross profit and non-GAAP gross margin are relevant metrics to provide to investors, as they are metrics that management uses to measure the margin and amount available to the Company after network service costs, in essence these are measures of the efficiency of the Company's network.

($ in 000's) – unaudited

As of December 31, 2016

As of March 31, 2017

Cash and cash equivalents

$274,319

$263,196

Debt

Capital leases – current portion

6,626

7,215

Capital leases – long term

135,335

137,917

Senior unsecured notes

189,225

189,225

Senior secured notes

375,000

375,000

Note payable

5,521

8,611

Total debt

711,707

717,968

Total net debt

437,388

454,772

Trailing 12 months EBITDA, as adjusted

150,599

154,842

Gross leverage ratio

4.73

4.64

Net leverage ratio

2.90

2.94

COGENT COMMUNICATIONS HOLDINGS, INC., AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

AS OF MARCH 31, 2017 AND DECEMBER 31, 2016

(IN THOUSANDS, EXCEPT SHARE DATA)

March 31,
2017

December 31,
2016

(Unaudited)

Assets

Current assets:

Cash and cash equivalents

$

263,196

$

274,319

Accounts receivable, net of allowance for doubtful accounts of $1,543
  and $1,734, respectively

33,698

33,598

Prepaid expenses and other current assets

20,944

19,706

Total current assets

317,838

327,623

Property and equipment, net

368,938

361,641

Deferred tax assets - noncurrent

38,914

42,241

Deposits and other assets - $663 and $128 restricted,
  respectively

6,985

6,387

Total assets

$

732,675

$

737,892

Liabilities and stockholders' equity

Current liabilities:

Accounts payable

$

12,286

$

11,551

Accrued and other current liabilities

45,146

47,149

Installment payment agreement, current portion, net of discount of $306
  and $204, respectively

4,602

2,587

Current maturities, capital lease obligations

7,215

6,626

Total current liabilities

69,249

67,913

Senior secured 2022 notes, net of unamortized debt costs of
  $2,162 and $2,257, respectively and including premium of $441
  and $462, respectively

373,279

373,205

Senior unsecured 2021 notes, net of unamortized debt costs of
  $2,445 and $2,575, respectively

186,780

186,650

Capital lease obligations, net of current maturities

137,917

135,335

Other long term liabilities

29,062

28,043

Total liabilities

796,287

791,146

Commitments and contingencies:

Stockholders' equity:

Common stock, $0.001 par value; 75,000,000 shares authorized;
  45,498,751 and 45,478,787 shares issued and outstanding, respectively

45

45

Additional paid-in capital

445,976

442,799

Accumulated other comprehensive income — foreign currency translation

(15,865)

(17,193)

Accumulated deficit

(493,768)

(478,905)

Total stockholders' deficit

(63,612)

(53,254)

Total liabilities and stockholders' deficit

$

732,675

$

737,892

COGENT COMMUNICATIONS HOLDINGS, INC., AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

FOR THE THREE MONTHS ENDED MARCH 31, 2017 AND MARCH 31, 2016

(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)

Three Months
Ended
March 31, 2017

Three Months
Ended
March 31, 2016

(Unaudited)

(Unaudited)

Service revenue

$

117,203

$

108,291

Operating expenses:

Network operations (including $111 and $121 of equity-based compensation expense,
  respectively, exclusive of depreciation and amortization shown
  separately below)

50,662

47,277

Selling, general, and administrative (including $2,536 and $2,060 of
  equity-based compensation expense, respectively)

31,461

29,532

Depreciation and amortization

18,538

17,753

Total operating expenses

100,661

94,562

Gains on equipment transactions

2,124

1,946

Operating income

18,666

15,675

Interest income and other, net

854

133

Interest expense

(11,891)

(10,065)

Income before income taxes

7,629

5,743

Income tax provision

(3,493)

(2,389)

Net income

$

4,136

$

3,354

Comprehensive income:

Net income

$

4,136

$

3,354

Foreign currency translation adjustment

1,328

4,074

Comprehensive income

$

5,464

$

7,428

Net income per common share:

Basic and diluted net income per common share

$

0.09

$

0.08

Dividends declared per common share

$

0.42

$

0.36

Weighted-average common shares - basic

44,649,645

44,402,640

Weighted-average common shares - diluted

44,917,014

44,571,937

COGENT COMMUNICATIONS HOLDINGS, INC., AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THE THREE MONTHS ENDED MARCH 31, 2017 AND MARCH 31, 2016

(IN THOUSANDS)

Three months
Ended
March 31, 2017

Three months
Ended
March 31, 2016

(Unaudited)

(Unaudited)

Cash flows from operating activities:

Net income

$

4,136

$

3,354

Adjustments to reconcile net income to net cash provided by operating
  activities:

Depreciation and amortization

18,538

17,753

Amortization of debt discount and premium

280

216

Equity-based compensation expense (net of amounts capitalized)

2,647

2,181

Gains — equipment transactions and other, net

(2,172)

(2,186)

Deferred income taxes

3,229

2,323

Changes in operating assets and liabilities:

Accounts receivable

43

(387)

Prepaid expenses and other current assets

(1,067)

(2,217)

Accounts payable, accrued liabilities and other long-term liabilities

(1,660)

8,379

Deposits and other assets

(460)

(1,859)

Net cash provided by operating activities

23,514

27,557

Cash flows from investing activities:

Purchases of property and equipment

(12,249)

(15,034)

Net cash used in investing activities

(12,249)

(15,034)

Cash flows from financing activities:

Dividends paid

(18,999)

(16,171)

Proceeds from exercises of stock options

300

206

Principal payments on installment payment agreement

(218)

(2,184)

Principal payments of capital lease obligations

(3,854)

(3,369)

Net cash used in financing activities

(22,771)

(21,518)

Effect of exchange rates changes on cash

383

1,454

Net decrease in cash and cash equivalents

(11,123)

(7,541)

Cash and cash equivalents, beginning of period

274,319

203,591

Cash and cash equivalents, end of period

$

263,196

$

196,050