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

COGENT COMMUNICATIONS HOLDINGS, INC., AND SUBSIDIARIES

Summary of Financial and Operational Results

Q1 2016

Q2 2016

Q3 2016

Q4 2016

Q1 2017

Q2 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

$85,586

  % Change from previous Qtr.

2.9%

1.1%

2.9%

2.0%

0.1%

2.4%

Off-Net revenue

$29,356

$30,149

$30,972

$31,861

$33,386

$33,980

  % Change from previous Qtr.

3.3%

2.7%

2.7%

2.9%

4.8%

1.8%

Non-Core revenue (1)

$230

$267

$239

$224

$231

$211

  % Change from previous Qtr.

-5.3%

16.1%

-10.5%

-6.3%

3.1%

-8.7%

Service revenue – total

$108,291

$109,955

$113,057

$115,596

$117,203

$119,777

  % Change from previous Qtr.

3.0%

1.5%

2.8%

2.2%

1.4%

2.2%

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

3.0%

0.9%

3.1%

2.9%

1.6%

1.7%

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

12.2%

11.1%

9.7%

10.2%

8.7%

9.6%

Network operations expenses (2)

$47,156

$47,727

$48,666

$49,943

$50,551

$50,974

  % Change from previous Qtr.

3.2%

1.2%

2.0%

2.6%

1.2%

0.8%

GAAP gross profit (3)

$43,261

$43,479

$45,426

$45,434

$48,003

$49,765

  % Change from previous Qtr.

4.7%

0.5%

4.5%

0.0%

5.7%

3.7%

GAAP gross margin (3)

39.9%

39.5%

40.2%

39.3%

41.0%

41.5%

Non-GAAP gross profit (4) (6)

$61,135

$62,228

$64,391

$65,653

$66,652

$68,803

  % Change from previous Qtr.

2.8%

1.8%

3.5%

2.0%

1.5%

3.2%

Non-GAAP gross margin (4) (6)

56.5%

56.6%

57.0%

56.8%

56.9%

57.4%

Selling, general and administrative expenses (5)

$27,472

$27,278

$27,220

$28,576

$28,925

$28,704

  % Change from previous Qtr.

11.1%

-0.7%

-0.2%

5.0%

1.2%

-0.8%

Depreciation and amortization expense

$17,753

$18,604

$18,804

$20,073

$18,538

$18,897

  % Change from previous Qtr.

-1.4%

4.8%

1.1%

6.7%

-7.6%

1.9%

Equity-based compensation expense

$2,181

$2,687

$2,991

$2,876

$2,647

$3,225

  % Change from previous Qtr.

-15.2%

23.2%

11.3%

-3.8%

-8.0%

21.8%

Operating income

$15,675

$17,511

$16,063

$14,795

$18,666

$19,000

  % Change from previous Qtr.

-3.1%

11.7%

-8.3%

-7.9%

26.2%

1.8%

Interest expense

$10,065

$10,243

$9,891

$10,602

$11,891

$12,090

  % Change from previous Qtr.

-2.1%

1.8%

-3.4%

7.2%

12.2%

1.7%

Net income

$3,354

$4,224

$3,459

$3,892

$4,136

$4,317

Basic net income per common share

$0.08

$0.09

$0.08

$0.09

$0.09

$0.10

Diluted net income per common share

$0.08

$0.09

$0.08

$0.09

$0.09

$0.10

Weighted average common shares – basic

44,402,640

44,491,899

44,574,583

44,577,826

44,649,645

44,717,372

  % Change from previous Qtr.

0.2%

0.2%

0.2%

0.0%

0.2%

0.2%

Weighted average common shares – diluted

44,593,710

44,757,494

44,816,860

44,803,782

44,917,014

44,988,655

  % Change from previous Qtr.

0.2%

0.4%

0.1%

0.0%

0.3%

0.2%

EBITDA (6)

$33,663

$34,950

$37,171

$37,077

$37,727

$40,099

  % Change from previous Qtr.

-3.1%

3.8%

6.4%

-0.3%

1.8%

6.3%

EBITDA margin

31.1%

31.8%

32.9%

32.1%

32.2%

33.5%

Gains on asset related transactions

$1,946

$4,439

$687

$667

$2,124

$1,023

EBITDA, as adjusted (6)

$35,609

$39,389

$37,858

$37,744

$39,851

$41,122

  % Change from previous Qtr.

-3.1%

10.6%

-3.9%

-0.3%

5.6%

3.2%

EBITDA, as adjusted, margin

32.9%

35.8%

33.5%

32.7%

34.0%

34.3%

 Fees – net neutrality

$493

$1,036

$1,315

$432

$2

$188

Net cash provided by operating activities

$27,557

$23,698

$22,833

$33,879

$23,514

$28,045

  % Change from previous Qtr.

25.3%

-14.0%

-3.7%

48.4%

-30.6%

19.3%

Capital expenditures

$15,034

$14,260

$8,745

$7,195

$12,249

$12,007

  % Change from previous Qtr.

203.0%

-5.1%

-38.7%

-17.7%

70.2%

-2.0%

Principal payments on capital leases

$3,369

$3,935

$2,354

$2,808

$3,854

$2,194

  % Change from previous Qtr.

2.9%

16.8%

-40.2%

19.3%

37.3%

-43.1%

Dividends paid

$16,171

$16,671

$17,169

$18,199

$18,999

$19,946

Purchases of common stock

$ -

$ -

$ 1,666

$ 2,826

$ -

$ 1,829

Gross Leverage Ratio

4.39

3.94

3.89

4.73

4.64

4.62

Net Leverage Ratio

2.97

2.88

2.90

2.90

2.94

2.98

Customer Connections – end of period

On-Net

47,252

49,243

51,079

52,874

54,805

57,307

  % Change from previous Qtr.

3.9%

4.2%

3.7%

3.5%

3.7%

4.6%

Off-Net

7,654

7,971

8,259

8,598

9,055

9,355

  % Change from previous Qtr.

5.2%

4.1%

3.6%

4.1%

5.3%

3.1%

Non-Core (1)

450

349

386

350

383

340

  % Change from previous Qtr.

12.5%

-22.4%

10.6%

-9.3%

9.4%

-11.2%

Total customer connections

55,356

57,563

59,724

61,822

64,243

66,982

  % Change from previous Qtr.

4.1%

4.0%

3.8%

3.5%

3.9%

4.3%

On-Net Buildings – end of period

Multi-Tenant office buildings

1,545

1,560

1,577

1,592

1,601

1,618

Carrier neutral data center buildings

675

686

706

729

752

767

Cogent data centers

51

51

51

52

53

53

Total on-net buildings

2,271

2,297

2,334

2,373

2,406

2,438

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

834,341,216

840,042,330

847,266,071

858,958,167

864,432,176

872,293,092

Network  – end of period

Intercity route miles

56,183

56,183

56,684

57,213

57,213

57,403

Metro fiber miles

28,316

28,874

29,326

29,536

30,190

30,516

Connected networks – AS's

5,617

5,700

5,834

5,927

5,949

5,983

Headcount – end of period

Sales force – quota bearing

398

397

394

422

432

434

Sales force - total

517

519

516

542

554

559

Total employees

855

854

858

887

900

909

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

6.3

5.9

5.7

6.1

6.1

6.5

FTE – sales reps

373

373

377

384

416

410

(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, $111 and $141 in the three month periods ended March 31, 2016 through June 30, 2017, respectively.  Network operations expense includes excise taxes, including Universal Service Fund fees of $2,003, $2,156, $2,362, $2,549, $2,604 and $2,672 in the three month periods ended March 31, 2016 through June 30, 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, $2,536 and $3,084 in the three month periods ended March 31, 2016 through June 30, 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

Q2
2017

($ in 000's) – unaudited

Net cash flows provided by operating activities

$27,557

$23,698

$22,833

$33,879

$107,967

$23,514

$28,045

Changes in operating assets and liabilities

(3,681)

1,755

4,737

(6,781)

(3,968)

3,192

950

Cash interest expense and income tax expense

9,787

9,497

9,601

9,979

38,861

11,021

11,104

EBITDA

$33,663

$34,950

$37,171

$37,077

$142,860

$37,727

$40,099

PLUS: Gains on asset related transactions

1,946

4,439

687

667

7,739

2,124

1,023

EBITDA, as adjusted

$35,609

$39,389

$37,858

$37,744

$150,599

$39,851

$41,122

EBITDA margin

31.1%

31.8%

32.9%

32.1%

32.0%

32.2%

33.5%

EBITDA, as adjusted, margin

32.9%

35.8%

33.5%

32.7%

33.7%

34.0%

34.3%

($ in 000's) – unaudited

Q1

2016

Q2

2016

Q3

2016

Q4

2016

Year

2016

Q1

2017

Q2

2017

Service revenue, as reported – current period

$108,291

$109,955

$113,057

$115,596

$446,900

$117,203

$119,777

Impact of foreign currencies on service revenue

(10)

(709)

273

749

892

195

(531)

Service revenue - as adjusted  for currency impact (1)

$108,281

$109,246

$113,330

$116,345

$447,792

$117,398

$119,246

Service revenue, as reported – prior sequential period

$105,177

$108,291

$109,955

$113,057

$404,234

$115,596

$117,203

Constant currency increase

$3,104

$955

$3,375

$3,288

$43,558

$1,802

$2,043

Constant currency percent increase

3.0%

0.9%

3.1%

2.9%

10.8%

1.6%

1.7%

(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

Q2

2017

Service revenue, as reported – current period

$108,291

$109,955

$113,057

$115,596

$446,900

$117,203

$119,777

Impact of foreign currencies on service revenue

855

(168)

(68)

276

892

503

743

Service revenue - as adjusted for currency impact  (2)

$109,146

$109,787

$112,989

$115,872

$447,792

$117,706

$120,520

Service revenue, as reported – prior year period

$97,242

$98,799

$103,017

$105,177

$404,234

$108,291

$109,955

Constant currency increase

$11,904

$10,988

$9,972

$10,695

$43,558

$9,415

$10,565

Percent increase

12.2%

11.1%

9.7%

10.2%

10.8%

8.7%

9.6%

(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

Q2 2017

($ in 000's) – unaudited

Service revenue total

$108,291

$109,955

$113,057

$115,596

$446,900

$117,203

$119,777

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

70,012

GAAP Gross Profit (1)

$43,261

$43,479

$45,426

$45,434

$177,601

$48,003

$49,765

Plus  - Equity-based compensation – network operations expense

121

145

161

146

573

111

141

Plus – Depreciation and amortization expense

17,753

18,604

18,804

20,073

75,234

18,538

18,897

Non-GAAP Gross Profit (2)

$61,135

$62,228

$64,391

$65,653

$253,408

$66,652

$68,803

GAAP Gross Margin (1)

39.9%

39.5%

40.2%

39.3%

39.7%

41.0%

41.5%

Non-GAAP Gross Margin (2)

56.5%

56.6%

57.0%

56.8%

56.7%

56.9%

57.4%

(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 March 31, 2017

As of June 30, 2017

Cash and cash equivalents

$263,196

$256,492

Debt

Capital leases – current portion

7,215

7,635

Capital leases – long term

137,917

142,155

Senior unsecured notes

189,225

189,225

Senior secured notes

375,000

375,000

Note payable

8,611

9,445

Total debt

717,968

723,460

Total net debt

454,772

466,968

Trailing 12 months EBITDA, as adjusted

154,842

156,575

Gross leverage ratio

4.64

4.62

Net leverage ratio

2.94

2.98

COGENT COMMUNICATIONS HOLDINGS, INC., AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

AS OF JUNE 30, 2017 AND DECEMBER 31, 2016

(IN THOUSANDS, EXCEPT SHARE DATA)

June 30,
2017

December 31,
2016

(Unaudited)

Assets

Current assets:

Cash and cash equivalents

$

256,492

$

274,319

Accounts receivable, net of allowance for doubtful accounts of $1,731 and $1,734, 
     respectively

34,754

33,598

Prepaid expenses and other current assets

21,906

19,706

Total current assets

313,152

327,623

Property and equipment, net

376,867

361,641

Deferred tax assets

35,661

42,241

Deposits and other assets - $705 and $128 restricted, respectively

6,759

6,387

Total assets

$

732,439

$

737,892

Liabilities and stockholders' equity

Current liabilities:

Accounts payable

$

9,284

$

11,551

Accrued and other current liabilities

49,412

47,149

Installment payment agreement, current portion, net of discount of $312 and $204, 
     respectively

6,004

2,587

Current maturities, capital lease obligations

7,635

6,626

Total current liabilities

72,335

67,913

Senior secured 2022 notes, net of unamortized debt costs of $2,066 and $2,257, 
     respectively and including premium of $421 and $462, respectively

373,355

373,205

Senior unsecured 2021 notes, net of unamortized debt costs of $2,339 and $2,575, 
     respectively

186,886

186,650

Capital lease obligations, net of current maturities

142,155

135,335

Other long term liabilities

28,909

28,043

Total liabilities

803,640

791,146

Commitments and contingencies:

Stockholders' equity:

Common stock, $0.001 par value; 75,000,000 shares authorized; 45,927,374 and 
     45,478,787 shares issued and outstanding, respectively

46

45

Additional paid-in capital

447,852

442,799

Accumulated other comprehensive income — foreign currency translation

(9,702)

(17,193)

Accumulated deficit

(509,397)

(478,905)

Total stockholders' deficit

(71,201)

(53,254)

Total liabilities and stockholders' deficit

$

732,439

$

737,892

COGENT COMMUNICATIONS HOLDINGS, INC., AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

FOR THE THREE MONTHS ENDED JUNE 30, 2017 AND JUNE 30, 2016

(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)

Three Months
Ended
June 30, 2017

Three Months
Ended
June 30, 2016

(Unaudited)

(Unaudited)

Service revenue

$

119,777

$

109,955

Operating expenses:

Network operations (including $141 and $145 of equity-based compensation 
     expense, respectively, exclusive of depreciation and amortization shown 
     separately below)

51,115

47,872

Selling, general, and administrative (including $3,084 and $2,542 of equity-based 
     compensation expense, respectively)

31,788

29,820

Depreciation and amortization

18,897

18,604

Total operating expenses

101,800

96,296

Losses on debt purchases and installment loan repayment

—

(587)

Gains on equipment transactions

1,023

4,439

Operating income

19,000

17,511

Interest income and other, net

1,015

335

Interest expense

(12,090)

(10,243)

Income before income taxes

7,925

7,603

Income tax provision

(3,608)

(3,379)

Net income

$

4,317

$

4,224

Comprehensive income:

Net income

$

4,317

$

4,224

Foreign currency translation adjustment

6,163

(1,967)

Comprehensive income

$

10,480

$

2,257

Net income per common share:

Basic and diluted net income per common share

$

0.10

$

0.09

Dividends declared per common share

$

0.44

$

0.37

Weighted-average common shares - basic

44,717,372

44,491,899

Weighted-average common shares - diluted

44,988,655

44,757,494

COGENT COMMUNICATIONS HOLDINGS, INC., AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

FOR THE SIX MONTHS ENDED JUNE 30, 2017 AND JUNE 30, 2016

(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)

Six Months
Ended
June 30, 2017

Six Months
Ended
June 30, 2016

(Unaudited)

(Unaudited)

Service revenue

$

236,981

$

218,247

Operating expenses:

Network operations (including $252 and $266 of equity-based compensation expense, respectively, 
     exclusive of depreciation and amortization shown separately below)

101,778

95,149

Selling, general, and administrative (including $5,620 and $4,602 of equity-based compensation 
     expense, respectively)

63,252

59,352

Depreciation and amortization

37,435

36,357

Total operating expenses

202,465

190,858

Losses on debt purchases and installment loan repayment

—

(587)

Gains on equipment transactions

3,146

6,385

Operating income

37,662

33,187

Interest income and other, net

1,870

468

Interest expense

(23,978)

(20,309)

Income before income taxes

15,554

13,346

Income tax provision

(7,101)

(5,768)

Net income

$

8,453

$

7,578

Comprehensive income:

Net income

$

8,453

$

7,578

Foreign currency translation adjustment

7,491

2,107

Comprehensive income

$

15,944

$

9,685

Net income per common share:

Basic and diluted net income per common share

$

0.19

$

0.17

Dividends declared per common share

$

0.86

$

0.73

Weighted-average common shares - basic

44,720,971

44,484,863

Weighted-average common shares - diluted

44,990,298

44,713,196

COGENT COMMUNICATIONS HOLDINGS, INC., AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THE THREE MONTHS ENDED JUNE 30, 2017 AND JUNE 30, 2016

(IN THOUSANDS)

Three months
Ended
June 30, 2017

Three months
Ended
June 30, 2016

(Unaudited)

(Unaudited)

Cash flows from operating activities:

Net income

$

4,317

$

4,224

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

Depreciation and amortization

18,897

18,604

Amortization of debt discount and premium

287

480

Equity-based compensation expense (net of amounts capitalized)

3,225

2,687

Losses on debt purchases and installment loan repayment

—

587

Gains — equipment transactions and other, net

(1,457)

(4,294)

Deferred income taxes

3,292

3,310

Changes in operating assets and liabilities:

Accounts receivable

(384)

(1,058)

Prepaid expenses and other current assets

(133)

(1,218)

Accounts payable, accrued liabilities and other long-term liabilities

(423)

386

Deposits and other assets

424

(10)

Net cash provided by operating activities

28,045

23,698

Cash flows from investing activities:

Purchases of property and equipment

(12,007)

(14,260)

Net cash used in investing activities

(12,007)

(14,260)

Cash flows from financing activities:

Dividends paid

(19,946)

(16,671)

Purchases of common stock

(1,829)

—

Purchases of senior secured 2021 notes

—

(10,775)

Proceeds from exercises of stock options

186

424

Principal payments on installment payment agreement

(733)

(19,019)

Principal payments of capital lease obligations

(2,194)

(3,935)

Net cash used in financing activities

(24,516)

(49,976)

Effect of exchange rates changes on cash

1,774

(545)

Net decrease in cash and cash equivalents

(6,704)

(41,083)

Cash and cash equivalents, beginning of period

263,196

196,050

Cash and cash equivalents, end of period

$

256,492

$

154,967

COGENT COMMUNICATIONS HOLDINGS, INC., AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THE SIX MONTHS ENDED JUNE 30, 2017 AND JUNE 30, 2016

(IN THOUSANDS)

Six months
Ended
June 30, 2017

Six months
Ended
June 30, 2016

(Unaudited)

(Unaudited)

Cash flows from operating activities:

Net income

$

8,453

$

7,578

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

Depreciation and amortization

37,435

36,357

Amortization of debt discount and premium

567

696

Equity-based compensation expense (net of amounts capitalized)

5,872

4,868

Losses on debt purchases and installment loan repayment

—

587

Gains — equipment transactions and other, net

(3,628)

(6,480)

Deferred income taxes

6,626

5,633

Changes in operating assets and liabilities:

Accounts receivable

(341)

(1,445)

Prepaid expenses and other current assets

(1,200)

(3,435)

Accounts payable, accrued liabilities and other long-term liabilities

(2,084)

8,765

Deposits and other assets

(141)

(1,869)

Net cash provided by operating activities

51,559

51,255

Cash flows from investing activities:

Purchases of property and equipment

(24,256)

(29,294)

Net cash used in investing activities

(24,256)

(29,294)

Cash flows from financing activities:

Dividends paid

(38,945)

(32,842)

Purchases of common stock

(1,829)

—

Purchases of senior secured 2021 notes

—

(10,775)

Proceeds from exercises of stock options

486

630

Principal payments on installment payment agreement

(951)

(21,203)

Principal payments of capital lease obligations

(6,048)

(7,304)

Net cash used in financing activities

(47,287)

(71,494)

Effect of exchange rates changes on cash

2,157

909

Net decrease in cash and cash equivalents

(17,827)

(48,624)

Cash and cash equivalents, beginning of period

274,319

203,591

Cash and cash equivalents, end of period

$

256,492

$

154,967