UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the Quarterly Period Ended
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
Commission File No.
(Exact Name of Registrant as Specified in Its Charter)
(State of Incorporation) | (I.R.S. Employer | |
Identification Number) |
(Address of Principal Executive Offices and Zip Code)
(
(Registrant’s Telephone Number, Including Area Code)
Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class |
| Trading Symbol |
| Name of Each Exchange on which Registered |
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days.
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
☒ | Accelerated filer | ☐ | |
Non-accelerated filer | ☐ | Smaller reporting company | |
Emerging growth company |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
Common Stock, $.001 par value
INDEX
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3 | |||
3 | |||
4 | |||
5 | |||
Notes to Interim Condensed Consolidated Financial Statements (Unaudited) | 6 | ||
Management’s Discussion and Analysis of Financial Condition and Results of Operations | 16 | ||
28 | |||
28 | |||
29 | |||
29 | |||
29 | |||
29 | |||
30 | |||
CERTIFICATIONS |
2
PART I FINANCIAL INFORMATION
ITEM 1.
FINANCIAL STATEMENTS
COGENT COMMUNICATIONS HOLDINGS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
AS OF MARCH 31, 2022 AND DECEMBER 31, 2021
(IN THOUSANDS, EXCEPT SHARE DATA)
| March 31, |
| December 31, | |||
2022 | 2021 | |||||
(Unaudited) | ||||||
Assets | ||||||
Current assets: | ||||||
Cash and cash equivalents | $ | | $ | | ||
Restricted cash | | | ||||
Accounts receivable, net of allowance for credit losses of $ |
| |
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Prepaid expenses and other current assets |
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Total current assets |
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Property and equipment, net | | | ||||
Right-of-use leased assets |
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Deposits and other assets |
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Total assets | $ | | $ | | ||
Liabilities and stockholders’ equity | ||||||
Current liabilities: | ||||||
Accounts payable | $ | | $ | | ||
Accrued and other current liabilities |
| |
| | ||
Installment payment agreement, current portion | | | ||||
Current maturities, operating lease liabilities | | | ||||
Current maturities, finance lease obligations | | | ||||
Total current liabilities |
| |
| | ||
Senior unsecured 2024 Euro Notes, net of unamortized debt costs of $ | | | ||||
Senior secured 2026 Notes, net of unamortized debt costs of $ | | | ||||
Operating lease liabilities, net of current maturities | | | ||||
Finance lease obligations, net of current maturities |
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Other long-term liabilities |
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Total liabilities |
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Commitments and contingencies: | ||||||
Stockholders’ equity: | | |||||
Common stock, $ |
| |
| | ||
Additional paid-in capital |
| |
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Accumulated other comprehensive income — foreign currency translation |
| ( |
| ( | ||
Accumulated deficit |
| ( |
| ( | ||
Total stockholders’ deficit |
| ( |
| ( | ||
Total liabilities and stockholders’ deficit | $ | | $ | | ||
The accompanying notes are an integral part of these condensed consolidated balance sheets.
3
COGENT COMMUNICATIONS HOLDINGS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
FOR THE THREE MONTHS ENDED MARCH 31, 2022 AND MARCH 31, 2021
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
| Three Months Ended |
| Three Months Ended | |||
March 31, 2022 | March 31, 2021 | |||||
| (Unaudited) |
| (Unaudited) | |||
Service revenue | $ | | $ | | ||
Operating expenses: | ||||||
Network operations (including $ |
| |
| | ||
Selling, general, and administrative (including $ |
| |
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Depreciation and amortization |
| |
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Total operating expenses |
| |
| | ||
Gains on equipment transactions | — | | ||||
Gains on lease terminations | |
| — | |||
Operating income | | | ||||
Interest expense |
| ( |
| ( | ||
Unrealized foreign exchange gain on 2024 Euro Notes | | | ||||
Loss on debt extinguishment and repurchase – 2022 Notes | — | ( | ||||
Interest income and other, net | | | ||||
Income before income taxes |
| |
| | ||
Income tax expense |
| ( |
| ( | ||
Net income | $ | | $ | | ||
Comprehensive (loss) income: | ||||||
Net income | $ | | $ | | ||
Foreign currency translation adjustment |
| ( |
| ( | ||
Comprehensive (loss) income | $ | ( | $ | | ||
Net income per common share: | ||||||
Basic and diluted net income per common share | | | ||||
Dividends declared per common share | $ | | $ | | ||
Weighted-average common shares - basic | | | ||||
Weighted-average common shares - diluted |
| |
| | ||
The accompanying notes are an integral part of these condensed consolidated statements.
4
COGENT COMMUNICATIONS HOLDINGS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED MARCH 31, 2022 AND MARCH 31, 2021
(IN THOUSANDS)
| Three Months |
| Three Months | |||
Ended | Ended | |||||
March 31, 2022 | March 31, 2021 | |||||
(Unaudited) | (Unaudited) | |||||
Cash flows from operating activities: | ||||||
Net income | $ | | $ | | ||
Adjustments to reconcile net income to net cash provided by operating activities: | | |||||
Depreciation and amortization |
| |
| | ||
Amortization of debt discount and premium |
| |
| | ||
Equity-based compensation expense (net of amounts capitalized) |
| |
| | ||
Gains – lease transactions | ( | — | ||||
Gains - equipment transactions and other, net | | | ||||
Unrealized foreign currency exchange gain on 2024 Euro Notes | ( | ( | ||||
Loss on debt extinguishment and repurchase of 2022 Notes | — | | ||||
Deferred income taxes | ( | | ||||
Changes in operating assets and liabilities: | | | ||||
Accounts receivable | | | ||||
Prepaid expenses and other current assets | ( | | ||||
Accounts payable, accrued liabilities and other long-term liabilities | | | ||||
Deposits and other assets |
| ( |
| | ||
Net cash provided by operating activities |
| |
| | ||
Cash flows from investing activities: | ||||||
Purchases of property and equipment |
| ( |
| ( | ||
Net cash used in investing activities |
| ( |
| ( | ||
Cash flows from financing activities: | ||||||
Dividends paid |
| ( | ( | |||
Repurchase and extinguishment of 2022 Notes | — | ( | ||||
Proceeds from exercises of stock options | | | ||||
Principal payments on installment payment agreement | ( | ( | ||||
Principal payments of finance lease obligations | ( | ( | ||||
Net cash used in financing activities |
| ( |
| ( | ||
Effect of exchange rates changes on cash |
| ( |
| ( | ||
Net decrease in cash, cash equivalents and restricted cash |
| ( |
| ( | ||
Cash, cash equivalents and restricted cash, beginning of period |
| |
| | ||
Cash, cash equivalents and restricted cash, end of period | $ | | $ | | ||
Supplemental disclosure of non-cash financing activities: | ||||||
Finance lease obligations incurred | $ | | $ | | ||
The accompanying notes are an integral part of these condensed consolidated statements.
5
COGENT COMMUNICATIONS HOLDINGS, INC., AND SUBSIDIARIES
NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. Description of the business:
Reorganization and merger
On May 15, 2014, pursuant to the Agreement and Plan of Reorganization (the “Merger Agreement”) by and among Cogent Communications Group, Inc. (“Group”), a Delaware corporation, Cogent Communications Holdings, Inc., a Delaware corporation (“Holdings”) and Cogent Communications Merger Sub, Inc., a Delaware corporation, Group adopted a new holding company organizational structure whereby Group is now a wholly owned subsidiary of Holdings. Holdings is a “successor issuer” to Group pursuant to Rule 12g-3(a) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”). References to the “Company” for events that occurred prior to May 15, 2014 refer to Cogent Communications Group, Inc. and its subsidiaries and on and after May 15, 2014 the “Company” refers to Cogent Communications Holdings, Inc. and its subsidiaries. Cogent Communications, Inc. is wholly owned by Group and the vast majority of Cogent’s assets, contractual arrangements, and operations are executed by Cogent Communications, Inc.
Description of business
The Company is a facilities-based provider of low-cost, high-speed Internet access, private network services, and data center colocation space and power. The Company’s network is specifically designed and optimized to transmit packet switched data. The Company delivers its services primarily to small and medium-sized businesses, communications service providers and other bandwidth-intensive organizations in
The Company offers on-net Internet access services exclusively through its own facilities, which run from its network to its customers’ premises. The Company offers its on-net services to customers located in buildings that are physically connected to its network. As a result, the Company is not dependent on local telephone companies or cable TV companies to serve its customers for its on-net Internet access and private network services. The Company’s on-net service consists of high-speed Internet access and private network services offered at speeds ranging from
The Company provides its on-net Internet access and private network services to its corporate and net-centric customers. The Company’s corporate customers are located in multi-tenant office buildings and typically include law firms, financial services firms, advertising and marketing firms, as well as health care providers, educational institutions and other professional services businesses. The Company’s net-centric customers include bandwidth-intensive users that leverage its network to either deliver content to end users or to provide access to residential or commercial internet users. Content delivery customers include over the top (“OTT”) media service providers, content delivery networks, web hosting companies, and commercial content and application software providers. Access customers include access networks comprised of other Internet Service Providers (“ISPs”), telephone companies, mobile phone operators and cable television companies that collectively provide internet access to a substantial number of broadband subscribers and mobile phone subscribers across the world. These net-centric customers generally receive the Company’s services in carrier neutral colocation facilities and in the Company’s own data centers. The Company operates data centers throughout North America and Europe that allow its customers to collocate their equipment and access the Company’s network.
In addition to providing on-net services, the Company provides Internet access and private network services to customers that are not located in buildings directly connected to its network. The Company provides these off-net services primarily to corporate customers using other carriers’ circuits to provide the “last mile” portion of the link from the customers’ premises to the Company’s network. The Company also provides certain non-core services that resulted from acquisitions. The Company continues to support but does not actively sell these non-core services.
6
Basis of presentation
The accompanying unaudited condensed consolidated financial statements have been prepared by the Company pursuant to the rules and regulations of the Securities and Exchange Commission. In the opinion of management, the unaudited condensed consolidated financial statements reflect all normal recurring adjustments that the Company considers necessary for the fair presentation of its results of operations and cash flows for the interim periods covered, and of the financial position of the Company at the date of the interim condensed consolidated balance sheet. Certain information and footnote disclosures normally included in the annual consolidated financial statements prepared in accordance with U.S. generally accepted accounting principles ("GAAP") have been condensed or omitted pursuant to such rules and regulations. The operating results for interim periods are not necessarily indicative of the operating results for the entire year. While the Company believes that the disclosures are adequate to not make the information misleading, these interim condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes included in its annual report on Form 10-K for the year ended December 31, 2021.
The accompanying unaudited condensed consolidated financial statements include all wholly owned subsidiaries. All inter-company accounts and activity have been eliminated.
Use of estimates
The preparation of consolidated financial statements in conformity with US GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results may differ from these estimates.
Financial instruments
At March 31, 2022 and December 31, 2021, the carrying amount of cash and cash equivalents, restricted cash, accounts receivable, prepaid and other current assets, accounts payable, and accrued expenses approximated fair value because of the short-term nature of these instruments. The Company measures its cash equivalents and restricted cash at amortized cost, which approximates fair value based upon quoted market prices (Level 1). Based upon recent trading prices (Level 2—market approach) at March 31, 2022 the fair value of the Company’s $
Restricted cash and interest rate swap agreement
Restricted cash represents amounts held in a segregated bank accounts by our clearing broker as margin in support of our interest rate swap agreement as discussed in Note 3 and was $
Gross receipts taxes, universal service fund and other surcharges
Revenue recognition standards include guidance relating to taxes or surcharges assessed by a governmental authority that are directly imposed on a revenue-producing transaction between a seller and a customer and may include, but are not limited to, gross receipts taxes, excise taxes, Universal Service Fund fees and certain state regulatory fees. Such charges may be presented gross or net based upon the Company’s accounting policy election. The Company records certain excise taxes and surcharges on a gross basis and includes them in its revenue and network operations expense. Excise taxes and surcharges billed to customers and recorded on a gross basis (as service revenue and network operations expense)were $
Basic and diluted net income per common share
Basic earnings per share (“EPS”) excludes dilution for common stock equivalents and is computed by dividing net income or (loss) available to common stockholders by the weighted-average number of common shares outstanding for the period. Diluted EPS is based on the weighted-average number of shares of common stock outstanding during each period, adjusted for the effect of dilutive common stock equivalents. Shares of restricted stock are included in the computation of basic EPS as they vest and are included in diluted EPS, to the extent they are dilutive, determined using the treasury stock method.
7
The following details the determination of diluted weighted average shares:
| Three Months Ended |
| Three Months Ended | |
March 31, | March 31, | |||
2022 | 2021 | |||
Weighted average common shares - basic | |
| | |
Dilutive effect of stock options | |
| | |
Dilutive effect of restricted stock | |
| | |
Weighted average common shares - diluted | |
| |
The following details unvested shares of restricted common stock as well as the anti-dilutive effects of stock options and restricted stock awards outstanding:
| March 31, 2022 |
| March 31, 2021 | |
Unvested shares of restricted common stock | |
| | |
Anti-dilutive options for common stock | | | ||
Anti-dilutive shares of restricted common stock | |
| |
Stockholders’ Deficit
The following details the changes in stockholders’ deficit for the three months ended March 31, 2022 and March 31, 2021 (in thousands except share amounts):
| Accumulated | ||||||||||||||||
Additional | Other | Total | |||||||||||||||
Common Stock | Paid-in | Comprehensive | Accumulated | Stockholders’ | |||||||||||||
|
| Shares |
| Amount |
| Capital |
| Income (Loss) |
| Deficit |
| Equity (Deficit) | |||||
Balance at December 31, 2020 | | $ | | $ | | $ | ( | $ | ( | $ | ( | ||||||
Forfeitures of shares granted to employees |
| ( |
| — |
| — |
| — |
| — |
| — | |||||
Equity-based compensation |
| — |
| — |
| |
| — |
| — |
| | |||||
Foreign currency translation |
| — |
| — |
| — |
| ( |
| — |
| ( | |||||
Issuances of common stock |
| |
| |
| — |
| — |
| — |
| | |||||
Exercises of options |
| |
| — |
| |
| — |
| — |
| | |||||
Dividends paid |
| — |
| — |
| — |
| — |
| ( |
| ( | |||||
Net income |
| — |
| — |
| — |
| — |
| |
| | |||||
Balance at March 31, 2021 |
| | $ | | $ | | $ | ( | $ | ( | $ | ( | |||||
Accumulated | |||||||||||||||||
Additional | Other | Total | |||||||||||||||
Common Stock | Paid-in | Comprehensive | Accumulated | Stockholders’ | |||||||||||||
| Shares |
| Amount |
| Capital |
| Income (Loss) |
| Deficit |
| Equity (Deficit) | ||||||
Balance at December 31, 2021 |
| |
| $ | |
| $ | |
| $ | ( |
| $ | ( |
| $ | ( |
Forfeitures of shares granted to employees |
| ( |
| — |
| — |
| — |
| — |
| — | |||||
Equity-based compensation |
| — |
| — |
| |
| — |
| — |
| | |||||
Foreign currency translation |
| — |
| — |
| — |
| ( |
| — |
| ( | |||||
Issuances of common stock |
| |
| — |
| — |
| — |
| — |
| — | |||||
Exercises of options |
| |
| — |
| |
| — |
| — |
| | |||||
Dividends paid |
| — |
| — |
| — |
| — |
| ( |
| ( | |||||
Net income |
| — |
| — |
| — |
| — |
| |
| | |||||
Balance at March 31, 2022 |
| | $ | | $ | | $ | ( | $ | ( | $ | ( | |||||
8
Revenue recognition
The Company recognizes revenue under ASU No. 2014-09, Revenue from Contracts with Customers (“ASC 606”), which requires an entity to recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods or services to customers. Under ASC 606 the Company recognizes installation fees for contracts with terms longer than month-to-month over the contract term. The Company believes that for contracts with terms longer than month-to-month the installation fee does not give rise to a material right as defined by ASC 606. The Company recognizes revenue over the estimated average customer life for installation fees associated with month-to-month contracts, because the installation fee represents a material right as defined by ASC 606. The Company capitalizes certain contract acquisition costs that relate directly to a customer contract, including commissions paid to its sales team and sales agents and amortizes these costs on straight-line basis over the period the services are transferred to the customer for commissions paid to its sales team (estimated customer life) and over the remaining original contract term for agent commissions. Management assesses these costs for impairment at least quarterly and as “triggering” events occur that indicate it is more likely than not that an impairment exists.
The Company’s service offerings consist of on-net and off-net telecommunications services. Fixed fees are billed monthly in advance and usage fees are billed monthly in arrears. Amounts billed are due upon receipt and contract lengths range from month to month to
To achieve this core principle, the Company follows the following five steps:
| 1) | Identification of the contract, or contracts with a customer |
| 2) | Identification of the performance obligations in the contract |
| 3) | Determination of the transaction price |
| 4) | Allocation of the transaction price to the performance obligations in the contract |
| 5) | Recognition of revenue when, or as, the Company satisfies its performance obligations |
Fees billed in connection with customer installations are deferred (as deferred revenue) and recognized as noted above. To the extent a customer contract is terminated prior to its contractual end the customer is subject to termination fees. The Company vigorously seeks payment of these termination fees. The Company recognizes revenue for termination fees as they are collected.
Service revenue recognized from amounts in deferred revenue (contract liabilities) at the beginning of the period during the three months ended March 31, 2022 was $
9
Leases
In February 2016, the FASB issued ASU No. 2016-02, Leases (“ASU 2016-02”). ASU 2016-02 replaced most existing lease accounting guidance. The operating lease liability under ASU 2016-02 is not considered a liability under the consolidated leverage ratio calculations in the indentures governing the Company’s senior unsecured and senior secured note obligations. The Company has made an accounting policy election to not apply the recognition requirements of ASU 2016-02 to its short-term leases - leases with a term of one year or less. The Company has also elected to apply certain practical expedients under ASU 2016-02 including not separating lease and non-lease components on its finance and operating leases.
| Three Months |
| Three Months | ||||
Ended |
| Ended | |||||
| March 31, 2022 |
| March 31, 2021 | ||||
Finance lease costs |
|
| |||||
Amortization of right-of-use assets | $ | | $ | | |||
Interest expense on finance lease liabilities |
| | | ||||
Operating lease cost |
| | | ||||
Total lease costs | | | |||||
Other lease information | |||||||
Cash paid for amounts included in the measurement of lease liabilities | |||||||
Operating cash flows from finance leases | ( | ( | |||||
Operating cash flows from operating leases | ( | ( | |||||
Financing cash flows from finance leases | ( | ( | |||||
Right-of-use assets obtained in exchange for new finance lease liabilities | | | |||||
Right-of-use assets obtained in exchange for new operating lease liabilities | | | |||||
Weighted-average remaining lease term — finance leases (in years) | |||||||
Weighted-average remaining lease term — operating leases (in years) | |||||||
Weighted average discount rate — finance leases | | % | | % | |||
Weighted average discount rate — operating leases | | % | | % | |||
Finance leases—fiber lease agreements
The Company has entered into lease agreements with numerous providers of dark fiber under indefeasible-right-of use agreements (“IRUs”). These IRUs typically have initial terms of
10
Operating leases
The Company leases office space and data center facilities under operating leases. In certain cases the Company also enters into short-term operating leases for dark fiber. Right-of-use assets represent the Company’s right to use an underlying asset for the lease term and lease liabilities represent its obligation to make lease payments under the lease. Operating lease right-of-use assets and liabilities are recognized at the lease commencement date based on the present value of lease payments over the reasonably certain lease term. The implicit rates within the Company’s operating leases are generally not determinable and the Company uses its incremental borrowing rate at the lease commencement date to determine the present value of its lease payments. The Company determines its incremental borrowing rate for each lease using its current borrowing rate, adjusted for various factors including level of collateralization and term to align with the term of the lease. The determination of the Company’s incremental borrowing rate requires judgment. Certain of the Company’s leases include options to extend or terminate the lease. The Company establishes the number of renewal option periods used in determining the operating lease term based upon its assessment at the inception of the operating lease of the number of option periods for which failure to renew the lease imposes a penalty in such amount that renewal appears to be reasonably certain. The option to renew may be automatic, at the option of the Company or mutually agreed to between the landlord or dark fiber provider and the Company. Once the Company has accepted the related fiber route or the facility lease term has begun, the present value of the aggregate future minimum operating lease payments is recorded as an operating lease liability and a right-of-use leased asset. Lease incentives and deferred rent liabilities for facilities operating leases are presented with, and netted against, the right-of-use leased asset. Lease expense for lease payments is recognized on a straight-line basis over the term of the lease.
The future minimum payments under these operating lease and finance lease agreements are as follows (in thousands):
| Operating |
| Finance | |||
For the Twelve Months Ending March 31, | Leases | Leases | ||||
2022 |
| $ | | $ | | |
2023 | | | ||||
2024 | | | ||||
2025 | | | ||||
2026 | | | ||||
Thereafter | | | ||||
Total minimum lease obligations | | | ||||
Less—amounts representing interest | ( | ( | ||||
Present value of minimum lease obligations | | | ||||
Current maturities | ( | ( | ||||
Lease obligations, net of current maturities | $ | | $ | | ||
Allowance for credit losses
As of January 1, 2020, the Company maintained an allowance for credit losses to cover its current expected credit losses on its trade receivables arising from the failure of customers to make contractual payments. The Company estimates credit losses expected over the life of its trade receivables based on historical information combined with current conditions that may affect a customer's ability to pay and reasonable and supportable forecasts. While the Company uses various credit quality metrics, it primarily monitors collectability by reviewing the duration of collection pursuits on its delinquent trade receivables. Based on the Company's experience, the customer's delinquency status is the strongest indicator of the credit quality of the underlying trade receivables, which is analyzed monthly.
|
| Current-period |
|
|
| |||||||
Provision for | Write offs | |||||||||||
Beginning | Expected Credit | Charged Against | Ending | |||||||||
Description |
| Balance |
| Losses |
| Allowance |
| Balance | ||||
Allowance for credit losses (deducted from accounts receivable) |
|
|
|
| ||||||||
Three months ended March 31, 2022 | $ | | $ | | $ | ( | $ | | ||||
Three months ended March 31, 2021 | $ | | $ | | $ | ( | $ | | ||||
Net bad debt expense for the three months ended March 31, 2022 was $
11
2. Property and equipment:
Depreciation and amortization expense related to property and equipment and finance leases was $
3. Long-term debt:
As of March 31, 2022, the Company had outstanding $
Limitations under the indentures
The indentures governing the 2024 Notes (the “2024 Notes Indenture”) and the 2026 Notes (the “2026 Notes Indenture”), among other things, limit the Company’s ability to incur indebtedness; to pay dividends or make other distributions; to make certain investments and other restricted payments; to create liens; to consolidate, merge, sell or otherwise dispose of all or substantially all of its assets; to incur restrictions on the ability of a subsidiary to pay dividends or make other payments; and to enter into certain transactions with its affiliates. There are certain exceptions to the limitations on the Company’s ability to incur indebtedness under the 2024 Notes Indenture and the 2026 Notes Indenture, including IRU agreements incurred in the normal course of business and any additional indebtedness if (i) under the 2024 Notes Indenture, the Company’s consolidated leverage ratio, as defined in the 2024 Notes Indenture, is less than
Interest rate swap agreement
As of March 31, 2022, the Company was party to an interest rate swap agreement (the “Swap Agreement”) that has the economic effect of modifying the fixed interest rate obligation associated with its 2026 Notes to a variable interest rate obligation based on the Secured Overnight Financing Rate (“SOFR”) so that the interest payable on the 2026 Notes effectively became variable based on overnight SOFR. The critical terms of the Swap Agreement match the terms of the 2026 Notes, including the notional amount and the optional redemption date on February 1, 2026. The Company did not elect hedge accounting for the Swap Agreement. The Swap Agreement is recorded at its fair value at each reporting period, and the Company incurs gains and losses due to changes in market interest rates. By entering into the Swap Agreement, the Company has assumed the risk associated with variable interest rates. Changes in interest rates affect the interest expense that the Company recognizes in its consolidated statements of comprehensive income. The values that the Company reports for the Swap Agreement as of each reporting date are recognized as interest expense with the corresponding amounts included in assets or liabilities in the Company’s consolidated balance sheets. As of March 31, 2022 the fair value of the Swap Agreement was a net liability of $
12
Under the Swap Agreement, the Company pays the counterparty a semi-annual payment based upon overnight SOFR plus a contractual interest rate spread, and the counterparty pays the Company a semi-annual fixed
Debt extinguishment and repurchase of 2022 Notes
In March 2021, Group repurchased $
On April 6, 2021, Group issued a notice of conditional partial redemption for $
4. Commitments and contingencies:
Current and potential litigation
In accordance with the accounting guidance for contingencies, the Company accrues its estimate of a contingent liability when it is both probable that a liability has been incurred and the amount of the loss can be reasonably estimated. Where it is probable that a liability has been incurred and there is a range of expected loss for which no amount in the range is more likely than any other amount, the Company accrues at the low end of the range. The Company reviews its accruals at least quarterly and adjusts them to reflect the impact of negotiations, settlements, rulings, advice of legal counsel, and other information and events pertaining to a particular matter. The Company has taken certain positions related to its obligations for leased circuits for which it is reasonably possible could result in a loss of up to $
In the ordinary course of business the Company is involved in other legal activities and claims. Because such matters are subject to many uncertainties and the outcomes are not predictable with assurance, the liability related to these legal actions and claims cannot be determined with certainty. Management does not believe that such claims and actions will have a material impact on the Company’s financial condition or results of operations. Judgment is required in estimating the ultimate outcome of any dispute resolution process, as well as any other amounts that may be incurred to conclude the negotiations or settle any litigation. Actual results may differ from these estimates under different assumptions or conditions and such differences could be material.
5. Income taxes:
The components of income before income taxes consist of the following (in thousands):
Three Months Ended |
| Three Months Ended | ||||
| March 31, 2022 | March 31, 2021 | ||||
Domestic | $ | | $ | | ||
Foreign |
| ( |
| ( | ||
Total | $ | | $ | | ||
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6. Common stock buyback program and stock options and award plan:
The Company’s Board of Directors has approved purchases of the Company’s common stock under a buyback program (the “Buyback Program”) through December 31, 2022. As of March 31, 2022, there was $
During the three months ended March 31, 2022 the Company granted
7. Dividends on common stock:
On April 29, 2022, the Company’s Board of Directors approved the payment of a quarterly dividend of $
The payment of any future dividends and any other returns of capital, including stock buybacks will be at the discretion of the Company’s Board of Directors and may be reduced, eliminated or increased and will be dependent upon the Company’s financial position, results of operations, available cash, cash flow, capital requirements, limitations under the Company’s debt indentures and other factors deemed relevant by the Company’s Board of Directors. The Company is a Delaware corporation and under the General Corporate Law of the State of Delaware distributions may be restricted including a restriction that distributions, including stock purchases and dividends, do not result in an impairment of a corporation’s capital, as defined under Delaware law. The indentures governing the Company’s notes limit the Company’s ability to return cash to its stockholders.
8. Related party transactions:
Office leases
The Company’s headquarters is located in an office building owned by Sodium LLC whose owner is the Company’s Chief Executive Officer. The fixed annual rent for the headquarters building is $
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9. Segment information:
The Company operates as
Three Months Ended March 31, 2022 | ||||||||||||
Revenues |
| On-net |
| Off-net |
| Non-core |
| Total | ||||
North America | $ | | $ | | $ | | $ | | ||||
Europe |
| |
| |
| |
| | ||||
Asia Pacific | | | | | ||||||||
Latin America | | | | | ||||||||
Africa | | | — | | ||||||||
Total | $ | | $ | | $ | | $ | | ||||
Three Months Ended March 31, 2021 | ||||||||||||
Revenues |
| On-net |
| Off-net |
| Non-core |
| Total | ||||
North America | $ | | $ | | $ | | $ | | ||||
Europe | | | | | ||||||||
Asia Pacific | | | — | | ||||||||
Latin America | | | — | | ||||||||
Africa | | | — | | ||||||||
Total | $ | | $ | | $ | | $ | | ||||
March 31, | December 31, | |||||
| 2022 |
| 2021 | |||
Long-lived assets, net | ||||||
North America | $ | | $ | | ||
Europe and other |
| |
| | ||
Total | $ | | $ | | ||
The majority of North American revenue consists of services delivered within the United States.
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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
You should read the following discussion and analysis together with our condensed consolidated financial statements and related notes included in this report. The discussion in this report contains forward-looking statements that involve risks and uncertainties, such as statements of our plans, objectives, expectations and intentions. The cautionary statements made in this report should be read as applying to all related forward-looking statements wherever they appear in this report. Our actual results could differ materially from those discussed here. Factors that could cause or contribute to these differences include, but are not limited to:
The COVID-19 pandemic and accompanying government policies worldwide; vaccination and in-office requirements, delays in the delivery of network equipment and optical fiber, future economic instability in the global economy, which could affect spending on Internet services; the impact of changing foreign exchange rates (in particular the Euro to US dollar and Canadian dollar to US dollar exchange rates) on the translation of our non-US dollar denominated revenues, expenses, assets and liabilities into US dollars; legal and operational difficulties in new markets; the imposition of a requirement that we contribute to the US Universal Service Fund on the basis of our Internet revenue; changes in government policy and/or regulation, including rules regarding data protection, cyber security and net neutrality; increasing competition leading to lower prices for our services; our ability to attract new customers and to increase and maintain the volume of traffic on our network; the ability to maintain our Internet peering arrangements on favorable terms; our ability to renew our long-term leases of optical fiber that comprise our network; our reliance on an equipment vendor, Cisco Systems Inc., and the potential for hardware or software problems associated with such equipment; the dependence of our network on the quality and dependability of third-party fiber providers; our ability to retain certain customers that comprise a significant portion of our revenue base; the management of network failures and/or disruptions; our ability to make payments on our indebtedness as they become due and outcomes in litigation, risks associated with variable interest rates under our interest rate swap agreement as well as other risks discussed from time to time in our filings with the Securities and Exchange Commission including, without limitation, our annual report on Form 10-K for the year ended December 31, 2021.
Ukraine & Russia
Following the Russian invasion of Ukraine in February 2022, we terminated services to customers linked to Russia and the Russian government. These customers represented less than 0.3% of our consolidated revenues for the three months ended March 31, 2022. We do not provide service within Russia but we do provide services in Ukraine via our Ukrainian subsidiary, TOV Cogent Communications Ukraine (“Cogent Ukraine”). As a result of the damage to facilities caused by the war, our services in Ukraine have experienced periodic outages which our third-party fiber provider repairs for us. We have taken steps to enhance our network security, provide financial flexibility to our Ukrainian customers and assist our Ukrainian employees. We do not believe that the termination of services to certain Russian customers or the impact of the war on our ability to provide services in Ukraine will have, taken together, a material impact on our network, financial statements or operating results. Cogent Ukraine represented less than 0.4% of our consolidated revenues for the three months ended March 31, 2022 and less than 0.7% of our consolidated assets as of March 31, 2022.
General Overview
We are a facilities-based provider of low-cost, high-speed Internet access, private network services, and data center colocation space. Our network is specifically designed and optimized to transmit packet switched data. We deliver our services primarily to small and medium-sized businesses, communications service providers and other bandwidth-intensive organizations in 50 countries across North America, Europe, Asia, South America, Australia and Africa. We are a Delaware corporation, and we are headquartered in Washington, DC.
We offer on-net Internet access services exclusively through our own facilities, which run from our network to our customers' premises. We offer our on-net services to customers located in buildings that are physically connected to our network. As a result, we are not dependent on local telephone companies or cable TV companies to serve our customers for our on-net Internet access and private network service. Our on-net service consists of high-speed Internet access and private network services offered at speeds ranging from 100 megabits per second (“Mbps”) to 400 gigabits per second (“Gbps”).
Our on-net revenues represented 75.5% of our revenues for the three months ended March 31, 2022 and 74.9% of our revenues for the three months ended March 31, 2021. We provide our on-net Internet access and private network services to our corporate and net-centric customers. Our corporate customers are located in multi-tenant office buildings and typically include law firms, financial services firms, advertising and marketing firms, as well as health care providers, educational institutions and other professional services businesses. Our net-centric customers include bandwidth-intensive users that leverage our network to either deliver content to end users or to provide access to residential or commercial internet users. Content delivery customers include over
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the top (“OTT”) media service providers, content delivery networks, web hosting companies, and commercial content and application software providers. Our net-centric customers include 7,625 access networks comprised of other Internet service providers (“ISPs”), telephone companies, mobile phone operators and cable television companies that collectively provide internet access to a substantial number of broadband subscribers and mobile phone subscribers across the world. These net-centric customers generally receive our services in carrier neutral colocation facilities and in our data centers. We operate data centers throughout North America and Europe that allow our customers to collocate their equipment and access our network.
In addition to providing our on-net services, we provide Internet access and private network services to customers that are not located in buildings directly connected to our network. We provide these off-net services primarily to corporate customers using other carriers’ circuits to provide the “last mile” portion of the link from the customers’ premises to our network. Our off-net revenues represented 24.4% of our revenues for the three months ended March 31, 2022 and 25.0% of our revenues for the three months ended March 31, 2021.
We also provide certain non-core services that resulted from acquisitions. We continue to support but do not actively sell these non-core services. We expect revenue from non-core services to continue to decline or to remain flat. Our non-core revenues represented less than 0.1% of our revenues for both the three months ended March 31, 2022 and March 31, 2021.
Competitive Advantages
We believe we address many of the data communications needs of small and medium-sized businesses, communications service providers and other bandwidth-intensive organizations by offering them high-quality, high-speed Internet access and private network services at attractive prices. We believe that our organization has the following competitive advantages:
Low Cost of Operation: We believe that the wireline telecom industry is undergoing, and will continue to face, significant price deflation for its applications and services. This price deflation is a result of a variety of factors including increased competition, enhanced substitutability of certain products and services and the continued impact of Moore’s Law, which has driven down the cost of technology, particularly for fiber optic Wavelength Division Multiplexing (“WDM”) equipment and optically interfaced routers. Faced with the backdrop of continued price deflation in our industry, we have made a series of discreet choices around our network design, operating strategy and product offerings that are consistent with our objective of becoming the low cost operator in our industry. Since our initiation of operations, this strategy has resulted in a rapid decline in our cost to transmit bits, which has increased our margins and decreased our capital intensity as measured by our capital expenditures per total revenues. Over the last five fiscal years, our cost of goods sold per bit delivered for our customers has declined at a compounded annual rate of 23.3%. Important components of our low cost operating strategy include:
| ● | One Network Protocol. Upon our founding, we selected to operate our network solely using Ethernet protocol. We made this selection in order to take advantage of the significantly greater installed base and lower cost of Ethernet network equipment versus other protocols, the substantially lower costs associated with operating and maintaining one network protocol and the continued benefits of the rapid price performance ratio improvements of Ethernet-related equipment. Our single network design allows us to avoid many of the costs that our competitors who operate circuit-switched, TDM and hybrid fiber coaxial networks incur related to provisioning, monitoring and maintaining multiple transport protocols. Selecting one operating protocol has also had positive effects in terms of our operating overhead and the simplicity of our organization. We believe the vast majority of our competition currently operates their networks with multiple protocols and we believe that attempts to upgrade their networks to one protocol would be operationally challenging and costly. |
| ● | Widespread Access to Fiber on a Cost Effective, Long-Term Basis. We have acquired a large portfolio of dark fiber leases from around the world sourced from the excess inventory of existing networks. This choice to lease rather than build reduces our capital intensity and the operating costs of our intercity and metro networks. The nature of this portfolio and the individual leases provides us long-term access to dark fiber at attractive rates and the opportunity in many cases to extend these leases for multiple terms. On average, a modest number of our dark fiber leases come up for renewal each year. We have relationships with 297 dark fiber vendors across the globe enabling us to lease dark fiber on a long-term, cost-effective basis to virtually any geographic route or facility we require. |
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| ● | Narrow and Focused Product Set. Since our founding, we have strategically focused on delivering a very narrow product set to our customers. The vast majority of our revenue is driven or related to our high-capacity, bi-directional, symmetric internet access services which can be accessed on-net in multi-tenant office buildings and carrier neutral data centers or off-net through other carriers’ “last mile” connections to customer facilities. There are significant cost advantages as a result of this narrow product set. We believe that the relative size of our salesforce training, support and overhead is lower than comparable telecom providers which tend to offer a broader, one-stop shop product set to their client base. |
| ● | Scalable Network Equipment and Hub Configurations. Due to our single network protocol and narrow product set, our transmission and network operations rely mainly on two sets of equipment for operation. In order to further scale our operating leverage, we have systematically reused older equipment in less dense portions of our network. Due to interoperability between the generations of products, we are able to transfer older equipment from our core, high-traffic areas to newer, less congested routes. The result of this dynamic grooming process is that we are able to utilize our equipment for materially longer time frames than the expected life of this equipment thereby reducing our capital investment in our network. We design and build all of our network hubs to the same standards and configurations. This replication strategy provides us scale benefits in equipment purchases, training, and maintenance. |
Greater Control and Superior Delivery. Our on-net service does not rely on circuits that must be provisioned by a third-party carrier. In our on-net multi-tenant office buildings (“MTOBs”) we provide our customers the entire network, including the “last mile” and the in-building wiring connecting to our customer’s suite. In our carrier neutral data centers (“CNDCs”) we are collocated with our customers. As a result, only a cross-connection within the data center is required to provide our services to our customers. The structure of our on-net service provides us more control over our service, quality and pricing. It also allows us to provision services more quickly and efficiently than provisioning services on a third-party carrier network. The vast majority of our on-net services can be installed in less than two weeks which is materially faster than the installation times for some of our incumbent competitors.
High-Quality, Reliable Service. We are able to offer high-quality Internet service due to our network design and composition. We believe that we deliver a high level of technical performance because our network is optimized for packet switched traffic. Its design increases the speed and throughput of our network and reduces the number of data packets dropped during transmission compared to traditional circuit-switched networks. We believe that our network is more reliable and carries traffic at lower cost than networks built as overlays to traditional circuit-switched, or TDM networks.
Large Addressable Market. We have systematically evaluated and chosen our network extensions to buildings, data centers and markets based upon a rigorous set of criteria to evaluate the economic opportunity of network locations. Additional factors relevant to our pursuit of new buildings include the willingness of building owners to grant us access rights, the availability of optical fiber networks to serve those buildings, the costs to connect buildings to our network and equipment availability. We have also begun to evaluate the sustainability of new locations by evaluating the LEED Green Rating of Buildings, the potential to source renewable energy at potential locations and the potential impact of climate change on a location including access to water and the risk of flooding. Our network is connected to 3,065 total buildings located in 216 metropolitan markets. These buildings include 1,824 large MTOBs (totaling 992.3 million square feet of office space) in major North American cities where we offer our services to a diverse set of high-quality corporate customers within close physical proximity of each other. These buildings also include 1,383 CNDCs located in 1,187 buildings in North America, Europe, Asia, South America, Australia and Africa where our net-centric customers directly interconnect with our network. We also operate 54 of our own data centers across the United States and in Europe which comprise over 606,000 square feet of floor space and are directly connected to our network. We believe that these network points of presence strategically position our network to attract high levels of Internet traffic and maximize our revenue opportunities and profitability.
Balanced, High-Traffic Network. Since its inception, our network has grown significantly in terms of its geographic reach, customer connections, and traffic. We currently serve 7,625 access networks as well as numerous large and small content providers and 45,393 corporate customer connections. As a result of these growing bases of customers who distribute (content providers) and receive (access networks) content on our network, we believe that the majority of all the traffic remains “on-net” by both originating and terminating on our network. This control of traffic is an important differentiator as it increases our service reliability and speed of traffic delivery. The increasing share of traffic delivered from content providers to access networks also enhances our margins as we are compensated by both the originating customer and terminating customer. The breadth of our network, extensive size of our customer base, and the volume of our traffic enables us to be one of a handful of Tier 1 networks that are interconnected on a settlement-free basis. This Tier 1 peering status broadens our geographic delivery capability and materially reduces our network costs.
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Proven and Experienced Management Team. Our senior management team is composed of seasoned executives with extensive expertise in the telecommunications industry as well as knowledge of the markets in which we operate. The members of our senior management team have an average of over 20 years of experience in the telecommunications industry and many have been working together at the Company for several years. Several members of the senior management team have been working together at the Company since 2000. Our senior management team has designed and built our network and, during our formative years, led the integration of network assets we acquired through 13 significant acquisitions and managed the expansion and growth of our business.
Our Strategy
We intend to become the leading provider of high-quality, high-speed Internet access and private network services and to continue to improve our profitability and cash flow. The principal elements of our strategy include:
Grow our Corporate Customer Base. Our on-net corporate customers are typically small to medium-sized businesses connected to our network through multi-tenant office buildings or connected to our network through one of our carrier neutral data centers. We generally sell two types of services to our corporate customers: dedicated internet access and private network services. We typically sell dedicated internet access at the same price per connection as our competitors, but our customers benefit from our significantly faster speeds and rapid installation times. These customers are increasingly integrating off-site data centers and cloud services into their IT infrastructure in order to take advantage of the safety, security and redundancy that is offered by locating company processing power, storage and software at a data center. An important part of this new infrastructure is a high-speed, dedicated internet connection from the corporate premises to the data center and the Internet and from one corporate premises to another corporate premises. We believe that the importance of data centers will increasingly lead tenants to reconfigure their communications infrastructure to include dedicated internet access across their locations.
Increase our Share of the Net-Centric Market. We are currently one of the leading providers of high-speed internet access to a variety of content providers and access networks across the world. We intend to further load our high-capacity network as a result of the growing demand for high-speed internet access generated by these types of bandwidth-intensive applications such as over-the-top (“OTT”) media services, online gaming, video, Internet of Things (“IoT”), voice over IP (“VOIP”), remote data storage, and other services. We expect that we will continue to grow our shares of these segments by offering our customers a series of attractive features including:
| ● | Geographic breadth – We have the broadest carrier neutral data center footprint in the industry and currently offer network services in 50 countries – as net-centric customers seek a more international audience this footprint is a significant advantage; |
| ● | High capacity and reliability – We offer 100 Mbps to 100 Gbps ports in all of the carrier neutral data centers and 400Gbps in selected locations on our network, which differentiates the capacity choices we provide our net-centric clients; |
| ● | Balanced customer base – Our leading share of content providers and access networks increases the amount of traffic that originates and terminates on our network thereby reducing latency and enhancing reliability; |
| ● | Large and dedicated salesforce – Our team of 208 net-centric sales professionals is one of the largest salesforces in this industry segment and enables us to better serve this customer segment while also identifying new sales opportunities and gaining new business and customers; and |
| ● | Competitive pricing – We aggressively price and offer discounts for our services to customers in order to attract new customers and drive volume. |
Develop a Worldwide Peering Platform. In late 2020 we introduced a new product, Global Peer Connect (“GPC”), targeted at the growing demand for certain net-centric customers to dynamically peer traffic anywhere on our global platform. Our GPC product provides access to our Global Peer Exchange (“GPE”) which is a worldwide connectivity platform for the exchange of peering traffic destined for the Internet. Similar product offerings in the marketplace offer a materially smaller geographic footprint configuration and require a higher fixed cost for customers.
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Pursue On-net Customer Growth. Our high-capacity network provides us with the ability to add a significant number of customers to our network with minimal direct incremental costs. We intend to increase usage of our network and operational infrastructure by adding customers in our existing on-net buildings, as well as developing additional markets and connecting more multi-tenant office buildings and carrier neutral data centers to our network. We emphasize our on-net services because they generate greater profit margins and we have more control over service levels, quality, pricing and our on-net services are provisioned in considerably less time than our off-net services. Our fiber network connects directly to our on-net customers’ premises and we pay no local access (“last mile”) charges to other carriers to provide our on-net services.
Continue to Improve our Sales Efforts and Productivity. A critical factor in our success has been our investment and focus on our sales and marketing efforts. We seek to maintain a consistent level of sales productivity as measured by the number of connections sold per salesperson per month, taking into account adjustments to the changing mix of products sold and installed. In order to gain market share in our targeted businesses, we expect to continue our sales efforts including introducing strategies and tools to optimize and improve our sales productivity.
Expand our Off-net Corporate Internet Access Business. We have agreements with national carriers providing us last mile network access to over 4.0 million commercial buildings across North America that are lit by fiber optic cable and that are not currently served by our network. We believe these agreements broaden our addressable market for corporate dedicated internet access and enhances our competitive position through the ability to provide enterprise-wide connectivity for corporate customers. In order to take advantage of this large set of commercial buildings we have developed an automated process to enable our salesforce to identify opportunities in the off-net market for dedicated internet access and to quickly offer pricing proposals to potential customers. We continue to negotiate reduced pricing under our numerous carrier agreements that enable us to reduce our cost of off-net services which enhances our competitive position in the marketplace.
Three Months Ended March 31, 2022 Compared to the Three Months Ended March 31, 2021
Our management reviews and analyzes several key financial measures in order to manage our business and assess the quality and variability of our service revenue, operating results and cash flows. The following summary tables present a comparison of our results of operations with respect to certain key financial measures. The comparisons illustrated in the tables are discussed in greater detail below.
Three Months Ended |
| ||||||||
March 31, | Percent |
| |||||||
| 2022 |
| 2021 |
| Change |
| |||
(in thousands) |
| ||||||||
Service revenue |
| $ | 149,175 |
| $ | 146,777 |
| 1.6 | % |
On-net revenue |
| 112,634 |
| 109,947 |
| 2.4 | % | ||
Off-net revenue |
| 36,387 |
| 36,723 |
| (0.9) | % | ||
Network operations expenses (1) |
| 57,449 |
| 57,092 |
| 0.6 | % | ||
Selling, general, and administrative expenses (2) |
| 40,627 |
| 41,442 |
| (2.0) | % | ||
Depreciation and amortization expenses |
| 22,688 |
| 21,970 |
| 3.3 | % | ||
Unrealized foreign exchange gain on 2024 Notes |
| 8,014 |
| 18,870 |
| NM | |||
Loss on debt extinguishment and repurchase – 2022 Notes |
| — |
| 3,868 |
| NM | |||
Interest expense |
| 35,439 |
| 15,836 |
| 123.8 | % | ||
Income tax expense |
| 541 |
| 7,350 |
| NM | |||
| (1) | Includes equity-based compensation expenses of $144 and $2,076 in the three months ended March 31, 2022 and 2021, respectively. |
| (2) | Includes equity-based compensation expenses of $5,912 and $5,231 in the three months ended March 31, 2022 and 2021, respectively. |
NM – not meaningful
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Three Months Ended |
| ||||||||
March 31, | Percent |
| |||||||
| 2022 |
| 2021 |
| Change |
| |||
Other Operating Data |
| ||||||||
Average Revenue Per Unit (ARPU) |
|
|
|
|
|
| |||
ARPU—on-net | $ | 463 | $ | 471 |
| (1.8) | % | ||
ARPU—off-net | $ | 948 | $ | 1,012 |
| (6.4) | % | ||
Average Price per Megabit — installed base | $ | 0.31 | $ | 0.38 |
| (18.6) | % | ||
Customer Connections—end of period |
| |
|
| |
| |||
On-net |
| 81,627 |
| 78,389 |
| 4.1 | % | ||
Off-net |
| 12,922 |
| 12,216 |
| 5.8 | % | ||
Service Revenue. We continually work to grow our total service revenue by increasing the number of potential customers that we can reach on our network. We do this by investing capital to expand the geographic footprint of our network, increasing the number of buildings that we are connected to, including carrier neutral data centers and multi-tenant office buildings, and increasing our penetration rate into our existing buildings. These efforts broaden the global reach of our network and increase the size of our potential addressable market. We also seek to grow our service revenue by investing in our sales and marketing team. We typically sell corporate connections at similar pricing to our competitors, but our clients benefit from our significantly faster speeds, enhanced service level agreements and rapid installation times. In the net-centric market, we offer comparable services in terms of capacity but typically at significantly lower prices.
Our service revenue increased by 1.6% from the three months ended March 31, 2021 to the three months ended March 31, 2022. Exchange rates negatively impacted our increase in service revenue by $1.9 million. All foreign currency comparisons herein reflect results for the three months ended March 31, 2022 translated at the average foreign currency exchange rates for the three months ended March 31, 2021. We increased our total service revenue by expanding our network, by adding additional buildings to our network, by increasing our penetration into the buildings connected to our network and by gaining market share by offering our services at lower prices than our competitors.
Revenue recognition standards include guidance relating to any tax assessed by a governmental authority that is directly imposed on a revenue-producing transaction between a seller and a customer and may include, but is not limited to, gross receipts taxes, Universal Service Fund fees and certain state regulatory fees. We record these taxes billed to our customers on a gross basis (as service revenue and network operations expense) in our consolidated statements of comprehensive income. The impact of these taxes including the Universal Service Fund, resulted in a decrease to our revenues of $0.8 million from the three months ended March 31, 2021 to the three months ended March 31, 2022.
Our corporate customers generally purchase their services on a price per connection basis. Our net-centric customers generally purchase their services on a price per megabit basis. Revenues from our corporate and net-centric customers represented 57.7% and 42.3% of total service revenue, respectively, for the three months ended March 31, 2022 and represented 62.7% and 37.3% of total service revenue, respectively, for the three months ended March 31, 2021. Revenues from corporate customers decreased by 6.4% to $86.1 million for the three months ended March 31, 2022 compared to the three months ended March 31, 2021. Revenues from our net-centric customers increased by 15.1% to $63.1 million for the three months ended March 31, 2022 compared to the three months ended March 31, 2021.
Our corporate customers take advantage of our superior speeds, service levels and installation times versus our competitors. The growing trend of customers installing second lines for redundancy in order to construct Virtual Private Networks (“VPN’s) has also led to our ability to increase our corporate revenues. However, beginning in the second quarter of 2020, we saw corporate customers take a more cautious approach to new configurations and upgrades as well as a reduction in demand for connecting smaller satellite offices as a result of the challenges and uncertainties of the COVID-19 pandemic. We also witnessed a deteriorating real estate market in and around the buildings we service, with rising vacancy levels and falling lease initiations or renewals resulting in fewer sales opportunities for our salesforce. As a result, we have experienced a slowdown in new sales to our corporate customers which negatively impacted our corporate revenue results. While we believe that demand for office space in the buildings in which we operate will remain among the strongest in our markets, we may experience increased corporate customer turnover, fewer upgrades of existing corporate customer configurations and fewer new tenant opportunities which would negatively impact our corporate revenue growth.
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Our revenue from our net-centric customers increased primarily due to an increase in our number of net-centric customers and growth in network traffic from these customers partly offset by a decline in our average price per megabit. Our net-centric customers purchase our services on a price per megabit basis. The net-centric market exhibits significant pricing pressure due to the continued introduction of new technology which lowers the marginal cost of transmission and routing, and the commodity nature of the service where price is typically the only differentiating factor for these customers. Our average price per megabit of our installed base of customers declined by 18.6% from the three months ended March 31, 2021 to the three months ended March 31, 2022. We expect that our average price per megabit will continue to decline at similar rates. The impact of foreign exchange rates has a more significant impact on our net-centric revenues.
Our on-net revenues increased by 2.4% from the three months ended March 31, 2021 to the three months ended March 31, 2022. Our on-net revenues increased as we increased the number of our on-net customer connections by 4.1% at March 31, 2022 from March 31, 2021. On-net customer connections increased at a greater rate than on-net revenues primarily due to a decrease in our on-net ARPU from the three months ended March 31, 2021 to the three months ended March 31, 2022 and the negative impact of foreign exchange. ARPU is determined by dividing revenue for the period by the average customer connections for that period.
Our off-net revenues decreased by 0.9% from the three months ended March 31, 2021 to the three months ended March 31, 2022. Our off-net revenues decreased primarily from the decrease in our off-net ARPU from the three months ended March 31, 2021 to the three months ended March 31, 2022 offsetting the 5.8% increase in the number of our off-net customer connections from March 31, 2021 to March 31, 2022 and the negative impact of foreign exchange.
Network Operations Expenses. Network operations expenses include the costs of personnel associated with service delivery, network management and customer support, network facilities costs, fiber and equipment maintenance fees, leased circuit costs, access and facilities fees paid to building owners and excise taxes billed to our customers and recorded on a gross basis. Our network operations expenses, including non-cash equity-based compensation expense, increased by 0.6% from the three months ended March 31, 2021 to the three months ended March 31, 2022. Non-cash equity-based compensation expense is included in network operations expenses consistent with the classification of the employee’s salary and other compensation. The increase in network operations expense is primarily attributable to an increase in costs related to our network and facilities expansion activities being partly offset by a $1.9 million decrease in equity-based compensation expense from the vesting of restricted employee shares that occurred in the three months ended March 31, 2021 and by price reductions obtained in certain of our leased circuit costs.
Selling, General, and Administrative (“SG&A”) Expenses. Our SG&A expenses, including non-cash equity-based compensation expense, decreased by 2.0% from the three months ended March 31, 2021 to the three months ended March 31, 2022. Non-cash equity-based compensation expense is included in SG&A expenses consistent with the classification of the employee’s salary and other compensation. SG&A expenses decreased primarily from a decrease in salaries and benefits from a reduction in our total headcount and a reduction in our bad debt expense. Our sales force headcount was 620 at March 31, 2022 and 693 at March 31, 2021, and our total headcount was 987 at March 31, 2022 and 1,066 at March 31, 2021. We experienced an increase in both voluntary and involuntary employee departures, particularly within our sales department, in the second half of 2021 and in the first quarter of 2022. We believe that this rise in departures was attributable both to an increased focus on monitoring sales productivity and to the unwillingness of some employees to be vaccinated and/or to return to a full-time, in-office environment.
Depreciation and Amortization Expenses. Our depreciation and amortization expense increased by 3.3% from the three months ended March 31, 2021 to the three months ended March 31, 2022. The increase is primarily due to the depreciation expense associated with the increase in deployed fixed assets.
Interest Expense and Losses on Debt Extinguishment and Redemptions. Our interest expense resulted from interest incurred on our 2022 Notes until these notes were fully extinguished in May 2021, interest incurred on our €350.0 million of 2024 Notes, interest incurred on our $500.0 million of 2026 Notes that we issued in May 2021, interest incurred on our installment payment agreement and interest incurred on our finance lease obligations. In March 2021, we repurchased and extinguished $115.9 million of our 2022 Notes at 103.24% of par value resulting in a loss on debt extinguishment and repurchase of $3.9 million and reduced the par value from $445.0 million to $329.1 million. In May 2021, we extinguished the remaining $329.1 million of our 2022 Notes at par value.
In August 2021 we entered into an interest rate swap agreement (the “Swap Agreement”) that has the economic effect of modifying the fixed interest rate obligation associated with our 2026 Notes to a variable interest rate obligation based on the Secured Overnight Financing Rate (“SOFR”) which results in the interest payable on the 2026 Notes effectively becoming variable based on overnight SOFR. The Swap Agreement is recorded at its fair value at each reporting period, and we incur gains and losses due to changes in market interest rates. The values that we report for the Swap Agreement as of each reporting date are recognized as non-
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cash interest expense with the corresponding amounts included in assets or liabilities in our consolidated balance sheets. As of March 31, 2022 the fair value of our Swap Agreement was a net liability of $30.3 million and we recorded an unrealized loss as non-cash interest expense of $21.3 million in the three months ended March 31, 2022. We did not elect hedge accounting for our Swap Agreement. Under our Swap Agreement, we pay the counterparty a semi-annual payment based upon overnight SOFR plus a contractual interest rate spread, and the counterparty pays us a semi-annual fixed 3.50% interest payment. These settlement payment is made in November and May until the Swap Agreement expires in February 2026. Under the first Swap Agreement settlement payment we received a payment of $0.6 million from the counterparty for a net cash savings of $0.6 million for the period from August 9, 2021 (the Swap Agreement inception date) to October 31, 2021. Under the settlement payment made on May 4, 2022, we recevied a payment of $1.2 million from the counterparty for a net cash savings of $1.2 million for the period from November 1, 2021 to April 30, 2022. Our interest expense increased by 123.8% from the three months ended March 31, 2021 to the three months ended March 31, 2022. This increase was primarily due to the reduction in interest expense from the lower interest rate on our 2026 Notes as compared to our 2022 Notes being offset by the additional $21.3 million of additional non-cash interest expense we recorded related to our Swap Agreement in the three months ended March 31, 2022.
Unrealized Gain on Foreign Exchange – 2024 Notes. Our 2024 Notes were issued in Euros and are reported in our reporting currency – US Dollars. As of March 31, 2022, our 2024 Notes were valued at $389.0 million. Our unrealized gain on foreign exchange on our 2024 Notes from converting our 2024 Notes into USD was $8.0 million for the three months ended March 31, 2022 and $18.9 million for the three months ended March 31, 2021. We have not entered into hedging arrangements for our foreign currency obligations.
Income Tax Expense. Our income tax expense was $0.5 million for the three months ended March 31, 2022 and $7.4 million for the three months ended March 31, 2021. The decrease in our income tax expense is primarily related to the decrease in our income before income taxes.
Buildings On-net. As of March 31, 2022 and 2021, we had a total of 3,065 and 2,939 on-net buildings connected to our network, respectively. The increase in our on-net buildings was a result of our disciplined network expansion program. We anticipate adding a similar number of buildings to our network for the next several years.
Liquidity and Capital Resources
In assessing our liquidity, management reviews and analyzes our current cash and restricted cash balances, accounts receivable, accounts payable, accrued liabilities, capital expenditure commitments, and required finance lease and debt payments and other obligations. As our business has grown as a result of an increasing customer base, broader geographic coverage and increased traffic on our network, we have produced a growing level of operating cash flow. As a result of the operating leverage of our network, our annual capital expenditures as measured as a percentage of revenues has fallen over the last decade. Increasing our operating cash flow is in part dependent upon expanding our geographic footprint and increasing our network capacity. Recent supply chain issues in obtaining network equipment may adversely impact our ability to grow our network and revenue.
We have also had increasing success in raising capital by issuing notes and arranging financing and leases that have had a lower cost and more flexible terms. The combination of this improved operating performance and access to capital has enhanced our financial flexibility and increased our ability to make distributions to shareholders in the form of cash dividends or through share repurchases. Since our initial public offering, we have returned over $1.0 billion to our shareholders through share repurchases and dividends. We will continue to assess our capital and liquidity needs and, where appropriate, return capital to shareholders.
Over the next several years we have significant contractual and anticipated cash outlays including our indicative dividend payments on our common stock, our maturing debt obligations, interest payments on our debt obligations and our projected capital expenditure requirements in order to help execute our business plan. Based upon our historical growth rate of our dividend, we expect that we would have to provide approximately $363 million in order to meet our expected quarterly dividend payments over the next two years. Our $500.0 million 2026 Notes mature in May 2026 and include annual interest payments of $17.5 million until maturity. Our €350 million 2024 Notes mature in June 2024 and include annual interest payments €15.3 million until maturity. Our €350 million 2024 Notes are denominated in Euros and expose us to potentially unfavorable adverse movements in foreign currency rate changes. Our overseas operations provides us access to Euros, however these amounts may be insufficient to fund our obligations under our 2024 Notes. Additionally, we have not entered into foreign currency hedging arrangements which would seek to reduce our risks related to foreign exchange volatility.
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Interest rate swap agreement
As of March 31, 2022, we were party to our Swap Agreement that has the economic effect of modifying the fixed interest rate obligation associated with our 2026 Notes to a variable interest rate obligation based on the SOFR so that the interest payable on our 2026 Notes effectively became variable based on overnight SOFR. The critical terms of our Swap Agreement match the terms of our 2026 Notes, including the notional amount and the optional redemption date on February 1, 2026. The Swap Agreement is recorded at its fair value at each reporting period, and we incur non-cash gains and losses due to changes in market interest rates. By entering into the Swap Agreement, we have assumed the risk associated with variable interest rates. Changes in interest rates affect the interest expense that we recognize in our consolidated statements of comprehensive income. The values that we report for the Swap Agreement as of each reporting date are recognized as non-cash interest expense with the corresponding amounts included in assets or liabilities in our consolidated balance sheets.
As of March 31, 2022 the fair value of the Swap Agreement was a net liability of $30.3 million of which $0.6 million is presented with accrued and other current liabilities and $29.7 million is presented with other long-term liabilities. We recorded an unrealized loss related to the Swap Agreement of $21.3 million in the three months ended March 31, 2022 which is presented in interest expense in our statement of comprehensive income. We have made a $35.0 million deposit with the counterparty to the Swap Agreement. If the fair value of the Swap Agreement exceeds a net liability of $35.0 million we will be required to deposit additional funds with the counterparty equal to the net liability fair value in excess of $35.0 million. As of March 31, 2022, $30.3 million of the deposit was restricted and $4.7 million was unrestricted.
Under the Swap Agreement, we pay the counterparty a semi-annual payment based upon overnight SOFR plus a contractual interest rate spread and the counterparty pays us a semi-annual fixed 3.50% interest payment. The settlement payments is made in November and May until the Swap Agreement expires in February 2026. Under the first Swap Agreement settlement payment, we received a payment of $0.6 million from the counterparty for a net cash savings of $0.6 million for the period from August 9, 2021 (the Swap Agreement inception date) to October 31, 2021. Under the settlement payment made on May 4, 2022, we received a payment of $1.2 million from the counterparty for a net cash savings of $1.2 million for the period from November 1, 2021 to April 30, 2022.
Any future acquisitions or other significant unplanned costs or cash requirements in excess of amounts we currently hold may require that we raise additional funds through the issuance of debt or equity. We cannot assure you that such financing will be available on terms acceptable to us or our stockholders, or at all. Insufficient funds may require us to delay or scale back the number of buildings and markets that we add to our network, reduce our planned increase in our sales and marketing efforts, or require us to otherwise alter our business plan or take other actions that could have a material adverse effect on our business, results of operations and financial condition. If issuing equity securities raises additional funds, substantial dilution to existing stockholders may result.
We may need to or elect to refinance all or a portion of our indebtedness at or before maturity and we cannot provide assurances that we will be able to refinance any such indebtedness on commercially reasonable terms or at all. In addition, we may elect to secure additional capital in the future, at acceptable terms, to improve our liquidity or fund acquisitions or for general corporate purposes. In addition, in an effort to reduce future cash interest payments as well as future amounts due at maturity or to extend debt maturities, we may, from time to time, issue new debt, enter into interest rate swap agreements, enter into debt for debt, or cash transactions to purchase our outstanding debt securities in the open market or through privately negotiated transactions. We will evaluate any such transactions in light of the existing market conditions. The amounts involved in any such transaction, individually or in the aggregate, may be material.
We or our affiliates may, at any time and from time to time, seek to retire or purchase our outstanding debt through cash purchases and/or exchanges for equity or debt, in open-market purchases, privately negotiated transactions or otherwise. Such repurchases or exchanges, if any, will be upon such terms and at such prices as we may determine, and will depend on prevailing market conditions, our liquidity requirements, contractual restrictions and other factors. The amounts involved may be material.
In light of the economic uncertainties associated with the COVID-19 pandemic, our executive officers and Board have continued to carefully monitor our liquidity and cash requirements. Based on current circumstances, we plan to continue our current dividend policy. Given uncertainties regarding the duration of the pandemic and timing for economic recovery, we will continue to monitor our capital spending. As we do each year, we will continue to monitor our future sources and uses of cash, and anticipate that we will make adjustments to our capital allocation strategies when, as and if determined by our Board of Directors.
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Cash Flows
The following table sets forth our consolidated cash flows.
Three Months Ended March 31, | ||||||
(in thousands) |
| 2022 |
| 2021 | ||
Net cash provided by operating activities | $ | 49,411 | $ | 47,106 | ||
Net cash used in investing activities |
| (18,121) |
| (15,444) | ||
Net cash used in financing activities |
| (47,528) |
| (163,667) | ||
Effect of exchange rates changes on cash |
| (615) |
| (1,316) | ||
Net decrease in cash and cash equivalents | $ | (16,853) | $ | (133,321) | ||
Net Cash Provided by Operating Activities. Our primary source of operating cash is receipts from our customers who are billed on a monthly basis for our services. Our primary uses of operating cash are payments made to our vendors, employees and interest payments made to our finance lease vendors and our note holders. Our changes in cash provided by operating activities are primarily due to changes in our operating profit and changes in our interest payments. Cash provided by operating activities for the three months ended March 31, 2021 include interest payments on our note obligations of $12.4 million. There were no interest payments on our note obligations for the three months ended March 31, 2022.
Net Cash Used In Investing Activities. Our primary use of cash for investing activities is for purchases of property and equipment. Purchases of property and equipment were $18.1 million and $15.4 million for the three months ended March 31, 2022 and 2021, respectively. The changes in purchases of property and equipment are primarily due to the timing and scope of our network expansion activities including geographic expansion and adding buildings to our network.
Net Cash Used In Financing Activities. Our primary uses of cash for financing activities are payments to redeem and extinguish our debt, dividend payments, principal payments under our finance lease obligations and our installment payment agreement, and for purchases of our common stock. During the three months ended March 31, 2022 and 2021 we paid $41.3 million and $36.1 million, respectively, for our quarterly dividend payments. Our quarterly dividend payments have increased due to increases in our quarterly dividend per share amounts. In March 2021, we paid $119.7 million to repurchase and extinguish $115.9 million of our 2022 Notes at 103.24% of par value. Principal payments under our finance lease obligations were $5.9 million and $5.7 million for the three months ended March 31, 2022 and 2021, respectively. The changes in our principal payments under our finance lease obligations are primarily due to the timing and extent of our network expansion activities including geographic expansion and adding buildings to our network. Principal payments under our installment payment agreement were $0.6 million and $2.4 million for the three months ended March 31, 2022 and 2021, respectively. There were no purchases of our common stock in both the three months ended March 31, 2022 and 2021.
Cash Position and Indebtedness
Our total indebtedness, at par, at March 31, 2022 was $1.1 billion and our total cash, cash equivalents and restricted cash was $311.8 million. Our total indebtedness at March 31, 2022 includes $245.2 million of finance lease obligations for dark fiber under long-term IRU agreements.
Summarized Financial Information of Holdings
Holdings is not a restricted subsidiary as defined under the indentures governing our 2026 Notes and our 2024 Notes. Holdings is a guarantor under these notes. Under the indentures we are required to disclose financial information of Holdings including its assets, liabilities and its operating results (“Holdings Financial Information”). The Holdings Financial Information as of and for the three months ended March 31, 2022 is detailed below (in thousands).
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| March 31, 2022 | ||
(Unaudited) | |||
Cash and cash equivalents | $ | 107,589 | |
Accrued interest receivable |
| 5 | |
Total assets | $ | 107,594 | |
Investment from subsidiaries | $ | 409,909 | |
Common stock |
| 48 | |
Accumulated deficit |
| (302,363) | |