Cogent Communications Reports Second Quarter 2016 Results and Increases Regular Quarterly Dividend on Common Stock

COGENT COMMUNICATIONS HOLDINGS, INC., AND SUBSIDIARIES

Summary of Financial and Operational Results

Q1 2015

Q2 2015

Q3 2015

Q4 2015

Q1 2016

Q2 2016

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

On-Net revenue

$71,234

$72,010

$75,088

$76,513

$78,705

$79,539

  % Change from previous Qtr.

-0.1%

1.1%

4.3%

1.9%

2.9%

1.1%

Off-Net revenue

$25,730

$26,522

$27,688

$28,421

$29,356

$30,149

% Change from previous Qtr.

2.3%

3.1%

4.4%

2.6%

3.3%

2.7%

Non-Core revenue (1)

$278

$267

$241

$243

$230

$267

  % Change from previous Qtr.

-3.8%

-4.0%

-9.7%

0.8%

-5.3%

16.1%

Service revenue – total

$97,242

$98,799

$103,017

$105,177

$108,291

$109,955

  % Change from previous Qtr.

0.5%

1.6%

4.3%

2.1%

3.0%

1.5%

Constant currency total revenue quarterly growth rate – sequential quarters

2.9%

2.0%

4.4%

2.5%

3.0%

0.9%

Constant currency total revenue quarterly growth rate – year over year quarters

9.3%

9.5%

12.1%

12.1%

12.2%

11.1%

Network operations expenses (2)

$40,907

$42,252

$45,056

$45,710

$47,156

$47,727

% Change from previous Qtr.

0.0%

3.3%

6.6%

1.5%

3.2%

1.2%

Non-GAAP gross margin (2)

$56,335

$56,547

$57,961

$59,467

$61,135

$62,228

% Change from previous Qtr.

0.9%

0.4%

2.5%

2.6%

2.8%

1.8%

Non-GAAP gross margin percentage (2)

57.9%

57.2%

56.3%

56.5%

56.5%

56.6%

Selling, general and administrative expenses (3)

$26,708

$25,987

$24,740

$24,737

$27,472

$27,278

  % Change from previous Qtr.

6.6%

-2.7%

-4.8%

0.0%

11.1%

-0.7%

Depreciation and amortization expense

$17,513

$17,371

$17,634

$18,008

$17,753

$18,604

% Change from previous Qtr.

-0.2%

-0.8%

1.5%

2.1%

-1.4%

4.8%

Equity-based compensation expense

$3,141

$3,098

$2,704

$2,571

$2,181

$2,687

% Change from previous Qtr.

4.7%

-1.4%

-12.7%

-4.9%

-15.2%

23.2%

Operating  income

$10,487

$10,810

$15,519

$16,174

$15,675

$17,511

% Change from previous Qtr.

-19.7%

3.1%

43.6%

4.2%

-3.1%

11.7%

Interest expense

$11,307

$9,692

$10,002

$10,280

$10,065

$10,243

% Change from previous Qtr.

-7.2%

-14.3%

3.2%

2.8%

-2.1%

1.8%

Net income (loss)

$(1,585)

$840

$3,161

$2,480

$3,354

$4,224

Basic net income (loss) per common share

$(0.04)

$0.02

$0.07

$0.06

$0.08

$0.09

Diluted net income (loss) per common share

$(0.04)

$0.02

$0.07

$0.06

$0.08

$0.09

Weighted average common shares – basic

45,158,250

44,774,831

44,474,724

44,323,131

44,402,640

44,491,899

% Change from previous Qtr.

-0.2%

-0.8%

-0.7%

-0.3%

0.2%

0.2%

Weighted average common shares – diluted

45,158,250

45,054,507

44,702,127

44,558,089

44,571,937

44,705,037

% Change from previous Qtr.

-0.2%

-0.2%

-0.8%

-0.3%

0.0%

0.3%

EBITDA (4)

$29,627

$30,560

$33,221

$34,730

$33,663

$34,950

% Change from previous Qtr.

-3.8%

3.1%

8.7%

4.5%

-3.1%

3.8%

EBITDA margin

30.5%

30.9%

32.2%

33.0%

31.1%

31.8%

Gains on asset related transactions

$1,548

$719

$1,152

$2,023

$1,946

$4,439

EBITDA, as adjusted (4)

$31,175

$31,279

$34,373

$36,753

$35,609

$39,389

  % Change from previous Qtr.

-7.3%

0.3%

9.9%

6.9%

-3.1%

10.6%

EBITDA, as adjusted, margin

32.1%

31.7%

33.4%

34.9%

32.9%

35.8%

 Fees – net neutrality

$1,405

$952

$816

$569

$493

$1,036

Net cash provided by operating activities

$18,372

$20,035

$23,403

$21,999

$27,557

$23,698

% Change from previous Qtr.

2.4%

9.1%

16.8%

-6.0%

25.3%

-14.0%

Capital expenditures

$12,916

$10,866

$6,838

$4,962

$15,034

$14,260

  % Change from previous Qtr.

-0.8%

-15.9%

-37.1%

-27.4%

203.0%

-5.1%

Principal payments on capital leases

$3,650

$7,332

$5,956

$3,273

$3,369

$3,935

  % Change from previous Qtr.

31.8%

100.9%

-18.8%

-45.0%

2.9%

16.8%

Dividends paid

$16,001

$18,972

$15,296

$16,045

$16,171

$16,671

Purchases of common stock

$8,119

$19,106

$12,169

$ -

$ -

$ -

Gross Leverage Ratio

4.42

4.50

4.57

4.55

4.39

3.94

Net Leverage Ratio

2.45

2.77

2.98

3.02

2.97

2.88

Customer Connections – end of period

On-Net

40,732

42,002

43,364

45,473

47,252

49,243

  % Change from previous Qtr.

2.4%

3.1%

3.2%

4.9%

3.9%

4.2%

Off-Net

6,368

6,583

6,897

7,279

7,654

7,971

% Change from previous Qtr.

4.8%

3.4%

4.8%

5.5%

5.2%

4.1%

Non-Core (1)

311

325

356

400

450

349

  % Change from previous Qtr.

-14.1%

4.5%

9.5%

12.4%

12.5%

-22.4%

Total customer connections

47,411

48,910

50,617

53,152

55,356

57,563

  % Change from previous Qtr.

2.6%

3.2%

3.5%

5.0%

4.1%

4.0%

On-Net Buildings – end of period

Multi-Tenant office buildings

1,488

1,510

1,523

1,541

1,545

1,560

Carrier neutral data center buildings

618

631

647

659

675

686

Cogent data centers

49

50

51

51

51

51

Total on-net buildings

2,155

2,191

2,221

2,251

2,271

2,297

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

804,760,238

818,039,601

823,712,433

831,585,875

834,341,216

840,042,330

Network  – end of period

Intercity route miles

59,161

55,191

56,079

56,079

56,183

56,183

Metro fiber miles

27,619

28,036

28,067

28,158

28,316

28,874

Connected networks – AS's

5,334

5,435

5,511

5,582

5,617

5,700

Headcount – end of period

Sales force – quota bearing

343

358

363

378

398

397

Sales force - total

459

464

474

495

517

519

Total employees

785

799

808

828

855

854

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

5.3

5.6

6.0

6.3

6.3

5.9

FTE – sales reps

326

330

337

351

373

373

(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 $172, $160, $126, $126, $121 and $145 in the three month periods ended March 31, 2015 through June 30, 2016, respectively.  Network operations expense includes excise taxes, including Universal Service Fund fees of $53, $57, $1,757, $1,729, $2,003 and $2,156 in the three month periods ended March 31, 2015 through June 30, 2016, respectively.  Non-GAAP gross margin represents service revenue less network operations expense, excluding equity-based compensation and amounts shown separately (depreciation expense).Non-GAAP gross margin percentage is defined as non-GAAP gross margin divided by total service revenue.  Management believes that gross margin is a relevant metric to provide investors, as it is a metric 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.

(3)

Excludes equity-based compensation expense of $2,969, $2,938, $2,578, $2,445, $2,060 and $2,542 in the three month periods ended March 31, 2015 through June 30, 2016, respectively. 

(4)

See schedule of non-GAAP metrics below for definition and reconciliation to GAAP measures below.

COGENT COMMUNICATIONS HOLDINGS, INC., AND SUBSIDIARIES

EBITDA, and EBITDA, as adjusted, are reconciled to cash flows provided by operating activities in the table below.

Q1 2015

Q2 2015

Q3 2015

Q4 2015

Q1 2016

Q2 2016

($ in 000's) – unaudited

Net cash flows provided by operating activities

$18,372

$20,035

$23,403

$21,999

$27,557

$23,698

Changes in operating assets and liabilities

(159)

1,245

(68)

3,047

(3,681)

1,755

Cash interest expense and income tax expense

11,414

9,280

9,886

9,684

9,787

9,497

EBITDA

$29,627

$30,560

$33,221

$34,730

$33,663

$34,950

PLUS: Gains on asset related transactions

1,548

719

1,152

2,023

1,946

4,439

EBITDA, as adjusted

$31,175

$31,279

$34,373

$36,753

$35,609

$39,389

Impact of foreign currencies ("constant currency" impact) on change in sequential quarterly service revenue

($ in 000's) – unaudited

Q2 2016

Service revenue, as reported – Q2 2016

$109,955

Impact of foreign currencies on service revenue

(709)

Service revenue -  Q2 2016, as adjusted (1)

$109,246

Service revenue, as reported – Q1 2016

$108,291

Constant currency increase from Q1 2016 to Q2 2016 - (Service revenue, as adjusted for Q2 2016 less service revenue, as reported for Q1 2016)

$955

Percent increase (Constant currency increase from Q1 2016 to Q2 2016 divided by service revenue, as reported for Q1 2016)

0.9%

(1)

Service revenue, as adjusted, is determined by translating the service revenue for the three months ended June 30, 2016 at the average foreign currency exchange rates for the three months ended March 31, 2016. The Company believes that disclosing quarterly revenue growth without the impact of foreign currencies on service revenue is a useful measure of revenue growth. Service revenue, as adjusted, is an integral part of the internal reporting and planning system used by management as a supplement to GAAP financial information.

Impact of foreign currencies ("constant currency" impact) on change in prior year quarterly service revenue

($ in 000's) – unaudited

Q2 2016

Service revenue, as reported – Q2 2016

$109,955

Impact of foreign currencies on service revenue

(168)

Service revenue -  Q2 2016, as adjusted (2)

$109,787

Service revenue, as reported – Q2 2015

$98,799

Constant currency increase from Q2 2015 to Q2 2016 - (Service revenue, as adjusted for Q2 2016 less service revenue, as reported for Q2 2015)

$10,988

Percent increase (Constant currency increase from Q2 2015 to Q2 2016 divided by service revenue, as reported for Q2 2015)

11.1%

(2)

Service revenue, as adjusted, is determined by translating the service revenue for the three months ended June 30, 2016 at the average foreign currency exchange rates for the three months ended June 30, 2015. The Company believes that disclosing quarterly revenue growth without the impact of foreign currencies on service revenue is a useful measure of revenue growth. Service revenue, as adjusted, 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

As of March 31, 2016

As of June 30, 2016

Cash and cash equivalents

$196,050

$154,967

Debt

Capital leases – current portion

5,584

6,086

Capital leases – long term

131,371

129,933

Senior unsecured notes

200,000

189,225

Senior secured notes

250,000

250,000

Note payable

19,020

-

Total debt

605,975

575,244

Total net debt

409,925

420,277

Trailing 12 months EBITDA, as adjusted

138,014

146,124

Gross Leverage Ratio

4.39

3.94

Net Leverage Ratio

2.97

2.88

COGENT COMMUNICATIONS HOLDINGS, INC., AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

AS OF JUNE 30, 2016 AND DECEMBER 31, 2015

(IN THOUSANDS, EXCEPT SHARE DATA)

June 30,
2016

December 31,
2015

(Unaudited)

Assets

Current assets:

Cash and cash equivalents

$

154,967

$

203,591

Accounts receivable, net of allowance for doubtful accounts of $1,102 and $1,757, respectively

32,379

30,718

Prepaid expenses and other current assets

20,701

17,030

Total current assets

208,047

251,339

Property and equipment, net

370,573

360,136

Deferred tax assets - noncurrent

39,548

45,142

Deposits and other assets - $131 and $355 restricted, respectively

8,210

6,199

Total assets

$

626,378

$

662,816

Liabilities and stockholders' equity

Current liabilities:

Accounts payable

$

16,293

$

12,401

Accrued and other current liabilities

43,502

38,355

Installment payment agreement, current portion, net of discount of $678

—

11,901

Current maturities, capital lease obligations

6,086

6,247

Total current liabilities

65,881

68,904

Senior secured 2022 notes, net of unamortized debt costs of $1,165 and $1,252, respectively

248,835

248,748

Senior unsecured 2021 notes, net of unamortized debt costs of $2,835 and $3,305, respectively

186,390

196,695

Capital lease obligations, net of current maturities

129,933

129,763

Other long term liabilities

24,728

30,977

Total liabilities

655,767

675,087

Commitments and contingencies:

Stockholders' equity:

Common stock, $0.001 par value; 75,000,000 shares authorized; 45,565,303 and 45,198,718 shares issued and outstanding, respectively

45

45

Additional paid-in capital

440,200

434,161

Accumulated other comprehensive income — foreign currency translation

(12,586)

(14,693)

Accumulated deficit

(457,048)

(431,784)

Total stockholders' deficit

(29,389)

(12,271)

Total liabilities and stockholders' deficit

$

626,378

$

662,816

COGENT COMMUNICATIONS HOLDINGS, INC., AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

FOR THE THREE MONTHS ENDED JUNE 30, 2016 AND JUNE 30, 2015

(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)

Three Months
Ended
June 30, 2016

Three Months
Ended
June 30, 2015

(Unaudited)

(Unaudited)

Service revenue

$

109,955

$

98,799

Operating expenses:

Network operations (including $145 and $160 of equity-based compensation expense, respectively, exclusive of depreciation and amortization shown separately below)

47,872

42,412

Selling, general, and administrative (including $2,542 and $2,938 of equity-based compensation expense, respectively)

29,820

28,925

Depreciation and amortization

18,604

17,371

Total operating expenses

96,296

88,708

Losses on debt purchases and installment loan repayment

(587)

—

Gains on equipment transactions

4,439

719

Operating income

17,511

10,810

Interest income and other, net

335

417

Interest expense

(10,243)

(9,692)

Income before income taxes

7,603

1,535

Income tax provision

(3,379)

(695)

Net income

$

4,224

$

840

Comprehensive income:

Net income

$

4,224

$

840

Foreign currency translation adjustment

(1,967)

1,683

Comprehensive income

$

2,257

$

2,523

Net income per common share:

Basic and diluted net income per common share

$

0.09

$

0.02

Dividends declared per common share

$

0.37

$

0.42

Weighted-average common shares - basic

44,491,899

44,774,831

Weighted-average common shares - diluted

44,705,037

45,054,507

COGENT COMMUNICATIONS HOLDINGS, INC., AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

FOR THE SIX MONTHS ENDED JUNE 30, 2016 AND JUNE 30, 2015

(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)

Six Months
Ended
June 30, 2016

Six Months
Ended
June 30, 2015

(Unaudited)

(Unaudited)

Service revenue

$

218,247

$

196,041

Operating expenses:

Network operations (including $266 and $332 of equity-based compensation expense, respectively, exclusive of depreciation and amortization shown separately below)

95,149

83,491

Selling, general, and administrative (including $4,602 and $5,908 of equity-based compensation expense, respectively)

59,352

58,603

Depreciation and amortization

36,357

34,883

Total operating expenses

190,858

176,977

Losses on debt purchases and installment loan repayment

(587)

—

Gain on capital lease termination

—

10,110

Gains on equipment transactions

6,385

2,268

Loss on debt extinguishment and redemption

—

(10,144)

Operating income

33,187

21,298

Interest income and other, net

468

516

Interest expense

(20,309)

(21,000)

Income before income taxes

13,346

814

Income tax provision

(5,768)

(1,558)

Net income (loss)

$

7,578

$

(744)

Comprehensive income (loss):

Net income (loss)

$

7,578

$

(744)

Foreign currency translation adjustment

2,107

(5,713)

Comprehensive income (loss)

$

9,685

$

(6,457)

Net income (loss) per common share:

Basic and diluted net income (loss) per common share

$

0.17

$

(0.02)

Dividends declared per common share

$

0.73

$

0.77

Weighted-average common shares - basic

44,484,863

45,012,441

Weighted-average common shares - diluted

44,676,081

45,012,441

COGENT COMMUNICATIONS HOLDINGS, INC., AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THE THREE MONTHS ENDED JUNE 30, 2016 AND JUNE 30, 2015

(IN THOUSANDS)

Three months
Ended
June 30, 2016

Three months
Ended
June 30, 2015

(Unaudited)

(Unaudited)

Cash flows from operating activities:

Net income

$

4,224

$

840

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

Depreciation and amortization

18,604

17,371

Amortization of debt discount

480

37

Equity-based compensation expense (net of amounts capitalized)

2,687

3,098

Loss on debt purchases and installment loan repayment

587

—

Gains — equipment transactions and other, net

(4,294)

(814)

Deferred income taxes

3,310

653

Changes in operating assets and liabilities:

Accounts receivable

(1,058)

(997)

Prepaid expenses and other current assets

(1,218)

1,426

Accounts payable, accrued liabilities and other long-term liabilities

386

(1,399)

Deposits and other assets

(10)

(180)

Net cash provided by operating activities

23,698

20,035

Cash flows from investing activities:

Purchases of property and equipment

(14,260)

(10,866)

Proceeds from disposition of assets

—

82

Net cash used in investing activities

(14,260)

(10,784)

Cash flows from financing activities:

Dividends paid

(16,671)

(18,972)

Purchases of common stock

—

(19,106)

Purchases of senior unsecured 2021 notes

(10,775)

—

Costs from issuance of senior secured 2022 notes

—

(60)

Proceeds from exercises of stock options

424

89

Principal payments on installment payment agreement

(19,019)

—

Principal payments of capital lease obligations

(3,935)

(7,332)

Net cash used in financing activities

(49,976)

(45,381)

Effect of exchange rates changes on cash

(545)

574

Net decrease in cash and cash equivalents

(41,083)

(35,556)

Cash and cash equivalents, beginning of period

196,050

260,050

Cash and cash equivalents, end of period

$

154,967

$

224,494

COGENT COMMUNICATIONS HOLDINGS, INC., AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THE SIX MONTHS ENDED JUNE 30, 2016 AND JUNE 30, 2015

(IN THOUSANDS)

Six months
Ended
June 30, 2016

Six months
Ended
June 30, 2015

(Unaudited)

(Unaudited)

Cash flows from operating activities:

Net income (loss)

$

7,578

$

(744)

Adjustments to reconcile net income (loss) to net cash provided by operating activities:

Depreciation and amortization

36,357

34,883

Amortization of debt discount and premium

696

(127)

Equity-based compensation expense (net of amounts capitalized)

4,868

6,240

Losses on debt extinguishment and redemption

—

10,144

Gain on capital lease termination

—

(10,110)

Loss on debt purchases and installment loan repayment

587

—

Gains — equipment transactions and other, net

(6,480)

(1,837)

Deferred income taxes

5,633

1,475

Changes in operating assets and liabilities:

Accounts receivable

(1,445)

1,126

Prepaid expenses and other current assets

(3,435)

(3,124)

Accounts payable, accrued liabilities and other long-term liabilities

8,765

689

Deposits and other assets

(1,869)

(208)

Net cash provided by operating activities

51,255

38,407

Cash flows from investing activities:

Purchases of property and equipment

(29,294)

(23,782)

Proceeds from disposition of assets

—

82

Net cash used in investing activities

(29,294)

(23,700)

Cash flows from financing activities:

Dividends paid

(32,842)

(34,973)

Purchases of common stock

—

(27,225)

Purchases of senior unsecured 2021 notes

(10,775)

—

Net proceeds from issuance of senior secured 2022 notes

—

248,599

Redemption of senior secured 2018 notes

—

(251,280)

Proceeds from exercises of stock options

630

219

Principal payments on installment payment agreement

(21,203)

—

Principal payments of capital lease obligations

(7,304)

(10,982)

Net cash used in financing activities

(71,494)

(75,642)

Effect of exchange rates changes on cash

909

(2,361)

Net decrease in cash and cash equivalents

(48,624)

(63,296)

Cash and cash equivalents, beginning of period

203,591

287,790

Cash and cash equivalents, end of period

$

154,967

$

224,494