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Press Release -- February 23rd, 2017
Source: Cogent Communications
Tags:

Cogent Communications Reports Fourth Quarter and Full Year 2016 Results and Increases Regular Quarterly Dividend on Common Stock

WASHINGTON, Feb. 23, 2017 /PRNewswire/ --

Financial and Business Highlights

  • Cogent approves a 5.0% increase of $0.02 per share to its regular quarterly dividend to $0.42 per common share to be paid on March 24, 2017 to shareholders of record on March 10, 2017
  • Service revenue for Q4 2016 increased by 2.2% from Q3 2016 to $115.6 million and on a constant currency basis increased from Q3 2016 by 2.9%
  • Service revenue for Q4 2016 increased by 9.9% from Q4 2015 and on a constant currency basis increased from Q4 2015 by 10.2%
  • Service revenue for 2016 increased by 10.6% from 2015 to $446.9 million and on a constant currency basis increased from 2015 by 10.8%
  • Dividends in 2016 totaled $68.2 million, or $1.51 per share, with 78.7% treated as a return of capital and 21.3% treated as dividends for US federal income tax purposes
  • Net cash provided by operating activities increased by 48.4% from Q3 2016 to $33.9 million and increased by 28.8% from 2015 to $108.0 million for 2016

Cogent Communications Holdings, Inc. (CCOI) today announced service revenue of $115.6 million for the three months ended December 31, 2016, an increase of 9.9% from $105.2 million for the three months ended December 31, 2015 and an increase of 2.2% from $113.1 million for the three months ended September 30, 2016.  Service revenue was $446.9 million for the year ended December 31, 2016, an increase of 10.6% from $404.2 million for the year ended December 31, 2015.  Foreign exchange negatively impacted service revenue from Q3 2016 to Q4 2016 by $0.7 million, negatively impacted service revenue growth from Q4 2015 to Q4 2016 by $0.3 million and negatively impacted service revenue growth from 2015 to 2016 by $0.9 million.  On a constant currency basis, service revenue grew by 10.2% from Q4 2015 to Q4 2016, grew by 2.9% from Q3 2016 to Q4 2016 and grew by 10.8% from 2015 to 2016.

On-net service is provided to customers located in buildings that are physically connected to Cogent's network by Cogent facilities. On-net revenue was $83.5 million for the three months ended December 31, 2016; an increase of 9.1% over $76.5 million for the three months ended December 31, 2015 and an increase of 2.0% from $81.8 million for the three months ended September 30, 2016. On-net revenue was $323.6 million for the year ended December 31, 2016; an increase of 9.8% over $294.8 million for the year ended December 31, 2015.

Off-net customers are located in buildings directly connected to Cogent's network using other carriers' facilities and services to provide the last mile portion of the link from the customers' premises to Cogent's network. Off-net revenue was $31.9 million for the three months ended December 31, 2016; an increase of 12.1% over $28.4 million for the three months ended December 31, 2015 and an increase of 2.9% over $31.0 million for the three months ended September 30, 2016. Off-net revenue was $122.3 million for the year ended December 31, 2016; an increase of 12.9% over $108.4 million for the year ended December 31, 2015.

GAAP gross profit is defined as total service revenue less network operations expense, depreciation and amortization and equity based compensation included in network operations expense.  GAAP gross margin is defined as GAAP gross profit divided by total service revenue. GAAP gross profit increased by 9.9% from $41.3 million for the three months ended December 31, 2015 to $45.4 million for the three months ended December 31, 2016 and increased by 0.0% from $45.4 million for the three months ended September 30, 2016. GAAP gross profit increased by 11.6% from $159.2 million for the year ended December 31, 2015 to $177.6 million for the year ended December 31, 2016. GAAP gross margin was 39.3% for the three months ended December 31, 2016, 39.3% for the three months ended December 31, 2015 and 40.2% for the three months ended September 30, 2016.  GAAP gross margin was 39.7% for the year ended December 31, 2016, and 39.4% for the year ended December 31, 2015.  Excise taxes, including Universal Service Fund fees, recorded on a gross basis and included in service revenue and cost of network operations expense were $2.5 million for the three months ended December 31, 2016, $2.4 million for the three months ended September 30, 2016, $1.7 million for the three months ended December 31, 2015, $3.6 million for the year ended December 31, 2015 and $9.1 million for the year ended December 31, 2016.

Non-GAAP gross profit represents service revenue less network operations expense, excluding equity-based compensation and amounts shown separately (depreciation and amortization expense). Non-GAAP gross margin is defined as non-GAAP gross profit divided by total service revenue.  Non-GAAP gross profit increased by 10.4% from $59.5 million for the three months ended December 31, 2015 to $65.7 million for the three months ended December 31, 2016 and increased by 2.0% from $64.4 million for the three months ended September 30, 2016. Non-GAAP gross profit increased by 10.0% from $230.3 million for the year ended December 31, 2015 to $253.4 million for the year ended December 31, 2016. Non-GAAP gross profit margin was 56.8% for the three months ended December 31, 2016, 56.5% for the three months ended December 31, 2015 and 57.0% for the three months ended September 30, 2016.  Non-GAAP gross profit margin was 56.7% for the year ended December 31, 2016, and 57.0% for the year ended December 31, 2015.

Cash flow from operating activities increased by 54.0% from $22.0 million for the three months ended December 31, 2015 to $33.9 million for the three months ended December 31, 2016 and increased by 48.4% from $22.8 million for the three months ended September 30, 2016. Cash flow from operating activities increased by 28.8% from $83.8 million for the year ended December 31, 2015 to $108.0 million for the year ended December 31, 2016.

Earnings before interest, taxes, depreciation and amortization (EBITDA) increased by 6.8% from $34.7 million for the three months ended December 31, 2015 to $37.1 million for the three months ended December 31, 2016 and decreased by 0.3% from $37.2 million for the three months ended September 30, 2016. EBITDA increased by 11.5% from $128.1 million for the year ended December 31, 2015 to $142.9 million for the year ended December 31, 2016. EBITDA margin was 32.1% for the three months ended December 31, 2016, 33.0% for the three months ended December 31, 2015, 32.9% for the three months ended September 30, 2016, 31.7% for the year ended December 31, 2015 and 32.0% for the year ended December 31, 2016. In addition to on-going fees associated with defending net-neutrality, and included in SG&A expenses and negatively impacting EBITDA for the three months ended December 31, 2016 were $2.9 million of expenses associated with the proposed settlement of a class action wage and hour claim for certain of our current and former sales representatives.

EBITDA, as adjusted, increased by 2.7% from $36.8 million for the three months ended December 31, 2015 to $37.7 million for the three months ended December 31, 2016 and decreased by 0.3% from $37.9 million for the three months ended September 30, 2016. EBITDA, as adjusted, increased by 12.7% from $133.6 million for the year ended December 31, 2015 to $150.6 million for the year ended December 31, 2016. EBITDA, as adjusted, margin was 32.7% for the three months ended December 31, 2016, 34.9% for the three months ended December 31, 2015, 33.5% for the three months ended September 30, 2016, 33.0% for the year ended December 31, 2015 and 33.7% for the year ended December 31, 2016.

Basic and diluted net income per share was $0.09 for the three months ended December 31, 2016, $0.06 for the three months ended December 31, 2015 and $0.08 for the three months ended September 30, 2016. Basic and diluted net income per share was $0.11 for the year ended December 31, 2015 and $0.33 for the year ended December 31, 2016.

Total customer connections increased by 16.3% from 53,152 as of December 31, 2015 to 61,822 as of December 31, 2016 and increased by 3.5% from 59,724 as of September 30, 2016. On-net customer connections increased by 16.3% from 45,473 as of December 31, 2015 to 52,874 as of December 31, 2016 and increased by 3.5% from 51,079 as of September 30, 2016. Off-net customer connections increased by 18.1% from 7,279 as of December 31, 2015 to 8,598 as of December 31, 2016 and increased by 4.1% from 8,259 as of September 30, 2016.

The number of on-net buildings increased by 122 on-net buildings from 2,251 on-net buildings as of December 31, 2015 to 2,373 on-net buildings as of December 31, 2016 and increased by 39 on-net buildings from 2,334 on-net buildings as of September 30, 2016.

Quarterly Dividend Increase Approved

On February 22, 2017, Cogent's board approved a regular quarterly dividend of $0.42 per common share payable on March 24, 2017 to shareholders of record on March 10, 2017. This first quarter 2017 regular dividend represents a 5.0% increase of $0.02 per share from the fourth quarter 2016 regular dividend of $0.40 per share.

The payment of any future dividends and any other returns of capital will be at the discretion of Cogent's board of directors and may be reduced, eliminated or increased and will be dependent upon Cogent's financial position, results of operations, available cash, cash flow, capital requirements, limitations under Cogent's debt indenture agreements and other factors deemed relevant by Cogent's board of directors.

Tax Treatment of 2016 Dividends

Cogent paid four quarterly dividends in 2016 totaling $68.2 million, or $1.51 per share. The expected tax treatment of these dividends are generally that 78.7% are treated as a return of capital and 21.3% are generally treated as dividends for United States federal income tax purposes. While the above information includes general statements about the tax classification of dividends paid on Cogent common stock, these statements do not constitute tax advice. The taxation of corporate distributions can be complex, and stockholders are encouraged to consult their tax advisers to determine what impact the above information may have on their specific tax situation.

Conference Call and Website Information

Cogent will host a conference call with financial analysts at 8:30 a.m. (ET) on February 23, 2017 to discuss Cogent's operating results for the fourth quarter of 2016 and full year 2016 and to discuss Cogent's expectations for full year 2017. Investors and other interested parties may access a live audio webcast of the earnings call in the "Events" section of Cogent's website at www.cogentco.com/events. A replay of the webcast, together with the press release, will be available on the website following the earnings call.

About Cogent Communications

Cogent Communications (CCOI) is a multinational, Tier 1 facilities-based ISP.  Cogent specializes in providing businesses with high speed Internet access, Ethernet transport, and colocation services. Cogent's facilities-based, all-optical IP network backbone provides services in over 190 markets globally.

Cogent Communications is headquartered at 2450 N Street, NW, Washington, D.C. 20037. For more information, visit www.cogentco.com. Cogent Communications can be reached in the United States at (202) 295-4200 or via email at info@cogentco.com.

COGENT COMMUNICATIONS HOLDINGS, INC., AND SUBSIDIARIES
Summary of Financial and Operational Results

Q1 2015

Q2 2015

Q3 2015

Q4 2015

Q1 2016

Q2 2016

Q3 2016

Q4 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

$81,846

$83,511

  % Change from previous Qtr.

-0.1%

1.1%

4.3%

1.9%

2.9%

1.1%

2.9%

2.0%

Off-Net revenue

$25,730

$26,522

$27,688

$28,421

$29,356

$30,149

$30,972

$31,861

% Change from previous Qtr.

2.3%

3.1%

4.4%

2.6%

3.3%

2.7%

2.7%

2.9%

Non-Core revenue (1)

$278

$267

$241

$243

$230

$267

$239

$224

  % Change from previous Qtr.

-3.8%

-4.0%

-9.7%

0.8%

-5.3%

16.1%

-10.5%

-6.3%

Service revenue – total

$97,242

$98,799

$103,017

$105,177

$108,291

$109,955

$113,057

$115,596

  % Change from previous Qtr.

0.5%

1.6%

4.3%

2.1%

3.0%

1.5%

2.8%

2.2%

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

2.9%

2.0%

4.4%

2.5%

3.0%

0.9%

3.1%

2.9%

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

9.3%

9.5%

12.1%

12.1%

12.2%

11.1%

9.7%

10.2%

Network operations expenses (2)

$40,907

$42,252

$45,056

$45,710

$47,156

$47,727

$48,666

$49,943

% Change from previous Qtr.

0.0%

3.3%

6.6%

1.5%

3.2%

1.2%

2.0%

2.6%

GAAP gross profit (3)

$38,650

$39,016

$40,201

$41,333

$43,261

$43,479

$45,426

$45,434

% Change from previous Qtr.

1.3%

0.9%

3.0%

2.8%

4.7%

0.5%

4.5%

0.0%

GAAP gross margin (3)

39.7%

39.5%

39.0%

39.3%

39.9%

39.5%

40.2%

39.3%

Non-GAAP gross profit (4) (6)

$56,335

$56,547

$57,961

$59,467

$61,135

$62,228

$64,391

$65,653

% Change from previous Qtr.

0.9%

0.4%

2.5%

2.6%

2.8%

1.8%

3.5%

2.0%

Non-GAAP gross margin (4) (6)

57.9%

57.2%

56.3%

56.5%

56.5%

56.6%

57.0%

56.8%

Selling, general and administrative expenses (5)

$26,708

$25,987

$24,740

$24,737

$27,472

$27,278

$27,220

$28,576

  % Change from previous Qtr.

6.6%

-2.7%

-4.8%

0.0%

11.1%

-0.7%

-0.2%

5.0%

Depreciation and amortization expense

$17,513

$17,371

$17,634

$18,008

$17,753

$18,604

$18,804

$20,073

% Change from previous Qtr.

-0.2%

-0.8%

1.5%

2.1%

-1.4%

4.8%

1.1%

6.7%

Equity-based compensation expense

$3,141

$3,098

$2,704

$2,571

$2,181

$2,687

$2,991

$2,876

% Change from previous Qtr.

4.7%

-1.4%

-12.7%

-4.9%

-15.2%

23.2%

11.3%

-3.8%

Operating  income

$10,487

$10,810

$15,519

$16,174

$15,675

$17,511

$16,063

$14,795

% Change from previous Qtr.

-19.7%

3.1%

43.6%

4.2%

-3.1%

11.7%

-8.3%

-7.9%

Interest expense

$11,307

$9,692

$10,002

$10,280

$10,065

$10,243

$9,891

$10,602

% Change from previous Qtr.

-7.2%

-14.3%

3.2%

2.8%

-2.1%

1.8%

-3.4%

7.2%

Net income (loss)

$(1,585)

$840

$3,161

$2,480

$3,354

$4,224

$3,459

$3,892

Basic net income (loss) per common share

$(0.04)

$0.02

$0.07

$0.06

$0.08

$0.09

$0.08

$0.09

Diluted net income (loss) per common share

$(0.04)

$0.02

$0.07

$0.06

$0.08

$0.09

$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

44,574,583

44,577,826

% Change from previous Qtr.

-0.2%

-0.8%

-0.7%

-0.3%

0.2%

0.2%

0.2%

0.0%

Weighted average common shares – diluted

45,158,250

45,054,507

44,702,127

44,558,089

44,571,937

44,705,037

44,776,918

44,803,782

% Change from previous Qtr.

-0.2%

-0.2%

-0.8%

-0.3%

0.0%

0.3%

0.2%

0.1%

EBITDA (6)

$29,627

$30,560

$33,221

$34,730

$33,663

$34,950

$37,171

$37,077

% Change from previous Qtr.

-3.8%

3.1%

8.7%

4.5%

-3.1%

3.8%

6.4%

-0.3%

EBITDA margin

30.5%

30.9%

32.2%

33.0%

31.1%

31.8%

32.9%

32.1%

Gains on asset related transactions

$1,548

$719

$1,152

$2,023

$1,946

$4,439

$687

$667

EBITDA, as adjusted (6)

$31,175

$31,279

$34,373

$36,753

$35,609

$39,389

$37,858

$37,744

  % Change from previous Qtr.

-7.3%

0.3%

9.9%

6.9%

-3.1%

10.6%

-3.9%

-0.3%

EBITDA, as adjusted, margin

32.1%

31.7%

33.4%

34.9%

32.9%

35.8%

33.5%

32.7%

 Fees – net neutrality

$1,405

$952

$816

$569

$493

$1,036

$1,315

$432

Net cash provided by operating activities

$18,372

$20,035

$23,403

$21,999

$27,557

$23,698

$22,833

$33,879

% Change from previous Qtr.

2.4%

9.1%

16.8%

-6.0%

25.3%

-14.0%

-3.7%

48.4%

Capital expenditures

$12,916

$10,866

$6,838

$4,962

$15,034

$14,260

$8,745

$7,195

  % Change from previous Qtr.

-0.8%

-15.9%

-37.1%

-27.4%

203.0%

-5.1%

-38.7%

-17.7%

Principal payments on capital leases

$3,650

$7,332

$5,956

$3,273

$3,369

$3,935

$2,354

$2,808

  % Change from previous Qtr.

31.8%

100.9%

-18.8%

-45.0%

2.9%

16.8%

-40.2%

19.3%

Dividends paid

$16,001

$18,972

$15,296

$16,045

$16,171

$16,671

$17,169

$18,199

Purchases of common stock

$8,119

$19,106

$12,169

$ -

$ -

$ -

$ 1,666

$ 2,826

Gross Leverage Ratio

4.42

4.50

4.57

4.55

4.39

3.94

3.89

4.73

Net Leverage Ratio

2.45

2.77

2.98

3.02

2.97

2.88

2.90

2.90

Customer Connections – end of period

On-Net

40,732

42,002

43,364

45,473

47,252

49,243

51,079

52,874

  % Change from previous Qtr.

2.4%

3.1%

3.2%

4.9%

3.9%

4.2%

3.7%

3.5%

Off-Net

6,368

6,583

6,897

7,279

7,654

7,971

8,259

8,598

% Change from previous Qtr.

4.8%

3.4%

4.8%

5.5%

5.2%

4.1%

3.6%

4.1%

Non-Core (1)

311

325

356

400

450

349

386

350

  % Change from previous Qtr.

-14.1%

4.5%

9.5%

12.4%

12.5%

-22.4%

10.6%

-9.3%

Total customer connections

47,411

48,910

50,617

53,152

55,356

57,563

59,724

61,822

  % Change from previous Qtr.

2.6%

3.2%

3.5%

5.0%

4.1%

4.0%

3.8%

3.5%

On-Net Buildings – end of period

Multi-Tenant office buildings

1,488

1,510

1,523

1,541

1,545

1,560

1,577

1,592

Carrier neutral data center buildings

618

631

647

659

675

686

706

729

Cogent data centers

49

50

51

51

51

51

51

52

Total on-net buildings

2,155

2,191

2,221

2,251

2,271

2,297

2,334

2,373

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

847,266,071

858,958,167

Network  – end of period

Intercity route miles

59,161

55,191

56,079

56,079

56,183

56,183

56,684

57,213

Metro fiber miles

27,619

28,036

28,067

28,158

28,316

28,874

29,326

29,536

Connected networks – AS's

5,334

5,435

5,511

5,582

5,617

5,700

5,834

5,927

Headcount – end of period

Sales force – quota bearing

343

358

363

378

398

397

394

422

Sales force - total

459

464

474

495

517

519

516

542

Total employees

785

799

808

828

855

854

858

887

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

5.7

6.1

FTE – sales reps

326

330

337

351

373

373

377

384

(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, $145, $161 and $146 in the three month periods ended March 31, 2015 through December 31, 2016, respectively.  Network operations expense includes excise taxes, including Universal Service Fund fees of $53, $57, $1,757, $1,729, $2,003, $2,156, $2,362 and $2,549 in the three month periods ended March 31, 2015 through December 31, 2016, respectively. 

(3)

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

(4)

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

(5)

Excludes equity-based compensation expense of $2,969, $2,938, $2,578, $2,445, $2,060, $2,542, $2,830 and $2,730 in the three month periods ended March 31, 2015 through December 31, 2016, respectively. 

(6)

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

Schedules of Non-GAAP Measures

EBITDA and EBITDA, as adjusted

EBITDA represents net cash flows from operating activities plus changes in operating assets and liabilities, cash interest expense and cash income tax expense.  Management believes the most directly comparable measure to EBITDA calculated in accordance with generally accepted accounting principles in the United States, or GAAP, is cash flows provided by operating activities. The Company also believes that EBITDA is a measure frequently used by securities analysts, investors, and other interested parties in their evaluation of issuers.  EBITDA, as adjusted, represents EBITDA plus net gains (losses) on asset related transactions.

The Company believes that EBITDA, and EBITDA, as adjusted, are useful measures of its ability to service debt, fund capital expenditures and expand its business.  EBITDA, and EBITDA, as adjusted are an integral part of the internal reporting and planning system used by management as a supplement to GAAP financial information. EBITDA, and EBITDA, as adjusted are not recognized terms under GAAP and accordingly, should not be viewed in isolation or as a substitute for the analysis of results as reported under GAAP, but rather as a supplemental measure to GAAP. For example, these metrics are not intended to reflect the Company's free cash flow, as it does not consider certain current or future cash requirements, such as capital expenditures, contractual commitments, and changes in working capital needs, interest expenses and debt service requirements. The Company's calculations of these metrics may also differ from the calculations performed by its competitors and other companies and as such, its utility as a comparative measure is limited.

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

Year 2015

Q1 2016

Q2 2016

Q3 2016

Q4 2016

Year 2016

($ in 000's) – unaudited

Net cash flows provided by operating activities

$18,372

$20,035

$23,403

$21,999

$83,809

$27,557

$23,698

$22,833

$33,879

$107,967

Changes in operating assets and liabilities

(159)

1,245

(68)

3,047

4,067

(3,681)

1,755

4,737

(6,781)

(3,968)

Cash interest expense and income tax expense

11,414

9,280

9,886

9,684

40,260

9,787

9,497

9,601

9,979

38,861

EBITDA

$29,627

$30,560

$33,221

$34,730

$128,136

$33,663

$34,950

$37,171

$37,077

$142,860

PLUS: Gains on asset related transactions

1,548

719

1,152

2,023

5,443

1,946

4,439

687

667

7,739

EBITDA, as adjusted

$31,175

$31,279

$34,373

$36,753

$133,579

$35,609

$39,389

$37,858

$37,744

$150,599

EBITDA margin

30.5%

30.9%

32.2%

33.0%

31.7%

31.1%

31.8%

32.9%

32.1%

32.0%

EBITDA, as adjusted margin

32.1%

31.7%

33.4%

34.9%

33.0%

32.9%

35.8%

33.5%

32.7%

33.7%

Constant currency revenue is reconciled to service revenue as reported in the tables below.

Constant currency impact on revenue changes – sequential periods

($ in 000's) – unaudited

Q1

2015

Q2

2015

Q3

2015

Q4

2015

Year

2015

Q1

2016

Q2

2016

Q3

2016

Q4

2016

Year

2016

Service revenue, as reported – current period

$97,242

$98,799

$103,017

$105,177

$404,234

$108,291

$109,955

$113,057

$115,596

$446,900

Impact of foreign currencies on service revenue

2,287

340

154

385

16,639

(10)

(709)

273

749

892

Service revenue - as adjusted  for currency impact (1)

$99,529

$99,139

$103,171

$105,562

$420,873

$108,281

$109,246

$113,330

$116,345

$447,792

Service revenue, as reported – prior sequential period

$96,749

$97,242

$98,799

$103,017

$380,003

$105,177

$108,291

$109,955

$113,057

$404,234

Constant currency increase

$2,780

$1,897

$4,372

$2,545

$40,870

$3,104

$955

$3,375

$3,288

$43,558

Constant currency percent increase

2.9%

2.0%

4.4%

2.5%

10.8%

3.0%

0.9%

3.1%

2.9%

10.8%

(1)

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

Constant currency impact on revenue changes – prior year periods

($ in 000's) – unaudited

Q1

2015

Q2

2015

Q3

2015

Q4

2015

Year

2015

Q1

2016

Q2

2016

Q3

2016

Q4

2016

Year

2016

Service revenue, as reported – current period

$97,242

$98,799

$103,017

$105,177

$404,234

$108,291

$109,955

$113,057

$115,596

$446,900

Impact of foreign currencies on service revenue

4,321

4,785

4,278

3,305

16,639

855

(168)

(68)

276

892

Service revenue - as adjusted for currency impact  (2)

$101,563

$103,584

$107,295

$108,482

$420,873

$109,146

$109,787

$112,989

$115,872

$447,792

Service revenue, as reported – prior year period

$92,937

$94,623

$95,691

$96,749

$380,003

$97,242

$98,799

$103,017

$105,177

$404,234

Constant currency increase

$8,626

$8,961

$11,604

$11,733

$40,870

$11,904

$10,988

$9,972

$10,695

$43,558

Percent increase

9.3%

9.5%

12.1%

12.1%

10.8%

12.2%

11.1%

9.7%

10.2%

10.8%

(2)

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

Non-GAAP gross profit and Non-GAAP gross margin

Non-GAAP gross profit and Non-GAAP gross margin are reconciled to GAAP gross profit and GAAP gross margin in the table below.

Q1 2015

Q2 2015

Q3 2015

Q4 2015

Year 2015

Q1 2016

Q2 2016

Q3 2016

Q4 2016

Year 2016

($ in 000's) – unaudited

Service revenue total

$97,242

$98,799

$103,017

$105,177

$404,235

$108,291

$109,955

$113,057

$115,596

$446,900

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

58,592

59,783

62,816

63,844

245,035

65,030

66,476

67,631

70,162

269,299

GAAP Gross Profit (1)

$38,650

$39,016

$40,201

$41,333

$159,200

$43,261

$43,479

$45,426

$45,434

$177,601

Plus  - Equity-based compensation – network operations expense

172

160

126

126

584

121

145

161

146

573

Plus – Depreciation and amortization expense

17,513

17,371

17,634

18,008

70,526

17,753

18,604

18,804

20,073

75,234

Non-GAAP Gross Profit (2)

$56,335

$56,547

$57,961

$59,467

$230,310

$61,135

$62,228

$64,391

$65,653

$253,408

GAAP Gross Margin (1)

39.7%

39.5%

39.0%

39.3%

39.4%

39.9%

39.5%

40.2%

39.3%

39.7%

Non-GAAP Gross Margin (2)

57.9%

57.2%

56.3%

56.5%

57.0%

56.5%

56.6%

57.0%

56.8%

56.7%

(1)

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

(2)

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

Gross and Net Leverage Ratios

Gross leverage ratio is defined as total debt divided by the trailing last 12 months EBITDA, as adjusted.  Net leverage ratio is defined as total net debt (total debt minus cash and cash equivalents) divided by the trailing last 12 months EBITDA, as adjusted.  Cogent's gross leverage ratio was 3.89 at September 30, 2016 and 4.73 at December 31, 2016 and Cogent's net leverage ratio was 2.90 at September 30, 2016 and 2.90 at December 31, 2016 and as shown below.

($ in 000's) – unaudited

As of September 30, 2016

As of December 31, 2016

Cash and cash equivalents

$148,151

$274,319

Debt

Capital leases – current portion

6,122

6,626

Capital leases – long term

134,229

135,335

Senior unsecured notes

189,225

189,225

Senior secured notes

250,000

375,000

Note payable

2,746

5,521

Total debt

582,322

711,707

Total net debt

434,171

437,388

Trailing 12 months EBITDA, as adjusted

149,609

150,599

Gross leverage ratio

3.89

4.73

Net leverage ratio

2.90

2.90

Cogent's SEC filings are available online via the Investor Relations section of www.cogentco.com or on the Securities and Exchange Commission's website at www.sec.gov.

COGENT COMMUNICATIONS HOLDINGS, INC., AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
AS OF DECEMBER 31, 2016 AND 2015
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)

2016

2015

Assets

Current assets:

Cash and cash equivalents

$

274,319

$

203,591

Accounts receivable, net of allowance for doubtful accounts of $1,734 and $1,757, respectively

33,598

30,718

Prepaid expenses and other current assets

19,706

17,030

Total current assets

327,623

251,339

Property and equipment:

Property and equipment

1,136,470

1,070,111

Accumulated depreciation and amortization

(774,829)

(709,975)

Total property and equipment, net

361,641

360,136

Deferred tax assets

42,241

45,142

Deposits and other assets ($128 and $355 restricted, respectively)

6,387

6,199

Total assets

$

737,892

$

662,816

Liabilities and stockholders' equity

Current liabilities:

Accounts payable

$

11,551

$

12,401

Accrued and other current liabilities

47,149

38,355

Installment payment agreement, current portion, net of discounts of $204 and $678, respectively

2,587

11,901

Current maturities, capital lease obligations

6,626

6,247

Total current liabilities

67,913

68,904

Senior secured 2022 notes, net of unamortized debt costs of $2,257 and $1,252, respectively and including premium of $462 in 2016

373,205

248,748

Senior unsecured 2021 notes, net of unamortized debt costs of $2,575 and $3,305, respectively

186,650

196,695

Capital lease obligations, net of current maturities

135,335

129,763

Other long term liabilities

28,043

30,977

Total liabilities

791,146

675,087

Commitments and contingencies

Stockholders' equity:

Common stock, $0.001 par value; 75,000,000 shares authorized; 45,478,787 and 45,198,718 shares issued and outstanding, respectively

45

45

Additional paid-in capital

442,799

434,161

Accumulated other comprehensive income

(17,193)

(14,693)

Accumulated deficit

(478,905)

(431,784)

Total stockholders' deficit

(53,254)

(12,271)

Total liabilities and stockholders' equity

$

737,892

$

662,816

COGENT COMMUNICATIONS HOLDINGS, INC., AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
FOR THE THREE MONTHS ENDED DECEMBER 31, 2016 AND DECEMBER 31, 2015
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)

Three Months
Ended
December 31, 2016

Three Months
Ended
December 31, 2015

(Unaudited)

(Unaudited)

Service revenue

$

115,596

$

105,177

Operating expenses:

Network operations (including $146 and $126 of equity-based compensation expense, respectively, exclusive of depreciation and amortization shown separately below)

50,089

45,836

Selling, general, and administrative (including $2,730 and $2,445 of equity-based compensation expense, respectively)

31,306

27,182

Depreciation and amortization

20,073

18,008

Total operating expenses

101,468

91,026

Gains on equipment transactions

667

2,023

Operating income

14,795

16,174

Interest income and other, net

341

440

Interest expense

(10,602)

(10,280)

Income before income taxes

4,534

6,334

Income tax expense

(642)

(3,854)

Net income

$

3,892

$

2,480

Comprehensive loss:

Net income

$

3,892

$

2,480

Foreign currency translation adjustment

(5,295)

(2,746)

Comprehensive loss

$

(1,403)

$

(266)

Net income per common share:

Basic and diluted net income per common share

$

0.09

$

0.06

Dividends declared per common share

$

0.40

$

0.35

Weighted-average common shares - basic

44,577,826

44,323,131

Weighted-average common shares - diluted

44,803,782

44,558,089

COGENT COMMUNICATIONS HOLDINGS, INC., AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
FOR EACH OF THE TWO YEARS ENDED DECEMBER 31, 2016
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)

2016

2015

Service revenue

$

446,900

$

404,234

Operating expenses:

Network operations (including $573 and $584 of equity-based compensation expense, respectively), exclusive of amounts shown separately

194,066

174,510

Selling, general, and administrative (including $10,162 and $10,931 of equity-based compensation expense, respectively)

120,709

113,103

Depreciation and amortization

75,235

70,527

Total operating expenses

390,010

358,140

Gains on equipment transactions

7,739

5,443

Gains on capital lease terminations

11,643

Losses on debt extinguishment and redemption

(587)

(10,144)

Operating income

64,042

53,036

Interest income and other

1,021

956

Interest expense

(40,803)

(41,280)

Income before income taxes

24,260

12,712

Income tax expense

(9,331)

(7,816)

Net income

$

14,929

$

4,896

Comprehensive income (loss):

Net income

$

14,929

$

4,896

Foreign currency translation adjustment

(2,500)

(8,231)

Comprehensive income (loss)

$

12,429

$

(3,335)

Net income per common share:

Basic and diluted net income per common share

$

0.33

$

0.11

Dividends declared per common share

$

1.51

$

1.46

Weighted-average common shares—basic

44,641,805

44,888,723

Weighted-average common shares—diluted

44,873,030

45,159,489

COGENT COMMUNICATIONS HOLDINGS, INC., AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED DECEMBER 31, 2016 AND DECEMBER 31, 2015
(IN THOUSANDS)

Three months
Ended
December 31, 2016

Three months
Ended
December 31, 2015

(Unaudited)

(Unaudited)

Cash flows from operating activities:

Net income

$

3,892

$

2,480

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

Depreciation and amortization

20,074

18,008

Amortization of debt discount and premium

226

181

Equity-based compensation expense (net of amounts capitalized)

2,876

2,571

(Gains) losses — equipment transactions and other, net

(549)

(1,898)

Deferred income taxes

771

3,879

Changes in operating assets and liabilities:

Accounts receivable, net

(705)

1

Prepaid expenses and other current assets

333

356

Accounts payable, accrued liabilities and other long-term liabilities

5,768

(3,408)

Deposits and other assets

1,193

(171)

Net cash provided by operating activities

33,879

21,999

Cash flows from investing activities:

Purchases of property and equipment

(7,195)

(4,962)

Net cash used in investing activities

(7,195)

(4,962)

Cash flows from financing activities:

Dividends paid

(18,199)

(16,045)

Purchases of common stock

(2,826)

Net proceeds from issuance of senior secured 2022 notes—net of debt costs of $1,202

124,267

Proceeds from exercises of stock options

326

135

Principal payments of installment payment agreement

(575)

Principal payments of capital lease obligations

(2,808)

(3,273)

Net cash provided by (used in) financing activities

100,760

(19,758)

Effect of exchange rates changes on cash

(1,276)

(978)

Net increase (decrease) in cash and cash equivalents

126,168

(3,699)

Cash and cash equivalents, beginning of period

148,151

207,290

Cash and cash equivalents, end of period

$

274,319

$

203,591

COGENT COMMUNICATIONS HOLDINGS, INC., AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR EACH OF THE TWO YEARS ENDED DECEMBER 31, 2016
(IN THOUSANDS)

2016

2015

Cash flows from operating activities:

Net income

$

14,929

$

4,896

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

Depreciation and amortization

75,235

70,527

Amortization of debt discount and premium

1,105

171

Equity-based compensation expense (net of amounts capitalized)

10,735

11,515

Loss on debt extinguishment and redemption

587

10,144

Gains on capital lease terminations

(11,643)

Gains—equipment transactions and other, net

(7,674)

(4,866)

Deferred income taxes

9,224

7,709

Changes in operating assets and liabilities:

Accounts receivable

(3,183)

1,119

Prepaid expenses and other current assets

(2,923)

(2,898)

Deposits and other assets

(336)

(221)

Accounts payable, accrued liabilities and other long-term liabilities

10,268

(2,644)

Net cash provided by operating activities

107,967

83,809

Cash flows from investing activities:

Purchases of property and equipment

(45,234)

(35,582)

Proceeds from asset sales

111

Net cash used in investing activities

(45,234)

(35,471)

Cash flows from financing activities:

Net proceeds from issuance of senior secured 2022 notes—net of debt costs of $1,202 and $1,397, respectively

124,267

248,603

Extinguishment of 2021 senior unsecured notes

(10,775)

Redemption of 2018 secured notes

(251,280)

Dividends paid

(68,210)

(66,314)

Principal payments of capital lease obligations

(12,466)

(20,215)

Principal payments on installment payment agreement

(21,203)

(670)

Purchases of common stock

(4,492)

(39,394)

Proceeds from exercises of common stock options

1,220

423

Net cash provided by (used in) financing activities

8,341

(128,847)

Effect of exchange rate changes on cash

(346)

(3,690)

Net increase (decrease) in cash and cash equivalents

70,728

(84,199)

Cash and cash equivalents, beginning of year

203,591

287,790

Cash and cash equivalents, end of year

$

274,319

$

203,591

Except for historical information and discussion contained herein, statements contained in this release constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995.  Such statements include, but are not limited to statements identified by words such as "believes," "expects," "anticipates," "estimates," "intends," "plans," "targets," "projects" and similar expressions.  The statements in this release are based upon the current beliefs and expectations of Cogent's management and are subject to significant risks and uncertainties.  Actual results may differ from those set forth in the forward-looking statements.  Numerous factors could cause or contribute to such differences, including future economic instability in the global economy or a contraction of the capital markets which could affect spending on Internet services and our ability to engage in financing activities; the impact of changing foreign exchange rates (in particular the Euro to USD and Canadian dollar to USD exchange rates) on the translation of our non-USD denominated revenues, expenses, assets and liabilities; legal and operational difficulties in new markets; changes in government policy and/or regulation, including net neutrality rules  by the United States Federal Communications Commission and in the area of data protection; 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 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; and outcomes in litigation as well as other risks discussed from time to time in our filings with the Securities and Exchange Commission, including, without limitation, our report on Form 10-K  for the year ended December 31, 2016 to be filed with the Securities and Exchange Commission. Cogent undertakes no duty to update any forward-looking statement or any information contained in this press release or in other public disclosures at any time.

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