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Press Release -- November 4th, 2010
Source: Cogent Communications
Tags: Earnings, Equipment, Exchange

Cogent Communications Reports Third Quarter 2010 Results

WASHINGTON, Nov. 4, 2010 /PRNewswire-FirstCall/ --

Financial and Business Highlights

  • Service revenue for Q3 2010 of $66.8 million -- an increase of 3.7% from $64.4 million for Q2 2010 and an increase of 10.9% from $60.2 million for Q3 2009
    • Foreign exchange positively impacts revenue growth from Q2 2010 to Q3 2010 by $0.1 million and negatively impacts revenue growth from Q3 2009 to Q3 2010 by $1.3 million
  • EBITDA, as adjusted, of $20.3 million for Q3 2010 -- an increase of 7.7% from $18.9 million for Q2 2010 and an increase of 19.6% from $17.0 million for Q3 2009
  • EBITDA, as adjusted, margin of 30.4% for Q3 2010 -- an increase from EBITDA, as adjusted, margin of 29.3% for Q2 2010 and 28.2% for Q3 2009
  • Operating income for Q3 2010 of $3.7 million -- an increase of 25.8% from $3.0 million for Q2 2010 and an increase of 718.6% from $0.5 million for Q3 2009
  • 24,065 customer connections on the Cogent network at the end of Q3 2010 -- an increase of 2.9% from 23,376 customer connections at the end of Q2 2010 and an increase of 14.7%  from 20,988 customer connections at the end of Q3 2009
  • 1,539 on-net buildings on the Cogent network at the end of Q3 2010 -- an increase of 36 on-net buildings from 1,503 on-net buildings at the end of Q2 2010 and an increase of 118 on-net buildings from 1,421 on-net buildings at the end of Q3 2009

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Cogent Communications Group, Inc. (NASDAQ:CCOI - News) today announced service revenue of $66.8 million for the three months ended September 30, 2010, an increase of 3.7% over $64.4 million for the three months ended June 30, 2010, and an increase of 10.9% over $60.2 million for the three months ended September 30, 2009.

On-net revenue was $51.5 million for the three months ended September 30, 2010, an increase of 2.5% over $50.3 million for the three months ended June 30, 2010, and an increase of 7.2% over $48.1 million for the three months ended September 30, 2009.  On-net service is provided to customers located in buildings that are physically connected to Cogent's network by Cogent facilities.

Off-net revenue was $14.5 million for the three months ended September 30, 2010, an increase of 8.5% over $13.4 million for the three months ended June 30, 2010, and an increase of 30.4% over $11.1 million for the three months ended September 30, 2009. 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.

Non-core revenue was $0.8 million for the three months ended September 30, 2010, $0.8 million for the three months ended June 30, 2010, and $1.1 million for the three months ended September 30, 2009.  Non-core services are legacy services, which Cogent acquired and continues to support but does not actively sell.

Earnings before interest, taxes, depreciation and amortization (EBITDA), as adjusted, increased 7.7% to $20.3 million for the three months ended September 30, 2010 from $18.9 million for the three months ended June 30, 2010, and increased 19.6% from $17.0 million for the three months ended September 30, 2009.   EBITDA, as adjusted, margin was 30.4% for the three months ended September 30, 2010, 29.3% for the three months ended June 30, 2010, and 28.2% for the three months ended September 30, 2009.

Basic and diluted net (loss) per share was $(0.01) for the three months ended September 30, 2010, $(0.02) for the three months ended June 30, 2010, and $(0.07) for the three months ended September 30, 2009.

Total customer connections increased 2.9% to 24,065 as of September 30, 2010 from 23,376 as of June 30, 2010, and increased 14.7% from 20,988 as of September 30, 2009. On-net customer connections increased 3.5% to 19,869 as of September 30, 2010 from 19,193 as of June 30, 2010 and increased 19.5% from 16,633 as of September 30, 2009.  Off-net customer connections increased 1.7% to 3,466 as of September 30, 2010 from 3,408 as of June 30, 2010 and increased 5.3% from 3,290 as of September 30, 2009.  Non-core customer connections were 730 as of September 30, 2010, 775 as of June 30, 2010 and 1,065 as of September 30, 2009.

The number of on-net buildings increased by 36 on-net buildings to 1,539 on-net buildings as of September 30, 2010 from 1,503 on-net buildings as of June 30, 2010, and increased by 118 on-net buildings from 1,421 on-net buildings as of September 30, 2009.

Cogent is exploring the possibility of raising in the near future up to $200 million in a secured debt financing.  If consummated, Cogent expects to use the proceeds from such a transaction for general corporate purposes which could include opportunistic repurchases of its common stock or its convertible notes or a special dividend.

Conference Call and Website Information

Cogent will host a conference call with financial analysts at 8:30 a.m. (ET) on November 4, 2010 to discuss Cogent's operating results for the third quarter of 2010 and Cogent's expectations for full year 2010.  Investors and other interested parties may access a live audio webcast of the earnings call under "Events" at the Investor Relations section of Cogent's website at http://www.cogentco.com/us/ir_events.php.   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 (NASDAQ:CCOI - News) is a multinational, Tier 1 facilities-based ISP.  Cogent specializes in providing businesses with high speed Internet access and point-to-point transport services.  Cogent's facilities-based, all-optical IP network backbone provides IP services in over 155 markets located in North America and Europe.

Cogent Communications is headquartered at 1015 31st Street, NW, Washington, D.C. 20007. 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 GROUP, INC., AND SUBSIDIARIES

Summary of Financial and Operational Results

Q1 2009 Q2 2009 Q3 2009 Q4 2009 Q1 2010 Q2 2010 Q3 2010
Metric ($ in 000's, except share and per share data) – unaudited
On-Net revenue $44,293 $46,453 $48,050 $49,667 $49,635 $50,253 $51,513
% Change from previous Qtr. -1.1% 4.9% 3.4% 3.4% -0.1% 1.2% 2.5%
Off-Net revenue $9,867 $10,562 $11,127 $11,791 $12,316 $13,370 $14,509
% Change from previous Qtr. 7.7% 7.0% 5.3% 6.0% 4.5% 8.6% 8.5%
Non-Core revenue (1) $916 $976 $1,052 $1,053 $825 $772 $761
% Change from previous Qtr. -8.7% 6.6% 7.8% 0.1% -21.7% -6.4% -1.4%
Service revenue – total $55,076 $57,991 $60,229 $62,511 $62,776 $64,395 $66,783
% Change from previous Qtr. 0.3% 5.3% 3.9% 3.8% 0.4% 2.6% 3.7%
Network operations expenses (2) $24,118 $24,511 $26,375 $27,597 $28,051 $29,129 $30,535
% Change from previous Qtr. 1.5% 1.6% 7.6% 4.6% 1.6% 3.8% 4.8%
Gross profit (2) $30,958 $33,480 $33,854 $34,914 $34,725 $35,266 $36,248
% Change from previous Qtr. -0.7% 8.1% 1.1% 3.1% -0.5% 1.6% 2.8%
Gross profit margin (2) 56.2% 57.7% 56.2% 55.9% 55.3% 54.8% 54.3%
Selling, general and administrative expenses (3) $17,068 $16,962 $16,847 $17,593 $17,401 $16,390 $15,964
% Change from previous Qtr. 3.3% -0.6% -0.7% 4.4% -1.1% -5.8% -2.6%
Depreciation and amortization expense $14,576 $15,271 $15,282 $14,784 $13,471 $14,099 $14,736
% Change from previous Qtr. -2.6% 4.8% 0.1% -3.3% -8.9% 4.7% 4.5%
Equity-based compensation expense $3,814 $2,350 $1,267 $1,176 $1,165 $1,796 $1,799
% Change from previous Qtr. -10.5% -38.4% -46.1% -7.2% -0.9% 54.2% 0.2%
Operating (loss) income $(4,500) $(1,103) $458 $1,361 $2,688 $2,981 $3,749
% Change from previous Qtr. 1.8% 75.5% 141.5% 197.2% 97.5% 10.9% 25.8%
EBITDA, as adjusted (4) $13,890 $16,670 $17,007 $17,379 $17,509 $18,880 $20,334
% Change from previous Qtr. -5.2% 20.0% 2.0% 2.2% 0.7% 7.8% 7.7%
EBITDA, as adjusted margin (4) 25.2% 28.7% 28.2% 27.8% 27.9% 29.3% 30.4%
Net loss $(8,160) $(4,453) $(3,279) $(1,259) $(570) $(883) $(462)
% Change from previous Qtr. -177.8% 45.4% 26.4% 61.6% 54.7% -54.9% 47.7%
Basic and diluted net loss per common share $(0.19) $(0.10) $(0.07) $(0.03) $(0.01) $(0.02) $(0.01)
% Change from previous Qtr. -176.0% 47.4% 30.0% 57.1% 66.7% -100.0% 50.0%
Weighted average common shares – basic and diluted 42,758,372 43,689,747 43,894,098 44,242,791 44,464,821 44,525,633 44,585,230
% Change from previous Qtr. -0.1% 2.2% 0.5% 0.8% 0.5% 0.1% 0.1%
Cash provided by operating activities $12,816 $13,031 $14,751 $16,346 $15,309 $15,201 $19,001
% Change from previous Qtr. 18.7% 1.7% 13.2% 10.8% -6.3% -0.7% 25.0%
Capital expenditures $11,746 $13,378 $16,676 $7,707 $11,333 $13,188 $16,518
% Change from previous Qtr. 126.4% 13.9% 24.7% -53.8% 47.0% 16.4% 25.3%
Customer Connections – end of period
On-Net 14,674 15,988 16,633 17,188 18,097 19,193 19,869
% Change from previous Qtr. 3.7% 9.0% 4.0% 3.3% 5.3% 6.1% 3.5%
Off-Net 3,008 3,291 3,290 3,236 3,310 3,408 3,466
% Change from previous Qtr. -1.1% 9.4% -% -1.6% 2.3% 3.0% 1.7%
Non Core (1) 564 1,149 1,065 925 830 775 730
% Change from previous Qtr. -7.8% 103.7% -7.3% -13.1% -10.3% -6.6% -5.8%
Total 18,246 20,428 20,988 21,349 22,237 23,376 24,065
% Change from previous Qtr. 2.5% 12.0% 2.7% 1.7% 4.2% 5.1% 2.9%
Other – end of period
Buildings On-Net 1,355 1,389 1,421 1,451 1,475 1,503 1,539
Employees 548 536 569 578 583 571 566
(1)  Consists of legacy services of companies whose assets or businesses were acquired by Cogent, primarily including voice services (only provided in Toronto, Canada) and dial-up Internet access services.

(2)  Excludes equity-based compensation expense of $76, $47, $25, $24, $47, $95 and $104 in the three months ended March 31, 2009, June 30, 2009, September 30, 2009, December 31, 2009, March 31, 2010, June 30, 2010 and September 30, 2010, respectively.

(3)  Excludes equity-based compensation expense of $3,738, $2,303, $1,242, $1,152, $1,118,  $1,701 and $1,695 in the three months ended March 31, 2009, June 30, 2009, September 30, 2009, December 31, 2009, March 31, 2010, June 30, 2010 and September 30, 2010, respectively.

(4)  See schedule of non-GAAP metrics below for definition and reconciliation to GAAP measures. EBITDA, as adjusted, includes net gains from asset related transactions of $152, $58, $185, $4 and $50 in the three months ended June 30, 2009, December 31, 2009, March 31, 2010, June 30, 2010 and September 30, 2010, respectively.

Schedule of Non-GAAP Measures

EBITDA and EBITDA, as adjusted

EBITDA represents net (loss) income before income taxes, net interest expense, depreciation and amortization. Management believes the most directly comparable measure to EBITDA calculated in accordance with GAAP is cash flows provided by operating activities.

EBITDA, as adjusted, represents EBITDA plus gains on asset related transactions. The Company believes EBITDA, as adjusted, is a useful measure of its ability to service debt, fund capital expenditures and expand its business.  EBITDA, as adjusted, is an integral part of the internal reporting and planning system used by management as a supplement to GAAP financial information. The Company also believes that EBITDA is a frequently used measure by securities analysts, investors, and other interested parties in their evaluation of issuers.

EBITDA and EBITDA, as adjusted, are not recognized terms under generally accepted accounting principles in the United States, or 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, EBITDA is 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 EBITDA and EBITDA, as adjusted, may also differ from the calculation of EBITDA and EBITDA, as adjusted, by its competitors and other companies and as such, its utility as a comparative measure is limited.

COGENT COMMUNICATIONS GROUP, INC., AND SUBSIDIARIES

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

Q1 2009 Q2 2009 Q3 2009 Q4 2009 Q1 2010 Q2 2010 Q3 2010
($ In 000's) – unaudited
Cash flows provided by operating activities $12,816 $13,031 $14,751 $16,346 $15,309 $15,201 $19,001
Changes in operating assets and liabilities (1,486) 1,109 (333) (530) (188) 1,031 (1,728)
Cash interest expense and income tax expense 2,560 2,378 2,589 1,505 2,203 2,644 3,011
Gains on asset related transactions - 152 - 58 185 4 50
EBITDA, as adjusted $13,890 $16,670 $17,007 $17,379 $17,509 $18,880 $20,334
Impact of foreign currencies on sequential quarterly service revenue
($ In 000's) – unaudited Q3 2010
Service revenue as reported – Q3 2010 $66,783
Impact of foreign currencies on service revenue (128)
Service revenue -  Q3 2010 , as adjusted (1) $66,655
Service revenue as reported – Q2 2010 $64,395
Increase from Q2 2010 to Q3 2010 - (Service revenue as adjusted for Q3 2010 less service revenue as reported for Q2 2010) $2,260
Percent increase (Increase from Q2 2010 to Q3 2010 divided by service revenue as reported for Q2 2010) 3.5%
(1)  Service revenue as adjusted is determined by translating the service revenue for the three months ended September 30, 2010 at the average foreign currency exchange rates for the three months ended June 30, 2010. 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.

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 GROUP, INC., AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

AS OF DECEMBER 31, 2009 AND SEPTEMBER 30, 2010

(IN THOUSANDS, EXCEPT SHARE DATA)

December 31,
2009
September 30,
2010
(Unaudited)
Assets
Current assets:
Cash and cash equivalents $ 55,929 $ 47,835
Accounts receivable, net of allowance for doubtful accounts of $2,516 and $3,856 respectively 22,877 24,497
Prepaid expenses and other current assets 8,045 10,285
Total current assets 86,851 82,617
Property and equipment, net 263,784 281,454
Deposits and other assets - $469 and $462 restricted, respectively 4,360 5,460
Total assets $ 354,995 $ 369,531
Liabilities and stockholders' equity
Current liabilities:
Accounts payable $ 12,781 $ 15,899
Accrued liabilities 17,609 19,852
Current maturities, capital lease obligations 5,643 6,706
Total current liabilities 36,033 42,457
Capital lease obligations, net of current maturities 104,021 104,568
Convertible senior notes, net of discount of $25,708 and $22,036, respectively 66,270 69,942
Other long term liabilities 4,187 4,946
Total liabilities 210,511 221,913
Commitments and contingencies:
Stockholders' equity:
Common stock, $0.001 par value; 75,000,000 shares authorized; 44,853,974 and 45,798,581 shares issued and outstanding, respectively 45 46
Additional paid-in capital 475,158 480,481
Accumulated other comprehensive income 1,976 1,701
Accumulated deficit (332,695) (334,610)
Total stockholders' equity 144,484 147,618
Total liabilities and stockholders' equity $ 354,995 $ 369,531
COGENT COMMUNICATIONS GROUP, INC., AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2009 AND SEPTEMBER 30, 2010

(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)

Three Months
Ended
September 30, 2009
Three Months
Ended
September 30, 2010
(Unaudited) (Unaudited)
Service revenue $ 60,229 $ 66,783
Operating expenses:
Network operations (including $25 and $104 of equity-based compensation expense, respectively, exclusive of amounts shown separately) 26,400 30,639
Selling, general, and administrative (including $1,242 and $1,695 of equity-based compensation expense, respectively) 18,089 17,659
Depreciation and amortization 15,282 14,736
Total operating expenses 59,771 63,034
Operating income 458 3,749
Interest income and other, net 231 (24)
Interest expense (4,022) (4,100)
Loss before income taxes (3,333) (375)
Income tax benefit (provision) 54 (87)
Net loss $ (3,279) $ (462)
Net loss per common share:
Basic and diluted net loss per common share $ (0.07) $ (0.01)
Weighted-average common shares—basic and diluted 43,894,098 44,585,230
COGENT COMMUNICATIONS GROUP, INC., AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2009 AND SEPTEMBER 30, 2010

(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)

Nine months
Ended
September 30, 2009
Nine months
Ended
September 30, 2010
(Unaudited) (Unaudited)
Service revenue $ 173,295 $ 193,955
Operating expenses:
Network operations (including $149 and $246 of equity-based compensation expense, respectively, exclusive of amounts shown separately) 75,153 87,961
Selling, general, and administrative (including $7,281 and $4,514 of equity-based compensation expense, respectively) 58,158 54,266
Depreciation and amortization (Note 2) 45,128 42,306
Total operating expenses 178,439 184,533
Operating (loss) income (5,144) 9,422
Interest income and other, net 932 735
Interest expense (11,655) (12,340)
Loss before income taxes (15,867) (2,183)
Income tax (provision) benefit (25) 268
Net loss $ (15,892) $ (1,915)
Net loss per common share:
Basic and diluted net loss per common share $ (0.36) $ (0.04)
Weighted-average common shares -- basic and diluted 43,785,352 44,578,107
COGENT COMMUNICATIONS GROUP, INC., AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2009 AND SEPTEMBER 30, 2010

(IN THOUSANDS)

Nine months
Ended
September 30, 2009
Nine months
Ended
September 30, 2010
(Unaudited) (Unaudited)
Cash flows from operating activities:
Net cash provided by operating activities $ 40,598 $ 49,511
Cash flows from investing activities:
Purchases of property and equipment (41,800) (41,039)
Maturities of short term investments 62
Purchase of other assets (246)
Proceeds from dispositions of assets 97 433
Net cash used in investing activities (41,887) (40,606)
Cash flows from financing activities:
Purchases of common stock (730)
Proceeds from exercises of stock options 346 129
Repayments of capital lease obligations (19,214) (17,119)
Net cash used in financing activities (19,598) (16,990)
Effect of exchange rate changes on cash 710 (9)
Net decrease in cash and cash equivalents (20,177) (8,094)
Cash and cash equivalents, beginning of period 71,291 55,929
Cash and cash equivalents, end of period $ 51,114 $ 47,835
Supplemental disclosure of cash flow information:
Capital lease obligations incurred $ 23,659 $ 19,936

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-USD and Canadian dollar – USD exchange rates) on the translation of our non-USD denominated revenues, expenses, assets and liabilities; legal and operational difficulties in new markets; the imposition of a requirement that we contribute to the Universal Service Fund; changes in government policy and/or regulation, including pending 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 annual report on Form 10-K for the fiscal year ended December 31, 2009 and our quarterly report on Form 10-Q for the quarter ended September 30, 2010, 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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