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Press Release -- May 5th, 2011
Source: Cogent Communications
Tags: Earnings, Equipment, Exchange

Cogent Communications Reports First Quarter 2011 Results

WASHINGTON, May 5, 2011 /PRNewswire/ --

Financial and Business Highlights

  • Service revenue for Q1 2011 of $73.5 million – an increase of 5.8% from $69.5 million for Q4 2010 and an increase of 17.0% from $62.8 million for Q1 2010
    • Foreign exchange positively impacts revenue growth from Q4 2010 to Q1 2011 by $0.2 million and positively impacts revenue growth from Q1 2010 to Q1 2011 by $0.1 million
  • Traffic growth of 18% from Q4 2010 to Q1 2011 and traffic growth of 39% from Q1 2010 to Q1 2011
  • EBITDA, as adjusted, of $24.2 million for Q1 2011 - an increase of 7.4% from $22.6 million for Q4 2010 and an increase of 38.5% from $17.5 million for Q1 2010
  • EBITDA, as adjusted, margin was 33.0% for Q1 2011, 32.5% for Q4 2010 and 27.9% for Q1 2010
  • 26,145 customer connections on the Cogent network at the end of Q1 2011 - an increase of 4.4% from 25,046 customer connections at the end of Q4 2010 and an increase of 17.6% from 22,237 customer connections at the end of Q1 2010
  • 1,609 on-net buildings on the Cogent network at the end of Q1 2011 - an increase of 30 on-net buildings and 1.9% from 1,579 on-net buildings at the end of Q4 2010 and an increase of 134 on-net buildings and 9.1% from 1,475 on-net buildings at the end of Q1 2010
  • Gross profit margin, as adjusted, was 56.9% for Q1 2011, 55.5% for Q4 2010 and 55.3% for Q1 2010
  • Raised $170.5 million of net proceeds from the issuance of Senior Secured Notes

Cogent Communications Group, Inc. (NASDAQ:CCOI - News) today announced service revenue of $73.5 million for the three months ended March 31, 2011, an increase of 5.8% over $69.5 million for the three months ended December 30, 2010 and an increase of 17.0% over $62.8 million for the three months ended March 31, 2010.

On-net revenue was $56.8 million for the three months ended March 31, 2011, an increase of 5.9% over $53.6 million for the three months ended December 31, 2010 and an increase of 14.4% over $49.6 million for the three months ended March 31, 2010. 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 $16.0 million for the three months ended March 31, 2011, an increase of 5.6% over $15.1 million for the three months ended December 31, 2010 and an increase of 29.5% over $12.3 million for the three months ended March 31, 2010. 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 $0.7 million for the three months ended March 31, 2011, $0.8 million for the three months ended December 31, 2010 and $0.8 million for the three months ended March 31, 2010.  Non-core services are legacy services, which Cogent acquired and continues to support but does not actively sell.

Gross profit, excluding equity-based compensation expense, increased 8.6% to $41.8 million for the three months ended March 31, 2011 from $38.5 million for the three months ended December 31, 2010 and increased 20.5% from $34.7 million for the three months ended March 31, 2010.   Gross profit margin, excluding equity-based compensation expense, was 56.9% for the three months ended March 31, 2011, 55.5% for the three months ended December 31, 2010, and 55.3% for the three months ended March 31, 2010.

Earnings before interest, taxes, depreciation and amortization (EBITDA), as adjusted, increased 7.4% to $24.2 million for the three months ended March 31, 2011 from $22.6 million for the three months ended December 31, 2010 and increased 38.5% from $17.5 million for the three months ended March 31, 2010.   EBITDA, as adjusted, margin was 33.0% for the three months ended March 31, 2011, 32.5% for the three months ended December 31, 2010, and 27.9% for the three months ended March 31, 2010.

Basic and diluted net income (loss) per share was $(0.01) for the three months ended March 31, 2011, $0.06 for the three months ended December 31, 2010 and $(0.01) for the three months ended March 31, 2010.

Total customer connections increased 4.4% to 26,145 as of March 31, 2011 from 25,046 as of December 31, 2010 and increased 17.6% from 22,237 as of March 31, 2010. On-net customer connections increased 4.8% to 21,878 as of March 31, 2011 from 20,872 as of December 31, 2010 and increased 20.9% from 18,097 as of March 31, 2010.  Off-net customer connections were 3,642 as of March 31, 2011, 3,526 as of December 31, 2010 and 3,310 as of March 31, 2010.  Non-core customer connections were 625 as of March 31, 2011, 648 as of December 31, 2010 and 830 as of March 31, 2010.

The number of on-net buildings increased by 30 on-net buildings to 1,609 on-net buildings as of March 31, 2011 from 1,579 on-net buildings as of December 31, 2010, and increased by 134 on-net buildings from 1,475 on-net buildings as of March 31, 2010.

Conference Call and Website Information

Cogent will host a conference call with financial analysts at 8:30 a.m. (ET) on May 5, 2011 to discuss Cogent's operating results for the first quarter of 2011 and Cogent's expectations for full year 2011.  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 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 (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 160 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 2010 Q2 2010 Q3 2010 Q4 2010 Q1 2011
Metric ($ in 000's, except share and per share data) – unaudited
On-Net revenue $49,635 $50,253 $51,513 $53,602 $56,772
% Change from previous Qtr. -0.1% 1.2% 2.5% 4.1% 5.9%
Off-Net revenue $12,316 $13,370 $14,509 $15,098 $15,951
% Change from previous Qtr. 4.5% 8.6% 8.5% 4.1% 5.6%
Non-Core revenue (1) $825 $772 $761 $761 $737
% Change from previous Qtr. -21.7% -6.4% -1.4% -% -3.2%
Service revenue – total $62,776 $64,395 $66,783 $69,461 $73,460
% Change from previous Qtr. 0.4% 2.6% 3.7% 4.0% 5.8%
Network operations expenses (2) $28,051 $29,129 $30,535 $30,939 $31,633
% Change from previous Qtr. 1.6% 3.8% 4.8% 1.3% 2.2%
Gross profit (2) $34,725 $35,266 $36,248 $38,522 $41,827
% Change from previous Qtr. -0.5% 1.6% 2.8% 6.3% 8.6%
Gross profit margin (2) 55.3% 54.8% 54.3% 55.5% 56.9%
Selling, general and administrative expenses (3) $17,401 $16,390 $15,964 $15,967 $17,582
% Change from previous Qtr. -1.1% -5.8% -2.6% -% 10.1%
Depreciation and amortization expense $12,877 $14,099 $14,736 $14,814 $14,791
% Change from previous Qtr. -12.9% 4.7% 4.5% 0.5% -0.2%
Asset impairment $594 - - - -
% Change from previous Qtr. 100.0% -100.0% - - -
Equity-based compensation expense $1,165 $1,796 $1,799 $1,877 $2,096
% Change from previous Qtr. -0.9% 54.2% 0.2% 4.3% 11.7%
Operating  income $2,688 $2,981 $3,749 $5,864 $7,358
% Change from previous Qtr. 97.5% 10.9% 25.8% 56.4% 25.5%
EBITDA, as adjusted (4) $17,509 $18,880 $20,334 $22,580 $24,247
% Change from previous Qtr. 0.7% 7.8% 7.7% 11.0% 7.4%
EBITDA, as adjusted margin (4) 27.9% 29.3% 30.4% 32.5% 33.0%
Net (loss) income $(570) $(883) $(462) $2,584 $(278)
% Change from previous Qtr. 54.7% -54.9% 47.7% 659.3% -110.8%
Basic and diluted net (loss) income  per common share $(0.01) $(0.02) $(0.01) $0.06 $(0.01)
% Change from previous Qtr. 66.7% -100.0% 50.0% 700.0% -116.7%
Weighted average common shares – basic 44,464,821 44,525,633 44,585,230 44,646,381 44,731,858
% Change from previous Qtr. 0.5% 0.1% 0.1% 0.1% 0.2%
Weighted average common shares – diluted 44,464,821 44,525,633 44,585,230 45,005,387 44,731,858
% Change from previous Qtr. 0.5% 0.1% 0.1% 0.9% -0.6%
Cash provided by operating activities $15,309 $15,201 $19,001 $21,966 $13,468
% Change from previous Qtr. -6.3% -0.7% 25.0% 15.6% -38.7%
Capital expenditures $11,333 $13,188 $16,518 $11,718 $12,842
% Change from previous Qtr. 47.0% 16.4% 25.3% -29.1% 9.6%
Customer Connections – end of period
On-Net 18,097 19,193 19,869 20,872 21,878
% Change from previous Qtr. 5.3% 6.1% 3.5% 5.0% 4.8%
Off-Net 3,310 3,408 3,466 3,526 3,642
% Change from previous Qtr. 2.3% 3.0% 1.7% 1.7% 3.3%
Non-Core (1) 830 775 730 648 625
% Change from previous Qtr. -10.3% -6.6% -5.8% -11.2% -3.5%
Total 22,237 23,376 24,065 25,046 26,145
% Change from previous Qtr. 4.2% 5.1% 2.9% 4.1% 4.4%
Other – end of period
Buildings On-Net 1,475 1,503 1,539 1,579 1,609
Employees 583 571 566 570 569
(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) Excludes equity-based compensation expense of $47, $95, $104, $124 and $140 in the three months ended March 31, 2010, June 30, 2010, September 30, 2010, December 31, 2010 and March 31, 2011, respectively.

(3) Excludes equity-based compensation expense of $1,118, $1,701, $1,695, $1,753 and $1,956 in the three months ended March 31, 2010, June 30, 2010, September 30, 2010, December 31, 2010 and March 31, 2011, 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 $185, $4, $50, $25 and $2 in the three months ended March 31, 2010, June 30, 2010, September 30, 2010, December 31, 2010 and March 31, 2011, respectively.

Schedule of Non-GAAP Measures

EBITDA and EBITDA, as adjusted

EBITDA represents net (loss) income before income taxes, net interest expense, equity-based compensation expense and depreciation and amortization. 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.

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

Q1  2010 Q2  2010 Q3  2010 Q4  2010 Q1  2011
($ in 000's) – unaudited
Cash flows provided by operating activities $15,309 $15,201 $19,001 $21,966 $13,468
Changes in operating assets and liabilities (188) 1,031 (1,728) (1,438) 4,483
Cash interest expense and income tax expense 2,203 2,644 3,011 2,027 6,294
Gains on asset related transactions 185 4 50 25 2
EBITDA, as adjusted $17,509 $18,880 $20,334 $22,580 $24,247
Impact of foreign currencies on sequential quarterly service revenue
($ in 000's) – unaudited Q1 2011
Service revenue as reported – Q1 2011 $73,460
Impact of foreign currencies on service revenue (210)
Service revenue -  Q1 2011, as adjusted (1) $73,250
Service revenue as reported – Q4 2010 $69,461
Increase from Q4 2010 to Q1 2011 - (Service revenue as adjusted for Q1 2011 less service revenue as reported for Q4 2010) $3,789
Percent increase (Increase from Q4 2010 to Q1 2011 divided by service revenue as reported for Q4 2010) 5.5%
(1) Service revenue as adjusted is determined by translating the service revenue for the three months ended March 31, 2011 at the average foreign currency exchange rates for the three months ended December 31, 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 MARCH 31, 2011 AND DECEMBER 31, 2010

(IN THOUSANDS, EXCEPT SHARE DATA)

March 31,
2011
December 31,
2010
(Unaudited)
Assets
Current assets:
Cash and cash equivalents $ 225,342 $ 56,283
Accounts receivable, net of allowance for doubtful accounts of $2,468 and $2,464 respectively 24,477 23,702
Prepaid expenses and other current assets 11,117 8,654
Total current assets 260,936 88,639
Property and equipment, net 300,675 280,455
Deposits and other assets - $467 and $462 restricted, respectively 11,297 7,009
Total assets $ 572,908 $ 376,103
Liabilities and stockholders' equity
Current liabilities:
Accounts payable $ 13,207 $ 15,979
Accrued liabilities 20,017 19,538
Current maturities, capital lease obligations 7,676 6,143
Total current liabilities 40,900 41,660
Senior secured notes 175,000
Capital lease obligations, net of current maturities 121,474 105,562
Convertible senior notes, net of discount of $19,453 and $20,758 respectively 72,525 71,220
Other long term liabilities 6,055 5,860
Total liabilities 415,954 224,302
Commitments and contingencies:
Stockholders' equity:
Common stock, $0.001 par value; 75,000,000 shares authorized; 45,971,294 and 45,838,510 shares issued and outstanding, respectively 46 46
Additional paid-in capital 485,183 482,737
Accumulated other comprehensive income 4,029 1,044
Accumulated deficit (332,304) (332,026)
Total stockholders' equity 156,954 151,801
Total liabilities and stockholders' equity $ 572,908 $ 376,103
COGENT COMMUNICATIONS GROUP, INC., AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

FOR THE THREE MONTHS ENDED MARCH 31, 2011 AND MARCH 31, 2010

(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)

Three Months
Ended
March 31, 2011
Three Months
Ended
March 31, 2010
(Unaudited) (Unaudited)
Service revenue $ 73,460 $ 62,776
Operating expenses:
Network operations (including $140 and $47 of equity-based compensation expense, respectively, exclusive of depreciation and amortization shown separately below) 31,773 28,098
Selling, general, and administrative (including $1,956 and $1,118 of equity-based compensation expense, respectively) 19,538 18,519
Asset impairment 594
Depreciation and amortization 14,791 12,877
Total operating expenses 66,102 60,088
Operating income 7,358 2,688
Interest income and other, net 230 379
Interest expense (7,585) (4,092)
Income (loss) before income taxes 3 (1,025)
Income tax (provision) benefit (281) 455
Net loss $ (278) $ (570)
Net loss per common share:
Basic and diluted net loss per common share $ (0.01) $ (0.01)
Weighted-average common shares—basic and diluted 44,731,858 44,464,821
COGENT COMMUNICATIONS GROUP, INC., AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THE THREE MONTHS ENDED MARCH 31, 2011 AND MARCH 31, 2010

(IN THOUSANDS)

Three months
Ended
March 31, 2011
Three months
Ended
March 31, 2010
(Unaudited) (Unaudited)
Cash flows from operating activities:
Net cash provided by operating activities $ 13,468 $ 15,309
Cash flows from investing activities:
Purchases of property and equipment (12,842) (11,333)
Proceeds from dispositions of assets 2 230
Net cash used in investing activities (12,840) (11,103)
Cash flows from financing activities:
Proceeds from issuance of senior secured notes, net 170,513
Proceeds from exercises of stock options 67 14
Repayments of capital lease obligations (3,032) (4,943)
Net cash provided by (used in) financing activities 167,548 (4,929)
Effect of exchange rate changes on cash 883 (198)
Net increase (decrease) in cash and cash equivalents 169,059 (921)
Cash and cash equivalents, beginning of period 56,283 55,929
Cash and cash equivalents, end of period $ 225,342 $ 55,008

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; the imposition of a requirement that we contribute to the Universal Service Fund; 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 annual report on Form 10-K for the fiscal year ended December 31, 2010 and our quarterly report on Form 10-Q for the quarter ended March 31, 2011, 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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