Cogent Communications Reports Fourth Quarter 2013 and Full Year 2013 Results and Increases Quarterly Dividend on Common Stock

COGENT COMMUNICATIONS GROUP, INC., AND SUBSIDIARIES

Summary of Financial and Operational Results

Q1 2012

Q2 2012

Q3 2012

Q4 2012

Q1 2013

Q2 2013

Q3 2013

Q4 2013

Metric ($ in 000's, except share

and per share data) – unaudited

On-Net revenue

$56,750

$57,321

$58,138

$60,380

$61,678

$62,693

$64,548

$66,032

  % Change from previous Qtr.

-4.7%

1.0%

1.4%

3.9%

2.1%

1.6%

3.0%

2.3%

Off-Net revenue

$19,501

$19,868

$20,912

$21,646

$22,309

$22,604

$22,767

$23,438

% Change from previous Qtr.

3.0%

1.9%

5.3%

3.5%

3.1%

1.3%

0.7%

2.9%

Non-Core revenue (1)

$637

$628

$606

$586

$566

$506

$446

$389

  % Change from previous Qtr.

1.1%

-1.4%

-3.5%

-3.3%

-3.4%

-10.6%

-11.9%

-12.8%

Service revenue – total

$76,888

$77,817

$79,656

$82,612

$84,553

$85,803

$87,761

$89,859

  % Change from previous Qtr.

-2.8%

1.2%

2.4%

3.7%

2.3%

1.5%

2.3%

2.4%

Network operations

expenses (2)

$34,255

$34,994

$36,375

$37,489

$37,154

$36,950

$37,327

$38,288

% Change from previous Qtr.

2.6%

2.2%

3.9%

3.1%

-0.9%

-0.5%

1.0%

2.6%

Non-GAAP gross margin (2)

$42,633

$42,823

$43,281

$45,123

$47,399

$48,853

$50,434

$51,571

% Change from previous Qtr.

-6.7%

0.4%

1.1%

4.3%

5.0%

3.1%

3.2%

2.3%

Non-GAAP gross margin

percentage (2)

55.4%

55.0%

54.3%

54.6%

56.1%

56.9%

57.5%

57.4%

Selling, general and

administrative expenses (3)

$20,188

$17,496

$17,109

$17,299

$19,106

$19,215

$19,772

$20,937

  % Change from previous Qtr.

12.9%

-13.3%

-2.2%

1.1%

10.4%

0.6%

2.9%

5.9%

Depreciation and

amortization expense

$15,239

$15,503

$15,610

$16,124

$15,874

$15,900

$16,024

$16,562

% Change from previous Qtr.

0.1%

1.7%

0.7%

3.3%

-1.6%

0.2%

0.8%

3.4%

Equity-based

compensation expense

$1,238

$2,023

$2,530

$2,531

$2,514

$2,137

$2,061

$2,007

% Change from previous Qtr.

-26.7%

63.4%

25.1%

0.0%

-0.7%

-15.0%

-3.6%

-2.6%

Operating income

$5,968

$7,801

$8,032

$9,169

$9,905

$11,601

$12,577

$12,065

% Change from previous Qtr.

-45.2%

30.7%

3.0%

14.2%

8.0%

17.1%

8.4%

-4.1%

Net (loss) income

$(2,090)

$(1,791)

$(94)

$(276)

$361

$1,607

$2,122

$52,599

% Change from previous Qtr.

-138.5%

14.3%

-94.8%

193.6%

230.8%

345.2%

32.0%

2,378.7%

Basic net (loss) income 

per common share

$(0.05)

$(0.04)

$(0.00)

$(0.01)

$0.01

$0.03

$0.05

$1.14

  % Change from previous Qtr.

-141.7%

20.0%

-100.0%

-100.0%

200.0%

200.0%

66.7%

2,180.0%

Diluted net (loss) income 

per common share

$(0.05)

$(0.04)

$(0.00)

$(0.01)

$0.01

$0.03

$0.05

$1.10

  % Change from previous Qtr.

-141.7%

20.0%

-100.0%

-100.0%

200.0%

200.0%

66.7%

2,100.0%

Weighted average common

shares – basic

45,241,418

45,313,804

45,377,732

45,492,847

45,537,607

46,040,692

46,171,194

46,302,926

% Change from previous Qtr.

0.4%

0.2%

0.1%

0.3%

0.1%

1.1%

0.3%

0.3%

Weighted average common

shares – diluted

45,241,418

45,313,804

45,377,732

45,492,847

46,435,677

46,769,184

46,823,167

48,800,560

% Change from previous Qtr.

-0.7%

0.2%

0.1%

0.3%

2.1%

0.7%

0.1%

4.2%

EBITDA, as adjusted (4)

$22,557

$25,338

$26,171

$28,548

$28,295

$29,638

$30,703

$31,548

  % Change from previous Qtr.

-19.0%

12.3%

3.3%

9.1%

-0.9%

4.7%

3.6%

2.8%

EBITDA, as adjusted margin (4)

29.3%

32.6%

32.9%

34.6%

33.5%

34.5%

35.0%

35.1%

Net cash provided by

operating activities

$12,686

$19,471

$15,489

$32,297

$14,962

$22,703

$14,898

$29,288

% Change from previous Qtr.

-53.5%

53.5%

-20.5%

108.5%

-53.7%

51.7%

-34.4%

96.6%

Capital expenditures

$12,289

$10,575

$11,187

$10,286

$16,316

$12,455

$10,165

$10,095

  % Change from previous Qtr. 

17.9%

-13.9%

5.8%

-8.1%

58.6%

-23.7%

-18.4%

-0.7%

Customer Connections –

end of period

On-Net

26,246

27,471

28,839

29,875

30,914

31,876

33,310

34,671

  % Change from previous Qtr.

2.9%

4.7%

5.0%

3.6%

3.5%

3.1%

4.5%

4.1%

Off-Net

3,962

4,100

4,258

4,465

4,591

4,728

4,886

5,088

% Change from previous Qtr.

1.2%

3.5%

3.9%

4.9%

2.8%

3.0%

3.3%

4.1%

Non-Core (1)

549

495

485

471

463

453

443

415

  % Change from previous Qtr.

-2.8%

-9.8%

-2.0%

-2.9%

-1.7%

-2.2%

-2.2%

-6.3%

Total

30,757

32,066

33,582

34,811

35,968

37,057

38,639

40,174

  % Change from previous Qtr.

2.5%

4.3%

4.7%

3.7%

3.3%

3.0%

4.3%

4.0%

Other – end of period

Buildings On-Net

1,769

1,799

1,832

1,867

1,890

1,921

1,955

1,990

Employees

612

613

621

611

619

633

673

706

(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 $83, $118, $166, $162,

        $155, $126, $114 and $112 in the three months ended March 31, 2012, June 30, 2012, September 30, 2012,

        December 31, 2012, March 31, 2013, June 30, 2013, September 30, 2013 and December 31, 2013, respectively.

        Non-GAAP gross margin represents service revenue less network operations expense, excluding equity-based

        compensation and amounts shown separately (depreciation expense).   

(3)   Excludes equity-based compensation expense of $1,155, $1,905, $2,364, $2,369, $2,359, $2,011, $1,947 and

        $1,895 in the three months ended March 31, 2012, June 30, 2012, September 30, 2012, December 31, 2012,

        March 31, 2013, June 30, 2013, September 30, 2013 and December 31, 2013, respectively.    

(4)   See schedule of non-GAAP metrics below for definition and reconciliation to GAAP measures. EBITDA, as

        adjusted, includes net gains (losses) from asset related transactions of $112, $11, $(1), $724, $2, $41 and

        $914 in the three months ended March 31, 2012, June 30, 2012, September 30, 2012, December 31, 2012,

        March 31, 2013, September 30, 2013 and December 31, 2013, respectively.

COGENT COMMUNICATIONS GROUP, INC., AND SUBSIDIARIES

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

Q1 

2012

Q2 

2012

Q3 

2012

Q4 

2012

Q1 

2013

Q2

2013

Q3

2013

Q4

2013

($ in 000's) – unaudited

Net cash flows provided by operating activities

$12,686

$19,471

$15,489

$32,297

$14,962

$22,703

$14,898

$29,288

Changes in operating assets and liabilities

3,053

(2,252)

3,965

(13,089)

5,365

(1,446)

6,771

42,329

Cash interest expense and income tax expense 

6,706

8,108

6,718

8,616

7,966

8,381

8,993

(40,983)

Gains (losses) on asset related transactions   

112

11

(1)

724

2

-

41

914

EBITDA, as adjusted

$22,557

$25,338

$26,171

$28,548

$28,295

$29,638

$30,703

$31,548

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

($ in 000's) – unaudited

Q4 2013

Service revenue, as reported – Q4 2013

$89,859

Impact of foreign currencies on service revenue

(474)

Service revenue – Q4 2013, as adjusted (1)

$89,385

Service revenue, as reported – Q3 2013

$87,761

Constant currency increase from Q3 2013 to Q4 2013 – (Service revenue, as adjusted for Q4 2013 less

service revenue, as reported for Q3 2013)

$1,624

Percent increase (Constant currency increase from Q3 2013 to Q4 2013 divided by service revenue, as

reported for Q3 2013)

1.9%

(1)   Service revenue, as adjusted, is determined by translating the service revenue for the three months ended

        December 31, 2013 at the average foreign currency exchange rates for the three months ended September

        30, 2013. 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

Q4 2013

Service revenue, as reported – Q4 2013

$89,859

Impact of foreign currencies on service revenue

(636)

Service revenue – Q4 2013, as adjusted (2)

$89,223

Service revenue, as reported – Q4 2012

$82,612

Constant currency increase from Q4 2012 to Q4 2013 – (Service revenue, as adjusted for Q4 2013 less

service revenue, as reported for Q4 2012)

$6,611

Percent increase (Constant currency increase from Q4 2012 to Q4 2013 divided by service revenue, as

reported for Q4 2012)

8.0%

(2)   Service revenue, as adjusted, is determined by translating the service revenue for the three months ended

        December 31, 2013 at the average foreign currency exchange rates for the three months ended December

        31, 2012. 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 service revenue

($ in 000's) – unaudited

Service revenue, as reported – 2013

$347,979

Impact of foreign currencies on service revenue

(1,757)

Service revenue – 2013, as adjusted (2)

$346,222

Service revenue, as reported – 2012

$316,973

Constant currency increase from 2012 to 2013 – (Service revenue, as adjusted for 2013 less

service revenue, as reported for 2012)

$29,249

Percent increase (Constant currency increase from 2012 to 2013 divided by service revenue, as

reported for 2012)

9.2%

(3)   Service revenue, as adjusted, is determined by translating the service revenue for the year ended

        December 31, 2013 at the average foreign currency exchange rates for the year ended December 31, 2012.

        The Company believes that disclosing annual 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

Cash and cash equivalents

$304,866

Debt

Capital leases – current portion

$9,252

Convertible notes – par value

$91,978

Capital leases – long term

$152,527

Senior secured notes – par value

$240,000

Total debt

$493,757

Total net debt

$188,891

Trailing 12 months EBITDA, as adjusted

$120,188

Total net debt to trailing 12 months EBITDA, as adjusted

1.57

COGENT COMMUNICATIONS GROUP, INC., AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
AS OF DECEMBER 31, 2013 AND 2012
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)

2013

2012

Assets

Current assets:

Cash and cash equivalents

$

304,866

$

247,285

Accounts receivable, net of allowance for doubtful accounts of $1,871

     and $3,083, respectively

30,628

23,990

Prepaid expenses and other current assets

18,777

9,978

Total current assets

354,271

281,253

Property and equipment:

Property and equipment

985,084

889,229

Accumulated depreciation and amortization

(643,891)

(578,054)

Total property and equipment, net

341,193

311,175

Deferred tax assets – noncurrent

50,861

5,546

Deposits and other assets ($448 and $442 restricted, respectively)

8,776

8,557

Total assets

$

755,101

$

606,531

Liabilities and stockholders' equity

Current liabilities:

Accounts payable

$

14,098

$

14,734

Accrued and other current liabilities

31,465

26,519

Convertible senior notes – current portion, net of discount of $3,099

88,879

—

Current maturities, capital lease obligations

9,252

10,487

Total current liabilities

143,694

51,740

Senior secured notes including premium of $5,423 and $0,

     respectively

245,423

175,000

Capital lease obligations, net of current maturities

152,527

127,461

Convertible senior notes, net of discount of $9,494

—

82,484

Other long term liabilities

19,965

10,067

Total liabilities

561,609

446,752

Commitments and contingencies

Stockholders' equity:

Common stock, $0.001 par value; 75,000,000 shares authorized;

     47,334,218 and 47,116,644 shares issued and outstanding,

     respectively

47

47

Additional paid-in capital

508,256

497,349

Accumulated other comprehensive income

2,136

667

Accumulated deficit

(316,947)

(338,284)

Total stockholders' equity

193,492

159,779

Total liabilities and stockholders' equity

$

755,101

$

606,531

COGENT COMMUNICATIONS GROUP, INC., AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
FOR EACH OF THE TWO YEARS ENDED DECEMBER 31, 2013
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)

2013

2012

Service revenue

$

347,979

$

316,973

Operating expenses:

Network operations (including $507 and $529 of equity-

     based compensation expense, respectively, exclusive of

     amounts shown separately)

150,225

143,642

Selling, general, and administrative (including $8,212 and

     $7,794 of equity-based compensation expense,

     respectively)

87,242

79,885

Depreciation and amortization

64,358

62,478

Total operating expenses

301,825

286,005

Operating income

46,154

30,968

Interest income and other

2,630

1,851

Interest expense

(41,797)

(36,319)

Income (loss) before income taxes

6,987

(3,500)

Income tax benefit (expense)

49,702

(751)

Net income (loss)

$

56,689

$

(4,251)

Comprehensive income (loss):

Net income (loss)

$

56,689

$

(4,251)

Foreign currency translation adjustment

1,469

1,249

Comprehensive income (loss)

$

58,158

$

(3,002)

Basic net income (loss) per common share

$

1.22

$

(0.09)

Diluted net income (loss) per common share

$

1.21

$

(0.09)

Dividends declared per common share

$

0.76

$

0.21

Weighted-average common shares – basic

46,286,735

45,514,844

Weighted-average common shares – diluted

46,996,904

45,514,844

COGENT COMMUNICATIONS GROUP, INC., AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
FOR THE THREE MONTHS ENDED DECEMBER 31, 2013 AND DECEMBER 31, 2012
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)

Three Months Ended

December 31, 2013

Three Months Ended

December 31, 2012

Service revenue

$

89,859

$

82,612

Operating expenses:

Network operations (including $112 and $162 of equity-

     based compensation expense, respectively, exclusive of

     amounts shown separately)

38,400

37,651

Selling, general, and administrative (including $1,895 and

     $2,369 of equity-based compensation expense,

     respectively)

22,832

19,668

Depreciation and amortization

16,562

16,124

Total operating expenses

77,794

73,443

Operating income

12,065

9,169

Interest income and other

1,097

925

Interest expense

(11,144)

(9,320)

Income before income taxes

2,018

774

Income tax benefit (expense)

50,581

(1,050)

Net income (loss)

$

52,599

$

(276)

Comprehensive income

Net income (loss)

$

52,599

$

(276)

Foreign currency translation adjustment

595

1,193

Comprehensive  income

$

53,194

$

917

Basic net income (loss) per common share

$

1.14

$

(0.01)

Diluted net income (loss) per common share

$

1.10

$

(0.01)

Dividends declared per common share

$

0.37

$

0.11

Weighted-average common shares – basic

46,302,926

45,492,847

48,800,560

45,492,847

COGENT COMMUNICATIONS GROUP, INC., AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR EACH OF THE TWO YEARS ENDED DECEMBER 31, 2013
(IN THOUSANDS)

2013

2012

Cash flows from operating activities:

Net income (loss)

$

56,689

$

(4,251)

Adjustments to reconcile net income (loss) to net cash provided by

    operating activities:

Depreciation and amortization

64,358

62,478

Amortization of debt discount and premium

6,086

6,031

Equity-based compensation expense (net of amounts capitalized)

8,719

8,323

Gains – dispositions of assets and other, net

(1,001)

(971)

Changes in assets and liabilities:

Accounts receivable

(6,293)

1,247

Prepaid expenses and other current assets

(3,642)

459

Deferred income taxes

(50,069)

2,692

Deposits and other assets

770

(436)

Accounts payable, accrued liabilities and other long-term liabilities

6,234

4,371

Net cash provided by operating activities

81,851

79,943

Cash flows from investing activities:

Purchases of property and equipment

(49,031)

(44,337)

Proceeds from asset sales

50

141

Net cash used in investing activities

(48,981)

(44,196)

Cash flows from financing activities:

Net proceeds from issuance of senior secured notes

69,882

—

Dividends paid

(35,352)

(9,549)

Principal payments of capital lease obligations

(11,164)

(16,794)

Purchases of common stock

—

(1,265)

Proceeds from exercises of common stock options

1,218

404

Net cash provided by (used in) financing activities

24,584

(27,204)

Effect of exchange rate changes on cash

127

535

Net increase in cash and cash equivalents

57,581

9,078

Cash and cash equivalents, beginning of year

247,285

238,207

Cash and cash equivalents, end of year

$

304,866

$

247,285

COGENT COMMUNICATIONS GROUP, INC., AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED DECEMBER 31, 2013 AND DECEMBER 31, 2012
(IN THOUSANDS)

Three Months Ended

December 31, 2013

Three Months Ended

December 31, 2012

Cash flows from operating activities:

Net income (loss)

$

52,599

$

(276)

Adjustments to reconcile net income (loss) to net cash provided by

    operating activities:

Depreciation and amortization

16,560

16,125

Amortization of debt discount and premium

1,390

1,553

Equity-based compensation expense (net of amounts capitalized)

2,007

2,531

(Gains) losses – dispositions of assets and other, net

(977)

(773)

Changes in assets and liabilities:

Accounts receivable

(1,784)

4,210

Prepaid expenses and other current assets

(875)

532

Deferred income taxes

(50,487)

1,577

Deposits and other assets

143

214

Accounts payable, accrued liabilities and other long-term liabilities

10,712

6,604

Net cash provided by operating activities

29,288

32,297

Cash flows from investing activities:

Purchases of property and equipment

(10,095)

(10,286)

Proceeds from asset sales

8

21

Net cash used in investing activities

(10,087)

(10,265)

Cash flows from financing activities:

Dividends paid

(17,206)

(5,012)

Principal payments of capital lease obligations

(2,234)

(2,361)

Proceeds from exercises of common stock options

244

74

Net cash used in financing activities

(19,196)

(7,299)

Effect of exchange rate changes on cash

86

488

Net increase in cash and cash equivalents

91

15,221

Cash and cash equivalents, beginning of period

304,775

232,064

Cash and cash equivalents, end of period

$

304,866

$

247,285

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 U.S. Universal Service Fund and similar funds in other countries; 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, 2013 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.