Internet backbone operator Cogent Communications (NASDAQ:CCOI, news, filings) turned in its results for the fourth quarter and full year 2010, finishing a quiet but rather powerful year with a quarterly profit of $0.06 per share, six cents above expectations, and $0.01 per share overall. The company has let its financial progress do its talking in 2010, here’s a quick table:
| $ in millions | Q4/09 | Q1/10 | Q2/10 | Q3/10 |
Q4/10 |
FY2010 |
|---|---|---|---|---|---|---|
| Revenue | $62.5 | $62.8 | $64.4 | $66.8 | $69.5 | $263.4 |
| EBITDA | $17.4 | $17.5 | $18.9 | $20.3 | $22.6 | $79.2 |
| Earnings per share | -0.03 | -0.01 | -0.02 | -0.01 | +0.06 | +0.01 |
| Gross Margin | 55.9% | 55.3% | 54.8% | 54.3% | 55.5% | 55.0% |
| Adj. EBITDA Margin | 27.8% | 27.9% | 29.3% | 30.4% | 32.5% | 30.1% |
Revenue: Since the fourth quarter of 2009, each quarter has seen revenue growth at a higher rate than the prior one, culminating in double digit growth and putting them within striking distance of $300M in 2011, though probably not quite. The company has given less guidance in the last few years, but I’m curious how they view 2011.
EBITDA and Margins: EBITDA grew just as steadily, with EBITDA margins surging once again, this time all the way up to 32.5% for the fourth quarter, up almost 500 basis points over Q4/09.
Traffic: Interestingly, Cogent did all this while seeing rather unimpressive traffic growth of 41% over 2009. Obviously it isn’t their wholesale IP business that is driving things, which brings us to…
On-Net Buildings: Cogent added another 40 on-net buildings to its network, for 128 on the year and a total of 1579 by December 31. They’ve been picking up this pace all year, and they seem likely to continue.
Conclusions: It’s hard to find any weaknesses in Cogent’s 2010, they obviously went into it with a plan and executed it ruthlessly all the way to a profit – which I have felt was the main goal all year. With profit and excess cash flow come greater flexibility. I wonder what they will do with it in 2011.
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Categories: Financials · Internet Backbones · Metro fiber
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Rob,
Re your last question, they did announce a $50 million stock repurchase program.
“they did announce a $50 million stock repurchase program.”
Yes, that’s right. They did BORROW money to buy back some shares. Life is always great when you are on a credit diet…
ddm08,
They are leveraged under 3x EBITDA (after the latest debt issuance). They are FCF positive and growing consistantly and buying back stock is a logical course of action. “Credit diet”?? I know many emerging telco’s that wish they had the flexibility that CCOI enjoys. You should recalibrate your thinking.
“They are leveraged under 3x EBITDA (after the latest debt issuance). They are FCF positive and growing consistantly and buying back stock is a logical course of action.”
I find these comments to be very comical. There is even a humorous irony to it. Let me throw something at you, en_ron_hubbard. If they are 3X EBITDA and “FCF positive”, why do they NEED TO BORROW money to buy back shares? I guess the days buying back shares with YOUR OWN FCF are gone now eh? They don’t teach that at MBA school anymore eh? BORROWING MONEY to buy back shares is not what I call “SHAREHOLDERS FRIENDLY”. So, who should be recalibrate his thinking again, I am forgot? LOL!
“If they are 3X EBITDA and “FCF positive”, why do they NEED TO BORROW money to buy back shares? I guess the days buying back shares with YOUR OWN FCF are gone now eh?”
First thing, that is their leverage ratio AFTER they borrowed the money. Second, debt does have a place on the balance sheet so long as it is not overdone, and by any standard 3x EBITDA is not overleveraged in this industry. The net effect is that they are replacing capital with a cost of 15-20% (equity) with capital that has an after tax cost of ~ 6% (debt), and this is EXTREMELY shareholder friendly.
If I follow your argument (and I’m not quite sure I do) then no company with ANY debt should EVER pay a dividend or repurchase stock if they feel it’s cheap– instead they should use their FCF to reduce debt to zero.
CCOI had debt capacity and chose to use it to buy the best value they saw out there– their own stock. They didn’t go out and pay a premium to buy another telecom, they bought their own stock at what they see as a discount, and again, I would describe that as very shareholder friendly.
“I am forgot?”
I can agree with that.
Enron-
Your arguments hold true only if CCOI wishes to do a secondary down the road. Everything held constant, the enterprise value remains the same and now they have to pay cash for the interest. In the short-term, that erodes shareholder value.
el-correct-eh?
el-corrrect,
Yes, at the time they repurchase stock, EV remains the same but FUTURE value creation is divided amongst fewer shares. Also, the cash interest they pay is far cheaper than the implicit (but very real) return that would have been required on the stock that has been retired. It is simply true that debt is a cheaper way to fund operations/assets than equity and CCOI has/had excess debt capacity. They have used that capacity to increase future returns on equity and it was the right thing to do. This is why we see many companies with excess cash (or debt capacity) doing exactly the same thing.
En_ron_hubbard is clearly right in this discussion. Companies take on debt strategically, and in this case investing in their own stock just means that CCOI thinks it will grow faster than its interest rate (which means they can generate cash by selling off shares if they wish).
However, there is a negative side to this sort of refinancing, which is that it implies taht CCOI will continue playing for slow, gradual growth. They are very dedicated to avoiding the mistakes of past fiber players, but I’d love to see some more aggressive growth plans. As Rob notes, growth in their buildings is strong, but they could improve in other areas.