Cogent Swings to Profit on Data-Center Sale
Service revenue fell 1.5% sequentially to $235.6 million as customer attrition continued.
Cogent Communications Holdings (CCOI), the fiber-optic internet-service provider, swung to a second-quarter profit after a data-center sale produced a $130.7 million gain. Net income totaled $66.6 million, or $1.38 a diluted share, compared with a $39.5 million loss in the first quarter.
The profit masked a deepening contraction in the underlying business. Service revenue declined 4.3% from a year earlier, or 4.6% in constant currency, while the sequential drop accelerated from 0.6% in each of the previous two quarters. Total customer connections fell 0.8%, extending a four-quarter run of sequential declines.
The revenue mix continued shifting toward wavelength and net-centric services. Wavelength revenue rose 63.8% from a year earlier to $14.8 million, and net-centric revenue increased 1.6% sequentially to $107.4 million. Wavelength's sequential growth slowed to 9.2% from 12.3% in the first quarter, with connection growth also moderating.
Weakness intensified in Cogent's off-net and enterprise businesses. Off-net revenue fell 17.3% from a year earlier to $84.5 million as connections declined 4.1% sequentially. Enterprise revenue dropped 8.9% from the first quarter to $29.5 million, accompanied by an 8.7% reduction in connections.
Margins widened despite the lower revenue. GAAP gross margin increased to 24.5% from 23.4% in the first quarter, while non-GAAP gross margin reached 47.0%. Adjusted earnings before interest, taxes, depreciation and amortization rose 1.3% sequentially to $71.1 million, recovering only part of the prior quarter's decline.
Cash generation weakened. Operating cash flow dropped to $3.2 million from $14.8 million in the first quarter, though it improved from a $44.0 million use of cash a year earlier. Capital spending declined 16.7% sequentially to $38.5 million.
Cogent received $224.2 million of net proceeds from selling 10 data centers, reducing its owned technical buildings to 472 and its data-center count to 88. Adjusted net leverage declined to 6.23 times from 6.79 times in the first quarter.
The company directed part of the sale proceeds toward discounted debt repurchases, buying $138.8 million of its 2032 secured notes through July and recording $13.4 million of gains. An amended indenture committed at least $175 million of the proceeds to such purchases while raising the maximum secured-debt leverage ratio to 4.75 from 4.00.