Cogent's Reverse Prognosis
Tongues have wagged since Cogent Communications Inc. announced plans to merge with Allied Riser Communications (Nasdaq: ARCC) in August (see Cogent to Buy Allied Riser). And what they've had to say hasn't been entirely positive (see Cogent's Finances Revealed in Filing and associated message board).
The basic question was, and still seems to be: How can a company that's been losing money 30 times faster than it's making it achieve success?
Now, as detailed in updated filings with the U.S. Securities and Exchange Commission, the merger is set for approval by shareholders on January 31, 2002. If all goes as planned, Cogent will shortly thereafter become a public company in a "reverse IPO," by acquiring the public company.
There are several key arguments for and against Cogent's proposal to become a key provider of high-speed Internet access to small and medium-sized businesses by 2003. And the various points against leap off the pages of Cogent's latest filing:
- Cogent's losing money -- fast. Cogent's financials highlight the extremely high costs involved in getting an in-building service provider off the ground -- including obtaining leases, dark fiber, equipment, building permits, etc. Founded in August 1999, the company didn't start gathering revenue until April 2001. By September 30, 2001, its entire net sales were $747,000. Its total operating expenses were $43.1 million. Net loss for the year was minus $45.4 million. EBITDA (earnings before interest, taxes, and depreciation -- a generally accepted measure of liquidity) was minus $36.4 million.
Cogent doesn't look to stop bleeding cash anytime soon. As it adds to its customer roster, it also adds higher operations costs, including a variety of payments to building owners and other carriers to gain access where customers need it -- not to mention the costs associated with added personnel to serve a growing account roster.
- Allied Riser's also losing money. Allied Riser posted $24.3 million in revenues for the nine months ended September 31, 2001. For the same period, its total operating expenses were $411.3 million. Its net loss was $374.1 million. In its favor, however, the company has been working to rid itself of certain leases it held, and it's whittled its employee roster from about 97 to 52.
- The merger won't immediately improve the numbers. Even with adjustments made by both companies at the suggestion of advisors -- including Cogent's acquisition of the assets of bankrupt ISP NetRail for $11.7 million in September (see Cogent Acquires NetRail's Assets) -- the numbers still don't look good for the merged company, at least at first. With the assets and liabilities of each company adjusted and combined, the new Cogent's figures for the nine months ended September 30, 2001, will include a net loss of $55.9 million and total revenue of $5.2 million.
- Cogent's backed by Cisco. As noted in previous stories in Light Reading, Cisco Systems Inc. (Nasdaq: CSCO) has heavily bankrolled Cogent, most recently issuing a revised credit facility worth $409 million, up from $310 million. What's more, the covenants surrounding this facility, which called for considerable financial performance in 2002 from Cogent, are being renegotiated, indicating that Cisco is flexible on the terms. Cogent also holds 33 percent of Cogent's common stock -- although its entire holdings only give it 5.8 percent voting control.
Indeed, Cisco has invested in Cogent's success, as evidenced in a commitment by Cogent to buy $270 million worth of equipment, the majority of it before 2004. Cogent's already bought $107.6 million worth of gear and has agreed to purchase equipment valued at $29.5 million in 2002, $42.4 million in 2003, and $45.5 million in 2004. Even for Cisco, these aren't small chunks of change, and it's unlikely that it will allow such a significant contributor of potential revenue to hit really dire straits for very long.
- Cogent's market holds promise. Metropolitan Internet access services, particularly ones with Ethernet connectivity, are expected to heat up in 2002 (see The Lost Year and Last Mile Reaches Out ). Cogent says it sees a potential market of 56,000 small to medium-sized businesses turning to high-speed access in the foreseeable future, as an alternative to costly leased lines on the one hand or poorly performing dialup on the other. At Cogent's proposed price of $1,000 per month per prospective tenant, that's no small opportunity, even if only a fraction of it pans out.
Cogent has some time to right its finances, but time is costly, since the metro market won't be taking off for awhile, as shown by the recent woes of Cogent's competitors (see Telseon: Running out of Road?). What's more, service providers and their vendors are still hammering out the basics of how to supply access, particularly Ethernet access, in metro areas (see MPLS Spurs Metro Ethernet Debate and MPLS: Keeping it Real).
— Mary Jander, Senior Editor, Light Reading