Washington, D.C.-based Cogent Communications Friday filed a restructuring plan with the SEC. The plan reduces the company’s
debt significantly and lengthens the payment terms on the debt that remains.
The company urgently needed to restructure the debt because it was had defaulted
on covenants on the majority of the debt, which consists of equipment finance
from San Jose, Calif.-based Cisco Systems.
Cogent owed Cisco $262.8 million, and had about $39 million in cash at the start
of the year, which was down to $12 million on March 31, 2003. Under the agreement,
Cisco was allowed to demand all of the money it was owed or take over the company.
The restructuring will convert 5 series of preferred stock (series A through
E) into common stock, and issue several more series of preferred stock (Series
F, G, H, and “Investors Preferred”) to Cisco and to venture capitalists who
are injecting $41 million into the firm, giving the company enough cash to survive
the year.
So can Cogent survive? It has reduced its ongoing debt costs to nearly nothing,
but it still has substantial costs. The company does not own all of the fiber
it uses, and ongoing lease costs for local and long distance fiber remain considerable,
given the company’s cash situation.
Over the coming year, from March 31, 2003 to March 31, 2004, the company will
incur significant expenses. It will pay $7.915 million for dark fiber IRUs.
For office space and data centers, the company will pay $17.396 million during
the same period. For backbone, connectivity, and transit, the company will pay
$5.718 million. The total of these commitments is $31.029 million over the next
year—and these expenses do not include the costs of people, marketing, and
network expansion. It seems probable that Cogent will have to renegotiate some
of its leases and fiber commitments, but is not under immediate (day to day)
pressure to do so.
CEO Dave Schaffer says that costs are dropping fast at Cogent. “During the
first quarter we were expanding rapidly, and although, due to the lead times
on construction, some of that will continue into the second quarter, we are
now focusing on growing the revenue base on our existing network.”
Schaeffer is proud of the network Cogent has built. He says, “we have over
750 buildings on net, 7,400 miles of metro fiber, and 139 operational rings
in 21 cities.”
He says that Cisco’s acceptance of the deal is an endorsement of the company.
“The strength of our relationship with Cisco is proven in that they were willing
to take an equity position in the company [instead of cash]. We are remaining
a 100 percent Cisco shop, and use no other vendor.”
Asked for guidance about future costs, Schaeffer claims, “we never gave guidance.
We meet reporting requirements but do not market our securities through forward
looking statements. We do report our historical progress.”
The right price for your fiber diet
The price Cogent charges remains low, and its rivals, who charge higher prices,
allege that it will never be profitable. Schaeffer counters that Cogent’s network,
designed like a corporate LAN, avoids telco costs and inefficiencies. However,
as noted above, he does have leasing commitments to providers of dark fiber
and metro Ethernet connectivity.
Cogent will need to add customers over the coming year, and it will do so
by connecting more commercial buildings. Schaeffer says that his company looks
for buildings with many tenants. The profitability of a fiber network, according
to Schaeffer, is this simple, “the capital cost is directly proportional to
the number of nodes passed and the revenue is proportional to the number of
customers served.”
Cogent looks for buildings with at least 400,000 square feet of space and
at least 50 tenants to maximize the number of customers per building. Schaeffer
adds that the company looks for particularly well known buildings, which he
called, “trophy buildings.”
Adding buildings, however, is not cheap. Schaeffer says that if you take into
account the cost of in-building work, fiber to the building, equipment at the
CO, and a portion of the
fiber ring dedicated to that building (Cogent’s promise is that is does not
oversubscribe the network, a promise the company’s rivals find foolish), the
cost of adding a building with current technology is about $75,000, although
that is a very rough calculation.
At a time when the RBOCs are claiming that they will build fiber to every
neighborhood, these numbers make it seem that the bells will not actually be
able to deliver on their commitments. Schaeffer says the networks are not built
for fiber performance. He says, “if you look at the cable companies or the phone
companies, the architectures they deployed to date (branch and tree in the case
of cable companies, hub and spoke in the case of the phone companies) will not
allow them to meet the price points or the performance of a true ring architecture.
All connections have been through single threaded connections that will not
provide the reliability or throughput than can be achieved through a ring architecture.”
As Cogent’s fiber struggle continues, and its unique network grows or perishes,
it will be seen by many as a test case for the viability of business Ethernet.
If it fails, its rivals will say that they were right to claim that the company
should have been charging at least 10 times the prices it has charged so far
(it charges $1,000 per month for 100 Mbps and $10,000 per month for 1 Gbps,
with higher prices for intercity connections). With bravado, Schaeffer says
Cogent’s prices are not going up. He says, “we believe that based on our cost
structure, we can deliver services profitably at our current prices or even
lower prices in the future.”
