Tucows Inc. — Q3 2023 Form 10-Q
Reporting period: Three and nine months ended September 30, 2023; financial amounts are U.S. dollars. Tucows operates Ting (fiber internet), Wavelo (communications software and services), and Tucows Domains (domain registration and related services).
Financial performance
| Metric | Q3 2023 | Q3 2022 | Nine months 2023 | Nine months 2022 |
|---|---|---|---|---|
| Revenue | $87.0 million | $78.1 million | $252.4 million | $242.2 million |
| Gross profit / margin | $16.8 million / 19.3% | $18.0 million / 23.0% | $48.8 million / 19.4% | $61.2 million / 25.3% |
| Operating loss | $17.2 million | $9.4 million | $47.6 million | $18.7 million |
| Net loss | $22.8 million | $8.0 million | $72.8 million | $14.1 million |
| Adjusted EBITDA | $4.5 million | $7.9 million | $12.9 million | $30.9 million |
| Operating cash flow | $(6.9) million | $(1.0) million | $(13.8) million | $17.0 million |
Q3 diluted loss per share was $2.09, versus $0.74 a year earlier; nine-month diluted loss per share was $6.71, versus $1.31. Revenue growth did not translate into improved profitability: costs of revenue rose 17% in Q3 and 12% year to date, while operating expenses also increased.
Cash, liquidity and investment: At September 30, cash and cash equivalents were $110.7 million; restricted cash and secured-note reserves added $11.7 million but were not freely available. Total cash and restricted balances were $122.4 million. Current assets were $266.3 million and current liabilities $188.4 million. Nine-month capital expenditures were $77.5 million, primarily for Ting fiber expansion.
Debt and financing: The balance sheet showed $221.9 million of syndicated revolver debt and $222.1 million carrying value of secured notes payable. The notes had $238.5 million principal outstanding and are secured by specified fiber-related assets and revenues. The new $240 million revolving facility, entered into September 22, 2023, matures in 2026; $223.4 million principal was outstanding at quarter-end. A further $107.1 million redeemable preferred-share liability was recorded. Preferred returns accrue at 15% annually, subject to adjustment, and the instrument is mandatorily redeemable under specified circumstances, with expected maturity in 2028.
Material changes and business drivers
- Revenue increased 11% in Q3 and 4% for the first nine months. Wavelo growth was principally tied to DISH Boost Mobile subscribers migrating onto its platform; that migration was completed by June 30, 2023.
- Ting revenue rose 18% in Q3 and 20% year to date as subscribers and the fiber footprint expanded. Ting reported 41,000 accounts under management, 114,000 owned-infrastructure serviceable addresses and 25,000 partner-infrastructure serviceable addresses, excluding Simply Bits changes.
- Tucows Domains revenue was broadly flat in Q3 and declined 1% year to date. Management cited normalized post-pandemic registration growth and slower renewals; value-added services also faced weaker domain-expiry and auction proceeds.
- Adjusted EBITDA fell to $4.5 million in Q3 and $12.9 million year to date. Management attributed the decline mainly to Ting’s fiber-build spending, lower Domains contribution year to date, and mobile minimum-commitment penalties; stronger Wavelo contribution partly offset these pressures.
- Interest expense, net, was $10.7 million in Q3 and $29.1 million year to date, compared with $4.3 million and $8.6 million, respectively, in 2022. The nine-month period also included a $14.7 million loss on debt extinguishment associated with a preferred-unit redemption.
Outlook, risks and unusual items
- No formal financial guidance was provided. Management said Ting fiber capital expenditures were expected to continue increasing during fiscal 2023 and that it would monitor liquidity, operating cash flow, interest rates and economic conditions.
- The company impaired damaged or idle network assets by $2.7 million in Q3 and $4.7 million year to date. This reduced gross profit and reflects execution and asset-utilization risks as the network expands.
- Wavelo has significant customer concentration: DISH accounted for 12% of Q3 revenue and 11% of nine-month revenue, and 44% of accounts receivable at September 30. Management identified dependence on DISH’s relationship and subscriber volumes as a risk.
- Tucows accrued $0.5 million year to date for shortfalls against a retained mobile-network operator’s minimum revenue commitment and expected further penalties if subscriber growth remained limited.
- The company reported a material weakness in internal control over financial reporting related to capitalization of costs, including interest and labor inputs for Ting network construction. Disclosure controls were not effective as of September 30. Remediation was underway, with management targeting fiscal 2023, but gave no assurance it would be completed successfully or on time.
- Other risks include rising interest and build costs, competition, foreign-exchange exposure, the ability to finance Ting’s expansion, and compliance with debt and preferred-share terms. A 1% adverse rate change was estimated to increase annual interest on the revolver by approximately $2.1 million.
- The company received $227.3 million of gross proceeds from the secured-note issuance and $35.0 million from preferred-unit funding during the first nine months, while redeeming preferred units for $45.7 million, including a $14.7 million make-whole premium.
Most important facts for investors to verify
- Whether Ting’s expansion can produce subscriber growth and improved segment economics sufficient to offset rising network costs, impairments and capital spending.
- Current covenant headroom and refinancing or repayment plans for the $223.4 million revolver principal due in 2026 and secured notes with an anticipated repayment date in 2028.
- The preferred-share liability’s future cash cost, including its accruing return, redemption triggers and potential make-whole premium.
- DISH’s ongoing subscriber migration, contract economics, payment collection and concentration in Wavelo revenue and receivables.
- Progress in remediating the material weakness and whether redesigned capitalization controls are operating effectively.
- Whether negative operating cash flow and continued fiber investment can be funded without additional financing or dilution.