Tucows Inc. — Q3 2020 Form 10-Q
Reporting period: Three and nine months ended September 30, 2020; unaudited. All amounts below are U.S. dollars. The company operates Domain Services and Network Access Services, including fiber internet and mobile-related services.
Financial performance
| Metric | Q3 2020 | Q3 2019 | Nine months 2020 | Nine months 2019 |
|---|---|---|---|---|
| Revenue | $74.3m | $88.1m | $240.4m | $251.2m |
| Gross profit / margin | $19.9m / 26.8% | $27.6m / 31.3% | $68.1m / 28.3% | $74.7m / 29.7% |
| Operating income / margin | $1.3m / 1.8% | $8.6m / 9.8% | $8.0m / 3.3% | $19.4m / 7.7% |
| Net income | $0.7m | $4.2m | $3.7m | $9.6m |
| Diluted EPS | $0.07 | $0.39 | $0.35 | $0.89 |
| Adjusted EBITDA (non-GAAP) | $13.3m | $14.8m | $38.1m | $35.7m |
| Cash from operating activities | $11.4m | $11.2m | $34.4m | $27.2m |
Q3 revenue declined 16% year over year, largely from the Ting Mobile customer transfer to DISH and Roam Mobility shutdown, as well as the prior-year quarter’s large domain-portfolio sale. Nine-month revenue fell 4%. Adjusted EBITDA declined 10% in Q3 but increased 7% year to date.
Liquidity, debt and capital spending
- September 30 cash was $10.2m, down $10.2m from year-end 2019. Current assets were $139.3m versus current liabilities of $164.7m, a reported-balance working-capital deficit of $25.4m.
- Credit-facility borrowings were $114.4m gross ($113.7m carrying value). The facility provides up to $180m, with a $60m accordion, and matures June 2023. The company reported compliance with financial covenants.
- Capital expenditures were $32.7m for the first nine months; operating cash flow was $34.4m. Investing activities used $41.6m, including $8.8m for Cedar. Management expects fiber-network capital expenditures to continue increasing during 2020 and believes operating cash flow will cover anticipated needs, including debt repayments, for at least 12 months.
- Deferred revenue was $154.2m at September 30, up $4.9m from December 31, 2019. It primarily reflects advance customer payments, notably for domain services.
Business changes and unusual items
- On August 1, Tucows transferred substantially all Ting Mobile customer relationships and related inventory to DISH, while retaining its mobile-enablement platform and entering into service arrangements with DISH. The company recorded $4.6m of income tied to transferred customers, offset by $3.5m of related asset and contract-cost write-offs, producing a $1.1m gain. Future payments depend on margin generated by those customers over ten years.
- Q3 Network Access revenue was $13.5m, down from $24.6m. Mobile revenue fell to $8.9m from $21.7m; fiber revenue rose to $4.7m from $2.9m. Nine-month fiber revenue increased 68% to $13.4m. Ting Internet reported 14,000 accounts and 50,000 serviceable addresses, compared with 10,000 and 34,000 a year earlier.
- Q3 Domain Services revenue was $60.8m versus $63.5m. Domain names under management reached 25.0m, up from 23.9m a year earlier. Management attributed registration growth partly to pandemic-driven businesses establishing an online presence, while cautioning that this growth may not persist. The company expects portfolio revenue to remain materially lower after disposing of most of its domain portfolio in late 2019.
- The company discontinued Roam Mobility amid pandemic-related declines in travel demand and recorded $1.4m of intangible-asset impairment year to date. It also recorded $1.6m of property-and-equipment impairment, associated with discontinued Ting TV development.
- Cedar, acquired January 1, contributed $3.5m of revenue and a $0.6m net loss since acquisition for the nine-month period. Its preliminary purchase consideration was $13.9m, including contingent consideration.
Outlook, risks and contingencies
No formal revenue or earnings guidance is provided in the filing. Management said pandemic impacts were concentrated in mobile and expected to continue through Q4 2020 if the pandemic persisted. It reported fiber installation growth returning after implementing a lower-contact installation process, and no material COVID-19-related liquidity or covenant concern at the filing date. Domain registration growth may moderate.
Key risks include dependence on DISH for the new mobile-enablement business and on the performance of transferred subscribers for future payments; possible Ting-brand confusion or reputational harm; potential inability to meet minimum commitments under a retained mobile-network-operator contract; fiber build-out costs and competitive or regulatory changes; domain pricing pressure and customer erosion; foreign-exchange exposure; and COVID-19 effects. Tucows uses currency forwards and entered a $70m interest-rate swap; it estimated a 1% adverse rate change would increase annual interest by about $0.4m, assuming the reported loan balance remained outstanding. Management said ordinary-course legal matters were not expected to materially harm the company.
Investor facts to verify
- How DISH subscriber retention, margins, and the payment formula affect the ten-year consideration stream; the filing notes that collection and profitability are uncertain.
- Whether Tucows can diversify MSE customers beyond DISH, the sole customer at launch, and meet the MSE agreement’s service and milestone requirements.
- Fiber capital-spending plans, build-out economics, subscriber growth, and the ability to maintain liquidity and covenant compliance.
- Whether pandemic-related domain-registration growth continues and whether ongoing declines at eNom and lower portfolio revenue offset that growth.
- The concentration of accounts receivable: DISH represented 46% at September 30, 2020.