Tucows Inc. — FY2020 Form 10-K
Reporting period: Fiscal year ended December 31, 2020. Amounts are U.S. dollars; financial figures are in millions unless otherwise noted. The filing is an annual report, with selected fourth-quarter data also summarized below.
Business context
Tucows operates Domain Services, including wholesale and retail domain registration and related services, and Network Access Services, including mobile services and fixed fiber internet. Domain Services generated 78% of 2020 revenue. The year marked a strategic shift in mobile: Tucows sold most Ting Mobile customer relationships and inventory to DISH on August 1, 2020, while retaining its mobile-enablement platform and professional-services business. DISH became the first customer for those services. Tucows also acquired fiber provider Cedar on January 1, 2020.
Key financial metrics
| Metric | FY2020 | FY2019 |
|---|---|---|
| Revenue | $311.2 | $337.1 |
| Gross profit | $85.5 | $100.8 |
| Gross margin | 27.5% | 29.9% |
| Operating income | $6.9 | $29.3 |
| Net income | $5.8 | $15.4 |
| Diluted EPS | $0.54 | $1.43 |
| Adjusted EBITDA (non-GAAP) | $51.0 | $51.9 |
| Cash from operating activities | $36.1 | $40.4 |
| Cash and cash equivalents, year-end | $8.3 | $20.4 |
| Debt carrying value, year-end | $121.7 | $113.5 |
Net margin was approximately 1.9%, compared with 4.6% in 2019. Operating cash flow less $44.4 million of property and equipment additions was approximately negative $8.4 million, before acquisitions and other investing activity. Total assets were $451.9 million, total liabilities $347.2 million, and stockholders’ equity $104.7 million at year-end. Current assets of $141.2 million were below current liabilities of $163.0 million; current liabilities include substantial deferred revenue and customer deposits.
Fourth quarter: Revenue was $70.8 million, gross profit $17.4 million, net income $2.1 million, and diluted EPS $0.19. In fourth-quarter 2019, these were $85.9 million, $26.0 million, $5.8 million, and $0.54, respectively.
Material changes versus the prior period
- Revenue fell $25.9 million, or 8%, largely reflecting the Ting Mobile customer sale and Roam Mobility shutdown. Network Access revenue declined to $68.9 million from $95.7 million; Domain Services revenue was broadly stable at $242.3 million versus $241.5 million.
- Mobile Services revenue fell to $50.5 million from $84.7 million. Fiber Internet revenue rose 67% to $18.4 million, supported by Cedar and network expansion. Serviceable addresses increased to 56,000 from 36,000, and managed accounts to 15,000 from 10,000.
- Domain registrations under management increased to 25.4 million from 23.8 million, with pandemic-era online business formation and growth at OpenSRS and EPAG partly offset by continued erosion among non-core eNom customers.
- Gross profit declined $15.3 million, and operating income declined $22.4 million. Operating costs included a $1.4 million impairment of Roam Mobility customer relationships and a $1.6 million write-off of the discontinued Ting TV project.
- Net income included a $7.6 million net gain on the Ting customer-asset sale, reported in other income rather than revenue. The underlying consideration is a 10-year payment stream tied to the transferred customer base.
- Adjusted EBITDA decreased 2% to $51.0 million. This non-GAAP measure excludes, among other items, interest, taxes, depreciation, amortization, impairments, stock compensation, and certain acquisition and transition costs.
Outlook, risks and unusual items
- Management provided no specific quantitative revenue or earnings guidance. It expected fiber-network capital expenditures to increase significantly in 2021 and anticipated higher sales and marketing, technical operations and development, and general and administrative expenses.
- Beginning January 1, 2021, Network Access reporting was to be split into Mobile and Fiber segments; adjusted EBITDA was to be added as a segment performance measure alongside gross profit.
- DISH was the sole MSE and professional-services customer at year-end. DISH represented 59% of accounts receivable, although no customer exceeded 10% of annual revenue. The MSE business therefore has material customer and subscriber-volume concentration risk.
- Tucows retained minimum commitments under one mobile network operator agreement, with risk of penalties if it cannot meet them. DISH received the right to use the Ting brand for 24 months and an option to purchase it; brand overlap could affect Ting Fiber’s reputation or require rebranding.
- The $122.4 million gross revolving-credit balance was due at facility maturity in June 2023; the facility is secured by substantially all personal property and assets. Tucows reported compliance with its financial covenants at December 31, 2020. The facility includes leverage, interest-coverage, capital-expenditure and share-repurchase restrictions.
- Cedar acquisition consideration included up to $4.0 million of contingent payments subject to milestones. COVID-19 reduced mobile usage and travel-related roaming demand, prompting the Roam Mobility shutdown; installation constraints also slowed fiber customer additions. Management reported no material pandemic-related change to liquidity or covenant capacity at the time of filing.
- Foreign-exchange exposure remains relevant: a modeled 10% adverse currency move would reduce 2020 pretax income by approximately $4.5 million. A one-percentage-point interest-rate increase was estimated to add about $0.5 million to annual interest expense, assuming year-end debt remained outstanding.
- The board authorized a new share-repurchase program of up to $40 million in February 2021. Tucows repurchased $3.3 million of shares in 2020 and paid no cash dividends. Management reported no material pending legal proceedings; the auditor issued unqualified opinions on the financial statements and internal controls.
Important facts for investors to verify
- Review the DISH agreement’s 10-year payment formula, payment durability, contract terms and Ting-brand option, and assess the company’s dependence on a single MSE customer.
- Track fiber subscriber growth, serviceable-address expansion, capital spending and cash generation against management’s stated investment plans.
- Assess whether Domain Services registration growth is sustainable and whether eNom customer erosion and declining portfolio-related revenue persist.
- Monitor debt, covenant headroom, the June 2023 maturity and the effect of planned fiber investment and share repurchases on liquidity.
- Reconcile the filing’s differing descriptions of expected portfolio revenue trends: one passage says revenue is expected to decline into 2021, while another says it is expected to remain flat into 2021 and thereafter.