Tucows Inc. 10-Q Summary: Period Ended June 30, 2010
Business Context and Reporting Period
Tucows Inc. is a global distributor of Internet services, including domain name registration, security products, and email, operating through a network of over 10,000 resellers. The company reports as a smaller reporting company. This filing covers the quarterly period ended June 30, 2010, and the six-month period ended on the same date.
Key Financial Metrics
| Metric | Three Months Ended June 30, 2010 | Six Months Ended June 30, 2010 |
|---|---|---|
| Net Revenues | $20.85 million | $41.29 million |
| Gross Profit | $5.06 million | $10.20 million |
| Net (Loss) Income | $(0.77) million | $(0.20) million |
| Cash and Cash Equivalents | $4.07 million | $4.07 million (Ending Balance) |
| Operating Cash Flow | $1.17 million | $2.55 million |
| Loan Payable (Current) | $2.26 million | $2.26 million (Ending Balance) |
| Deferred Revenue | $60.05 million (Total) | $60.05 million (Total) |
Material Changes vs. Prior Period
- Revenue Growth: Net revenues increased 4% ($0.82 million) for the quarter and 3% ($1.18 million) for the six months compared to the prior year periods. This was driven primarily by a 7% increase in OpenSRS Domain Services revenue.
- Profitability Decline: The company reported a net loss of $0.77 million for the quarter and $0.20 million for the six months, a significant reversal from net income of $4.38 million and $5.41 million in the comparable 2009 periods.
- Foreign Exchange Impact: A major driver of the loss was a $1.92 million loss on the change in fair value of forward exchange contracts for the quarter (compared to a $1.94 million gain in 2009). This was due to the strengthening of the Canadian dollar against the U.S. dollar.
- Expense Reductions: General and administrative expenses decreased 62% for the quarter and 59% for the six months, largely due to the reversal of foreign exchange losses recorded in the prior year.
- Share Repurchases: The company aggressively reduced its share count, repurchasing 6.34 million shares via a Dutch auction tender offer in January 2010 and an additional 3.41 million shares under a normal course issuer bid during the six months ended June 30, 2010.
Guidance, Outlook, and Risks
- Outlook: Management expects domain name registration volumes to continue to incrementally increase but notes market volatility. Network costs are expected to decrease slightly for fiscal 2010 excluding exchange rate movements.
- Debt Facility: The company has a $9.6 million credit facility with the Bank of Montreal. While a cash sweep payment based on 2009 results would have fully repaid the loan, the bank has deferred this payment pending negotiations for an alternative facility.
- Foreign Exchange Risk: A significant portion of expenses are in Canadian dollars while revenues are in U.S. dollars. The strengthening Canadian dollar negatively impacted operating costs and resulted in significant non-cash losses on derivative instruments.
- Revenue Mix: Email services revenue continues to decline due to the loss of media portal customers, while advertising revenue on content sites (Butterscotch) remains flat due to shifts in advertiser preferences and Google AdSense program changes.
Investor Verification Checklist
- Derivative Valuation: Verify the impact of the $1.9 million non-cash loss on forward exchange contracts and the company's hedging strategy for 2011.
- Debt Covenant Status: Confirm the outcome of negotiations with the Bank of Montreal regarding the deferred cash sweep payment and the status of the credit facility.
- Share Count Reduction: Assess the impact of the 15% reduction in outstanding shares on future earnings per share calculations.
- Deferred Revenue: Review the $60 million deferred revenue balance to understand the runway for future revenue recognition.
- Customer Concentration: Note that two customers accounted for 25% of accounts receivable as of June 30, 2010, though these were paid subsequent to the period end.