Tucows Inc. — Q2 2023 Form 10-Q
Reporting period: Three and six months ended June 30, 2023. Amounts are U.S. dollars; financial amounts below are in millions unless stated otherwise. Tucows operates Ting (fiber internet), Wavelo (communications platforms and services), and Tucows Domains (domain registration and related services).
Financial performance
| Metric | Q2 2023 | Q2 2022 | First half 2023 | First half 2022 |
|---|---|---|---|---|
| Revenue | $85.0 | $83.1 | $165.4 | $164.2 |
| Gross profit | $18.0 | $22.1 | $32.1 | $43.3 |
| Gross margin | 21.2% | 26.5% | 19.4% | 26.3% |
| Operating loss | $(13.1) | $(4.4) | $(30.4) | $(9.3) |
| Net loss | $(31.0) | $(3.1) | $(50.1) | $(6.1) |
| Adjusted EBITDA | $5.4 | $11.7 | $8.4 | $23.0 |
| Operating cash flow | $(1.6) | $12.6 | $(6.8) | $18.0 |
| Capital expenditures | $23.2 | $30.3 | $54.9 | $53.3 |
- Q2 diluted loss per share was $2.86, versus $0.29 a year earlier; first-half diluted loss per share was $4.63, versus $0.57.
- At June 30, cash and cash equivalents were $147.9; restricted cash and secured-notes reserve funds totaled a further $11.7 and are not freely available. Current assets were $308.7 and current liabilities $194.1.
- Debt included $229.9 principal outstanding under the syndicated revolver and $238.5 principal on the 2023 secured fiber notes (carrying value $221.1). Redeemable preferred shares were recorded as a $103.0 liability. Interest expense was $10.5 in Q2 and $18.4 in the first half.
Material changes and drivers
- Revenue grew 2% in Q2 and 1% in the first half. Ting revenue rose 22% in both comparisons, to $12.4 million and $24.3 million, respectively; management attributed growth to subscriber additions and fiber expansion. Wavelo platform revenue increased with subscriber migrations, including DISH’s Boost Mobile migration, completed by the end of June.
- Tucows Domains revenue declined 2% in Q2 and 3% in the first half, amid normalization after pandemic-era registration growth, slower renewals, and lower expiry-auction proceeds. Domains under management were 24.4 million, down from 24.8 million a year earlier.
- Profitability weakened despite modest revenue growth: gross profit fell, while network costs and depreciation rose with Ting network expansion and Wavelo platform investment. First-half network impairment was $2.0 million, primarily related to damaged conduit and scrap capital inventory.
- Adjusted EBITDA declined 54% in Q2 and 63% in the first half. Management cited higher Ting fiber-build investment, lower Tucows Domains contribution, and Wavelo operating and development investment.
- Cash from operations turned negative in the first half, while investing activities used $55.3 million, mainly for property and equipment. Cash rose substantially due to financing, not operating cash generation.
Financing, outlook, and risks
- In May, Ting subsidiaries issued $238.5 million principal of secured fiber revenue notes: Class A-2 at 5.95%, Class B at 7.40%, and Class C at 9.95%. Net proceeds were $220.5 million. The notes are secured by specified fiber-related assets and customer contracts; anticipated repayment is April 2028, with additional interest provisions if not repaid or refinanced by then.
- The company redeemed $31.0 million of Generate preferred units for a total payment of $45.7 million, including a discounted make-whole premium. The transaction generated a $14.7 million debt-extinguishment loss. Preferred units accrue a 15% annual return, subject to stated adjustments; further funding depends on milestones. Remaining Generate capital commitment was $77.5 million at June 30.
- The $240 million revolver matures September 30, 2024. Its amendment introduced monthly covenant testing during a relief period and stepped leverage limits; the company reported covenant compliance at June 30. Revolver borrowings are variable-rate, and management estimated a 1% rate increase would raise annual interest by about $2.3 million at the reported balance.
- Management expects 2023 fiber-network capital expenditures to continue increasing. Continued Ting expansion depends in part on milestone-based financing and potentially additional financing; availability and terms are not assured. The filing does not provide specific revenue or earnings guidance.
- Risks include Ting construction costs and competition; Wavelo’s customer concentration and dependence on DISH subscriber volumes; domain pricing competition and renewal trends; foreign-exchange and interest-rate exposure; and the ability to service debt and preferred-share obligations. DISH represented 12% of Q2 revenue and 55% of accounts receivable at June 30.
- The company accrued $0.4 million of first-half penalties for a shortfall against a retained mobile-network minimum commitment and expects further penalties if subscriber growth remains limited. Management said ordinary-course legal claims are not expected to have a material adverse effect.
- Disclosure controls and internal control over financial reporting were reported ineffective due to a material weakness involving capitalization controls, including review of costs and labor inputs. Remediation was underway, with a target during fiscal 2023, but completion and effectiveness were not assured.
Most important facts to verify
- Whether Ting subscriber growth and fiber expansion can deliver improved margins and operating cash flow despite rising network costs and continued capital spending.
- Progress against revolver covenants and refinancing or repayment plans ahead of the September 2024 revolver maturity and April 2028 anticipated notes repayment date.
- Generate preferred-unit return, redemption, milestone-funding, and make-whole terms, including the consequences of missed payments or covenant defaults.
- DISH exposure: Wavelo revenue and receivable concentration, platform subscriber performance, and the future value of the legacy customer payment stream.
- Remediation and independent testing of the material weakness in capitalization controls, plus the accuracy of related capitalized costs.
- Further MNO minimum-commitment penalties, domain renewal and auction trends, and the availability and cost of additional financing.