Tucows Inc. — Q2 2022 Form 10-Q
Reporting period: Three and six months ended June 30, 2022. Amounts are U.S. dollars; financial statement amounts are in millions unless stated otherwise. The filing was signed August 9, 2022.
Business context and reporting period
Tucows provides fiber internet access, software platforms and professional services for communications providers, and domain registration and related services. In Q1 2022, it reorganized reporting into Fiber Internet Services, Platform Services and Domain Services; prior-period segment figures were recast. Domain Services remained the largest business, while Platform Services and fiber expansion were important growth drivers.
Key financial metrics
| Metric | Q2 2022 | Q2 2021 | Six months 2022 | Six months 2021 |
|---|---|---|---|---|
| Revenue | $83.1 | $75.1 | $164.2 | $146.0 |
| Gross profit (margin) | $22.1 (26.5%) | $18.2 (24.3%) | $43.3 (26.3%) | $35.7 (24.5%) |
| Operating income (loss) | $(4.4) | $(2.0) | $(9.3) | $(3.2) |
| Net income (loss) | $(3.1) | $1.8 | $(6.1) | $4.0 |
| Diluted EPS | $(0.29) | $0.17 | $(0.57) | $0.37 |
| Adjusted EBITDA (non-GAAP) | $11.7 | $11.2 | $23.0 | $23.9 |
| Cash from operating activities | $12.6 | $3.5 | $18.0 | $17.6 |
Q2 revenue grew 11%; first-half revenue grew 12%. Q2 adjusted EBITDA increased modestly, but first-half adjusted EBITDA declined about 4%. The company reported operating and net losses in both 2022 periods, versus profits in the 2021 comparisons. Q2 interest expense was $2.4 million, compared with $1.0 million a year earlier; first-half interest expense was $4.2 million versus $1.9 million.
Segment trends: Q2 Fiber Internet revenue was $10.2 million, up 85%, and Platform Services revenue was $9.0 million, up from $2.7 million. Domain Services revenue declined to $61.1 million from $62.3 million. Q2 segment adjusted EBITDA was $(6.2) million for Fiber, $3.9 million for Platform Services and $12.1 million for Domain Services. Segment adjusted EBITDA is a non-GAAP measure and should not be treated as a substitute for GAAP results or cash flow.
Cash, liquidity and debt: Cash was $6.5 million at June 30, down from $9.1 million at December 31, 2021. First-half investing cash outflow was $53.5 million, including $53.3 million of property and equipment additions, principally for fiber network expansion. Financing provided $32.9 million, including $35.7 million of credit-facility borrowings. Revolver borrowings were $227.1 million; the reported carrying value was $226.4 million after debt costs. The balance sheet classified the borrowing as current, with scheduled principal repayment in 2023 under the then-current facility. Current assets were $153.3 million and current liabilities $423.8 million. The company reported compliance with its covenants at June 30.
Material changes versus the prior comparable period
- Fiber growth reflected subscriber additions, continued network expansion and the Simply Bits acquisition; Ting reported 30,000 accounts under management versus 20,000 a year earlier.
- Platform Services growth was driven mainly by additional DISH subscribers migrating to Wavelo’s MONOS platform. DISH represented 11% of Q2 revenue and 10% of first-half revenue, and 34% of accounts receivable at June 30.
- Domain Services revenue and domain transactions softened as registration growth and renewal rates normalized from pandemic-era levels. Domains under management fell to 24.8 million from 25.6 million a year earlier.
- Network depreciation and operating costs rose with fiber and platform investment. Sales and marketing expense increased 44% in both the quarter and first half, with management citing hiring, wage inflation and growth initiatives.
- The $4.5 million Q2 and $9.3 million first-half gain from the DISH customer-asset sale payment stream was reported in other income, not revenue. The payment stream is expected to decline over time as transferred customers churn.
Outlook, risks and unusual items
- No formal revenue or earnings guidance is provided in the supplied filing text. Management expected fiber-network capital expenditures to continue increasing during 2022 and transitional-services revenue and costs for DISH to keep declining.
- On August 8, 2022, Ting Fiber entered into an agreement for $60 million of Series A preferred units, with up to a further $140 million available over three years subject to milestones. The units carry a 15% annual preferred return, non-cash for the first 24 months, subject to stated adjustments. Initial funding was expected by August 12; the filing does not confirm receipt of those funds by the filing date.
- A separate agreement contemplated up to $400 million of capital commitments for jointly evaluated fiber networks. Funding depends on network approvals and related terms; it is not presented as committed proceeds available for general corporate use.
- Also on August 8, the company amended its $240 million credit facility, extended maturity to June 14, 2024, released Ting Fiber entities from guarantees and liens, and transitioned borrowing options from LIBOR to SOFR. Revised leverage covenants are 4.00:1.00 through September 29, 2023 and 3.75:1.00 thereafter; minimum interest coverage is 3.00:1.00. Calculations exclude Ting Fiber entities.
- Risks include substantial fiber buildout spending and uncertain returns; dependence on DISH for platform growth and receivables; competitive and renewal-rate pressure in domains; foreign-exchange and variable-interest-rate exposure; and the ability to meet financing milestones and debt or preferred-return obligations.
- The company accrued $0.4 million of penalties in Q2 and $0.7 million in the first half for failing to meet minimum commitments with a mobile network partner, and expects penalties to continue until the contract ends. Management did not expect ordinary-course legal matters to materially harm the business. It described COVID-19 impacts as limited.
Important facts for investors to verify
- Whether the expected $60 million preferred-unit funding occurred, and whether Ting meets the milestones required to access the additional $140 million.
- How the preferred return, redemption provisions and revised credit covenants affect cash requirements, leverage and the parent company’s access to Ting Fiber assets.
- Whether fiber subscriber growth and network utilization generate returns sufficient to support rising capital expenditures and operating costs.
- DISH platform subscriber migration, customer concentration, receivable collection and the trajectory of the DISH payment stream.
- Progress in addressing mobile-partner minimum commitments and the resulting penalties.
- Changes in domain renewals, domains under management, segment profitability, operating cash flow and debt balances in subsequent filings.