Tucows Inc. — Q3 2022 Form 10-Q
Reporting period: Three and nine months ended September 30, 2022; unaudited. Amounts are U.S. dollars. Tucows provides fiber internet access (Ting), communications-provider software and services (Wavelo), and domain registration and related services (Tucows Domains). Management reorganized its reporting segments in 2022; prior-period comparisons were reclassified where applicable.
Financial performance and position
| Metric | Q3 2022 | Q3 2021 | Nine months 2022 | Nine months 2021 |
|---|---|---|---|---|
| Revenue | $78.1m | $75.9m | $242.2m | $221.9m |
| Gross profit / margin | $18.0m / 23.1% | $18.0m / 23.8% | $61.2m / 25.3% | $53.7m / 24.2% |
| Operating income (loss) | ($9.4m) | ($3.2m) | ($18.7m) | ($6.4m) |
| Net income (loss) | ($8.0m) | $1.4m | ($14.1m) | $5.3m |
| Diluted earnings (loss) per share | ($0.74) | $0.13 | ($1.31) | $0.49 |
| Adjusted EBITDA (non-GAAP) | $7.9m | $12.2m | $30.9m | $36.1m |
| Cash from operating activities | ($1.0m) | $1.5m | $17.0m | $19.1m |
- For the nine months, investing activities used $100.1m, primarily for fiber network property and equipment; financing activities provided $104.6m. Cash and equivalents were $30.5m at September 30, versus $9.1m at December 31, 2021.
- At September 30, current assets were $172.3m and current liabilities $185.9m. Total assets were $645.5m and stockholders’ equity $105.6m.
- Credit-facility borrowings were $239.7m gross ($238.8m carrying value), up from $191.4m gross at year-end. The revolving facility totals $240m, matures June 2024, and was reported in covenant compliance. The filing states maximum debt-to-adjusted-EBITDA covenants of 4.00:1 through September 2023 and 3.75:1 thereafter, and minimum interest coverage of 3.00:1.
Material changes and management commentary
- Revenue grew 3% in Q3 and 9% year to date. Ting revenue rose 70% in Q3 and 82% year to date, supported by fiber expansion and subscriber growth; Q3 included $2.2m of Simply Bits revenue. Wavelo revenue rose modestly in Q3 and substantially year to date, mainly from DISH platform subscriber migrations and year-to-date professional services.
- Tucows Domains revenue declined 1% in Q3 and 1% year to date, reflecting normalized domain registrations and slower renewals after pandemic-era growth. Domains under management fell to 24.5m from 25.4m a year earlier. Transitional services revenue from DISH also declined.
- Profitability weakened despite revenue growth. Q3 operating expenses rose, including sales and marketing (+40%) and general and administrative (+56%); network expenses also increased as fiber and platform infrastructure expanded. Higher interest expense and lower gains from the DISH customer-asset sale contributed to the net loss. Interest expense was $4.3m in Q3 and $8.6m year to date.
- Adjusted EBITDA declined 35% in Q3 and 14% year to date. Management attributed the decline principally to investment in Ting’s fiber buildout, Wavelo platform and team growth, and weaker domain contributions. Adjusted EBITDA is a non-GAAP measure and is not a liquidity measure.
- The company invested $100.0m in property and equipment during the first nine months and said fiber-build capital expenditures were expected to continue increasing during fiscal 2022. No specific earnings or revenue guidance was provided.
Financing, risks, and unusual items
- In August 2022, Ting LLC received $60m from Generate for preferred units; up to another $140m is committed subject to operational and financial milestones over three years. The units accrue a 15% annual preferred return, adjustable between 13% and 17%, and have mandatory redemption provisions. Early redemption before the fourth anniversary can trigger a make-whole premium; the expected maturity is August 2028. The reported liability was $60.5m at quarter-end, after accretion and financing costs.
- The preferred financing carries material payment and redemption obligations; failure to meet specified payment, covenant, or other conditions may give Generate conversion or asset-sale rights. The company also pays a standby fee on the undrawn commitment.
- Key exposures include rising interest rates, Canadian-dollar exchange movements, inflation and fiber-build costs, competitive pressure in domains and internet services, and execution and funding risk in Ting’s expansion. A 1% adverse interest-rate change was estimated to increase annual interest payments by approximately $1.7m after hedging. The $70m interest-rate swap’s hedge accounting was discontinued prospectively in Q3.
- Wavelo’s external platform and professional-services revenue is concentrated in DISH, exposing the business to DISH’s subscriber growth and customer relationship. DISH represented 37% of accounts receivable at quarter-end, although no customer exceeded 10% of revenue.
- The company reversed $0.7m of previously accrued minimum-commitment penalties after negotiating with a mobile-network partner; management expects penalties to begin in fiscal 2023 and continue until the contract ends. Management considers ordinary-course litigation unlikely to materially harm the company. COVID-19 impacts were described as limited.
Investor verification points
- Track Ting subscriber additions, serviceable addresses, fiber capital spending, build costs, and cash generation against the substantial expansion plan.
- Verify progress toward the Generate financing milestones and assess the preferred return, redemption, make-whole, and standby-fee obligations alongside the senior credit facility.
- Monitor covenant headroom, floating-rate interest costs, debt maturity and refinancing needs; the filing reports compliance but does not provide the actual covenant ratios.
- Assess Wavelo’s DISH concentration, subscriber migrations, contract-asset amortization, and ability to win additional platform customers.
- Monitor Tucows Domains renewals, domains under management, pricing pressure, and any continued normalization in registration activity.
- Reconcile reported GAAP losses and operating cash flow with non-GAAP adjusted EBITDA, which excludes items including interest, depreciation, amortization, stock compensation, and selected costs.