Tucows Inc. — Q3 2021 Form 10-Q
Reporting period: Three and nine months ended September 30, 2021. Unless noted otherwise, amounts are U.S. dollars. Tucows provides fiber Internet access, mobile enablement and related services, and wholesale and retail domain services. Comparative figures are for 2020.
Financial results
| Metric | Q3 2021 | Q3 2020 | Nine months 2021 | Nine months 2020 |
|---|---|---|---|---|
| Revenue | $75.9 million | $74.3 million | $221.9 million | $240.4 million |
| Gross profit / margin | $18.0 million / 23.8% | $19.9 million / 26.8% | $53.7 million / 24.2% | $68.1 million / 28.3% |
| Operating income (loss) | $(3.2) million | $1.3 million | $(6.4) million | $8.0 million |
| Net income | $1.4 million | $0.7 million | $5.3 million | $3.7 million |
| Diluted EPS | $0.13 | $0.07 | $0.49 | $0.35 |
| Adjusted EBITDA (non-GAAP) | $12.2 million | $13.3 million | $36.1 million | $38.1 million |
| Operating cash flow | $1.5 million | $11.4 million | $19.1 million | $34.4 million |
Q3 net income included a $5.6 million gain related to the DISH transaction; the comparable 2020 quarter included $1.1 million. For the nine months, the corresponding amounts were $15.8 million and $1.1 million. Interest expense was $1.2 million in Q3 and $3.1 million year to date.
Liquidity, debt and investment
- Cash and cash equivalents were $5.5 million at September 30, 2021, down from $8.3 million at December 31, 2020. Current assets were $143.8 million and current liabilities $168.4 million.
- Credit-facility borrowings were $150.4 million, versus $122.4 million at year-end 2020; the facility was secured and scheduled to mature in June 2023. No current principal repayment was scheduled before maturity.
- Year-to-date capital expenditures were $50.1 million, primarily for fiber network expansion, versus $32.7 million in 2020. Investing activities used $52.3 million; financing activities provided $30.5 million.
- Management said operating cash flow and credit facilities should be adequate for working capital, capital expenditures and interest payments for at least the next 12 months. The company reported compliance with credit covenants for the periods presented.
Material changes and management commentary
- Q3 revenue increased 2%, as Fiber Internet revenue rose 43% to $6.7 million, offsetting lower mobile and slightly lower domain revenue. Nine-month revenue fell 8%, mainly due to the prior-year sale of most Ting Mobile customer relationships to DISH and the shutdown of Roam Mobility; domain and fiber growth partly offset that decline.
- Fiber Internet revenue was $17.9 million year to date, up 34%. Serviceable addresses increased to 75,000 from 50,000 a year earlier, and accounts under management to 23,000 from 14,000. Management cited upfront network investment as a reason fiber costs were growing faster than revenue.
- Domain Services contributed $60.7 million, or 80% of Q3 revenue. Domain names under management were 25.4 million, up from 25.0 million a year earlier; management cautioned that pandemic-related registration growth may not persist and noted ongoing erosion among non-core eNom customers.
- Mobile Services revenue was $8.5 million in Q3 and $19.8 million year to date. DISH was the company’s sole MSE platform and professional-services customer; DISH represented 48% of accounts receivable at quarter-end. Mobile platform revenue growth reflects the transition to MSE and a longer comparable operating period than in 2020.
- Management said COVID-19’s financial impact had been limited and expected limited impact through the remainder of 2021 if the pandemic persisted. It expected fiber-network capital expenditures to continue increasing during 2021. No specific revenue or earnings guidance was provided.
Risks, contingencies and subsequent events
- Key risks include dependence on DISH for MSE services and the 10-year, subscriber-margin-based payment stream; the stream could be reduced by subscriber churn, pricing or cost changes. The filing also identifies minimum-commitment exposure under an excluded mobile network agreement.
- Fiber buildout entails substantial upfront spending and may not be fully recovered if competition, technology or regulation changes. Domain Services faces pricing competition and possible normalization or decline in registrations and advertising yields.
- Foreign-exchange exposure is material because many expenses are in Canadian dollars while revenue is primarily in U.S. dollars. The filing estimates a hypothetical 10% adverse currency move would reduce quarterly net income by about $1.3 million before hedging. A 1% adverse interest-rate move was estimated to add about $0.8 million to annual interest expense after hedging.
- The company reported ordinary-course legal claims but did not expect their resolution to materially harm its financial position. It was awaiting final IRS acceptance of a tax accounting-method change; management considered acceptance more likely than not and recorded no related additional tax uncertainty, interest or penalties.
- After quarter-end, Tucows acquired UNR-related domain registry assets on October 1 for $3.0 million, less estimated assumed working-capital liabilities of $0.5 million; the asset fair value had not yet been determined. On October 26, it amended its credit agreement, increasing committed facility access to $240 million and revising the maximum debt-to-adjusted-EBITDA covenant to 4.50x through March 31, 2023 and 4.00x thereafter; minimum interest coverage remained 3.00x.
Important facts for investors to verify
- Whether fiber subscriber and revenue growth can generate returns commensurate with continued high capital expenditures.
- DISH’s subscriber trends, payment stream, receivable collection and continued role as the sole MSE customer.
- Cash generation and funding needs relative to debt, facility covenants, and the June 2023 maturity under the pre-amendment facility terms.
- Whether domain-registration growth and renewal trends normalize, and the pace of expected declines in Realnames surname-portfolio revenue.
- The final accounting valuation and financial impact of the UNR acquisition, and the effects of the amended credit agreement.