Tucows Inc. — Q2 2021 Form 10-Q
Business context and reporting period. This unaudited quarterly report covers the three and six months ended June 30, 2021; amounts below are U.S. dollars. Tucows provides domain registration and related services, mobile platform and professional services, and fixed fiber internet. In Q1 2021, it reorganized reporting into Fiber Internet, Mobile Services, and Domain Services segments, and recast comparatives.
Financial performance
| Metric | Q2 2021 | Q2 2020 | First half 2021 | First half 2020 |
|---|---|---|---|---|
| Revenue | $75.1 million | $82.1 million | $146.0 million | $166.1 million |
| Gross profit | $18.2 million | $23.0 million | $35.7 million | $48.1 million |
| Gross margin | 24.3% | 28.0% | 24.5% | 29.0% |
| Operating income (loss) | $(2.0) million | $1.5 million | $(3.2) million | $6.7 million |
| Net income | $1.8 million | $0.2 million | $4.0 million | $3.0 million |
| Diluted EPS | $0.17 | $0.01 | $0.37 | $0.28 |
| Adjusted EBITDA | $11.2 million | $12.2 million | $23.9 million | $24.9 million |
Q2 revenue fell 9%; first-half revenue declined 12%. The main driver was the prior-year sale to DISH of most Ting Mobile customer relationships and the shutdown of Roam Mobility. Q2 Domain Services revenue rose to $62.3 million from $60.1 million, while Fiber Internet revenue increased to $5.8 million from $4.4 million. Mobile Services revenue was $7.0 million, versus $17.6 million, reflecting the changed business mix.
Net income benefited from $4.8 million of DISH-related consideration recognized as a gain on sale in Q2 (and $10.2 million in the first half), rather than as revenue. Excluding that item is important in assessing underlying performance: operating results were a loss in both Q2 and the first half. Q2 income tax was a $0.1 million recovery; the first-half tax provision was $1.0 million.
Cash flow, liquidity and debt
- First-half operating cash flow was $17.6 million, down from $23.0 million. Investing activities used $37.8 million, including $35.6 million of property and equipment additions, primarily for fiber network expansion. Financing activities provided $19.2 million, including an $18.0 million credit-facility draw.
- Cash was $7.3 million at June 30, 2021, down from $8.3 million at year-end 2020. Current assets were $146.4 million and current liabilities $170.7 million; reported figures imply negative working capital of about $24.3 million.
- Credit-facility borrowings were $140.4 million gross ($139.9 million net of unamortized costs), compared with $122.4 million gross at year-end. The facility provides access to up to $240 million and matures June 13, 2023; the debt is secured by substantially all company assets. No scheduled principal repayments are due before maturity. Tucows reported compliance with its financial covenants.
- Interest expense, net, was $1.0 million in Q2 and $1.9 million in the first half. A $70 million interest-rate swap partially hedges floating-rate exposure.
Material changes, outlook and risks
- Fiber investment and growth: Ting Internet reported 20,000 active accounts and 71,000 serviceable addresses, compared with 13,000 and 48,000 a year earlier. Management said fiber capital spending was expected to increase during 2021. It believes operating cash flow will cover anticipated working capital, capital spending and debt requirements for at least 12 months.
- DISH dependence: DISH was the sole customer for the MSE platform and related professional services, and accounted for 45% of accounts receivable at quarter-end. The company’s 10-year DISH payment stream depends on margins from transferred subscribers. Management identifies subscriber retention, DISH’s subscriber growth and the ability to add MSE customers as risks.
- Domain trends: Domains under management reached 25.6 million, up 1.0 million year over year. Management attributed growth partly to pandemic-driven online activity and cautioned that it may not persist. eNom continued to experience declines among non-core customers; Realnames surname-portfolio revenue was expected to decline materially during 2021 and thereafter.
- Fiber execution and competition: Fiber networks require substantial upfront investment, and competition, technology or regulatory changes could prevent full recovery of those costs. Higher fiber build-out costs contributed to lower adjusted EBITDA.
- Other risks and unusual items: Foreign exchange exposure remains material; management estimated that a hypothetical 10% adverse currency move would reduce quarterly net income by about $1.4 million before hedging. LIBOR transition could require amendments to the credit facility and swaps. Management reported no expected material COVID-19 impact through the rest of 2021, while continuing to monitor developments. No formal numerical earnings or revenue guidance was provided.
- Ordinary-course legal claims were not expected by management to have a material adverse effect. No material changes to risk factors were reported in this 10-Q.
Key facts for investors to verify
- How much of reported earnings and adjusted EBITDA reflects recurring operations versus the DISH payment stream and other excluded or unusual items.
- DISH subscriber performance, payment calculations, receivable collection, and the prospects for diversifying MSE customers.
- Fiber build-out spending, subscriber additions, unit economics, and the timing of returns on invested capital.
- Debt headroom, covenant calculations, refinancing plans ahead of the June 2023 maturity, and sensitivity to interest rates and LIBOR transition.
- Whether pandemic-related domain registration growth continues, alongside eNom and Realnames revenue trends.