Tucows Inc. — Q1 2016 Form 10-Q
Reporting period: Three months ended March 31, 2016. All amounts are in U.S. dollars unless noted. Tucows provides mobile and fixed internet access services and distributes domain registration and related internet services.
Financial performance
| Metric | Q1 2016 | Q1 2015 | Change |
|---|---|---|---|
| Revenue | $45.61 million | $40.47 million | Up 13% |
| Gross profit | $15.17 million | $12.22 million | Up 24% |
| Gross margin | 33.3% | 30.2% | Up 3.1 percentage points |
| Operating income | $6.26 million | $4.41 million | Up 42% |
| Net income | $4.44 million | $2.83 million | Up 57% |
| Diluted EPS | $0.41 | $0.24 | Up $0.17 |
| Adjusted EBITDA (non-GAAP) | $7.49 million | $6.78 million | Up 10% |
| Cash provided by operating activities | $5.55 million | $2.94 million | Up $2.62 million |
Revenue growth was led by Network Access Services, up 38% to $17.84 million, including mobile services revenue of $16.94 million. Domain Services revenue increased 1% to $27.77 million: wholesale was broadly flat, retail rose 19% to $3.41 million, and portfolio revenue declined to $0.78 million. Adjusted EBITDA is a company-defined non-GAAP measure; Tucows revised its definition for 2016, so comparisons with other companies or periods may not be directly comparable.
Financial position and liquidity
- Cash and cash equivalents were $10.01 million at March 31, 2016, versus $7.72 million at December 31, 2015. Total assets were $138.35 million.
- Loan balances totaled approximately $9.3 million: $6.0 million on the revolving demand loan and $3.3 million on the revolving reducing loan. The company reported compliance with its credit-facility covenants.
- Operating cash flow was $5.55 million. Investing activities used $6.91 million, including a $6.05 million advance for the Melbourne IT asset acquisition and $0.86 million of property and equipment additions. Financing activities provided $3.65 million, including a $6.0 million loan draw, partly offset by $2.18 million of share repurchases.
- Current liabilities were $83.89 million and current assets were $71.45 million; current liabilities include substantial deferred revenue associated with services paid for in advance.
Material changes, outlook and risks
- Ting had approximately 141,000 mobile subscribers and 221,000 devices under management, compared with 103,000 and 163,000, respectively, a year earlier. Management attributed the adjusted EBITDA increase primarily to Ting growth.
- Domain registrations processed were 2.35 million, versus 2.50 million. Total domains under management declined to 13.31 million from 13.55 million, with management citing large customers moving to their own registrar accreditations or in-house systems.
- Sales and marketing expense rose 39% to $5.29 million, primarily reflecting marketing to acquire Ting and fixed-internet subscribers and Hover customers. Management said competition, subscriber churn and mobile-network partner costs could constrain Ting’s growth and margins.
- On April 1, 2016, Tucows completed the $6.0 million acquisition of Melbourne IT’s international wholesale domain reseller customer base, adding approximately 1.6 million domain names under management. The purchase was funded by the loan draw and advance made on March 31.
- The company authorized up to $40 million of share repurchases through February 9, 2017; it repurchased 98,718 shares for $2.18 million during the quarter.
- Management stated that operating cash flow should cover anticipated working capital, capital expenditure and loan repayment needs for at least the next 12 months. No specific financial guidance was provided.
- Foreign-exchange exposure remains material: a hypothetical 10% adverse exchange-rate movement was estimated to reduce quarterly net income by approximately $0.5 million. The company held $17.0 million of forward contracts at quarter-end.
- Management did not expect ordinary-course litigation to materially harm the business; it reported no material changes to the risk factors in its 2015 Form 10-K. A $20,985 impairment was recorded for domain names not renewed. The quarter also included $0.1 million of income from amortizing the gain on the .online joint marketing arrangement.
Investor facts to verify
- Track whether Ting subscriber growth and customer retention continue amid pricing competition, churn and reliance on mobile network operators.
- Assess the Melbourne IT customer-base acquisition’s integration, retention and contribution to revenue and cash flow.
- Monitor domain customer migration, domains under management and wholesale revenue trends.
- Review debt levels, covenant headroom, capital spending and the pace and terms of share repurchases.
- Evaluate foreign-exchange exposure and the effect of hedge results on reported earnings and other comprehensive income.