Tucows Inc. — Q3 2016 Form 10-Q
Business context and reporting period. This unaudited quarterly report covers the three and nine months ended September 30, 2016; financial amounts are in U.S. dollars. Tucows operates in Network Access (Ting mobile and other internet services) and Domain Services (wholesale, retail and domain portfolio services). The filing was signed November 7, 2016.
Financial performance
| Metric | Q3 2016 | Q3 2015 | Nine months 2016 | Nine months 2015 |
|---|---|---|---|---|
| Revenue | $49.1M | $44.3M | $141.0M | $127.0M |
| Gross profit / margin | $16.6M / 33.9% | $13.8M / 31.2% | $46.6M / 33.1% | $38.2M / 30.1% |
| Operating income / margin | $7.2M / 14.8% | $5.1M / 11.5% | $19.6M / 13.9% | $13.4M / 10.5% |
| Net income | $4.7M | $3.2M | $13.3M | $8.3M |
| Basic / diluted EPS | $0.45 / $0.45 | $0.29 / $0.28 | $1.26 / $1.23 | $0.75 / $0.72 |
| Adjusted EBITDA | $8.6M | $5.8M | $22.8M | $15.4M |
| Operating cash flow | $5.0M | $6.8M | $12.7M | $12.0M |
Adjusted EBITDA is a non-GAAP measure; the company revised its definition in 2016 and recast prior-period comparisons. It cautions that this measure is not a substitute for GAAP results or a liquidity measure.
Liquidity, debt and capital
- Cash and cash equivalents were $10.5M at September 30, 2016, up from $7.7M at December 31, 2015. Current assets of $81.1M were approximately equal to current liabilities of $80.8M.
- Loan payable was $11.0M gross, presented net of $0.5M unamortized issuance costs; the balance sheet reports $1.9M current and $8.5M long-term. The company had drawn $6.0M under Facility B and $5.0M under Facility C, with no Facility A borrowings.
- A new secured, five-year credit facility established in August provides up to $75M, including a $15M accordion. Financial covenants include maximum funded debt/EBITDA ratios and a minimum fixed-charge coverage ratio. Tucows reported compliance at September 30, 2016.
- Nine-month investing cash outflow was $10.2M, including $3.9M of property and equipment additions, primarily for fiber expansion, and $6.2M for the Melbourne IT reseller-channel acquisition. Financing cash flow was a $0.3M inflow, including $7.2M of share repurchases and credit-facility activity.
Material changes and operating drivers
- Revenue increased 11% in both the quarter and nine-month period. Ting/mobile growth was a principal driver: Network Access revenue rose 18% in Q3 and 25% year to date. Ting managed 147,000 subscribers and 235,000 devices, versus 122,000 and 192,000 a year earlier.
- Domain Services revenue rose 6% in Q3 and 4% year to date. The Melbourne IT reseller-channel acquisition contributed to wholesale growth; total domains under management reached 14.8M, versus 13.4M a year earlier.
- Portfolio revenue declined to $0.9M in Q3 and $2.5M year to date, partly reflecting the absence of prior-year gains related to the sale of the company’s .store minority interest. Value-added services revenue also declined modestly.
- Net income and operating margins improved alongside revenue growth. Cost of revenue rose 6%, slower than revenue, while sales and marketing expense increased 21%, largely due to Ting marketing and staffing. General and administrative expense declined 17% in Q3.
- The company repurchased 308,416 shares for $7.2M in the first nine months under its 2016 buyback authorization; no shares were repurchased in Q3. Outstanding common shares were 10.45M at September 30.
Outlook, risks and unusual items
- No specific revenue or earnings guidance is provided. Management said operating cash flow should be adequate for anticipated working capital, capital expenditures and loan repayments for at least the next 12 months.
- Management cited aggressive mobile pricing competition, increasing absolute Ting churn, dependence on mobile network operator partners and the risk that Ting may struggle to sustain positive monthly net additions. Supplier cost reductions led to Ting data-price reductions effective August 2016; management expects these to affect both mobile revenue and cost growth.
- Domain Services faces price competition and the migration of some large customers to their own registrar accreditations and systems. Portfolio advertising and domain-sale revenue face lower traffic/yields and variability in sale timing. The company also highlighted Canadian-dollar exposure; its sensitivity analysis estimated a $0.6M net-income decrease from a hypothetical 10% adverse exchange-rate movement for the quarter.
- The company recognized an immaterial marketing-credit classification correction, recording certain credits as a reduction of revenue rather than sales and marketing expense. It said this had no impact on operating income, net income, EPS, balance sheets or cash flows.
- A $1.5M gain from the .online joint-marketing arrangement is being recognized over three years; $0.1M was recognized in Q3 and $0.4M year to date. Legal claims are in the ordinary course, and management did not expect their resolution to materially affect financial position. No material changes to the prior annual-report risk factors were reported.
- Management concluded disclosure controls were effective and reported no material changes in internal control over financial reporting during the quarter.
Most important facts for investors to verify
- Whether Ting can sustain subscriber growth and margins amid price competition, churn and changes in network-partner costs.
- How much of domain-revenue growth reflects the Melbourne IT acquisition, and whether customer migrations to competing or in-house registrar systems weigh on future volumes.
- Cash generation relative to fiber investment, share repurchases and scheduled debt amortization; confirm covenant headroom under the new secured facility.
- Whether portfolio advertising and domain-sale revenue stabilize, and how foreign-exchange movements affect costs and reported results.
- The full terms and effect of the referenced subsequent event: the filing text provided here identifies a subsequent-event note but does not include its details.