Tucows Inc. — Q1 2021 Form 10-Q
Reporting period: Three months ended March 31, 2021; filed May 6, 2021. Dollar amounts below are U.S. dollars. The company provides fiber internet, mobile enablement and services, and wholesale and retail domain services.
Financial performance
| Metric | Q1 2021 | Q1 2020 | Change / context |
|---|---|---|---|
| Revenue | $70.9 million | $84.0 million | Down 16% |
| Gross profit | $17.5 million | $25.2 million | Gross margin 24.6%, versus 29.9% |
| Operating income (loss) | ($1.1 million) | $5.2 million | Operating margin was approximately (1.6%) |
| Net income | $2.1 million | $2.8 million | Down 24%; diluted EPS $0.20 versus $0.26 |
| Adjusted EBITDA (non-GAAP) | $12.7 million | $12.7 million | Essentially flat; company-defined measure |
| Operating cash flow | $14.1 million | $14.1 million | Essentially flat |
| Capital expenditures | $13.9 million | $9.9 million | Primarily fiber network expansion |
- Revenue by segment: Fiber Internet $5.4 million, up 26%; Mobile Services $4.3 million, down from $20.1 million; Domain Services $61.2 million, up 3%.
- Segment adjusted EBITDA: Fiber Internet ($(2.6) million) versus ($(1.1) million); Mobile Services $4.5 million versus $5.0 million; Domain Services $13.8 million versus $11.5 million. Corporate costs were $(3.0) million versus $(2.8) million.
- Cash and liquidity: Cash was $8.3 million, essentially unchanged from year-end. Current assets were $142.1 million and current liabilities $172.1 million; current liabilities include substantial deferred revenue and customer obligations.
- Debt: $122.4 million outstanding under the secured revolving credit facility, reported net of unamortized costs at $121.8 million. The facility matures June 2023; no scheduled principal repayment is due before 2023. The company reported compliance with its financial covenants.
- Other balance-sheet items: Total assets were $464.1 million and stockholders’ equity $107.4 million. Deferred revenue increased to $157.6 million from $152.2 million at year-end.
Material changes versus the prior year
- Revenue fell mainly because Tucows sold most Ting Mobile customer relationships to DISH in August 2020 and shut down Roam Mobility. Retail mobile revenue declined 90% to $2.0 million; new mobile platform and professional-services revenue partly offset the decline.
- The company recorded $5.4 million of income associated with the DISH customer-asset sale in Q1 2021, classified outside revenue as a gain on sale. DISH payments are linked to margins on transferred customers over a 10-year period.
- Domain Services grew as registrations and reseller activity increased; domains under management reached 25.8 million, up 1.9 million year over year. Management cautioned pandemic-driven growth may not persist.
- Fiber revenue and the footprint expanded: 17,000 subscribers and 65,000 serviceable addresses, compared with 12,000 and 45,000 a year earlier. Fiber investment and network costs rose ahead of expected revenue growth.
- Segment reporting was reorganized into Fiber Internet, Mobile Services and Domain Services; prior-year segment figures were reclassified for comparison.
Outlook, risks and unusual items
- Management said operating cash flow should cover anticipated working capital, capital expenditures and loan repayments for at least the next 12 months. It expects fiber-network capital expenditures to continue increasing during 2021; no formal earnings or revenue guidance was provided.
- Management reported limited COVID-19 impact to date and expected limited effects through the rest of 2021 if the pandemic persisted. It noted that domain-registration growth associated with the pandemic may plateau and that installation constraints had slowed fiber customer acquisition, although fiber growth had resumed.
- Mobile Services is in transition from retail MVNO activity toward MSE and professional services. DISH was the sole MSE customer, creating customer-concentration and subscriber-volume risks. The company also retained obligations under an excluded mobile-network agreement, including minimum revenue commitments and potential penalties.
- Fiber build-outs require substantial upfront investment and may not be recovered if competition, technology or regulation changes. Domain Services faces pricing pressure, competition, and expected declines in surname-domain portfolio revenue. Foreign-exchange exposure remains; a modeled 10% adverse currency move would reduce quarterly net income by approximately $1.4 million before hedging.
- The $70 million interest-rate swap partially hedges variable-rate debt. A 1% adverse interest-rate change was estimated to increase annual interest payments by about $0.5 million after hedging. LIBOR transition will require amendments to the credit facility and swap arrangements.
- The company reported no material expected adverse effect from ordinary-course legal claims, no goodwill impairment, and no material COVID-related impairment anticipated. It was awaiting the IRS’s final response on a previously filed accounting-method relief request; management considered acceptance more likely than not.
- The board authorized a new share-repurchase program of up to $40 million through February 9, 2022; no shares were repurchased in Q1. Any repurchases may require lender consent if a specified leverage threshold is exceeded.
Key facts for investors to verify
- Whether the DISH-related payment stream, MSE relationship and subscriber economics develop as expected, given DISH’s concentration in Mobile Services and accounts receivable.
- Whether domain growth and reseller renewals remain durable if pandemic-driven demand normalizes, and how continuing eNom customer erosion and surname-portfolio declines affect results.
- Fiber subscriber additions, network utilization, capital spending and the timing of returns on the expanding fiber footprint.
- Debt covenant headroom, refinancing or repayment plans ahead of the June 2023 maturity, and sensitivity to interest rates and the LIBOR transition.
- The sustainability of operating cash flow and adjusted EBITDA, including the effects of working-capital movements, capital expenditures and the DISH-related gain.
- Collection of receivables: DISH represented 49% of accounts receivable at March 31, 2021, although no customer exceeded 10% of quarterly revenue.