Tucows Inc. — Q1 2022 Form 10-Q
Reporting period: Three months ended March 31, 2022. Amounts are in U.S. dollars; financial-statement amounts are in millions unless stated otherwise.
Business context
Tucows provides fiber internet access, communications-service-provider software and services, and domain registration and related services. In Q1 2022, it reorganized reporting into Fiber Internet Services, Platform Services and Domain Services; prior-period segment results were reclassified. The change reflects a shift away from retail mobile services toward platform services.
Financial performance and liquidity
| Metric | Q1 2022 | Q1 2021 |
|---|---|---|
| Revenue | $81.1 | $70.9 |
| Gross profit / gross margin | $21.2 / 26.1% | $17.5 / 24.6% |
| Operating income (loss) | $(4.8) | $(1.1) |
| Net income (loss) | $(3.0) | $2.1 |
| Adjusted EBITDA (non-GAAP) | $11.3 | $12.7 |
| Cash from operating activities | $5.4 | $14.1 |
| Capital expenditures | $23.1 | $13.9 |
Revenue grew 14%. Fiber Internet revenue rose to $9.8 million from $5.1 million, and Platform Services revenue reached $6.8 million from $0.6 million. Domain Services revenue was broadly stable at $61.5 million versus $61.2 million. Gross margin improved, but operating and net results weakened; higher operating expenses, depreciation and interest contributed. Adjusted EBITDA declined about 11%.
Operating cash flow fell 62%. Investing cash outflow was $23.1 million, primarily for fiber-network expansion; operating cash flow less capital expenditures was approximately negative $17.6 million. Cash ended the quarter at $6.2 million, down from $9.1 million at year-end. Current assets were $154.2 million and current liabilities $182.8 million, a working-capital deficit of about $28.6 million.
Outstanding revolver borrowings were $207.9 million under a $240 million credit facility, compared with $191.4 million at December 31, 2021. The facility matures in June 2023, with scheduled principal repayment shown in 2023. The company reported compliance with its financial covenants at March 31, 2022. Debt is secured by substantially all personal property and assets.
Material changes and notable items
- Fiber revenue growth reflected subscriber gains, expanded network reach and the Simply Bits acquisition. Ting Internet reported 28,000 accounts under management, 81,000 owned-infrastructure serviceable addresses and 17,000 partner-infrastructure serviceable addresses.
- Platform Services growth was driven primarily by additional DISH subscribers migrating to Tucows’ MONOS platform. Management warns that external platform and professional-services revenue is concentrated in DISH and depends in part on its subscriber volumes.
- Domain names under management fell to 25.0 million from 25.8 million a year earlier; new, renewed and transferred-in domain transactions were 5.951 million versus 6.247 million. Management cited normalization after pandemic-era growth.
- The company recorded $4.8 million of income from the Ting customer-asset sale payment stream from DISH, versus $5.4 million a year earlier. This is reported as other income, not revenue, and management expects the payment stream to decline as transferred subscribers churn.
- Sales and marketing expense increased 44% to $12.0 million, and general and administrative expense increased 47% to $7.3 million. Management cited fiber expansion, Wavelo hiring and growth in acquired teams, among other factors.
- The company accrued $0.3 million in penalties for failing to meet minimum commitments with a retained mobile-network partner and expects further penalties through fiscal 2022 and thereafter until the contract ends.
Outlook, risks and contingencies
- No specific revenue or earnings guidance is provided. Management expects fiber-network capital expenditures to continue increasing during fiscal 2022 and is exploring additional financing to support planned expansion. It cautions that financing may not be available on favorable terms, or at all, and any equity financing could dilute shareholders.
- Key risks include the high level of debt and upcoming facility maturity, covenant compliance, interest-rate exposure, and dependence on external financing for fiber investment. A one-percentage-point adverse interest-rate move was estimated to increase annual interest payments by approximately $1.4 million after hedging, assuming the quarter-end debt balance remained outstanding for a year.
- Other risks include competition and pricing pressure in domain services, foreign-exchange exposure from Canadian-dollar costs, dependence on DISH for platform activity and the sale-payment stream, and possible losses on fiber build-outs if demand, regulation or competition do not support recovery of investment.
- Management described COVID-19’s financial and operational impact as limited and expected limited impact through the upcoming fiscal year, while noting uncertainty remains. Ordinary-course legal matters were not believed likely to have a material adverse effect. Management reported effective disclosure controls and no material change in internal controls.
Important facts for investors to verify
- Progress on refinancing or other financing before the June 2023 credit-facility maturity, covenant headroom, and the effect of further fiber capital spending on liquidity.
- DISH platform revenue concentration, subscriber migration and retention, receivable collection, and the durability of the DISH payment stream; DISH represented 46% of accounts receivable at quarter-end.
- Fiber subscriber additions and network utilization relative to the substantial upfront build costs and management’s expected higher fiscal 2022 capital expenditures.
- Whether domain registrations, renewals and names-related advertising stabilize after the reported declines and post-pandemic normalization.
- The amount and duration of penalties under the retained mobile-network minimum commitments, and the impact of LIBOR transition amendments to the credit facility and interest-rate swap.