Tucows Inc. — FY2018 Form 10-K
Reporting period: Fiscal year ended December 31, 2018; filed March 5, 2019. Amounts are U.S. dollars unless noted. Tucows operates Network Access Services (Ting Mobile, Ting Internet and related services) and Domain Services (wholesale and retail domain registration, value-added services and domain portfolio).
Financial performance and liquidity
| Metric | FY2018 | FY2017 | Change |
|---|---|---|---|
| Revenue | $346.0 million | $329.4 million | +5% |
| Gross profit / margin | $96.8 million / 28.0% | $84.5 million / 25.7% | Margin +2.3 percentage points |
| Operating income / margin | $29.3 million / 8.5% | $27.1 million / 8.2% | +8% operating income |
| Net income | $17.1 million | $22.3 million | -23% |
| Diluted EPS | $1.59 | $2.07 | -23% |
| Adjusted EBITDA (non-GAAP) | $50.1 million | $41.4 million | +21% |
| Cash from operations | $37.2 million | $31.9 million | +17% |
| Cash and cash equivalents at year-end | $12.6 million | $18.0 million | Down $5.4 million |
| Debt at year-end | $64.6 million | $76.9 million | Down $12.3 million |
Network Access revenue was $97.3 million, up 9%; Domain Services revenue was $248.7 million, up 4%. Cash used in investing was $29.7 million, including $27.9 million of property and equipment investment, primarily for fiber expansion. Financing used $12.9 million, including $19.6 million of debt repayments and $7.0 million of new borrowing. Cash decreased by $5.4 million over the year.
Current assets were $131.9 million and current liabilities $165.3 million at year-end (current ratio approximately 0.80). These include substantial prepaid registry costs and deferred revenue associated with the domain business. Debt is variable-rate and secured by substantially all personal property and assets; scheduled principal repayments were $18.4 million in 2019, $18.4 million in 2020 and $28.4 million in 2021. The company reported compliance with its debt covenants at December 31, 2018.
Material changes versus comparable periods
- Revenue growth reflected the full-year contribution of prior-year acquisitions, Ting Internet expansion, growth in Ting Mobile and wholesale domains, and $16.9 million of accelerated revenue recognition from Namecheap domain transfers. Related accelerated cost of revenue was $16.7 million.
- Domain names under management fell to 23.3 million from 27.7 million, principally after approximately 2.8 million Namecheap domains were transferred during 2018. New, renewed and transferred-in registrations declined to 17.4 million from 19.4 million.
- Ting Mobile had approximately 163,000 subscribers, versus 166,000 a year earlier, while devices under management increased to 296,000 from 282,000. Mobile service revenue rose, but hardware revenue declined.
- Net income fell despite higher revenue and operating income, largely because income tax expense rose to $9.0 million from $1.7 million. FY2017 benefited from tax-reform-related and share-based compensation tax benefits; FY2018 included a $2.8 million expense from valuation allowances on foreign tax credits and losses.
- FY2018 fourth-quarter revenue was $85.6 million versus $90.6 million in Q4 2017; quarterly net income was $4.4 million versus $11.2 million.
Outlook, commentary, risks and unusual items
- Management expected 2019 revenue contributions from continued Ting Internet expansion, including planned Raleigh-Durham construction and additional communities. Fiber capital spending was expected to remain significant.
- Management expected sales and marketing, technical operations and development, and general and administrative expenses to increase in absolute dollars in 2019, excluding exchange-rate effects.
- Management stated operating cash flow should cover anticipated working capital, capital expenditures and loan repayments for at least the next 12 months, while noting that further financing could be needed for faster expansion, product development or acquisitions.
- Risks include intense wireless, broadband and domain-registration competition; mobile subscriber churn and pricing pressure; dependence on T-Mobile and Sprint networks and the proposed merger review; execution and returns on fiber investments; domain customer migration to their own registrar credentials; registry fee increases; cybersecurity and privacy exposure; and foreign-exchange and tax uncertainty.
- The Namecheap dispute was settled and dismissed in September 2018; remaining approximately 0.2 million names were expected to transfer in Q1 2019. The bulk transfers accelerated recognition of revenue and associated registry costs, with limited immediate gross-profit contribution.
- The company adopted ASC 606 using the modified retrospective method, recording a $1.1 million increase to opening retained earnings. It expected adoption of lease accounting in 2019 to materially increase balance-sheet assets and liabilities; quantification was not final.
- A new buyback authorization of up to $40 million was approved in February 2019, but the company had no obligation to repurchase a particular amount. No shares were repurchased under the preceding 2018 authorization. No cash dividends were paid.
Important facts for investors to verify
- Underlying Domain Services performance and renewal trends excluding the one-time Namecheap revenue and cost acceleration; monitor domain counts and ongoing customer attrition.
- Ting Mobile subscriber retention and economics, and the terms and continuity of its network access following the T-Mobile/Sprint merger process.
- Fiber build-out spending, subscriber uptake, returns on invested capital and debt repayment capacity.
- Drivers of the higher FY2018 effective tax rate, recoverability of deferred tax assets and outcome of the prepaid-registry-fee tax-method position.
- Actual use of the $40 million buyback authorization and the impact of the new lease standard on reported liabilities and liquidity.
KPMG issued unqualified opinions on the consolidated financial statements and internal control over financial reporting; management also concluded controls were effective as of year-end.