Tucows Inc. — Q1 2015 Form 10-Q
Business context and period: Unaudited results for the three months ended March 31, 2015, compared with Q1 2014; balance sheet compared with December 31, 2014. Amounts are in U.S. dollars. Tucows provides domain services and network access services, including Ting mobile service and, following a February acquisition, fixed internet access in Virginia.
Financial performance and liquidity
| Metric | Q1 2015 | Q1 2014 / comparison |
|---|---|---|
| Revenue | $40.47 million | $34.40 million; up 18% |
| Gross profit and margin | $12.22 million; 30.2% | $8.76 million; 25.5% |
| Operating income and margin | $4.41 million; 10.9% | $0.80 million; 2.3% |
| Net income | $2.83 million; diluted EPS $0.24 | $0.48 million; diluted EPS $0.04 |
| Operating cash flow | $2.94 million provided | $0.04 million used |
| Cash and cash equivalents | $13.68 million at March 31 | $8.27 million at December 31, 2014 |
| Total assets / stockholders’ equity | $133.70 million / $31.01 million | $125.80 million / $35.64 million at December 31, 2014 |
Revenue growth was principally driven by Network Access Services: Ting revenue rose 93% to $12.93 million, while Domain Services revenue was nearly flat at $27.54 million. Ting had approximately 103,000 subscribers and 163,000 devices under management, versus 61,000 and 94,000 a year earlier. Domain registrations processed were approximately 2.50 million, nearly unchanged, while domains under management declined to 13.55 million from 14.18 million.
Cost of revenues increased 10% to $28.25 million, slower than revenue growth; reported gross margin consequently improved. Income taxes were $1.55 million on $4.39 million of pretax income. The company repurchased 407,996 shares for $7.71 million during the quarter. Cash also benefited from $6.62 million received in connection with the .online arrangement and $3.5 million of loan proceeds; investing activities provided $6.02 million overall.
Current assets were $75.61 million and current liabilities $77.24 million at quarter-end. Current liabilities included $57.63 million of current deferred revenue; total deferred revenue was $73.29 million. The balance sheet reported a $3.5 million loan payable. The credit facility provides up to $14 million in revolving facilities, in addition to separate treasury-risk and operating-loan facilities; the company reported covenant compliance.
Material changes, outlook, and risks
- Acquisition: Tucows acquired 70% of Ting Virginia, LLC and the Blue Ridge InternetWorks group on February 27 for approximately $3.6 million in cash consideration, assumed debt, and a $3.0 million redeemable non-controlling interest. Options provide for potential additional purchases and a put requiring purchase of the remaining minority interest for $3.6 million on the fourth anniversary.
- .online arrangement: The company ended its proposed joint venture and entered a joint marketing agreement. It received $6.62 million; $1.5 million associated with the marketing arrangements is to be recognized evenly over three years once .online is generally available.
- Management outlook: No specific revenue or earnings guidance is provided. Management said operating cash flow should be adequate for working capital, capital expenditures, and loan repayments for at least the next 12 months. It also expects continued competitive and market pressures.
- Principal risks: Domain-services growth faces large customers migrating to their own accreditations and systems, pricing competition, and uncertainty around ICANN’s new gTLD program. Ting faces mobile-market competition, network-partner dependence, and potential subscriber churn. A hypothetical 10% adverse currency move was estimated to reduce quarterly net income by approximately $0.7 million.
- Currency and unusual items: Forward-contract losses were $0.96 million in the quarter, and derivative liabilities were $2.14 million at March 31. The company cited lower advertising yields and domain-sale variability, and recognized a portfolio revenue gain related to resolution of the .store auction.
- Controls and contingencies: Management stated disclosure controls were not effective because of a previously disclosed material weakness in internal control over financial reporting. Remediation was underway, with completion targeted during 2015, but success and timing were not assured. The company reported ordinary-course legal matters and did not expect them to have a material adverse effect.
Important facts for investors to verify
- Resolve the filing’s inconsistent descriptions of the $3.5 million borrowing: the balance sheet and loan note identify it as the DLR Loan, while the liquidity discussion describes the DLRR Loan as outstanding and the DLR Loan as repaid.
- Track whether Ting’s subscriber growth translates into sustainable margins as service costs increased with its larger customer base.
- Monitor domain volumes, large-customer migrations, and trends in value-added, advertising, and portfolio revenue.
- Assess the timing and accounting recognition of the .online proceeds, and the cash and financing implications of the Ting Virginia minority-interest options.
- Follow foreign-exchange exposure and hedge results, covenant compliance, and remediation of the disclosed material weakness.