Tucows Inc. — Q2 2013 Form 10-Q Summary
Business context and period. Tucows distributes domain registration and other internet services through wholesale, retail and portfolio businesses; retail includes Ting mobile service. This unaudited report covers the quarter and six months ended June 30, 2013. Amounts are in U.S. dollars.
Financial performance and position
| Metric | Q2 2013 | Q2 2012 | Six months 2013 | Six months 2012 |
|---|---|---|---|---|
| Revenue | $31.17 million | $28.15 million | $61.16 million | $55.69 million |
| Gross profit / margin | $6.71 million / 21.5% | $6.63 million / 23.5% | $13.19 million / 21.6% | $13.46 million / 24.2% |
| Operating income / margin | $0.89 million / 2.9% | $1.06 million / 3.8% | $1.19 million / 1.9% | $3.10 million / 5.6% |
| Net income | $0.59 million | $0.70 million | $0.66 million | $2.36 million |
| Diluted EPS | $0.01 | $0.01 | $0.01 | $0.05 |
- Cash flow: Six-month operating cash flow was $3.39 million, versus $2.08 million in 2012. Investing used $0.92 million, mainly for property and equipment; financing used $2.42 million. Cash increased $0.05 million to $6.47 million from year-end.
- Liquidity and debt: At June 30, cash was $6.47 million and current assets were $64.32 million against current liabilities of $77.03 million. Loan payable was $7.50 million, with $7.50 million remaining available under the $14 million credit facility. The company reported compliance with loan covenants.
- Balance sheet: Total assets were $119.10 million and stockholders’ equity was $20.71 million, down from $26.55 million at year-end 2012. Deferred revenue was $73.0 million, compared with $74.5 million a year earlier.
Changes versus prior comparable periods
- Q2 revenue rose 11%; six-month revenue rose 10%. Retail revenue grew to $5.74 million in Q2 from $2.30 million, primarily from Ting device and service sales and improved retail marketing. Ting had 25,000 subscribers and 40,000 devices under management at quarter-end.
- Wholesale revenue was nearly flat in Q2 and up 2% for the six months. Management cited customers moving registrations to their own registrar accreditations and scaled-back vendor and reseller marketing programs. Domain registration transactions declined year over year, while total domains under management rose 3% to 14.2 million.
- Portfolio revenue declined to $1.08 million in Q2 and $2.21 million for the six months, reflecting lower domain sales and advertising revenue.
- Cost of revenue increased 14% in both periods, faster than revenue growth. Gross margin contracted; Q2 gross profit was only modestly higher, while six-month gross profit declined. Sales and marketing expense rose 43% in Q2, largely due to Ting; a $0.5 million Ontario digital media tax credit helped reduce technical development expense in Q2.
- Six-month results also compare against $0.53 million of other income in 2012 from selling intangible assets. Currency-forward results shifted to a $0.38 million loss in the first half of 2013 from a $0.18 million gain in 2012.
Outlook, commentary, risks and unusual items
- Management stated operating cash flow should be adequate for working capital, capital expenditures and loan repayments for at least the next 12 months. The filing provides no quantified revenue or earnings guidance.
- Management identified competition and pricing pressure, changing domain-registration patterns, uncertainty around ICANN’s new gTLD program, and possible reductions in vendor marketing funds as risks. Portfolio advertising and domain-sale revenue may fluctuate, and domain sales can reduce advertising revenue.
- Revenue is primarily in U.S. dollars while a substantial portion of expenses is in Canadian dollars. A hypothetical 10% adverse foreign-exchange movement was estimated to reduce Q2 net income by approximately $0.5 million. At quarter-end, forward contracts had $18.1 million notional value and a $0.80 million liability; July contracts added $20.4 million notional value at an average rate of US$1.00 to C$1.0630.
- The company repurchased 4.11 million shares for $6.17 million in a January Dutch auction tender offer, funded partly by a $5.2 million credit-facility draw; it also repurchased 143,073 shares for $0.26 million under a subsequent buyback program. These repurchases reduced shares outstanding and equity.
- Management said ordinary-course legal claims were not expected to have a material adverse effect, while noting litigation can still entail expense and management distraction. The company reported no material change in internal controls and concluded disclosure controls were effective.
Important facts for investors to verify
- Whether Ting’s revenue growth can translate into improved profitability, given rising retail costs and sales and marketing spending.
- Whether wholesale customer migration and lower registration transactions continue, and how new gTLD developments affect volumes and revenue.
- Cash generation, working-capital requirements, debt repayments, available borrowing capacity and continued covenant compliance.
- The economic impact of Canadian-dollar movements and the coverage, valuation and settlement of foreign-exchange contracts.
- Subsequent outcomes and accounting for the July 2013 gTLD arrangements and forward contracts, and any material developments in tax reviews or legal matters.