Tucows Inc. — Q2 2020 Form 10-Q
Reporting period: Three and six months ended June 30, 2020. Financial amounts below are U.S. dollars. Tucows operates Network Access Services, including mobile and fiber internet, and Domain Services, including wholesale and retail domain registration.
Financial results
| Metric | Q2 2020 | Q2 2019 | Six months 2020 | Six months 2019 |
|---|---|---|---|---|
| Revenue | $82.1m | $84.1m | $166.1m | $163.1m |
| Gross profit | $23.0m | $24.5m | $48.1m | $47.2m |
| Gross margin | 28.0% | 29.1% | 29.0% | 28.9% |
| Operating income | $1.5m | $5.7m | $6.7m | $10.8m |
| Net income | $0.2m | $2.6m | $3.0m | $5.4m |
| Diluted earnings per share | $0.01 | $0.24 | $0.28 | $0.50 |
| Operating cash flow | $8.9m | $7.0m | $23.0m | $16.0m |
- Q2 revenue declined 2%, as mobile revenue fell amid reduced usage and subscriber losses related to COVID-19. Six-month revenue rose 2%, supported by Cedar and the inclusion of a full six months of Ascio revenue.
- Domain Services generated $60.1m of Q2 revenue, approximately 73% of total revenue; Network Access Services generated $22.0m. Q2 mobile revenue declined 16% year over year, while other Network Access Services revenue increased 69%.
- Q2 operating income and net income fell substantially year over year. Results included a $1.5m impairment of Ting TV property and equipment and a $1.4m impairment of Roam Mobility customer relationships. Higher depreciation, amortization and operating expenses also weighed on operating income. The Q2 effective tax rate was 74%, which management attributed in part to impairment-related losses whose tax benefit was only partially recognized.
- Adjusted EBITDA, a non-GAAP measure, was $12.2m in Q2, up 6%, and $24.9m for the first half, up 19%. Management attributed growth mainly to Ting Fiber in Q2 and to Ascio synergies and Ting Fiber for the first half; mobile and eNom performance partly offset the increases.
- At June 30, cash was $8.9m, down from $20.4m at year-end 2019. Current assets were $141.6m and current liabilities $165.1m. Operating cash flow for the first half was $23.0m; investing activities used $30.9m, including $22.1m for property and equipment and $8.8m for Cedar. Cash declined $11.5m over the six months.
- Credit-facility borrowings were $114.4m gross ($113.6m net carrying value), with no scheduled principal repayments before maturity in June 2023. The secured revolving facility provides access to up to $240m, including a $60m accordion. Tucows reported compliance with its financial covenants at June 30.
Material changes, outlook and risks
- In June, Tucows decided to discontinue Roam Mobility because pandemic-related travel restrictions sharply reduced demand. It recorded the impairment noted above and recognized all previously deferred Roam revenue by June 30.
- On August 1, 2020, after quarter-end, Tucows sold most Ting Mobile customer accounts and related inventory to DISH. Consideration includes a working-capital payment, DISH’s assumption of certain liabilities and a 10-year payment stream tied to revenue from transferred subscribers; the filing does not provide a fixed total purchase price. Tucows also entered into a four-year mobile service-enabler agreement with DISH and a transitional-services agreement with a term of up to five years.
- Tucows retains minimum revenue commitments of $51.5m under an MNO contract associated with customer accounts excluded from the sale. The company expects to continue adding customers under that contract with DISH’s cooperation, but warns it may not meet the commitments and could incur penalties.
- Domain Services benefited from increased registrations among some resellers during the pandemic, but management cautioned that this growth may not persist. Total domains under management were 24.6m, down 0.4m from a year earlier, primarily due to erosion among non-core eNom customers. Tucows expects portfolio revenue to decline materially after disposing of most of its domain portfolio in 2019.
- Fiber internet expansion and the Cedar acquisition supported growth. Management expects fiber capital expenditures to increase during 2020 and said operating cash flow should cover anticipated working capital, capital expenditures and debt requirements for at least 12 months. It also cited risks that competition, regulatory or technology changes could limit returns on fiber investment.
- Management said COVID-19 had chiefly affected mobile services: lower mobile usage and business-account churn, and the shutdown of Roam. Fiber installations slowed initially but resumed with a lower-risk installation process; Domain Services had not experienced material pandemic-related disruption. The company warned that the pandemic’s duration and effects remain uncertain.
- Other key risks include mobile network partner relationships and minimum commitments, competition and customer churn, foreign-exchange exposure, interest-rate changes, acquisition integration, and the ability to collect the DISH payment stream. Tucows had $70m notionally covered by an interest-rate swap and reported $52.1m of currency forwards outstanding.
Important facts for investors to verify
- Terms, accounting treatment and actual collections under the DISH 10-year revenue-based payment stream, including subscriber retention and the effect of DISH-controlled pricing and costs.
- How Tucows will satisfy the retained $51.5m MNO minimum commitments and whether penalties or additional costs arise.
- Fiber capital-spending plans, subscriber growth and returns on expanded network infrastructure, alongside the stated expectation of higher 2020 capital expenditures.
- Whether domain-registration growth during the pandemic is sustained and whether eNom customer erosion continues.
- Future liquidity and covenant headroom given the cash decline, continued fiber investment and $114.4m gross credit-facility borrowing.