TUCOWS INC. SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10-Q contains, in addition to historical information, forward-looking statements by us with regard to our expectations as to financial results and other aspects of our business that involve risks and uncertainties and may constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Words such as "may," "should," "anticipate," "believe," "plan," "estimate," "expect" and "intend," and other similar expressions are intended to identify forward-looking statements. The forward-looking statements contained in this report include statements regarding, among other things: the competition we expect to encounter as our business develops and competes in a broader range of Internet services; the Company's foreign currency requirements, specifically for the Canadian dollar; Ting mobile, Roam mobile and fixed Internet access subscriber growth and retention rates; our belief regarding the underlying platform for our domain services, our expectation regarding the trend of sales of domain names and advertising; our expectations regarding portfolio revenue, our belief that, by increasing the number of services we offer, we will be able to generate higher revenues; the revenue that our parked page vendor relationships may generate in the future; our expectation regarding litigation; the potential impact of current and pending claims on our business; our valuations of certain deferred tax assets; our expectation to collect our outstanding receivables, net of our allowance for doubtful accounts; our expectation regarding fluctuations in certain expense and cost categories; our expectations regarding our unrecognized tax; our expectations regarding cash from operations to fund our business; the impact of cancellations of or amendments to market development fund programs under which we receive funds, our expectation regarding our ability to manage realized gains/losses from foreign currency contracts; our expectations regarding increased price competition among MVNO; our expectations regarding costs associated with migrating Ting customers using the T-Mobile platform to an alternative platform, including Verizon; our expectations regarding our ability to complete the migration of customers from the T-Mobile platform in a timely manner; the impact of the COVID-19 outbreak on our business, operations and financial performance; and general business conditions and economic uncertainty. These statements are based on management's current expectations and are subject to a number of uncertainties and risks that could cause actual results to differ materially from those described in the forward-looking statements. Many factors affect our ability to achieve our objectives and to successfully develop and commercialize our services including:
• Changes in the nature of key strategic relationships with our MVNO partners;
• The effects of vigorous competition on a highly penetrated mobile
telephony market, including the impact of competition on the price we are
able to charge subscribers for services and devices and on the geographic
areas served by our MVNO partner wireless networks;
• Our ability to manage any potential increase in subscriber churn or bad
debt expense;
• Our ability to continue to generate sufficient working capital to meet our
operating requirements;
• Our ability to service our debt commitments;
• Our ability to maintain a good working relationship with our vendors and
customers;
• The ability of vendors to continue to supply our needs;
• Actions by our competitors;
• Our ability to attract and retain qualified personnel in our business;
• Our ability to effectively manage our business;
• The effects of any material impairment of our goodwill or other
indefinite-lived intangible assets;
• Our ability to obtain and maintain approvals from regulatory authorities
on regulatory issues;
• Our ability to invest in the build-out of fiber networks into selected
towns and cities to provide Internet access services to residential and
commercial customers while maintaining the development and sales of our
established services;
• Adverse tax consequences such as those related to changes in tax laws or
tax rates or their interpretations, including with respect to the impact
of the Tax Cuts and Jobs Act of 2017;
• The application of judgment in determining our global provision for income
taxes, deferred tax assets or liabilities or other tax liabilities given
the ultimate tax determination is uncertain;
• Our ability to effectively integrate acquisitions;
• Our ability to attract and retain customers by securing access to the
latest mobile network technology, and migrating existing customers when
necessary;
• Our ability to migrate existing T-Mobile customers to one of our MVNO
partners, in an efficient and cost-effective manner;
• Our ability to monitor, assess and respond to the rapidly changing impacts
of the COVID-19 pandemic. Our current assessment of expected impacts has
been included below as part of the Opportunities, Challenges & Risks
section
• Pending or new litigation; and
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• Factors set forth under the caption "Item 1A Risk Factors" in our Annual
Report on Form 10-K for the fiscal year ended December 31, 2019 filed with
the SEC on March 4, 2020 (the "2019 Annual Report").
As previously disclosed the under the caption "Item 1A Risk Factors" in our 2019
Annual Report, data protection regulations may impose legal obligations on us
that we cannot meet or that conflict with our ICANN contractual requirements.
This list of factors that may affect our future performance and financial and
competitive position and the accuracy of forward-looking statements is
illustrative, but it is by no means exhaustive. Accordingly, all forward-looking
statements should be evaluated with the understanding of their inherent
uncertainty. All forward-looking statements included in this document are based
on information available to us as of the date of this document, and we assume no
obligation to update these cautionary statements or any forward-looking
statements, except as required by law. These statements are not guarantees of
future performance.
We qualify all the forward-looking statements contained in this Quarterly Report on Form 10-Q by the foregoing cautionary statements.
OVERVIEW
Our mission is to provide simple useful services that help people unlock the power of the Internet.
We accomplish this by reducing the complexity of our customers' experience as they access the Internet (at home or on the go) and while using Internet services such as domain name registration, email and other Internet services. We are organized, managed and report our financial results as two segments, Network Access Services and Domain Services, which are differentiated primarily by their services, the markets they serve and the regulatory environments in which they operate. Our management regularly reviews our operating results on a consolidated basis, principally to make decisions about how we utilize our resources and to measure our consolidated operating performance. To assist us in forecasting growth and to help us monitor the effectiveness of our operational strategies, our management regularly reviews revenue for each of our service offerings in order to gain more depth and understanding of the key business metrics driving our business. Accordingly, we report Network Access Services and Domain Services revenue separately
For the three months ended
Network Access Services
Network Access Services includes mobile, fixed high-speed Internet access services and other revenues, including, billing solutions to small ISPs.
Our primary mobile service offering ("Ting Mobile") is mainly distributed
through the Ting website and to a lesser extent certain third-party retail
stores and on-line retailers. We generate revenues from the sale of retail
telephony services, mobile phone hardware and related accessories to individuals
and small businesses through the Ting website. Ting Mobile's primary focus is
providing simple and easy to use services, including simple value pricing, in
particular for multi-line accounts, and superior customer care. Our Roam
Mobility, Zipsim and Always Online Wireless brands (collectively "Roam Mobility
brands") operate as a MVNO on the same nationwide Global System for Mobile
communications network as Ting Mobile. Roam Mobility brands cater to
international travelers and distribute products through third-party retail
stores and product branded websites.
The Company also derives revenue from the sale of fixed high-speed Internet
access ("Ting Internet") in select towns throughout the United States , with
further expansion underway to both new and existing Ting towns. Our primary
sales channel of Ting Internet is through the Ting website. The primary focus of
Ting Internet is to provide reliable Gigabit Internet services to consumer and
business customers. On January 1, 2020 , the Company closed its previously
disclosed acquisition of Cedar Holdings Group, Incorporated ("Cedar"), a fiber
Internet provider business based in Durango, Colorado . Cedar is a
telecommunications provider serving multiple markets in the Western Slope of
Colorado and northwestern New Mexico . Cedar has focused the last several years
on building fiber to enterprise, anchor institution, and residential customers.
Revenues from Ting Mobile and Ting Internet are generated in the U.S. and are
provided on a monthly basis with no fixed contract term. Revenues from Roam
Mobility brands are generated in the U.S. and Canada on a prepaid usage basis
with no fixed contract terms.
As of March 31, 2020 , Ting managed mobile telephony services for approximately
272,000 subscribers and 154,000 accounts. For a discussion of subscribers and
how they impacted our financial results, see the Net Revenue discussion below.
Domain Services
Domain Services includes wholesale and retail domain name registration services,
value added services and portfolio services derived through our OpenSRS, eNom,
Ascio, EPAG and Hover brands. We earn revenues primarily from the registration
fees charged to resellers in connection with new, renewed and transferred domain
name registrations. In addition, we earn revenues from the sale of retail domain
name registration and email services to individuals and small businesses; and by
making our portfolio of domain names available for sale or lease. Domain
Services revenues are attributed to the country in which the contract
originates, mainly the Canadian and the U.S. Ascio domain services contracts,
which were acquired by the Company on March 18, 2019 , and EPAG primarily
originate in Europe .
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Our primary distribution channel is a global network of approximately 36,000
resellers that operate in over 150 countries and who typically provide their
customers, the end-users of Internet-based services, with solutions for
establishing and maintaining an online presence. Our primary focus is serving
the needs of this network of resellers by providing the broadest portfolio of
generic top-level domain ("gTLD") and the country code top-level domain options
and related services, a white-label platform that facilitates the provisioning
and management of domain names, a powerful Application Program Interface,
easy-to-use interfaces, comprehensive management and reporting tools, and
proactive and attentive customer service. Our services are integral to the
solutions that our resellers deliver to their customers. We provide "second
tier" support to our resellers by email, chat and phone in the event resellers
experience issues or problems with our services. In addition, our Network
Operating Center proactively monitors all services and network infrastructure to
address deficiencies before customer services are impacted.
We believe that the underlying platforms for our services are among the most
mature, reliable and functional reseller-oriented provisioning and management
platforms in our industry, and we continue to refine, evolve and improve these
services for both resellers and end-users. Our business model is characterized
primarily by non-refundable, up-front payments, which lead to recurring revenue
and positive operating cash flow.
Wholesale, primarily branded as OpenSRS, eNom, EPAG and Ascio, derives revenue
from its domain service and from providing value-added services. The OpenSRS,
eNom, EPAG and Ascio domain services manage 23.9 million domain names under the
Tucows , eNom, EPAG and Ascio ICANN registrar accreditations and for other
registrars under their own accreditations, which has decreased by 1.3 million
domain names since March 31, 2019 . The decrease is driven by the continued
erosion of registrations related to non-core customers from our Enom brand.
Value-Added Services include hosted email which provides email delivery and
webmail access to millions of mailboxes, Internet security services, Internet
hosting, WHOIS privacy, publishing tools and other value-added services. All of
these services are made available to end-users through a network of 36,000 web
hosts, ISPs, and other resellers around the world. In addition, we also derive
revenue by monetizing domain names which are near the end of their lifecycle
through advertising revenue or auction sale.
Retail, primarily the Hover and eNom portfolio of websites, including eNom, eNom
Central and Bulkregister, derive revenues from the sale of domain name
registration and email services to individuals and small businesses. Retail also
includes our Personal Names Service - based on over 36,000 surname domains -
that allows roughly two-thirds of Americans to purchase an email address based
on their last name.
Portfolio generates revenue by offering names in our domain portfolio for resale through a number of distribution channels including our reseller network.
In the fourth quarter of 2019, the Company disposed of its entire domain portfolio, excluding surname domains used in the Realnames email service. The Company expects portfolio revenue to materially decline in Fiscal 2020 and thereafter.
KEY BUSINESS METRICS AND NON-GAAP MEASURES
We regularly review a number of business metrics, including the following key metrics and non-GAAP measures, to assist us in evaluating our business, measure the performance of our business model, identify trends impacting our business, determine resource allocations, formulate financial projections and make strategic business decisions. The following tables set forth the key business metrics which we believe are the primary indicators of our performance for the periods presented: Adjusted EBITDATucows reports all financial information in accordance withUnited States generally accepted accounting principles ("GAAP"). Along with this information, to assist financial statement users in an assessment of our historical performance, we typically disclose and discuss a non-GAAP financial measure, adjusted EBITDA, on investor conference calls and related events that exclude certain non-cash and other charges as we believe that the non-GAAP information enhances investors' overall understanding of our financial performance. Please see discussion of adjusted EBITDA in the Results of Operations section below. Ting Mobile For the Three Months EndedMarch 31, 2020 2019 (in '000's) Ting mobile accounts under management 154
160
Ting mobile subscribers under management 272 284 (1) For a discussion of these period-to-period changes in subscribers and
devices under management and how they impacted our financial results, see
the Net Revenues discussion below.
Ting Internet For the Three Months Ended March 31,
2020 2019
(in '000's)
Ting Internet accounts under management 12 8
Ting Internet serviceable addresses (1) 45 32
(1) Defined as premises to which Ting has the capability to provide a customer
connection in a service area.
For the Three Months Ended March
Domain Services 31,(1)
2020 2019
(in 000's)
Total new, renewed and transferred-in
domain name registrations provisioned 4,756 4,562
Domains under management Registered using Registrar Accreditation belonging to theTucows Group 19,145
20,208
Registered using Registrar Accreditation belonging to Resellers 4,750
4,999
Total domain names under management 23,895 25,207 (1) For a discussion of these period-to-period changes in the domains
provisioned and domains under management and how they impacted our financial
results see the Net Revenues discussion below.
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OPPORTUNITIES, CHALLENGES AND RISKS
Our revenue is primarily realized inU.S. dollars and a major portion of our operating expenses are paid in Canadian dollars. Fluctuations in the exchange rate between theU.S. dollar and the Canadian dollar may have a material effect on our business, financial condition and results from operations. In particular, we may be adversely affected by a significant weakening of theU.S. dollar against the Canadian dollar on a quarterly and an annual basis. Our policy with respect to foreign currency exposure is to manage our financial exposure to certain foreign exchange fluctuations with the objective of neutralizing some or all of the impact of foreign currency exchange movements by entering into foreign exchange forward contracts to mitigate the exchange risk on a portion of our Canadian dollar exposure. We may not always enter into such forward contracts and such contracts may not always be available and economical for us. Additionally, the forward rates established by the contracts may be less advantageous than the market rate upon settlement. Network Access Services As a MVNO our Ting Mobile service is reliant on our Mobile Network Operators ("MNOs") providing competitive networks. Our MNOs each continue to invest in network expansion and modernization to improve their competitive positions. Deployment of new and sophisticated technology on a very large-scale entails risks. Should they fail to implement, maintain and expand their network capacity and coverage, adapt to future changes in technologies and continued access to and deployment of adequate spectrum successfully, our ability to provide wireless services to our subscribers, to retain and attract subscribers and to maintain and grow our subscriber revenues could be adversely affected, which would negatively impact our operating margins. Ting Mobile enjoyed rapid growth in its first four years of operation with the growth slowing for the past two years. During the rapid growth phase, we were able to continue to grow gross customer additions and maintain a consistent churn rate, which allowed us to maintain net new customer additions despite the impact of churn on a fast-growing customer base. We have also been able to supplement organic growth with bulk migrations of customer bases of other MVNOs. We expect price competition to grow more intense in the industry which could result in increased customer churn or reductions of customer acquisition rates either of which could result in a further slowing growth rate or in certain cases, our ability to maintain growth. Two of our current MNOs, T-Mobile and Sprint, submitted a formal merger application to theFederal Communications Commission ("FCC ") in 2018, which has since been approved. InFebruary 2020 , the lawsuit filed by certain state attorneys general opposing the merger was overruled in favour of the merger. T-Mobile and Sprint successfully completed the merger onApril 1, 2020 . This consolidation of our MNOs could hinder our ability in the future to negotiate favourable rates and access to mobile services. OnFebruary 17, 2020 , the Company launched its mobile services with a new MNO partner, Verizon. As an ISP, we have invested and expect to continue to invest in new fiber to the home ("FTTH") deployments in select markets inthe United States . The investments are a reflection of our ongoing efforts to build FTTH network via public-private partnerships in communities we identify as having strong, unmet demand for FTTH services. Given the significant upfront build and operational investments for these FTTH deployments, there is risk that future technological and regulatory changes as well as competitive responses from incumbent local providers, may result in us not fully recovering these investments.
The communications industry continues to compete on the basis of network reach and performance, types of services and devices offered, and price.
Domain Services
The increased competition in the market for Internet services in recent years,
which we expect will continue to intensify in the short and long term, poses a
material risk for us. As new registrars are introduced, existing competitors
expand service offerings and competitors offer price discounts to gain market
share, we face pricing pressure, which can adversely impact our revenues and
profitability. To address these risks, we have focused on leveraging the
scalability of our infrastructure and our ability to provide proactive and
attentive customer service to aggressively compete to attract new customers and
to maintain existing customers.
Substantially all of our Domain Services revenue is derived from domain name
registrations and related value-added services from wholesale and retail
customers using our provisioning and management platforms. The market for
wholesale registrar services is both price sensitive and competitive and is
evolving with the introduction of new gTLDs, particularly for large volume
customers, such as large web hosting companies and owners of large portfolios of
domain names. We have a relatively limited ability to increase the pricing of
domain name registrations without negatively impacting our ability to maintain
or grow our customer base. Growth in our Domain Services revenue is dependent
upon our ability to continue to attract and retain customers by maintaining
consistent domain name registration and value-added service renewal rates and to
grow our customer relationships through refining, evolving and improving our
provisioning platforms and customer service for both resellers and end-users. In
addition, we also generate revenue through pay-per-click advertising and the
sale of names from our portfolio of domain names and through the OpenSRS Domain
Expiry Stream. The revenue associated with names sales and advertising has
recently experienced flat to declining trends due to the uncertainty around the
implementation of ICANN's New gTLD Program, lower traffic and advertising yields
in the marketplace, which we expect to continue.
From time-to-time certain of our vendors provide us with market development
funds to expand or maintain the market position for their services. Any decision
by these vendors to cancel or amend these programs for any reason may result in
payments in future periods not being commensurate with what we have achieved
during past periods.
Sales of domain names from our domain portfolio have a negative impact on our
advertising revenue as these names are no longer available for advertising
purposes. In addition, the timing of larger domain names portfolio sales is
unpredictable and may lead to significant quarterly fluctuations in our
Portfolio revenue. In the fourth quarter of 2019, the Company disposed of its
remaining domain portfolio, excluding surname domains used in the Realnames
email service. The Company expects portfolio revenue to materially decline in
Fiscal 2020 and thereafter.
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Table of Contents Critical Accounting Policies The preparation of our consolidated financial statements in conformity withU.S. GAAP requires us to make estimates and judgements that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. There have been no material changes to the critical accounting policies and estimates as previously disclosed in Part II, Item 7 of our 2019 Annual Report. For further information on our critical accounting policies and estimates, see Note 3 - Recent accounting pronouncements to the consolidated financial statements of the Company in Part I, Item 1 in this Quarterly Report on Form 10-Q. Current COVID-19 Response Our EmployeesTucows is a global business. Our first consideration during the global pandemic as a result of the disease caused by the novel strain of coronavirus ("COVID-19") outbreak is for the health and safety of our employees, our customers and their communities, all around the world.Tucows has long encouraged a culture of remote work even prior to this global pandemic, and onSunday March 8, 2020 Tucows' executive leadership announced that all employees who could conceivably work from home were encouraged to do so.Tucows is actively and strongly encouraging its workforce to heed travel and all other emergency advisories, including social distancing and where appropriate, self-isolation. We expect our work from home policy to remain in effect until emergency state and governmental declarations where we have physical offices have ended and we believe the risk of community spread of the disease has subsided. Given our experience with remote work prior to COVID-19, we do not expect to have productivity issues while the overwhelming majority of our office based workforce is dispersed. For the small group of employees who are unable work from home during this time, including our order fulfillment and Fiber installation teams, many of whom work in the field, they are encouraged to practice social distancing and to continue to follow hygiene best practices and safety protocols as outlined by theCenters for Disease Control and Prevention . At the initial stage of the COVID-19 outbreak, we took steps to cancel and reschedule all in-home installation and service appointments across ourTing Fiber footprint. Since then, the Ting Internet team has begun to rollout a install solution for our employees and customers that minimizes risks associated with person-to-person contact. Our Customers We recognize the important role we play within the Internet space and are committed to continue providing quality service during the COVID-19 outbreak. Services like individual and wholesale domain names, email and hosting do not rely on in-person interaction or the supply chain in the same way physical products and services do. We are providing uninterrupted services for all Domains related services, across our OpenSRS, Enom, Ascio, EPAG & Hover brands. Our Mobile services businesses are both without any physical storefronts, are similarly well-positioned to weather this event. We are fully prepared to continue providing uninterrupted services for all Mobile related services, across our Ting Mobile and Roam Mobility brands. We are committed to making sure no customer who is in need is without access to core mobile service while we work through this unprecedented situation together. Our Fiber Internet business does not have bandwidth caps or other such limitations. Likewise, our networks are built with the capacity to accommodate future needs. To help our customers remain connected at home during this time, we upgraded all our lower-tier fiber customers to symmetrical gigabit access at no charge. Any additional traffic from our customers working from home has not had and is not expected to have any negative impact on connectivity. As discussed above, our install solution was implemented in earlyMay 2020 . With this service limitation, new customer acquisition will remain slower than pre-pandemic levels of growth and installation. Even with an install solution that minimizes risks, customers may be unwilling to have service personnel visit their homes or offices. Our Community
From an early point in the current global crisis, it was clear to us that we were going to need to do something new and different in how we responded to COVID-19 related domain registrations. Many of these domains are registered for good, helpful purposes, such as community organization, dissemination of healthcare information, and recording people's experiences through this pandemic. Others, however, purport to sell COVID-19 cures, vaccines, or tests, none of which are legitimately available on the market at the time of the registration and many of which pose a significant health risk to the general public. There are three major components to our COVID-19 activities related to domain registrations: (i) identification, (ii) assessment for harm, and (iii) stakeholder engagement. It is important to note that our response to each and every issue that we find is contextual and dependent on the specific circumstances. We expect to return to our regular procedures as the pandemic and corresponding risks subsides. Although this approach vastly increases the burden on our compliance staff and puts us in the uncomfortable position of having to assess the level of harm represented by a COVID-related domain and the website to which it resolves - we feel these circumstances are exceptional and are determined to do our part. In order to provide Internet access and assistance to residents of cities and towns that are part of the Ting Fiber network, we have set up free, fiber-fed, drive-up Wi-Fi hotspots. These hotspots enable those with no home Internet access, or insufficient access, to access critical services like online learning and telehealth services, work remotely, check in on and access vital health, government and other services and generally access information. These hotspots will remain in operation as long as they are needed and as long as it is safe and prudent to do so.
We have not experienced any material resource constraints nor do we foresee requiring any material expenditures to continue to implement our business continuity plans described above.
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Current and expected COVID-19 Impacts
Financial & Operational Impacts
Further to the below discussion within this Quarterly Report around the financial condition and results of operations for the current period financial results, the current impact from COVID-19 has been quite limited given the outbreak came late into the first quarter of 2020. Management continues to assess the impact on a daily basis and expects greater impact through the second quarter of 2020, should the COVID-19 pandemic persist. On a segment basis, our current assessment is as follows:
Network Access - Mobile Services:
Both our Mobile Services businesses are completely online and do not rely on physical storefronts to attract or service customers' needs. We are fully prepared to continue to provide uninterrupted services to our customers both now and into the future. Although COVID-19 has impacted the demand for our Mobile services, the overall impact on our financial results is not material, nor do we expect it to substantially worsen over the coming months. Ting Mobile, our primary post-paid Mobile Services brand is an MVNO operating acrossthe United States . Through the end ofMarch 2020 , we saw a moderate drop in data usage by our customers, with some small uptake in voice and messaging usage. This is a direct result of social distancing measures enacted by state and local authorities acrossthe United States . With our customers staying indoors and working from home, they now rely on an increased use of home Wi-Fi networks rather than mobile data services. This reduced usage has since stabilized and we expect it to only return to pre-pandemic usage levels once social distancing measures are relaxed. Additionally, nearing the end ofMarch 2020 , we saw an increased churn rate of low-margin business accounts as their own businesses came to a halt. Our core consumer customer base remains intact and experiencing normal levels of growth and churn. We do not foresee any increased risk of churn or collection risk given our current situation. Although we maintain minimum purchase guarantees with our MNOs, we do not expect any material shortfalls with respect to reduced usage from COVID-19. Roam Mobility, our niche prepaid Mobile Services brand that provides Mobile Services for people travelling withinthe United States and Worldwide has accounted for the majority of the negative financial impact caused by COVID-19. The business relies on global travel as a key factor in its success. With travel restrictions and border closures essentially resulting in the halt of business and leisure travel, we have seen new revenues for Roam Mobility trend toward zero through the end ofMarch 2020 . We will continue to refund or defer service plan start dates for existing customers. Management has taken substantial measures to reduce and eliminate any unnecessary costs within that business. The assets associated with Roam are insignificant to the consolidated Company total. We continue to employ the small group of employees focused on the Roam Mobility brands. Given the current uncertainty around reopening of borders, easing of travel restrictions and consumers' level of comfort with business and leisure travel in a post pandemic world, we believe we will earn little to none of the$1.0 million of the second quarter 2020 revenues that we had previously forecasted for this business prior to onset of the COVID-19 pandemic.
Network Access - Other Services:
As discussed above, upon news of the COVID-19 outbreak, we took the major step to cancel and reschedule all in-home installation and service appointments across ourTing Fiber footprint. Since then, the Ting Internet team has begun to rollout a smart-install solution for our employees and customers alike. Although new customer installations have slowed, our existing customer base continues to provide recurring revenue for us to support this business. This is aided by our most recent acquisition of Cedar, which increased our revenues significantly in period. The negative impact posed by the COVID-19 outbreak is largely operational in nature as we have experienced delayed construction in parts of ourTing Fiber footprint and a halting of new installations for a period of time across our entire footprint. Those towns and cities that are serviceable for new customers' addresses will now have a reduced level of installation and setup relative to pre-pandemic conditions. We expect this segment to grow at a reduced rate until such time that this pandemic subsides and social distancing measures are relaxed. Domain Services: Domain Services are foundational to the functioning of the Internet. As discussed above, services like individual and wholesale domain names, email and hosting do not rely on in-person interaction or the supply chain in the same way physical products and services do. We have not experienced any COVID-19 related impacts, either financially or operationally for Domains related services, across our OpenSRS, Enom, Ascio, EPAG & Hover brands. Our results of operations for the current period financial results are in line with management's expectation for the period given product, customer mix and current brand trajectories. We will continue to monitor the impact but do not foresee any negative financial or operational impacts associated with this segment. 30
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Liquidity & Financial Resource Impacts
For a complete assessment of our liquidity and covenant positions please reference the relevant discussions within this Quarterly Report. We have experienced no significant change to our liquidity position or credit risk as a result of the financial and operational impacts related to COVID-19, as discussed above. Our cost or access to funding sources has not changed and is not reasonably likely to change in the near future as a result of the pandemic. Our sources and uses of cash have not been materially impacted and there is no known material uncertainty about our ongoing ability meet covenants or repayment terms of our credit agreements at this time.
Internal Controls over Financial Reporting
Tucows has long encouraged a culture of remote work even prior to COVID-19. Our financial reporting systems and our internal controls over financial reporting and disclosure controls and procedures are already adapted for a remote work environment. There have been no changes during the current period that as a result of COVID-19 would affect our ability to maintain these systems and controls.
COVID-19 Related Assistance & Support
Currently,Tucows has not received any form of financial or resource related assistance from any government or local authority. There do exist programs in the regions in which we operate that have been developed to support corporations likeTucows during this time, primarily in the form employee wage subsidization.Tucows will continue to investigate these programs as their details are refined and seek out application for any that make sense for our businesses. Across our businesses, we have been able to defer portions of installment taxes payable to various Government bodies as payment timelines have been extended in response to the pandemic. Accounting Policy Impacts Given the rapidly changing nature of COVID-19 developments and the current uncertainty around the length and severity these developments could create,Tucows does not have sufficient evidence to anticipate a material impairment with respect to goodwill, intangible assets, long-lived assets, or right of use assets. We will continue to monitor the impacts closely and as more information becomes available. We do not foresee any changes in accounting judgements in relation to COVID-19 that will have a material impact on our financial statements. 31
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RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED
NET REVENUES
Network Access Services
The Company generates Network Access Services revenues primarily through the
provisioning of mobile services. Other sources of revenue include the
provisioning of fixed high-speed Internet access as well as billing solutions to
ISPs.
Mobile Services
Ting Mobile wireless usage contracts grant customers access to standard talk,
text and data mobile services. Ting Mobile contracts are billed based on the
actual amount of monthly services utilized by each customer during their billing
cycle and charged to customers on a postpaid basis. Voice minutes, text messages
and megabytes of data are each billed separately based on a tiered pricing
program. The Company recognizes revenue for Ting Mobile usage based on the
actual amount of monthly services utilized by each customer.
Ting Mobile services are primarily contracted through the Ting website, for one
month at a time and contain no commitment to renew the contract following each
customer's monthly billing cycle. The Company's billing cycle for all Ting
Mobile customers is computed based on the customer's activation date. In order
to recognize revenue as the Company satisfies its obligations, we compute the
amount of revenues earned but not billed from the end of each billing cycle to
the end of each reporting period. In addition, revenues associated with the sale
of wireless devices and accessories are recognized when title and risk of loss
is transferred to the customer and shipment has occurred. Incentive marketing
credits given to customers are recorded as a reduction of revenue.
Our Roam Mobility brands also offer standard talk, text and data mobile
services. Roam customers prepay for their usage through the Roam Mobility
website. When prepayments are received the amount is deferred, and subsequently
recognized as the Company satisfies its obligation to provide mobile services.
In addition, revenues associated with the sale of SIM cards are recognized when
title and risk of loss is transferred to the subscriber and shipment has
occurred. Incentive marketing credits given to customers are recorded as a
reduction of revenue.
Other services
Other services derive revenues from providing Ting Internet to individuals and
small businesses in select cities. In addition, we provide billing, provisioning
and customer care software solutions to Internet Service Providers ("ISPs")
through our Platypus billing software. Ting Internet access contracts provide
customers Internet access at their home or business through the installation and
use of our fiber optic network. Ting Internet contracts are generally prepaid
and grant customers with unlimited bandwidth based on a fixed price per month
basis. Since consideration is collected before the service period, revenue is
initially deferred and recognized as the Company performs its obligation to
provide Internet access.
Ting Internet services are primarily contracted through the Ting website, for
one month at a time and contain no commitment to renew the contract following
each customer's monthly billing cycle. The Company's billing cycle for all Ting
Internet access customers is computed based on the customer's activation date.
In order to recognize revenue as the Company satisfies its obligations, we
compute the amount of revenues earned but not billed from the end of each
billing cycle to the end of each reporting period. In addition, revenues
associated with the sale of Internet hardware to subscribers are recognized when
title and risk of loss is transferred to the subscriber and shipment has
occurred. Incentive marketing credits given to customers are recorded as a
reduction of revenue.
In those cases, where payment is not received at the time of sale, revenue is
not recognized until contract inception unless the collection of the related
accounts receivable is reasonably assured. The Company records costs that
reflect expected refunds, rebates and credit card charge-backs as a reduction of
revenues at the time of the sale based on historical experiences and current
expectations.
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Table of Contents Domain Services Wholesale Domain registration contracts, which can be purchased for terms of one to ten years, provide our resellers and retail registrant customers with the exclusive right to a personalized internet address from which to build an online presence. The Company enters into domain registration contracts in connection with each new, renewed and transferred-in domain registration. At the inception of the contract, the Company charges and collects the registration fee for the entire registration period. Though fees are collected upfront, revenue from domain registrations are recognized rateably over the registration period as domain registration contracts contain a 'right to access' license of IP, which is a distinct performance obligation measured over time. The registration period begins once the Company has confirmed that the requested domain name has been appropriately recorded in the registry under contractual performance standards. Historically, our wholesale domain service has constituted the largest portion of our business and encompasses all of our services as an accredited registrar related to the registration, renewal, transfer and management of domain names. In addition, this service fuels other revenue categories as it often is the initial service for which a reseller will engage us, enabling us to follow on with other services and allowing us to add to our portfolio by purchasing names registered through us upon their expiration. Domain services will continue to be the largest portion of our business and will further fuel our ability to sell add-on services. The Company is an ICANN accredited registrar. Thus, the Company is the primary obligor with our reseller and retail registrant customers and is responsible for the fulfillment of our registrar services to those parties. As a result, the Company reports revenue in the amount of the fees we receive directly from our reseller and retail registrant customers. Our reseller customers maintain the primary obligor relationship with their retail customers, establish pricing and retain credit risk to those customers. Accordingly, the Company does not recognize any revenue related to transactions between our reseller customers and their ultimate retail customers.
Wholesale - Value-Added Services
We derive revenue from domain related value-added services like digital certifications, WHOIS privacy and hosted email and by providing our resellers and retail registrant customers with tools and additional functionality to be used in conjunction with domain registrations. All domain related value-added services are considered distinct performance obligations which transfer the promised service to the customer over the contracted term. Fees charged to customers for domain related value-added services are collected at the inception of the contract, and revenue is recognized on a straight-line basis over the contracted term, consistent with the satisfaction of the performance obligations.
We also derive revenue from other value-added services, which primarily consists of Internet hosting services on the OpenSRS and eNom domain expiry streams.
Retail
We derive revenues from Hover and eNom's retail properties through the sale of retail domain name registration and email services to individuals and small businesses.
Portfolio
The Company sells the rights to its portfolio domains or names acquired through
the Company's domain expiry stream. Revenue generated from sale of domain name
contracts, containing a distinct performance obligation to transfer the domain
name rights under the Company's control, is generally recognized once the rights
have been transferred and payment has been received in full. Domain portfolio
names are sold through our premium domain name service, auctions or in
negotiated sales. In the fourth quarter of 2019, the Company disposed of its
entire domain portfolio, excluding surname domains used in the Realnames email
service. The Company expects portfolio revenue to materially decline in Fiscal
2020 and thereafter.
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The following table presents our net revenues, by revenue source (Dollar amounts
in thousands of
(Dollar amounts in thousands of U.S. dollars) For the Three Months Ended March 31,
2020 2019
Network Access Services:
Mobile Services $ 20,148 $ 20,809
Other Services 4,308 2,443
Total Network Access Services 24,456 23,252
Domain Services:
Wholesale
Domain Services 45,964 42,591
Value Added Services 4,707 4,184
Total Wholesale 50,671 46,775
Retail 8,449 8,642
Portfolio 409 284
Total Domain Services 59,529 55,701
$ 83,985 $ 78,953
Increase over prior period $ 5,032
Increase - percentage 6 %
The following table presents our revenues, by revenue source, as a percentage of
total revenues (Dollar amounts in thousands of
For the Three Months Ended March 31,
2020 2019
Network Access Services:
Mobile Services 24 % 27 %
Other Services 5 % 3 %
Total Network Access Services 29 % 30 %
Domain Services:
Wholesale
Domain Services 55 % 54 %
Value Added Services 6 % 5 %
Total Wholesale 61 % 59 %
Retail 10 % 11 %
Portfolio 0 % 0 %
Total Domain Services 71 % 70 %
100 % 100 %
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Table of Contents
Total net revenues for the three months endedMarch 31, 2020 increased by$5.0 million , or 6%, to$84.0 million from$79.0 million when compared to the three months endedMarch 31, 2019 . The three-month increase in revenue was primarily driven by the$4.6 million of revenues attributable to our prior year acquisition of Ascio. Ascio revenues, which now represent a full quarter of earned revenue compared to the stub period of attributable revenue during the three months endedMarch 31, 2019 . Fiber access revenues increased$1.9 million driven by our current period acquisition of Cedar, a fiber Internet provider business based inDurango, Colorado as well as through the expansion of our existing Ting Internet footprint. The increases in revenues were offset by a further decrease in domain name services revenue of$0.8 million , related to a continued erosion in Wholesale domain registrations by non-core customer primarily from our existing Domain Services brands. Additionally, Mobile Services revenue decreased by$0.7 million due to a decrease in mobile subscribers and reduced usage related to COVID-19. Deferred revenue from domain name registrations and other Internet services atMarch 31, 2020 increased to$152.6 million from$149.3 million atDecember 31, 2019 primarily due to current period billings for domain name registration and service renewals. During the three months endedMarch 31, 2020 , no customer accounted for more than 10% of total revenue. For the three months endedMarch 31, 2019 , no customer accounted for more than 10% of total revenue. As atMarch 31, 2020 andDecember 31, 2019 , no customer accounted for more than 10% of accounts receivable. Though a significant portion of the Company's domain services revenues are prepaid by our customers, where the Company does collect receivables, significant management judgment is required at the time revenue is recorded to assess whether the collection of the resulting receivables is reasonably assured. On an ongoing basis, we assess the ability of our customers to make required payments. Based on this assessment, we expect the carrying amount of our outstanding receivables, net of allowance for doubtful accounts, to be fully collected. Network Access Services Mobile Services Net revenues from mobile phone equipment and services for the three months endedMarch 31, 2020 decreased by$0.7 million or 3% to$20.1 million as compared to the three months endedMarch 31, 2019 . This decrease reflects a decline in mobile service revenue, which decreased by$0.8 million compared toMarch 31, 2019 , to$18.6 million , as a result of a decline in mobile subscribers and reduced usage related to the COVID-19 pandemic. Revenues from the sale of mobile hardware and related accessories increased by$0.1 million compared toMarch 31, 2019 , to$1.6 million . The increase in device revenue was primarily driven by strong sales and refreshed product mix for devices compared to the three months endedMarch 31, 2019 .
As of
Other Services Other revenues from Ting Internet and billing solutions generated$4.3 million in revenue during the three months endedMarch 31, 2020 , up$1.9 million or 79% compared to the three months endedMarch 31, 2019 . This growth is driven by the current period acquisition of Cedar, a fiber Internet provider business based inDurango, Colorado . Cedar contributed$1.2 million of revenue in the current period, with$0.7 million related to the continued expansion of our Ting Internet footprint in existing Ting towns throughoutthe United States . As ofMarch 31, 2020 , Ting Internet had access to 45,000 serviceable addresses and 12,000 active accounts under its management compared to having access to 32,000 serviceable addresses and 8,000 active accounts under its management as ofMarch 31, 2019 . These figures include the increase in accounts and serviceable addresses attributable to the current period Cedar acquisition. 35
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Table of Contents Domain Services Wholesale During the three months endedMarch 31, 2020 , Wholesale domain services revenue increased by$3.4 million or 8% to$46.0 million , when compared to the three months endedMarch 31, 2019 . The three-month increase was primarily driven by a$4.6 million increase in revenue related to the prior year acquisition of Ascio. Ascio revenues now represent a full quarter of earned revenue compared to the stub period of attributable revenue during the three months endedMarch 31, 2019 . The increase was partially offset by a$1.2 million decrease in Wholesale domain revenue, driven by a decline in domain registrations by non-core customers from our eNom brand. Total domains that were managed under the OpenSRS, eNom, EPAG, and Ascio domain services decreased by 1.3 million domain names to 23.9 million as ofMarch 31, 2020 , when compared to 25.2 million atMarch 31, 2019 . The decrease is a driven by the continued erosion of registrations related to non-core customers from our eNom brand. During the three months endedMarch 31, 2020 , value-added services increased by$0.5 million to$4.7 million compared to the three months endedMarch 31, 2019 . The three-month increases were primarily driven by an increase in expiry revenue of$0.7 million , offset by a decrease in hosting revenue of$0.1 million . Retail Net revenues from retail for the three months endedMarch 31, 2020 , as compared to the three months endedMarch 31, 2019 , decreased by less than$0.2 million to$8.4 million . Revenue decreased as a result of a shrinking eNom customer base. Portfolio Net revenues from portfolio for the three months endedMarch 31, 2020 , increased by$0.1 million to$0.4 million , as compared to the three months endedMarch 31, 2019 , due to higher proceeds from individual portfolio sales compared to the three months endedMarch 31, 2019 . In the fourth quarter of 2019, the Company disposed of its entire domain portfolio, excluding surname domains used in the Realnames email service. The Company expects portfolio revenue to materially decline in Fiscal 2020 and thereafter. COST OF REVENUES Network Access Services Mobile Services Cost of revenues for mobile services includes the costs of provisioning mobile services, which is primarily our customers' voice, messaging, data usage provided by our Network Operators, and the costs of providing mobile phone hardware, which is the cost of mobile phone devices and SIM cards sold to our customers, order fulfillment related expenses, and inventory write-downs.
Other Services
Cost of revenues for other services primarily includes the costs for
provisioning high speed Internet access, which is comprised of network access
fees and software licenses and the costs of providing hardware. Hardware costs
are comprised of network routers sold to our customers, order fulfillment
related expenses, inventory write-downs and fees paid to third-party service
providers primarily for printing services in connection with billing services to
ISPs.
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Domain Services
Wholesale
Domain Service
Cost of revenues for domain registrations represents the amortization of
registry and accreditation fees on a basis consistent with the recognition of
revenues from our customers, namely rateably over the term of provision of the
service. Registry fees, the primary component of cost of revenues, are paid in
full when the domain is registered, and are initially recorded as prepaid domain
registry fees. This accounting treatment reasonably approximates a recognition
pattern that corresponds with the provision of the services during the period.
Market development funds that do not represent a payment for distinct goods or
services provided by the Company, and thus do not meet the criteria for revenue
recognition under ASU 2014-09, are reflected as cost of goods sold and are
recognized as earned.
Value-Added Services
Costs of revenues for value-added services include licensing and royalty costs
related to the provisioning of certain components of related to hosted email and
fees paid to third-party hosting services. Fees payable for trust certificates
are amortized on a basis consistent with the provision of service, generally one
year, while email hosting fees and monthly printing fees are included in cost of
revenues in the month they are incurred.
Retail
Costs of revenues for our provision and management of Internet services through
our retail sites, Hover.com and the eNom branded sites, include the amortization
of registry fees on a basis consistent with the recognition of revenues from our
customers, namely rateably over the term of provision of the service. Registry
fees, the primary component of cost of revenues, are paid in full when the
domain is registered, and are recorded as prepaid domain registry fees.
Portfolio
Costs of revenues for our portfolio represent the amortization of registry fees
for domains added to our portfolio over the renewal period, which is generally
one year, the value attributed under intangible assets to any domain name sold
and any impairment charges that may arise from our assessment of our domain name
intangible assets. Payments for domain registrations are payable for the full
term of service at the time of activation of service and are recorded as prepaid
domain registry fees and are expensed rateably over the renewal term.
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Table of Contents Network expenses
Network expenses include personnel and related expenses, depreciation and amortization, communication costs, equipment maintenance, stock-based compensation and employee and related costs directly associated with the management and maintenance of our network. Communication costs include bandwidth, co-location and provisioning costs we incur to support the supply of all our services.
The following table presents our cost of revenues, by revenue source:
(Dollar amounts in thousands of U.S. dollars) For the Three Months Ended March 31,
2020 2019
Network Access Services:
Mobile Services $ 9,857 $ 10,743
Other Services 1,716 1,069
Total Network Access Services 11,573 11,812
Domain Services:
Wholesale
Domain Services 36,469 34,839
Value Added Services 785 794
Total Wholesale 37,254 35,633
Retail 4,234 4,359
Portfolio 127 128
Total Domain Services 41,615 40,120
Network Expenses:
Network, other costs 2,416 2,395
Network, depreciation and amortization costs 3,231 1,975
5,647 4,370
$ 58,835 $ 56,302
Increase over prior period $ 2,533
Increase - percentage 4 %
The following table presents our cost of revenues, as a percentage of total cost of revenues for the periods presented:
For the Three Months Ended March 31,
2020 2019
Network Access Services:
Mobile Services 17 % 19 %
Other Services 3 % 2 %
Total Network Access Services 20 % 21 %
Domain Services:
Wholesale
Domain Services 63 % 62 %
Value Added Services 1 % 1 %
Total Wholesale 64 % 63 %
Retail 7 % 8 %
Portfolio 0 % 0 %
Total Domain Services 71 % 71 %
Network Expenses:
Network, other costs 4 % 4 %
Network, depreciation and amortization costs 5 % 4 %
9 % 8 %
100 % 100 %
Total cost of revenues for the three months ended March 31, 2020 , increased by
$2.5 million , or 4%, to $58.8 million from $56.3 million in the three months
ended March 31, 2019 . The three-month increase was driven by the $3.4 million
increase in costs attributable to our prior year acquisition of Ascio. Ascio
costs now represent a full quarter compared to the stub period of attributable
costs during the three months ended March 31, 2019 . The increase in cost of
revenue was also related to a $1.3 million increase in Network, depreciation and
amortization as well as a $0.6 million increase in direct Fiber Access costs,
both associated with the expanding Ting Internet footprint and the acquisition
of Cedar. These increases in cost of revenue were offset by a $1.9 million
decrease in domain services costs driven by the erosion in registrations by
non-core customers for our eNom brand, as well as a decrease of $0.9 million in
Mobile Services costs. Prepaid domain registration and other Internet services
fees as of March 31, 2020 increased by $2.8 million , or 3%, to $112.0 million
from $109.2 million at December 31, 2019 primarily due to current period domain
name registration and annual service renewals.
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Table of Contents Network Access Services Mobile Services Cost of revenues from mobile phone equipment and services for the three months endedMarch 31, 2020 , as compared to the three months endedMarch 31, 2019 , decreased by$0.9 million or 8% to$9.9 million . The decrease was primarily driven by reduced minimum commitment charges with network operators, which decreased by$0.9 million as compared to the three months endedMarch 31, 2019 . Furthermore, Mobile services across both Ting Mobile and Roam Mobility brands experienced a decline in mobile subscribers and reduced usage related to the COVID-19 pandemic, attributable to a decrease in costs of$0.4 million . These decreases in costs of revenue were offset by a$0.4 million increase in network set-up and international long distance charges incurred by Ting Mobile in the period as well as a$0.1 million increase in device costs. Other Services During the three months endedMarch 31, 2020 , costs related to provisioning high speed Internet access and billing solutions increased$0.6 million or 55%, to$1.7 million as compared to$1.1 million during three months endedMarch 31, 2019 . The increase in costs were primarily driven by increased direct costs and bandwidth costs related to the continued expansion of the Ting Fiber network, for both existing towns and cities as well as those acquired via the Cedar acquisition. Domain Services Wholesale Domain Service Costs for Wholesale domain services for the three months endedMarch 31, 2020 increased by$1.7 million to$36.5 million , when compared to the three months endedMarch 31, 2019 . The increase was primarily driven by$3.4 million increase related to the acquisition of Ascio. Ascio costs now represent a full quarter compared to the stub period of attributable costs during the three months endedMarch 31, 2019 . This increase was offset by a$1.8 million decrease in wholesale domain services costs driven by the erosion in registrations by non-core customers for our eNom brand. Value-Added Services
Costs for wholesale value-added services for the three months ended
Retail Costs for retail for the three months endedMarch 31, 2020 decreased by$0.2 million , to$4.2 million as compared to the three months endedMarch 31, 2019 . The decrease was a result of an overall declining volume of transactions related to the eNom retail brands. Portfolio Costs for portfolio for the three months endedMarch 31, 2020 remained flat at$0.1 million when compared to the three months endedMarch 31, 2019 . In the fourth quarter of 2019, the Company disposed of its entire domain portfolio, excluding surname domains used in the Realnames email service. The Company expects portfolio cost of revenue to materially decline in Fiscal 2020. Network Expenses Network costs for the three months endedMarch 31, 2020 increased by$1.2 million to$5.6 million when compared to the three months endedMarch 31, 2019 . The three-month increase was driven by depreciation as a result of the expansion of the Company's increased network infrastructure associated with the continuing expansion of the Ting Fiber footprint. 39
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SALES AND MARKETING
Sales and marketing expenses consist primarily of personnel costs. These costs
include commissions and related expenses of our sales, product management,
public relations, call center, support and marketing personnel. Other sales and
marketing expenses include customer acquisition costs, advertising and other
promotional costs.
(Dollar amounts in thousands of U.S. dollars) For the Three Months Ended March 31,
2020 2019
Sales and marketing $ 8,985 $ 8,741
Increase over prior period $ 244
Increase - percentage 3 %
Percentage of net revenues 11 % 11 %
Sales and marketing expenses for the three months ended March 31,
2020 increased by $0.2 million , or 3%, to $9.0 million as compared to the three
months ended March 31, 2019 . This three-month increase primarily related to a
$0.7 million increase in people costs driven by the acquisition of Cedar in the
first quarter of 2020 and inclusion of a full quarter of people costs related to
workforce acquired in the Ascio acquisition on March 18, 2019 . Stock-based
compensation expenses also increased $0.2 million in 2020 to attract and retain
labor. The overall increase in sales and marketing expense was partially offset
by a decrease in other marketing expenses of $0.5 million .
TECHNICAL OPERATIONS AND DEVELOPMENT
Technical operations and development expenses consist primarily of personnel costs and related expenses required to support the development of new or enhanced service offerings and the maintenance and upgrading of existing infrastructure. This includes expenses incurred in the research, design and development of technology that we use to register domain names, network access services, email, retail, domain portfolio and other Internet services, as well as to distribute our digital content services. Editorial costs relating to the rating and review of the software content libraries are included in the costs of product development. All technical operations and development costs are expensed as incurred. (Dollar amounts in thousands ofU.S. dollars) For the Three
Months Ended
2020 2019
Technical operations and development $ 2,751 $ 2,523
Increase over prior period $ 228
Increase - percentage 9 %
Percentage of net revenues 3 % 3 %
Technical operations and development expenses for the three months ended March
31, 2020 increased by $0.2 million , or 9%, to $2.8 million when compared to the
three months ended March 31, 2019 . The increase in costs relates primarily to
increased salaries and benefits driven by an expanding workforce and wage
inflation, including the workforce acquired in the Ascio acquisition on March
18, 2019 .
GENERAL AND ADMINISTRATIVE
General and administrative expenses consist primarily of compensation and related costs for managerial and administrative personnel, fees for professional services, public listing expenses, rent, foreign exchange and other general corporate expenses.
(Dollar amounts in thousands of U.S. dollars) For the Three Months Ended March 31,
2020 2019
General and administrative $ 4,741 $ 4,448
Increase over prior period $ 293
Increase - percentage 7 %
Percentage of net revenues 6 % 6 %
General and administrative expenses for the three months ended March 31,
2020 increased by $0.3 million , or 7%, to $4.7 million as compared to the three
months ended March 31, 2019 . The increase was primarily driven by a
$0.1 million increase related to the acquisition of Cedar and Ascio, an increase
in foreign exchange expense of $0.3 million and an increase in people costs of
$0.2 million . The increase in general and administrative expenses was offset by
a decrease in facility and transitional costs of $0.2 million .
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DEPRECIATION OF PROPERTY AND EQUIPMENT
(Dollar amounts in thousands ofU.S. dollars) For the Three
Months Ended
2020 2019
Depreciation of property and equipment $ 113 $ 124
Decrease over prior period $ (11 )
Decrease - percentage (9 )%
Percentage of net revenues 0 % 0 %
Depreciation costs remained flat for the three months ended
LOSS ON DISPOSAL OF PROPERTY AND EQUIPMENT
(Dollar amounts in thousands ofU.S. dollars) For the Three
Months Ended
2020 2019
Loss on disposition of property and equipment $ - $ -
Decrease over prior period $ -
Decrease - percentage N/A
Percentage of net revenues - % - %
There were no losses on disposal costs during the three months ended
AMORTIZATION OF INTANGIBLE ASSETS
(Dollar amounts in thousands ofU.S. dollars) For the Three
Months Ended
2020 2019
Amortization of intangible assets $ 2,947 $ 1,866
Increase over prior period $ 1,081
Increase - percentage 58 %
Percentage of net revenues 4 % 2 %
Amortization of intangible assets for the three months ended March 31,
2020 increased $1.1 million to $2.9 million as compared to the three months
ended March 31, 2019 . The increase is driven by a full quarter of amortization
related to the acquisition of Ascio of $0.4 million , amortization of $0.4
million related to the current period acquisition of Cedar and $0.3 million in
amortization related to FreedomPop customer acquisition that closed in July
2019 . Network rights, brand and customer relationships acquired in connection
with the following acquisitions are amortized on a straight-line basis over a
range of two to seven years: eNom in January 2017 , Roam Mobility brands in
September of 2017, Ascio in March of 2019, FreedomPop in July 2019 , and Cedar in
January 2020 .
LOSS (GAIN) ON CURRENCY FORWARD CONTRACTS
Although our functional currency is theU.S. dollar, a major portion of our fixed expenses are incurred in Canadian dollars. Our goal with regard to foreign currency exposure is, to the extent possible, to achieve operational cost certainty, manage financial exposure to certain foreign exchange fluctuations and to neutralize some of the impact of foreign currency exchange movements. Accordingly, we enter into foreign exchange contracts to mitigate the exchange rate risk on portions of our Canadian dollar exposure. (Dollar amounts in thousands ofU.S. dollars) For the Three
Months Ended
2020 2019
Loss (gain) on currency forward contracts $ 441 $ (79 )
Increase over prior period $ 520
Increase - percentage 658 %
Percentage of net revenues 1 % 0 %
The Company recorded a net loss of $0.4 million on the change in fair value of
outstanding contracts as well as realized on matured contracts during the three
months ended March 31, 2020 .
At March 31, 2020 , our balance sheet reflects a derivative instrument asset of
$0.5 million and a liability of $1.7 million as a result of our existing foreign
exchange contracts. Until their respective maturity dates, these contracts will
fluctuate in value in line with movements in the Canadian dollar relative to the
U.S. dollar.
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OTHER INCOME (EXPENSES)
(Dollar amounts in thousands of U.S. dollars) For the Three Months Ended March 31,
2020 2019
Other income (expense), net $ (1,237 ) $ (972 )
Increase over prior period $ (265 )
Increase - percentage 27 %
Percentage of net revenues 1 % 1 %
Other expenses during the three months ended March 31, 2020 increased by
$0.3 million when compared to the three months ended March 31, 2019 . This
was primarily due to interest incurred on our credit facility with the majority
of the borrowings on the credit facility to support the build-out of the Ting
Fiber network. Other expense consists primarily of the interest we incur in
connection with our Amended 2019 Credit Facility. The interest incurred
primarily relates to our loan balances obtained to fund the acquisition of eNom,
Ascio and Cedar and funding for expenditures associated with the Company's Fiber
to the Home program.
INCOME TAXES
The following table presents our provision for income taxes for the periods presented:
(Dollar amounts in thousands of U.S. dollars) For the Three Months Ended March 31,
2020 2019
Provision for income taxes $ 1,101 $ 1,257
Decrease in provision over prior period $ (156 )
Decrease - percentage (12 )%
Effective tax rate 28 % 31 %
We operate in various tax jurisdictions, and accordingly, our income is subject
to varying rates of tax. Losses incurred in one jurisdiction cannot be used to
offset income taxes payable in another jurisdiction. Our ability to use income
tax loss carry forwards and future income tax deductions is dependent upon our
operations in the tax jurisdictions in which such losses or deductions arise.
Income taxes are computed using the asset and liability method, under which
deferred tax assets and liabilities are determined based on the difference
between the financial statement carrying values and tax base of assets and
liabilities using enacted tax rates in effect for the year in which the
differences are expected to affect taxable income. Valuation allowances are
established when necessary to reduce deferred tax assets to the amount expected
to be realized.
For the three months ended March 31, 2020 , we recorded an income tax expense of
$1.1 million on income before income taxes of $3.9 million , using an estimated
effective tax rate for Fiscal 2020 adjusted for certain minimum state taxes as
well as the inclusion of a $0.2 million tax recovery related to ASU 2016-09,
which requires all excess tax benefits and tax deficiencies related to employee
share-based payments to be recognized through income tax expense.
Comparatively, for the three months ended March 31, 2019 , we recorded an income
tax expense of $1.3 million on income before taxes of $4.1 million , using an
estimated effective tax rate for the 2019 fiscal year and reflecting the
$0.4 million tax recovery impact related to ASU 2016-09.
In assessing the realizability of deferred tax assets, management considers
whether it is more likely than not that some portion or all of the deferred tax
assets will not be realized. The ultimate realization of deferred tax assets is
dependent upon the generation of future taxable income during the years in which
those temporary differences become deductible. Management projected future
taxable income, uncertainties related to the industry in which the Company
operates, and tax planning strategies in making this assessment.
We recognize accrued interest and penalties related to income taxes in income
tax expense. We did not have significant interest and penalties accrued at March
31, 2020 and December 31, 2019 , respectively.
ADJUSTED EBITDA
We believe that the provision of this supplemental non-GAAP measure allows
investors to evaluate the operational and financial performance of our core
business using similar evaluation measures to those used by management. We use
adjusted EBITDA to measure our performance and prepare our budgets. Since
adjusted EBITDA is a non-GAAP financial performance measure, our calculation of
adjusted EBITDA may not be comparable to other similarly titled measures of
other companies; and should not be considered in isolation, as a substitute for,
or superior to measures of financial performance prepared in accordance with
GAAP. Because adjusted EBITDA is calculated before recurring cash charges,
including interest expense and taxes, and is not adjusted for capital
expenditures or other recurring cash requirements of the business, it should not
be considered as a liquidity measure. See the Consolidated Statements of Cash
Flows included in the attached financial statements. Non-GAAP financial measures
do not reflect a comprehensive system of accounting and may differ from non-GAAP
financial measures with the same or similar captions that are used by other
companies and/or analysts and may differ from period to period. We endeavor to
compensate for these limitations by providing the relevant disclosure of the
items excluded in the calculation of adjusted EBITDA to net income based on U.S.
GAAP, which should be considered when evaluating the Company's results. Tucows
strongly encourages investors to review its financial information in its
entirety and not to rely on a single financial measure.
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Our adjusted EBITDA definition excludes depreciation, amortization of intangible assets, income tax provision, interest expense (net), accretion of contingent consideration, stock-based compensation, asset impairment, gains and losses from unrealized foreign currency transactions and infrequently occurring items. Gains and losses from unrealized foreign currency transactions removes the unrealized effect of the change in the mark-to-market values on outstanding unhedged foreign currency contracts, as well as the unrealized effect from the translation of monetary accounts denominated in non-U.S. dollars toU.S. dollars.
The following table reconciles net income to adjusted EBITDA:
Reconciliation of Net income to Adjusted EBITDA Three Months Ended March 31, (In Thousands of US Dollars) 2020 2019 (unaudited) (unaudited) (unaudited) Net income for the period $ 2,834$ 2,799 Depreciation of property and equipment 2,990 1,925 Amortization of intangible assets 3,301 2,040 Interest expense, net 1,150 972 Accretion of contingent consideration 87 - Provision for income taxes 1,101 1,257 Stock-based compensation 801 525 Unrealized loss (gain) on change in fair value of forward contracts 348 (118 )
Unrealized loss (gain) on foreign exchange revaluation of foreign denominated monetary assets and liabilities
(42 ) (328 )
Acquisition and other costs1 111 359
Adjusted EBITDA $ 12,681 $ 9,431
1Acquisition and other costs represents transaction-related expenses,
transitional expenses, such as duplicative post-acquisition expenses, primarily
related to our acquisition of eNom in January 2017 , Ascio in March 2019 , and
Cedar in January 2020 . Expenses include severance or transitional costs
associated with department, operational or overall company restructuring
efforts, including geographic alignments.
Adjusted EBITDA increased by $3.3 million , or 35% to $12.7 million for the three
months ended March 31, 2020 when compared to the three months ended March 31,
2019 . The increase in adjusted EBITDA from period-to-period was primarily driven
by an increased contribution from Ascio, which is the result of increased
operating cost synergies realized during the first quarter of 2020, as well as
an increased contribution from Ting Fiber . The overall increase in EBITDA was
partially offset by decreased contribution from the erosion of wholesale and
retail registrations from our eNom brand as well as lower contribution from Ting
Mobile, related to a decreasing subscriber base and lower usage related to
COVID-19.
OTHER COMPREHENSIVE INCOME (LOSS)
To mitigate the impact of the change in fair value of our foreign exchange
contracts on our financial results, in
The following table presents other comprehensive income for the periods presented:
(Dollar amounts in thousands ofU.S. dollars) For the Three
Months Ended
2020 2019
Other comprehensive income (loss) $ (1,191 ) $ 610
Decrease over prior period $ (1,801 )
Decrease - percentage (295 )%
Percentage of net revenues (1 )% 1 %
The impact of the fair value adjustments on outstanding hedged contracts for the
three months ended March 31, 2020 was a loss in OCI of $1.2 million as compared
to a gain of $0.6 million for the three months ended March 31, 2019 .
The net amount reclassified to earnings during the three months ended March 31,
2020 was a loss of $0.0 million compared to a loss of $0.1 million during the
three months ended March 31, 2019 .
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LIQUIDITY AND CAPITAL RESOURCES
As ofMarch 31, 2020 , our cash and cash equivalents balance decreased$8.0 million when compared toDecember 31, 2019 . Our principal uses of cash were$9.9 million for the continued investment in property and equipment,$8.8 million for the Acquisition ofCedar Holdings Group, Incorporated ("Cedar"),$3.1 million in stock repurchases, and$0.2 million of other costs, including tax payment associated with stock option exercises. These uses of cash were offset by cash provided by operating activities of$14.1 million .
Amended 2019 Credit Facility
OnJune 14, 2019 , the Company and its wholly-owned subsidiaries,Tucows.com Co. ,Ting Fiber, Inc. ,Ting Inc. ,Tucows (Delaware) Inc. andTucows (Emerald), LLC , entered into an Amended and Restated Senior Secured Credit Agreement with Royal Bank of Canada ("RBC"), as administrative agent, and lenders party thereto (collectively with RBC, the "Lenders") under which the Company has access to an aggregate of up to$240 million in funds, inclusive of a$60 million accordion facility. The Amended 2019 Credit Facility replaced a secured Credit Agreement datedJanuary 20, 2017 withBank of Montreal RBC and Bank of Nova Scotia (as amended, the "2017 Amended Credit Facility"). OnNovember 27, 2019 , the Company entered into Amending Agreement No. 1 to the Amended and Restated Senior Secured Credit Agreement (collectively with the Amended and Restated Senior Secured Credit Agreement, the "Amended 2019 Credit Facility") to amend certain defined terms in connection with the Cedar acquisition. In connection with the Amended 2019 Credit Facility, the Company incurred an additional$0.3 million of fees paid to lenders and$0.2 million of legal fees related to the debt issuance. Of these fees,$0.4 million are debt issuance costs, which have been reflected as a reduction to the carrying amount of the loan payable and will be amortized over the term of the credit facility agreement and$0.1 million have been recorded in General and administrative expenses.
The obligations of the Company under the Amended 2019 Credit Agreement are secured by a first priority lien on substantially all of the personal property and assets of the Company and has a four-year term.
Other Credit Facilities Prior to the Company entering into the Amended 2019 Credit Facility and the 2017 Amended Credit Facility, the Company had credit agreements (collectively the "Prior Credit Facilities") with BMO, which provided the Company with continued access to a treasury risk management facility and a credit card facility. All remaining credit facilities under the 2017 Amended Credit Facility and the Prior Credit Facilities have been terminated. The treasury risk management facility under the Prior Credit Facilities provides for a$3.5 million settlement risk line to assist the Company with hedging Canadian dollar exposure through foreign exchange forward contracts and/or currency options. Under the terms of the Prior Credit Facilities, the Company may enter into such agreements at market rates with terms not to exceed 18 months. As ofMarch 31, 2020 , the Company held contracts in the amount of$61.8 million to tradeU.S. dollars in exchange for Canadian dollars. 44
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Cash Flow from Operating Activities
Net cash inflows from operating activities during the three months endedMarch 31, 2020 was$14.1 million , an increase of 57% when compared to the three months endedMarch 31, 2019 . Net income, after adjusting for non-cash charges, during the three months endedMarch 31, 2020 was$9.9 million , an increase of 34% when compared to the prior year. Net income included non-cash charges and recoveries of$7.1 million such as depreciation, amortization, stock-based compensation, deferred income taxes, excess tax benefits on stock-based compensation, other income, unrealized gains on currency forward contracts, and disposal of domain names. In addition, changes in our working capital provided$4.2 million . Positive contributions of$8.8 million from movements in deferred revenue, accounts receivable, accounts payable, inventory, income taxes recoverable, accreditation fees payable, customer deposits and prepaid expenses and deposits were offset by$4.6 million utilized in changes from prepaid domain name fees and accrued liabilities.
Cash Flow from Financing Activities
Net cash outflows from financing activities during the three months endedMarch 31, 2020 totaled$3.3 million as compared to cash inflows of$27.9 million during the three months endedMarch 31, 2019 . Total cash outflows of$3.3 million were driven by$3.1 million related to the stock repurchases, in addition to a$0.2 million outflow for the payment of tax obligations resulting from the net exercise of stock options and loan payable costs. These cash outflows were offset by minor cash inflows related to the proceeds received on exercise of stock options.
Cash Flow from Investing Activities
Investing activities during the three months endedMarch 31, 2020 used net cash of$18.7 million as compared to using$38.5 million during the three months endedMarch 31, 2019 . Cash outflows of$8.8 million related to the acquisition of Cedar, in addition to$9.9 million invested in property and equipment, primarily to support the continued expansion of our fiber footprint. The Company continues to invest in our existingTing Towns ofCentennial, CO ,Charlottesville, VA ,Fuquay-Varina, NC ,Holly Springs, NC ,Sandpoint, ID andWestminster, MD as well ramping construction inFullerton, CA , Roaring Fork, CO,Rolesville, NC ,Solana Beach, CA andWake Forest, NC , as we seek to extend both our current network and expand to new towns. We expect our capital expenditures on building and expanding our fiber network to continue to increase during Fiscal 2020.
Based on our operations, we believe that our cash flow from operations will be adequate to meet our anticipated requirements for working capital, capital expenditures and our loan repayments for at least the next 12 months.
We may need additional funds or seek other financing arrangements to facilitate more rapid expansion, develop new or enhance existing products or services, respond to competitive pressures or acquire or invest in complementary businesses, technologies, services or products. We may also evaluate potential acquisitions of other businesses, products and technologies. We currently have no commitments or agreements regarding the acquisition of other businesses. If additional financing is required, we may need additional equity or debt financing and any additional financing may be dilutive to existing investors. We may not be able to raise funds on acceptable terms, or at all.
Off Balance Sheet Arrangements
As of
Contractual Obligations
In our Annual Report on Form 10-K for the year ended
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