TUCOWS INC. CAUTIONARY 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 and Euro; Wavelo, and Ting subscriber growth and retention rates; the number of new, renewed and transferred-in domain names we register as our business develops and competes; the effect of a potential generic top level domain "gTLD") expansion by theInternet Corporation for Assigned Names and Numbers ("ICANN") on the number of domains we register and the impact it may have on related revenues; our belief regarding the underlying platform for our Tucows Domains services, our expectation regarding the trend of sales of domain names; our belief that, by increasing the number of services we offer, we will be able to generate higher revenues; 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 to obtain additional financing to accelerate the Ting Internet footprint while sustaining liquidity; 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 partnership with an affiliate ofGenerate TF Holdings, LLC , aDelaware limited liability company ("Generate Affiliate"); 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:
• Our ability to continue to generate sufficient working capital to meet our
operating requirements;
• Our ability to further accelerate the expansion of the Ting Internet
footprint, by obtaining additional financing;
• Our ability to service our debt commitments and preferred share
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;
• Our ability to meet the operational and financial drawdown milestones
under the Unit Purchase Agreement with Generate TF Holdings, LLC , a
Delaware limited liability company ("Generate"), which provides the
Company with the ability to obtain additional financing to invest in the
expansion of fiber networks;
• 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 and the
Cooperation and Development ("OECD") model global minimum tax rules;
• 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 collect anticipated payments from DISH in connection with
the 10-year payment stream that is a function of the margin generated by
the transferred subscribers over a 10-year period pursuant to the terms of
the Asset Purchase Agreement dated
DISH Wireless "DISH" (the "DISH Purchase Agreement"); • Pending or new litigation; and
• 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, 2022 filed with
the SEC on March 15, 2023 (the "2022 Annual Report") and in "Item 1A Risk
Factors" in Part II of this report.
As previously disclosed the under the caption "Item 1A Risk Factors" in our 2022 Annual Report, data protection regulations may impose legal obligations on us that we cannot meet or that conflict with our ICANN contractual requirements.
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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 related
services. We are organized into three operating and reporting segments - Ting,
Wavelo, and Tucows Domains. Each segment differentiated primarily by their
services, the markets they serve and the regulatory environments in which they
operate. The Ting segment contains the operating results of our retail high
speed Internet access operations, including its wholly owned subsidiaries -
Cedar and Simply Bits. The Wavelo segment includes our platform and professional
services offerings, as well as the billing solutions to Internet services
providers ("ISPs") (branded as Platypus). Tucows Domains includes wholesale and
retail domain name registration services, as well as value added
services derived through our OpenSRS, eNom, Ascio, EPAG and Hover brands. Our
Chief Executive Officer (CEO), who is also our chief operating decision
maker, reviewed the operating results of Ting, Wavelo and Tucows Domains as
three distinct segments in order to make key operating decisions as well as
evaluate segment performance. Certain revenues and expenses disclosed under the
Corporate category are excluded from segment earnings before interest, tax,
depreciation and amortization ("EBITDA") results as they are centrally managed
and not monitored by or reported to our CEO by segment, including Mobile Retail
Services, the 10-year payment stream on transferred legacy Mobile subscribers,
eliminations of intercompany transactions, portions of Finance and Human
Resources, Legal and Corporate IT.
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 revenues, operating results and performance for
each of our service offerings in order to gain more depth and understanding of
the key business metrics driving our business.
For the three months ended
Table of Contents Ting Ting and its wholly owned subsidiaries - Cedar, and Simply Bits includes the provision of fixed high-speed Internet access services to select towns throughoutthe United States , with further expansion underway to both new and existing markets. Our primary sales channel is through the Ting website. The primary focus of this segment is to provide reliable Gigabit Internet services to consumer and business customers. Revenues are all generated in theU.S. and are provided on a monthly basis and have no fixed contract terms. Wavelo Wavelo includes the provision of full-service platforms and professional services providing a variety of solutions that support Communication Services providers ("CSPs"), including subscription and billing management, network orchestration and provisioning, and individual developer tools. Wavelo's focus is to provide accessible telecom software to CSPs globally, minimizing network and technical barriers and improving internet access worldwide. Wavelo's suite of flexible, cloud-based software simplifies the management of mobile and internet network access, enabling CSPs to better utilize their existing infrastructure, focus on customer experience and scale their businesses faster. Wavelo launched as a proven asset for CSPs, with DISH using Wavelo's Mobile Network Operating System ("MONOS") software to drive additional value within its Digital Operator Platform since 2021. More recently, Ting Internet has also integrated Wavelo's Internet Service Operating System ("ISOS") and Subscriber Management ("SM") software to enable faster subscriber growth and footprint expansion. The Wavelo segment also includes the Platypus brand and platform, our legacy billing solution for ISPs. Wavelo revenues from MONOS, ISOS, SM and professional services are all generated in theU.S. and our customer agreements have set contract lengths with the underlying CSP. Similarly, Platypus revenues are largely generated in theU.S. , with a small portion earned inCanada and other countries. Tucows Domains Tucows Domains includes wholesale and retail domain name registration services, as well as value added 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.Tucows Domains revenues are attributed to the country in which the contract originates, which is primarily inCanada and theU.S for OpenSRS and eNom brands. Ascio domain services contracts and EPAG agreements primarily originate inEurope . Our primary distribution channel is a global network of over 35,000 resellers that operate in over 200 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. 26
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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 24.5 million domain names under theTucows , eNom, EPAG and Ascio ICANN registrar accreditations and for other registrars under their own accreditations. Value-Added Services include hosted email which provides email delivery and webmail access to millions of mailboxes, Internet security services, WHOIS privacy, publishing tools and other value-added services. All of these services are made available to end-users through a network of over 35,000 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 or auction sale. Retail, primarily the Hover and eNom portfolio of websites, including eNom, and eNom Central, derive revenues from the sale of domain name registration, email services to individuals and small businesses. Retail also includes our Personal Names Service - based on 36,000 surname domains - that allows roughly two-thirds of Americans to purchase an email address based on their last name. The retail segment includes the sale of the rights to its portfolio of surname domains used in connection with our Realnames email service as well as our Exact Hosting Service, that provides Linux hosting services for websites of individuals and small businesses.
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. TingMarch 31, 2023 2022 (in '000's) Ting Internet accounts under management 37
28
Ting Internet owned infrastructure serviceable addresses 102 81
Ting Internet partner infrastructure serviceable addresses 20 17
Tucows Domains For the Three Months Ended March 31,(1)
2023 2022
(in 000's)
Total new, renewed and transferred-in domain name
transactions 2 5,963 5,951
Domains under management 24,483 25,020
(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.
Includes all transactions processed under our accreditations for our
(2) resellers and our retail brands, as well as transactions processed on behalf
of other registrars using our platform.
Tucows Domains March 31,
2023 2022
(in 000's)
Registered using Registrar Accreditation belonging to
the
17,967 18,651
Registered using Registrar Accreditation belonging to Resellers
6,516 6,369
Total domain names under management 24,483 25,020
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. 27
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Ting
As an ISP, we have invested and expect to continue to invest in new fiber to the
home ("FTTH") deployments in select markets in the 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.
Wavelo
Wavelo launched as a proven asset for CSPs, with DISH using Wavelo's MONOS
software to drive additional value within its Digital Operator Platform since
2021. More recently, Ting Internet has also integrated Wavelo's ISOS and
SM software to enable faster subscriber growth and footprint expansion. With our
external platform and professional services revenues concentrated to one
customer in DISH, we are exposed to significant risk if we are unable to
maintain this customer relationship or establish new relationships for any our
Platforms in the future. Additionally, our revenues as a platform provider are
directly tied to the subscriber volumes of DISH's MVNO or Mobile Network
Operator ("MNO") networks, and our profitability is contingent on the ability of
DISH to continue to add subscribers, either from organic growth or from
migration off legacy systems, onto our platforms.
Tucows Domains
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 Tucows Domains 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 Tucows Domains 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 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 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.
Other opportunities, challenges and risks
As described above, the Company is entitled to a long-term payment stream that is a function of the margin generated by the transferred subscribers over the 10-year term of the DISH Purchase Agreement executed in Fiscal 2020. This consideration structure may not prove to be successful or profitable in the long-term to us if the existing subscriber base churns at an above average rate. Additionally, given DISH controls the revenues and costs incurred associated with the acquired subscribers, there could arise a situation where profitability for the subscriber base is diminished either by lower price points or cost inflation. Additionally, as part of the DISH Purchase Agreement, the Company retained a small number of customer accounts associated with one MNO agreement that was not reassigned to DISH at time of sale. We continue to be subject to the minimum revenue commitments previously agreed to with this excluded MNO agreement. The Company is able to continue adding customers under the excluded MNO network in order to meet the commitment. However, with no direct ability to change customer pricing and limited ability to renegotiate contract costs or significant terms, the Company may be unable to meet the minimum commitments with this MNO partner and could incur significant and recurring penalties until such a time that the contract is complete. These penalties would negatively impact our operational performance and financial results if enforced by the MNO. During the three months endedMarch 31, 2023 , the Company has accrued$0.2 million in penalties associated with the minimum commitment shortfall and expects to continue to incur penalties through the end of Fiscal 2023. Critical Accounting Estimates The preparation of our consolidated financial statements in conformity with 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 estimates as previously disclosed in Part II, Item 7 of our 2022 Annual Report.
Inflation, rising interest rates and expected impacts
The Company continues to operate in a challenging macro environment as inflation
and interest rates continue to rise globally. The impact of these issues on our
business will vary by geographic market and operating segment. We continue to
monitor economic conditions closely, as well as segment revenues, cash position,
cash flow from operations, interest rates and other factors. Across our three
operating segments - Ting, Wavelo and Tucows Domains, personnel costs were
impacted by wage inflation in the current period, with issued increases in
Fiscal 2022 in excess of 5% to align with economic conditions and market rates.
These increases were necessary in order to remain competitive to attract and
retain the best talent. The Company continues to monitor and assess wage
inflation and is managing it against offsets in hiring plans and contractor mix.
Outside of wage inflation, the operating segment most impacted by inflation
overall is Ting, as sustained levels of inflation increase our Fiber Network
build costs across both materials and contracted labor. We continue to assess
ways to reduce build costs through more efficient management of our build
design, build efficiency and real-time tracking of build costs to more
effectively manage total cost estimates against actual spends. We are also
managing our significant vendor relationships closely to mitigate supply chain
disruptions and ensure optimal pricing. However, there can be no assurance as to
the effectiveness of our efforts to mitigate any impact of the current and
future adverse economic conditions, and other unknown developments.
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RESULTS OF OPERATIONS FOR THE three months ended
NET REVENUES Ting Ting and its subsidiaries - Cedar, and Simply Bits includes the provision of high-speed Internet access services to select towns throughoutthe United States , with further expansion underway to both new and existing markets. Our primary sales channel is through the Ting website. The primary focus of this segment is to provide reliable Gigabit Fiber and Fixed Wireless Internet services to consumer and business customers. Revenues are all generated in theU.S. , have no fixed contract terms and are provided on a monthly basis, with unlimited bandwidth based on a fixed price. The Company's billing cycle for all Ting Internet customers is computed based on the customer's activation date. Since consideration is collected before the service period, revenue is initially deferred and recognized as the Company performs its obligation to provide Internet access within 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, as is the case for service requiring installation, then revenue is not recognized until a customer's service is activated. 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. Wavelo Platform ServicesTucows' Platform Services include the following full-service platforms from Wavelo, including MONOS, ISOS, SM and our legacy Platypus ISP Billing software. Under each of these platforms there are a variety of solutions that support CSPs, including subscription and billing management, network orchestration and provisioning, and individual developer tools. Wavelo launched as a proven asset for CSPs, with DISH using Wavelo's MONOS software to drive additional value within its Digital Operator Platform since 2021. More recently, Ting has also integrated Wavelo's ISOS and SM software to enable faster subscriber growth and footprint expansion. Wavelo's customers are billed monthly, on a postpaid basis. The monthly fees are variable, based on the volume of their subscribers utilizing the platform during a given month, to which minimums may apply. Customers may also be billed fixed platform fees and granted fixed credits as part of the consideration for long-term contracts. Consideration received is allocated to platform services and bundled professional services and recognized as each service obligation is fulfilled. Any fixed fees for Wavelo are recognized into revenue evenly over the service period, while variable usage fees are recognized each month as they are consumed. Professional services revenue is recognized as the hours of professional services granted to the customer are used or expire. When consideration for these platform services is received before the service is delivered, the revenue is initially deferred and recognized only as the Company performs its obligation to provide services. Likewise, if platform services are delivered before the Company has the unconditional right to invoice the customer, revenue is recognized as a Contract Asset.
Other Professional Services
This revenue stream includes any other professional services earned in
connection with the Wavelo business from the provision of standalone technology
services development work. These are billed to our customers monthly at set and
established rates for services provided in period. The Company recognizes
revenue over this new revenue stream as the Company satisfies its obligations to
provide professional services.
Tucows Domains
Wholesale - Domain Services
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. Tucows Domains 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.
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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 proceeds from the OpenSRS, eNom and Ascio domain expiry streams.
Retail We derive revenues mainly from Hover and eNom's retail properties through the sale of retail domain name registration and email services to individuals and small businesses. The retail segment also includes the sale of the rights to its portfolio of surname domains used in connection with our Realnames email service and Linux hosting services for websites through our Exact Hosting brand.
Tucows Corporate - Mobile Services and Eliminations
Although we still provide mobile telephony services to a small subset of customers retained through the Ting Mobile brand as part of the DISH Purchase Agreement executed in Fiscal 2020, this revenue stream no longer represents the Company's strategic focus going forward. Instead we have transitioned towards being a platform provider for CSPs globally via Wavelo. Retail telephony services and transition services revenues are excluded from segment EBITDA results as they are centrally managed and not monitored by or reported to our CEO by segment. Ting Mobile wireless usage contracts grant customers access to standard talk, text and data mobile services. Ting Mobile contracts are billed based on the customer's selected rate plan, which can either be usage based or an unlimited plan. All rate plan options are charged to customers on a postpaid, monthly basis at the end of their billing cycle. All future revenues associated with Retail Mobile Services stream will only be for this subset of customers retained by the Company, as mentioned above. 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. The Mobile Services revenue streams also includes transitional services provided to DISH. These are billed monthly at set and established rates for services provided in period and include the provision of sales, marketing, customer support, order fulfillment, and data analytics related to the legacy customer base sold to DISH. The Company recognizes revenue as the Company satisfies its obligations to provide transitional services.
As a form of consideration for the sale of the customer relationships, the Company receives a payout on the margin associated with the legacy customer base sold to DISH, over a period of 10 years. This has been classified as Other Income and not considered revenue in the current period.
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,
2023 2022
Ting:
Fiber Internet Services $ 11,853 $ 9,788
Wavelo:
Platform Services 6,498 6,097
Other Professional Services 802 750
Total Wavelo 7,300 6,847
Tucows Domains:
Wholesale
Domain Services 46,293 46,836
Value Added Services 4,531 5,649
Total Wholesale 50,824 52,485
Retail 8,418 9,061
Total Tucows Domains 59,242 61,546
Tucows Corporate:
Mobile services and eliminations 2,035 2,918
$ 80,430 $ 81,099
(Decrease) increase over prior period $ (669 )
(Decrease) increase - percentage (1 )%
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The following table presents our net revenues, by revenue source, as a
percentage of total net revenues (Dollar amounts in thousands of
(Dollar amounts in thousands of U.S. dollars) For the Three Months Ended March 31,
2023 2022
Ting:
Fiber Internet Services 15 % 12 %
Wavelo:
Platform Services 8 % 8 %
Other Professional Services 1 % 1 %
Total Wavelo 9 % 9 %
Tucows Domains:
Wholesale
Domain Services 57 % 57 %
Value Added Services 6 % 7 %
Total Wholesale 63 % 64 %
Retail 10 % 11 %
Total Tucows Domains 73 % 75 %
Tucows Corporate:
Mobile services and eliminations 3 % 4 %
100 % 100 %
Total net revenues for the three months ended March 31, 2023 decreased by less
than $0.7 million , to $80.4 million from $81.1 million when compared to the
three months ended March 31, 2022 . The three-month decrease in net revenue was
driven by our Tucows Domains segment of $2.3 million from lower expiry auction
revenues relative to the three months ended March 31, 2022 and more broadly from
the continued normalization of both wholesale and retail domain name
registration growth from those observed as a result of the COVID-19 pandemic in
prior years. This decrease was furthered from Mobile Service and eliminations of
$0.9 million , attributable to increased intercompany revenues and decreased
transitional services revenues. The decreases above were partially offset by
increased revenues from both Ting and Wavelo segments. Ting revenues increased
$2.1 million in the current period from the attraction of additional customers
to Ting from the continued buildout of our Fiber network footprint across the
United States , and Wavelo revenues increased of $0.5 million , as a result of
increased MONOS platform revenues earned from the migration of additional
subscribers onto our new platform.
Deferred revenue at March 31, 2023 increased by $6.3 million to $151.4 million
from $145.1 million at December 31, 2022 . This was primarily driven by Tucows
Domains, accounting for $6.4 million of the increase which is due to the
increase in current period billings for domain name registrations and service
renewals, characteristic of the seasonal renewal pattern we see during the first
quarter of every fiscal year. Tucows Domains also increased prices as a result
of increased costs from gTLD registries, which is also a factor increased
deferred revenues in the current period. Additionally, Ting saw a small increase
of $0.1 million , reflective of the continued growth in customer base and
billings of that segment relative to December 31, 2022 . These increases were
partially offset by a decrease from Wavelo of $0.2 million , specifically related
to Other Professional Services revenues for standalone technology services
development work with DISH, which we defer until such time as that work is
complete and we've satisfied our obligations to provide the professional
services. These other professional services were completed in the current period
and thus recognized out of previously deferred revenues.
No customer accounted for more than 10% of total net revenue during the three
months ended March 31, 2023 or the three months ended March 31, 2022 . DISH
accounted for 53%of total accounts receivable as at March 31, 2023 and 46% of
total accounts receivable as at December 31, 2022 . Though a significant portion
of the Company's Tucows Domains 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.
Ting
Ting generated $11.9 million in net revenue during the three months ended March
31, 2023 , up $2.1 million or 21% compared to the three months ended March 31,
2022 . This growth is driven by subscriber growth across our Fiber network
relative to the three months ended March 31, 2022 , as well as the continued
expansion of our Ting Internet footprint to new Ting towns throughout the United
States .
As of March 31, 2023 , Ting Internet had access to 102,000 owned
infrastructure serviceable addresses, 20,000 partner infrastructure serviceable
addresses and 37,000 active subscribers under its management; compared to having
access to 81,000 owned infrastructure serviceable addresses, 17,000 partner
infrastructure serviceable addresses and 28,000 active subscribers under its
management as of March 31, 2022 . These figures exclude the increase in
serviceable addresses and accounts attributable to Simply Bits.
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Table of Contents Wavelo Platform Services Net revenues from Wavelo Platform Services for the three months endedMarch 31, 2023 increased by$0.4 million or 6.6%, to$6.5 million as compared to the three months endedMarch 31, 2022 . This is driven from increased MONOS platform revenues earned from the migration of additional DISH subscribers, from their Boost Mobile brand onto our new platform. The increased platform fees in the current period are partially offset by a reduction of revenues related to the amortization of the related contract asset with DISH; compared to the prior period where the contract asset impact was accretive to revenue. The Company expects the contract asset to continue to amortize against revenue through the remainder of Fiscal 2023 and thereafter as we continue to fulfill the performance obligations of the contract. Our full-service platforms support CSPs with subscription and billing management, network orchestration and provisioning, and individual developer tools. Wavelo launched as a proven asset for CSPs, with DISH using Wavelo's MONOS software to drive additional value within its Digital Operator Platform since 2021. More recently, Ting Internet has also integrated Wavelo's ISOS and SM software to enable faster subscriber growth and footprint expansion. Any intercompany ISOS or SM revenues earned from Ting Internet are eliminated upon consolidation. Other Professional Services
Net revenues from Other Professional Services for the three months ended
Tucows Domains
Wholesale - Domain Services
During the three months endedMarch 31, 2023 , Wholesale domain services net revenue decreased by$0.5 million to$46.3 million , when compared to the three months endedMarch 31, 2022 . Decreases from Wholesale domain registrations were driven from the continued normalization of domain name registration growth and slowed renewal rates from those observed as a result of the COVID-19 pandemic in prior years. As ofMarch 31, 2023 together, the OpenSRS, eNom, EPAG, and Ascio Domain Services manage 24.5 million domain names under theTucows , eNom, EPAG and Ascio ICANN registrar accreditations and for other registrars under their own accreditations. Domains under management has decreased by 0.5 million domain names when compared toMarch 31, 2022 . The decrease in domains under management came largely from eNom, with smaller decreases from OpenSRS and the European brands, Ascio and EPAG.
Wholesale - Value Added Services
During the three months endedMarch 31, 2023 , value-added services net revenue decreased by$1.1 million to$4.5 million , when compared to the three months endedMarch 31, 2022 . The decrease in value-added service revenue was primarily driven by lower expiry stream proceeds across our Domain Services brands as a result of the normalization of renewal rates and domains under management discussed above in connection to COVID-19. The prior period continued to benefit from a significant volume of expired domain names being available for our expiry streams, which returned favorable proceeds at auction and drove revenue generation for value added services. That continues to hold true, albeit at a slower rate as the value of domain names sold at auction has declined relative to the prior period. Retail During the three months endedMarch 31, 2023 , retail domain services net revenue decreased by$0.6 million or 7.3% to$8.4 million compared to the three months endedMarch 31, 2022 . This was driven by decreased revenues related to one-time outsized domain name portfolio sales of$0.5 million in the prior period as well as a decrease in revenues associated with retail domain name registrations of$0.2 million . Both of these decreasing impacts are partially offset by a small increase in Exact Hosting revenues of less than$0.1 million .
Tucows Corporate - Mobile Services and Eliminations
Net revenues from Mobile Services and eliminations for the three months endedMarch 31, 2023 decreased by$0.9 million or 30.3% to$2.0 million as compared to the three months endedMarch 31, 2022 . This was driven by incremental intercompany corporate eliminations of$0.6 million , a result of increased revenues associated with ISOS and SM platforms billing between Wavelo and Ting, which increased in the current period consistent with the subscriber growth experienced by the Ting segment as discussed above. This was furthered by decreased transitional services of$0.2 million , notably from a decreased level of customer support and marketing services provided to DISH in connection with the legacy Ting Mobile customer base. This decrease was furthered by decreased revenues of less than$0.1 million associated with the mobile telephony services and device revenues from the small group of customers retained by the Company as part of the DISH Purchase Agreement as a result of organic subscriber churn we experienced relative to the three months endedMarch 31, 2022 . COST OF REVENUES Ting Cost of revenues primarily includes the costs for provisioning high speed Internet access for Ting and its subsidiaries - Cedar, and Simply Bits, which is comprised of network access fees paid to third-parties to use their network, leased circuit costs to directly support enterprise customers, the personnel and related expenses (net of capitalization) for the physical planning, design, construction and build out of the physical Fiber network, and as well as personnel and related expenses (net of capitalization) for the installation, activation, repair, maintenance and overall field service delivery of the Ting business. Hardware costs include the cost of equipment sold to end customers, including routers, ONTs, and IPTV products, and any adjustments on this inventory. Other costs include field vehicle expenses, and small sundry equipment and supplies consumed in building the Fiber network. 32
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Table of Contents Wavelo Platform Services Cost of revenues to provide the MONOS, ISOS and SM platforms, as well as our legacy Platypus ISP Billing software services including network access, provisioning and billing services for CSPs. This includes the amortization of any capitalized contract fulfillment costs over the period consistent with the pattern of transferring network access, provisioning and billing services to which the cost relates. Additionally, this includes any fees paid to third-party service providers primarily for printing services in connection with the Platypus ISP Billing software. Other Professional Services Cost of revenues to provide standalone technology services development work to our CSP customers to help support their businesses. This includes any personnel and contractor fees for any client service resources retained by the Company. Only a subset of the Company's employee base provides professional services to our customers. This cost reflects that group of resources. Tucows Domains Wholesale - Domain Services 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.
Wholesale - 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 and are expensed rateably over the renewal term. Costs of revenues for our surname 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.
Tucows Corporate - Mobile Services and Eliminations
Cost of revenues for Retail Mobile Services includes the costs of provisioning
mobile services, which is primarily our customers' voice, messaging, data usage
provided by our MNO partner, 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. Included in the
costs of provisioning mobile services is any penalties associated with the
minimum commitments with our MNO partner.
These Mobile Services costs also include the personnel and related costs of
transitional services provided to DISH. These are billed monthly at set and
established rates for services provided in period and include the provision of
sales, marketing, customer support, order fulfillment, and data analytics
related to the legacy customer base sold to DISH. The Company recognizes costs
as the Company satisfies its obligations to provide professional services.
Network expenses
Network expenses include personnel and related expenses related to platform and
network site reliability engineering, network operations centers, IT
infrastructure and supply chain teams that support our various business
segments. It also includes the depreciation and any impairment charges of
property and equipment related to our networks and platforms, amortization of
any intangible assets related to our networks and platforms, communication and
productivity tool costs, and equipment maintenance costs. Communication and
productivity tool costs includes collaboration, customer support, bandwidth,
co-location and provisioning costs we incur to support the supply of all our
services.
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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,
2023 2022
Ting:
Fiber Internet Services $ 3,985 $ 4,038
Wavelo:
Platform Services 334 185
Other Professional Services 692 776
Total Wavelo 1,026 961
Tucows Domains:
Wholesale
Domain Services 37,002 36,397
Value Added Services 606 656
Total Wholesale 37,608 37,053
Retail 4,113 4,759
Total Tucows Domains 41,721 41,812
Tucows Corporate:
Mobile services and eliminations 2,558 2,610
Network Expenses:
Network, other costs 6,323 4,180
Network, depreciation of property and equipment 8,436 5,895
Network, amortization of intangible assets 378 378
Network, impairment of property and equipment 1,942 27
17,079 10,480
$ 66,369 $ 59,901
Increase over prior period $ 6,468
Increase - percentage 11 %
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,
2023 2022
Ting:
Fiber Internet Services 6 % 7 %
Wavelo:
Platform Services - -
Other Professional Services 1 % 1 %
Total Wavelo 1 % 1 %
Tucows Domains:
Wholesale
Domain Services 55 % 61 %
Value Added Services 1 % 1 %
Total Wholesale 56 % 62 %
Retail 6 % 8 %
Total Tucows Domains 62 % 70 %
Tucows Corporate:
Mobile services and eliminations 4 % 4 %
Network Expenses:
Network, other costs 10 % 7 %
Network, depreciation of property and equipment 13 % 10 %
Network, amortization of intangible assets 1 % 1 %
Network, impairment of property and equipment 3 % 0 %
27 % 18 %
100 % 100 %
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Total cost of revenues for the three months endedMarch 31, 2023 , increased by$6.5 million , or 11%, to$66.4 million from$59.9 million in the three months endedMarch 31, 2022 . The three-month increase in cost of revenues was driven by a$6.6 million increase in Network Expenses. The increase from Network Expenses is a result of the expansion of the Company's increased network infrastructure associated with the continuing expansion of the Ting Internet network footprint, the ramp up of Wavelo's platforms, as well as increased communication and productivity tool costs across our operating segments. Additionally, we experienced an increase from Wavelo of less than$0.1 million , driven by the increased amortization of capitalized contract fulfillment costs. These increases were partially offset by decreased cost of revenues fromTucows Domains, Ting, and from Mobile Services and eliminations of$0.1 million , each respectively. The decrease in Tucows Domains is aligned with the reduced net revenues discussed above in the Net Revenues section and reduction in domains under management in the current period. The decrease in costs of revenues for Ting was driven by reduced network connectivity and bandwidth costs. The decrease in Mobile Services and Eliminations was driven by decreased transitional services costs from the provision of less transitional services to DISH in the current period. Deferred costs of fulfillment as ofMarch 31 , 2023increased by$4.00 million , or 4%, to$114.6 million from$110.7 million atDecember 31, 2022 . This was primarily driven by Tucows Domains with an increase of$4.6 million , consistent with the increase in deferred revenues discussed above from the increase in current period deferred costs for domain name registrations and service renewals that typically occur in the first quarter of each fiscal year. This increase was partially offset by Wavelo, with a decrease of$0.6 million related to the completion of Other Professional Services discussed above for standalone technology services development work with DISH. As these professional services were completed in the current period, the deferred costs to fulfill those services were amortized into costs of revenues. Ting During the three months endedMarch 31, 2023 , costs related to provisioning high speed Internet access for Ting and its subsidiaries - Cedar, and Simply Bits decreased by less than$0.1 million , to$4.0 million as compared to three months endedMarch 31, 2022 . The small decrease in costs were primarily driven by reduced network connectivity, bandwidth and colocation costs related to the continued expansion of the Ting Fiber network. Wavelo Platform Services Cost of revenues from Wavelo Platform Services for the three months endedMarch 31, 2023 increased$0.1 million or 81%, to$0.3 million as compared to$0.2 million for the three months endedMarch 31, 2022 . Costs incurred are driven by the amortization of previously capitalized costs incurred to fulfill the DISH Master Services Agreement ("MSA") over the term of the agreement. The continued incurrence of additional costs to fulfill the contract have resulted in increased amortization in the current period relative to the fixed term of the agreement. Other Professional Services Cost of revenues from Other Professional Services for the three months endedMarch 31, 2023 decreased by less than$0.1 million or 11% to$0.7 million as compared$0.8 million for the three months endedMarch 31, 2022 . Costs of revenues to provide other professional services change depending on the nature and scope of work we are engaged to perform for our customers for select statements of work. Tucows Domain Wholesale - Domain Services Costs for Wholesale domain services for the three months endedMarch 31, 2023 increased by$0.6 million or 2%, to$37.0 million , as compared to$36.4 million to the three months endedMarch 31, 2022 . The increase is driven by escalating registry costs for gTLDs and the prior period including registry rebate adjustments to standard cost, partially offset by decreased registration costs aligned with the discussion above in the Net Revenue section associated with the continued normalization of domain name registrations, slowed renewal rates and reduction in domains under management in the current period.
Wholesale - Value-Added Services
Costs for wholesale value-added services for the three months endedMarch 31, 2023 decreased by less than$0.1 million or 8%, to$0.6 million , as compared to$0.7 million for the three months endedMarch 31, 2022 . This decrease was driven by decreased costs related to Expiry stream revenues, consistent with the decline in Net Revenues discussed above, as well as decreased costs for Digital Certificates. Retail Costs for retail domain services for the three months endedMarch 31, 2023 decreased by$0.7 million or 14%, to$4.1 million , as compared to$4.8 million for the three months endedMarch 31, 2022 . This was driven by decreased costs related to retail domain name registrations of$0.7 million from lower retail registrations, partially offset by a small increase in Exact Hosting cost of revenues of less than$0.1 million consistent with revenue growth discussed above in the Net Revenues section. 35
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Tucows Corporate - Mobile Services and Eliminations
Cost of revenues from Mobile Services and Eliminations for the three months endedMarch 31, 2023 decreased by less than$0.1 million or 2% to$2.6 million , as compared to the three months endedMarch 31, 2022 . Consistent with the above discussion around net revenues, this was a driven by decreased transitional services costs provided to DISH in connection with the legacy Ting Mobile customer base, offset by increased costs of revenues associated with mobile telephony services and device cost of revenues from the small group of customers retained by the Company as part of the DISH Purchase Agreement. During the three months endedMarch 31, 2023 , the Company has accrued$0.2 million in penalties associated with the MNO minimum commitment shortfall and expects to continue to incur penalties through the end of Fiscal 2023. Network Expenses Network expenses for the three months endedMarch 31, 2023 increased by$6.6 million or 63%, to$17.1 million , as compared to$10.5 million for the three months endedMarch 31, 2022 . The current period increase was driven by increased network costs, network depreciation, and network impairment by$2.1 million ,$2.5 million , and$1.9 million respectively. The current period increase in network costs relates to the investment in hiring additional personnel for both Ting Internet and Wavelo network operations focused teams as well as increased spending on contracted services including tools and systems to better monitor and manage our network infrastructure and platforms. The current period increase in network depreciation relates to$2.1 million in incremental depreciation from Ting's continued capital expansion of the Fiber network with increased footprint acrossthe United States . Incremental to Ting, the current period included$0.5 million in incremental depreciation of Wavelo's newly developed platform assets, partially offset by decreased amortization of$0.1 million related to Tucows Domains. Incremental to network costs and network depreciation, the current period increase in network impairment of$1.9 million was primarily driven by an impairment charge for Ting for damaged conduit and other scrap capital inventory in the current period. 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, 2023 2022 Sales and marketing $ 15,737 $ 11,987 Increase over prior period $ 3,750 Increase - percentage 31 % Percentage of net revenues 20 % 15 % Sales and marketing expenses for the three months endedMarch 31, 2023 increased by$3.8 million , or 31%, to$15.7 million as compared to the three months endedMarch 31, 2022 . This current period increase was primarily related to the investment in hiring additional personnel for Ting's sales, product, marketing, customer support and success teams to drive growth in Ting markets. Outside of additional hiring, personnel costs were impacted by wage inflation across our three segments, with issued increases from the prior period made in excess of 5% to align with economic conditions and market rates at the time. In addition to personnel related costs, both marketing related costs and facility costs increased to drive active subscription growth in Ting markets given the increase in serviceable addresses available to Ting and to support our growing workforce in select Ting towns acrossthe United States .
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, provide Wavelo's platform services, provide Ting's Internet Services, email, retail, domain portfolio and other Internet services. All technical operations and development costs are expensed as incurred. (Dollar amounts in thousands ofU.S. dollars) For the Three
Months Ended
2023 2022
Technical operations and development $ 4,815 $ 3,765
Increase (decrease) over prior period $ 1,050
Increase (decrease) - percentage 28 %
Percentage of net revenues 6 % 5 %
Technical operations and development expenses for the three months ended March
31, 2023 increased by $1.1 million , or 28%, to $4.8 million when compared to the
three months ended March 31, 2022 . The current period increase was primarily
related to the investment in hiring additional personnel for Ting as well as
Wavelo for the development of the MONOS, ISOS and SM platforms which accelerated
over Fiscal 2022. The increase from personnel costs is also reflective of wage
inflation across our segments, with issued increases from the prior period made
in excess of 5% to align with economic conditions and market rates at the time.
Related to personnel costs, another driver of the increase was the
higher stock-based compensation expenses in order to attract, retain technical
operations and development personnel. In addition to these personnel and
related costs, both contracted services for tools, systems and labor to support
the technical operations and development of our systems and platforms increased
compared to the three months ended March 31, 2022 .
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Table of Contents 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,
2023 2022
General and administrative $ 8,146 $ 7,296
Increase over prior period $ 850
Increase - percentage 12 %
Percentage of net revenues 10 % 9 %
General and administrative expenses for the three months ended March 31, 2023
increased by $0.9 million , or 12% to $8.1 million as compared to the three
months ended March 31, 2022 . The increase was primarily driven by an
increase in personnel costs driven by the growth of teams and continued
investment in hiring for administrative teams to better support our segments as
part of our new corporate reorganization. The increase from personnel costs is
also reflective of wage inflation across our three segments, with issued
increases in excess of 5% to align with economic conditions and market rates at
the time. Another driver of the increase was the higher stock-based compensation
expenses in order to attract, retain and scale core administrative teams to meet
projected Company growth. Smaller contributors to the increase include credit
card fees and facility costs driven by Ting and the continuing expansion of the
Ting Internet footprint.
DEPRECIATION OF PROPERTY AND EQUIPMENT
(Dollar amounts in thousands ofU.S. dollars) For the Three
Months Ended
2023 2022
Depreciation of property and equipment $ 152 $ 148
Increase over prior period $ 4
Increase - percentage 3 %
Percentage of net revenues 0 % 0 %
Depreciation costs remained flat at
AMORTIZATION OF INTANGIBLE ASSETS
(Dollar amounts in thousands ofU.S. dollars) For the Three
Months Ended
2023 2022
Amortization of intangible assets $ 2,494 $ 2,465
Increase over prior period $ 29
Increase - percentage 1 %
Percentage of net revenues 3 % 3 %
Amortization of intangible assets remained flat at
OTHER INCOME (EXPENSES) (Dollar amounts in thousands ofU.S. dollars) For the Three
Months Ended
2023 2022
Other income (expense), net $ (3,510 ) $ 2,906
Increase (decrease) over prior period $ (6,416 )
Increase (decrease) - percentage (221 )%
Percentage of net revenues (4 )% 4 % Other Income during the three months endedMarch 31, 2023 decreased by$6.4 million when compared to the three months endedMarch 31, 2022 . This was driven by higher interest incurred of$7.3 million , driven both by our Amended Credit Agreement (as defined below) as well as interest on redeemable preferred shares. In addition to higher interest expense, the Company experienced a$0.4 million decrease in the gain on sale of Ting Customer Assets to DISH in the current period. As described above, the Company receives a payout on the margin associated with the legacy customer base sold to DISH over the 10-year term of the agreement, as form of consideration for the sale of the legacy customer relationships. The Company expects the gain on the sale of Ting Customer Assets to continue to decrease over the term of the payout as legacy customers naturally churn away from Ting Mobile. These decreases to Other Income were partially offset by a$1.1 million increase from the capitalization for interest expense related to the Fiber network assets under construction as part of our Ting segment. 37
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Table of Contents INCOME TAXES (Dollar amounts in thousands ofU.S. dollars) For the
Three Months Ended
2023 2022
Provision for income taxes $ (1,710 ) $ 1,078
Decrease in provision over prior period $ (2,788 )
Decrease - percentage (259 )%
Effective tax rate 8 % (56 )%
Income taxes for the three months ended March 31, 2023 decreased by $2.8 million
from an expense to a recovery when compared the three months ended March 31,
2022 . The change in effective tax rate is primarily due to the change in net
loss before tax for the period, and it is partially offset by an increase in
valuation allowance on net operating losses and interest limitation as a result
of a change in the geographical mix of income.
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
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.
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 costs that are one-time in nature
and not indicative of on-going performance (profitability), including
acquisition and transition costs. Gains and losses from unrealized foreign
currency transactions removes the unrealized effect of the change in the
mark-to-market values on outstanding foreign currency contracts not designated
in accounting hedges, as well as the unrealized effect from the translation of
monetary accounts denominated in non-U.S. dollars to U.S. dollars.
The following table reconciles adjusted EBITDA to net income:
Reconciliation of Income before Provision for Income Taxes to Adjusted EBITDA Three Months Ended March 31, (In Thousands of US Dollars) 2023 2022 (unaudited) (unaudited) (unaudited) Net Income (Loss) for the period$ (19,083 ) $ (3,020 ) Less: Provision for income taxes (1,710 ) 1,078 Depreciation of property and equipment 8,588 6,043
Impairment and loss on disposition of property and equipment
1,942 412
Amortization of intangible assets 2,872 2,843
Interest expense, net 7,880 1,796
Accretion of contingent liability - 98
Stock-based compensation 2,246 1,391
Unrealized loss (gain) on foreign exchange revaluation of foreign denominated monetary assets and liabilities
40 53
Acquisition and other costs1 255 617
Adjusted EBITDA $ 3,030 $ 11,311
1 Acquisition and other costs represent transaction-related expenses,
transitional expenses, such as redundant post-acquisition expenses, primarily
related to our acquisitions, including Simply Bits in November 2021 . Expenses
include severance or transitional costs associated with department, operational
or overall company restructuring efforts, including geographic alignments
Adjusted EBITDA decreased by $8.3 million to $3.0 million for the three months
ended March 31, 2023 when compared to the three months ended March 31, 2022 . The
decrease in adjusted EBITDA from period-to-period was primarily driven by
decreased contribution from Ting of $5.0 million , from the increased investment
for the ramp of expenditures related to the Fiber Internet network build and
expansion plan. Ting's decrease was furthered by Wavelo with decreased
contribution of $1.7 million , primarily driven by the current period charge for
amortization of the contract asset related to the DISH agreement. Additionally,
these decreases were furthered by Tucows Domains with decreased contribution of
$1.4 million from the continued normalization of domain registrations and slowed
renewal rates relative to patterns experienced over the last fiscal years from
the COVID-19 pandemic; as well as domains under management.
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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
2023 2022
Other comprehensive income (loss) $ (168 ) $ 1,034
Decrease over prior period $ (1,202 )
Decrease - percentage (116 )%
Percentage of net revenues (0 )% 1 %
The impact of the fair value adjustments on outstanding hedged contracts for the
three months ended March 31, 2023 was a gain in OCI before reclassifications of
less than $0.1 million as compared to a gain in OCI of $1.0 million before
reclassifications for the three months ended March 31, 2022 .
The net amount reclassified to earnings during the three months ended
LIQUIDITY AND CAPITAL RESOURCES
As ofMarch 31, 2023 , our cash and cash equivalents balance decreased by$11.7 million when compared toDecember 31, 2022 . Our principal uses of cash were$31.7 million for the continued investment in property and equipment driven by Ting Internet expansion,$5.3 million from cash used in operating activities,$2.8 million related to the repayment of the loan payable,$1.6 million related to the contingent consideration related to the acquisition of Cedar,$0.3 million related to the payment of loan payable costs, and$0.2 million related to the acquisition of intangible assets. These uses of cash were partially offset by$30 million proceeds from redeemable preferred shares, and$0.1 million from additional deferred preferred financing costs.
Third Amended 2019 Credit Facility
OnJune 14, 2019 , the Company and its wholly owned subsidiaries,Tucows.com Co ,Ting Fiber, Inc. ,Tucows (Delaware) Inc. andTucows (Emerald), LLC entered into an Amended and Restated Senior Secured Credit Agreement (the "Amended 2019 Credit Facility") withRoyal Bank ("RBC") as administrative agent and lenders party thereto (collectively with RBC, the "Lenders") under which the Company had access to an aggregate of up to$240 million in funds. OnAugust 8, 2022 , the Company entered into a Third Amended and Restated Senior Secured Credit Agreement (the "Amended Credit Agreement") with its existing lenders. The Amended Credit Agreement continues to provide the Company with access to an aggregate of$240 million in committed funds (the Credit Facility). Under the Amended Credit Agreement, and in connection with the Unit Purchase Agreement (as defined in Note 18 - Redeemable preferred shares), the Lenders agreed thatTing Fiber Inc. (converted toTing LLC ) and its wholly owned subsidiaries ceased to be Guarantors under the Credit Facility and shall automatically be released from the respective guarantee and security documents, including a release of the Lenders' security interests and liens upon the assets of such entities. The terms of the LLC agreement with Generate prohibitTucows from funding the operations or capital investments inTing, LLC with funds generated by its subsidiaries outside ofTing LLC or its wholly owned subsidiaries ("Excluding-Ting"). Additionally, the Amended Credit Agreement has extended the maturity of the Credit Facility toJune 14, 2024 . Excluding-Ting was subject to the following financial covenants at all times, which are to be calculated on a rolling four quarter basis: (i) maximum Total Funded Debt to Adjusted EBITDA Ratio of 4.00:1.00 untilSeptember 29, 2023 and 3.75:1.00 thereafter? and (ii) minimum Interest Coverage Ratio of 3.00:1.00. The Amended Credit Agreement also requires Excluding-Ting to comply with other customary terms and conditions. Both the maturity date and maximum Total Funded Debt to Adjusted Ratio covenant were subsequently amended onMarch 14, 2023 described more fully below. The Amended Credit Agreement added SOFR Loans as a form of advance available under the Credit Facility to replace LIBOR Rate Advances, and such SOFR Loans may bear interest based on Adjusted Daily Simple SOFR (defined to be the applicable SOFR rate published by theFederal Reserve bank ofNew York plus 0.10% per annum subject to a floor of zero) or Adjusted Term SOFR (defined to be the applicable SOFR rate published byCME Group Benchmark Administration Limited plus 0.10% for one-month, 0.15% for three-months, and 0.25% for six-months per annum).
Amending Agreement No.2 to the Third Amended and Restated Senior Secured Credit Agreement
OnMarch 14, 2023 Excluding-Ting entered into an Amending Agreement No.2 (the "Credit Agreement Amendment") to the Third Amended and Restated Senior Secured Credit Agreement with its existing syndicate of lenders (The "Amended Credit Agreement"). The Amended Credit Agreement continues to provide Excluding-Ting with access to an aggregate of$240 million in committed funds, however there is a suspension to the$60 million accordion during the relief period (the "Leverage Step Up Period"), which is defined as from Closing (March 14, 2023 ) to the date that Excluding-Ting delivers a compliance certificate for the period ending onDecember 31, 2023 demonstrating compliance with financial covenants. Additionally, the Credit Agreement Amendment has extended the maturity of the Credit Facility toSeptember 30, 2024 . As a result of the closing of the Credit Agreement, Excluding-Ting is subject to the following financial covenants at all times, with monthly testing during the Leverage Step Up Period and reverting to quarterly tests thereafter: (i) maximum Total Funded Debt to Adjusted EBITDA Ratio of 4.50:1.00 fromMarch 14, 2023 up to and includingSeptember 29, 2023 ? 4.00:1.00 fromSeptember 30, 2023 up to and includingDecember 30, 2023 ? and 3.75:1.00 thereafter? and (ii) minimum Interest Coverage Ratio of 3.00:1.00. OnMarch 14, 2023 , Excluding-Ting made a repayment of$2.8 million on the Credit Facility. 39
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Cash Flow from Operating Activities
Net cash inflows (outflows) from operating activities during the three months endedMarch 31, 2023 totaled($5.3) million , a decrease of 198% when compared to the three months endedMarch 31, 2022 . Net income, after adjusting for non-cash charges, during the three months endedMarch 31, 2023 was($2.9) million , a decrease of 144% when compared to the prior year. Net income included non-cash charges and recoveries of$16.2 million such as depreciation, amortization, stock-based compensation, loss (gain) on change in fair value of currency forward contracts, net right of use operating asset or liability, amortization of debt discount and issuance costs, impairment of property and equipment, net amortization of contract costs, excess tax benefits on stock-based compensation, accretion of redeemable preferred shares, deferred income taxes (recovery), and amortization of discontinued cash flow hedge from Accumulated Other Income. In addition, changes in our working capital contributed to a net cash outflow of$2.3 million . Utilized cash of$12.4 million from the changes in accounts receivable, deferred costs of fulfillment, prepaid expenses and deposits, accrued liabilities, accreditation fees payable, and accounts payable were offset by positive contributions of$10.1 million from movements in deferred revenue, contract asset, inventory, income taxes recoverable, and customer deposits.
Cash Flow from Financing Activities
Net cash inflows from financing activities during the three months endedMarch 31, 2023 totaled$25.4 million , an increase of 72% when compared to the three months endedMarch 31, 2022 . Total cash inflows were driven by$30 million of proceeds from redeemable preferred shares issued to Generate, and$0.1 million from deferred preferred financing costs. These cash inflows were partially offset by$2.8 million related to the repayment of loan payable,$1.6 million related to the contingent consideration related to the acquisition of Cedar, as well as$0.3 million related to the payment of loan payable costs.
Cash Flow from Investing Activities
Investing activities during the three months endedMarch 31, 2023 used net cash of$31.9 million , an increase of 38% when compared to the three months endedMarch 31, 2022 . Cash outflows of$31.7 million primarily related to the investment in property and equipment, primarily to support the continued expansion of our Ting Internet Fiber network footprints inCalifornia ,Colorado ,North Carolina andVirginia as we seek to extend both our current network and expand to new markets. We expect our capital expenditures on building and expanding our fiber network to continue to increase during Fiscal 2023. In addition to investment in property and equipment, the current period used$0.2 million for the acquisition of other intangible assets. Material Cash Requirements In order to continue the Company's planned expansion of the Ting Internet footprint, the Company will need to access additional financing under the Unit Purchase Agreement by meeting certain predetermined operational and financial drawdown milestones. Under the Unit Purchase Agreement, from the Transaction Close until the earlier of (i) the End Date and (ii) the date upon which Generate has purchased$140 million of Series A Preferred units pursuant to Milestone Fundings,Ting LLC is required to pay Generate a standby fee at a rate of 0.50% of the unpaid$140 million capital commitment which will be paid quarterly. In addition, in order to further accelerate the expansion of the Ting Internet footprint, the Company may seek additional financing, which may include an equity or debt issuance, a partnership or collaborating arrangement with another third party. We may not be able to secure additional financing on favorable terms, or at all, at the time when we need that funding. We currently have no commitments or agreements regarding the acquisition of other businesses. Any additional financing may be dilutive to existing investors. As described in "Note 19 (a) - Subsequent events" of the Notes to the Consolidated Financial Statements, onApril 21, 2023 , the Company issued and sold an additional 833,333 units of Series A Preferred Units to Generate at a cash purchase price of$6.00 per unit pursuant to the Unit Purchase Agreement. The Milestone Funding provided the Company with an additional$5.0 million of capital and reduced Generate's future capital commitment under the Unit Purchase Agreement to$77.5 million . As described in "Note 19 (b) - Subsequent events" of the Notes to the Consolidated Financial Statements, onMay 4, 2023 (the "Closing Date"),Tucows Inc. through certain of its indirect and wholly owned subsidiaries, includingTing Fiber, LLC entered into a definitive agreement relating to a securitized financing facility pursuant to a privately placed securitization transaction. On the Closing Date,Ting Issuer LLC , aDelaware limited liability company (the "Issuer"), a limited purpose, bankruptcy-remote, indirect wholly owned subsidiary of the Company issued (i)$168,357,000 of its 5.95% Secured Fiber Revenue Notes, Series 2023-1, Class A-2, (ii)$23,289,000 of its 7.40% Secured Fiber Revenue Notes, Series 2023-1, Class B and (iii)$46,859,000 initial principal amount of 9.95% Secured Fiber Revenue Notes, Series 2023-1, Class C. Subject to certain limitations, the 2023 Notes are secured by certain of the Company's revenue-generating assets, consisting principally of fiber-network related agreements, fiber-network assets and customer contracts, that are owned by certain other limited-purpose, bankruptcy-remote, wholly owned indirect subsidiaries of the Company. As described in "Note 19 (c) - Subsequent events" of the Notes to the Consolidated Financial Statements, onMay 4, 2023 ,Ting Fiber, LLC executed the Redemption Agreement and the Side Letter Agreement with Generate. Under the terms of terms of the Redemption Agreement,Ting Fiber, LLC redeemed 5,173,067 Series A Preferred Units held by Generate. The terms of the redemption were modified by the Side Letter Agreement, which granted a 30% discount on the make-whole premium for a total redemption price of$45.7 million inclusive of the make-whole premium. Terms of the Side Letter Agreement also precludeTing Fiber, LLC from issuing additional Series A Preferred Units for 365 days from the closing of the Redemption Agreement during which time standby fees will suspended. In our 2022 Annual Report, we disclosed our material cash requirements of both the Ting segment as well as the other segments excluding Ting. As ofMarch 31, 2023 , other than the items mentioned above, there have been no other material changes to our material cash requirements outside the ordinary course of business. 40
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