Tucows Q3 2020 financial results: revenue is down after Ting Mobile sale

Tucows Inc. (NASDAQ:TCX, TSX:TC) reported its financial results for the third quarter ended September 30, 2020. All figures are in U.S. dollars.

Note on the Financial Impact of Tucows’ Sale of Ting Mobile Customer Relationships and Transition to Mobile Services Enabler Platform:

As previously announced, effective August 1, 2020 most of Tucows customers relationships were sold to DISH Networks (“DISH”) as part of Tucows’ transition of its mobile business to a Mobile Services Enabler (MSE) model from a Mobile Virtual Network Operator (MVNO) model, under which DISH became Tucows’s first MSE customer. Accordingly, the results of the Mobile Services business in our Network Access segment for the third quarter of 2020 reflect two months of operations under the new MSE model and one month of operations under the previous MVNO model. (All comparative prior-year periods are composed entirely of operations under Tucows’ previous MVNO model.)

Under the terms of the earn out arrangement for the Ting customer base acquired by DISH, the income generated by the customer base acquired by Dish are recognized (net of expenses) as “Other Income” under the heading “Gain on Sale of Ting Customer Assets”. As a result, revenue and gross margin for Mobile Services in the Network Access segment for the third quarter of 2020 are lower than those for the third quarter of 2019. Tucows will recognize fees paid by customers owned by DISH under the Ting brand, as well as customers under DISH’s Boost brand, that are added to Tucows’ MSE platform, as Mobile Platform Services revenue under the terms of the MSE Agreement signed with Dish. For more information, see Tucows’ Financial Statements and Management Discussion and Analysis for the third quarter of 2020.

“The third quarter was once again demonstrative of the consistency and cash generating ability of the Tucows business,” said Elliot Noss, President and Chief Executive Officer, Tucows Inc. “Revenue and gross margin from our Domains and Ting Internet businesses, excluding the impact of a large bulk domains sale from our Domains Portfolio in the third quarter of last year, increased 2% and 10% year over year, respectively.”

“Our Domains business once again saw strong transaction activity, although softening from the first two quarters of this year, as micro- and small-sized businesses and start-ups continued to establish a web presence for the first time amid the pandemic, while we continued to benefit from our focus on the quality of our customer base for gross margin contribution. In our Mobile Services business, we generated our first fees under our new MSE agreement with DISH and we look forward to increasing that revenue in the future as DISH adds customers under the Ting Mobile brand and we migrate DISH’s Boost customers to the MSE platform. In the Ting Internet business, we achieved another record quarter for capital expenditure on the network, as we continued to add passed addresses, serviceable addresses and new customers, and grow revenue and gross margin.”

Financial Results

Net revenue for the third quarter of 2020 was $74.3 million, a decrease of 16% from $88.1 million for the third quarter of 2019. The majority of the decrease was due to the absence of Ting Mobile MVNO revenue for approximately two months of the third quarter of 2020 following the Company’s sale of its Ting Mobile customer relationships to DISH and the related earn out being recognized as Other Income. The decrease was also due to a $1.9 million bulk domain sale from the Domains Portfolio business in the third quarter of 2019 that was not repeated in the third quarter of 2020 as the Company exited its Portfolio business at the end of 2019. Excluding the Mobile Services business, as well as the impact of the bulk Domains sale in the third quarter of 2019, net revenue for the combined Domains and Ting Internet businesses for the third quarter of 2020 increased 2% year over year.

Gross profit for the third quarter of 2020 was $19.9 million, a decrease of 28% from $27.6 million for the third quarter of 2019. The decrease in gross profit is attributable to the same factors as the decline in revenue. Excluding the Mobile Services business, as well as the impact of the bulk Domains sale in the third quarter of 2019, gross margin for the combined Domains and Ting Internet businesses for the third quarter of 2020 increased 10% year over year.

Net income for the third quarter of 2020 was $0.7 million, or $0.07 per share, compared with $4.2 million, or $0.40 per share. Net income was impacted by the one-time $3.5 million non-cash write-down of certain assets related to the sale of the Ting Mobile customer relationships to DISH, which was netted from the $4.6 million Gain on Sale of Ting Customer Assets under Other Income. Excluding the after-tax impact of the write-down, net income would have been $3.4 million, or $0.33 per share, down 19% year over year.

Adjusted EBITDA¹ for the third quarter of 2020 was $13.3 million compared with $14.8 million for the third quarter of 2019. Excluding the impact of an outsized Portfolio bulk domain name sale in the third quarter of 2019, Adjusted EBITDA grew 3%.

Cash and cash equivalents at the end of the third quarter of 2020 was $10.2 million compared with $8.9 million at the end of the second quarter of 2020 and $12.0 million at the end of the third quarter of 2019.