Tucows(TCX) - 2025 Q2 - Quarterly Report

PART I FINANCIAL INFORMATION Condensed Consolidated Financial Statements This section presents the unaudited condensed consolidated financial statements, including balance sheets, statements of operations, and cash flows, along with detailed notes on accounting policies and key financial data Condensed Consolidated Statements of Operations Highlights | Indicator | Q2 2025 (in millions) | Q2 2024 (in millions) | H1 2025 (in millions) | H1 2024 (in millions) | | :--- | :--- | :--- | :--- | :--- | | Net Revenues | $98.5 | $89.4 | $193.1 | $176.9 | | Gross Profit | $22.1 | $20.8 | $45.6 | $39.1 | | Loss from Operations | $(2.9) | $(8.6) | $(4.9) | $(25.1) | | Net Loss | $(15.6) | $(18.6) | $(30.8) | $(45.1) | | Basic and Diluted Loss per Share | $(1.41) | $(1.70) | $(2.79) | $(4.12) | Condensed Consolidated Balance Sheet Highlights | Indicator | June 30, 2025 (in millions) | December 31, 2024 (in millions) | | :--- | :--- | :--- | | Total Current Assets | $211.7 | $205.4 | | Total Assets | $742.2 | $758.8 | | Total Current Liabilities | $200.6 | $199.9 | | Total Liabilities | $863.9 | $854.1 | | Total Stockholders' Deficit | $(121.7) | $(95.3) | Condensed Consolidated Statements of Cash Flows Highlights (Six Months Ended June 30) | Indicator | 2025 (in millions) | 2024 (in millions) | | :--- | :--- | :--- | | Net cash provided by (used in) operating activities | $(4.7) | $(10.4) | | Net cash provided by (used in) financing activities | $(2.5) | $(12.0) | | Net cash provided by (used in) investing activities | $2.5 | $(30.4) | | Increase (decrease) in cash and cash equivalents | $(4.6) | $(52.8) | Notes to Condensed Consolidated Financial Statements This section provides detailed notes on the company's accounting policies, segment information, debt, revenue recognition, and other significant financial disclosures - The company operates through three main businesses: Ting (high-speed internet), Wavelo (platform services for Communication Service Providers), and Tucows Domains Services (domain name registration and related services)[17] - Effective Q1 2025, the company updated the format of its financial statements to condense certain line items for improved clarity, with no impact on previously reported financial results[20][25][26] - As of June 30, 2025, the company held foreign exchange forward contracts with a notional amount of $55.6 million to hedge against fluctuations in the Canadian dollar[33] - Goodwill remained unchanged at $130.4 million, with 83% allocated to Tucows Domains and 17% to the Ting segment. No impairment was recognized[38][39] - The company was in compliance with all financial covenants for its $240 million 2023 Credit Facility, which had an outstanding principal of $192.9 million as of June 30, 2025[44][47][48] - Ting's securitized notes payable totaled $289.6 million as of June 30, 2025, secured by fiber-network assets and customer contracts[58] - For H1 2025, the company recorded an income tax expense of $4.4 million on a pre-tax loss of $26.3 million. The effective tax rate differs from the statutory rate primarily due to a valuation allowance on net operating losses and the impact of foreign earnings[64] - In H1 2025, one customer in the Wavelo segment accounted for 12% of total revenue ($23.1 million) and represented 56% of accounts receivable at period end[87][88] - Ting's redeemable preferred units, classified as a liability, had a balance of $122.2 million as of June 30, 2025. Ting accrued the $4.6 million preferred return for Q2 2025 instead of paying in cash[156][157][159] - In Q2 2025, the company sold property and equipment for $11.0 million, recognizing a gain of $2.1 million[167] - Subsequent to the quarter end, on July 1, 2025, the company sold certain Ting assets for $7.0 million and expects to recognize a gain of $3.6 million in Q3 2025[183] Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses the company's financial performance, segment results, and liquidity, highlighting revenue growth, Adjusted EBITDA improvement, and Ting's need for additional financing Results of Operations This section analyzes the company's revenue, cost of revenues, and operating expenses across its business segments, detailing key drivers of financial performance Net Revenue by Segment (Six Months Ended June 30) | Segment | 2025 (in millions) | 2024 (in millions) | % Change | | :--- | :--- | :--- | :--- | | Ting | $32.7 | $28.7 | +14% | | Wavelo | $24.1 | $19.9 | +21% | | Tucows Domains | $132.9 | $124.3 | +7% | | Corporate and other | $3.4 | $4.1 | -15% | | Total Net Revenues | $193.1 | $176.9 | +9% | - Total net revenues for H1 2025 increased by $16.2 million (9%) year-over-year, driven by growth across all segments, particularly Wavelo (up 21%) and Ting (up 14%)[240] - Total cost of revenues for H1 2025 increased by $9.6 million (7%) year-over-year, primarily due to a one-time $3.0 million lease accounting adjustment in the Ting segment and higher registry costs for Tucows Domains[272] - Sales and marketing expenses for H1 2025 decreased significantly by $10.4 million (31%) year-over-year, mainly due to reduced personnel costs and marketing spend in the Ting segment following the 2024 Capital Efficiency Plan[291] Reconciliation of Net Loss to Adjusted EBITDA (Six Months Ended June 30) | Line Item | 2025 (in millions) | 2024 (in millions) | | :--- | :--- | :--- | | Net Loss for the period | $(30.8) | $(45.1) | | Provision for income taxes | $4.4 | $3.0 | | Depreciation of property and equipment | $21.0 | $20.2 | | Amortization of intangible assets | $2.3 | $2.9 | | Interest expense, net | $27.2 | $24.4 | | Stock-based compensation | $2.9 | $3.6 | | Acquisition and other costs | $0.7 | $3.8 | | Other adjustments | $(1.6) | $0.6 | | Adjusted EBITDA | $26.2 | $13.4 | - Adjusted EBITDA for H1 2025 increased by $12.9 million (96%) to $26.3 million compared to H1 2024, largely driven by cost reductions and operational efficiencies in the Ting segment[314] Liquidity and Capital Resources This section assesses the company's cash position, funding sources, and ability to meet short-term and long-term financial obligations, particularly for the Ting segment - As of June 30, 2025, cash and cash equivalents decreased by $4.9 million since year-end 2024, primarily due to cash used in operations, debt repayment, and capital expenditures, offset by proceeds from asset sales[315] - The Ting segment may not be able to meet its financial obligations over the next twelve months without additional financing. It has historically relied on its redeemable preferred units and term notes to fund operations and expansion[334] - Ting has scheduled interest payments of $35.0 million in the twelve months following June 30, 2025, and its ability to obtain further financing is subject to market conditions and operating performance[333][334] - Tucows businesses excluding Ting plan to fund their 2025 cash requirements through operating income while making discretionary repayments on the $192.9 million outstanding balance of the 2023 Credit Facility[335][336] Quantitative and Qualitative Disclosures About Market Risk The company's primary market risks include foreign currency exchange fluctuations, interest rate changes on its credit facility, and credit risk from accounts receivable - A hypothetical 10% adverse movement in foreign currency exchange rates would decrease net income for H1 2025 by approximately $2.6 million, before the effects of hedging[343] - The company is exposed to interest rate risk on its $192.9 million outstanding balance under the 2023 Credit Facility. A 1% adverse change in interest rates would increase annual interest payments by approximately $1.9 million[346] Controls and Procedures Management concluded that the company's disclosure controls and procedures were effective as of June 30, 2025, with no material changes in internal control over financial reporting - Management concluded that disclosure controls and procedures were effective at a reasonable assurance level as of June 30, 2025[347] PART II OTHER INFORMATION Legal Proceedings The company is involved in various legal claims arising from normal business operations, none of which are expected to have a material adverse effect Risk Factors This section updates key risk factors, including Ting's financing needs, operational risks from workforce reductions, and minimum purchase commitments with its MNO partner - A significant risk is that the Ting subsidiary may not be able to meet its financial obligations over the next 12 months without securing additional financing, as it has historically relied on external funding for operations and expansion[354] - The company faces ongoing risks from the Ting workforce reductions, including potential operational disruptions, negative impacts on employee morale and retention, and a slowdown in network expansion and revenue growth due to reduced capital expenditures[357][359] - The company is subject to minimum purchase commitments with its MNO supplier, with $13.9 million in remaining payments through February 2026. Failure to grow the Ting Mobile subscriber base could lead to significant penalties and increase the company's net loss[360] Unregistered Sales of Equity Securities and Use of Proceeds The Board approved a $40 million stock buyback program, but no shares were repurchased during the three and six months ended June 30, 2025 Other Information No directors or officers adopted, modified, or terminated any Rule 10b5-1 or non-Rule 10b5-1 trading arrangements during Q2 2025