Note 13 - Segment Reporting

9 Months Ended

Sep. 30, 2022

Notes to Financial Statements

Segment Reporting Disclosure [Text Block]

13. Segment Reporting: 

Reportable operating segments:

We are organized and managed based on three operating segments which are differentiated primarily by their services, the markets they serve and the regulatory environments in which they operate.  No operating segments have been aggregated to determine our reportable segments.

During the first quarter of 2022, the Company completed a reorganization of its reporting structure into three operating and reportable segments: Ting, Wavelo and Tucows Domains. Previously, the Company disclosed the three operating and reportable segments: Fiber Internet Services, Mobile Services and Domain Services. The retail portion of the previously disclosed Mobile Services, including the earn-out of the sale of legacy subscribers are now included within Tucows Corporate and ISP platform revenues and related results previously included within Ting are now included within Wavelo.  

The change to our reportable operating segments was the result of a shift in our business and management structures that was completed during the first quarter of 2022. The operations supporting what was previously known as our Mobile Services segment have become increasingly operationally distinct between our mobile retail services and our platform services.  As a result, commencing in the first quarter of 2022, our Chief Executive Officer ("CEO"), who is also our chief operating decision maker, reviews 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 EBITDA results as they are centrally managed and not monitored by or reported to our CEO by segment, including Mobile Retail Services, eliminations of intercompany transactions, portions of Finance and Human Resources that are centrally managed, Legal and Corporate IT.

Our reportable operating segments and their principal activities consist of the following:

1.     Ting - This segment derives revenue from the retail high speed Internet access to individuals and small businesses primarily through the Ting website.  Revenues are generated in the United States.

2.     Wavelo – This segment derives revenue from platform and other professional services related to communication service providers, including Mobile Network Operators and Internet Service Providers, and are primarily generated in the United States.       

3.    Tucows Domains – This segment includes wholesale and retail domain name registration services, value added services and portfolio services. The Company primarily earns revenues from the registration fees charged to resellers in connection with new, renewed and transferred domain name registrations; the sale of retail Internet domain name registration and email services to individuals and small businesses. Domain Services revenues are attributed to the country in which the contract originates, primarily Canada and the United States. 

Our segmented results include shared services allocations, including a profit margin, from Tucows Corporate for Finance, Human Resources and other technical services, to the operating units.  In addition, Wavelo charges Ting a subscriber based monthly charge services rendered. Financial impacts from these allocations and cross segment charges are eliminated as part of the Tucows Corporate results. 

Key measure of segment performance:

The CEO, as the chief operating decision maker, regularly reviews the operations and performance by segment. The CEO reviews segment revenue, gross margin and adjusted EBITDA (as defined below) as (i) key measures of performance for each segment and (ii) to make decisions about the allocation of resources.   Sales and marketing expenses, technical operations and development expenses and general and administrative expenses and not reviewed or managed by the CEO separate from adjusted EBITDA, and are thus not included as separate measurements of segment profitability.  Depreciation of property and equipment, amortization of intangibles assets, impairment of indefinite life intangible assets, gain on currency forward contracts and other expense net are organized along functional lines and are not included in the measurement of segment profitability. Total assets and total liabilities are centrally managed and are not reviewed at the segment level by the CEO. The Company follows the same accounting policies and methods of application as described in the "2021 Annual Report" for the segments as those described in “Note 10 – Revenue”.

Our key measures of segment performance and their definitions are:

1.     Segment gross margin - Net revenues less Direct cost of revenues attributable to each segment.  

2.     Segment adjusted EBITDA - segment gross margin as well as the recurring gain on sale of Ting Customer Assets, less network expenses and certain operating expenses attributable to each segment, such as sales and marketing, technical operations and development, general and administration expenses but excludes gains and losses from unrealized foreign currency, stock-based compensation and transactions that are one-time in nature and not indicative of on-going performance, including acquisition and transition costs. Certain revenues and expenses disclosed under the Tucows Corporate category are excluded from segment EBITDA results as they are centrally managed and not monitored by or reported to our CEO by segment, including Mobile Retail Services, eliminations of intercompany transactions, portions of Finance and Human Resources that are centrally managed, Legal and Corporate IT.

Our comparative period financial results have also been reclassified to reflect the current key measures of segment performance. 

The Company believes that both segment gross margin and adjusted EBITDA measures are important indicators of the operational strength and performance of its segments, by identifying those items that are not directly a reflection of each segment’s performance or indicative of ongoing operational and profitability trends.  Segment gross margin and segment adjusted EBITDA both exclude depreciation of property and equipment, amortization of intangibles assets, impairment of indefinite life intangible assets that are included in the measurement of income before provision for income taxes pursuant to generally accepted accounting principles ("GAAP").  Accordingly, adjusted EBITDA is a non-GAAP financial performance measure and should be considered in addition to, but not as a substitute for net income, cash flow provided by operating activities and other measures of financial performance prepared in accordance with GAAP. Total assets and total liabilities are centrally managed and are not reviewed at the segment level by the CEO. The Company follows the same accounting policies and methods of application as described in the "2021 Annual Report" for the segments as those described in “Note 10 – Revenue”.

Information by reportable segments (with the exception of disaggregated revenue, which is discussed in “Note 10 – Revenue”), which is regularly reported to the chief operating decision maker, and the reconciliations thereof to our income before taxes, are set out in the following tables (Dollar amounts in thousands of US dollars): 

Reconciliation of Adjusted EBITDA to Income before Provision for Income Taxes	Three Months Ended September 30,					Nine Months Ended September 30,
(In Thousands of US Dollars)	2022			2021		2022			2021
(unaudited)	(unaudited)			(unaudited)		(unaudited)			(unaudited)
Adjusted EBITDA	$	7,879		$	12,205	$	30,890		$	36,083
Depreciation of property and equipment		7,285			4,758		20,063			12,728
Impairment and loss on disposition of property and equipment		(16	)		470		491			536
Amortization of intangible assets		2,842			2,288		8,528			7,253
Interest expense, net		4,337			1,169		8,555			3,108
Accretion of contingent consideration		50			96		198			287
Stock-based compensation		1,569			1,126		4,396			3,357
Unrealized loss (gain) on change in fair value of foreign currency forward contracts		-			249		-			606
Unrealized loss (gain) on foreign exchange revaluation of foreign denominated monetary assets and liabilities		348			72		446			178
Acquisition and other costs1		472			901		1,549			2,034
Income/(loss) before provision for income taxes	$	(9,008	)	$	1,076	$	(13,336	)	$	5,996

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.

	Ting			Wavelo			Tucows Domains		Tucows Corporate		Consolidated Totals
For the Three Months Ended September 30, 2022
Net Revenues	$	10,946		$	4,048		$	60,281	$	2,775	$	78,050
Direct cost of revenues	4,290			235			42,111		1,666		48,302
Segment Gross Margin	6,656			3,813			18,170		1,109		29,748
Adjusted EBITDA	$	(5,040	)	$	(902	)	$	10,385	$	3,436	$	7,879

	Ting			Wavelo		Tucows Domains		Tucows Corporate		Consolidated Totals
For the Three Months Ended September 30, 2021
Net Revenues	$	6,391		$	3,845	$	60,729	$	4,928	$	75,893
Direct cost of revenues	3,632			140		42,253		3,515		49,540
Segment Gross Margin	2,759			3,705		18,476		1,413		26,353
Adjusted EBITDA	$	(5,490	)	$	1,751	$	11,473	$	4,471	$	12,205

	Ting			Wavelo		Tucows Domains		Tucows Corporate		Consolidated Totals
For the Nine Months Ended September 30, 2022
Net Revenues	$	30,955		$	19,865	$	182,890	$	8,523	$	242,233
Direct cost of revenues		12,746			2,254		125,023		7,000		147,023
Segment Gross Margin		18,209			17,611		57,867		1,523		95,210
Adjusted EBITDA	$	(15,546	)	$	5,017	$	34,266	$	7,153	$	30,890

	Ting			Wavelo		Tucows Domains		Tucows Corporate		Consolidated Totals
For the Nine Months Ended September 30, 2021
Net Revenues	$	17,021		$	7,217	$	184,215	$	13,408	$	221,861
Direct cost of revenues		9,247			338		125,814		9,461		144,860
Segment Gross Margin		7,774			6,879		58,401		3,946		77,001
Adjusted EBITDA	$	(14,008	)	$	1,394	$	36,790	$	11,907	$	36,083

(b)           The following is a summary of the Company’s property and equipment by geographic region (Dollar amounts in thousands of US dollars): 

	September 30, 2022		December 31, 2021
Canada	$	1,463	$	1,994
United States		252,509		170,630
Europe		187		38
	$	254,159	$	172,662

(c)           The following is a summary of the Company’s amortizable intangible assets by geographic region (Dollar amounts in thousands of US dollars): 

	September 30, 2022		December 31, 2021
Canada	$	3,123	$	1,386
United States		26,524		36,732
Germany		60		-
	$	29,707	$	38,118

(d)           Valuation and qualifying accounts (Dollar amounts in thousands of US dollars):

Allowance for doubtful accounts	Balance at beginning of period		Charged to costs and expenses		Write-offs during period		Balance at end of period
Nine Months Ended September 30, 2022	$	541	$	195	$	-	$	736
Twelve months ended December 31, 2021	$	222	$	319	$	-	$	541