Tucows Inc.
Q1 2024 Earnings Call Transcript

Published: 11 May 2024

[Monica Webb - Director of Market Development and Government Affairs:]

[Elliot Noss - President and CEO:]

[Dave Woroch - CEO, Tucows Domains:]

[Justin Reilly - CEO, Wavelo:]

[Dave Singh - CFO:]

[Monica Webb:]

Welcome to Tucows' First Quarter 2024 Management Commentary. We have prerecorded prepared remarks regarding the quarter and outlook for the Company. A Tucows-generated transcript of these remarks, with relevant links, is also available on the Company's website. In lieu of a live question-and-answer period following these remarks, shareholders, analysts and prospective investors are invited to submit questions to Tucows' management. Please submit questions via email to [e-mail] until Thursday, May 16th. Management will either address your questions directly or provide a recorded audio response and transcript that will be posted to the Tucows website on Tuesday, May 28th, at approximately 4

[Elliot Noss:]

Thanks, Monica. A comment before our results

[Dave Woroch:]

Thanks, Elliot. The first quarter for Tucows Domains reflects the consistency of our business. We continue to reliably generate cash, while modestly increasing transactions, domains under management, revenue and margin. In addition, I will expand on an exciting new joint venture called Orange Domains that was announced earlier this year, and I will conclude my comments today with some thoughts on this partnership. In the first quarter of 2024, domains under management and transactions were both up slightly from Q1 of 2023. We're pleased to see that, given flat to declining numbers for the industry, including Verisign. Revenue for Domain Services for Q1 was $61.9 million, up 4.5% from $59.2 million for the same quarter last year. Gross margin was $18.5 million, also up 5.8% from the same quarter last year. Domain Services' adjusted EBITDA, which was $10 million in the first quarter, was down 3.2% from Q1 of last year. A couple comments here. First, we operate critical infrastructure, and the scope and scale of attacks on network infrastructure has increased. This required us to add to our investment in cybersecurity, which is a step-function increase that's not large, but in a tight business like this, it is a few basis points. And second, there is a timing element to some of our operating expenses this year, which were higher in Q1. We expect these to normalize out over the remainder of the year. Looking at the results from the segments of our business; in our Wholesale channel, revenue for Q1 was up 4% compared to Q1 of last year, and gross margin was up 3.2% year-over-year. Within the Wholesale channel, Domain Services' gross margin was up 2% in Q1 compared to the same period last year, while Value-Added Services' gross margin was up 5.9%. In our Retail channel, revenue was up 7.2%, and gross margin was up 13.6% year-over-year. As I mentioned last quarter, the outsized retail margin continues to be a result of the shift of customers from our Wholesale channel to Retail, which started in Q4 and will positively impact Retail margin numbers over the course of 12 months. Our combined overall renewal rate, at 76% in Q1 across all Tucows Domains brands, remains within our historical range and above the industry average. I want to close with more information on the March announcement of our partnership in Orange Domains. Orange Domains is a joint venture with Trust Machines and Hiro Systems that is working to seamlessly connect domain names, identity and Web3. This is a long-term initiative and we are a minority partner, but we are quite excited about its prospects. I've spoken previously about the evolution of Web3 and our interest in participating in a future where elements of identity and functionality related to it are delivered using Web3 technology. You may recall I spoke in 2022 about the funding of Unstoppable Domains, which is offering domain name registrations in strings like .crypto and .nft. Although we didn't prefer the particular approach they were taking, we did see the financing as evidence that investors are looking to the future, and the convergence of domain names and identity. In this venture, we're providing our expertise in DNS, our registry platform, and distribution through our reseller channel. Trust Machines and Hiro are bringing their deep expertise in Web3. It's also worth noting that Don Ruiz, a Tucows Domains alum is the GM at Orange Domains. Don brings his extensive domain name industry experience and entrepreneurial perspective to the role, and we're pleased to have him in the leadership seat for this important initiative. In terms of what investors will see coming from this project, we expect to launch a new TLD later this year, with distribution and support across all of our registrar brands, and that we see bridging the traditional domain name space, Web3 and identity. Now, over to Justin Reilly, CEO of Wavelo.

[Justin Reilly:]

Thanks, Dave. A year ago at this time, we were in the midst of orchestrating the fastest telecom migration the industry has seen, putting to test a muscle that we have honed over decades in Domains and Ting. Sitting here today, we can see what a few quarters of a fully-loaded base on the Wavelo platform looks like and how our team and our platform can deliver this level of scale and operational rigor. It's a long game and we're just getting started. Started. Wavelo's revenues were 9.4 million in Q1, up 28.6% from Q1 2023 and down 1.6% from Q4. Gross margin was 9 million up 44.1% year-over-year and down 1.9% from last quarter. Adjusted EBITDA for Q1 was 2.8 million, up 7% from last quarter and up 7 32% year-over-year. The year-over-year trends reflect the loading ramp of subscribers onto the Wavelo platform, which did not finish in earnest until summer of 2023. The quarterly trends represent impacts from the rightsizing of Dish's subscriber base across prepaid and postpaid. As they've shared publicly, they expect 2024 to be largely a year of transition. Unlike its competitors, but identical to all successful modern SaaS businesses, the Wavelo business relies on subscription fees, not professional services or maintenance. When you align your business model to scale up and down based on your customer's subscriber base, you are highly reliant on their ability to retain customers and to grow. I'll remind investors that this is a feature, not a bug. We'll win in the long run by being the most customer-centric platform in the world, winning when our customers win, while our competitors focus on in-year, one-time professional services revenues at their customer's expense. Also impacting the adjusted EBITDA trend quarter-over-quarter is an increased, yet conservative investment in our growth teams. We expect to continue to invest there throughout the year, as we position Wavelo for the next phase of growth. I'm proud of our management team's ability to manage costs in the quarter, while simultaneously setting the business up to welcome new telecoms onto the Wavelo platform. On go-to-market, our months-long search for a growth leader has concluded and I'm proud to announce that Andy Youe has joined us to lead Wavelo's sales efforts. Andy brings with him 25 years of experience selling telecom software around the world, including storied tenures at Amdocs and Oracle. He shares our thesis of an industry that needs to move from massive professional services to subscription fees like the rest of the internet and we're excited to have him hit the ground running. As you heard me say last quarter, 2024 is about building an efficient go-to-market machine that can deliver against our pipeline and provide the seamless and elegant onboarding experience Tucows is famous for. Since December, we've added four new customers to the Wavelo family. Each of these small to midsize ISPs or MVNOs is looking to expand their business on a platform that promises the flexibility and scalability that they've yet to receive from their current vendors. And, as I've said before, although we are battling the long procurement cycles that telecom is famous for and that are even more commonplace with the macro conditions today, we have some major tailwinds, the move towards mobile-fixed convergence, cloudification of critical systems, and the need to accommodate both prepaid and postpaid billing, all of which benefit Wavelo. And in terms of the pipeline, the team continued the trend from last quarter of generating new qualified opportunities. These are a mix of MVNOs, ISPs, and MNOs that are, some for the first time, picking their heads up to question if there is a better way to operate. Wavelo is the answer to that question. I remind investors that MNOs are big game; they take a long time to work through the pipeline, but are both the most lucrative opportunities in our space and the ones that would most benefit from what Wavelo provides. As I look at the progress we've made and what we've built in a short time, I'm incredibly proud. But I'm equally excited for what's to come. With a standout platform, newly-added go-to-market resources and a mission-driven team, we can be laser focused on our singular goal for 2024

[Elliot Noss:]

Thanks, Justin. Q1 was another strong quarter for new subscriber additions for Ting, with 2,700 net new subscribers, growing 25.6% year-over-year and taking us to over 46,000 subscribers in total. We also had a 22.5% year-over-year growth of completed serviceable addresses in Q1, taking us to 124,000 serviceable addresses for Ting-owned infrastructure. We are currently being more conservative with our capital, which has moderated our serviceable address additions this quarter. Our partner markets are continuing to ramp up their builds with over 70% growth in addresses year-over-year. This brings us to over 157,000 total serviceable addresses across all Ting footprints. Revenue for Q1 grew 19% year-over-year to $14.1 million, and gross margin grew 11% year-over-year to $8.7 million. Adjusted EBITDA came in at negative $9.5 million, which has come down from last quarter. As I have previously stated, we plan to continue to reduce this number. Our first quarter fiber CapEx is unchanged from Q4 of 2023 at just over $18 million, but continues to be lower than our spends a year ago. I've spoken about partner markets the last couple of quarters, and how we're leveraging Ting's expertise to improve partner performance. The next step that we're taking is doing installations for our partners. We've signed a deal in Memphis to do installs for Meridiam, and expect to do this in other markets as well. It makes sense in larger partner markets particularly. This allows us to deliver the same end-to-end customer experience in partner markets as we do in our organic-built markets. The general underperformance of construction in partner markets has impacted our results negatively, so this approach really could have huge benefits. This is both profitable and will make it easier for the customer experience in partner markets to more closely resemble organic markets. It is a win-win. One thing many of you know is at the core of Tucows ethos is commitment to policies that benefit Internet users. We've actively supported Open Internet initiatives like Net Neutrality. One program we celebrated as significant progress towards equality of access was The Affordable Connectivity Program, enacted under the Bipartisan Infrastructure Law as the largest internet affordability program in U.S. history. For 23 million households, ACP meant the difference between having functional home Internet or not. Way too many poor families rely on mobile data, by far the most expensive data one can buy. Unfortunately inertia in the current U.S. Congress has led to discontinue funding the program and when the current funding runs out this month, it may cause many of those households to lose their home access entirely. Given our historical footprint this will not have a meaningful impact on our results, but all of Ting views digital equity as part of what makes us proud to be doing what we are doing. We will continue to agitate for better outcomes. Now we'll hear from Tucows CFO, Dave Singh, who will discuss our financial results in detail.

[Dave Singh:]

Thanks Elliot. Total revenue for the first quarter of 2024 increased 8.7% to $87.5 million compared to $80.4 million for the first quarter of 2023. When looking across the different businesses, Ting had revenue gains of 19% year-over-yea , increasing to $14.1 million in Q1 2024 from $11.9 million in Q1 2023. Wavelo's revenues increased 29% to $9.4 million in Q1 2024 from $7.3 million in Q1 2023. And the revenue for Tucows Domains for Q1 was up 4.5%, increasing to $61.9 million from $59.2 million in Q1 2023. Corporate revenues were essentially unchanged in Q1 2024 from Q1 2023. Gross profit before network costs for the first quarter increased 14.5% year-over-year to $35.7 million from $31.1 million in Q1 2023. As a percentage of revenue, gross profit before network costs increased this quarter to 41% compared to 39% for Q1 2023. Breaking down gross profit by business, Tucows Domains' gross profit for the first quarter of 2024 increased 5.8% from Q1 of last year to $18.5 million from $17.5 million. As a percentage of revenue, gross margin for Tucows Domains remained unchanged year over year at 30% for first quarter 2024. Wavelo's gross profit increased by 44% to $9 million this quarter from $6.3 million for Q1 2023, reflecting the full transition from professional services to subscriber-based revenues on the fully migrated Boost subscriber base. As a percentage of revenue, gross margin for Wavelo was 96% this quarter, which is up from 86% in Q1 of 2023. The increased margin is a reflection of Wavelo's increased efficiency from the fully-migrated DISH subscriber base. Ting gross profit for Q1 increased 11.1% year-over-year to $8.7 million from $7.9 million for the same period of last year. As a percentage of revenue, gross margin for Ting was 62% in the first quarter of 2024, down from 66% in Q1 of last year. Network expenses for Q1 were $17.3 million, up slightly from $17.1 million for the same period last year. Network expenses continue to be driven primarily by the depreciation of our expanding fiber network assets. I do want to remind investors however, that our network expenses in Q1 2023 accounted for impairment costs that included write-downs of certain fiber capital inventory due to damage and obsolescence. The impact of that write-down is that the year-over-year change in network expenses looks lower than it would have been otherwise. Total operating expenses for the first quarter of 2024 increased 11.1% to $34.8 million from $31.3 million for the same period last year. The increase is primarily the result of the following changes

[Elliot Noss:]

Thanks, Dave. Last week was the annual Berkshire Hathaway annual meeting; the first without Charlie Munger. I always view this meeting as a bit of a bellwether and this year was no exception. There were two things I took away. Not Warren's views on crypto or AI, nor his views on interest rates or inflation. What I paid attention to was a huge and growing cash hoard and Apple as their continued largest holding. Those may seem like non-items but they tell a story. The two points combine to reinforce things I have been talking about that the market is exceedingly concentrated and that investors, and therefore the market, is more short term than it has ever been. It is a market that has more dollars chasing fewer companies and, likely due to the amount of money concentrating in the largest index funds, we see returns concentrating into the largest stocks. At the same time we see the world's greatest value investor piling up cash. Warren famously says, we only swing at pitches we like, and he makes clear that in this market he doesn't see a lot he likes. He more than anyone knows about the corrections to come in the private markets as P/E, VC and commercial real estate work through the overvalued portions of their portfolios in a process that will take years. More importantly, he suffers from the short-term focus of markets more than anyone. It is tough to look for value when the market only rewards scale and short-term story. We see these macro trends reinforced in the fiber market which had two big stories this quarter; Digital Bridge making an unsolicited offer for Wide Open West, and EQT combining with T-Mobile to take the Lumos' fiber assets and split them into infrastructure and ISP, similar to our partner markets. Both items are further reminders that the long-term nature of building and operating infrastructure like fiber assets is not rewarded in the public markets. In fact, it is clearly viewed negatively. And the latter item is the first large deal that validates the split between infrastructure and operating assets that we have been pursuing since 2015. What all of the above reinforces is that the one inarguably successful way to navigate the public markets if you are not one of the biggest seven companies in the world or are not a stock selling the current story and trading at impossible to maintain multiples is to require low amounts of capital, to generate cash on a consistent and ideally growing basis, and to use that cash to distribute to your shareholders through either buybacks or dividends. Following that path does not require analysts. It does not require mainstream institutional investors. This is the approach we followed with great success from 2008 through 2014 with our eight Dutch tenders and plenty of open market buyback activity. In 2015, we started another cycle of investing in fiber. We've done a great job of building a real business in fiber. We have over 125,000 organic addresses. We have another 200,000 to build in our current footprints requiring no more market development, and then well over another 0.5 million in our existing partner markets including two large cities in Colorado Springs and Memphis. But a growing fiber business requires capital. We have every indication that the public markets are not the right place to source that capital. If you look at TCX, the market is saying that if we turned over the keys of the Ting fiber business to its lenders for nothing that our stock price would likely skyrocket. That is market inefficiency. Inefficiencies create opportunities. We have a good sense of what the inefficiencies are and a track record of exploiting them. We are looking forward to the rest of 2024 and to the long-term future. And with that, I look forward to your written questions and exploring areas that interest you in greater detail. Again, please send your questions to [e-mail] by May 16th, and look for our recorded Q&A audio response and transcript to this call to be posted to the Tucows website on Tuesday, May 28th, at approximately 4

[End of Q&A:]