Tucows Inc.
Q4 2020 Earnings Call Transcript

Published: 9 Feb 2021

[Monica Webb:]

Welcome to Tucows’ Fourth Quarter 2020 Management Commentary. We have pre-recorded 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 the remarks, shareholders, analysts and prospective investors are invited to submit their questions to Tucows’ management via email at [e-mail], until Wednesday, February 17. Management will address your questions directly, or in a recorded audio response and transcript that will be posted to the Tucows website on Tuesday, February 23 at approximately 4 p.m. eastern time. We would also like to advise that the updated Tucows Quarterly KPI Summary, which provides key metrics for all of our businesses for the last eight quarters, as well as 2018, 2019, and 2020, is available in the Investors section of the website, along with the updated Ting Build Scorecard and Investor Presentation.

[Elliot Noss:]

Thanks, Monica. Q4 2020 was a strong finish to a very solid year across all Tucows’ businesses. Domains delivered another quarter of elevated transaction activity on top of the underlying consistency of that business, and had it’s highest growth in Adjusted EBITDA in years. It was the first full quarter under our new Mobile Service Enabler, or MSE model. And in our Fiber Internet business, we nearly matched our highest CapEx spend to date achieved in Q3, and had by far our highest quarterly add in serviceable addresses at 5,100, nearly double that of Q3. Turning to our financial results, as a reminder, with the transition of our Mobile business to the MSE model, our reported revenue and gross margin results are negatively impacted, with all of that revenue and much of the expenses associated with the Mobile business now subsumed in “Other Income,” toward the bottom of the P&L. We are, however, including these earnings in our adjusted EBITDA results, and as such, adjusted EBITDA may provide a better year-over-year view on operating results. For those that might require a refresh on the details of impact, please refer to my opening comments in the Q3 2020 management remarks. For comparative purposes, the best way to view our revenue and gross margin performance for Q4 is by confining those to the Domains and Ting Internet businesses -- that is, absent the impact of Mobile.

[Dave Singh:]

Thanks, Elliot. Again, as a reminder, our fourth quarter results reflect the transition of our Mobile business to the MSE model. Total revenue for the fourth quarter of 2020 was $70.8 million, an 18% decrease from $85.9 million for the same period of 2019, with the majority of the decrease attributable to the sale of the Ting Mobile customer relationships during the third quarter, which therefore did not contribute any revenue in Q4 of this year, but also due in part to the large bulk domains sale in our Portfolio business in Q4 of 2019, which we subsequently exited at the end of that year. Those decreases were partially offset by continued strong growth in Ting Internet revenue, largely the result of the Cedar acquisition in January of 2020, but also the result of the continued growth in the Internet Services customer base, which notably crossed the 15,000 mark in the fourth quarter. As Elliot discussed, when factoring out the impact on revenue of the change in the Mobile model, revenue for the combined Domains and Ting Internet businesses, excluding the Portfolio sales increased 6%. Cost of revenues before network costs, decreased 14% to $47.1 million from $55 million for Q4 the prior year, with the decline primarily due to the lower revenue. As a percentage of revenue, cost of revenues before network costs increased slightly to 67% from 64% as the improved mix in the Domains business was offset by the shift in mobile revenues, including the addition of low margin transition services to DISH. Gross margin before network costs for the fourth quarter decreased 23% to $23.7 million from $30.9 million, with the decrease primarily related to the sale of Ting Mobile assets and to a lesser extent the outsized portfolio sale in Q4 2019. As a reminder, the margin generated by the mobile customers sold to DISH is now incorporated in the earn-out recorded in Other Income. As a percentage of revenue, gross margin before network costs decreased to 33% from 36 % for Q4 2019. I’ll now review gross margin for each of the Domain Services and Network Access businesses. Starting with Domain Services, gross margin for the fourth quarter of 2020 was essentially unchanged from the fourth quarter of 2019 at $19.4 million. However, excluding the large bulk domains sale in Q4 2019, gross margin increased 8%. As a percentage of revenue, gross margin for Domain Services was unchanged from Q4 of 2019 at 31%. But, when excluding the Q4 2019 bulk Domain sale, gross margin was up about 160 basis points. Within the Domain Services business, gross margin for the Wholesale Channel was up 12% to $14.8 million from $13.2 million for the same period the prior year, the result of year-over-year growth in the number of Domains under management, as well as the success of our continued focus on managing the business for gross margin. As a percentage of revenue, gross margin for Wholesale increased to 28% from 26%. Gross margin for Retail Domain Services decreased 6% to $4.4 million from $4.7 million for Q4 2019, although I will note that retail gross margin in Q4 of the prior year benefited from an outsized quarter as we had a deferral related positive accounting adjustment in Q4 2019, excluding that impact, gross margin increased 1% year-over-year. As a percentage of revenue, gross margin was 51% compared to 54% in Q4 2019, with the decrease due to the adjustment in the prior year quarter just noted. Turning now to Network Access, gross margin for the fourth quarter of 2020 was $4.3 million, a decrease of 62% from $11.5 million in Q4 2019. Again, the vast majority of the decrease is the result of the absence of revenue and margin in Q4 of this year, as a result of the sale of the Ting Mobile customers to DISH and our transition to a MSE model during the third quarter of this year. Mobile Services gross margin was $1.2 million, a decrease of 87% from $9.4 million, the result of the difference in two Mobile models. We did, however, generate $6.5 million as a Gain on the Sale of Ting Customer Assets, which represents the earn-out on that customer base and which appears under the heading Other Income in the P&L. In the Fiber Internet Services business, gross margin increased 52% to $3.1 million from $2.1 million in Q4 2019, with growth attributable to the incremental contribution of the Cedar Networks acquisition at the beginning of 2020, as well as continued expansion of the Ting Internet subscriber base. As a percentage of revenue, gross margin for all of Network Access was unchanged at 48% compared to Q4 of the prior year, with Mobile Services decreasing to 31% from 45% for the reasons stated earlier, and Fiber Internet Services decreasing to 62% from 68%, primarily due to sales mix as a result of the Cedar acquisition. Turning now to costs, Network expenses for Q4 2020 increased 28% to $6.3 million from $4.9 million for the corresponding period in 2019, with the increase being primarily due to higher amortization resulting from the continued build-out of the Fiber network, as well as the incremental impact from the Cedar acquisition. Total operating expenses for the fourth quarter of 2020 increased 15% to $18.5 million from $16.1 million for the fourth quarter last year. The increase is the result of the following. Excluding the impact from the acquisition of Cedar on January 1st of 2020, people costs increased by $2.2 million, primarily from an increased workforce to support business expansion, including the Ting Internet expansion and the Ting MSE platform build, as well as $0.4 million from higher anticipated performance bonus payments year-to-date versus last year, due to improved business performance. In addition, there was a net $1 million increase from the fourth quarter of 2019, when we commenced capitalizing the development work efforts, associated with our domains platform. Cedar related expenses added $0.4 million to the quarter, primarily workforce related. Marketing costs decreased by $0.5 million, mainly driven by the transition of the mobile business, while costs related to travel and other discretionary expenses decreased by $0.2 million. Stock-based compensation increased $0.2 million, while facility costs increased by $0.3 million, partially related to elimination of some of our office space. Amortization of intangible assets decreased by $0.2 million, due to the write-down of the Ting Mobile assets earlier this year, offset by the set-up this year of intangible assets for the Cedar customer relationships and network rights totaling $5.6 million. And lastly, there was a $0.2 million net increase in expenses related to foreign exchange impacts. Specifically, we had a gain of $0.3 million in Q4 2020, related to mark-to-market re-measurements for our forward currency contracts that do not qualify for hedge accounting, compared to a gain of $0.1 million in Q4 of last year, resulting in a year-over-year gain of $0.2 million. In addition, we experienced a loss of $0.3 million on the revaluation of foreign denominated monetary assets and liabilities this quarter, compared to a gain of $0.1 million in the fourth quarter of 2019, which had the impact of increasing our expenses $0.4 million, on a year-over-year basis. As a percentage of revenue, total operating expenses increased to 26% from 19%, with the increase being mainly due to the lower revenue in Q4, 2020, resulting from the sale of the Ting Mobile customer relationships to DISH. Net income for the fourth quarter of 2020 was $2.1 million, or $0.19 per share, compared with $5.8 million, or $0.55 per share in the same period 2019. The decrease was primarily driven by higher depreciation, driven by our continued Fiber network build, lower EBITDA and a slightly higher effective tax rate. Adjusted EBITDA for the fourth quarter was $12.8 million, down 21% from $16.2 million for Q4 2019. The reduction in EBITDA was largely driven by the prior year bulk domain name sale, noted earlier. Turning to our balance sheet and cash flows, cash and cash equivalents at the end of the fourth quarter of 2020 were $8.3 million, compared with $10.2 million at the end of the third quarter of 2020 and $20.4 million, at the end of the fourth quarter of 2019. During the fourth quarter, we generated $1.7 million in cash from operations, compared with $13.2 million in the same period of 2019. We also drew down $8.0 million on our loan, which was more than offset by our investment of an additional $11.7 million in property and equipment, primarily related to the Ting Internet build out. Note, cash flow from operations this quarter was impacted by the transition of the Ting operations, including daily cash collections, to Dish in the fourth quarter after a two month post-close transition period. Cash flow from operations, are expected to return to normal levels in Q1 of 2021. Finally, deferred revenue at the end of the fourth quarter was $152 million, down slightly from $154 million, at the end of the third quarter of this year. And up from $149 million at the end of the fourth quarter of last year. That concludes my remarks. I'll now turn it back to Elliot.

[Elliot Noss:]

At the close of our corporate planning cycle, after goals and measurement setting, and budgeting, and detailed product roadmaps, comes communication throughout the organization. Coming out of this year's communications to the whole company, I find myself feeling particularly optimistic. The budget numbers are good. Sure. The opportunities are plentiful in each business. But when I tried to identify the source of my optimism, I realized that it was a feeling that the business was closer to what it should be, than at any time in the past. Starting with the Q1, 2021 results, we will be presenting the business to investors in segments. In this first year of communicating to you with the results presented by segment, I want to set the table, both for the year, and for my optimism and to ask for your patience, as we learn a new language together. In Domains, the story of the last few years has been one of steady growth. And even that has masked the improvement in revenue quality. Specifically, we no longer have revenue from portfolio sales. And we have lower revenue from some of the lower quality eNom retail streams. We have more than made-up for both of these declines with growth in the core offerings. While it continues to be a moderate growth business, the foundation keeps getting stronger and the opportunities for outsized growth continue to increase with the improvements in our underlying technology. In Mobile, we are consumed with helping DISH migrate Boost and launch their 5G network. As noted above, things are progressing at an impressive pace, but the timing of all of the moving parts is quite dynamic. In addition, there is some reliance on third parties outside of either our or DISH’s control. That will make 2021 both unpredictable and uneven, in terms of revenue. Accordingly, I will be waiting until next quarter to provide financial guidance in this business. And it is not impossible that I will be asking for your indulgence again next quarter. Most importantly, the developments in the US mobile phone business since last summer have greatly reinforced that we made the right decision to pivot when we did. We have played to our strengths and away from our weaknesses, and this move has both pushed us in a direction that feels right, and has created more leverage and synergies with the rest of the business. In Fiber, the story is a simple one. Lots of growth, lots of opportunity -- in fact the greatest opportunity I have seen in my lifetime – and lots of hard work needed to take advantage of these opportunities. 2021 will include our largest CapEx spend by far. We would love to see CapEx double this year. Of course that means corresponding growth in fiber customers. But the work underneath that growth is more important as we continue to build a construction, billing, and provisioning platform that can scale to meet the massive opportunity that is the coax-to-fiber conversion taking place in the US. As CapEx in the Fiber business scales, so will the EBITDA burn. Investors will now need to retrain themselves to look at each of the three business segments separately. We understand that we are asking more of our investors and we will do our best to provide them with more tools to make their jobs easier. In this vein, on February 16, we will be providing a video deep dive into our experience in Holly Springs over the last four years. We have chosen to use a narrated video format with some significant financial disclosure embedded, in order to balance the needs of investors with competitive dynamics. We noted last quarter that we are unique as a public company competing in this space. Finally, in light of our new assessment of segments and related financial disclosures in 2021, I want to talk for the first time about corporate overheads. These include the obvious things like finance and HR, as well as networks and facilities. They also include shared technology elements like security, authentication and payments infrastructure. We have three billing and provisioning platforms

[End of Q&A:]