Earnings Transcript for TCX - Q3 Fiscal Year 2024

Monica Webb: Welcome to Tucows' Third 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. We will begin with opening remarks from Elliot Noss, President and CEO of Tucows and Ting; followed by business remarks from Dave Woroch, CEO of Tucows Domains; Justin Reilly, CEO of Wavelo; Elliot Noss on Ting; Ivan Ivanov, Tucows' new CFO, who will discuss our financial results in detail and finish with closing remarks from Elliot Noss. 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 by e-mail to ir@tucows.com until Thursday, November 14. 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, November 26, at approximately 5

Elliot Noss: Thanks, Monica. Last week, we announced major changes to the Ting business. We laid off over 40% of the Ting workforce, mostly those involved directly or in support of market expansion and new plant construction. We have also streamlined other functions within the Ting and Tucows businesses, which had impacts within Tucows' shared services at the parent level. This was the most prudent way to move Ting to a sustainable cost structure with positive and growing adjusted EBITDA. The plan removes around $22 million in cash operating expenses from the business, with the bulk of those reductions in people costs. It was done following extensive exploration of strategic and partnership options for the Ting business to secure equity capital to continue network expansion. I note that we were unsuccessful in finding a long-term common equity partner. Well, all of you will have seen 4 specific transactions in the fiber space in the last year, 2 with T-Mobile and 1 each with Verizon and Bell Canada. Those transactions involve companies much, much larger than Ting in scope and scale. There have been little to no common equity transactions in the fiber mid-market in the last year or 2. We will stop all expansion into new markets and take a more conservative approach to capital deployment, focusing on success-based CapEx to load the existing 132,000 owned addresses and the over 40,000 partner addresses, as well as the over 500,000 more addresses that will be added by our partners in Colorado Springs and Memphis. We expect this to lead to significant adjusted EBITDA growth for Tucows in 2025 and for the Ting business to be in and around adjusted EBITDA breakeven in 2025. I do note that Ting will still have over $40 million in interest expense that we will have to pay before spending on success-based CapEx in 2025. At the end of September, we had nearly $80 million in cash on hand, including cash restricted for the ABS. And the first debt expiry we will have is 2028. I will talk more about how we view and how investors should view the Ting investment in my closing remarks. On a consolidated basis, in the third quarter, Tucows had strong year-over-year growth in revenue, gross profit and adjusted EBITDA. Ivan Ivanov, our CFO, will cover our financial results in detail. We continue to prioritize deleveraging the business. And in Q3, we made $2.5 million in payments on the Tucows syndicated debt, which was on the low end of what we expect to pay down quarterly and held down by some onetime expenses. I'll now turn over to Dave Woroch, CEO of Tucows Domains.

David Woroch: Thanks, Elliot. In Q3, Tucows Domains delivered our seventh consecutive quarter of revenue growth. We also had solid year-over-year gains in gross margin and adjusted EBITDA, a testament to the reliability of our business, the strength of the brand and consistent attention to cost control. Our domains under management were up marginally, both year-over-year and quarter-over-quarter. And while our transactions were down 2% from Q3 of 2023, they were stable quarter-over-quarter. Both measures compared favorably to the results from industry counterparts. Revenue for Domain Services for Q3 was $64.7 million, up 6% from $61.1 million for the same quarter last year. Gross margin was $19.8 million in Q3, up 8% from the same quarter last year, with strength across the business. Our year-to-date gross margin is up 6%, and ahead of 2023 at this time by $3.4 million, a testament to how we've been able to grow margin in a competitive space, in part due to strong reseller relationships. Domain Services adjusted EBITDA was $11.5 million in the third quarter, up 6% from Q3 of last year. Looking at the results from the segments of our business. In our wholesale channel, revenue for Q3 was $55 million, up 6% compared to $51.9 million for Q3 of last year, and gross margin was $14.4 million, up 8% from $13.3 million from Q3 of 2023. Within the wholesale channel, Domain Services gross margin was up 1% in Q3 compared to the same period last year, while value-added services gross margin was up 26% year-over-year. The large increase in value-added services margin was driven primarily by strong nonrecurring sales from our expiry stream and to a lesser extent, from our hosted email service. In our retail channel, revenue for Q3 was $9.7 million, up 5% from $9.2 million in Q3 of last year. Retail gross margin for the third quarter was up 8% year-over-year. Our combined overall renewal rate at 76% in Q3 across all Tucows Domains brands remains within our historical range and above the industry average. In summary, the key measures of the health of our business demonstrate that our core business is solid and holding its own relative to our competitors and in a mature industry. We continue to balance cash generation for Tucows with investment in both our platform and infrastructure and in developing additional new and complementary services to generate further growth for the business. These are midterm opportunities for the business, of which our registry services is the furthest along and the one I will have the most to share and discuss in the coming quarters. Now over to Justin Reilly, CEO of Wavelo.

Justin Reilly: Thanks, Dave. In Q3, Wavelo delivered another strong quarter of revenue, gross margin and adjusted EBITDA, further reminding us of how resilient these recurring revenue SaaS businesses can be. Wavelo's revenue was $10.1 million in Q3, a 4% decrease from last quarter and a 9% decrease from Q3 2023. Gross margin was $10 million this quarter, a 1.4% decrease from last quarter and a 4.6% decrease from Q3 2023. Adjusted EBITDA for Q3 was $3.4 million, a decrease of 12.4% quarter-over-quarter and an 18.5% decrease from Q3 2023. The year-over-year numbers had a couple of drivers

Elliot Noss: Thanks, Justin. Ting's focus now shifts from increasing our fiber footprint, raising capital and running an ISP, to simply running an ISP. This focus will serve us well. In Q3, Ting added 1,400 net new subscribers, growing 21% year-over-year and taking us to almost 50,000 subscribers in total. We also had over 15% year-over-year growth in completed serviceable addresses in Q3, taking us to 132,000 serviceable addresses for Ting-owned infrastructure. Our partner markets are continuing to ramp up their builds with 60% growth in addresses for Q3 year-over-year. This brings us to 172,600 total serviceable addresses across all Ting footprints. Revenue for Q3 grew 19% year-over-year to $15.3 million, driven by a healthy increase in subscribers over the same period. Gross margin in Q3 increased 38% to $11 million year-over-year and an adjusted EBITDA loss of $5 million, which was $7.1 million less in Q3 of this year compared to Q3 of 2024 (sic) [ 2023 ], in part driven by the reduction in workforce from Q1 of this year as well as a reduction in sales and marketing spending as we pulled back to analyze the effectiveness of our tactics used in customer acquisition. We started decelerating our fiber CapEx spend in Q2 as we began to conserve capital. Again, in Q3, our CapEx spend was reduced from just over $12 million in Q2 to $8.2 million in Q3. We expect to finish off some work responsibly in a couple of markets, and then you will see CapEx become near exclusively success-based. I talked about focus. We now move our focus to penetration, churn and ARPU. We will be putting thought into how to present those metrics going forward, but we are no longer building new organic footprints. The existing scorecard is no longer the right presentation. You will see a new presentation for Q4 earnings in February. Now we'll hear from our new CFO, Ivan Ivanov, who will discuss our financial results in detail.

Ivan Ivanov: Thank you, Elliot. Our third quarter results showed strong year-over-year performance for revenue, gross profit and adjusted EBITDA, reflecting our continued focus on profitable growth. Starting with revenue. Total consolidated revenue for the third quarter of '24 increased 6.1% to $92.3 million compared to $87 million for the third quarter of '23, primarily driven by revenue gains from the Ting and Domains businesses. Tucows Domains revenue was up 5.9%, increasing to $64.7 million from $61.1 million in the prior year, primarily driven by an expiry option sale in Q3 of this year. Ting grew revenue 19% year-over-year, increasing to $15.3 million from $12.9 million in the same quarter last year thanks to a 21% increase in subscribers over the same period. Wavelo's revenue decreased 9% to $10.1 million from $11.1 million in Q3 of '23, reflecting churn from DISH's Boost subscribers from their peak post migration in Q3 of '23, as well as the transition to subscriber-based revenues without the professional services included a year ago. Finally, corporate revenue was up 12% to $2.2 million in Q3 '24 versus $2 million last year. The consolidated gross profit was $22.2 million, up 32.4% versus Q3 '23. The increase was driven by year-over-year gross margin gains from the Ting and Domains businesses totaling $4.4 million but were partially offset by declines of $1 million from Wavelo and corporate. Consolidated gross profit as a percentage of revenue increased to 24% in Q3 '24 from 19% in Q3 '23, driven primarily from Ting and Wavelo. Gross profit before network costs for the third quarter increased 9.1% year-over-year to $39.7 million from $36.3 million in Q3 '23. At an efficiency level, gross profit before network costs increased to 43% of revenue from 42% in the prior year. The reduction in network expenses from $19.5 million in Q3 '23 to $17.5 million this quarter reflects a nonrecurring asset impairment charge in Q3 of last year. Breaking down gross margin by business, Tucows Domains gross margin increased 7.8% to $19.8 million from $18.4 million in Q3 '23. As a percentage of revenue, gross margin for Tucows Domains increased slightly year-over-year from 30% to 31%. Ting gross margin for Q3 increased 38% year-over-year to $11 million from $8 million for the same period last year. As a percentage of revenue, gross margin for Ting was 72% in the third quarter of '24, up from 62% in Q3 of last year. Over the past 4 quarters, we have seen continued increases in Ting's gross margin as a percentage of revenue as Ting continues to reduce costs while growing top line revenue. Wavelo's gross margin decreased 4.6% to $10 million this quarter from $10.5 million in Q3 '23. Gross margin as a percentage of revenue continues to increase for Wavelo. In Q3 '24, it was 99%, up from 95% in Q3 '23 and up from 94% in Q3 of '22. Total consolidated operating expenses, excluding network costs, decreased 5% to $32.2 million from $33.9 million in Q3 '23. The decrease is primarily the result of a $2.1 million reduction in sales and marketing costs, primarily from decreased marketing spend in Ting, as well as a $1.4 million in fully amortized intangible assets from the Enom brand and customer relationships. The overall operating expenses reduction was partially offset by increased costs from professional fees, including audit fees and certain other services in conjunction with our Ting transformation. As a percentage of revenues, operating expenses declined to 35% in Q2 of this year from 39% in Q3 of '23. We reported a net loss for the third quarter of $22.3 million or a loss of $2.03 per share compared with a net loss of $22.8 million or $2.09 per share for the third quarter of '23. The decreased loss was primarily driven by strong growth in adjusted EBITDA. Adjusted EBITDA for Q3 was $8.7 million, up 94% from $4.5 million in Q3 '23, primarily driven by profitability improvements at Ting and Domains. The adjusted EBITDA breakdown amongst our 3 businesses is as follows

Elliot Noss: On TCX adjusted EBITDA guidance year-to-date, we're at over $22 million, which puts us on track to approximately double in 2024 from the $15.5 million of adjusted EBITDA for 2023. I want to share with outside investors how I think of TCX. I think of the business in 2 parts

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