Q1 2021 Tucows Inc Earnings Call - Pre-Recorded
Accounts third quarter 2020 management commentary, we have prerecorded prepared remarks regarding the quarter and outlook for the company. A transcript of these remarks is also available on the company's website and move a live question and answer period. Following the remarks shareholders analysts and prospective investors are invited to submit their questions to two cows.
Management by email at IR at <unk> Dot Com until Tuesday November 10th management will address your questions directly or in our recorded audio response and transcript will be posted to the truth of web site on Tuesday November 17th at approximately four P M Eastern time.
We would also like to advise of the updated Tucows quarterly Kpis summary, which provides key metrics for all of our businesses for the last seven quarters as well as 2018 2019 and year to date is available in the investors section of the website along with the updated Ting build scorecard and investor presentation.
Please note that the Kpis summary has been modified to reflect our transition from a mobile virtual network operator to of mobile services enabler of this means the mobile metrics that are no longer applicable to our business have been removed.
Now for managements prepared remarks on Thursday November five two accounts issued a news release reporting its financial results for the third quarter ending September 32020 that.
That news release and the company's financial statements are available on the Companys website at Tucows Dot com under the investors section. Please.
Please note that the following discussion may include forward looking statements, which as such are subject to risks and uncertainties that could cause actual results to differ materially. These risk factors are described in detail in the Companys documents filed with the SEC specifically the most recent reports on the form 10-K and 10-Q the company urges you to read.
Read its security filings for a full description of the risk factors applicable for its business.
I would now like to turn the call over to Tucows, President and Chief Executive Officer, Mr. Elliot Noss. Thanks Monica.
Q3, 2020 was another strong quarter of performance.
The highlight at the outset that our revenue and gross margin figures for the third quarter reflects our transition to a mobile services enabler model from an <unk> model and the sale of the vast majority of the Ting mobile customer base of dish networks of third of the way through the quarter.
Dave will discuss in more detail here as the.
Chi Chi the.
The complicating factor is the compensation, we got for the customer base.
Money received for the burn out of the sold customers is being recognized under other income which sits below operating income as the gain on the sale of the T mobile assets.
This income stream will remain in place for well over five years.
When we considered this transaction we looked at improving the cash contribution to the overall business.
And we considered all amounts received as part of the analysis.
We knew it would complicate our reported and make it more difficult to follow but we give our investors credit for being able to follow and we maximize for cash generated.
The amount in other income will be relatively close to what the sold customers would have generated on a contribution basis and will decline over time roughly with churn as.
As a result, as we transitioned to the MSC business, our reported revenue and gross margin results will be negatively impacted with all of that revenue and much of the expenses associated with it now subsumed in other income.
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 revenue and gross margin the best way to view our performance for Q3 is by confining those to the domains in Ting Internet businesses.
That is absent the impact of mobile.
Revenue from our domains of Ting Internet operations for Q3 was $65 5 million a decrease of 1% from $66 4 million for the same period last year.
A strong increase from Ting Internet was more than offset by a decline of debates. However, I will remind you that last year's domains revenue included a $1 9 million bulk sale from our portfolio as we exited that business exclude.
Excluding net bulk portfolio sale revenue for domains in Ting Internet was up 2% year over year.
Gross margin for the domains in Ting Internet businesses for Q3 was essentially unchanged year on year of 21 8 million. However, excluding the contribution of the bulk portfolio sales year over year gross margin for domains and Ting Internet was up 10%.
Although net income incorporates the net impacts of the transition of the mobile business the year over year comparable was impacted by three factors that I want to highlight.
Already mentioned the large portfolio sale of Q3 of last year that contributed approximately $1 5 million. After tax. In addition, Q3 2020 net income was impacted by a higher effective tax rate in this year's quarter, which Dave will provide additional color on in a few minutes.
And we incurred a one time non cash write down of the sale of Ting mobile assets of $3 $5 million, which is included under other income.
Excluding the write down of the T. Mobile assets net income was $3 4 million or <unk> 33 per share compared with $4 2 million or <unk> 40 per share for Q3 last year, both down 19% respectively.
Adjusted EBITDA for Q3 was $13 4 billion compared with $14 8 million.
And finally cash flow from operations was 11 4 million up slightly from $11 2 million in Q3 last year. Once again underscoring the ability of the debates and mobile services businesses to consistently generate cash to invest in the outsized growth opportunity inherent in Ting Internet.
Yeah.
Now looking at each of our individual businesses the.
A domains business delivered another solid quarter with consistency of profitability of this business again benefiting from the acceleration of the Digitization of the economy in response to the pandemic.
This acceleration is decelerating for fans of the second order derivatives.
<unk> also continued to benefit from the higher transaction activity, resulting for the pandemic total registrations for Q3 were up 6% year over year to 387000 with new registrations up 20% gross margin for the retail channel. However was essentially flat compared to Q3 of last.
Year as a result of the delay of the positive impact on gross margin of the higher transaction volumes due to deferred revenue accounting.
And the higher priced enorm related names that have naturally been declining because I have discussed previously.
Those now only represent a little more than 10% of the retail channel gross margin.
The retail channel renewal rate like that for wholesale also remains solidly above the industry average consistent with Q2 of 82%.
In my Q2 remarks in August of discuss the benefits of the new domains infrastructure across all three of our businesses and how we have teased out functional elements that were common across all three platforms and of the process developed transferable capabilities and institutional knowledge.
At this point of the year, we are deep into budget planning for 2021.
And as we are doing the work to shift the platform from a retail to an MSC service, we will take advantage of some of the key structural of architectural work that we did of the debates platform. In fact, we've taken a core team who worked out of what I would call the nervous system of the new debates platform and shifted them over to the.
Dish initiatives in order to leverage that very important work and where we believe it will have the greatest near term return on investment.
On Ting mobile Theres not a lot of news to report just yet I will mostly continue to frame the business as I believe you should think about it and track it over the coming months quarters and years.
The mobile business will be defined by three key line items the.
Earn out on the legacy subscriber base sold for dish the platform fees on the mobile services enabler of our MSC platform.
And the revenue and costs on professional services, including transitional for TSA services for now you will also see a line called retail which represent a small amount of Verizon subscribers that are still entirely ours.
The legacy base the generates the earn out continues to churn at historical rates still quite low since COVID-19.
That will get more interesting when Ting mobile introduces new dish enabled pricing, which we've hinted at quite broadly and should see shortly.
We expect thousands of legacy customers to take advantage of that pricing.
It should lower our churn rate.
As for gross margin per subscriber it will really depend on how the new pricing changes consumption.
We of Street tested this and we feel it will land within a very comfortable range.
Once we settle into that new subscriber churn rate and monthly gross margin per subscriber of the legacy base I expect the earn out to be quite predictable as the declines of steadily over time.
The small contribution you will see all of the TSA for the first number of quarters again reflects our people. The dish is essentially contracting to continue to operate the retail business.
To me this line resembles our old mobile device sales at a couple of ways first the revenue will be followed closely by expenses with the rather narrow margin that we retain said differently. The TSA revenue could potentially be a bit distracting and can look more exciting than it is second.
It doesn't correlate to the real health of the strategic mobile business, which will be driven by the MSE platform revenue in the long term.
And finally, the MSC fees.
Of those fees will grow a bit in the coming quarters as we add new subscribers on Ting mobile then they will grow appreciably once for all of the other side of the boost migration sometime in 2021.
And we hope for material upside in 2022 and beyond as dish grows its mobile business and we potentially bring additional providers onto the platform.
Back in the present, we have started our work in earnest to support dish and migrate boost.
After our first quarter operating of the new paradigm, we are comfortable that mobile's contribution to the overall business will increase as expected. We expect contribution growth from this segment post boost migration of welcome change for the flat to down we have had the past couple of years.
For the next while the mobile section of the quarterly call will get smaller.
We were of business with one customer you could easily track our customers progress of their investor call.
We will keep you apprised of what you would need to know to follow the business that.
That will just be much simpler for a period.
Moving onto the Ting Internet.
The third quarter continues to illustrate the results of our efforts to scale the business with new highs of subscriber growth and capex spend in particular.
That being said, we note that internally we view these as modest gains compared with what we continue to learn and building of the operating more efficiently. The foundational work, we are actively undertaking to accelerate growth.
And the opportunities in front of us.
We are even more bullish of fiber internet access and we were quite bullish before.
The pandemic has emphasized the importance of high capacity symmetrical bandwidth, we continue to feel the by far the best is yet to come in this business.
Our investment of Capex continues to trend in an upward direction with $10 7 million spent in Q3, representing an increase of 25% for Q3 of last year.
We passed 3700, new addresses and 2600 of those became serviceable, bringing us to a total of 50000 to 500 serviceable addresses an increase of 48% from Q3 of last year, we had a bump in serviceable addresses with the lighting of central office facilities in Fuchs.
We've read of North Carolina in Q2, and Centennial, Colorado in Q3.
We expect to light more facilities in North Carolina, and Colorado, with Q4, which will continue to grow our serviceable addresses and feed our subscriber funnel.
In Q3, we saw our biggest quarterly net subscriber increase of 1200 subscribers, bringing us to a total of 13700 subscribers.
The pent up demand for Ting fiber remains very strong.
The pandemic induced increase in demand for fiber combined with reduced installations. During the first month of COVID-19 created a large backlog of orders for us.
We've been grinding through the backlog and increasing our installation capacity, but despite that the backlog remains of this quarter due to ever increasing demand at the orders.
We view this as a good problem to have and are working on adding resources and streamlining processes to get through it.
A key focus for our fiber business currently is increasing our build velocity.
This is partly because of where we are of the trajectory of the growth of the tip of fiber operation and where we have laid the foundations with people with platforms and with processes to support scale.
But there is a pressing urgency now as we're seeing the time frame for the generational transition of coax or fiber compressed as the result of the pandemic induced nationwide clamor for fiber to the premise of service.
As we look to our 2021 planet, we're hoping to significantly increase our capex spend over 2020.
Investors should expect our investment in fiber our announcements of new markets.
The evolution of our operations and products to reflect our focus and ramping up this business.
You will see us of new markets that give us more year round to build velocity to offset our seasonal builds in Colorado and Idaho.
As new ways to build of install faster.
One new development is micro trenching.
It has been deployed widely in Europe and has been used in North America for about a decade and is that a point, where we can find experts with solid track records for utilizing best practices here.
This is the new deployment method for tic that adds to our competencies in traditional underground the area of fiber construction.
Michael Retrenching, specifically it gives us a new option to deploy that is less expensive than underground drilling and boring it is materially faster.
It also enables us to navigate cities and areas within the cities with compromised access of the public right of way, which is an issue. We encounter is older communities.
Look for us to be utilizing micro trenching more broadly for 2021.
Another goal for 2021 is to deliver a comprehensive product lineup to business institutional and residential customers.
We've been in this business for five years, now and expanding our offerings as part of our natural growth.
Will create additional revenue streams, but it is more focused on increasing take rate by removing coals.
We are already seeing increasing demand for our newly offered devices, such as TV streaming boxes and mesh Wi Fi extenders for our residential customers.
Finally, our private infrastructure partner SIFI networks deploying in Fullerton, California began to latest network at the tail end of Q2 with <unk> first customers coming online there in early July.
Our infrastructure partner net the fiber deploying in Solana Beach, California completed its first phase of the past addresses at the end of Q2, and we let our first customers in August.
Now working through installation of preorders in serviceable areas in both markets.
I'd now like to turn the call over to our CFO, Dave Singh to review, our financial results for the quarter in greater detail, Dave. Thanks, Elliot given the Elliot already summarized the mechanics of the financials of the mobile services business at the outset I wont review of those here again, but I will speak to the specifically within the context of the results you can also go for.
Of the note at the beginning of our news release for an explanation of those and the impacts of our Q3 results.
Total net revenue for the third quarter of 2020 was $74 3 million of 16% decrease from $88 1 million for the third quarter of last year.
As Elliot discussed the majority of the decrease was the result of the sale of the Ting mobile customer relationships on August one, but it was also due to the large bulk domain sale in Q3 last year from our portfolio of business, which we have since exited the.
Those decreases were partially offset by continued strong growth continuing internet revenue largely the result of the Cedar acquisition in January of this share but also of the result of the continued growth in the Ting Internet services customer base cost of revenue for network costs decreased 13% to $48 3 million for $55 8 million for Q3 of last year with the <unk>.
Climb primarily due to the lower revenue.
As a percentage of revenue cost of revenue for network costs rose slightly to 65% as the improved mix in the domain business was offset by the shift in mobile revenues, including the addition of low margin transition services to dish.
Gross margin for network costs for the third quarter decreased 20% to 26 million from $32 4 million with the decrease primarily related to the sale of T mobile assets and to a lesser extent the outside portfolio sale. In Q3 2019 note the margins generated by the mobile customer sold the dish is now incorporated the earn out recorded in other income.
As a percentage of revenue gross margin decreased to 35% for 37% in Q3 2019.
I will now review of gross margin for each of the domain services and network access businesses.
Starting with the main services gross margin for the third quarter decreased 5% to $18 9 million for $19 9 million in Q3 last year.
Excluding the large bulk domain seller referenced earlier gross margin increased 5% of.
The percentage of revenue gross margin for domain services was unchanged from Q3 of last year of 31%.
The when excluding last year's bulk sale gross margin was up 2% year on year.
Within the domain services business gross margin for the wholesale channel increased 8% to $14 4 million from $13 3 million for the same quarter last year. The result from year over year growth in the number of domains under management as well as of the success of our continued focus of managing the business for gross margin in particular, our focus on high quality customers as of <unk>.
Range of revenue gross margin for wholesale increased 28% from 25%.
Gross margin for retail domain services was unchanged from Q3 of last year it for $4 million and was relatively flat the 50% of percentage of revenue.
Turning now to network access gross margin for the third quarter decreased 43% to $7 1 million from $12 5 million in Q3 last year again, the vast majority of the decrease is the result of the absence of revenue and margin for the last two months of the quarter for the Ting mobile customers are sold to dish.
The mobile services gross margin decreased by 61% year over year to $4 1 million from $10 6 million as the result of the transition in that business from retail services for the first month of the quarter to an MSP model for the last two months of the quarter.
The comparative period of last year. It was of course entirely retail services I.
I will note. However, we generated one point of $1 million in other income specifically the gain on the sale of 10 customer assets on the face of income statement, which represents the earn out on that customer base net of of $3 5 million noncash write down certain intangible assets from prior <unk> customer relationship acquisitions.
Looking at the fiber Internet services business gross margin increased 52% to $3 million from $2 million in Q3 last year driven by the incremental contribution of Cedar networks acquired at the start of this year as well as continued growth in the Ting Internet subscriber base.
As a percentage of revenue gross margin for network access increased to 53% of 51% in Q3 of last year with mobile service of tipping to 47% of 49% and fiber Internet services declining to 64% from 68%.
Year to date of 2020 gross margin as a percentage of revenue of 62% of the fiber business.
Turning now to costs network expenses for Q3, 2020 increased 26% 6 million from $4 8 million in the same period, a year ago with the increase being primarily due to higher amortization, resulting from the continued build out of the fiber services network as well as the incremental impact from the Cedar acquisition.
Total operating expenses for the third quarter of 2020 decreased 2% to $18 6 million from $19 million for the third quarter last year.
The decrease is reflective of the reduction in certain costs related to the Ting mobile asset sulfur dish, such as customer service and fulfillment.
Those costs are now reflected in the net earn out numbers within other income normalize for this impact expenses increased $1 4 million due to the following excluding the impact from the acquisition of Cedar on January 1st of all the share people costs increased by $1 8 million, primarily from the increase workforce to support business expansion, including the Ting Internet expansion.
And the thing MSE platform build as well as the Oakland formulary for the higher anticipated performance bonus payments year to date versus last year due to an improved business performance the.
These were offset by the <unk> 2 million expense reduction from the composition of development cost associated with our domains platform work in the fourth quarter of 2019, we commenced capitalizing the work efforts associated with our new tools being built.
And the related expenses added <unk> $6 million for the quarter, primarily workforce related.
Marketing cost decreased by <unk> 2 million, while costs related to travel and other discretionary expenses decreased by <unk> 4 million amortization.
Amortization of intangible assets decreased by <unk> 2 million due to the write down of the Ting mobile assets offset by the setup the share of intangible assets for the theater customer relationships in network rates totaling $5 6 million.
Finally last year, we also had a loss on disposition of property and equipment for sort of point of $1 million of no corresponding loss in Q3 of 2020 of.
The percentage of revenue total operating expenses increased to 25% from 22% with the increase being mainly due to the lower revenue in Q3. This year, resulting from the sale of the Ting mobile customer relationships to dish.
Net income for the third quarter of 2020 was <unk> 7 million of <unk> <unk> per share compared with $4 $2 million of 40 cents per share in the third quarter of last year.
Net income was impacted by the noncash write down of certain assets related to the sale of the Ting mobile customer relationships of dish.
Including the archetype of impact of the write down net of income would've been $3 4 million for 33 per share down 19% year over year the.
The primary drivers of the decline excluding the write down for the outside the portfolio of bulk domain name sale in the third quarter of 2019 and of higher estimate of annual effective tax rate driven by the geographic mix of our income.
Adjusted EBITDA for the third quarter decreased 11% to $13 2 million from $14 8 million for Q3 last year.
Excluding the impact of the outside of bulk domain names sale last year adjusted EBITDA grew 3%.
Turning to our balance sheet and cash flows cash and cash equivalents of the end of the third quarter of 2020 was $10 2 million compared with $8 9 million at the end of the second quarter of this year and $12 million at the end of the third quarter of last year true.
For the third quarter, we generated $11 4 million in cash from operations compared with $11 2 million in Q3 last year cash from operations on the substantially offset by our investment in additional $10 6 million in property and equipment, primarily related to the Ting Internet buildup, we did not repurchase any stock during the quarter.
Deferred revenue of the end of the third quarter was $154 million down slightly from $155 million at the end of the second quarter of this year and flat compared to the end of the third quarter of last year.
That concludes my remarks, I'll now turn it back to Elliot.
Thanks, Dave and.
And the value of investment community investors like the concept of an owner's manual and on some level that is the way I view these ongoing transcripts.
This quarter there were a couple of elements that feel like important additions to the manual the.
The way to track our mobile business going forward.
Made up a fair bit of my opening comments and I expect as time passes will take up some more.
The other is what we expect from Ting fiber in the coming years.
I have previously mentioned that we now see the bulk of the transition from coax to fiber of the U S. Taking place over the next five to six years not the 10% to 12 years, we previously expected.
<unk> also noted a number of times at recent remarks the <unk>.
Money was pouring into this asset class around the world, but in the U S. In particular.
There are implications that land and the numbers that I want to help you all understand.
The first implication of the above is that we want to accelerate an already aggressive plan to lay as much fiber as we can.
We have noted repeatedly the influx of capital to the space.
And of yield starved world mature assets and a fantastic infrastructure asset class like fiber to the home are trading at very lofty multiples.
Fiber is the utility that looks like of business. You have currently if one has the skills and wherewithal to be able to build and operate these assets. One can build EBITDA at 4% to five times, which puts a huge premium on building as much as possible.
We will continue to attract and invest in world class management talent in this regard.
This creates the second dislocation the.
The faster, we build particularly in new footprints the greater the drag on cash EBITDA.
At the same time, we are seeing the expected strong growth in cash generation in the markets. We are already on.
On some level, we are doing two things inside the same business segments building assets that will yield EBITDA of great returns and operating assets that are providing amazingly consistent returns and traded high multiples.
Our challenge here becomes helping you the investor understand the interrelationship between those two.
This means enhancing our fiber metrics, including looking at ways to provide more detailed analysis on a city level.
The third factor that I want you all to be aware of is the fact that we are public is unique in the space in the U S.
When we look at the other management teams that are leaders in this transition from coax to fiber.
They are all backed by private equity or infrastructure funds.
They openly talk about the advantages of long term capital and not having to obsess over beating quarterly numbers.
We would like to meet this head on.
We believe that our investors are overwhelmingly long term in their thinking.
No I am in.
And I know we are.
We also believe that we will have no problem with access to capital as we continue this journey.
The combination of of yield starved world the abundance of capital of the attractiveness of the space provides more than enough opportunity for capital without having to change our corporate structure.
But we do want our investors to be aware of our uniqueness in this regard.
The force factor as we grow is understanding the difference between growth in the machine and growth of more direct operating expenses of the city level, we will have to provide investors with more tools and more information in order to aid in this understanding as a reminder, the fiber machine is the central.
<unk> costs necessary to build and launch fiber assets.
What we expect here is the declining ratio of the centralized costs relative to capex spend in the period.
In closing.
I want to reiterate that there is consensus among of those participating in the coax or fiber transition.
Infrastructure funds private equity firms bankers consultants and suppliers.
But the scarce resource is not capital and is not opportunity it is management.
And we continue to believe that we have the best management team attacking this opportunity, we say that with respect to a lot of existing operators, but we think two things set us apart.
First a number of us have been involved of the ISP space since the early days of dialogue and that experience is invaluable.
Experienced building fiber is important but only for the first couple of years of of build.
Operating those assets is important for the next 100 years.
We believe we are the only operator, who builds and maintains their own software stack.
This provides us with significant advantages that manifest primarily in speed and customer experience, but of course also have an operating cost advantage.
We are aware as we enter this next phase that we will be asking a little more of our investors.
And we will need to provide more tools. In this regard. We are also extremely confident that our investors are up for the challenge and we expect to reward them handsomely for their support.
I look forward to your written questions and exploring areas that interest you with greater detail again. Please send your questions. The IR at <unk> Dot Com by November 10th and look for a recorded Q&A audio response and transcript of this call to be posted to the <unk> website on Tuesday November 17th at approximately.
The four P M eastern time, thank you.