Q3 2021 Tucows Inc Earnings Call - Pre Recorded
And adjusted EBITDA was $11 2 million compared with $12 2 billion in.
In Q2 last year exclude.
Excluding the impact of the change in how our mobile results flow through the income statement due to the shift to the MSE model revenue for just the domains and fiber Internet businesses for Q2 increased 5% year over year, $68 1 billion and gross margin for domains and fiber was up 4% to 20.
$2 3 billion.
Total revenue for the second quarter was $75 $1 million.
Compared with $82 1 million for the same period last year and total gross margin was $18 2 million compared with $23 million in Q2 last year.
Decrease in each as a result of the shift in our mobile services business to the MSE model in early August of last year.
Turning now to our individual businesses, starting with domain services Q2 was another solid quarter. Once again, highlighting the overall consistency of the business revenue and gross margin were both up 4% year over year with adjusted EBITDA of just over 3% to $12 8 million.
With the outsized transaction volumes generated by the pandemic, having dissipated the business has settled into a healthy new steady state level as we continue to benefit from our focus on the quality of our customer base to optimize gross margin as well as operating the business efficiently.
In our wholesale channel, we saw year over year growth in both revenue and gross margin five and 9% respectively.
And the domain services component of the wholesale channel, having now emerged from the period of pandemic benefit and given the outsized Q2 last year. It makes some sense as to look at transaction performance for Q2. This year compared to that of Q2 2019 total registrations for Q2 of this year were $4 million more.
Our or less the same as that for Q2 of 2019, but down 6% for the pandemic related highs of last year.
Renewals were up 7% benefiting from the pandemic spike in registrations and the renewal rate for the wholesale channel for Q2 was 77% down as expected from our recent historical levels of around 80% due to the outsized number of first time renewals the renewal rate. However is still.
<unk> the industry average and we expect it will return to normal next year.
New registrations were down 37% as new registration activity return to more normal levels.
Importantly, however revenue for the domain services component of wholesale was up 4% with gross margin up 3%.
The value added services component of the wholesale channel had another very strong quarter, which saw revenue increased 16% and gross margin, 22% year over year, driven mainly by the continued strong performance from our expiry stream business that I noted on our last call in our retail channel.
<unk> registrations for about 370000, essentially flat compared to the second quarter of 2019, but up 8% when we correct for the transition in Q2 of this year of several hundred eagle customers with nearly a quarter million domains from our retail business to the wholesale business where they were.
We'll be better service. This is part of our ongoing strategy to simplify the debates brand structure.
Impaired to Q2 last year again correcting for the transition of the wholesale leads to retail total transactions were essentially unchanged from Q2 last year and new registrations were down 10% again with Q2 last year being an outsized quarter due to the pandemic.
The retail renewal rate was 85% down slightly from 86% for the first quarter of this year.
<unk> also remains solidly above the industry average.
<unk> margin for the retail channel for Q2 was down 9% from the same period last year.
Combination of an accentuation of the trends, we have discussed in previous quarters and the transition of customers from retail to wholesale that I just mentioned.
Five quarters now for the start of the pandemic.
Pleased with both our performance through this period of the current state of the business.
In the mobile business, we continue to focus on our work for dish both in continuing to meet milestones for the MSE platform and providing services to dish under our TSA.
We're fulfilling the requirements to the high standards thing has become known for under the TSA.
The legacy <unk> customer base that dish now owns is performing well relative to our expectations and our assumption of more aggressive pricing leading to high retention rates has proven to be correct.
<unk> on July 19th.
<unk> announced the signing of a long term strategic network services agreement with AT&T.
AT&T the primary network services partner for dish <unk> customers.
Through this agreement <unk> will provide current and future customers of its retail wireless brands, including boost mobile Ting mobile and Republic wireless access to At&t's Wireless network. In addition to the new dish <unk> network. They.
The agreement accelerates. This just expansion of retail wireless distribution to rural markets with dish provides satellite TV services for US. This is further evidence that this is making all the necessary moves to grow their customer base and deliver of becoming the fourth major mobile player in the U S I will share more.
Thoughts on this in my closing comments one thing to note here is that this will postpone the already delayed settling at the steady state for this business, even further but for the best of business reasons for both dish and us as their success is our success.
Last quarter, we mentioned the issue with T mobile, forcing sprint subscribers to migrate by the end of the year costing every provider with those subscribers, including <unk> and boost subscribers time and money to address the migration requirements in a compressed amount of time this.
Impacts both our work and our revenue flows and as I've advised previously the best information of the Ting mobile at boost basis will come from dish disclosures. This is still outstanding although again dish moving from a shotgun marriage with T mobile to one built on a real long term relationship.
With AT&T should help mitigate.
Moving on Ting Internet, we are really starting to see our work to scale the business come to fruition.
Q2, we hit a milestone of 20000 subscribers to put in context, how the pace of our business has accelerated we hit 10000 subscribers in Q4 of 2019 at the end of five years of the business and 15000 in Q4 of 2020. This quarter was also our largest net gain a.
Drivers to date at an increase of 55% in Q2 from Q1, we also set a record with our largest increase in past addresses to date was 6900, new addresses in Q2 from Q1, bringing us to a total of 77200 passed addresses and 71400.
Serviceable addresses.
Our Capex investment also continues trending upwards with a 17% increase in Q2 from Q1, and 67% compared to Q2 last year I'd like to remind investors that our efforts to scale and grow as a material burden associated with them as we focus on building capacity hiring at all.
Laying in the perimeters that will allow our ISP business to scale with continued high levels of customer satisfaction.
<unk> how this work is transforming the business and setting the stage to build generate revenue faster and operate more efficiently.
I have to say I have never enjoyed losing money so much.
To that point, we recently lift our network in Culver City, California with service. This is the fastest market. We have planned built and lift to date, we publicly announced the market November 17th 2020 began building the network using micro trenching at the beginning of March.
Then added our first live customer to the network July 20th.
We are now also using micro trenching to expedite the remainder of our deployment in Centennial Colorado.
And as a result, we expect to complete the build there in the first half of 2022.
Im extremely pleased to see our business kpis accelerating but as I've said, we are continuing to implement and refine processes that will allow further acceleration of these metrics.
We are refining both our builds machine at our operation for maximum efficiency visibility scalability, we continue to integrate tools that automate track and provide robust visibility into our network operations and that helps streamline much of our pre network build work, we're ensuring our supply.
Hi chain is secure.
Micro trenching practice continues to expand I do want to remind investors that micro trenching for us is about reducing time to build and bring on customers, it's not about reduced costs.
You will recall my mention of the vastly increased interest for capital sources and building fiber markets. This has accelerated the timelines across the country for us to find and build markets in micro trenching is a critical tool for us to deploy quickly.
Any of you have also heard me say that I'm looking for time not money when evaluating partners at opportunities.
I would also like to mention teams inaugural foray into leveraging government funding to increase affordability of broadband access.
One of the first cohort of industry players supporting the emergency broadband benefit or ABB.
It's funded by $3 2 billion allocated by Congress and the December 2020 stimulus package and aims to help Americans struggling to pay for broadband Internet service during the pandemic as.
As part of the ABB eligible Ting Internet customers will receive up to a $50 monthly credit while their internet bill for the duration of the program, we were able to implement the necessary internal processes to enable participation of the program and launched it as soon as it was available at May immediately.
Signing up customers.
We saw the first funds flow to us from the government in June.
Importantly, unlike most every other provider we are providing under this program is a full symmetrical gig subsidized we do not believe that those on the wrong side of the digital divide have less needs or deserve worst internet.
That those on the other side.
I will share more of the regulatory environment in the close as well.
Now I'd like to turn the call over to our CFO, Dave <unk> to review our financial results for the quarter in greater detail, Dave. Thanks, Elliot I want to remind you at the outset of beginning in Q1 of this year, we reorganized our reporting structure into three segments fiber Internet services mobile services and domain services for each of which we are now reporting battle.
To the adjusted EBITDA line.
Certain corporate costs are excluded from the adjusted EBITDA for each segment of their centrally managed these include finance human resources legal corporate it depressed.
Depreciation and amortization expense or impairments interest expense stock based compensation and other income and expense items.
As part of our segment operations.
Our comparative periods financial results have also been reclassified to reflect the new segment structure and prior periods segment adjusted EBITDA results provided.
In addition, as Elliot noted at the outset, our second quarter results. Once again reflect the impact of the transition of our mobile business to the MSE model on August 1st of last year.
As a reminder, as a result of this transition gross margin now consists of only the legacy mobile retail customer base that was not sold to dish therefore decreased significantly year over year.
Or more accurately to <unk> no longer owns and therefore does not benefit from the margin on a growing portion of that base operating expenses also decreased because we eliminate retail spend and transocean retail staff and staff intended to build and operate a wholesale business all of the revenue associated with customer relationships that were sold today.
And much of the expenses associated with the previous mobile retail model are now included other income we are however, including those earnings and our adjusted EBITDA results and as such adjusted EBITDA may provide a better year over year view on the operating performance of the overall <unk> business.
Turning now to the results total revenue for the second quarter of 2021, $75 1 million and 9% decrease from $82 1 million a second quarter of 2020. The decrease is the result of the sale of the Ting mobile customer relationships, a largest first and last year that decrease was partially offset by continued.
Growth in Ting fiber Internet revenue up $1 4 million or 32% year over year.
Saba base continues to grow as well as growth in our demands business of $2 1 million or 4% year over year.
Putting the impact of the shift in the mobile business. The MSE model that I described a moment ago revenue for the combined domains and fiber internet businesses increased 5%.
Cost of revenues core network cost for Q2 decreased 5% to $49 1 million from $51 8 million same period last year, although declined primarily due to the lower revenue.
As a percentage of revenue cost of revenue for network costs increased to 65% from 63% the increase as a percentage of revenue is mainly due to a mix shift or saw higher fiber revenue relative to lower mobile revenue.
Gross margin for network costs for the second quarter decreased 14% year over year to $26 million from $30 $3 million with the entirety of the decrease again attributable to the sale of Ting mobile customer relationships.
<unk> revenue gross margin before network costs decreased to 35% <unk>, 7% for Q2 last year once again, excluding the Ting mobile business for a more relevant year over year comparison gross margin before network cost for the combined domain services and fiber Internet services businesses was up 4% year over year to $22 3 million.
I will now review the individual gross margin for each of the domain mobile and fiber Internet services business.
Starting with domain services gross margin for the second quarter of 2021 increased 4% to $19 5 million from $18 7 million for the second quarter of last year as a percentage of revenue gross margin for domain services was unchanged from Q2 last year at 31%.
Within the domain services business gross margin for the wholesale channel increased 9% to $15 1 million from $13 9 million for Q2 last year. The increase was a combined result of the year over year growth in the number of domains under management and our success in managing the business for gross margin.
As a percentage of revenue gross margin for wholesale increased to 28% from 27%.
Gross margin for our retail channel domain services decreased 9% to $4 4 million $4 8 million for Q2 2020.
As Elliot mentioned earlier much of this decrease was the result of the transition in Q2 of this year with significant number of <unk> customers under remains from our retail business to a wholesale business.
As a percentage of revenue gross margin was 49% compared with 52% in Q2 last year.
Our mobile services gross margin was $3 7 million compared with $8 9 million in Q2 last year with the difference primarily attributable to the sale of the Ting mobile customer stitch I will note here of $3 7 million for Q2 of this year is up significantly from $1 5 million in Q1 as during the quarter, we recognized revenue on bundled professional search.
<unk> included as part of the MSE platform fees.
As per the accounting treatment of the dish transaction, we generally have the gain on the sale of 10 customer assets of $4 8 million, which represents the earn out on that customer base and is recognized in the income statement as other income.
The fiber Internet services gross margin increased 2% to $2 8 million from $2 $7 million in Q2 last year as I explained last quarter gross margin is impacted by a number of factors and cost drivers that are incurred prior to subscriber revenue being generated hence the relatively modest increase relative to the increase in the subscriber base over the same period a quicker.
<unk>.
Cost of revenues include the following network access fees paid to third parties to use our network such as our partnerships from a sensor portion Thats long beach bandwidth costs and personnel related expenses net of capitalization related to the physical construction and build out of our fiber network and as well as personnel and related expenses net of capitalization again absolutely.
Installation and repair and overhaul field service delivery of our pharma business.
<unk> costs include the cost of equipment sold to end customers, including routers <unk> of IP to new products and any adjustments on the inventory of these items.
Other costs include field vehicle expenses small hundred equivalent on suppliers consumed and the building of a fiber network as a percentage of revenue gross margin for fiber instruments decreased to 48% from 62%. The decrease was primarily a factor of the timing of revenue relative to the occurring of course network expenses for the second quarter of 2021 increased five.
Sent to seven 7 million $7 4 million of the same period of last year.
I'll remind you that Q2 last year included a write down of $1 5 million related to the Ting TV, excluding that write down networking expenses were up 30% year over year.
Overall operating expenses for the second quarter of 2021 decreased 5% to $20 3 million from 21 on Formula for the second quarter last year, excluding the onetime noncash $1 4 million impairment of intangible assets. In Q2, 2020 operating expenses were up $2 million or one 5%. The increase was the result of a hallmark.
Costs were up <unk> 5 million this quarter with increase workforce cost to support business expansion, including Ting Internet growth, an MSE platform build offset by certain mobile costs relates to the legacy subscriber base being included in other income marketing costs and credit card fees decreased by <unk> 3 million, each mainly driven by the transition of the mobile business while bad.
<unk> decreased by one one stock based compensation increases are from $3 million and professional fees were up <unk> 2 million amortization of intangible assets decreased by <unk> 2 million due to the write down of the Ting mobile vulnerability related assets last year and a loss of <unk> 1 million net increase in expenses related to foreign exchange impacts.
We had a loss of <unk> $1 million in Q2 2021 related to Mark to market re measurements are forward currency contracts that do not qualify for hedge accounting congratulate gains was <unk> $4 million in Q2 of last year, resulting in a year over year loss of <unk> 5 million.
In addition, we experienced losses zircon $1 million on the revaluation of foreign denominated monetary assets and liabilities this quarter compared to losses of $5 million in the second quarter, and 'twenty, which had the impact of decreasing our expenses <unk> 4 million a year over year basis.
As a percentage of revenue operating expenses increased slightly to 27% from 26%.
Net income for the second quarter of 2021 was $1 8 million or <unk> 17 per share compared with <unk> 2 million or <unk> per share for Q2 2020 as I have noted in the outset net income for Q2 last year included noncash nonrecurring charges that when excluded resulted a net income of $2 5 million or <unk> 23 per share excluding <unk>.
Non recurring charges from Q2 last year the year over year decrease in net income is primarily the result of lower EBITDA due to the Tim fiber investments higher amortization of our fiber network build which reflects the higher year on year network expenses and to a lesser extent higher interest costs offset by a lower effective tax rate in Q2 2021.
Adjusted EBITDA for the second quarter of 2021 was a low of $2 million down 8% from $12 2 million for Q2 last year.
<unk> includes $2 6 million of expense that is related to the corporate shared services, which compares to $3 million for the same period last year.
The remaining positive $14 2 million for Q2, 2021 breaks out amongst our business segments as follows adjusted EBITDA for domain services for Q2 increased 2% year over year to $12 8 million from $12 Formula in Q2 last year adjusted EBITDA for mobile services increased 31% year over year to $5 3 million.
$3 9 million with the impact of the transition to the C model. The adjusted EBITDA line is the best indicator of the year on year performance of our mobile business given the change in the model. The increase was driven primarily by the increase in professional services revenues that I described earlier.
Finally, adjusted EBITDA for fiber Internet services for Q2 was negative $3 3 million compared to a negative $1 1 million in Q2 last year, the higher EBITDA loss as a result of the higher costs required to support the accelerated expansion of our fiber business.
Turning to our balance sheet cash and cash equivalents at the end of Q2 were $7 2 million down from $8 2 million at the end of the first quarter of this year and down from $8 9 million at the end of the second quarter of last year.
During Q2, we generated $3 5 million in cash from operations compared with $8 9 million in Q2 last year. There were a number of factors that impact of the Q2 cash flow from operations with the majority related to our fiber bill, including an increase in the year over year cash EBITDA investment fiber internet higher inventory and prepaid balances and higher Canadian tax.
Installments in Q2 2021 of the Canadian revenue agency allow deferral monthly installments in Q2 of last year. During the early days of the pandemic. All of this was partially offset by better accounts receivable collections. We also drew down $18 million on our loan and generated a net $1 $2 million from the exercise of stock options. These sources of cash were offset by our investment in <unk>.
$4 million in property and equipment and other fiber investments primarily related to the Ting Internet buildout as well as the ongoing MSE platform built finally deferred revenue or in the second quarter was $155 million down 2% from $158 million at the end of the first quarter of this year and effectively flat as compared to the end of the second quarter of last year.
That concludes my remarks, and I'll now turn it back to Valeant.
Thanks, Dave I wanted to start by hopefully being able to welcome our New Board member Marlene Carl in September subject to the results of our AGM. She brings a wealth of experience and capital structures relating to infrastructure in general and fiber in particular she.
He is standing for election in the seat currently held by Raleigh Rolls Raleigh has generously served to Cal since 2009 and has been instrumental in helping me understand the needs of shareholders. We all given the big banks for all his time and effort and wish him the best in his future personal and professional endeavors.
I will also note with a solid second quarter, both operationally and financially we reiterate our guidance for 2021 of $43 million and adjusted EBITDA.
Last quarter I shared my thoughts on the macro environment fiber.
All of which points to a huge fiber buildout over the next five years in particular.
This quarter I want to look a little bit more at the micro <unk>.
First we continue to see serious attention being paid to broadband stimulus in the U S. We are pleased to see more focus on affordability.
Over the next quarter or two we hope to see these policies clarified so we can integrate them into our operating plans. We expect this to impact how we approach the less dense areas surrounding our current builds.
And the programs, we were able to put in place to help address the serious digital divide issues in the U S.
We've seen a number of private equity firms invest in our platform and executive team at an existing operation, which could serve as the basis for building a large number of fiber passes and for acquiring smaller Isps.
Certainly true is that when you look at the plans of incumbents like AT&T and frontier and then what I imagine is the sum of the number of customers built or acquired in the spreadsheets of all these corporate development teams. It totals to many times the number of actual households in the United States.
Thus smart nimble moves on the ground or at a premium.
As is keeping a sober view.
We are now seeing more deal flow for midsized and smaller Isps I have talked about five years of build it and then five years of consolidation we could see more of these two things happening in parallel most importantly, when how and why to partner and buy will be at EBIT greater premium.
Probably the biggest news in U S. Telecom in this quarter is the AT&T dish deal I will not recount the details here as it has been well covered but I will share what this means through our eyes.
First and most importantly, this is an important affirmation of what dish is doing we've talked previously our bets in our dish deal paying off.
We have talked about this in the context of how we dealt with our legacy subs in terms of how we dealt with the brand and in terms of how we approached five G.
But of course.
Biggest federal is on whether or not dish will be successful and I think that this AT&T deal is a huge validation of that back.
It was interesting in this regard that the most critical feedback I have seen has been that AT&T in quotes.
Off the hook with this deal this suggests that leaving them with T mobile as a partner would have minimized dishes chances for success.
If both says a lot of what the telecom industry or at least one analyst thinks of T. Mobile as a partner and is also a very cynical view that puts the profitability of three companies ahead of the needs of 300 million Americans.
Thankfully.
<unk> position was to paraphrase dish will succeed with us or without us. So we may as well benefit from working with the.
The connective tissue tying together the fiber market.
Dish AT&T is the next generation of our ISP SaaS billing software.
As this gets integrated into our MSE platform. It opens up a whole new set of opportunities.
This is still a few quarters away at least I've mentioned it here because it sits at the intersection of the huge opportunity to help other Isps participating and the incredible coax or fiber transition that is now well underway and the horrible deaths that is the current state of the telecom back office.
We have now seen under the Hood of a number of telecom large and small and things are even worse than we expected and.
And we have very low expectations.
And let's be clear.
This is the single greatest reason that larger telecom in particular have such low customer satisfaction and.
And it is the single greatest reason why for the last 10 years, our mobile and ISP customers have been the happiest telecom customers in the world.
I note. This as it is now evident to us that at some point the ISP software business will transition into our mobile segment combined with MSC.
But that is just an accounting note for down the road at a business level, we see three long term trends that we have talked about for years coming together.
Multi generational transition from collection to fiber.
Yes that is the telecom back office and the integration of fixed and mobile networks.
We love our opportunities, both direct and the ISP space and indirect helping telecoms around the world create happier customers starting with dish.
And with that I look forward to your written questions and exploring areas that interest you in greater detail.
Ken Please send your questions to IR at <unk> Dot Com by August 11th and look for a recorded Q&A audio response and transcript to this call to be posted to the <unk> website on Tuesday August 17 at approximately four PM Eastern time. Thank you.