Q2 2022 Tucows Inc Earnings Call (Pre-Recorded)
Turning to the most recent quarter I am pleased to report that domain services delivered another quarter of solid performance that once again underscore the consistency of the business revenue.
Revenue for domain services for the first quarter was essentially unchanged from the same period of last year with gross margin down slightly I will note. However, the gross margin for Q1 last year benefited from our registry rebates, which happens from time to time that was not repeated this year.
Excluding this rebate gross margin was in line with that of Q1 last year.
Domain services adjusted EBITDA net of the impact of the rebate decreased 5%.
Thats majority of this decrease was as a result of the stronger Canadian dollar, which increases operating expenses, mainly due to Canadian dollar based compensation costs, while the overall financial performance of the domains business was very much in line with Q1 of last year total transactions for the business as expected.
Are now settling back in at pre pandemic levels. After the elevated levels in 2020 and 2021, we are seeing signs that these are industry trends verisign. The operator of the dot com and Dot net registry announced our Q1 results last week, commenting that the component of growth.
Attributed to the pandemic has subsided and that their new registrations of $10 2 million for the quarter were down 12% year over year.
Importantly, I will note here the <unk> overall combined renewal rate for Q1, which we view as an indicator of the health of the business remained well above the industry at 81% also back to a pre pandemic levels.
In the wholesale channel revenue for Q1 was up just shy of 1% and year over year with gross margin down just under 2% <unk>.
Excluding the benefit of the rebate to last year's numbers gross margin was up 4%.
Within the wholesale channel domain services revenue was unchanged from Q1 last year, while gross margin was down 7%, primarily due to the benefit in last year's quarter of the rebate excluding.
Excluding the <unk> gross margin was also unchanged year over year.
The value added services component of the wholesale channel once again generated solid growth with both revenue and gross margin up 11% compared to Q1 last year the increases.
<unk> continued to be driven by the performance of our expiry stream business, where the secondary market for domain name sales continues to be strong.
In our retail channel revenue decreased 1% and gross margin decreased 10% from Q1 2021. Once again retail gross margin was impacted by the transition in Q2 of last year of a number of <unk> customers and their demand from our retail channel to our wholesale channel.
Along with the realignment of the business segments, we have taken the opportunity within <unk> domains to more closely connect the <unk> parent and the registrar brands for more than two decades, <unk> has been synonymous with domain registration and.
In the coming months, you will see a stronger connection of the <unk> brand with our registrar properties with each anchored by the rich heritage of the 2008.
Thing that we're all proud of and reflects our two decades of success and building the world's largest wholesale domain registration business and the second largest domain registration business overall now over to Justin Reilly to report on wavelength, Thanks, Dave and Hello to CX investors I'm Justin Reilly.
The CEO of waived Lowe and I am excited to be delivering remarks to you for the first time.
I joined <unk> in September 2019, following my tenure, leading product at one of the world's largest telecoms the.
The problem wave lowest solving falls into what is called the startup Holy Grail, a big on attended fragmented low NPS market, where our solution solves a core issue procurements.
To address the low customer satisfaction and telecom many times the customer experiences of Bismal no customer is happy with their telecom and know telecom is happy with their billing software.
The market for Telecom software is trending north of 100 billion and the move to the cloud is accelerating the last 30% of digital transformation and I'm thrilled to be at the helm of this audacious effort to use the wave low platform to transform telecom and the connected experience for more humans worldwide.
Wavelength is of course the brand name, we have given to our software platform business, formerly launched earlier. This year. It is organized as a wholly owned subsidiary of <unk> with its own executive team and financials. It was launched not only with the advantages of the funding and resources of <unk>, but <unk>.
Also with two formidable anchor customers dish and Ting Internet.
Don't get me wrong, there is much to work through at this early phase of the business, but launching a new company under these conditions gives us a significant head start and a strong operational base to work from.
After launching in January we snapped into operating wave low right away developing operating principles and putting a management structure around the formerly named MSC business and importantly, we brought on new people to round out our leadership team that now includes an OEM Chief Technology Officer, Neil Shah.
Chief product Officer, Michael <unk>, Chief Revenue Officer, Tom Mcgill Ray Vice President of customer experience, Joshua Bondi director of Finance and character Leslie head of people. The team has hit the ground running with meaningful progress already being made on subscription management early sales pipeline work.
Hiring and core feature development for the two platforms. Currently the majority of wave Lowe's revenues come from the work with dish and their customers Q1, 2022 platform revenue was $6 1 million up from zero point $6 million in Q1 of last year as additional platform fees and subscribers.
Greater to the platform.
<unk> services went from new to 0.8 million year over year as mentioned over the last few quarters. We are completing some one time strategic work for dish.
We're at the tail end of that professional services work as we support dish and their <unk> launch going forward, we will focus on subscription based revenue as our growth engine. This revenue is sticky predictable and most importantly, aligns our success with our customers' success.
<unk> domains has proven that for many years and a much smaller market.
I understand you are all very interested in what the subscriber base coming from dish will look like beyond T mobile subscribers and the boost migration as always we recommend consulting dishes quarterly earnings reports and guidance. However, I will note one item from the Q4 2021 report.
Dishes Native <unk> network. The world's first is now live in Las Vegas, and impressively. They are on track to have 20% of the U S population covered and over 25 major metros and 100 smaller cities in June of this year. We are excited to support dish in the Las Vegas launch as wave.
LOE is one of the first platforms to integrate with dishes, new native <unk> network, we couldnt ask for a better partner and are bullish about their mission to disrupt the mobile market as we know it.
Having run a venture backed startup before I can tell you that the time I saved not having to worry about fund raising allows me to operate the business with an obsessive focus on efficiency growth and value.
With mobile carriers and Isps are looking for an alternative to legacy Oss and BSS providers. We are confident that we are the best choice and we have proved it with the happy customers. We created in both Ting mobile and Ting Internet. There has never been a better time to start a telecom software company.
And no better home for it then at Tcf.
And lastly, I know many of you are interested in learning more about wavelength I would encourage you to visit our website at wave low dot com and read the white paper. We are posted there I also look forward to any questions. You may have from the script. Thanks for listening and now over to Elliot Thanks, Justin moving onto Ting fiber.
We continued our rapid growth in the first quarter and shared the news of our three largest new markets to date.
In Q1, we had 2300 net subscriber additions taking us to 27800 in total our total for both <unk> and <unk> partner serviceable address additions were 7000, taking us to 98100 total serviceable addresses both were impacted.
But the typical Q1 weather effects are.
Our fiber capex moderated due to weather in Q1 to just over $14 million, we expect to be back to increasing construction pace in capex spend in Q2.
This quarter, we also announced three sizable new markets in January we announced the thing would be the initial anchor tenant on a citywide fiber network being built and owned by Colorado Springs Utilities. This would be our biggest market yet with over 200000 serviceable addresses we hope.
For the first addresses from the utility to land in early 2023.
In April we announced that <unk> will be expanding into Aurora, Colorado, a community of over 130000 addresses that will have joined our network footprint and centennial when combined with our existing network and planned expansion in our southwest Colorado markets that takes us to 400 thousands of potential serviceable.
<unk> in our Colorado footprint, we are moving forward quickly and Aurora with our first permit already filed and crews ready to deploy.
Also earlier this year investors may have noticed that thing was one of the finalists in the bid for our broadband franchise in Alexandria, Virginia, and we were undertaking negotiations with the city.
Alexandria has a thriving city of 90000 serviceable addresses and thanks to regional initiatives like Amazon's HQ2 is experiencing growth in Densification teen.
<unk> emerged as the final ISP in the process and where the end stages of negotiation with Alexandria with the execution of the franchise a formal announcement and startup construction all expected in Q2.
This was a unique quarter with over 200000 addresses to be built and another 200000 partner address as announced in a space where competition for opportunities is increasing this is a fantastic accomplishment.
With this quarter's results we will have our first look at some of the new disclosure I've been talking about specifically our view of mature versus growth fiber markets and I look at the operating costs related to building the footprint.
The city level disclosure telecom is inherently a local business with a fiber build at any specific city or town. It will be unprofitable in the first 18 to 30 months and we will then generate cash until long. After we are all around even the youngest of us in the growth period, we engage in the <unk>.
<unk> marketing, we're standing up a workforce to handle install we are finding new local facilities. Among other startup costs and of course, we have very few customers.
Once we have operated for a couple of years, we pass the threshold into generating cash and that cash generation grows until roughly the five year, Mark where it roughly plateaus beyond that we will look for growth more from <unk>, but from customer growth for.
For disclosure purposes, we are defining a mature market as one where the average age of addresses in the market exceeds two years.
And our first quarter looking at this disclosure I will focus on two things first the cash generated from growth markets grew from Q1 2021 to Q1 2022 by over 80% to nearly $2 6 million in the quarter.
This gives investors a small window into the powerful cash generation potential of this business.
Looking at growth markets those with average address age under two years, we see the EBITDA loss grow by over 40% to over $1 4 million for.
For the next three to four years as we ramp up our build pace and our launches. Both these numbers will grow with the loss from growth markets growing faster than the gains from mature markets as those newer markets mature we will see the trend reversed at cash start to powerfully flow.
Second looking at the expense side remember that most customer service marketing and installation costs are covered at a city level at a national level, we have two buckets of costs construction costs and national costs.
The latter our costs on a national level for things like finance HR product management, and the national components of marketing and customer service.
Think of them as the cost to build and the cost to operate and.
And remember in each market, we will build for one to two years and operate for decades.
There is positive financial leverage in both of these cost buckets with construction costs, we see leverage when comparing them to capex a simple lens is the view of the construction cost is overhead required to produce addresses thus efficiency is in construction cost per serviceable address produce.
With national costs, we see leverage when comparing it to the number of customers a simple lens is national costs per customer.
Thus, we were able to track the leverage and therefore, the efficiency of the spend by looking at it through these lenses.
However, as 10 grows these two buckets are growing significantly on an absolute basis, we are building a business to scale to a much greater levels than it. Currently is we are hoping to grow capex aggressively and create a larger footprint.
Thus these buckets are where you will see the overall loss get generated.
This disclosure is a work in progress we hope that this start point lets you see both the absolute growth in various categories as well as providing some context to allow you to follow and evaluate them on a relative basis, we welcome comments here.
Investors will also note that on the Q1 Kpis summary, we are now reporting only serviceable addresses as our key network footprint metric fatigue and have retired reporting past addresses.
We added the past address metric at the end of 2019 to provide better visibility into how our capex spend translated into build progress. While we were experiencing significant lags in lighting addresses primarily due to issues with data center construction. We are now reverting to disclosure more in line.
With the industry and that is hopefully less confusing.
I would now 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 before I begin just a quick note of the results from prior periods have been recast to reflect the changes we've made this quarter to the reporting segments to make the parent's directly comparable total revenue for the first quarter of 2020.
Two increased 14% to $81 1 million from $70 9 million for the first quarter of 2021. The increase was driven by strong growth in both Ting fiber Internet services and platform services up 93% and 973%, respectively, which were partially offset by the expected decline in revenue from transition services.
With dish, which as Elliot mentioned are now part of the corporate category revenue from two <unk> domain services was essentially unchanged from Q1 last year.
Cost of revenues before network cost for Q1 increased 7% to $49 4 million or $46 2 million for the same period of last year with the increase being less than the revenue growth due to the increase in high margin platform services revenues as a percentage of revenue cost of revenues before network costs decreased to 61% from 65%.
Gross profit before network costs for the first quarter increased 28% year over year to 31 7 million from $24 7 million with the increase due mainly to the higher margin contributions up a platform services and fiber Internet services as a percentage of revenue gross margin before network costs increased to 39% from 35%.
Broken down gross margin by business domain services gross margin for the first quarter of 2022 decreased 4% from Q1 last year to $19 7 million from $20 5 million as a percentage of revenue gross margin for domain services, a 32% compared with 33% platform services gross margin increased nearly tenfold to $5 <unk>.
$9 million from zero <unk> 6 million for Q1 2021 with the entirety of the increase being driven by revenues generated by the underlying mobile operator platform as a percentage of revenue gross margin for platform services was 86% compared with 87% in Q1 last year.
<unk> fiber Internet services gross margin for Q1 increased to 132% year over year to $5 8 million from $2 5 million for the same period of last year I will remind you that gross margin for fiber Internet services is impacted by a number of factors and cost drivers that are incurred prior to subscriber revenue being generated that will cause some variability from quarter to quarter. These are detailed.
And my second quarter 2021 prepared remarks.
As a percentage of revenue gross margin for fiber Internet services expanded to 59% from 49%. The increase was primarily due to the timing of revenue relative to the incursion of costs, including utilization of our field and engineering labor related to the delivery of our network network expenses for Q1 increased 45% to $10 5 million from $7 2 million.
The same period of last year, the increase was driven by both the higher depreciation of our fiber network assets as well as an increase in the workforce to support our growing fiber network total operating expenses for the first quarter of 2022 increased 40% to $26 million from $18 6 million for the same period last year.
The increase was primarily the result of the following people costs were up $3 5 million this quarter with increased workforce cost to support business expansion related to the Ting internet growth, including the first full quarterly inclusion of the <unk> team, which John This past November as well as the continued platform sources build and to a lesser extent the acquisition of the <unk> assets and his development team and.
One of our 2021.
Marketing costs increased by 1 million, mainly driven by increased investments in the Ting Internet business, including implements professional fees increased <unk> 4 million, primarily related to regulatory and market development support for Ting fiber facility and third party contracting and support costs were up $1 1 million, primarily related to simply bits and stock based compensation increases formula.
Other expenses, including travel and credit card fees were up <unk> $5 million, driven by increased revenue and business activity amortization of intangible assets and loss on impairment of property and equipment increased <unk> 5 million and lastly, foreign exchange impacts increased expenses by <unk> 2 million. This quarter, specifically, we did not have any mark to market remeasurement poor forward currency.
Contracts that do not qualify for hedge accounting is not currently holding any such contracts compared to a gain of <unk> $3 million in Q1 of last year, resulting in a year over year loss on zircon $3 million. In addition, we're expanding the loss of <unk> 1 million on the revaluation of foreign denominated monetary assets and liabilities this quarter compared to a loss of <unk> $2 million in the first quarter of 'twenty.
'twenty, one which had the impact of decreasing our expenses zircon 1 million on a year over year basis as a percentage of revenue operating expenses increased to 32% from 26%. We reported a net loss for Q1 2022 of $3 million or <unk> 20 per share compared with net income of $2 1 million or <unk> 20 per share for the same period of last year.
Our net loss was driven predominantly by the accelerated build of our fiber network and ongoing ramp of Internet operations as well as higher depreciation and interest expenses.
Our tax expense reflects our geographic mix with taxes payable in Canada on our legacy domains business. Adjusted EBITDA for Q1 was $11 3 million down 11% from $12 7 million for Q1, 2021 that total breaks down amongst our three businesses of follow ups on <unk>.
The EBITDA for domain services was $11 8 million down 11% year over year from $13 2 million.
As Dave mentioned earlier, a significant portion of this decline relates to the outsized rebate in Q1 2021.
Adjusted EBITDA for platform services was $2 million compared with a negative $1 1 million last year adjusted EBITDA for fiber instrument services was negative $4 3 million compared with negative $3 9 million in Q1, 2021, with a larger loss, reflecting higher costs required to support the accelerated expansion of our business.
And finally, the corporate category of positive adjusted EBITDA of $1 8 million compared with $4 5 million in Q1 last year with the decline primarily driven by and as expected the lower earn out from the sale of the Ting mobile customers to dish as customers continue to turn lower transition services margins and lower contribution from mobile subscribers retained.
Turning to our balance sheet cash and cash equivalents at the end of Q1 were $6 2 million compared with $9 1 million at the end of the fourth quarter of 2021, and $8 3 million at the end of the first quarter of 2021 during.
During the quarter, we generated $5 4 million in cash from operations compared with $14 1 million in Q1 last year with the <unk>.
Decrease being primarily due to increased prepaid expenses timing of AR collections and the recognition of our contract assets this quarter and the platform services business. We also added $16 5 million to cash we are further drawdown on alone as well as the <unk> 5 million from the exercise of stock options.
These sources of cash for more than offset by our investment of $23 1 million in property and equipment, primarily for the accelerated buildout of the Ting fiber Internet network as well as the continued build of the Weibo platform. Finally deferred revenue at the end of Q1 was $152 million up 3% from $148 million at the end of the fourth quarter of last year, but down.
And 3% from $157 million at the end of the first quarter of last year.
That concludes my remarks, I'll now turn it back to Elliot Thanks, Dave I've been thinking a lot about the difference between where value is created and with value is realized right now for both wave low and team there was a huge gap between the value being created and the value realized as reflected in the Tcf stock.
For wave low telecom software is a new segment.
<unk> investors have yet to fully learn it and existing telecom investors have no idea, who tcs is.
And even at a purely financial level. It is difficult for investors to really understand or appreciate wavelength until the dish migrations are substantially completed and investors can get a better sense, what ongoing subscription revenue will look like.
For <unk>, while the coax or fiber transition in the U S is a unique multi generational opportunity both in terms of the returns and in terms of how much capital can be deployed it is a long term investment we.
We are virtually alone as a public company competing with private equity backed platforms for a reason the fantastic returns are not realized for some time and are hidden by the financials until they become ripe.
A ton of value is being created but it is a challenge to see it realized we have been here before in the late <unk> and early teens, we had two businesses domains in Ting mobile domains was generating solid cash and was winning in the market. Many of its competitors were starting to get squeezed.
The use of short term choices, while <unk> was making long term choices.
Competitors, where ripening on the volume into acquisition targets.
Ting mobile Meanwhile, clearly found a better most trap.
We had a better offering that was not yet copied by the big incumbents. We have found some customer acquisition advantages by being very early and vehicles, such as podcasts and we held onto our gains with best in the world customer satisfaction.
But the stock did not move until investors clearly saw the cash being generated by Ting mobile and until the acquisition opportunities came off the volume and into our cupboard.
And of course that has moved significantly.
Now history never repeats, but it does Brian we have been here before we know what the gap between value creation and value realization looks like and we know how to both lived through it and to take advantage of it both we and our investors have the benefit of having been here before the benefit of <unk>.
<unk> and.
With that I look forward to your written questions and exploring areas that interest you with greater detail again. Please send your questions to IR at <unk> Dot Com by Friday may 13th and look for a recorded Q&A audio response and transcript to this call to be posted to the <unk> website on Wednesday may 25.
At approximately four PM eastern time, thank you.
Okay.