Q3 2022 Tucows Inc Management Q&A Pre-Recording
<unk> generated transcript as these remarks with relevant links is also available on the company's website and lose a live question and answer period. Following these remarks shareholders analysts and prospective investors are invited to submit questions to <unk> management by E Mail at IR at <unk> Dot Com until November 10th management will address.
Your questions directly or in our recorded audio response and transcript that will be posted to the <unk> web site on November 22nd at approximately four P. M. Eastern time, we would also like to advise that the updated Tucows quarterly Kpis summary, which provides key metrics for all of our businesses for the last seven quarters as well as for full year.
2020 in 2021 and also includes historical financial results is available in the investors section of the website along with the updated Tingled scorecard and investor presentation.
Now for managements prepared remarks on Thursday November three two <unk> issued a news release reporting its financial results for the third quarter ended September 32022 that news release and the company's financial statements are available on the Companys website at <unk> Dot com under the investors section. 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 forms 10-K and 10-Q the company urges you to read.
Security filings for a full description of the risk factors applicable for its business.
Finally as discussed previously starting in Q1 of this year, we started reporting as separate businesses Teng wave low and Tucows domains. In addition to <unk> corporate for those that have not yet done. So I encourage you to watch the video we posted on the <unk> Investor site in February for additional detail and perspective on the rationale for this.
Change I would now like to turn the call over to <unk>, President and Chief Executive Officer Elliot Noss go ahead Elliot. Thanks, Monica Q3 was another solid quarter in a tough operating environment.
Full of uncertainty.
Times like these it is important to focus on what you can control we continue to be grateful to focusing on cash generation is useful if undervalued in good times, but extremely important in times of uncertainty.
Q3 was our third quarter managing the businesses under the new corporate structure.
As we wrap up our 2023 budget cycles, we have learned important lessons and we will be able to refine tcs operations in order to better serve the operating businesses.
The change in structure is a success, allowing us important financial flexibility without losing in fact in some ways gaining operational efficiency. In addition, I would like to reiterate our previously provided guidance should be above point, we've now provided four points of guidance rather than just.
And we're pleased that this has not proven unduly difficult.
A reminder, that as part of changing our reporting by business segments. You will now hear directly from the heads of each business in these remarks as well as from our CFO , Dave <unk>, who will cover our financial results in detail. The first speaker as Dave Ward Chief Executive Officer <unk> domains go ahead, Dave. Thanks, Elliot two counts domains had a.
Relatively flat quarter year over year as both the domain industry and our business continues to return to pre pandemic levels. The boom of Covid has given way to an echo, but with the continued positive trend when looking over longer Timeframes revenue for domain services for the third quarter was down 1% from the same quarter of last year.
Gross margin was down 2%.
Domain services adjusted EBITDA was down 9% from Q3 of last year.
Here I will note that the decrease in adjusted EBITDA as a result of both the lower gross margin as well as increased operating expenses and in line with how we have always endeavored to manage this business efficiently and especially now as we approach the anniversary of the new corporate structure and in an inflationary environment. We are reviewing.
Streamlining expenses.
Building off my comments in the second quarter total transactions for the business have continued at the lower pre pandemic levels that we've discussed in previous quarters as with many in our industry, we too see the broad based economic and other challenges and the uncertainty of the global economy connected to this the rapid appreciation from earlier this year.
<unk> and the value of the U S. Dollar has impacted our European business and introduce challenges for many of our resellers in Europe , we price services in euros and have a cost based in U S dollars.
Currency impacts from the U S dollar gaining strength against the Euro has and continues to apply downward pressure to our gross margin to address this we've adjusted prices in Q3, and we've announced that we will do so again later this quarter.
Returning to the two segments of our business and our wholesale channel revenue for Q3 was essentially unchanged year over year with gross margin down 2%.
Within the wholesale channel domain services revenue was likewise unchanged from the same period last year, while gross margin was down 4%.
Revenue for the value added services component of the wholesale channel was unchanged year over year with gross margin up 2%.
Noting the gross margin from wholesale domain services was up 8% when compared to Q3 of 2019 and pre COVID-19.
In our retail channel revenue decreased 4%, while gross margin decreased 1% year over year.
And lastly, our combined overall renewal rate at 80% in Q3 across all <unk> domain brands remains well above the industry average.
Since we founded the <unk> domains business early in 2000, whether different global and regional economic cycles and conditions by focusing on managing our business responsibly and with a long term view.
We provide access to domain and related services.
Integral to how consumers and businesses use the internet for life and work today.
We've defined innovation with continual evolution of our domain platform and we've built a strong global distribution channel for our domain services today in light of the last few years on grateful we can stand on the foundation of such a resilient consistent business and that we have the people and resources to always be thinking about.
We leverage what we can do best to create growth opportunities for our business and our customers and I'm excited to tell you more about that beyond my comments in Q2 as it develops.
Now over to Justin Reilly CEO of waypoint, Thanks, Dave and a low <unk> investors.
I want to frame my comments today by re emphasizing some of my remarks from last quarter. We have now started the migration of boost customers in earnest as that process reaches scale, we expect to reach an inflection point in the business sometime around Q2 next year, where we are transitioning from one off professional services revenues from dish.
To ramping up a scalable high margin reoccurring revenue model based on subscribers from dish and team.
We're extremely excited about the growth trajectory of the business with our current customers and potential new ones now the financial report year over year revenues and gross profit are up modestly five 3% and two 9% respectively.
Order over quarter is where we see the numbers look lumpy as expected with revenue for Q3 at 4 million a decline of 55% from Q2 and gross margin at $3 8 million a decline of 52% revenue was down sequentially for two reasons as we noted last quarter, we <unk>.
Had an outsized revenue recognition in Q2 related to bundled professional services included as part of the platform services provided to dish. This recognition occurs at an accounting treatment of some of the noncash terms in the dish transaction. This lumpy revenue recognition was seen in Q1 as well.
The second sequential revenue impact is from a partial reversal of a contract asset related to the noncash revenue recognition of certain fixed payment components the contract asset and associated revenue recognition varies based on the estimated relative mix of variable and fixed payments and note that the contract asked.
That will unwind over the term of the contract which is up for renewal in Q3 2024.
On the subscriber fee component of revenues, both wave low and dish had hoped to have more boost subscribers migrated at this point as we noted above the migration process is now underway. We are pleased that dish has been putting new boost customers on the platform for a while as always we recommend you review dishes disclosures.
Including the mentioned in our Q2 remarks of the significance of the CDMA shutdown to their focus and progress.
As a reminder from last time, the two most challenging parts of any new customer engagement, our network integrations and customer migrations. We've completed three network integrations T mobile AT&T and dish <unk> in record time, highlighting the agility of wave Lowes platform. This gives dish on them.
Paralleled advantage as they compete both in retail wireless and as the fourth Eminem.
In addition to network integrations, we've built world class migration tools to help dish migrate boost subscribers as with any heart endeavor. These are iterative exercises and we've recently completed finishing touches to help dish migrate subscribers more seamlessly these will be important tools for future wave low customers.
We're seeing positive signs from dishes announced plans around financing and build out that bode well over the next three quarters dishes announced its intention to introduce boost infinite our postpaid offering with disruptive unlimited usage pricing expected over the next few quarters postpaid products are typically much.
Stickier than prepaid, which the current boosted basis. Additionally, this is on track to meet their June 2023 deadlines for their <unk> deployment with 70% of the U S population coverage and 15000 cell sites. We believe strongly in the compelling proposition from dish of an extensive high quality <unk>.
<unk> coverage and flexible pricing and packages to attract and retain mobile customers, which in turn benefits wavelength.
There may be no more compelling case for wave <unk> platform, then dishes ability to launch prepaid and postpaid offerings inside of the same billing and provisioning system. This means launching new plans in hours not months, regardless of when you'd like to build a customer and regardless of which network provides the service for those key.
<unk> score over the last 25 years of Telecom. This is plagued operators as they attempt to adapt to an evolving market of competitors and consumers. We're.
We're confident that wave Lowe's flexibility will be a key enabler in helping dish win in the coming years.
Our adjusted EBITDA number for Q3 was negative 0.9 million, which reflects the burn at this point in the growth of the business as we staff up where needed to continue critical development work and round out our core leadership and support teams and with respect to our burn one reason the migration of boost subscribers is important is that.
Once the majority of boost customers our transition to the platform those fees will fund most of our Opex and accordingly will be investing in more sales and marketing and for the rest of the year, we're continuing to focus on developing and launching new key features for our two anchor customers dish and Teng and building our.
Go to market machine, thanks for listening and now over to Elliot. Thanks, Justin in Q3 team delivered another strong quarter of fiber construction deploying close to the same record fiber footage as we did in Q2.
The serviceable address number is dampened fairly significantly this quarter as we resolved a small issue in California that was administrative in nature that will push roughly 7000 addresses into Q1 of 2023.
Our Q3 fiber Capex was again near $25 million at $23 7 million. This is up over 70% year over year as we continue accelerating our build we added 2300 net subscribers in Q3, taking us to 32600 in total that represents growth of nearly 8%.
From last quarter, and 42, 5% year over year, our total for both <unk> and team partner serviceable address additions was 4800, taking us to a 108500 total serviceable addresses we expect those numbers to ramp in Q4 and into 2023.
Of the backlog referred to above comes online.
We continue to have a strong pipeline of orders to installs as addresses become serviceable, including in our mature markets. Despite increased competition and economic uncertainty. This reinforces our belief that people see internet services essential and they view team to be superior to other options.
In this regard I note that our qualitative feedback from customers and our customer engagement scores continue to reinforce our belief that ting customers truly are the most satisfied ISP customers in the United States.
Starting in Q1 on page two of the Kpis summary, we provided new disclosure on mature versus growth markets.
You May recall I said these metrics would provide a view of how more mature markets grow as they load customers and generate powerful net margins.
Also noted in Q2 that these numbers were a little uneven on the bottom line as we still have plenty of new construction happening in North Carolina, and Colorado are two largest footprints.
That being said Q3 was strong the mature market contribution for Q3 is $2 3 million up 45% from Q2, and 25% year over year more importantly, gross profit grew by 15% quarter over quarter, and 141% year over year to $6.
$7 million King's revenue grew 7% quarter over quarter, and 71% year over year to $11 million. This will continue to tell our clean story on the top line and be a little more uneven on the bottom line as we continue to build and larger mature footprints.
We continue to work on how to best lead investors see operating leverage we are using the 2023 budget process as a forcing mechanism and expect to have more on this next quarter.
Some market updates Mike Retrenching continues in our markets in Culver City, California.
Danielle, Colorado as well as our partner markets in California. We also started micro trenching in Alexandria, Virginia in Q3 and that work will accelerate in Q4 with our first customers expected there in early 2023.
We've also completed a lot of fiber footage in our North Carolina footprint, primarily connecting new Greenfield areas.
We're also excited for Colorado Springs to start their construction in Q4 of this year and look forward to Aurora, Colorado getting underway in 2023.
Also pleased to report on our work related to the Ting Internet financing, we announced last quarter with generate capital. We're actively engaged on strategic and operational fronts with their teams preparing for a busy 2023.
Generates subsidiary Ubiquity is taken over managing our partner markets and so on a beach in Encinitas and we're seeing new momentum in completing the encinitas build creating a nice foothold in San Diego County, as we round, the turn and head for home in 2022, it is worth noting that interest rates labor costs.
And most importantly, the increased expectation of fiber overbuilding have started to chip away at the incredible returns, but the coax or fiber transition offers the good news is that our focus on above market take rates and profitability and most importantly, our flexibility in providing ISP services.
On both our own as well as others networks has us in a relatively strong position.
Focusing on execution plays to our strengths and now I would like to turn the call over to Dave <unk> for a deeper dive on our financial results. Thanks Elliot total revenue for the third quarter of 2022 increased two 8% to $78 1 million from $75 9 million for the third quarter of 2021, the increase was primarily from <unk> and wave low up.
71% and five 3% year over year, respectively. The gains were partially offset by a 44% decline in 2000 corporate revenue to $2 8 million from $4 9 million in Q3 of last year driven by the expected decrease in transition services revenue with this year to date total revenue for 2022 is $242 million up 9% from the year to date total revenue of <unk>.
<unk> hundred $22 million at the end of Q3 last year.
Revenue from <unk> was essentially flat at $60 3 million down slightly from $60 7 million in Q3 last year.
Cost of revenues before network cost for Q3 was down slightly at $48 3 million as compared to $49 5 million for the same period of last year as a percentage of revenue cost of revenues before network costs decreased to 62% from 65% in Q3 2021. This was primarily due to growth in the high margin Ting Internet services revenues gross profit before net.
<unk> costs for the third quarter increased 13% year over year to $29 7 million from $26 4 million with the increase due mainly to the higher gross profit contribution of Ting Internet as a percentage of revenue gross margin before network costs increased to 38% from 35%.
Breaking down gross profit by business <unk> gross profit for the third quarter of 2022 decreased one 7% from Q3 last year to $18 2 million from $18 5 million as a percentage of revenue gross margin for <unk> was flat at 30% year over year.
<unk> gross profit increased two 9% to $3 8 million from $2 7 million for Q3 2021 as a percentage of revenue gross margin for wavelength was 94% compared with 96% in Q3 last year as referenced earlier by Justin Whaler gross profit is down sequentially from Q1, and Q2 2022, driven by the noncash amortization of the contract.
As it relates to dish <unk>.
Gross profit for Q3 increased to 141% year over year to $6 7 million from $2 8 million for the same period of last year as Elliot discussed in the Q2 management remarks, the growing contribution continues in mature markets is generating strong net margins.
As a percentage of revenue gross margin for Ting expanded to 61% in the third quarter from 23% in Q3 last year, driven by stronger contribution from our growth markets as well as higher capitalization of our field and engineering Labor network expenses for Q3 increased 41% to $11 8 million from $8 3 million for the same period of last year. The increase continues to be driven by both the <unk>.
Depreciation of our fiber network assets up 54% year over year as well as the increase in our workforce to support the expanding fiber network total operating expenses for the third quarter of 2022 increased 29% to 27 4 million from $21 2 million for the same period last year. The increase was primarily the result of the following people costs were up.
$3 2 million this quarter with increase workforce cost to support business expansion related to tech instrument growth as well as the continued wave low ramp and to a lesser extent the acquisitions of simply pits as well as the you on our assets and its development team. Both in October 2021 sales and marketing costs increased by $1 2 million year over year, mainly driven by the increased investments in the Ting Internet.
This expansion facility and third party contracting and support costs were up $2 5 million, primarily related to Super pits and credit card fees were up $3 2 million stock based compensation increased <unk> 5 million and lastly, foreign exchange impacts increased expenses by <unk> 4 million this quarter, primarily driven by the year over year impacts from the revaluation of our foreign denominated <unk>.
<unk> assets and liabilities as a percentage of revenue operating expenses increased to 35% for Q3 of this year from 28% for the same period last year.
We reported a net loss for the third quarter of 2022 of $8 million or <unk> 74 per share compared with net income of $1 4 million a $13 per share for the same period of last year. The net loss was driven predominantly by higher interest expenses, including the new preferred debt with generate capital the accelerated build of our fiber network and ongoing ramp of the Ting Internet operations and related.
Operational and depreciation expenses note our tax expense reflects our geographic mix the taxes payable in Canada on a legacy demands business adjusted EBITDA for Q3 was $7 9 million down 35% from $12 2 million for Q3 2021.
Of that total breaks down amongst our three businesses as follows adjusted EBITDA for <unk> was $10 4 million down nine 5% from Q3 of last year adjusted EBITDA for waiver was negative <unk> 9 million a decrease of 151% from a positive $1 8 million last year Weibo results reflect the ongoing investment in ramping the business as well as the <unk>.
Noncash impact of the amortization of the contract assets related to dish, we expect the asset to amortize over the remaining term of the contract adjusted.
Adjusted EBITDA for <unk> was negative $5 million compared with negative $5 5 million in Q3, 2021, and adjusted EBITA level, we expect to continue as we fund our fiber network expansion and finally, the corporate category had adjusted EBITDA of $3 4 million this quarter compared with $1 5 million in Q3 last year with the decline primarily driven by and as expected the lower earn out from the <unk>.
All of the Ting mobile customers to dish as customers continue to turn lower transition services margins and lower contribution from the mobile subscribers retained offset slightly by a onetime recovery from the renegotiation of our supply contract.
Turning to our balance sheet cash and cash equivalents at the end of Q3 with $30 5 million compared with $6 $5 million at the end of the second quarter of 2022, and $5 5 million at the end of the third quarter of 2021. This is due to the additional cost from a funding facility put generate for use in the Ting business. During the quarter, we had negative $1 million cash from operations compared with positive $1 5 million.
In Q3 last year with the decrease being due to a net loss this quarter along with increases in deferred income taxes of accounts receivable and inventory our cash was more than offset by our investment of $47 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.
This number reflects the actual cash paid for capital assets in the quarter, which was outsize related to timing of payments in Q2, the gross book value of fixed assets, including capital inventory increased 36 million. This quarter. Finally deferred revenue at the end of Q3 was $147 million down 2% from $150 million at the end of the second quarter of 2022 and down three.
3% from $152 million for the third quarter of last year.
With my remarks, and I'll now turn it back to Elliot. Thanks, Dave I turned 60 last month and it took until a month before I turned 60 to raise equity for the first time.
So now I will make another departure and we'll talk about valuation on this investor call something I have not done in any detail since we turned public over 20 years ago.
This feels like the right conversation to have with investors as we are immersed in our 2023 planning and we settle into the role of Tcs as capital Allocator I wanted to share the way we are thinking about that roll into place. It in the context of where the world is more generally.
First let's talk about the three operating businesses at a high level. We are not fans of complex valuation models, a wall of numbers can offer a sort of placebo.
Allowing people to be comforted by and too often fooled by precision we prefer being generally right to precisely wrong.
We value our three operating businesses simply.
We value <unk> domains on the basis of cash EBITDA.
Wavelengths on the basis of last quarter annualized recurring revenue.
<unk> on the basis of homes passed and customers loaded.
I will now talk in more detail about each with two cows domains. There has been a solid cash generators since it launched in 2000. It has funded a number of acquisitions in the domains business and it is funded every other business, we launched <unk> mobile Ting Internet to Waveland.
This business is incredibly reliable cash flows and other than acquisitions is not easy to grow low alpha very low beta.
It is also a mature business that is hard to be efficient on a net margin basis in order to successfully compete.
Historically, we view our operating efficiency is what allowed us to be the acquirer rather than the acquired I note. We expect the same characteristic to be relevant when the fiber market turns to consolidation ever.
EBITDA multiple is the obvious easy valuation metric for 2000 domains wave.
<unk> on the other hand is essentially a SaaS startup with a couple of strong anchor customers and a strong team in a market space with a lot of room for growth. If we look at the main driver here as telecom moving to the cloud. The best estimates are that this process is only 20% complete in this regard.
Telecom is behind EBIT insurance or banking, when we think of the most appropriate evaluation metric we view it as a multiple of annual recurring revenue, we view the last quarter or last month annualized as the right input.
We also view the multiple is being influenced by profitability strong customers pipeline market size and cheap of course. This is not an exhaustive list.
With T. During the massive coax or fiber buildout, taking place in the United States. We believe the best way to value of these businesses is on a multiple of homes past <unk> customers. The multiples here are typically a function of expected take rates churn and profitability.
Once the build out in the industry is complete evaluation method will quickly shift to EBITDA multiple although I note that as capital allocators, we prefer a metric that captures network maintenance costs. As this is certainly a difference both between fiber networks, and particularly between fiber and coax networks in each.
Of these three cases, the actual multiples used will vary over time.
We are spending time internally following each of these three areas, but there is no secret sauce here, we're simply tracking public information, which is readily available.
At Investor or potential Investor asked me, what multiple to use I will remind them. They also have Google and could look up the current state of play themselves.
I also wish to be clear that I am sharing our thinking as capital Allocators UV investor value our stock every day in the market I felt it important for you to understand how we view things as the sum of those three parts plus whatever is happening at a <unk> level. It.
It is also clear that on this basis, but even very conservative multiples Tcs is quite undervalued.
No. We are like every parents, who thinks highly of their children, but we wanted those listening to the basis for our belief.
Finally, we are expecting a period of economic uncertainty I would not call. It a recession or expansion. There are factors like interest rates geopolitical uncertainty economic inequality and of course climate change that will be a drag on the global economy.
There are also things happening in the economy, primarily around the continued progress of technology that are creating significant growth opportunities. When you combine the above with the world entering a period, where the impact of demographics will be a headwind for the first time in modern history, you get uncertainty in.
Uncertainty the most important thing to focus on is cash generation when times are good cash generation is good but often undervalued.
They are uncertain cash generation is great for better or worse across more than a quarter century. This is what we have done focus on cash generation.
If I had to set up 2023 with one thought it would be to put our heads down and focus on efficiency and cash generation, while feeding responsible growth.
And with that I look forward to your written questions and exploring areas that interest you in greater detail again. Please send your questions to IR at <unk> Dot com by Thursday November 10th and look for a recorded Q&A audio response and transcript to this call to be posted to the <unk> website on Tuesday November 20 <unk>.
At approximately four PM eastern time, thank you.