Q4 2022 Tucows Inc Management Earnings Call - Pre-Recorded
The challenge is that they were lit with service at the end of the quarter and during the holidays. So the corresponding bump in subscribers will be in Q1 as we're currently working through installing preorders. It is worth mentioning again this quarter that despite the ongoing macroeconomic factors in the U S. We continue to have a straw.
<unk> preorder pipeline.
The mature market contribution for Q4 is $2 4 million up 8% from Q3 and 45% year over year.
Gross profit grew by 8% quarter over quarter, and 31% year over year to $7 2 million.
<unk> revenue grew four 8% quarter over quarter at 38% year over year to 11 5 million. A reminder, that our numbers will continue to tell a growth story on the top line, but it will be more uneven on the bottom line as we continue to build an ever larger footprints for market updates <unk>.
Retrenching continues in our markets in Culver City, California, Alexandria, Virginia, and our partner markets in California.
We're also continuing our accelerated build using micro trenching in centennial, Colorado, although that market will see some winter weather delays our partner market of Colorado Springs has also started their construction and we're ramping up our marketing efforts there.
In the South Denver suburbs will be moving some of our attention from Aurora to other surrounding areas as we work to best deploy our construction crews, we will be updating our build scorecard accordingly.
We continue to be pleased with our partnership with generate capital and ubiquity. The teams from each company are working productively together and the shared knowledge is benefiting both parties, we're especially pleased to see the delivery of serviceable addresses in their Encinitas, California market begins to accelerate.
I also want to share that Jill Schumacher, our EVP of networks that Ting Internet is moving on to an incredible new opportunity.
Jill was with us for two years and in that time built a great team and lay the operational foundation that we will build on for years to come.
I want to thank her personally and we all wish her great success and know that she will continue that there might be things. She has ably succeeded by Jason Smith, who Jill brought into the organization very early in her tenure both C&I, though the group is in great hands.
Within the week, we expect to post the video we discussed last quarter, providing a deeper dive into Capex. This will give you all a chance to see Jason firsthand, you'll be able to find it on our website in the investors section under videos, it's a great opportunity for investors to gain insight into how Capex is spent during a bill.
And learn about the components of the builds that.
And a housekeeping issue our teams build scorecard has been slightly streamlined we've begun grouping local cities into regional footprints for measurement and reporting which at this point, primarily means our Denver and Raleigh regions.
And now I'd like to turn the call over to Dave for a deeper dive on our financial results. Dave. Thanks, Elliot total revenue for the fourth quarter of 2022 decreased four 2% to 79 million from $82 5 million for the fourth quarter of 2021 thing had revenue gains of 38% year over year increase of $11 5 million.
In Q4 of $2022 3 million in Q4 2021, the gains were offset by a decline in revenue of 53% year over year from wavelengths, mainly due to reduced professional services revenue from dish as well as the revenue recognition impact related to a reassessment of fixed payments and no disagreement but was also declining corporate revenues of 17% year over year.
$3 2 million in Q4, 2021 to $2 7 million in Q4 2022, driven by the expected decrease in low margin transitional service revenues with dish.
<unk> revenue had a modest decrease of one 8% year over year from 61 4 million in Q4 2021 to $60 $3 million in Q4 2022 as transaction levels normalized following the homeowner.
Cost of revenues before network costs for Q4 was up slightly at $49 2 million as compared to $40 2 million on the same period of last year.
A revenue cost surrounds departmental costs increased to six 2% to 8% in Q4 'twenty 'twenty. One this was primarily due to the lower high margin impact of the Weibo business, which have both lower revenues and proportionately higher cost of revenues in Q4 of this year versus last year.
Gross profit before network cost for the fourth quarter decreased 14% year over year to $29 7 million from $34 2 million with the decrease due mainly to the lower wafer contribution and lower contribution from demands as a percentage of revenue gross profit before network costs decreased this quarter to 38% from 42% in Q4 2021.
Breaking down gross profit by business to <unk> gross profit for the fourth quarter of 2022 decreased six 5% from Q4 last year $20 formulary on 19 console Asics.
As a percentage of revenue gross margin for <unk> was down slightly up 41% for Q4 2022 compared to 32% in Q4 2021.
The numbers reflect both the normalization of transactions to pre COVID-19 levels as well as the tailwind or the impact of the euro devaluation for the U S. Dollar in 2022, which increased our cost of buying domains in U S. Dollars that were sold to customers in euros that impact has not been mitigated from domain price increases we implemented late last fall for euro price domains.
Wafer gross profit declined by 56% to $3 8 million from $8 6 million for Q4 2021.
As a percentage of revenue gross margin for wave one was 85% compared with 90% in Q4 last year as discussed earlier by Justin waiver gross profit is down driven by a reduction in professional services revenue from dish and the revenue recognition impact related to the reassessment of fixed payments in the disagreement teen gross profit for Q4 increased 31% year over year.
$2 million from $5 5 million for the same period last year as a percentage of revenue gross margin for team continues at a healthy 62% in the fourth quarter down slightly from 66% in Q4 last year.
Network expenses for Q4 increased 30% to $12 7 million from $9 7 million from the same period of last year. The increase continues to be driven by higher depreciation and amortization of our fiber network assets up 60% year over year.
Total operating expenses for the fourth quarter of 2022 increased 16% to $30 million from $26 million for the same period last year.
Increase was primarily the result of the following people costs were up $2 7 million this quarter with increased workforce cost to support business expansion related to Ting internet growth as well as the continued with <unk> sales and marketing costs increased by <unk> 4 million year over year, mainly driven by increased investments in the team and chief business expansion facility.
Facility with third party contract you can support costs were up $6 9 million and credit card fees were up $2 million, while stock based compensation increased to $1 9 million year over year.
These were offset by a reduction in professional fees of $1 1 million and lower bad debt charges of zircon hormone and lastly, foreign exchange impacts decreased expenses as they are continuing in this quarter, primarily driven by the year over year impacts from the revaluation of our foreign denominated monetary assets and liabilities.
As a percentage of revenue operating expenses increased to 38% for Q4 of this year <unk>, 31% for the same period last year.
We reported a net loss for the fourth quarter of 2022 of $13 4 million or <unk> 25 per share compared with a net loss of $2 million or <unk> 18 per share for the same period of last year.
Our net loss was driven predominantly by higher interest expenses, including the new preferred depth with generate capital the accelerated build of our fiber network and ongoing ramp of the Ting Internet operations and related higher operation on depreciation expenses and higher stock based compensation and investments in the Weibo platform.
Our tax expense reflects our geographic mix with taxes payable in Canada on a legacy domains business.
Adjusted EBITDA for Q4 was $6 7 million down 47% from $12 7 million for Q4 2021.
Total breaks down amongst all three businesses as follows adjusted EBITDA for <unk> was $10 6 million down two 7% from Q4 last year, reflecting the normalization of renewals to pre COVID-19 levels. Adjusted EBIDTA for waiver was negative $1 1 million a decrease of 119% from a positive $5 9 million last year. The decrease was primarily due to lower.
High margin professional services and dish and the impact of two <unk> million and a contract asset related revenue recognition impact related to the reassessment of fixed payments and the disagreement the contract asset and associated revenue recognition varies based on the estimated relative mix of variable and fixed payments the year over year impact of the contract asset change was negative $2 1 million in this quarter.
As of December 31, 2022, a contract asset balances the $7 5 million and it will unwind as a contra revenue over the term of the contract which is up for renewal in Q3 2024.
The EBITDA return was negative $6 million compared with negative $4 8 million in Q4 2021, as we continue to invest in our fiber network expansion on.
And finally, the corporate category had adjusted EBITDA of $2 $3 million this quarter as compared to <unk> 6 million in Q4 last year with the increase primarily driven by lower corporate expenses this year versus last year, including one time items in Q4, 2021, and a higher earn out from the sale of the Ting mobile customers to dish turning to our balance sheet cash and cash equivalents at the end of Q.
Four were $23 5 million compared with $30 5 million at the end of the third quarter of 2022, and $9 1 million at the end of the fourth quarter of 2021 during the quarter, we had $2 9 million in cash from operations compared with $10 5 million in Q4 last year with the decrease being due to a lower net income once adjusted for noncash items, a working capital impact was <unk>.
The year over year.
Our cash is more than offset by our investment of $36 $7 million of property and equipment, primarily for the accelerated buildout of the Ting fiber Internet network. In addition to the continued investment in the Weibo platform note that number reflects the actual cash paid for capital losses in the quarter on a cash flow statement, the gross book value of fixed assets, including coppel inventory capital.
Internal and external software related labor and book, the wavelength domain and to a lesser extent servers and networking equipment in our data centers with $35 5 million in this quarter. A reminder, that the difference between $35 5 million and $36 7 million as a cost difference U S. GAAP requires mistaken hospitals tourism actual cash paid for capitalized.
In the quarter as opposed to showing it on an accrual basis also which you a further $27 5 million in preferred financing under our arrangement with generate we've now drawn a total of $8 5 million and as a reminder, cash interest payments are deferred for the first two years I also wanted to note that our December 31, 2022 syndicated loan balance for coming.
Accomplish purposes was a net 2% to $35 3 million when factoring in letters of credit and cash on hand of up to $5 million, resulting the leverage ratio of <unk> 90 times Hanmi deferred revenue at the end of Q4 was $145 million down one 4% from $147 million at the end of the third quarter 2022, and down one 8% from 148 million.
For the fourth quarter of last year, primarily reflecting the reversion domain renewals to pre COVID-19 levels.
Concludes my remarks, and I'll now turn it back to Elliot.
Dave first some housekeeping with the added complexity of three businesses in our holding company I'm pleased to announce that <unk> will be hosting its first investor day.
We'll hold it in may at a date and time and mode to be determined after receiving your input.
All investors, who are interested in participating should let us know whether they would like to attend in person or remotely.
Any time zone restrictions and preferences and if in person the dates when they could be in Toronto, we will try and accommodate the broadest range of investors possible.
This idea has been discussed with shareholders over the last couple of quarters, and we want to be on the other side of some of the balance sheet work before holding it we've been informed here by other companies like constellation software the.
<unk> executive team and business heads will participate we are also interested in your views on specific content you would like addressed although we note we have a pretty good idea of what we need to cover.
Also I note that we announced today that we reinstated our buyback for 2023. It is at the same level as the past several years of up to $40 million.
This is always important to allow us to be opportunistic in.
And the rest of these remarks I intend to quickly look back on 2020 to look forward to 2023, and then discuss the balance sheet in.
In terms of 2022 and meeting guidance you heard the positive numbers upfront.
Operationally each of the businesses performed roughly to plan. This was true across all three businesses and to the holding company.
We continue to operate our businesses in a remarkably predictable and reliable fashion.
The biggest negatives in 2022, the delayed generate closing the slower than hoped for dish subscriber loading and the rise in interest rates were all externalities that we had to deal with and I wish to be clear externalities happen and we are likely moving to a world where they'll happen more often.
We feel grateful that our business is able to digest these things and look forward.
And <unk> domains, we made a number of acquisitions from 2016 to 2022 those numerous legacy platforms have taken significant effort, we do not and did not underestimate that work as we have seen this done both successfully and unsuccessfully by a number of our larger customers.
As you heard in <unk> remarks, we are as excited about our growth prospects as we have been in a long time.
Waveland the platform is now loading at a brisk pace you can best see that by the end of year number adjusted shared a 2 million subscribers and the current number of over $3 million.
Wave low has now turned in earnest to building a pipeline of new customers with the team. They built I have every confidence.
This is already a business that will generate north of $25 million of revenue next year.
With <unk>, we're nearing the end of an over two year journey to lay in the right funding structure.
<unk> has proved to be a virtue.
Funding structures have evolved to better match, the nature of the industry and patients while continuing to build has helped us to likely maximize the value for <unk> shareholders and any potential equity transaction, if we choose to do.
She moves into deep execution mode, and we take what we believe is a best in industry ISP to a whole new level.
Flea changing the way people think about Isps forever.
But all of this translates to is EBITDA guidance of roughly $45 million for Tucows debates roughly breakeven for wavelengths and an EBITDA loss of around $40 million for two don't be alarmed by that thing loss as the cost of ramping so significantly in a business where paybacks are fantastic but.
Long term.
When you hear my comments below remember they are all made in light of this number meaning this loss is well understood by industry participants.
Also note we have essentially built the scale in the operation to handle the remainder of this period of building in the U S coax or fiber transition.
Finally, I would like to talk about the balance sheet and when I say that I'm really talking about two separate balance sheet first and most importantly, while there is work to be done on both sides of the business I expect that work to be complete or substantially complete by the time, We report our next quarter.
Obviously specifics will only come as we make announcements, but I note that this has been a long journey for my work specifically this journey dates back to the winter of 2020.
On the <unk> side, the solutions are likely to be straightforward.
Our leverage on that side of the business is higher than either we or the banking syndicate wed like it to be at the same time, we both understand that the primary reasons for that in 2022 with the delayed close of the generate financing, which required us to draw down an extra quarter of capital to continue to fund the fiber build.
Slower than hoped or load of dish subscribers, which was a negative cash outcome for all the right business reasons and the rise in interest rates as you see with the EBITDA results for 2022, the underlying businesses performed remarkably well to plan I said straightforward.
Simply we expect to start deleveraging exiting over this year and beyond.
On the team side I was at the Metro connect conference last week and the excitement over the coax or fiber transition in the U S has reached a new level.
Operators, who are already participating in this lab rush, our heads down and focused on their work infrastructure funds that are already participating are looking to deploy more capital as they see the inevitability those who are not yet involved are on the outside looking in.
People are realizing that it's too late in the cycle to standup new platforms.
There are also two themes that are clearly emerged.
Our good fortune. They are themes, we are well ahead of the curve fit.
Fixed mobile convergence and wholesale fiber builds.
Intend to cover both of these topics in detail at the Investor Day.
At a macro level the inevitability of fiber is now accepted by all on a micro level, we are respected and admired by our peers in the industry in general.
With two guys domains and wave low I'm excited for the growth prospects in 2023 with two cows domains I am more excited than I have been three years.
With <unk>, there was a feeling of being in the right place at the right time with the right people at the right business that I have not had since the early days of this century.
There is still work to do and that work is well underway. This is still a very dynamic macro economy and it is susceptible to shocks in our view.
But are now deep tradition of building and running businesses that are predictable and reliable and generate cash by delighting customers puts us in a fantastic position.
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 February 16, and look for a recorded Q&A audio response at transcript to this call to be posted to the <unk> website on Tuesday February 28 at approximately four PM Eastern time. Thank you.