Q2 2024 Tucows Inc Earnings Call - Pre-Recorded
Transcript at these remarks with relevant links is also available on the company's website. We will begin with opening remarks from Elliot Noss, President and CEO of two cows and Teng followed by business remarks from Dave work C O two cows demeans Justin Reilly.
Elliot Noss: Wavelength Elliot Noss on Ting.
Ivan Ivan: Ivan Ivan knocked two cows, new CFO, who will discuss our financial results in detail and finish with closing remarks from Elliot Noss.
Elliot Noss: In lieu of a live question and answer period. Following these remarks shareholders analysts and prospective investors are invited to submit questions to <unk> management.
Speaker Change: Please submit questions by E mail to IR at <unk> Dot Com until Thursday August 15th management will either address your questions directly or provide a recorded audio response and transcript that will be posted to the website on Tuesday August 27th at approximately four P. M Eastern time.
Elliot Noss: We would also like to advise that the updated Tucows quarterly Kpis summary, which provides key metrics.
Elliot Noss: All of our businesses for the last six quarters as well as for food.
Elliot Noss: 2022.
Elliot Noss: Q3, and 2024 year to date and also includes historical financial results is available in the investors section of the website. The updated Ting build scorecard and Investor presentation are also available.
Speaker Change: Now for management's prepared remarks.
Speaker Change: August eight two has issued a news release reporting its financial results for the second quarter ended June 30th 2024 that news release and the company's financial statements are available on the company's website at <unk> Dot com under the investors section.
Speaker Change: Please note that the following discussion may include forward looking statements, which are subject to risks and uncertainties that could cause.
Speaker Change: Lots to differ materially these.
Speaker Change: 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 its security filings for a full.
Elliot Noss: The risk factors applicable to its business.
Speaker Change: I would now like to turn the call over to <unk>, President and Chief Executive Officer Elliot Noss.
Speaker Change: Go ahead Elliot.
Elliot Noss: Thanks Monica.
Elliot Noss: Okay.
Speaker Change: Consolidated results the second quarter of 2024 saw solid year over year and quarter over quarter performance for revenue gross margin and adjusted EBITDA.
Speaker Change: It's the third consecutive quarter of growth of our headline metrics and reflective of our work.
Speaker Change: Oh revenue efficiently and employ rigor around cost controls to support continued expansion of margin.
Speaker Change: Consolidated net revenue for the second quarter increased five 2% year over year to 89.4 million with strong revenue gains from <unk>.
Speaker Change: Gross.
Speaker Change: In Q2 grew 15, 4% year over year to $28 million. The gross profit growth came from all three businesses with team doing the heaviest lifting.
Speaker Change: Adjusted EBITDA for the second quarter of <unk>.
Speaker Change: Before increased 70% year over year to $9 2 billion. The increase was primarily driven by <unk> reduction of its adjusted EBITDA losses and was supported by year over year gains from domains in waves.
Speaker Change: We continue to balance investment in the businesses with paying down debt in Q2.
Speaker Change: Further deleverage the business with $6 5 million in payments of syndicated debt.
Ivan Ivan: Many of you will exceed Ivan Ivan off as very recently taken over from Dave Singh as <unk> New CFO.
Ivan Feinseth: <unk> brings highly relevant expertise, including strategic capital management and lots of exposure to verizon's fiber business. We are pleased to have joined the executive team and both Dave and the island have worked to create an extremely smooth transition I also want to sincerely. Thank Dave for his impact on two cows over the last eight <unk>.
Speaker Change: Under his stewardship to cows has navigated significant growth and changes in our business and I'm grateful for having him as my partner through it all the entire <unk> family wishes and the best in his next endeavors and we know he will continue to cheer for us from the sidelines.
Speaker Change: Now we'll hear.
Speaker Change: As of each business.
Speaker Change: From Ivan at his inaugural remarks, CFO covering our financial results in detail. The first speaker is Dave work Chief Executive Officer, two cows debates go ahead Dave.
Dave: Thanks Elliot.
Ivan Ivan: In the second quarter, two goes demeans continue to reliably generate cash grow our margin and contribute to <unk> adjusted EBITDA.
Speaker Change: Our domains under management were up marginally year over year, and our transactions were down just under 3% from Q2 of 2023.
Speaker Change: We're pleased that our efforts to grow margin, while being rigorous on cost control has generated these results.
Dave: Particularly given the declining domain transaction numbers for sure.
Dave: Okay.
Dave: Revenue for domain services for Q2 was $62 4 million.
Dave: Up 4% from $60 million for the same quarter last year.
Dave: Gross margin was $18 9 million.
Dave: Five 2% from the same quarter last year.
Dave: Domain services adjusted EBITDA was $11 2 million in the second quarter up 6% from Q2 of last year.
Dave: Looking at the results from the segments of our business and our wholesale channel.
Dave: Revenue for Q2 was $53 million up two 9% compared to $51 5 million for Q2 of last year and.
Dave: And gross margin was $13 6 million down slightly from $13 7 million from Q2 of 2023.
Dave: Within the wholesale channel domain services gross margin was up 1% in Q2 compared to the same period last year with value added services gross margin was down three 8%.
Dave: In our retail channel.
Dave: Revenue for Q2 was $9 3 million up 10, 8% from $8 4 million in Q2 of last year.
Dave: Retail gross margin for the second quarter was up 23, 6% year over year.
Dave: The outsize retail revenue and margin continued to be positively impacted by the movement of some wholesale customers to retail that I have discussed previously and.
Dave: In retail margins are higher than wholesale margins, both as a percentage and in dollars per transaction.
Dave: Our combined overall renewal rate at 76% in Q2 across all two gals domains brands remains within our historical range and above the industry average.
Dave: In closing I wanted to add that we continue to have incremental successes in our registry services business.
Dave: We recently won the business with Dot music to operate their registry backend.
Dave: In addition, our Orange domains joint venture has announced the launch of their first T. L D.
Dave: Locker, which will also operate on the two cows domains backend.
Dave: Both new T. L. D's are expected to be in general availability.
Dave: At the end of this year.
Dave: In addition, and specific to the other new services, we're developing we continue to incorporate reseller input into our product development cycle.
Dave: Progress towards what we believe will ultimately deliver a useful and fulsome suite of tools to facilitate adoption.
Dave: Now over to Justin Reilly CEO of way low.
Justin Reilly: Thanks, Dave.
Justin Reilly: Looking back to a year ago, we were just wrapping up the migration of millions of boost subscribers to the wave <unk> platform. Since then dishes focused on optimizing their base for higher quality subscribers and managing the churn that's all too common in these prepaid businesses just recently.
Justin Reilly: <unk> launched a new unified brand with nationwide <unk> coverage that blurs the line between prepaid and postpaid a nod to our history with Ting mobile that is a welcome departure from the industry standard the configure ability and flexibility of wave lowest platform.
Speaker Change: Enabled them to deliver this in record time, instead, allowing them to focus on customer delight not technical implementations.
Speaker Change: <unk> revenues were $10 5 million in Q2 up 11, 8% from Q1 and down two 3% from Q2 2023 the.
Speaker Change: The small decrease in revenue year over year was driven by less onetime professional services work in the current year as we continue to transition towards recurring platform revenues.
Speaker Change: As we've previously noted we experienced outsized revenue recognition annually in Q2 related to the bundled professional services included as part of the platform services provided to dish adjusting for this revenues were right.
Speaker Change: Stable compared to Q1 with a small 1% reduction as dish focused on higher value subscribers gross margin was $10 2 million up 12, 4% quarter over quarter and up one 1% year over year.
Speaker Change: Lift consistent with the discussion on revenues as we recognize the bundled professional services provided to dish and transition our revenue mix more and more to higher margin platform services adjusted EBITDA for Q2 was three <unk>.
Speaker Change: $1 million up.
Speaker Change: 3% from last quarter, and up 14, 1% year over year.
Speaker Change: As we head into a more steady state with dish, we are pleased with their ability.
Speaker Change: That's their base positioned boost for growth and move from defense to offense and their marketing and product strategies on adjusted EBITDA. We continue to thoughtfully manage investment with a focus on margin performance and growth related to hiring.
Speaker Change: The latter we expect to ramp in the second half of the year as our go to market team comes into sharper relief.
Speaker Change: Last month, we launched product catalog to allow operators flexibility and choice as they navigate the competitive pressures of this current landscape as a go to market tool product catalog allows prospects to choose wave low without needing to re platform their entire BSS suite as more CIO has moved towards.
Speaker Change: REIT strategy core componentry like product catalog become important building blocks of their digital transformation. This gives us means of building in an initial relationship with room to expand from there as the relationship blossoms.
Speaker Change: From day, one our strategy has been to provide modular software solutions that meet customers, where they are and as the cloud transformation and telecom takes shape. This will be all the more important to onboarding, new telecoms onto the <unk> platform. Our teams have spent much of the quarter onboarding the new logos.
Speaker Change: Q1, and those efforts are going well.
Speaker Change: I'll remind investors that these are small isps and while the revenues are not material. The go to market and delivery muscles being built are fundamental to waive those ability to scale beyond our anchor customers.
Speaker Change: I am pleased to see our early marketing efforts starting to bear fruit as the number of inbound leads and rfps are increasing quarter over quarter in tandem our sales team is refocusing its efforts upmarket on larger <unk> and Isps, while this naturally means sales cycles elongate it more strategically positioned the business for longer term.
Speaker Change: Term profitable growth and as I've said before the larger telecoms are the ones, who can most benefit from what wave low has to offer as we've discussed before.
Speaker Change: We are well into an era of telecom colored by consolidation convergence and evolving customer expectations. Many of the systems in use today were built for the express purpose of managing either fixed or mobile billing and provisioning during a more simple landscape of competition, we've constructed wave, though to meet the needs that operators.
Speaker Change: Have now not yesterday and to run out in front of their needs Tomorrow I've never been more excited to be doing this work at this time and with this tremendous market opportunity ahead of us.
Speaker Change: Thanks for listening and now over to Elliot. Thanks.
Elliot Noss: In Q2 thing added 2100, net new subscribers growing 10, 5% year over year, and taking us to over 48000 subscribers in total.
Elliot Noss: We also had a 17, 4% year over year growth of completed serviceable addresses in Q2, taking us to 128300 serviceable addresses pertained to owned infrastructure.
Elliot Noss: Partner markets are continuing to ramp up their bills with 72% growth at addresses for Q2 year over year. This brings us to 164500 total serviceable addresses across all thing footprints.
Elliot Noss: Revenue for Q2 grew 17, 4% year over year to $14 6 million and gross margin grew 39% year over year to $9 8 million as we see margins expanding as expected.
Elliot Noss: Notably <unk> adjusted EBITDA loss was reduced to $6 4 million for <unk>.
Elliot Noss: Down by nearly 4 million year over year.
Elliot Noss: And while this pace of change May not continue we do expect this trend to continue.
Elliot Noss: It is primarily a result of a full quarter of recognition for the reductions in head count and seeing marketing spend returned to more normalized levels.
Speaker Change: As I mentioned last quarter. My focus is to continue moving the business forward on the path to profitability, we will continue to invest prudently to expand our footprint and our market share. We will continue to be disciplined on cost controls construction economics, and improving our margins and at the same time working to maintain.
Speaker Change: Hain things right now in the customer experience and low churn rates.
Elliot Noss: All well resolving the long term capitalization of the business.
Speaker Change: Our second quarter fiber Capex is reduced from Q1 of 2024 at just over 12 million for Q2 and continues to be lower than our spend a year ago. This is not only us being more judicious on capital deployment, but it also reflects that will newer markets are in active construction others such as Culver.
Speaker Change: City, Sandpoint and parts of the Raleigh, and Denver regions are now mostly built with opportunistic construction happening with new MD user neighborhoods are added.
Elliot Noss: Alexandria is resuming construction after a short hiatus, where we worked with the city to get consensus on the right approaches as it relates to construction specifics traffic management and planning practices in our historic in densely populated cities.
Speaker Change: While we have nothing specific to share on the further capitalization of thing there were a number of important industry events.
Elliot Noss: We continue to see financial markets sustained interest in securitization instruments for fiber deployments.
Elliot Noss: Since thing did our $239 million securitization in May of 2023, we've seen similar successful structured financings visibly frontier and allo among others, all well priced this reinforces our view that the market recognizes the inevitability.
Speaker Change: <unk> and long term profitability of the U S coal.
Elliot Noss: For transition and the view of the ABS product as a low risk instrument to participate.
Elliot Noss: The other trend that thing was early to embrace that we're now seeing in headlines as partnerships between infrastructure owners and service providers back in April.
Elliot Noss: A joint venture between T mobile and EQT to acquire fiber provider lubow.
Elliot Noss: In the last month, we've seen joint venture discussions between stone peak and frontier and a joint venture between T mobile and KKR to acquire Metronet. The first fiber provider to do an ABS transaction.
Elliot Noss: This aligns with our view on both partnerships, bringing together the operational structure of established fiber providers with the financial heft to capitalize on the coax.
Elliot Noss: For transition.
Elliot Noss: And the T mobile.
Elliot Noss: <unk> also reinforced the inevitability of convergence of fixed and mobile services and the need for a platform like wavelengths that seamlessly integrates with too.
Speaker Change: Now, we'll hear from our new CFO.
Ivan Ivanov: CFO, Ivan Ivan off who will discuss our financial results in detail.
Ivan: Thank you Elliot.
Ivan Ivanov: Starting with revenue total revenue for the second quarter of 2024 increased five 2% to $89 4 million compared to 85 now.
Speaker Change: The second quarter of 2023.
Speaker Change: With respect to each business ink grew revenue, 17% year over year, increasing to $14 6 million from $12 4 million in the same quarter last year.
Speaker Change: Okay.
Ivan: Prices decreased 4% to $10 5 million.
Ivan: Selecting a reduction in professional services fees as the business transitioning to a pronounced subscriber revenue base.
Ivan: Our domains revenue was.
Ivan: 4% increases.
Ivan Ivanov: $2 4 million from $60 million the prior year.
Ivan: Corporate <unk> was up six 4% to $2 million in Q2, 2024 versus $1 9 million.
Josh: Sure Josh.
Ivan: Gross profit before network costs for the second quarter increased 11, 3% RV.
Ivan: The $8 1 million.
Josh: <unk> $4 2 million in Q2 2023.
Anthony: Anthony patients here level gross profit before network costs increased to 42% compared to 20% in the prior year.
Josh: Down gross margin by business two cows domains gross margin increased five 2% to $18 9 million from $17 9 million in Q2 2023.
Ivan Ivanov: As a percentage of revenue gross margin for two calls domains remained unchanged year over year at 30%.
Ivan: Wherever else cross margin increased modestly to $10 2 million this quarter from $10 million in Q2 2023.
Ivan: As a percentage of revenue gross margin for weight loss was 97%.
Ivan: Up from 93% in the prior year.
Ivan: The increased margin reflects efficiency from the fully migrate it dish subscriber base.
Ivan: Inc. Gross margin for Q2 increased 39, 2% year over year to $9 8 million from $7 1 million for the same period last year.
Ivan: As a percentage of revenue gross margin for tank was 6% to 7% in the second quarter of 2024.
Ivan: Up from 57% in Q2 of last year net.
Ivan: Network expenses for Q2 were seven point 10 million up from $16 2 million for the same period last year, largely reflecting higher depreciation our expanding fiber network assets.
Ivan: Operating expenses decreased by 5% 29 million.
Ivan: From $31 1 million in Q2 2023. The decrease is primarily the result of.
Ivan: One 4 million in fully amortized intangible assets from the email and brand and customer relationships.
Ivan: And $1 $3 million reduction in sales and marketing costs.
Ivan: Primarily from more efficient marketing spend.
Ivan: And a <unk> 2 million reduction in stock based compensation.
Ivan: Overall, I'll try and expense reduction was partially offset by increased costs from contract and professional services professional fees and foreign exchange related expenses.
Ivan: As a percentage of revenue.
Ivan: Operating expenses improved.
Ivan: 2% compares to 37% for the same period last year.
Ivan: Largely as a result of portfolio wide cost management initiatives.
Ivan: We reported a net loss for the second quarter of 2024 up $18 6 million or a loss of $1.70 per share.
Ivan: Compared with a net loss of $30 8 million or $2 86 per share for the second quarter of 2023.
Ivan: The decreased loss is primarily the result of continued opex reductions.
Ivan: Taxes, and a onetime debt extinguishment costs.
Ivan: The decreased net loss was partially offset by increased interest expense and network depreciation.
Ivan: Resulting from our expanding fiber network adjusted EBITDA for Q2 was $9 2 million up 70% from $5 4 million for Q2 of 2023.
Ivan: Primarily driven by a reduced operating loss from tank.
Ivan: And year over year increases from domains on wavelength.
Ivan: The total breakdown amongst our key business change is as follows.
Ivan: Adjusted EBITDA for two calls domains was $11 2 million up 6% from Q2 of last year.
Ivan: Adjusted EBIT for wavelength was three nine.
Ivan: Up 10% from $10 4 million in Q2 of last year.
Ivan: Adjusted EBIT for tank was negative $6 4 million compared with negative $10 2 million in Q2 2023.
Ivan: Following a reduction in workforce in Q1 of this year and finally, the corporate category as adjusted.
Ivan: Ill point 5 million this quarter down from $1 7 million in Q2 of last year.
Ivan: The decrease is primarily driven by a lower contribution from the legacy mobile base, turning to our balance sheet cash and cash equivalents at the end of Q2 2024 were $39 2 million compared with $66 6 million at the end of the first quarter of 2024.
Ivan: $147 9 million at the end of the second quarter of 2023.
Ivan: In addition to a three nine point today, we have $12 9 million classified as restricted cash as part of the ABS transaction in 2023.
Ivan: As a reminder of the $12 9 million.
Ivan: Restricted cash $8.
Ivan: Will shape in a trust account for the duration of the ABS notes.
Ivan: The remaining $4 million reflects the cash collections from the securitized assets.
Ivan: And it is distributed model cash interests to not holders and cease to third parties with the remaining funds coming back to pink.
Ivan: We also not that we generate $1 7 million in interest income this quarter during the quarter, we had negative 4%.
Ivan: $700 million in cash from operations compared to a negative $6 8 million in Q2 of last year.
Ivan: With the improvement primarily as a result of a lower operating loss from tank in Q2 of 2024.
Ivan: And a onetime debt extinguishment in Q2 of last year used to reduce the general preferred shares obligations.
Ivan: $16 million in property and equipment, primarily for the continued buildout of the Ting fiber network. In addition to continuing to investment in the wavelet platform.
Speaker Change: Now that this number reflects the act.
Ivan: Cash paid for catheter assets in the quarter on our cash flow statement and includes capitalized cash interest as of June 30th 2024, our syndicated loan balance for covenant calculation purposes.
Ivan: Okay.
Speaker Change: Two 6 million went.
Speaker Change: When factoring in letters of credit and cash on hand of up to $7 1 million, which resulted in a leverage ratio of.
Ivan: 3.17 times. This is the fifth consecutive quarter, we have reduced the leverage ratio.
Speaker Change: You repaid a net $6 5 million on the balance of the loan this quarter and expect quality of repayments to continue.
Ivan: Finally deferred revenue at the end of Q2 was $156 million up slightly from 155.
Ivan: The first quarter of 2024, and also up from 100 to <unk> 1 million for the second quarter of 2023 that concludes my remarks and now.
Elliot Noss: Back to Elliot.
Elliot Noss: Thanks Ivan for.
Elliot Noss: For the last few quarters I've been talking about my strongly held belief the public markets in the summer of 'twenty 'twenty four can only sustain two kinds of companies.
Speaker Change: There are those that our story our concept stocks, where the goal is to sell to the next person to here and believe the story the.
Elliot Noss: The obvious example is in video.
Elliot Noss: And there are companies that are capital light and generate a lot of free cash flow.
Elliot Noss: No I do not say EBITDA, but truly free cash flow.
Ivan: And fiber <unk>.
Ivan: I talked last quarter about the T mobile EQT deal among others.
Ivan: This quarter I mentioned additional data points confirming our views the numerous additional ABS financings announced all with lots of demand at all with narrowing spreads.
Ivan: This demonstrates that there is still loads of capital looking for a home and that holders wanted to deploy as much capital as possible with as little risk as possible.
Ivan: And as I mentioned, the biggest deal yet in this space with T mobile buying a stake and Metronet, we see T. Mobile now partner with KKR. In addition to their existing EQT deal, we see a financial sponsor of them keeping their dollars at work on the network side, while at a T mobile.
Ivan: Take all the ISP risk.
Ivan: We are seeing the continued financials Asian fiber to the home as an asset class.
Ivan: Since 2017, we'd been talking about how eventually fiber networks will be financial is in the same way the towers.
Speaker Change: The financial Ization of towers started with the AT&T spinoff that became Crown castle at the turn of the century.
Speaker Change: Towers now trade had incredibly high multiples.
Speaker Change: Who better than AT&T to kick off the financial Ization of fiber.
Speaker Change: With their giga power deal.
Speaker Change: So where are we.
Speaker Change: For years, we've been talking about each fiber footprint as having three components capital construction at ISP with the deals we have seen and will continue to see we see the financials nation of the output of tab.
Speaker Change: <unk> the networks themselves.
Speaker Change: This leaves the ISP.
Speaker Change: So what happens to the ISP when you ones Heather the other two pieces well is generally a capital light.
Speaker Change: Generative business.
Speaker Change: But it is an operator.
Speaker Change: That is of little interest to traditional approvals of long term infrastructure capital.
Speaker Change: They strongly prefer less risk at Morris.
Speaker Change: Returns.
Speaker Change: In terms of the long term resolution of the Ting business I have nothing to share this quarter, but this remains the top priority whatever path, we choose to take it will be greatly informed by this financial backdrop.
Speaker Change: When it comes to Tcs and the broader market.
Speaker Change: Last quarter I talked about the Berkshire Hathaway annual meeting and the fact that Apple was now their largest holding.
Speaker Change: This quarter, they announced they have cut their stake in Apple in the half.
Speaker Change: They are seeing what we are seeing.
Speaker Change: There is no massive concentration of the market with a small number of the largest stocks accounting for a greater and greater.
Speaker Change: Of the total market capitalization. These are now stories no longer trading on free cash flow.
Speaker Change: When we look at the cumulative net income of the past three years of Microsoft Amazon meta at alphabet.
Speaker Change: Was an amazing $570 billion.
Speaker Change: But.
Speaker Change: They spent a combined 418 billion of that.
Speaker Change: Capex alone.
Speaker Change: They trade at massive multiples of net income, but when we look at free cash flow it looks like a bubble.
Speaker Change: We expect this is what Warren Buffett.
Speaker Change: It feels like we now need to invoke Stein's law.
Herbert Stein: If something cannot go on forever It will stop.
Speaker Change: How public companies that consist of capital light free cash generative businesses behave.
Speaker Change: And how they trade in the future is not clear.
Speaker Change: It is unlikely to be dividends or buybacks in the way they have been used in the last 10 years or so we.
Speaker Change: We don't we think that returning capital to shareholders has always been the right approach and is clearly the one that addresses the structure of capital markets in 2024.
Speaker Change: 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 August 15, and look for a recorded Q&A audio response and transcript to this call to be posted to the two cows website on Tuesday August 27.
Speaker Change: At approximately four P M eastern time, thank you.