Q1 2025 Tucows Inc Earnings Call - Q&A

[Company Representative] (Tucows): King, and David Woroch, CEO of Tucows Domains, will be responding to your questions. For your convenience, this audio file is also available as a transcript in the investor section of our website, along with our Q1 2025 financial results and updated reports. I would also like to remind investors that if you would like to receive our quarterly results and Q&A via email, please make the request to ir@tucows.com. Please note that the following discussion may include forward-looking statements, which are subject to risks and uncertainties that could cause actual results to differ materially. These risk factors are described in detail in the company's documents filed with the SEC, specifically the most recent reports on the Forms 10-Q and 10-K. The company urges you to read its security filings for a full description of the risk factors applicable to its business.

Operator: and Dave Warrick, CEO of Two Cows Domains, will be responding to your questions. For your convenience, this audio file is also available as a transcript in the investor section of our website, along with our Q1 2025 financial results and updated reports. I would also like to remind investors that if you would like to receive our quarterly results and Q&A via email, please make the request to ir2cows.com.

To cast means we'll be responding to your questions for your convenience. This audio file is also available as a transcript in the investors section of our website along with our Q1 2025 financial results and updated reports I would also like to remind investors that if you would like to receive our quarterly results and Q&A via E Mail.

Please make the request to IR at <unk> Dot com.

Note that the following discussion may include forward looking statements, which are subject to risks and uncertainties that could cause actual results to differ materially.

Operator: Please note that the following discussion may include forward-looking statements, which are subject to risks and uncertainties that could cause actual results to differ materially. These risk factors are described in detail in the company's documents filed with the SEC, specifically the most recent reports on the forms 10-Q and 10-K. The company urges you to read its security filings for a full description of the risk factors applicable to its business.

These risk factors are described in detail in the Companys documents filed with the SEC specifically the most recent reports on the forms 10-Q and 10-K. The company urges you to read its security filings for a full description of the risk factors applicable to its business.

Today's commentary includes responses to questions submitted to us following the prerecorded management remarks regarding the quarter and outlook for the company. We are grouping similar questions into categories that we feel are addressing common queries.

Operator: Today's commentary includes responses to questions submitted to us following the pre-recorded management remarks regarding the quarter and outlook for the company. We are grouping similar questions into categories that we feel are addressing common queries. If your questions reach a certain threshold or volume, we may ask you to schedule a call instead to ensure we can address the full body of your questions. And if you feel that the recorded questions and or any direct email you may receive do not address the full scope of your questions, please let us know.

[Company Representative] (Tucows): Today's commentary includes responses to questions submitted to us following the prerecorded management remarks regarding the quarter and outlook for the company. We are grouping similar questions into categories that we feel are addressing common queries. If your questions reach a certain threshold or volume, we may ask you to schedule a call instead to ensure we can address the full body of your questions. If you feel that the recorded questions and/or any direct email you may receive do not address the full scope of your questions, please let us know. Go ahead, Elliot.

If your questions reach a certain threshold or volume we may ask you to schedule a call instead to ensure we can address the full body of your questions and if you feel that the recorded questions Andrew or any direct E. Mail you may receive do not address the full scope of your questions. Please let us know go ahead Elliot thank.

Thank you Monica and welcome to our Q&A for our first quarter 2025 financial results certainly reasonable concerns were raised this quarter regarding things balance sheet and its future outlook I'll start by being clear that our best path forward is to take advantage of our over 130.

Elliot: Go ahead, Elliot. Thank you, Monica. And welcome to our Q&A for our first quarter 2025 financial results. Several reasonable concerns were raised this quarter regarding Ting's balance sheet and its future outlook.

[Company Representative] (Tucows): Thank you, Monica, and welcome to our Q&A for our Q1 2025 financial results. Several reasonable concerns were raised this quarter regarding Ting's balance sheet and its future outlook. I will start by being clear that our best path forward is to take advantage of our over 130,000 owned addresses and use them to lower the debt on the Ting balance sheet and become, to the greatest extent possible, a capital-light, asset-light ISP. The questions highlight the need to provide more long-term context and operating detail for what a capital-light ISP could look like. First, I want to remind shareholders that we've been thinking about these concepts for over a decade. From the very beginning of our entry into fiber, we've said that each fiber footprint has 3 distinct components: capital, construction, and ISP.

Elliot: I will start by being clear that our best path forward is to take advantage of our over 130,000 owned addresses and use them to lower the debt on the Ting balance sheet and become to the greatest extent possible a capital-like, asset-like ISP. Questions highlight the need to provide more long-term context and operating detail for what a capital light ISP could look like. First, I want to remind shareholders that we've been thinking about these concepts for over a decade. From the very beginning of our entry into fiber, we've said that each fiber footprint has three distinct components, capital, construction, and ISP.

<unk> owned dresses and use them to lower the debt on the <unk> balance sheet and become to the greatest extent possible capital light asset light ISP.

Questions highlight the need to provide more long term context, and operating detail for what a capital light ISP could look like first I want to remind shareholders that we have been thinking about these concepts for over a decade.

From the very beginning of our entry into fiber, we've said that each fiber footprint as three distinct components capital construction and ISP you can see our belief in this clearly in our early partnership with the city of Westminster, Maryland really the first of its kind in 2015 that has been a pre.

Elliot: You can see our belief in this clearly in our early partnership with the City of Westminster, Maryland, really the first of kind in 2015. That has been a productive 10-year relationship with a take rate in the low to mid 40s and a profitable operation. since that time, and particularly over the last five years. We've seen examples from around the world, and especially in North America, of telecoms monetizing their infrastructure. Specifically, this means separating the ISP operation, which owns the customer relationship, from the physical network and. Some of the world's largest private equity firms, BlackRock, KKR, Brookfield, along with many mid-sized PE firms, have pursued this.

[Company Representative] (Tucows): You can see our belief in this clearly in our early partnership with the City of Westminster, Maryland, really the first of its kind, in 2015. That has been a productive 10-year relationship with a take rate in the low to mid-40s and a profitable operation. Since that time, and particularly over the last 5 years, we've seen examples from around the world, and especially in North America, of telecoms monetizing their infrastructure. Specifically, this means separating the ISP operation, which owns the customer relationship, from the physical network infrastructure. Some of the world's largest private equity firms, BlackRock, KKR, Brookfield, along with many mid-sized PE firms, have pursued this strategy. Yet there are very few ISPs that are interested in being tenants on these networks.

<unk> 10 year relationship with the take rate in the low to mid forties at a profitable operation.

Since that time, and particularly over the last five years, we've seen examples from around the world, especially in North America of telecoms monetizing their infrastructure specifically.

Separating the ISP operation, which owns the customer relationship from the physical network infrastructure.

Some of the world's largest private equity firms Blackrock KKR Brookfield, along with many midsized PE firms have pursued this strategy.

Yes.

There are very few Isps that are interested in being tenants on these networks. We have discussed previously that almost every ISP. The current U S. Fiber landscape is owned by private equity and private equity wants to own infrastructure. In fact, when we were in discussions with prospective net coast.

Elliot: And yet, there are very few ISPs that are interested in being tenants on these networks. We've discussed previously that almost every ISP in the current U.S. fiber landscape is owned by private equity. private equity wants to own infrastructure. In fact, when we're in discussions with prospective NETCOs, our competition is typically limited to AT&T and T-Mobile.

[Company Representative] (Tucows): We've discussed previously that almost every ISP in the current US fiber landscape is owned by private equity, and private equity wants to own infrastructure. In fact, when we're in discussions with prospective NetCos, our competition is typically limited to AT&T and T-Mobile. We think there is a white space opportunity in being a capital-light, asset-light ISP. Let's talk about the economics of operating a capital-light ISP. Operationally, the structure is very simple to a traditional ISP. The main difference is that the cost of network maintenance and repair shifts from the ISP to the NetCo. Aside from that, operations remain largely unchanged. Some NetCos deal with installations, some don't. Of course, the most significant financial difference is the lease cost or per-circuit fee paid to the NetCo. That cost typically falls in the range of $35 to $40 per customer per month, depending on what's included.

Our competition is typically limited to AT&T and T mobile.

We think there is a white space opportunity in being a capital light asset light ISP, let's talk about the economics of operating a capital light ISP.

Elliot: We think there is a white space opportunity in being a capital light, asset light, ISP. Let's talk about the economics of operating a capital light ISP. Operationally, the structure is very simple to a traditionalized The main difference is that the cost of network maintenance and repair shifts from the ISP to the network. Operations remain largely unchanged. Some NETCOs deal with installations, some don't. Of course, the most significant financial difference is the lease cost, or per-circuit fee, paid to the net. That cost typically falls in the range of $35 to $40 per customer per month, depending on what's included.

Operationally the structure is very simple to a traditional ISP.

The main difference is that the cost of network maintenance and repair shifts from the ISP to them that co aside from that.

Operations remained largely unchanged.

<unk> deal with installations. Some note of course, the most significant financial difference is the lease cost are per circuit fee paid to the net coke.

That cost typically falls in the range of 35 to $40 per customer per month, depending on what's included.

You flow all of that through the financial model a useful if slightly over simplified way to think about it is that net operating margins shift from around 70% and are fully penetrated traditionally capitalized network to somewhere in the 25% to 30% range and a capital light model.

Elliot: If you flow all of that through the financial model, a useful if slightly oversimplified way to think about it is that net operating margins shift from around 70% in a fully penetrated traditionally capitalized network to somewhere in the 25-30% range in a capital light. At its core, this model represents a different risk-reward balance. The Netco enjoys more certainty, while the ISP has more uptime. The ISP bears the risk of penetration in ARPU, but also benefits from outperforming on these same metrics. And as I've noted before, one of the challenges that we've encountered in past equity projects is that our Penetration, ARPU, and SHERD are best in class, meaning that private equity firms on the other side of the trade often struggle to normalize or benchmark those.

[Company Representative] (Tucows): If you flow all of that through the financial model, a useful, if slightly oversimplified way to think about it is that net operating margins shift from around 70% in a fully penetrated, traditionally capitalized network to somewhere in the 25% to 30% range in a capital-light model. At its core, this model represents a different risk-reward balance. The NetCo enjoys more certainty, while the ISP has more upside. The ISP bears the risk of penetration and ARPU, but also benefits from outperforming on these same metrics. As I've noted before, one of the challenges that we've encountered in past equity processes is that our penetration, ARPU, and churn are best in class, meaning that private equity firms on the other side of the trade often struggle to normalize or benchmark those numbers.

At its core this model represents a different risk reward balance the net co enjoys more certainty while the ISP has more upside the ISP bears the risk of penetration in <unk>, but also benefits from outperforming on these same metrics and as I've noted before one of the <unk>.

Challenges that we've encountered in past equity processes is that our penetration <unk> ensured our best in class meeting that private equity firms on the other side of the trade often struggle to normalize our benchmark those numbers.

You've heard me say many times that we believe <unk> is the best residential ISP in the U S.

Elliot: You've heard me say many times that we believe Ting is the best residential ISP in the U.S. what's especially is that we've delivered these results while also operating a construction business and dedicating significant effort to capitalizing on it. Dealing with capital and construction don't just introduce complexity, they introduce uncertainty. Operating a construction project is a lot like a historical military campaign. If you are idle, you are simply burning through resources, keeping the army clothed and fed. And that flows through to the other elements of the operation, like marketing spend and customer service, where cap and staffing levels are ideally paced in tandem with the construction.

[Company Representative] (Tucows): You've heard me say many times that we believe Ting is the best residential ISP in the US. What's especially notable is that we've delivered these results while also operating a construction business and dedicating significant effort to capitalizing the business. Dealing with capital and construction don't just introduce complexity, they introduce uncertainty. Operating a construction project is a lot like a historical military campaign. If you are idle, you are simply burning through resources, keeping the army clothed and fed. That flows through to the other elements of the operation, like marketing spend and customer service, where capex and staffing levels are ideally paced in tandem with the construction build. All of this lack of coordination caused by capital uncertainty leads to elevated costs throughout the operations. Accordingly, we believe there's room to improve Ting ISP's performance across all key measures.

What is especially notable is that we have delivered these results. While also operating our construction business and dedicating significant effort to capitalizing the business.

Dealing with capital and construction don't just introduce complexity.

Introduce uncertainty.

Operating a construction project is a lot like a historical military campaign fewer idle you were simply burning through resources, keeping the army closed and fed and that flows through to the other elements of the operation like marketing spend and customer service, where CAC and staffing.

Levels are ideally paced in tandem with the construction built all of this lack of coordination caused by capital uncertainty leads to elevated costs throughout the operations. Accordingly, we believe there is room to improve Ting Isps.

Elliot: All of this lack of coordination caused by capital uncertainty. leads to elevated costs throughout the operation. Accordingly, we believe there is room to improve Ting ISP's performance across all key measures.

<unk> across all key measures.

We continue to view the currency balance sheet as unacceptable and potentially even unsustainable. However, we also see real opportunity in our owned infrastructure of 133000 addresses. This is where we are spending the bulk of our time and attention.

Elliot: We continue to view the current Ting balance sheet as unacceptable, and potentially even unsustainable. However, we also see real opportunity in our owned infrastructure of 133,000 addresses. This is where we are spending the bulk of our time and it's.

[Company Representative] (Tucows): We continue to view the current Ting balance sheet as unacceptable and potentially even unsustainable. However, we also see real opportunity in our owned infrastructure of 133,000 addresses. This is where we are spending the bulk of our time and attention. Based on questions about our ability to buy back stock, I also wanted to give investors a picture of a typical current quarter from a free cash flow perspective. I will use this quarter's $2.5 million syndicated loan repayment as a launch point. This quarter had slightly elevated levels of balance sheet due to a seasonal receivable build. Other than that, I remind investors that Wavelo has a level of capitalized labor that is higher than a typical Tucows business, between $1.5 and $2 million per quarter. As many of you know, we would love to report cash EBITDA but are precluded from doing so.

Based on questions about our ability to buyback stock I also wanted to give investors a picture of a typical current quarter from a free cash flow perspective.

Elliot: Based on questions about our ability to buy back stock, I also wanted to give investors a picture of a typical current quarter from a free cash flow perspective. I will use this quarter's $2.5 million syndicated loan repayment as a launch. This quarter had slightly elevated levels of balance sheet due to a seasonable receivable bill. Other than that, I remind investors that Wavelo has a level of capitalized labor that is higher than a typical two cows. between $1.5M and $2M per quarter. As many of you know, We would love to report cash EBITDA, but are precluded from doing so.

I will use this quarter's $2 $5 million syndicated loan repayments as a launch point.

This quarter at slightly elevated levels of balance sheet due to a seasonable receivable build other than that I remind investors that wave low has a level of capitalized labor that is higher than a typical <unk> business.

We have one and a half and $2 million per quarter as many of you know.

We would love to report cash EDA, but are precluded from doing so a.

A typical quarter in 2025, we will generate free cash to allocate of between $5 million to $6 million.

Elliot: A typical quarter in 2025 will generate free cash to allocate of between $5 to $6 million. But if there's one thing the last couple of years have taught us, is there is rarely a typical... I want to be clear that there is no trade-off between servicing the debt within the Tsing and our decision to repurchase TCX Publix. this quarter or any other. As always, there are three primary reasons we might not be buying First, if we didn't believe the stock offered good value, and I think it's clear that's not the case today. Second, if we lacked the necessary cash, or third, if we were involved in discussions that would preclude us from doing.

[Company Representative] (Tucows): A typical quarter in 2025 will generate free cash to allocate of between $5 to 6 million. If there's one thing the last couple of years have taught us is there is rarely a typical quarter. I want to be clear that there is no trade-off between servicing the debt within the Ting business and our decision to repurchase TCX public stock this quarter or any other. As always, there are three primary reasons we might not be buying stock. First, if we didn't believe the stock offered good value, and I think it's clear that's not the case today. Second, if we lacked the necessary cash, or third, if we were involved in discussions that would preclude us from doing so. These will continue to be our guiding considerations.

But if there's one thing the last couple of years have taught US is there is rarely a typical quarter.

I want to be clear that there is no trade off between servicing the debt within the 10 business and our decision to repurchase <unk> public stock.

This quarter or any other.

As always there are three primary reasons, we might not be buying stock.

If we Didnt believe the stock offered good value and I think it's clear that's not the case today second if we lacked the necessary cash or third if we were involved in discussions that would preclude us from doing so.

These will continue to be our guiding considerations.

Elliot: These will continue to be our guiding considerations.

We received a question about the metrics, we would track moving forward on the 2000 <unk> growth initiatives and more specifically in reference to storefront and cloud hosting not registry services.

Elliot: We received a question about the metrics we would track moving forward on the 2COWS Domains growth initiative. and more specifically in reference to storefront and cloud hosting, not registry services. For storefront, we're focused both on the number of orders processed, as well as the revenue and margin per order. Today, this is Revenue from Domain Transactions, and in time, we expect that ARPU will increase with the bundling of additional 2CAVs value-added services. For cloud hosting, which I remind investors, is a higher margin service than our core domains offering. The number of websites added is the critical.

David Woroch: We received a question about the metrics we would track moving forward on the Tucows Domains growth initiatives, and more specifically in reference to Storefront and cloud hosting, not registry services. For Storefront, we're focused both on the number of orders processed as well as the revenue and margin per order. Today, this is revenue from domain transactions. In time, we expect that ARPU will increase with the bundling of additional Tucows value-added services. For cloud hosting, which I remind investors is a higher margin service than our core domains offering, the number of websites added is the critical metric. In both cases, these are currently modest numbers. We will share progress on these metrics as they become material. The last point I want to reinforce is the value of our reseller channel, which provides the potential for broad distribution and low customer acquisition costs.

For storefront, we're focused both on the number of orders processed as well as the revenue and margin per order.

Today. This is revenue from domain transactions and in time, we expect that <unk> will increase with the bundling of additional two counts value added services.

For cloud hosting which I remind investors is a higher margin service than our core domains offering.

Number of web sites added is the critical metric.

In both cases these are currently modest numbers.

Elliot: In both cases, these are currently modest numbers, and we will share progress on these metrics as they become material.

And we will share progress on these metrics as they become material.

And the last point I want to reinforce is the value of our reseller channel, which provides the potential for broad distribution and low customer acquisition cost but.

Elliot: And the last point I want to reinforce is the value of our reseller channel. which provides the potential for broad distribution and low customer acquisition costs. but at the same time, the channel is measured in their pace of adoption.

But at the same time the channel is measured in the pace of adoption.

David Woroch: At the same time, the channel is measured in their pace of adoption.

Thank you for listening to our Q&A and a reminder, that if you feel that the recorded answers or any direct E. Mail you receive do not address your question. Please follow up with us at IR at <unk> Dot com.

Operator: Thank you for listening to our Q&A and a reminder that if you feel that the recorded answers or any direct email you receive do not address your question, please follow up with us at iri2cows.com.

[Company Representative] (Tucows): Thank you for listening to our Q&A, and a reminder that if you feel that the recorded answers or any direct email you receive do not address your question, please follow up with us at ir@tucows.com.