Tucows - Q1 2024 (Q&A)

Transcript

Monica Webb (Senior Director of Market Development)

...Welcome to Tucows Question and Answer Dialogue for Q1 2024. Elliot Noss, President and Chief Executive Officer, 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 2024 financial results and updated reports. I would also like to remind investors that if you would like to receive our quarterly reports and Q&A via email, please make the request to [email protected]. 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 securities 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. 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 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.

Elliot Noss (CEO)

Thank you, Monica, and welcome to our Q&A for our first quarter 2024 financial results. We had a few questions on Ting's market penetration and profitability. The first question was how the penetration we've achieved in Ting's more mature markets compares to our 50% take rate target, and whether there are noticeable differences in take rates between owned and partner markets. Currently, nearly 20% of Ting's serviceable footprint is five years or older, and in aggregate, has met the 50% penetration rate goal. I know two things: First, we believe we are continually improving our ability to load the network, to keep churn low, and to attract new customers as old customers move from already connected premises. Second, our penetration rates, as well as our ARPU, churn, and customer satisfaction, are all seen as market leading.

The questioner also asked whether there was a difference in penetration performance between owned and partner markets. There is. Our owned networks perform better than our partner networks. There are a variety of reasons, but we believe that most of them have to do with the seams between our operation and our partners' operations. We're actively working on this as more and more capital enters the partner side of the market. For example, we're engaged in efforts to improve this in our new partner markets in Colorado Springs and Memphis. The next question asked on Ting was what contributed to Ting's $3 million quarter-over-quarter improvement in Adjusted EBITDA? Most of the improvement is permanent. It came from our February workforce reduction and reduced marketing spend, among other efficiencies.

There were some quarter-over-quarter reductions that were more transient, but we continue to focus on improving Ting's Adjusted EBITDA. One of the challenges of the last few years has been trying to settle on the scope and scale of the Ting build. As those of you following the story know, this has taken different paths and has been impacted by both macroeconomic and fiber market forces. Building an operating machine calibrated to the right size has been a challenge, and as we sort out the long-term capitalization of the Ting business, we will be much better able to tailor the operations appropriately. We had an inquiry on what the ideal Wavelo customer looks like. The target Wavelo customer is really any mobile or fixed telecom.

Wavelo significantly improves efforts to expand revenue with new products, services, or service areas, as well as through improving cost efficiency in their operations via automation. We cannot imagine any telecom who would say they don't want these things. The challenge, whether the potential customer is big or small, is their readiness and ability to change their back office. With billing and provisioning systems, change is hard. We know this from the domains business, and telecom is even trickier, as the target customers are generally less technically sophisticated than most web hosting companies. Our challenge is to make migrating as easy as possible using modern data practices and, just as importantly, to help the potential customers with their fear of migrations. We are changing the paradigm in that we value subscription revenues much more than professional service fees.

The industry until now has benefited from making migrations complex, as this drove professional service fees up, like lawyers benefiting from making every problem more complex. If you've spent your career as a CIO on the wrong side of this trade, the emotional hurdle, the trust hurdle, can be significant. The good news is every new customer makes the point easier to prove. An investor asked about the forecast for cash flow for Tucows in 2024. For forecasts, we provide annual Adjusted EBITDA guidance. The guidance we provided for Tucows for 2024 was $43 million in Adjusted EBITDA for Tucows Domains, $8-$10 million for Wavelo, and $2-$4 million in Adjusted EBITDA for our corporate segment, for a total of $53-$57 million for Tucows ex-Ting. We continue to track to that forecast.

Lastly, I was asked about my statement about exploiting inefficiencies in public markets. I will read the statement again for clarity: We have every indication that the public markets are not the right place to source long-term capital for fiber. If you look at TCX, the market is saying that if we turned over the keys of the Ting fiber business to its lenders for nothing, that our stock price would likely skyrocket. That is market inefficiency. Inefficiencies create opportunities. We have a good sense of what the inefficiencies are and a track record of exploiting them. Frankly, the statement speaks for itself. We have the two non-Ting businesses and the mobile tail generating well over $50 million in EBITDA. We have the Ting business, and we have the current stock price. My statement feels accurate.

Of course, I know that I'm just like every public company CEO who thinks his stock price is too low. Again, we think we have a clear sense of how to approach this. 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 [email protected].