Tucows - Q2 2024 (Q&A)

Transcript

Monica Webb (VP of Investor Relations)

Welcome to Tucows Question and Answer Dialogue for Q2 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 Investors section of our website, along with our Q2 2024 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 [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 SEC 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 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.

Elliot Noss (President and CEO)

Thank you, Monica, and welcome to our Q&A for our second quarter 2024 financial results. You will have seen that we just announced our second asset-backed securitization for $63 million. We've also talked extensively over the last couple of quarters about addressing the long-term capitalization of Ting. That work continues. The ABS is an extremely efficient facility because it creates high leverage for the borrower while carrying low relative risk for the lender. That's because it's predicated on the concept of Maintenance OpEx. In simpler terms, it's looking at the profitability of existing customers in existing footprints. Some of you have heard me talk over time about how important stocks and flows are to this business. I talked about that extensively at our Investor Day in May of 2023.

That's relevant here because we have fresh capital and will now need to decide on both the use and velocity of that cash. The velocity will depend primarily on the resolution of the long-term capitalization of Ting. Ideally, we would like that resolution to include partnering with a capital partner who would allow us to take full advantage of our construction capacity, our construction execution, and most importantly, our ability to add and retain customers, which is industry-leading. As is responsible and as you would expect from us, we also have to contemplate going forward without additional capital support. We do hope and expect to have a clear path by next quarter. Nobody wants to see that more than I do. That covers velocity.

In terms of uses of the cash, the competing uses are Growth OpEx for things like customer acquisition, Growth CapEx, or additional installs, building additional addresses, or funding the CapEx associated with enterprise sales. We continue to look at this very soberly and to make the best decisions in the context we're making. The combination of the ABS and our ability to execute gives us comfort. We consider ourselves fortunate that negative outcomes relate to lost opportunity and not existential risk. We had a couple of questions this quarter about the reduced customer acquisition costs and whether we believed that was impacting net subscriber adds. We all know the old adage: half of my marketing spend is wasted, I just don't know which half. In fact, we fear that in general, with most marketing, that number may be closer to 75%, not 50%. I wish to be clear.

I am talking about that across all marketing, not specific to fiber, and certainly not specific to Ting. We believe that marketing is a function that is long overdue for reinvention, particularly in the context of telecom. Looking at our situation, we started reducing CapEx in earnest in the March, April timeframe and continued that deceleration through Q2. We will start analyzing this impact from the new levels set towards the back end of the quarter, and we will be conducting this analysis for the next couple of quarters. We do not believe we have nearly enough information at this point to start drawing accurate conclusions. There are two things to add here.

First, choosing a new ISP is a choice that has a long fuse on it, that starts with either significant dissatisfaction with your current provider or deciding to move to a new house, new apartment, or new city. That identification of need has nothing to do with any amount of marketing we could engage in. Attribution is the greatest challenge in marketing and often the greatest misdirect in marketing, with too many marketers fooling themselves with false attribution. Second, Q2 is the quarter in the industry, invariably with the highest churn. This is due to moving, particularly with the ending of the school year, which is, of course, acute in markets like Charlottesville. When we look at our current customer additions, we do fantastically well, winning customers when they are dissatisfied with their existing suppliers.

We do not have the national footprint or the well-established marketing machine that our largest competitors, like Comcast and Spectrum, have, where between them, they have the ability to sign up a customer that is moving before that move has even taken place in nearly half the country. What we internally call the moving practice is nascent to Ting, and we expect to become better at that in the coming quarters and years. We also had a question about Tucows Domains following our remarks about incremental successes in our registry services business. It's a great example of a strategic acquisition that was done to add a complementary registry platform technology and a talented engineering team with specific expertise in our industry, which is something of a rarity.

Over the past two years, through integrating that engineering team into Tucows, we have leveraged the technology we acquired at that time and have been able to refresh the Tucows Domains tech stack and modernize systems, and as an added bonus, the registry system has more recently positioned the business to compete for new clients within this complementary market, and as Dave Woroch mentioned on the Q2 earnings call, bringing with it continued success. 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]