TUCOWS INC /PA/ (TCX)·Q4 2023 Earnings Summary

Executive Summary

• Consolidated Q4 revenue was $87.0M (+10.2% YoY), gross profit before network costs was $35.5M (+19.5% YoY), and adjusted EBITDA fell to $2.6M (-62% YoY) as Ting losses widened amid planned fiber investments .
• Operating cash flow improved materially to $9.0M in Q4 (vs $2.9M in Q4 2022), and management repaid $11.5M of the non‑Ting syndicated loan, continuing deleveraging and balance sheet focus .
• Wavelo sustained strong growth (Q4 revenue $9.5M, GM $9.2M) despite a sequential step down tied to DISH contract timing; Domains remained stable and cash generative (Q4 revenue $61.8M, GM $18.9M) .
• Management issued 2024 adjusted EBITDA guidance ex‑Ting of $53–$57M (Domains $43M; Wavelo $8–$10M; Corporate $2–$4M) and intends to reduce Ting’s EBITDA loss; Q4 also included a workforce reduction at Ting with ~$4M in restructuring charges expected in Q1 2024 .
• Key near‑term stock catalysts: clarity on Ting guidance and balance‑sheet actions, partner-market execution (Colorado Springs, Memphis), and continued cash generation from Wavelo/Domains .

What Went Well and What Went Wrong

What Went Well

• Wavelo outperformed FY2023 guidance, delivering adjusted EBITDA of $10.6M vs upgraded $4–$6M, and added three new customers; Q4 Wavelo GM reached 97% on efficiency gains from migrated DISH subscriber base .
• Domains maintained steady cash generation with Q4 revenue of $61.8M (+2.6% YoY), GM $18.9M (+2.5% YoY), and adjusted EBITDA $10.8M; renewal rates remained healthy at 76.5% and new, higher‑margin products are progressing .
• Operating cash flow strengthened to $9.0M and non‑Ting syndicated debt repayment accelerated ($11.5M in Q4, $28M in 2023), reinforcing deleveraging momentum; buyback program authorized (up to $40M) .

Quotes:

• “We finished 2023 at the high end of our range for Adjusted EBITDA guidance, a result driven by robust growth from Wavelo and consistent performance of Tucows Domains.” — Elliot Noss .
• “Gross margin for Wavelo was 97% this quarter… a reflection of Wavelo’s increased efficiency from the fully migrated DISH subscriber base.” — Davinder Singh .
• “Tucows Domains continues to generate cash for the company that is being used to pay down the debt and build the runway for Tucows long-term growth.” — David Woroch .

What Went Wrong

• Ting adjusted EBITDA loss widened to $(12.4)M (vs $(6.0)M in Q4 2022); Ting GM fell to 57% (from 63% YoY), reflecting scaling operations, higher depreciation, and macro rate-driven interest burden .
• Adjusted EBITDA declined to $2.6M (-62% YoY), weighed by Ting’s operating build; consolidated net loss was $(23.4)M (loss of $2.14 per share) driven by fiber investment, network depreciation, and higher interest expenses .
• Wavelo saw sequential pressure (Q/Q revenue -13.8%, GM -12.3%, EBITDA -38%) due to DISH Q3 deferred revenue recognition and mix shift to postpaid, plus increased growth investments .

Financial Results

Consolidated Performance

Notes:

• Consolidated gross profit (after network costs) in Q4 was $17.8M (+4.8% YoY) .
• Deferred revenue ended Q4 at $148M (vs $150M in Q3, $145M in Q4 2022) .

Segment Breakdown

KPIs (Ting Operational Metrics)

Guidance Changes

Additional note: Q4 included a Ting workforce reduction (~$4M restructuring charges, mainly severance/benefits), expected mostly in Q1 2024 .

Earnings Call Themes & Trends

Management Commentary

• “We also repaid a further $11.5M on the balance of the non‑Ting syndicated loan this quarter… we are more and more getting back to Tucows being a cash‑generating machine.” — Elliot Noss .
• “Given the recent changes at Ting, we’re working through a more refined guidance estimate… with an intention of reducing the EBITDA loss.” — Elliot Noss .
• “Q4 was another very strong quarter of construction for Ting… 121,300 serviceable addresses for Ting‑owned infrastructure… 150,700 total serviceable addresses.” — Elliot Noss .
• “Gross margin for Wavelo was 97%… increased efficiency from the fully migrated DISH subscriber base.” — Davinder Singh .
• “Domains… renewal rate at 76.5%… deploying higher‑margin products is critical for us to meaningfully get beyond the $75M gross margin range.” — David Woroch .

Q&A Highlights

• Q4 format featured prerecorded remarks with questions submitted until Feb 29 and responses posted Mar 12; no live Q&A took place in conjunction with the Q4 call .
• Recent Q3 Q&A themes (informing investor focus areas): DISH payment modeling and Verizon MVNO obligations; Wavelo revenue mix timing; Ting EBITDA path (operational/structural actions); Memphis partner market short‑term EBITDA/cash flow profile .
• Management reiterated intent to address Ting’s operating loss magnitude and maintain optionality while strengthening the balance sheet .

Estimates Context

• Wall Street consensus estimates from S&P Global were unavailable during this session due to access limits; as a result, we cannot provide a definitive beat/miss analysis versus consensus for Q4 2023. If needed, we can refresh and append a comparison once S&P Global access is restored [SPGI access error].
• Directionally, Wavelo’s FY2023 adjusted EBITDA materially exceeded its own guidance ($10.6M vs $4–$6M), suggesting upward estimate revisions may be warranted for Wavelo profitability, while Ting’s widened EBITDA loss and GM compression likely argue for more conservative near‑term expectations .

Key Takeaways for Investors

• Balance sheet improving: leverage ratio reduced to 3.42x; operating cash flow strengthened; continued syndicated debt repayments support equity case for deleveraging .
• Wavelo remains a bright spot with high gross margins and solid client momentum, albeit with lumpy quarterly revenue tied to DISH timing; 2024 guide reflects reinvestment in growth .
• Domains provides stable cash generation and is piloting higher‑margin services that could expand profitability beyond its historical ~$75M GM range over time .
• Ting’s losses are a central focus; management initiated workforce reduction and prioritization, signaled intent to lower EBITDA losses, and is leaning into partner markets for capital‑efficient growth .
• 2024 guidance clarity on Ting (and any balance‑sheet actions) is a key catalyst; monitor execution in Colorado Springs/Memphis and organic Thornton build for subscriber loading and margin trajectory .
• Macro caution persists; optionality via ABS and disciplined capital allocation remain important as telecom assets reprice across public/private markets .
• Near‑term trading: sentiment may track updates on Ting guidance reduction and deleveraging steps; medium‑term thesis hinges on Wavelo/Domain cash flows funding Ting’s transition and partner‑market execution .

Appendix: Revenue, EPS, Margins vs Prior Periods and Estimates

Note: S&P Global consensus was not accessible at the time of analysis; estimate comparisons will be appended when available [SPGI access error].